United States: Podcast - Supreme Court Ruling: Impression Products v. Lexmark International

In its May 30, 2017 decision in Impression Products v. Lexmark International, the U.S. Supreme Court expanded the scope of the patent exhaustion doctrine – a decision that could have substantial effects on patent owner rights, licensing practices, and what companies and consumers may do with products they buy.  Ropes & Gray IP litigation counsel Matt Rizzolo (Washington, D.C.) and associate Henry Huang (Silicon Valley) discuss the Court's ruling and its implications. 

Download Podcast

Matt: Hello and welcome to a special follow-up podcast in our Supreme Court series.  I'm Matt Rizzolo, IP litigation counsel in the Washington, D.C. office of Ropes & Gray.  Today's podcast topic is the Supreme Court's recent ruling in Impression Products v. Lexmark.  Joining me again today is my Silicon Valley colleague Henry Huang.  Henry is an IP litigation associate and a former district court and Federal Circuit clerk.  You might have heard our podcast a few weeks ago previewing this case.  Today we'll offer insights into the Court's ruling and discuss how this might affect you—as a consumer, a patent owner, or a reseller of products.

Let's start with a quick recap.  Henry—remind us what this case is about.

Henry: This case is about patent exhaustion and whether a patent owner can restrict what happens to patented products after they're sold.  Lexmark is a printer company that sells toner cartridges and has patent rights on those cartridges.  Lexmark tried to limit what customers could do with their cartridges after buying them, such as preventing customers from reselling or reusing them.  Impression is a small company that refurbishes and resells cartridges, including Lexmark's products.  Lexmark sued Impression, and the case went up to the Federal Circuit, which gave Lexmark a win ruling that no rights were exhausted due to Lexmark's sales in the U.S. or in other countries.  Then the Supreme Court took the case.

Matt: The Supreme Court was almost unanimous in reversing the Federal Circuit, is that right?

Henry: Yes.  The Court issued a near-unanimous decision that greatly expands patent exhaustion and limits patent rights.  As I mentioned, there were two issues about exhaustion—one related to conditional sales here in the U.S., and one related to sales made abroad.  On the first issue, about domestic exhaustion, the Court ruled 8-0 for Impression (Justice Gorsuch did not participate).  The Court held that when a patentee sells a product, it loses all rights to control what happens to that product afterwards.  On the second issue, about international exhaustion, the Court went 7-1 for Impression, holding that selling products in another country also exhausts U.S. patent rights.  Justice Ginsburg dissented on the second issue because she believed that U.S. patent law should not affect actions in other countries, whose patent laws may differ from those in the U.S. 

Matt: Reading the opinion, it seems like a big part of the decision was an issue we mentioned in our first podcast—the historical legal source of the patent exhaustion doctrine.

Henry: That's right.  Impression claimed that patent exhaustion is based on court-made common law dating back hundreds of years, which says that there can be no post-sale restrictions on personal property.  Lexmark, on the other hand, argued that patent exhaustion comes from the Patent Act, and specifically 35 U.S.C. § 271(a), which prevents others from making, using, or selling a patented product "without authority."  The Supreme Court agreed with Impression, and the Court said that common law doesn't distinguish between authorized sales here or in other countries.  According to the Court, "An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act."  In fact, Justice Roberts said that exhaustion has "an impeccable historic pedigree."  But while the Supreme Court stressed the historical source of the patent exhaustion doctrine, it seems pretty clear that this decision changes the patent licensing landscape.

Matt: I agree.  It is a bit too early to say, but Lexmark could affect a lot of patent ownership and licensing practices.  Patent owners will still want to maintain control over their products and maximize their revenue streams, without running afoul of the law.  One issue that the Court left open is what constitutes an "authorized sale."  For example, if a company sells products, what happens if it transfers its patent to a subsidiary?  Is the first company no longer the patentee, so that its sales are not "authorized" under the patent?  If so, then the subsidiary can still sue downstream customers.  So companies might try to create new ways to transfer ownership of patents to avoid this rule.

Henry: There's also a particularly important part of the opinion where the Supreme Court reaffirms the difference between "sales" and "licenses."  The Court said, "A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale."  This indicates that it's still possible to impose post-sale restrictions in patent licenses, such as preventing licensees from re-selling the product or using it in certain markets.  So one question that commentators have raised is whether certain companies may change their business models and simply say they are "licensing" their products to customers, instead of "selling" them.  We could see a lot more product "licenses" instead of sales to try to avoid triggering patent exhaustion.

Matt: It seems like those types of transactions might be easier to do in some industries rather than in others.  What industries do you think will be principally affected by this case?

Henry: It is hard to say this early, but we have some idea, partly because of the companies who filed amicus briefs with the Supreme Court.  As we pointed out in the first podcast, a bunch of retailers supported Impression because they sell or re-sell products, some of which have many patented components.  The same is true for some technology companies like Intel, who have complex supply chains across the world.  On the other hand, pharmaceutical and medical device companies sided with Lexmark because they want stronger control over their products.  Some news stories are already predicting that drug prices will come down because it might be easier to import cheaper drugs from other countries, though there are still are still a number of FDA rules that restrict that.

Matt: That's a very good point—those existing FDA rules may prevent arbitrage between the foreign and domestic drug markets despite this ruling.  For other industries, though, I imagine that this type of parallel importation may become much more appealing—especially importation from countries where certain types of patent protection may be harder to obtain.  There's a possibility that we could see increased activity in Section 337 actions at the International Trade Commission in D.C. as a result.  I could certainly envision some companies arguing that such parallel importation is an unfair trade practice prohibited by Section 337.

So Henry, what happens to existing licenses?  What if I already have a license or contract that has post-sale restrictions, like Lexmark or Impression?

Henry: It depends on which side you're on.  If you're the patent owner, then you might have just lost a lot of your enforcement rights.  Lexmark can't sue companies who re-sell their print cartridges.  Of course, second-hand sellers like Impression now have much greater freedom to operate.  Some IP licenses will have to be renegotiated, and several of our clients have asked for guidance on what to do now.

Matt: What else can patent owners do to protect their IP?  If they can't sue re-sellers or downstream customers for infringement because the patent owners have already exhausted their rights, what options do they have? 

Henry: There is still the possibility of suing for breach of contract.  The Supreme Court suggested this option when it said that "whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law."  However, as we noted last time, contracts are limited by the doctrine of privity—Lexmark would not have been able to sue Impression in this case, for example, because they never signed a contract together.  This is a big reason why companies will have be very careful with their contracts now, or come up with new ideas for controlling their products.  There's also the possibility that parties will begin to try to structure their contracts to create privity or third-party beneficiary issues in an effort to allow them to enforce the contracts more broadly; such creativity is likely to become the topic of future litigation.

Matt: Now I suppose we'll have to wait and see what companies do to adjust their patent enforcement strategies, and whether prices for consumer goods will change in some industries.  Henry, thanks for joining me for this follow-up Supreme Court podcast.  Until next time, please visit our Capital Insights page at www.ropesgray.com for more news and analysis on noteworthy issues arising out of Washington, D.C.

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.