United States: The Supreme Court Clarifies Patent Rights After A Patented Item Is Sold

Last Updated: July 3 2017
Article by Mae Hong and Ajay A. Jagtiani

On May 30, 2017, in Impression Products 1, the U.S. Supreme Court ruled that a patent owner's sale of an item, either within or outside the United States, exhausts all of the patent owner's patent rights in that item, regardless of any restrictions the patentee purports to impose upon the sale. This Court's decision solved long-term unsettled issues with respect to patent owners' post-sale restrictions on the use or resale of patented items.

Over the years, disputes have arisen with respect to the enforcement of patent owners' post-sale restrictions on the use or resale of patented items. In Mallinckrodt 2 the Federal Circuit determined that a post-sale restriction on a post-sold patented medical device for only a single patent use was valid and enforceable under the patent law because the use is within the scope of the patent grant.3 Since then, while many federal court decisions relied on the Federal Circuit's ruling in Mallinckrodt, the decisions from other federal courts have been inconsistent. This inconsistency among the courts is highlighted in the outcomes of cases involving Lexmark International Inc. (Lexmark), a manufacturer of laser and inkjet printers. Lexmark has been involved in a series of battles addressing its return program ("Prebate" program) in different federal courts with differing outcomes. Lexmark started the "Prebate" program in 1997, offering Prebate cartridges at a discount compared to the prices of its regular cartridges in exchange "for the customer's agreement to use each of the cartridges only once and return it only to Lexmark for remanufacturing or recycling."4 Lexmark used printer lock-out chips to prevent Lexmark printers from recognizing cartridges manufactured or refilled by others. A license agreement was placed on the outside of the each cartridge package which stated: "This patented cartridge is sold at a special price subject to a restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for remanufacturing and recycling."5 At the same time, Lexmark also offered regular cartridges without the license agreement at regular prices.6

In 2003, Arizona Cartridge Remanufactures Association ("ACRA"), an association of remanufactured printer cartridge wholesalers, filed a lawsuit challenging Lexmark's Prebate program.7 ACRA argued that Lexmark's Prebate program misled consumers to believe that the post-sale restriction in the agreement was enforceable when in fact Lexmark had exhausted its rights in the sold cartridges and the post-sale restriction was unenforceable.8 ACRA also argued that Lexmark's use of "lock-out" chip was an unfair business practice.9 The district court, relying on the Federal Circuit's decision in Mallinckrodt, held that Lexmark's Prebate program was not a deceptive practice.10 The district court ruled that Lexmark had not exhausted its patent rights and the single-use condition fell "squarely within Lexmark's patent right."11 ACRA appealed. The Ninth Circuit affirmed the district court's decision and decided that the restriction, on its face, was enforceable.12

In 2002, Lexmark sued Static Control Components ("Static Control") and numerous other parties, i.e, companies engaged in the business of remanufacturing and refurbishing used toner cartridges. The district court, relying on Mallinckrodt, found that "Lexmark's Prebate program avoided the exhaustion of patent rights normally associated with a patented article's first sale" and was valid.13 Later in 2009, in light of the Supreme Court's decision in Quanta,14 the district court reversed its prior order and found that "[n]o potential buyer was required to agree to abide by the Prebate terms before purchasing a cartridge," thus, "sales of the Lexmark's Prebate toner cartridges were authorized and unconditional, just like sales of LGE's patented products in Quanta."15 Based on this finding, the district court held that Lexmark exhausted its patent right in its toner cartridges and the Prebate program was invalid under patent law.16

In 2010, Lexmark sued Impression Products, Inc. ("Impression") for infringement because Impression was acquiring and reselling Lexmark's Prebate program cartridges that have been sold in the United States and foreign countries.17 Impression contended that Lexmark exhausted its U.S. patent rights in the Prebate program cartridges by its initial sale.18 In 2016, the Federal Circuit, in an en banc decision, held that "when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale," the patentee "does not exhaust its § 271 patent rights to charge the buyer who engages in those acts—or downstream buyers having knowledge of the restrictions—with infringement."19 The Federal Circuit further held that "a foreign sale of a U.S. patented article, when made by or with the approval of the U.S. patentee, does not exhaust the patentee's U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale."20

On appeal, the Supreme Court granted certiorari to consider: 1) whether the patent exhaustion doctrine applies to a "conditional sale" that "transfers title to the patented item while specifying post-sale restrictions on the article's use or resale, and 2) whether the patent exhaustion doctrine applies to a sale of a patented article—authorized by the U.S. patentee— that takes place outside of the United States."21 In Impression, No. 15-1189, the Supreme Court reversed the Federal Circuit's en banc decision and remanded for further proceedings.

Specifically, the Supreme Court provided four clarifications.

