Yesterday, the Supreme Court handed down its decision in Impression Products, Inc. v. Lexmark International, Inc. and ruled that a patent holder’s “decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.” With this opinion, the Court rejected decades of Federal Circuit precedent that permitted patent holders to expressly reserve the right to sue downstream users of the patented product for infringement. While the decision will prevent patent holders from bringing patent infringement suits to enforce restrictions on post-sale use, the Court emphasized that those restrictions can still be enforced through contract law.
Under the doctrine of patent exhaustion (also known as the “first sale” doctrine), the initial authorized sale of a patented product terminates all patent rights in that item. As a result, subsequent sales of the item cannot give rise to claims of infringement by the patent holder. In Impression Products, the Supreme Court considered two issues related to the scope of the patent exhaustion doctrine: 1) whether a patent holder’s sale of a patented product within the U.S., where the patent holder specifies contractual postsale restrictions, exhausts its patent rights, and 2) whether a patent holder’s sale of a patented product outside of the U.S exhausts its patent rights.
The patent holder in Impression Products – Lexmark – sold its patented laser printer toner cartridges both domestically and internationally. For most of its domestic sales, Lexmark required buyers to agree that they would not reuse or resell the cartridges. Despite this restriction, Impression purchased and refurbished used Lexmark cartridges sold in the United States and abroad and resold them to customers in the U.S. Lexmark sued Impression for patent infringement. Impression responded that the initial sales of the cartridges by Lexmark exhausted its patent rights under the first sale doctrine. The District Court for the Southern District of Ohio found that Lexmark’s patent rights were exhausted as to the domestically sold cartridges, but not as to the internationally sold cartridges. In a 10-2 en banc decision, the Federal Circuit affirmed the district court’s holding that international sales do not trigger the first sale doctrine. The Federal Circuit, however, reversed the district court’s holding with respect to domestic sales, holding that a patent holder can reserve its patent rights if it sells patented articles subject to post-sale use restrictions. 3
As to the domestically sold cartridges, the Supreme Court unanimously rejected the Federal Circuit’s position that a patent holder can purposefully withhold/restrict resale rights when selling a patented product. The Court focused on English common law and its own precedent extending back 160 years to find that the limited, exclusive monopoly granted to a patent holder is completely extinguished upon the sale of a patented product. Accordingly, Lexmark could not bring a patent infringement action against Impression for its downstream use, despite the contractual restrictions placed on the original sale. 4
Furthermore, as to the internationally sold cartridges, the Supreme Court held 7-1 that a patent holder’s authorized international sale of a patented product should not be treated any differently than a domestic sale. Both types of sales exhaust the patent holder’s patent rights in the product and, therefore, Lexmark’s international sales of the patented cartridges exhausted its rights too. In support of this holding, the Court again relied on common law principles and its recent decision in Kirtsaeng v. John Wiley and Sons, Inc.5 holding that copyright exhaustion applies to authorized copies of a copyrighted work sold internationally.
On its face, Impression Products shuts the door on a patent holder’s ability to mete out single “sticks” from its patent “bundle of rights” to purchasers of its patented products. While, the Supreme Court made clear that post-sale restrictions are still enforceable under contract law, bringing breach of contract claims against customers who violate the post-sale restrictions will not be an attractive option for most patent holders. As an alternative, patent holders who place post-sale restrictions on their products may consider pursuing claims for intentional interference with contractual relations against companies like Impression who ask the original purchasers to violate the restrictions. Patent holders who wish to retain control over their patented products will also now have incentives to investigate licensing arrangements as an alternative to sales. Despite the holding in Impression Products, restrictions on a licensee’s ability to use and resell a patented product can still be enforced by way of a lawsuit for patent infringement.
Finally, in the wake of Impression Products, patent holders may consider restructuring their global pricing practices. The decision restricts a patent holder’s ability to curb the resale of certain products in the U.S. that were initially sold internationally at a lower price. Producers of patented drugs or medical products, which are often sold for higher prices in the U.S. than in other parts of the world, may be particularly vulnerable to this type of predatory reselling. Pricing schemes that mitigate the incentives for resellers to buy patented products internationally and sell them in the U.S. will thus have increased importance going forward.