The doctrine of “patent exhaustion” provides that once a patentee sells one of its products, it can no longer exercise control over the specific product. In this regard, the patentee’s patent rights are said to “exhaust”.

In Impression Products, Inc. v. Lexmark International, Inc. (“Lexmark”), the Supreme Court of the United States (“SCOTUS”) held that all patent rights in a specific product are exhausted, regardless of any restrictions the patentee purports to impose, when the patentee sells such product.

In view of the recent decision, this article discusses the doctrine of patent exhaustion as applicable in Canada and the UK.

SCOTUS decision regarding patent exhaustion

On May 30, 2017, the SCOTUS issued its decision in the Lexmark case1 addressing the doctrine of patent exhaustion vis-à-vis US patent rights.

At issue in Lexmark was Impression Products’ lawful purchase outside of the US of laser printer toner cartridges and subsequent importation into and sale in the US of those cartridges. In particular, when Lexmark originally sells a cartridge, in certain situations a customer will be required to sign a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark. However, companies such as Impression Products will acquire empty cartridges in the US and abroad, including cartridges acquired from customers who had signed the one-use contract, and will then refill the cartridges with toner, and resell them in the US.

Lexmark sued Impression Products on the basis that Impression Products’ importation into and sale within the US of used cartridges was unauthorized and therefore an infringement of Lexmark’s patent rights. Lexmark’s position was that it retained the right to enforce its patent rights where it had clearly communicated lawful restrictions on post-sale use or resale. As a result, Lexmark argued that its patent rights were not exhausted.

In finding in favour of Impression Products, the SCOTUS held that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose, including any clear and/or enforceable contractual restrictions. To this end, the SCOTUS found that when a patentee sells an item, the item is no longer within the limits of the patent monopoly and instead becomes the private property of the purchaser. Where a patentee negotiates a contract restricting a purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may not do so through a patent infringement lawsuit.

Furthermore, the SCOTUS held that an authorized sale outside the US, just as one within the United States, exhausts all patent rights. To be clear, the SCOTUS did distinguish between an authorized sale abroad, and a sale abroad where the patentee had nothing to do with the sale. With respect to the latter, a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction – only the patentee can decide whether to make a sale that exhausts its patent rights in an item.

Accordingly, the SCOTUS concluded that Lexmark could not bring a patent infringement suit against Impression Products because once Lexmark sold the cartridges at issue, it exhausted its right to control them through the patent laws.

Exhaustion of patent rights in Canada

Although the specific phrase “patent exhaustion” is not generally used in Canadian statutes or case law, the basic principle that a purchaser of a patented product acquires an implicit right to use the product without restriction is applicable in Canada.2 Indeed, Canadian courts have equated the rights acquired by a purchaser of a patented product with an implied license.3 There are, however, exceptions.

In Eli Lilly & Co v Novopharm Ltd,4 the Supreme Court of Canada confirmed that when a patentee sells a patented product, ownership of that product is transferred to the purchaser, and, subject to any agreed upon restrictions, the purchaser has the exclusive right to do as it wishes with the product without fear of infringing the patent, and the patentee no longer has any rights with respect to that product. Nevertheless, restrictive conditions imposed by a patentee on a purchaser or licensee may run with the productsif they are brought to the attention of the purchaser at the time of the product is acquired by the purchaser.

The key question, therefore, is whether the product was sold with or without restrictions. If no restrictions were imposed, the purchaser acquires general property rights over the product and the patentee’s rights are effectively exhausted with respect to that product.

Therefore, where the patentee does not communicate to purchasers any restrictions on the use of its products that would override the implicit right or license to use, the purchaser is free to proceed to use the product without restriction.5

As there is no clear law in Canada that confirms a patentee’s patent enforcement rights are exhausted regardless of any restrictions the patentee places on the use of its products, it is presently open to a patentee to assert patent infringement in the event that a purchaser of the patentee’s products violated any restrictions. Such a patent infringement assertion would be in addition to any contractual claims the patentee may possess. Indeed, the Supreme Court of Canada’s rejection in Monsanto Canada Inc v Schmeiser6 of the infringer’s property-based defence vis-à-vis a farmer that saved and re-used infringing seeds is noteworthy in relation to how Canada’s highest Court views the interface between property rights generally and patent rights, specifically: “the issue is not property rights, but patent protection. Ownership is no defence to a breach of the Patent Act.”7

The Canadian approach is in contrast to the findings of the SCOTUS in Lexmark where it was held that it did not matter whether the patentee imposed restrictions on post-sale use – the patentee’s patent enforcement rights were exhausted and its only potential recourse was by way of a breach of contract claim. Accordingly, and depending on the circumstances of a particular case, it is conceivable that a patentee that has placed post-sale restrictions on its products is precluded from enforcing US patent rights against a purchaser or subsequent acquirer as a result of Lexmark, but the same patentee may otherwise be able to enforce its corresponding Canadian patent rights against the same purchaser or acquirer (assuming there are infringing activities in Canada).

