The Federal Circuit's February 12, 2016 en banc decision in Lexmark International, Inc. v. Impression Products, Inc. reinforces that patent owners can use the patent system in certain ways to control the distribution of their products even after they sell them. It is well established that once a patent owner unconditionally sells a patented item in the U.S., the buyer has the right to use the item as he or she chooses: the patent owner's rights have been, in legal terms, "exhausted." Thus, a patent owner cannot sell you an item and then sue you for infringing a patent by using that very item. However, the Federal Circuit has long maintained that there are two exceptions to patent exhaustion: (i) a U.S. seller can contract around exhaustion by placing restrictions on the buyer's rights, and (ii) foreign sales do not exhaust the patentee's rights. In such cases, patentees maintain their right to use the patent system (and not just contract law) to enforce their rights. Although the defendant, with the amicus curiae support of the U.S. Department of Justice, argued that these exceptions conflict with recent U.S. Supreme Court precedent, the Federal Circuit in Lexmark, by a lopsided 10–2 vote, reaffirmed these exceptions.
Lexmark sells patented printer toner cartridges all over the world. Some of the foreign-sold cartridges and all of the domestically sold cartridges at issue were sold with an express single-use/no-resale restriction. Impression acquired these cartridges after they had been used in order to refill and resell them in the United States. Lexmark sued Impression for patent infringement. Impression responded that Lexmark's patent rights were exhausted by its sale of the cartridges.
In a 10–2 decision, the Federal Circuit ruled for Lexmark, reaffirming its prior holdings that a patent owner's rights are not exhausted either by U.S. sales subject to single-use/no-resale restrictions or by foreign sales.
Patent owners can sell a product while still maintaining certain rights under U.S. patent law to restrict that product's downstream use. The importance of this decision cuts across industries. To use one example highlighted by the Lexmark court, many pharmaceutical companies sell low-cost drugs to poor countries (with a restriction against resale attached) while selling the same drugs in the United States at a higher price. Lexmark enables the companies to continue this practice without the risk that the very drugs they sold abroad will later cannibalize their own U.S. market.
Patent owners must still be cautious. First, given the government's and the dissent's contention that the Federal Circuit's holdings conflict with recent Supreme Court precedent, there is a possibility of further review by the Supreme Court. Second, Lexmark explicitly left open several fact-specific questions, including (i) what happens if someone acquires a patented article with "less than actual knowledge" of the restrictions placed on the original sale by the patent owner and (ii) when would a foreign buyer have an "implied license" to sell in the United States, independent of patent exhaustion. These issues will surely be raised in future cases.
In light of Lexmark, here are steps patent owners can take to safeguard their patent rights:
- Patent owners can license others to sell their products instead of selling the products themselves. Even the dissent agrees that patent owners "can impose restrictions on a licensee" without exhausting their patent rights.
- Patent owners can include an explicit reservation of their U.S. patent rights with foreign sales. Again, even the dissent agrees that foreign sales do not exhaust patent owners' rights if they "explicitly reserve" their U.S. rights. Such explicit reservations would also prevent the buyer from arguing that there was an implied license.
- Patent owners can draft sales contracts to require buyers to convey the patent restrictions to downstream buyers, and the patent owners can publicize these restrictions themselves, to try to ensure that secondary buyers have actual knowledge of the restrictions.