Canada: Impression v. Lexmark* – Exhaustion Of Patent Rights In The U.S.

In a highly anticipated decision addressing the doctrine of exhaustion of patent rights in the U.S., the Supreme Court of the United States has reversed the U.S. Federal Circuit's decision and held that a patentee's sale of a patented product exhausts all of its patent rights in the product, regardless of any post-sale restrictions a patentee purports to impose through its patent rights, and regardless of whether the sale was made in the U.S. or abroad by the patentee. However, the Court also clarified that if the patentee negotiates a contract restricting a purchaser's right to use or resell the product after the sale, the patentee can enforce the restrictions against the purchaser as a matter of contract law.

This case involves Lexmark's toner cartridges for its printers, and the practice of remanufacturers who acquire empty Lexmark toner cartridges, refill them, and resell them into the U.S. market. Lexmark sued a number of remanufacturers including Impression for patent infringement with respect to their activities in the U.S., using empty Lexmark toner cartridges acquired from purchasers in the U.S. and from abroad. Lexmark structures its sales to encourage customers to return empty cartridges through its "Return Program" for a discount. A customer who buys through the Return Program signs a contract agreeing to use it only once, and not to transfer the empty cartridge to anyone but Lexmark. Lexmark also installs a microchip on each Return Program cartridge as a technology measure to prevent reuse. However, remanufacturers have developed ways to defeat the technology measure.

Lexmark argued that as it has expressly prohibited reuse of its Return Program toner cartridges, that Impression and other remanufacturers infringed Lexmark's patents by refurbishing, refilling and selling them in the U.S.

Impression countered that Lexmark had exhausted its patent rights when it first sold the toner cartridges in consideration for payment, whether sold in the U.S. or abroad, and that Impression was free to refill and resell them, and to import them from abroad.

Writing for a majority of seven Supreme Court justices, joined in part by an eighth, Chief Justice Roberts delivered the opinion of the Court that when a patentee sells one of its products, the patentee can no longer control the item through the patent laws. More specifically, the Court found that with respect to the Return Program cartridges that Lexmark sold in the U.S., Lexmark had exhausted its patent rights in the cartridges the moment it sold them. Nevertheless, the Court also clarified that the single-use/no-resale restriction in Lexmark's contracts with customers are enforceable under contract law.

Justice Roberts writes that the lower Federal Circuit reached its decision in favor of Lexmark because "it got off on the wrong foot" that the exhaustion doctrine must be understood as an interpretation of the infringement statutes, resulting in a misstep in logic that a patentee does not have to hand over the full bundle of patent rights every time. Rather, Roberts writes that "sale [of a patented product] 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 right left to enforce."

Roberts notes that patentees who license others to practice a patent may still retain the right to sue licensees for patent infringement if restrictions under the patent license are violated. However, the patentee's rights over the licensee do not extend to enable post-sale restrictions by the patentee on purchasers that are enforceable through patent laws. Roberts concludes:

In sum, patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee pur­ports to impose, either directly or through a license.

With respect to importation of printer cartridges from abroad, drawing parallels between international copyright laws and patent laws, Roberts found that foreign sales of a patented product by a patentee also exhaust its patent rights because it elected to give up title to an item in exchange for payment:

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.

As a result of this Supreme Court decision, owners of U.S. patents may now have more limited options in controlling patented products once sold by the patentee in the U.S., and in preventing importation into the U.S. of products sold by the patentee abroad.

However, given that the Supreme Court clarified that a patentee and a purchaser of a patented product may enter into a contractual agreement with post-sale restrictions, it seems that such a contractual agreement should be considered for the U.S. market, if appropriate, in lieu of seeking enforcement via patent rights.

While Canada does not have a directly analogous doctrine of exhaustion in its statutes or jurisprudence which mirrors that in the U.S., the Federal Court of Appeal in Canada has referenced as "settled law" an implied license granted to a purchaser:

It is settled law that the purchaser of a patented article from a patentee acquires, at the same time, an implied license to use the article and the right to sell it, together with the same "right to use" to another person. [Signalisation de Montreal Inc. v Services de Béton Uni­versels Ltée, [1992] F.C.J. No. 1151.]

Pitched against public policy as expressed in Federal competition laws, a patentee's rights after sale of a patented product in Canada are also limited, although not in a directly analogous manner to the doctrine of exhaustion in the U.S. Therefore, clients seeking to impose any post-sale restrictions on patented products in Canada are urged to seek advice before doing so.

*Impression Products, Inc. v. Lexmark International,15  S.Ct. 1189 (2017). Argued March 21, 2017—Decided May 30, 2017.

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