United States: First Sale Extinguishes Patent Rights: Supreme Court Guts Manufacturer Control Over Secondary Market

Manufacturers have long used patents, licenses and litigation to deter competitive products and restrict secondary markets in their products. The U.S. Supreme Court just dealt these practices a severe blow, confirming that a patent holder cannot extend its patent rights to enforce post-sale restrictions after an authorized sale of a patented item, regardless of whether the sale occurs in the United States or abroad.

In Impression Products, Inc. v. Lexmark, Int'l, Inc., Case # 15-1189, 581 U.S. ___ (May 30, 2017), the court held that patent holders cannot enforce post-sale conditions imposed on patented products. Lexmark had been selling its printer cartridges to purchasers under a "Return Program" that prohibited reuse and resale of the cartridges. Lexmark had been attempting to enforce its patents through infringement actions against companies who acquired used printer cartridges from purchasers, refilled the cartridges, and sold the refilled cartridges for a fraction of the new cartridge price. In Impression Products, the U.S. Supreme Court held that Lexmark could not enforce its patents against remanufacturing companies after the first sale by Lexmark because Lexmark's patent rights were exhausted upon such sale.

The ruling affirmed that the "patent exhaustion" doctrine does not extend beyond the sale of a patented product and that a patent-holder's patent rights will not enable manufacturers to control resale of the product. The trigger that terminates or "exhausts" a patent holder's rights is the sale of the patented item. After the sale, a patent holder's remaining rights are a matter of contract law, potentially enforceable through contracts with purchasers.

What happens next?

The U.S. Supreme Court drew a clear line in Impression Products: The patent holder's patent rights in a patented item are exhausted upon an authorized sale of the item. Further, the patent exhaustion rule applies whether the sale occurs in the United States or abroad and that certain licenses will be treated the same as a sale under patent exhaustion.

According to the U.S. Supreme Court, a patent holder cannot avoid the patent exhaustion doctrine by adding a go-between. In other words, a patent holder cannot do indirectly what a patent holder cannot do directly. For example, suppose a patent holder grants a license, and the license grant allows the licensee to sell licensed products and imposes a post-sale restriction on the licensee's purchasers (grounded in contract law, not as a matter of patent law). Upon a sale of the licensed products, the patent holder's rights are exhausted, even though the patent holder did not itself sell the licensed product and sold the item through an intermediary. Under the Impression Products holding, the patent holder cannot use a patent infringement action to enforce the post-sale restriction in the license agreement.

What were the circumstances in the Impression Products case?

Lexmark sells printer cartridges to consumers in the U.S. and around the world. Lexmark holds patents covering components and methods related to the cartridges. Lexmark offered cartridge purchasers the option of a "Return Program." Customers would receive a twenty percent discount if they agreed to use the cartridge only once and return it to Lexmark and no other company.

Remanufacturers, such as Impression Products, acquire the empty cartridges, refill them, and sell the refilled cartridges. Lexmark sued Impression Products, arguing that Impression Products infringed the Lexmark patents because Lexmark expressly prohibited the refurbishing and resale of the printer cartridges.

The Federal Circuit ruled for Lexmark, holding that a patent holder may sell a patented item and retain the right to enforce, via infringement suits, lawful post-sale or resale restrictions that are clearly communicated to purchasers, relying on Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). However, the Supreme Court confirmed the patent exhaustion doctrine does not allow patent holders to retain any patent rights upon sale of a patented item.

According to the U.S. Supreme Court, a sale of a patented item, like a cartridge, transfers all rights in such item, including the right to sell, use and import the purchased item, and the patent holder retains no exclusionary right under patent law. Purchasers are thus free to refurbish and/or resell the purchased items without the threat of a patent infringement suit.

So what does this decision mean for Manufacturers?

After Impression Products, the patent exhaustion rule is "uniform and automatic." Once a patent holder authorizes the sale of a product covered by its patents—whether on its own or through a licensee—that sale exhausts the patent holder's patent rights, regardless of any post-sale restrictions the patent holder purports to impose, either directly or indirectly through a license arrangement. The same rule applies regardless of whether the sale occurs in the United States or abroad.

The Impression Products ruling may have precedent-setting reach outside of printer ink, potentially affecting how a wide array of products are sold. While a manufacturer can choose to only contract with distributors that accept the manufacturer's contract terms, including post-sale restrictions, if those restrictions are grounded in patent law, they may no longer be enforceable. Manufacturers may also be able to engage in technological self-help outside of contractual protections; for example, some manufacturers already equip printers with technology to block use of unauthorized printer cartridges.

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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