A Swiss view on Impression Products vs. Lexmark International

On May 30, 2017, the U.S. Supreme Court overturned an appeals court ruling that Lexmark, a manufacturer of printers, can use its patents to prevent other companies from selling ink-refills without its permission. This decision is likely to affect not only the printer industry but also other companies reselling or repairing other company’s products or components in general.

Facts of the case

Lexmark is a well-known manufacturer of laser printers and of cartridges containing powdery substance (so called toner) used by laser printers to transcend an image on paper. Lexmark sells toner cartridges to consumers in the United States and around the globe. Furthermore, Lexmark owns a number of patents covering the components and the manner of use of these cartridges. Moreover, Lexmark structured its sales in a way encouraging its customers to return spent cartridges: Either the customers would buy a toner cartridge at full price with no restrictions or a cartridge at roughly 20 percent off through Lexmark’s “Return Program”, meaning, the costumers agree to use it only once and to refrain from transferring the empty cartridge to anyone else but to Lexmark. To enforce this no-resale-restriction, Lexmark had installed a microchip on each cartridge to prevent re-use once the toner in the cartridge runs out. However, tech-savvy re-manufacturers had found methods to unlock the microchips. With that obstacle out of the way, there was little to prevent them from offering a “re-fill and return”-program for Lexmark’s cartridges. Lexmark’s no-resale-restriction applied to its initial customers only, not to downstream purchasers like the re-manufacturers. Lexmark was not willing to accept this practice and therefore, in 2010, sued a number of re-manufacturers (including Impression Products) for patent infringement with respect to two groups of cartridges: One group consisted of cartridges Lexmark had sold within the United States. The other group consisted of toner cartridges Lexmark had sold abroad and which re-manufacturers had imported into the United States. The re-manufacturers raised the defense-argument that with Lexmark’s initial sales of the cartridges, it had exhausted its patents rights in the cartridges and, thus, cannot enjoin them from re-filling and returning the cartridges. After litigating through the Federal Circuit, the parties were granted certiorari from the U.S. Supreme Court.

Decision of the U.S. Supreme Court

1. The U.S. Supreme Court held that Lexmark cannot bring a patent infringement suit against Impression Products with regard to the Return Program cartridges sold in the United States. Once Lexmark has sold these cartridges, it has exhausted its right to control them through patent law.

Interestingly, recent U.S. case law has not been as clear on this subject as the decision might suggest. The U.S. Patent Act does not include an express provision addressing the extent of exhaustion, thus, this is an area largely dependent on common-law adjudication. The Federal Circuit in charge of the dispute first held that the exhaustion doctrine is an interpretation of the infringement statute and, thus, the sale of a patented item only presumptively grants authority to the purchaser to use and resell it. However, a patentee does not have to hand over the full bundle of rights every time. The U.S. Supreme Court corrected this as follows: The exhaustion doctrine is not a presumption on the authority coming along with a sale; it is a limitation on the scope of a patentee’s rights (see also United States v. General Elec. Co., 272 U.S. 476,489 (1926)). A patentee can impose restriction on licensees based on license agreements. A license does not implicate the same exhaustion concerns on restraints of commerce as a sale since it does not attempt to pass on the title to a product, but only changes the contours of the patentee’s monopoly right. However, when a patented item passes into commerce based on a sale, it should not be burdened with an unclear title status when moving through the market. This is the essence of the exhaustion doctrine.

2. Patent exhaustion is uniform and automatic. Once a patentee has decided to sell an item, that sale exhausts its patent rights regardless of any post-sale restrictions that the patentee purports to impose (be it based on a sale or an arguable license). The purchasers might not comply with the restriction. However, the only recourse for a seller/licensor lies in contract law. Therewith, the court implicitly said that Lexmark could sue its customers for breach of contract (although, in practice, the company might rather be reluctant to do so).

3. Lexmark cannot sue Impression Products for infringement with respect to cartridges sold abroad. An authorized sale outside the United Sates, just as one within the United Sates, exhausts all rights under the Patent Act. This international exhaustion principle was not adopted unanimously. Justice Ruth Bader Ginsburg dissented on this partial question. Pursuant to Ginsburg, patent law is territorial. When an inventor receives a U.S. patent, that patent provides no protection abroad. U.S. patent protection accompanies none of a U.S. patentee’s sales abroad. Thus, a foreign sale should not diminish the protection of U.S. law in the United States. Ginsburg emphasized that she had expressed the same dissent in the Supreme Court’s earlier decision Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 525 (2013), which established an international exhaustion principle for copyrights. Although there may be a “historical kinship” between patent law and copyright law, in her view, the two are not “identical twins”.

Swiss principles on Patent Exhaustion

Art. 9a of the Swiss Federal Act on Patents for Inventions (“FAPI”) sets forth the exhaustion principle for Swiss patents. Unlike in the United States, the exhaustion doctrine is established in written statutes. It is clearly regarded as an exception to the patentee’s monopoly right. If the proprietor of the patent has introduced patent-protected goods in the Swiss market or within the European Economic Area, or consented to such introduction respectively, these goods may be imported and used or resold commercially in Switzerland (para. 1). If the proprietor has introduced an item which embodies and enables to apply a patented process into the Swiss market or within the European Economic Area, or consented to such introduction respectively, the first and each subsequent person who acquires the item is entitled to use and apply it (para. 2). Therefore, Swiss law provides for an exhaustion principle applied on a euro-regional level. For goods with an only subordinate relevance of the patented features, the FAPI provides for an international exhaustion principle (Art. 9a para. 4 FAPI). For goods distributed under a governmentally controlled price regime, the FAPI only provides for a national exhaustion principle (Art. 9a para. 5 FAPI). Special rules apply to agricultural products (governed by Art. 27b of the Swiss Federal Act on Agriculture).