One additional and somewhat related issue under Canadian law is the distinction that is drawn between “repair” of a patented product, and “reconstruction” or “remanufacture” of a patented product. A lawful purchaser of a patented product is permitted to repair that product; however, such a purchaser will infringe the patent where the “repair” amounts to a reconstruction.8 Thus, even where a purchaser lawfully acquires an product from a patentee without any restrictions, further activities by the purchaser may constitute patent infringement if the further activities are remanufacturing in nature.

Where the line is specifically drawn between repair and reconstruction depends on the facts of each case. In this regard, it depends on whether the activities of the purchaser of the patented product comprise a practicing of the essence of the patent claims at issue. For example, where the essence of a patent claim is a particularly inventive combination of components and the purchaser remakes/reconstructs that combination, there would more likely be a finding of infringement. In contrast, where the purchaser is merely repairing a component or prolonging its life due to normal wear and tear, and that component is not the essence of the patent claim, then this would more likely be non-infringing.

Exhaustion of patent rights in the UK

The principle of free movement of goods and services within the European 'single market' (the countries of the European Economic Area (EEA)9) is enshrined in the treaties governing the European Union (EU) and the EEA. The legislated principle is complemented by the case law of the Court of Justice of the European Union (CJEU), and in legislation in respect of particular IP rights, which provide, in general, for a type of regional exhaustion of intellectual property rights.

Accordingly, although patent rights are national in scope, the placing of good on the market in any EEA country by the owner of the relevant intellectual property or with his consent generally exhausts the proprietor's ability to enforce his intellectual property in those good to prevent re-sale anywhere in the EEA.10

Specifically in respect of patents, the law in the UK recognizes a distinction between subsequent alterations to products which amount to a remanufacture and those which amount to a repair. The principle of exhaustion covers subsequent work to repair a patented product, but not works that amount to infringement by "making" the relevant products. However, the notions of making and repairing may overlap, and so must be interpreted contextually, the question being a matter of fact and degree.11

The UK legislative provisions that define the acts of infringement of a patent covering the UK are derived from the Community Patent Convention of 1975 (CPC). The CPC was an attempt by the members (at the time) of the European Economic Community (the predecessor to the EU) to create a unitary patent system in Europe. The CPC never came into force, but its signature led to much harmonization of national legislative provisions relating to patent infringement in Europe. As a result, in similar scenarios, questions of repair versus making can be expected to arise under the law of other European countries also. The UK courts have, for example, considered the approach taken in this respect by the German courts.

The implications of Brexit for exhaustion

Interesting questions arise regarding the scope of exhaustion following the UK's exit from the EU.

Unless an agreement is reached between the UK and the EU postponing the date of the UK's 'Brexit', it is expected to occur on 29 March 2019.

Upon Brexit, the UK will only remain in the single market if agreement on this is reached at least between the UK and the EU. Within the single market, the present exhaustion regime can be expected to remain in place.

Outside the single market, the UK would be outside the scope of the regional exhaustion regime applicable to the (remaining) EU. In that case, the placing of goods on the market in the UK would not exhaust the proprietor's intellectual property rights in the (remaining) EEA.

On the other hand, outside the single market the UK would be free to set its own scope of geographical exhaustion of intellectual property rights. The UK could pass legislation setting this, the options being for a national, some sort of regional, or international exhaustion regime. If no national legislation were passed, the scope of exhaustion applicable to the UK would be a matter for the courts of the UK to develop in accordance with the tradition of the common law.

Would the UK's courts shrink 'Fortress Europe' to 'Fortress UK'? Perhaps not. The law of England and Wales has a history of international exhaustion pre-dating the UK's accession to the European Economic Community (the predecessor to the EU). The common law legal tests, dating to the 19th Century, focused on consent. In the event the courts were called upon again to set the geographical scope of exhaustion applicable to the UK, they could be expected to turn not just to the earlier English case law, but also to the modern jurisprudence of countries in related common law legal systems, including the US and Canada, including the SCOTUS decision in the Lexmark case.

So, following Brexit, the geographical scope of exhaustion applicable in the UK could, perhaps counterintuitively, increase.