United States: Supreme Court Hears Oral Argument In Impression Products Inc. v. Lexmark Int'l, Inc.

On March 21, 2017, the Supreme Court of the United States heard oral argument in Impression Prods., Inc. v. Lexmark Int'l, Inc. This case concerns whether a patentee's U.S. patent rights may be exhausted by certain conditional U.S. sales, or by foreign sales of a patented item.

Background

Lexmark sells patented printer cartridges for use in Lexmark's printers. Impression buys printer cartridges, remanufactures them, and resells them within the U.S. Lexmark sued Impression for patent infringement, based on Impression's resale and/or importation of cartridges remanufactured from Lexmark cartridges that were (i) first sold in the U.S. at a discount in exchange for a customer's agreement to abide by a single use restriction ("Return Program Cartridges"), or (ii) first sold outside the U.S., either as "Return Program Cartridges" or at full price without restriction. The District Court for the Southern District of Ohio concluded that, while foreign sales did not trigger exhaustion, U.S. sales did trigger the exhaustion doctrine and prevented Lexmark from suing Impression.

On appeal, Impression argued that two Federal Circuit cases concerning the exhaustion doctrine had been overruled by later Supreme Court cases. First, Impression argued that Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), which held that a foreign sale does not exhaust U.S. rights, had been implicitly overruled by the Supreme Court's broader view of exhaustion under copyright law in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013).

Second, Impression argued that Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), in which a conditional sale of a patented article was found not to exhaust the patentee's rights, was overturned by the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). The Federal Circuit, sitting en banc, reaffirmed its earlier decisions, finding them unaffected by the Supreme Court's later rulings.

On December 2, 2016, the Supreme Court granted certiorari.

The Oral Argument

At the March 21, 2017 oral argument, Andrew J. Pincus spoke for Petitioner Impression, Constantine L. Trela, Jr. spoke for Respondent Lexmark, and Malcolm L. Stewart, Deputy Solicitor General, spoke for the United States as amicus curiae.

The Supreme Court noted several times that Impression was seeking a significant expansion of the current scope of the exhaustion doctrine. Justice Kennedy asked Mr. Pincus why the exhaustion doctrine has not been codified in the 1952 patent statute, and whether the failure to codify the doctrine suggests that the Court should be "cautious" in "extending" the doctrine's reach. Justice Alito noted that the "Federal Circuit's rule on this is 25 years old." And Justice Sotomayor observed that Impression's position on the foreign sales question raised "serious issues" and "negative consequences." Mr. Pincus acknowledged that Impression's position could have such consequences, but observed that the Supreme Court has disrupted the settled expectations of patentees before to "get[]the law right," citing the Alice decision as an example.

As to the foreign sales question, Justice Alito noted that in recent years, the Supreme Court has held that "a statute does not apply outside the United States unless it says that it applies outside the United States," and asked Mr. Pincus why the same shouldn't apply to a common-law rule. Mr. Pincus responded that he did not believe that extraterritoriality was implicated, and that the issue at hand instead concerned enforceability of U.S. patent rights.

The Court sought clarity from both Impression and Lexmark over whether a patentee has, through a foreign sale of a patented item, recouped the value of its U.S. patent. Justice Sotomayor voiced some skepticism on this point, stating that regardless of whether a U.S. or foreign patent is implicated, the patent owner is still receiving value. Mr. Pincus agreed. Lexmark's counsel, Mr. Trela, however, pushed back, asserting that the exhaustion doctrine is based upon the notion that a U.S. patentee is entitled to a premium for forfeiting its U.S. patent rights, and that because a U.S. patent has no force overseas, a foreign sale cannot constitute a premium for forfeiting U.S. rights. He also noted that the scope of a patentee's rights can vary widely across countries, citing as an example restrictions on software patents in certain foreign jurisdictions. He further noted that the unilateral adoption by the United States of a "blanket international exhaustion doctrine" could have consequences for international trade.

The government also weighed in on the foreign sales question, advocating a compromise position. According to Mr. Stewart, a U.S. patentee should be able to reserve its U.S. rights following a foreign sale (for example, to prevent a foreign buyer from re-importing products)— provided, however, that the patentee "expressly" reserve those rights. Justice Breyer expressed some concern about how an express reservation of rights would work in practice, and about the hypothetical liability faced by downstream consumers who haven't received adequate notice of such reservation of rights.

Those concerns carried over to Justice Breyer's questions to Mr. Trela. Mr. Trela offered several responses to address those concerns. For example, Mr. Trela noted that it has long been held that conditional sales of patented items are legal and valid, and that a buyer who resells a patented item cannot covey to downstream consumers more rights to the item than he has received. He also asserted that any liability faced by "unwitting" downstream consumers for infringement following a conditional sale is a consequence of patent law itself (which generally does not require that infringers know of their infringement), rather than of the exhaustion doctrine. He further argued that, as a practical concern, patentees were unlikely to sue individual consumers for infringement, and that other legal protections, such as UCC 2-312's warranty against third-party claims of infringement, would serve to shield consumers from liability.

Justices Roberts and Breyer asked questions as to whether contract law, rather than patent law, might be a more appropriate vehicle for enforcing post-sale restrictions on patented items. Mr. Trela noted that certain contract restrictions on resale could not be enforced against downstream parties due to lack of privity, and that certain remedies—in particular, injunctive relief—might not be available to patentees under contract law.

Conclusion

It is difficult to predict how the Court will decide this case. While Justice Breyer asked the most questions and seemed most concerned about the interests of downstream consumers following conditional sales, the other Justices seemed to acknowledge that Impression's positions on both the domestic and foreign sales questions would disrupt settled expectations and present serious consequences. Regardless of how the case is decided, the decision should clarify issues of considerable import to U.S. patentees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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