Last week, in Impression Products, Inc. v. Lexmark International, Inc., Case No. 15-1189 (May 30, 2017), the Supreme Court ruled that under the “exhaustion doctrine,” patent owners cannot use patent law to impose restrictions on the downstream sales or transfers of lawfully purchased patented goods. The decision took many patent practitioners by surprise. Not only did the Court reverse an en banc decision of the Federal Circuit, but it overturned the widespread view that patentees could enforce post-sale restrictions on the use or resale of patented products through patent infringement lawsuits so long as the post-sale restrictions were “clearly communicated.”
For copyright lawyers, however, the “exhaustion” restrictions the Court imposed on patentees were already familiar: they are the same ones the Court imposed four years ago on copyright owners under the Copyright Act’s first sale doctrine, 17 U.S.C. § 109(a). See Kirtsaeng v. John Wiley & Co., Inc., 568 U.S. 519, 538 (2013) (Court rejects imposition of geographical restrictions on the application of the first sale doctrine on the ground that it contradicts “the very basic concept of copyright law that, once you’ve sold a copy legally, you can’t restrict its resale.”) Indeed, Chief Justice Roberts’ near-unanimous opinion for the Court in Impression Products emphasized that patent law’s exhaustion doctrine and the Copyright Act’s first sale doctrine derive from a shared lineage, namely, “the ‘common law’s refusal to permit restraints on the alienation of chattels.” (Opinion at p. 6, quoting Kirtsaeng, 568 U.S. at 538.) As a result, “differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense [as] [t]he two share a ‘strong similarity . . . and identity of purpose.” (Id. at p. 14, quoting Bauer & Cie v. O’Donnell, 229 U.S. 1.13 (1913).) In short, the Supreme Court’s Impression Products means that patent and copyright owners will now be subject to the same basic set of “exhaustion” requirements.
The dispute giving rise to the Supreme Court’s excursion into the doctrine of patent exhaustion arose out of Lexmark’s various attempts to prevent consumers from taking their lawfully purchased used Lexmark copier toner cartridges to remanufacturers to be refilled with new toner ink at lower prices than charged by Lexmark. Lexmark sued one of the remanufacturers for patent infringement, contending that the remanufacturer’s use of Lexmark’s patented toner cartridges infringed the restrictions Lexmark imposed on the consumers who first purchased the cartridges. The Supreme Court reversed the lower courts’ rulings in favor of Lexmark’s patent infringement claims on the ground that the exhaustion doctrine precluded a patentee from imposing such post-sale restrictions under patent law.
There are several important “exhaustion” principles and limitations that emerge from the Supreme Court’s Impression Products decision. First, as with the Copyright Act’s first sale doctrine, patent exhaustion occurs when a patentee consents to a lawful sale of a product embodying the patented device or process. As the Court explained, “[w]hen a patentee chooses to sell an item, that product ‘is no longer within the limits of the [patent] monopoly’ and instead becomes the ‘private, individual property’ of the purchaser, with the rights and benefits that come along with ownership.” (Opinion at p. 6.) In other words, “the sale transfers the right to use, sell or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary [patent] right left to enforce.” (Id. at p. 10.)
Second, the only post-transfer restrictions the Court finds to be enforceable are those imposed under contract law, not patent or copyright law:
“Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: the patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. [Citation omitted] Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.” (Id. at 11.)
Third, the Court emphasized that patent exhaustion rules will be applied regardless of whether the patentee has received the full economic benefit of its patent rights. As the Court explained, “[e]xhaustion . . . does not depend on the patentee receiving some undefined premium for selling the right to access the American market” and therefore “exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decided is appropriate.” (Id. at p. 15.) Instead, a patentee’s “right to exclude just ensures that the patentee receives one reward—of whatever amount the patentee deems to be ‘satisfactory compensation’ [citation omitted] for every item that passes outside the scope of the patent monopoly.” (Id. at p. 16.) In other words, the patentee is free to adjust the prices charged at the initial or first sale in response to any increased competition resulting from the loss of the right to exclude.
It will be interesting to see how patent owners respond to the Court’s decision. Undoubtedly, some patent owners will make greater use of contractual licenses (as opposed to infringement lawsuits) as a way to control post-transfer uses of patented products. Alternatively, some patent owners may prefer to adjust the prices at which they sell their products in order to reflect any increased competition resulting from the downstream sales of lawfully purchased patented products. But one thing seems certain: Patent owners, like copyright owners, will now find it increasingly difficult to impose enforceable post-sale restrictions on the use of lawfully purchased patented products.