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Supreme Court Clarifies Scope of the Patent Exhaustion Doctrine

June 9, 2017

Supreme Court Clarifies Scope of the Patent Exhaustion Doctrine

June 9, 2017

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An apparent implication of the Court’s holding, among others, is that an owner of a patent cannot assert a patent infringement action to enforce post-sale restrictions in an agreement.

In a seven justice opinion rendered on May 30, 2017, the U.S. Supreme Court (“Court”) clarified the scope of the patent exhaustion doctrine—the principle that limits the patent rights that survive an initial authorized sale of a patented item. The Court addressed two important questions. First, the Court made it clear that patent exhaustion applies upon the sale of an item in the United States regardless of any post-sale restrictions that a patentee may purport to impose on the purchaser’s right to reuse or resell the product. As a result, the patentee may not enforce the restriction through a patent infringement lawsuit. Second, the Court asserted that an authorized sale of a patented item outside the United States, just as one within the United States, will also equally exhaust all rights under the U.S. Patent Act. 

An apparent implication of the Court’s holding, among others, is that an owner of a patent cannot assert a patent infringement action to enforce post-sale restrictions in an agreement. Instead, the patent holder will be left solely to rely upon contractual provisions—as limited by antitrust concerns, limits on remedies and business realities. This may significantly impact a patent holder’s ability to exert control over downstream use of an article embodying the patent and will surely result in complex licensing and contract structures in the industries that previously relied upon the Federal Circuit’s rules about patent exhaustion and its willingness to enforce post-sale restrictions.

Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189, 581 U.S. __ (2017)

The Court reversed the Federal Circuit decision permitting post-sale restrictions and held that patent exhaustion applies upon the sale of the item. The Court made clear that, even if there are restrictions in contracts with customers that are clear and enforceable under contract law, they do not entitle a patentee to retain patent rights in an item that it has elected to sell. Second, the Court held that geographic limitations do not affect the patent exhaustion rule and an authorized sale outside the United States will equally exhaust all U.S. patent rights. As justification for international patent exhaustion, the Court cited the common law’s refusal to permit restraints on the aliena­tion of chattels. So, the Court decided that a patentee’s decision to sell a product will exhaust all of its U.S. patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.   

Lexmark International, Inc. (“Lexmark”) designs, manufactures and sells toner cartridges to consumers in the United States and abroad, and owns a number of patents that covers components of those cartridges and the manner in which they are used. When Lexmark sells toner cartridges, it gives consumers the option to buy a toner cartridge at full price, with no restrictions, or the option to buy a cartridge at a discount through Lexmark’s Return Program. In exchange for the lower price, customers who buy through the Return Program must sign a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark. However, companies known as remanufacturers, such as Impression Products, Inc. (“Impression”), acquire empty Lexmark toner cartridges—including Return Program cartridges—from pur­chasers in the United States, refill them with toner, and then resell them. Remanufacturers do the same with Lexmark cartridges that they acquire from purchasers overseas to import the refilled cartridges into the United States. Lexmark sued a number of these remanufacturers, including Impression, for patent infringement with re­spect to the two groups of cartridges. For the first group, Lexmark argued that, because it expressly prohibited reuse and re­sale of these cartridges, Impression infringed the Lexmark patents when it refurbished and resold them. For the second group, those that Impression had acquired abroad, Lexmark claimed that it never gave anyone authority to import these cartridges, so Impression infringed its patent rights when Impression imported the cartridges.

Impression moved to dismiss Lexmark’s claim on the grounds that Lexmark’s sales, both in the United States and abroad, exhausted its patent rights in the cartridges, so Impression was free to re­furbish and resell them, and to import them if acquired overseas. The District Court granted the motion to dismiss as to the domestic Return Program cartridges, but denied the motion as to the cartridg­es sold abroad. The Federal Circuit then ruled for Lexmark with re­spect to both groups of cartridges. Beginning with the Return Pro­gram cartridges that Lexmark sold domestically, the Federal Circuit held that a patentee may sell an item and retain the right to enforce, through patent infringement lawsuits, clearly communicated, lawful restrictions on post-sale use or resale. Because Impression knew about Lexmark’s restrictions and those restrictions did not vio­late any laws, Lexmark’s sales did not exhaust its patent rights, and it could sue Impression for infringement. As for the car­tridges that Lexmark sold abroad, the Federal Circuit held that, when a patentee sells a product overseas, it does not exhaust its pa­tent rights over that item. Lexmark was therefore free to sue for in­fringement when Impression imported cartridges that Lexmark had sold abroad. 

In an opinion delivered by Chief Justice Roberts, the Court acknowledged that a United States patent entitles the patentee, for the term of the patent, to “exclude others from making, using, offering for sale, or selling [its] inven­tion throughout the United States or importing the inven­tion into the United States,” 35 U.S.C. § 154(a), and, whoever engages in one of these acts “without authority” from the patentee, may face liability for patent infringement. 35 U.S.C. § 271(a). However, the opinion quickly reaffirmed that, when a patentee sells one of its products, he can no longer control that item through the patent laws because its patent rights are said to “exhaust” upon the sale of the item. As a result, the purchaser and all subsequent owners are free to use or resell the product just like any other item of personal property, without fear of an infringement lawsuit.

