Today, the Supreme Court issued its decision in Impression Products v. Lexmark Int’l that draws a bright line for triggering the patent exhaustion doctrine when products are sold and leaves post-sale activity restrictions subject to any contractual rights between the parties, not patent law. This decision is sure to have patent owners and licensees reviewing their existing licensing agreements and tweaking future ones. The decision also provides another reason why patent owners may license their patents at an end product level, rather than a component level, to ensure that they have direct patent law remedies against the end product manufacturer that otherwise may be exhausted and unavailable if the patent is licensed at a component level.
The Supreme Court summarized its decision as follows:
This case presents two questions about the scope of the patent exhaustion doctrine:
First, whether a patentee that sells an item under an express restriction on the purchaser’s rights to reuse or resell the product may enforce that restriction through an infringement lawsuit.
And second, whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply.
We conclude 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.
Importantly, the decision focuses on whether patent rights exist after an authorized sale. The decision does not mean that the sale extinguishes other non-patent law remedies that a patent owner may have after the sale, such as remedies under contract law.
Patent owner Lexmark makes and sells printers and printer ink cartridges used in those printers. Lexmark’s patents covered its ink cartridges. Lexmark sold the ink cartridges at issue at a discount subject to an express single-use/no-resale restriction that precludes transferring the used cartridge to anyone other than Lexmark in what it called a “Return Program Cartridge”. Lexmark also sold “Regular Cartridges” at full price that did not have such restrictions. Lexmark sold its ink cartridges in the U.S. and abroad. Accused infringer Impression would acquire used Lexmark ink cartridges, refill them and resell the them in the U.S., which included importing such cartridges into the U.S..
Lexmark sued Impression for infringing U.S. patents that covered those ink cartridges. Specifically, Lexmark alleged infringement based on (1) resale/reuse of Return Program Cartridges that Lexmark originally sold in the U.S. (but not the Regular Cartridges) and (2) resale/reuse and import of both Return Program Cartridges and Regular Cartridges that Lexmark originally sold outside the U.S.
The Federal Circuit ruled that patent exhaustion did not apply here. (See our Feb. 16, 2016 post summarizing that decision).
The Majority decision, written by Chief Justice Roberts, was separated into two sections: (1) patent exhaustion as applied to the U.S. sales and (2) patent exhaustion as applied to sales outside the U.S.
Patent Exhaustion for Domestic Sales
The Court ruled that the patent rights were exhausted “the moment” the cartridges were sold, though contract law remedies may remain, stating:
Lexmark exhausted its patent rights in these cartridges the moment it sold them. The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell. [Op. .at 5 (underline added)]
The Court ruled that the patent exhaustion’s limit on the patent right to exclude “functions automatically” to preclude patent law controlling disposition of an item after ownership passes to the purchaser:
When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership. A patentee is free to set the price and negotiate contracts with purchasers, but may not, by virtue of his patent, control the use or disposition of the product after ownership passes to the purchaser. The sale terminates all patent rights to that item. [Op. at 6 (emphasis in original)]
Patent exhaustion “marks the point where patent rights yield to the common law principle against restraints on alienation.” (Op. at 6). Thus, “once a patentee sells an item, it has enjoyed all the rights secured” by the right to exclude and there is no patent right to restrain use thereafter. The Court provided the following example:
Take a shop that restores and sells used cars. The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles. That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale. The companies might, for instance, restrict resale rights and sue the shop owner for patent infringement. And even if they refrained from imposing such restrictions, the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits. Either way, extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain. And advances in technology, along with increasingly complex supply chains, magnify the problem. [Op. at 7-8]
The Court ruled that Lexmark’s domestic sales in this case triggered the patent exhaustion doctrine, limiting any remedy to contract law, not patent law, stating:
Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law. [Op. at 9]
The Court ruled that the Federal Circuit erred by considering patent exhaustion to be a presumption of what rights are conveyed in the sale — i.e., presumption that all of the bundle of sticks of patent rights are conveyed absent express reservation of some sticks from that bundle. Rather, patent exhaustion is a limit on the scope of the patentee’s rights. (Op. at 10). Someone has the right to use (sell, etc.) an item they own. Patent law grants the patent owner the right to prevent such use (sale, etc.) of the item. But patent exhaustion extinguishes those patent owner rights upon authorized sale of the item.
Patent Exhaustion for Sales By Licensee
The Court also discussed the rights that flow when a patent owner licenses a manufacturer (the licensee) and the manufacturer then sells a product under that license.
