Canada: U.S. Supreme Court On Patent Exhaustion: Impression Products V. Lexmark International

Last Updated: June 19 2017
Article by Ken Bousfield

U.S.S.C., May 30, 2017

Lexmark produced patented printer cartridges. It offered them for sale at a higher price for a single use cartridge, and at a lower price for a cartridge re-fillable by Lexmark. Impression Products reconditioned and re-filled cartridges without Lexmark's permission. Some of the re-filled cartridges were obtained in the U.S., others were imported.

There were two questions:

  1. Whether a patentee who sells a product under an express restriction on the purchaser's right to re-sell or re-use may enforce that restriction through an infringement lawsuit.
  2. Whether a patentee exhausts its patent rights in one country by selling its products outside that country.

In a decision written by the Chief Justice, the Court overturned the Federal Circuit.1: "We conclude 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."

On the first question, the Court held unanimously that the patentee could not enforce the restriction through patent law. Once a sale had taken place, the patentee had received the benefit of its patent right, and had no further right under the Patent Act, although a remedy might lie in contract. The Court distinguished such a sale from a license:

"A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee's monopoly ... .... Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections2."

The decision invites patentees to structure transactions as licenses rather than sales. The USSC rationale advanced in respect of licenses mirrors the overturned position of the Fed. Cir., in respect of withheld authority, but in the context that calling the transaction a "license" would not have removed it from the Patent Act. Would the restraint on trade be any less if the sale were a "license" or were enforced under contract law?

On the second question, with only Ginsburg J., dissenting, the Court held that any foreign sale permitted by the patentee exhausted the patentee's right in the U.S. In dissent, Ginsburg J., pointed out that patent rights are territorial, and that the grant of a U.S. patent is a different right from the grant of a patent in a foreign jurisdiction.

The case raises a number of issues.

In the re-fill cases, whether involving printer cartridges, or cameras, or coffee, the product may be sold at a low price, or even a loss, to gain a captive revenue stream for consumables.3 The vendor-exclusive unique geometry of the patented cartridge is the vehicle by which the larger profit on the sale of the non-patented commodity, namely the replacement ink, is gained. This business model is also seen in aircraft, farm equipment, constructions equipment, razors and automobiles, where the initial sale locks the buyer into long term servicing or spare parts reliance on the vendor.

In effect, the patent is used to create a tied selling condition between a patented item (the cartridge) and an unpatented ancillary commodity (the ink). The issue is whether the resultant restraint on trade is contrary to public anti-trust policy, not whether enforcement should properly be under contract law, rather than patent law.

Thus, the distinction in the case between a transfer of title in the cartridge, and a mere license seems hollow: It would be no less a restraint on trade if it were called a license. The issue is the anti-competitiveness of tied selling, not the avenue of enforcement.

Similarly, Ginsburg J., may have had the better point on foreign sales. Notwithstanding Betts v. Wilmot,4 a patent right in France is not also a patent right in England.

The decision in Impression Products is problematic: If the U.S. patentee lacks a patent in Freedonia, anyone can make and sell the invention there, and any sale must be price competitive. Yet a patentee-originating sale there will be deemed to have exhausted the U.S. right.

So, the U.S. patentee faces the choice of (a) abandoning export opportunities to competitors; (b) exposing itself to grey-market imports of its own products; or (c) only selling at the lowest price in any country in which the good is sold – i.e., as if the patentee had no patent, anywhere. Is curtailing exports really an objective of patent law?

Alternatively, the U.S. patentee may have patents in several countries. The patentee may sell those rights to one company in North America, and to others in Europe and East Asia. According to the Impression Products, the Assignee in North America would have no remedy against imports of goods obtained from either the European or East Asian Assignees, since those sales derived from the original patentee's right. What assignee would wish to buy a patent under those conditions? Does that not reduce the value of patent portfolios? It would be odd if buying a house in France also gave the purchaser a right to trespass on the vendor's other properties in Britain and Australia.

The USSC relies on venerable authority and commentary on the evils of restraints of trade5, and rightly so. Yet the economic issue in Impression Products is neither the avenue of enforcement, nor whether the re-filled cartridge is domestic or imported. The issue is whether the patentee has attempted to stretch the patent right beyond the bounds of the grant by leveraging it to extract economic rent on an associated non-patented item – namely the ink. Tied selling is offensive not because it is enforced by suit for patent infringement rather than contract, but by virtue of being tied selling. Similarly, if the problem is tied selling, it is irrelevant whether the good originates domestically or elsewhere: the problem is the tied sale, not the right to import.

Although the decision appears to have given clear and simple guidance to the public, it may have unexpected economic consequences.

Footnotes

1 Impression Products v Lexmark International, 816 F (3d) 721 (Fed Cir 2016). The Fed. Cir. had focused on the lack of authorisation by the patentee, "Federal Circuit held that a patentee may sell an item and retain the right to enforce, through patent infringement lawsuits, "clearly communicated, . . . lawful restriction[s] as to post-sale use or resale." The exhaustion doctrine, the court reasoned, derives from the prohibition on making, using, selling, or importing items "without authority." When you purchase an item you presumptively also acquire the authority to use or resell the item freely, but that is just a presumption; the same authority does not run with the item when the seller restricts post-sale use or resale." (citations omitted). This is similar to Canada, where a purchaser of a patented good is presumed to be an implied license to make use or sell, unless the patentee displaces that presumption.

2 Internal citations omitted.

3 Jazz Photo Corp v International Trade Commission, 264 F (3d) 1094 (Fed Cir 2001).; Keurig v. Sturm Foods, 732 F.3d 1370 (Fed. Cir. 2013)

4 Betts v Wilmott, (1870–71) LR 6 Cp App 239.

5 1 E. Coke, Institutes of the Laws of England §360, p. 223(1628); see J. Gray, Restraints on the Alienation of Prop­erty §27, p. 18 (2d ed. 1895)

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