United States: Contractual Restrictions In A License Agreement Do Not Prevent Authorized Sales From Exhausting Domestic And International Patent Rights

The Supreme Court recently held that the authorized sale of a patented product exhausts all U.S. patent rights for that product, regardless of any post-sale restrictions and regardless of whether the product is sold in a foreign country. Although post-sale restrictions cannot be enforced through patent infringement suits, the Court left open the possibility of enforcing restrictions through contract actions.

The Supreme Court recently decided two critical issues related to patent exhaustion, limiting a patent owner's patent rights after it sells a patented product.

First, an authorized sale of a patented product by a patent owner exhausts all patent rights in the product. Therefore, the patent owner cannot use patent rights to enforce any post-sale restrictions against the purchaser.

Second, an authorized sale of a patented product anywhere in the world exhausts the patent owner's U.S. patent rights in the product even if that exhausting sale occurs outside the United States. Although such sales exhaust patent rights in the product sold, the Court left open the possibility of enforcing contractual restrictions against purchasers by using contract law.

Background

Lexmark manufactures and sells printer cartridges in the United States and abroad. It sells cartridges in the United States under two purchasing options:

  1. Buyers can purchase a "Regular" cartridge at full price that is not subject to any reuse or resale restrictions, or
  2. Buyers can purchase a "Return Program" cartridge at a discount, subject to the restriction that the buyer will not reuse the cartridge and will not transfer the cartridge to anyone other than Lexmark after the toner runs out.

The Return Program is enforced by a microchip that prevents reusing a refilled cartridge.

Impression Products collected the used Return Program cartridges, "hacked" the microchip that prevented their reuse, refilled the cartridges, and resold them in the United States for use with Lexmark's printers. They also bought cartridges sold abroad, refilled them, and sold the refilled cartridges in the United States.

Lexmark sued Impression, alleging that the sale of the refurbished Return Program cartridges and the importation and sale of foreign-sold cartridges in the Unites States infringed its U.S. patents.

Impression responded that Lexmark's sales of the cartridges both abroad and in the United States, whether sold as Regular Cartridges or as Return Program cartridges, exhausted Lexmark's patent rights, preventing Lexmark from alleging patent infringement. A district court decided that Lexmark's rights in the Return Program cartridges were exhausted, but rights in the foreign-sold cartridges were not exhausted. Lexmark and Impression both appealed to the Federal Circuit, who heard the case en banc and determined that none of Lexmark's rights were exhausted by the sales. The parties then appealed to the Supreme Court, who granted certiorari to decide both issues.

The Lexmark Decision

The Supreme Court reversed the Federal Circuit's decision, holding that "a patentee's decision to sell a product exhausts all of its patent rights in
that product, regardless of any restrictions the patentee purports to impose or the location of the sale." Although the Court held that patent rights are exhausted by any authorized sale, it left open the possibility of enforcing restrictions under contract law.

Authorized Sale Exhausts All Patent Rights Regardless of Intended Post-Sale Restrictions

The Supreme Court held that the sale of a patented product exhausts the patentee's rights in the products it sells. The Court stated that the single-use/no-resale restrictions in Lexmark's Return Program might be enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it sold.

The Court compared patent exhaustion to its recent copyright exhaustion decision in Kirtsaeng v. John Wiley & Sons, where it held that foreign sales of copyrighted material exhausted United States' copyright protections. The Court explained that the relationship and similarities between patent and copyright law compelled the same result for patent rights. The Court also illustrated the policy reasons for its decision using the example of a used car that may contain many patented products. The Court explained that the threat of patent infringement for subsequent sales of the car would "clog the channels of commerce, with little benefit from the extra control that the patentees retain." The Court also explained that it had "long held" that selling a patented product under express restrictions still exhausts all patent rights in the product. Lexmark's patent rights were exhausted by the sale of the cartridges; it cannot enforce post-sale restrictions through patent infringement suits.

The Court stated that patent licenses and product sales implicate different ownership concerns. Because licenses exchange rights, not goods, patentees can restrict the licensee's use or sale of covered products because the license does not transfer ownership of the licensed products.

The Court explained that although patentees can restrict a licensee's actions, those licenses cannot enforce post-sale restrictions. If a patentee requires purchasers to sign a contract at the time of sale limiting the use of the product, the sale exhausts the patentee's ability to bring a patent infringement suit for violating the contract. The Court acknowledged, however, that patentees might be able to enforce the contract under contract law instead.

In sum, patent exhaustion is uniform and automatic—any sale of a patented product exhausts the patent owner's patent rights regardless of any post-sale restrictions the patent owner seeks to impose.

Patentee's International Sales Exhaust U.S. Patent Rights

The Court also held that foreign sales of patented products exhaust U.S. patent rights if the patentee authorizes the sale of the product abroad.

The Court explained that patent law does not guarantee a premium for selling a product in the United States—purchasers buy products, not the patent owner's rights.

Patent exhaustion applies when the patentee decides to sell the patented product regardless of the location of the sale or post-sale restrictions.

Strategy and Conclusion

The Lexmark case prevents patent owners from using U.S. patent law to control patented products after they are sold. As a result, patent owners may want to consider whether post-sale restrictions may be used and enforced under contract law to accomplish their objectives. Patent owners also may want to consider their global sales structures and the potential impact of authorized foreign sales on the United States market.

Further information

The Lexmark opinion can be found here.

Originally printed in LES Insights on June 6, 2017. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.

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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