A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections. [Op. at 11 (emphasis added)]
But the restrictions on a licensee does not necessarily permit post-sale patent-law restrictions on purchasers. Patent exhaustion applies to limit the patent rights as though the patent owner made the sale “[s]o long as a licensee complies with the license when selling an item”:
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. So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. That licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself. The result: The sale exhausts the patentee’s rights in that item. [Op. at 11-12 (emphasis in original)]
The patent owners rights against the licensee and purchaser following the sale, therefore, flow from contract rights and not patent law:
A license may require the licensee to impose a restriction on purchasers, like the license limiting the computer manufacturer to selling for non-commercial use by individuals. But if the licensee does so–by, perhaps, having each customer sign a contract promising not to use the computers in business–the sale nonetheless exhausts all patent rights in the item sold. The purchasers might not comply with the restriction, but the only recourse for the licensee is through contract law, just as if the patentee itself sold the item with a restriction. [Op. at 12]
The Court contrasted this to the situation where a licensee sold a product without complying with the license agreement, in which case the patent rights remain to assert against the purchaser. The Court explained this based on the circumstances of its decision in General Talking Pictures v. Western Elec., 305 U.S. 124 (1938):
General Talking Pictures involved a fundamentally different situation: There, a licensee knowingly made sales outside the scope of its license. We treated the sale as if no license whatsoever had been granted by the patentee, which meant that the patentee could sue both licensee and the purchaser–who knew about the breach–for infringement. This does not mean that patentees can use licenses to impose post-sale restraints on purchasers. Quite the contrary: The licensee infringed the patentee’s rights because it did not comply with the terms of its license, and the patentee could bring a patent suit against the purchaser only because the purchaser participated in the licensee’s infringement. General Talking Pictures, then, stands for the modest principle that, if a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee’s right. [Op. at 12-13 (internal quotations and citations omitted) (emphasis in original)]
The Court concluded that patent exhaustion automatically applies whether the sale is by the patent owner or its licensee:
In sum, patent exhaustion is uniform and automatic. Once 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. [Op. at 13]
Patent Exhaustion for International Sales
The Court first looked to its patent exhaustion ruling for copyright law in Kirtsaeng v. John Wiley & Sons, 113 S.Ct. 1351, 1356 (2013), which held that “the ‘first sale’ doctrine applies to copies of a copyrights work lawfully made abroad.” That decision was based on “common law’s refusal to permit restraints on the alienation of chattels.” (Op. at 14). The Court rejected the argument that territorial limits on patent rights required a different result from that reached for copyrights, because copyrights also do not have any extraterritorial operation. (Op. at 15).
The Court found exhaustion to be triggered by the sale abroad even if the patent owner could not get as high a royalty for that foreign sale as it could in the U.S. (because the foriegn sale was not subject to U.S. patent rights):
Nor does the territorial limit support the premise of Lexmark’s argument. Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate for the article and the invention which it embodies. The patentee may not be able to command the same amount for its products abroad as it does in the United States. But the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward–of whatever amount the patentee deems to be satisfactory compensation–for every item that passes outside the scope of the patent monopoly. [Op. at 15-16 (internal quotations and citations omitted)]
The Court contrasted this to a situation where a product is sold outside the United States where the patent owner “had nothing to do with the transaction”, referring to its decision in Boesch v. Graff, 133 U.S. 697 (1890), stating:
Boesch–from the days before the widespread adoption of electrical lighting–involved a retailer who purchased lamp burners from a manufacturer in Germany, with plans to sell them in the United States. The manufacturer had authority to make the burners under German law, but there was a hitch: Two individuals with no ties to the German manufacturer held the American patent to that invention. These patentees sued the retailer for infringement when the retailer imported the lamp burners into the United States, and we rejected the argument that the German manufacturer’s sale had exhausted the American patentees’ rights. The German manufacturer had no permission to sell in the United States from the American patentees, and the American patentees had not exhausted their patent rights in the products because they had not sold them to anyone, so purchasers from the German manufacturer could not be thereby authorized to sell the articles in the United States.
Our decision did not … exempt all foreign sales from patent exhaustion. Rather, it reaffirmed the basic premise that only the patentee can decide whether to make a sale that exhausts its patent rights in an item. The American patentees did not do so with respect to the German products, so the German sales did not exhaust their rights.
Finally, the Court indicated that patent exhaustion exists to preclude patent rights persisting through the market after a sale, which is independent of the parties expectations about what patent rights are transferred in a sale:
Exhaustion does not arise because of the parties’ expectations about how sales transfer patent rights. More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.
Justice Ginsburg dissented as to the international exhaustion given the substantial differences between U.S. patent and foreign patent rights.