After reviewing the facts of the case and the decisions of the District Court and the Federal Circuit, the Court cited several of its cases to establish that the Court has long held that, even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product. See Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 17–18, 20, 25 (1918); United States v. Univis Lens Co., 316 U.S. 241, 250 (1942); Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008). During this discussion, the Court noted that the well-established exhaustion rule marks the point where patent rights yield to the common law principle against restraints on alienation. According to the Court, once a patentee sells an item, it has “enjoyed all the rights secured” by that limited monopoly, Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661 (1895), and because “the purpose of the patent law is fulfilled … when the patentee has received his reward for the use of his invention,” that law provides “no basis for restraining the use and enjoyment of the thing sold.” Univis, 316 U.S. at 251.  

The Court used the illustration that the business of a shop that re­stores and sells used cars is feasible because the shop can rest assured that, “so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles.” The Court noted that the “smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale.” According to the Court, “the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits … and extending the patent rights beyond the first sale would clog the channels of commerce.” The Court then noted that advances in technology, along with in­creasingly complex supply chains, will magnify this problem and, as an example, pointed to a generic smartphone assembled from various high-tech components that could practice an estimated 250,000 patents.

The Court believed that the Federal Circuit had gotten off on the wrong foot in its own analysis because the Federal Circuit understood the exhaustion doctrine as an interpretation of the infringement statute, which prohib­its anyone from using or selling a patented article “with­out authority” from the patentee. The Court noted that the Federal Circuit believed that exhaustion reflected a default rule that a patentee’s decision to sell an item “presumptively grant[s] ‘authority’ to the purchaser to use it and resell it” and that a patentee does not have to hand over the full “bundle of rights” every time. Instead, according to the Federal Circuit, the patentee could withhold a stick from the bundle—perhaps by restricting the purchaser’s resale rights— and if it did, the buyer would never acquire that withheld authority. If this were the case, the patentee may continue to enforce its right to exclude that practice under the patent laws. The Court then said that the misstep in the Federal Circuit’s logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale, but is instead a limit on “the scope of the patentee’s rights.” See United States v. General Elec. Co., 272 U.S. 476, 489 (1926) (emphasis added). So, exhaustion extinguishes this exclusionary power before the power ever arises under the Patent Act. 

The Court also addressed the Federal Circuit’s concern that pre­venting patentees from reserving patent rights when they sell goods would create “an artificial distinction between such sales and sales by licensees.” According to the Court, a patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alien­ation as a sale. Rather, according to the Court, with a license, the patentee is exchanging rights, not goods. So, a patentee’s authority to limit licensees does not, as the Federal Circuit thought, mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws. Rather, so long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. The purchasers might not comply with the re­striction, but the only recourse for the licensee is then through contract law, just as if the patentee itself sold the item with a restriction.

The Court then distinguished the General Talking Pictures case where the licensee infringed the patentee’s rights because it did not comply with the terms of its license, and the purchaser participated in the licensee’s infringement. General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 124, 127 (1938).  In that case, the licensee “knowingly ma[de] … sales … outside the scope of its license.” General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 181–82 (1938) (emphasis added). According to the Court, General Talking Pictures then stands for the modest principle that, if a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee’s rights. Again though, the Court reiterated that, once a patentee decides to actually sell an item, and not just license it, that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee pur­ports to impose, either directly or through a license.

Turning to the issue of whether an authorized sale of a patented item outside the United States, where American patent laws do not apply, will also exhaust all rights under the U.S. Patent Act, the Court decided that it would. The Court acknowledged that the Federal Circuit found that a foreign sale does not trigger patent exhaustion unless the patentee “expressly or implicitly transfer[s] or license[s]” its rights. The Court then disagreed and noted that “what helped tip the scales for global exhaustion was that the first sale doctrine under copyright law originated in ‘the common law’s refusal to permit restraints on the aliena­tion of chattels’ in that this common-law doctrine makes no geographical distinctions.” Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538-39 (2013). Further, the lack of any textual basis for distinguishing between domestic and international sales meant that “a straightforward application” of the first sale doctrine required the conclu­sion that it applies overseas. Id., at 540 (internal quota­tion marks omitted). In applying patent exhaustion to foreign sales, the Court found that “patent exhaustion, too, has its roots in the antipathy toward restraints on alienation.” Additionally, “nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales.” Since the Court recognized a “historic kinship between copyright law and patent law,” it found that the same rules should apply for both. 

The decision also addressed a case the Court had previously decided over 125 years ago concerning international patent exhaustion, Boesch v. Gräff. Chief Justice Roberts determined that the case simply illustrated “that a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction” and reaffirmed the basic premise that only the patentee can decide whether to make a sale that exhausts its patent rights in an item. See Boesch, 133 U.S. 697, 703 (1890). Finally, the Court seemed to also disregard the position of the United States, as an amicus, advocating that “a foreign sale authorized by the U. S. patentee exhausts U. S. patent rights unless those rights are expressly reserved.” In the end, the Court found that restrictions and location are irrelevant with respect to the issue of patent exhaustion and what mat­ters is the patentee’s decision to make a sale.

Justice Ginsburg agreed with the decision that a patent is exhausted upon the sale of items in the United States, but disagreed with the decision regarding international sales recognizing that there are differences in copyright and patent laws in the United States and that they should have some effect.  

For Further Information

For more information about the opinion, please contact John M. Neclerio, Matthew C. Mousley, any lawyer in our Technology Transactions & Licensing Practice Group, any lawyer in our Intellectual Property Practice Group or the lawyer in the firm with whom you are regularly in contact.

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