1. As can be seen, different rules apply to product- or substance-patents and process-patents. Whereas product- or substance-patents relate to tangibles like e.g. machines or pharmaceuticals, process-patents protect a particular manufacturing process or method. Pursuant to Swiss scholarly opinions, process-patents as such can never be exhausted. Exhaustion can only apply to product- or substance-patents since these are embodied in a tangible product which may be subject to a potential sale. Art. 9a para. 2 FAPI sets forth that whoever introduces items into the market, exhausts its patent right in embodied processes well. Consequently, exhaustion can apply to process patents if they are embodied in a tangible item introduced by the patentee, which enables to conduct such process. This relatively new provision under the FAPI[1] has been criticized among scholars for being rather undifferentiated. The wording of the statute in Art. 9a para. 2 FAPI suggests a blank exhaustion rule as soon as a patented process is embodied in a sold item (in the sense of an “implied license” to use such process along with the item). The wording does not take into account whether the embodied product itself enjoys patent protection and whether the product could be used for multiple, different processes. Some scholars are of the view, that a patentee should still be in a position to limit his consent to particular forms of process applications and does not automatically grant an implied license to use such processes when selling the item embodying them. Others, however, consider the wording of the statute to be absolute and see no possibility to avoid exhaustion, unless one holds an isolated process-patent, separately. Future Swiss case law will have to guide and show how generous the exhaustion rule for embedded process-patents under Art. 9a para. 2 FAPI will be applied.

Interestingly, the differentiation between product-patents and process-patents was not addressed in the U.S. Supreme Court’s decision. There might have been good reasons for that if no process patents were involved. At least under Swiss patent law, different types of patents may be involved and this could provide room for further legal considerations, e.g., if the unlocking and refilling-process for Lexmark’s printer cartridges was protected as a patent. A process patent can never exhaust.

2. In view of the author, the un-locking and re-filling of printer cartridges is not only an issue to be examined under the exhaustion rule, but also a genuine issue of patent law infringement. Just as the exhaustion doctrine is recognized under Swiss law, it is also acknowledged that the repair of or the manufacturing of replacement parts to a patented invention is covered by the patentee’s monopoly right and constitutes an infringement if it is not approved by the patentee (Art. 8 FAPI). In Lexmark vs. Impression Products, Impression Products did not simply buy and re-sell printer cartridges “as is”. It unlocked and refilled them with new printer ink which is distinct and could be considered as an alteration of the sold item. Conceptually, the exhaustion doctrine is shaped to unchanged re-sales in commerce, not to the re-processing and repair of patented technology. The latter alterations can theoretically infringe a patentee’s monopoly right, if the repair or re-manufacturing itself makes use of the relevant patent claims (i.e., amounts to a repeated commercial realization of the protected technical doctrine and thereby extends the lifecycle of such item). Here, as well, the author does not attempt to take sides on any of both parties involved. Maybe in the end, a Swiss court would have come to the same conclusion as in Lexmark vs. Impression Products based on the argument that the printer cartridges substantially remained unchanged and therefore fit into the exhaustion pattern. However, under Swiss patent law, there might have been more to examine before moving to the exhaustion doctrine. Indeed, it appears that the decision of the U.S. Supreme Court was strongly driven by policy considerations, namely the urge to enable secondary repair-markets. Using the example of an auto-repair shop, Justice Roberts warned that allowing companies to enforce patents in the secondary market would stifle the repair business of e.g. vehicles offered by companies. This is a valid policy argument, but it does not follow the dogmatic line of patent law. At least under Swiss patent law, the repair and replacement part business has never been a safe harbor-zone from patent infringement. The exhaustion doctrine has so far not been applied to the repair or replacement of components to patented inventions. The relevant Swiss leading cases on patent exhaustion in Switzerland have only applied exhaustion to unchanged re-sales of patented products “as is” once they were introduced into the market.

3. Swiss law provides for similar rules on contractual re-sale limitations: Based on established court practice and scholarly opinions, contractual limitations on the re-sale of patented items are binding on the contractual parties. They have, however, no effect on third parties which buy such items. In this context, the Swiss Federal Supreme Court also emphasized that third party re-sellers do not act unlawful under unfair competition law statutes by “inducing” initial purchasers to a breach of their contract. The court also clearly denied an application of the Anglo-American notion of viewing exhaustion as an “implied license” of the patentee. The “implied license”-doctrine would indeed provide more room to impose restrictions on downstream sales with restrictive license terms (see decision of the Swiss Federal Supreme Court, Kodak, BGE 126 III 129, which, however, reflects an older regime under which still national exhaustion applied; see however also the relatively new provision in Art. 9a para. 2 FAPI which seems to suggest a partial adoption of the implied license for embodied process patents).

4. Finally, post-sale-restrictions aimed at prohibiting the free flow of goods and parallel importation from abroad must always be delicately examined under Swiss anti-trust/competition-law-statutes. The Swiss Federal Act on Cartels and other Restraints of Competition (“FACR”) provides that restraints which significantly restrict competition in a market for specific goods or services are unlawful, unless they are justified on grounds of economic efficiency (Art. 5 para. 1 KG). The potential impact of post-sale restrictions on competition must be analyzed on an individual basis. Sometimes, restrictions may be justified under efficiency considerations (Art. 5 para. 2 FACR). The question whether a return- or recycling-system (such as e.g. Lexmark’s Return Program) could be justified based on ecologic/environmental reasons is an interesting subject to debate. But this is another topic with a much further reach.