Why it matters: On May 30, 2017, the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc. again reversed the Federal Circuit and wholeheartedly embraced a mandatory doctrine of patent exhaustion for both domestic sales (even those subject to resale restrictions) and foreign sales of patented products because, as the Court said, “when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.”

Detailed discussion: On May 30, 2017, the Supreme Court again reversed the Federal Circuit and held in Impression Products, Inc. v. Lexmark International, Inc. that when a patent holder sells a patented product, the sale exhausts all of holder’s patent rights in that product, regardless of any resale restrictions that the patentee imposes or whether the sale is made domestically or abroad.

Factual and procedural background: Briefly, Lexmark International Inc. makes and sells patented toner cartridges for its laser printers. This case involved two groups of Lexmark patented cartridges: those sold by Lexmark outside the United States (i.e., in foreign markets) and those sold domestically within the United States at a discounted rate, which are subject to express single-use/no-resale restrictions through Lexmark’s “Return Program.”

Impression Products Inc. acquired Lexmark patented cartridges from both groups and (1) with respect to those purchased domestically that were subject to the resale restrictions, had a third party physically modify them and then resold them in the United States, and (2) with respect to those purchased abroad, imported them and resold them in the United States. Lexmark sued Impression in federal district court for patent infringement. The district court granted Impression’s motion to dismiss with respect to the Lexmark cartridges purchased domestically, but found in favor of Lexmark with respect to the cartridges purchased in the foreign markets.

Both parties appealed to the Federal Circuit, which, sua sponte, requested en banc review of the doctrine of patent exhaustion. After briefing and oral argument, the Federal Circuit found for Lexmark with respect to both groups of cartridges. As to the cartridges that were sold domestically subject to the resale restrictions, the Federal Circuit held that a patentee can sell a product and still retain the right to sue for patent infringement (that is, its patent rights would not be exhausted) if, as in this case, the post-sale restrictions are clearly communicated and lawful. As to the cartridges that Lexmark sold in the foreign markets, the Federal Circuit held that foreign sales do not exhaust patent rights (see our detailed discussion of the Federal Circuit’s en banc opinion in our April 2016 newsletter under “The Federal Circuit Rules, En Banc, That Patents Are Not ‘Exhausted’ by Foreign or Single-Use Sales”). Impression filed a petition for writ of certiorari with the Supreme Court, which agreed to review the issues and heard oral argument on March 21, 2017.

The Supreme Court decision: In the majority opinion written by Chief Justice John Roberts, the Court reversed the Federal Circuit and 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 or the location of the sale.” Justice Ruth Bader Ginsburg concurred in part and dissented in part.

At the outset of its opinion, the Court said that the case “presents two questions about the scope of the patent exhaustion doctrine: First, whether a patentee that sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through an infringement lawsuit. And second, whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply.”

The Court answered both questions in the negative. With respect to the Lexmark cartridges sold domestically that were subject to the resale restrictions, the Court held that “Lexmark exhausted its patent rights in these cartridges the moment it sold them. The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” The Court said that the “Federal Circuit reached a different result largely because it got off on the wrong foot” in its analysis. After reviewing the “long” line of Supreme Court precedent interpreting the “well-established” common-law doctrine of patent exhaustion, the Court concluded that:

“this well-settled line of precedent allows for only one answer: Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.”

With respect to the Lexmark cartridges that Impression purchased in the foreign markets and imported and resold in the United States, the Court held that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”

The Court roundly rejected Lexmark’s “territorial limits” argument that, as the Patent Act has no extraterrestrial reach, a patent holder gives up the “exclusionary premium” it is able to charge when selling in the United States and thus the exhaustion doctrine should not apply to foreign sales. In this context, the Court equated the patent exhaustion doctrine to the “first sale” doctrine in copyright law, noting that the Court held in the 2013 case of Kirtsaeng v. John Wiley & Sons, Inc. that the first sale doctrine applied equally to the authorized sale of copyrighted works made and sold abroad. The Court said that:

“[a]pplying patent exhaustion to foreign sales is just as straightforward. Patent exhaustion, too, has its roots in the antipathy toward restraints on alienation…and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales. In fact, Congress has not altered patent exhaustion at all; it remains an unwritten limit on the scope of the patentee’s monopoly.”

The Court concluded its opinion thusly:

“Exhaustion does not arise because of the parties’ expectations about how sales transfer patent rights. More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.”

Justice Ginsburg concurred with the Court’s opinion regarding domestic exhaustion, but dissented from the Court’s opinion regarding international exhaustion, stating that:

“[a] foreign sale, I would hold, does not exhaust a U.S. inventor’s U.S. patent rights… Because a sale abroad operates independently of the U.S. patent system, it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights. U.S. patent protection accompanies none of a U.S. patentee’s sales abroad—a competitor could sell the same patented product abroad with no U.S.-patent-law consequence. Accordingly, the foreign sale should not diminish the protections of U.S. law in the United States.”

Justice Ginsburg noted that to the extent the majority relied on the Court’s decision in Kirtsaeng regarding the “first sale” doctrine applying to copyrighted works made and sold abroad, she had dissented from that opinion too, based on the same reasoning.