United States: Supreme Court Holds That Sale By Patentee Exhausts Patent Rights Regardless Of Restrictions Or Location Of Sale

In Impression Products, Inc. v. Lexmark International, Inc., the Supreme Court held today 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. 581 U.S. ___ (2017), slip. op. at 2. The decision overturns Federal Circuit case law holding that (1) a patentee may bypass the exhaustion doctrine by selling an item under an express restriction on the purchaser's right to use or resell the product, and (2) a patentee does not exhaust its rights under United States patents when selling its product abroad. Id. at 1-2. Chief Justice Roberts delivered the opinion for the Court, in which Justices Kennedy, Thomas, Breyer, Alito, Sotomayor, and Kagan joined. Justice Ginsburg filed an opinion concurring with the decision regarding restrictions on sales, but dissenting with respect to the territorial exhaustion issue. Justice Gorsuch took no part in the consideration or decision of the case.

Background

Lexmark manufactures and sells printers and toner cartridges covered by multiple Lexmark patents in the United States and foreign markets. Toner cartridges are sold under two programs: a "regular" program, under which cartridges are sold at full price and without restriction on resale or reuse of the cartridge; and a "return" program under which cartridges are sold at a 20% discount, but subject to single-use and no-resale restrictions. Impression is a small business that acquires spent toner cartridges originally sold in the United States and abroad for refilling and sale in the United States, including restricted return program cartridges that are altered by microchip replacement to circumvent Lexmark enforcement. Lexmark sued Impression for patent infringement in connection with both United States and foreign toner cartridges. Impression argued that Lexmark's patent rights had been exhausted by Lexmark's first sale of the cartridges both domestically and abroad. Id. at 2-3.

In Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721 (Fed. Cir. 2016), the en banc Federal Circuit held that (1) the sale of an article under clearly communicated and otherwise lawful restrictions on use and resale avoids patent exhaustion and preserves the patentee's rights to pursue infringement remedies both against the first buyer and downstream purchasers with knowledge of the restrictions, and (2) a patentee's or licensee's foreign sales of a patented article do not exhaust the United States patent rights in the article sold, even if no reservation of those rights accompanies the sale. 581 U.S. ___ (2017), slip. op. at 4-5.

The Supreme Court granted certiorari to consider the Federal Circuit's decisions with respect to both domestic and international exhaustion and reversed. Id. at 2, 18.

With respect to the single-use/no-resale restrictions in Lexmark's contracts with customers, the Court held that while these restrictions may have been enforceable under contract law, the patent exhaustion doctrine does not entitle a patentee to retain patent rights in an item it has elected to sell. The Court relied principally on the common law's well-established refusal to permit restraints on the alienation of chattels and a string of the Court's decisions in the area of patent exhaustion culminating recently in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). 581 U.S. ___ (2017), slip. op. at 6. Importantly, the Court corrected the Federal Circuit's reasoning in the underlying appeal, explaining that the exhaustion doctrine is not a presumption about authorization that comes along with the sale of a product, but is instead a limit on the scope of the patentee's rights and thus may not be avoided by contract. Id. at 9-10. The Court's decision has the effect of overruling the Federal Circuit's long-questioned and much-criticized decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), which held that exhaustion could be avoided by conditioning the sale on restrictions as to post-sale use or resale.

The Court discussed the impact of its holding on sales by licensees, observing that so long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. As is the case with sales by patentees, an authorized sale by a licensee exhausts the patent, though the Court noted that a license may require the licensee to impose a contractual restriction on purchasers. On the other hand, consistent with the Court's decision in General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, aff'd on reh'g, 305 U.S. 124 (1938), where a licensee does not comply with the conditions of a license in selling an item, the patentee may bring an infringement suit against the licensee or the purchaser. 581 U.S. ___ (2017), slip. op. at 11-13.

With respect to sales abroad, the Court held that an authorized sale outside the United States, just as one within the United States, exhausts all rights in the patent, again noting the common law's refusal to permit restraints on alienation of chattels and the Court's recent precedents. The Court cited, among other decisions, its recent holding in Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), which found international exhaustion in the context of copyright law. 581 U.S. ___ (2017), slip. op. at 13-14. The Court's decision overruled the Federal Circuit's blanket rule that foreign sales do not trigger exhaustion, announced in Jazz Photo Corp. v. International Trade Comm'n, 264 F.3d 1094 (Fed. Cir. 2001).

Importance of the Decision

The Federal Circuit's decision in Lexmark created tension with the Court's recent authority on intellectual property exhaustion announced in Quanta and Kirtsaeng, so the result in this case is not unexpected.

The Court's decision will be viewed by many, especially in the electronics industry, as relieving a great deal of uncertainty as to whether the purchase of patented components in the worldwide market exhausts the patents of manufacturers and their licensors. These purchasers will gladly welcome the decision and concur with the Court's observation that "extending patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain." 581 U.S. ___ (2017), slip. op. at 7-8.

On the other hand, the decision may prove problematic for companies that have a strong interest in differentiated downstream licensing models, such as in the pharmaceutical industry. Licensing models built around field-of-use licenses now face the challenge of how to protect against the use and resale of products that are sold by the licensee under authorization within the designated field, but are used or resold downstream into other, unauthorized fields. The Court's decision suggests that the exhaustion doctrine is absolute and that infringement remedies will not be available against such downstream purchasers, but leaves open the possibility of contractual remedies for breach of field restrictions. Fashioning appropriate contractual restrictions and mechanisms for successfully imposing such restrictions on downstream purchasers that are not in privity with the patentee or licensee will require creativity and discipline in commercial dealings.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.