First, the Supreme Court clarified its decision in Quanta, stating that "[w]ithout so much as mentioning the lawfulness of the contract, we held that the patentee could not bring an infringement suit because the 'authorized sale...took its products outside the scope of the patent monopoly.'"22 The Supreme Court concluded that "Lexmark exhausted its patent rights in these cartridges the moment it sold them."23 According to the Supreme Court, "Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale prevision accompanying its Return Program cartridges...whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law."24

Second, the Supreme Court clarified that "the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on 'the scope of the patentee's rights."25 The Court specifies that "[t]he right to use, sell, or import an item exists independently of the Patent Act. What a patent adds—and grants exclusively to the patentee—is a limited right to prevent others from engaging in those practices."26 According to the Court, "Exhaustion extinguishes that exclusionary power... As a result, the sale transfers the right to use, sell, or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce."27

Third, the Court further clarified that a patentee can impose restrictions on licensees because "a license is not about passing title to a product, it is about changing the contours of the patentee's monopoly."28 However, "[a] patentee's authority to limit licensees does not...mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws."29 Accordingly, "[o]nce a patentee decides to sell-whether on its own or through a licensee-that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license."30

Fourth, with respect to the question about international exhaustion, the Supreme Court explicitly expressed that "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act."31 The Court concluded that "exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment ... restrictions and location are irrelevant; what matters is the patentee's decision to make a sale."32

In sum, the Supreme Court clearly answered the questions with respect to how much control a patentee retains over sold patented products under patent law. Simply put, the patentee retains no patent rights once title to the patented product changes hands. However, a patentee can still negotiate a contract restricting the purchaser's right to use or resell the item, but the patentee must file a breach of contract action to enforce that restriction, as opposed to filing a patent infringement lawsuit.33

Footnotes

1 Impression Products, Inc. v. Lexmark International, Inc. No. 15-1189, 581 U.S.___(2017)

2 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)

3 See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). In this case, the medical device was marked with the appropriated patent number and trademarks including "Mallinckrodt" and "Ultra Vent" and the inscription "Single Use Only." The package for each unit has words "For Single Patient Use Only." In addition, the package provided instructions on the procedures of disposal of contaminated apparatus. Id. at 702.

4 See https://www.lexmark.com/en_us/products/supplies-and-accessories/lexmark-return-cartridges.html. (last visited on 6/2/2017).

5 Arizona Cartridge Remanufacturers Ass'n. Inc. v. Lexmark Int'l Inc., 290 F. Supp. 2d 1034, 1038 (N.D.Cal. 2003).

6 See https://www.lexmark.com/en_us/products/supplies-and-accessories/lexmark-return-cartridges.html. (last visited on 6/2/2017).

7 See Arizona Cartridge Remfrs. Ass'n. Inc.v. Lexmark Int'l Inc. 290 F. Supp. 2d.

8 See id. at 1042.

9 See id. at 1038.

10 See id. at 1042.

11 See id. at 1050.

12 See Arizona Cartridge Remfrs. Ass'n. Inc., 421 F. 3d 981, 988 (9th Cir. 2005). The Ninth Circuit reasoned that the consumers had notice of the condition, had a chance to reject the contract, and had received consideration in the form of a reduced price in exchange for the limits placed on reuse of the cartridge. The Ninth Circuit further affirmed the district court's decision on the use of the lock-out chip. The Ninth Circuit stated that ACRA failed to allege that Lexmark acted beyond the scope of its patent in imposing a condition enforced with the use of the lock-out chip and failed to show that the use of the lock-out chip impermissibly exceeds the patent grant to produce anticompetitive effects.

13 Static Control Components, Inc. v. Lexmark Int'l Inc., 615 F. Supp. 2d 575, 578 (2009).

14 In Quanta Computer, Inc. v. LG Electronics., Inc., 553 U.S. 617 (2008), the Supreme Court reaffirmed its precedent in holding that "the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it." The Court ruled that the doctrine of patent exhaustion "provides that the initial authorized sale of a patented item terminates all patent rights to that item."

15 Static Control Components, 615 F., at 585.

16 Id. at 588. The lawsuits between Lexmark and Static Control continued to reach the Supreme Court, but the district court's decision on the validity of Lexmark's Prebate program was not further challenged.

17 Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721, 728 (2016).

18 See id. at 729.

19 Id. at 729-74.

20 Id. at 729-74.

21 See SCT Docket No. 15-1189, 580 U.S. ___(2016).

22 Impression, No. 15-1189, at 9. (Citing Quanta Computer, 553 U.S., at 638.)

23 Id. at 5.

24 Id. at 9.

25 Id. at 10.

26 Id.

27 Id.

28 Id. at 11.

29 Id.

30 Id. at 13.

31 Id. at 13.

32 Id. at 18.

33 Id. at 3.

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