United States: Supreme Court Announces ‘Uniform And Automatic' Rule For Patent Exhaustion

The Supreme Court on Tuesday, May 30, issued an opinion in Impression Prods., Inc. v. Lexmark Int'l, Inc., No. 15–1189 (S. Ct. May 30, 2017), [hereafter "Lexmark"], reversing the Federal Circuit on two aspects of the patent exhaustion doctrine and redefining the boundaries of the rights afforded a patentee under the Patent Act. Chief Justice Roberts authored the opinion, from which Justice Ginsburg dissented in part.

Under 35 U.S.C. § 154(a), a patent grants to the patentee "the right to exclude others from making, using, offering for sale, or selling" the patented invention. Infringement of a patent occurs when "whoever without authority makes, uses, offers to sell, or sells" the patented invention in the U.S., or imports the patented invention into the U.S. during the life of the patent. 35 U.S.C. § 271(a). But a patentee's right to exclude and ability to obtain damages for infringement are not without limit. The doctrine of patent exhaustion holds that when a patentee sells a patented item, that sale removes the item from the reach of the Patent Act. Lexmark, slip op. at 6. The purchaser is then free to use, sell or otherwise dispose of the item as he or she sees fit, without fear of liability for infringement.

Prior to this decision, patent exhaustion did not prohibit a patentee from imposing post-sale restrictions on the use of a patented invention, and it did not apply to foreign sales. Lexmark Int'l, Inc. v. Impression Prods., Inc., 816 F.3d 721, 773-74 (Fed. Cir. 2016) (en banc). A patent owner could lawfully condition the sale of a patented product in the U.S., or sell a patented product abroad, and still be able to control downstream sales and uses of the product through infringement actions. This view of patent exhaustion, endorsed by the Federal Circuit's en banc opinion in 2016, enabled businesses such as Lexmark Inc. to enforce their patent rights after selling their patented products.

Lexmark manufactures refillable toner cartridges for printers; it sells its cartridges in the U.S. either at a 20 percent reduced price with certain restrictions, or at full price with no post-sale restrictions on the purchaser. A purchaser opting for the reduced price agrees to return the used cartridge to Lexmark, whereas a full-price purchaser can keep, resell or discard the cartridge however he or she wishes. Lexmark also sells its cartridges abroad, free of post-sale restrictions.

This business model gave rise to competitors such as Impression Products and other companies that purchase used Lexmark cartridges, refill them with toner and resell them to consumers. Impression also purchases Lexmark cartridges sold to retailers abroad, and imports them into the U.S. When Lexmark sued to stop these "remanufacturers" from reselling refilled cartridges and importing foreign-sold cartridges, the Federal Circuit held that exhaustion did not preclude the remanufacturers' liability for patent infringement. 816 F.3d at 734.

The Federal Circuit reasoned that patent rights are not exhausted by lawful post-sale restrictions and foreign sales because exhaustion "derives from the prohibition on making, using, selling, or importing items 'without authority.'" Id. Lexmark could still sue downstream users and sellers of their cartridges who did not abide by the agreement imposed at the time of sale, or who imported the foreign-sold cartridges into the U.S., because these sellers acted "without authority" and therefore infringed. Id. at 734-41.

According to the Supreme Court, the Federal Circuit "got off on the wrong foot" when it began its assessment of exhaustion through the lens of the infringement statute. Lexmark, slip op. at 9. That is because "patent rights yield to the common law principle against restraints on alienation." Id. at 6. Indeed, "[t]he right to use, sell, or import an item exists independently of the Patent Act," and should not be viewed first through the lens of infringement. Id. at 9-10.

One question that arises from this analysis is whether patentees may enforce post-sale restrictions on licensees and on consumers who purchase patented items through licensees. Addressing this question, the Court distinguished the rights of a licensee from those of a purchaser. The Court held that patentees remain free to impose restrictions on licensees because a license does not pass title to a product; it merely adjusts "the contours of the patentee's monopoly" by "expanding the club of authorized producers and sellers." Id. at 11.

Thus, the Court delicately maneuvered around its own precedent in General Talking Pictures Corp. v. Western Elec. Co. by reasoning that a license carrying restrictions on the licensee does not exhaust patent rights, even though the licensee's subsequent sales to purchasers in accordance with the restrictions does. 305 U.S. 124 (1938). And where the licensee's subsequent sales to purchasers violate the license terms, the patentee's rights are not exhausted because "the patentee has not given authority" for that sale. Lexmark, slip. op. at 12-13.

Also at issue was whether Lexmark's foreign sales exhaust its patent rights, precluding Impression Products from infringement liability for its importation of foreign-sold Lexmark cartridges. The Federal Circuit's 2016 opinion reiterated prior holdings that foreign sales do not exhaust a patentee's right to sue for infringement after the first sale. The Federal Circuit held that the Supreme Court's intervening decision in Kirtsaeng v. John Wiley & Sons, Inc., which held copyright law's first sale doctrine is applicable to foreign sales, did not alter patent law's exhaustion doctrine. 568 U.S. 519, 538 (2013).

The Federal Circuit based its opinion on the differences between copyright law and patent law, and particularly on the territoriality of patent law. Because patentees possess no rights to assert their patents outside of the U.S., the court reasoned, foreign sales should not exhaust their rights in the U.S. 816 F.3d at 752-53.

Over Justice Ginsburg's dissent on this issue, the Supreme Court rejected the Federal Circuit's analysis, holding that "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act." Lexmark, slip op. at 13. It clarified that a U.S. retailer that purchases infringing items from a foreign manufacturer still may face liability for infringement even though it bought the items abroad, but only if "the patentee had nothing to do with" the transaction with the foreign manufacturer. Id. at 16. Under Lexmark, a patentee who decides to sell his or her products to a foreign retailer cannot subsequently hold liable for infringement a domestic business that imports the foreign-sold products. Id.

The Court also rejected the "middle-ground" argument, advocated by the government as an amicus, that a foreign sale expressly reserving certain rights to the patentee should not exhaust the patentee's rights. Id. at 16-18. The government's position was that foreign buyers would not presume to acquire all the rights pursuant to title in an item, the purchase of which was conditioned on certain post-sale restraints. Id. at 17.

Explaining that this argument "wrongly focuses on the likely expectation of the patentee and purchaser during a sale," the Court held that exhaustion applies to every authorized sale of a patented item, regardless of restrictions imposed on the buyer and regardless of the buyer's location. Id. at 18.

Although the opinion sets forth a bright-line rule that is "uniform and automatic" for patent exhaustion, the Lexmark decision severely limits patentees' ability to control downstream sales and uses of patented products under the force of the patent laws. Id. at 13. Patent owners such as Lexmark that wish to maintain a degree of exclusivity over the downstream commercial activity of their patented inventions will need to devise alternative business models in light of this decision. Such models may incorporate pursuing and asserting method patents, where appropriate, and relying more heavily on remedies under contract law.

If protecting a method of using (and reusing) an invention is not an option for some patent holders facing problems of remanufacturers or other downstream resellers, then perhaps marketing technology in a manner that retains ownership and control of the product is an option. As an example, licensing technology and leasing patented items to users may suggest a way for patent owners to retain protection of their intellectual property.

Such arrangements could better prepare the patentee to pursue remedies for breach of contract while at the same time leaving patent infringement on the table, even after the patentee has placed his or her technology into the market.

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.

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.