The United States Supreme Court recently held 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.” As a result of this new ruling, Lexmark, a manufacturer of printer cartridges, cannot impose a post-sale restriction that cartridges may not be reused or resold based upon patent rights because the restriction had exhausted after Lexmark’s sale of those cartridges to buyers.
In an almost unanimous opinion, the Supreme Court reversed the Federal Circuit decision on both domestic (8-0) and international (7-1) exhaustion. Chief Justice Roberts authored the opinion for The Court. Justice Ginsburg dissented with respect to international exhaustion. Newly appointed Justice Neil Gorsuch did not participate in the case.
What this ruling means
After a patent owner sells an item covered by a patent, the sale exhausts the patent owner’s patent rights over that item. This ruling scales back the post-sale control that a patent owner has over its patented product. In so ruling, the Supreme Court valued the principle of an individual’s ability to freely transfer acquired property to a new owner.
How the ruling may impact your business
Although this case is about ink cartridges, companies in many industries should now revisit how they enforce their patents and how they impose post-sale restrictions on patented products because they may face tougher challenges on both fronts. On the other hand, licensees, purchasers and end users of patented products can rejoice with their new-found freedom from additional post-sale restrictions imposed by patent owners.
This ruling may increase the sales of “grey market products” — products purchased in foreign jurisdictions at prices lower than those found in the U.S. and then re-sold in the U.S. at a profit. With international resellers’ relatively unfettered ability to sell grey market products to buyers in the U.S., particularly through Internet marketplaces such as Alibaba, Amazon and eBay, manufacturers of patented products may now face new challenges regarding their ability to control the quality of their products, their ability to protect the goodwill of their brands and how they determine when to honor warranties. Additionally, they may experience price pressure and price erosion, among other challenges.
By way of example, medical device companies had argued that the Supreme Court’s ruling would allow the re-use of devices like cardiac catheters, which could be detrimental to patients and additionally expose the original manufacturers to lawsuits. The trade association Biotechnology Industry Organization similarly argued that conditional sales with post-sale restrictions had allowed biotech companies to appropriately price their products in different markets and to restrict the use of toxic chemicals, e.g., herbicides, designed to protect the health and the environment. According to the Biotechnology Industry Organization, these favorable outcomes will now be weakened by the Supreme Court’s ruling.
On the other side of this argument were companies like Intel, which argued that like a variety of other products, many electronic devices are designed and manufactured outside of the United States, include patented parts designed and manufactured in the United States and are eventually sold in the United States. Intel and other parties filing amicus briefs in support of Impression argued that the Federal Circuit’s ruling not only failed to provide a practical way for purchasers and resellers to know whether their usage or sales were authorized or infringing — exposing them to significant litigation risk — but also suppressed aftermarket sales and innovation, among other negatives.
Thus, under the old application of the patent exhaustion doctrine, a patent owner could theoretically sell a patented component in one country and later sue the importer of the device when the finished product arrived in the U.S. Now, as a result of the ruling in Impression v. Lexmark, while patent owners may not be altogether foreclosed from being able to enforce restrictions on use or resale of their products with direct purchasers under regular contract law, they will no longer be able to use patent rights and the threat of a patent infringement lawsuit to do so.
This case involved Lexmark’s patented printer cartridges. Some Lexmark cartridges sold in the U.S. were subject to an express single-use/no-resale restriction. Other cartridges were sold abroad. Impression obtained spent Lexmark cartridges, altered the restriction chip, refilled them with new ink and resold them in the U.S. Lexmark sued Impression in the Southern District of Ohio. The district court dismissed the case concerning the restricted cartridges sold in the U.S., 9 F. Supp. 3d 830 (S.D. Ohio 2014), but found that Lexmark did not exhaust its patent rights on cartridges sold abroad. No. 1:10-CV-564, 2014 WL 1276133 (S.D. Ohio Mar. 27, 2014).
On appeal, following the oral argument before a three judge panel, the Federal Circuit ordered the case to be heard en banc. The Federal Circuit, in a 10-2 majority, decided that (1) patent exhaustion does not apply when a patentee sells a patented article in the U.S. made under a lawful restriction within the scope of the patent grant, and (2) patent exhaustion of U.S. patent rights also does not apply when a patentee sells a patented article abroad, and the sale does not give a buyer the authority to resell or use the article in the U.S. 816 F.3d 721 (Fed. Cir. 2016).
The Supreme Court reversed and remanded the Federal Circuit decision. The court held that sellers give up their patent rights even when they require buyers to not resell a product or restrict its use. Judge Roberts opined that the rule applies regardless of whether the sale was domestic or made abroad — “[e]xtending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain.” Slip. Op. at p. 7. He further noted that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” Id. at 13. “[W]hat matters is the patentee’s decision to make a sale.” Id. at 5.