U.S. Supreme Court Significantly Restricts Patent Owners’ Ability to Control Resale of Patented Items

Summary

On Tuesday, May 30, 2017, the Supreme Court of the United States held in Impression Products, Inc. v. Lexmark International, Inc. that an authorized sale of a patented product exhausts all of the patentee’s rights in the product, regardless of whether the product is sold within or outside the United States, and regardless of any restrictions the patentee and the purchaser agreed to at the time of sale.  The decision rejected Federal Circuit precedents, which permitted patentees to sell an item while retaining the right to enforce agreed-upon and lawful post-sale restrictions on use or resale through patent infringement lawsuits.  The Supreme Court decision now requires patentees to enforce post-sale restrictions through contract law, and not patent law.

Background of the Case

Lexmark International, Inc. sells toner cartridges in many countries around the world, and it owns several U.S. patents covering various components of the toner cartridges and the manner in which they are used.  Lexmark sells its toner cartridges either at full price or at a discount.  The discounted cartridges are subject to a signed agreement in which the end users agree to use the cartridges only once and to dispose of or return the cartridges to Lexmark when empty.  Impression Products, Inc. obtains used toner cartridges from the end users, refills them with more toner, and resells them.  The toner cartridges that Impression Products obtains for this refill and resale process include both, toner cartridges originally sold subject to Lexmark’s signed single-use agreement and toner cartridges originally sold by Lexmark outside the United States.  Impression Products was not a party to any of the signed agreements between Lexmark and the end users.  Lexmark filed a lawsuit against Impression Products, asserting that refurbishing and reselling toner cartridges that Lexmark sold subject to the signed single-use agreement infringed Lexmark’s patents because Lexmark had not granted the original purchasers the right to resell the patented toner cartridges.  Lexmark also asserted patent infringement against Impression Products for importing toner cartridges originally sold outside of the United States.  In its defense, Impression Products argued that Lexmark had exhausted its right to assert patent infringement when it sold the patented cartridges.  In an en banc decision, the Federal Circuit concluded that Lexmark retained a post-sale right to assert patent infringement against Impression Products for both the products originally sold outside the United States and the discounted products sold with the resale restriction.  Impression Products filed a petition for writ of certiorari before the Supreme Court, arguing that the Federal Circuit’s holding was inconsistent with the patent exhaustion doctrine.

Supreme Court’s Decision

Domestic Sales Subject to Post-Sale Restrictions

Regarding cartridges sold domestically subject to the single-use restriction, the Supreme Court explained that the patent exhaustion doctrine was rooted in the common law’s hostility to restrictions against alienation of personal property.  The Supreme Court also explained that Congress had enacted the Patent Act against this common-law backdrop and therefore had implicitly endorsed it.  Post-sale restrictions, the Court held, expressly impose restrictions on the right of a purchaser of a patented product to resell that product.  This subverts the common-law right to resell personal property without restrictions, and thus is inconsistent with the Patent Act.

The Court also rested its decision on its own previous patent exhaustion cases, including United States v. Univis Lens Co., 316 U.S. 241 (1942), and Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8 (1918).  In each of those cases, the Supreme Court struck down efforts by patent owners to control the post-sale disposition of the patented products.  The Supreme Court recognized that the restrictions at issue in Univis and Boston Store also violated antitrust laws.  But the Supreme Court concluded that the authorized sale of the patented item, and not the illegality of the restrictions, is what prevented the patentee from enforcing the resale agreements in each case.

International Sales

In determining whether foreign sales exhaust patent rights, the Supreme Court relied on the same common-law principles and rejected any distinction between domestic and foreign sales.  The Court also looked to its recently decided copyright case Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013).  In Kirtsaeng, the Supreme Court held that the first sale doctrine—copyright law’s analog to patent exhaustion—applied to sales made outside of the United States, and, therefore, the copyright holder could not prevent the importation of previously sold copyrighted materials, even when the sale occurred outside of the United States.  The Supreme Court concluded that no basis existed to distinguish between patent and copyright law in this context.  Accordingly, the Supreme Court held that patent exhaustion should apply to products first sold internationally.

Observations

In light of the Supreme Court’s Lexmark decision, a patentee who sells an item practicing its patents will no longer be able to use post-sale restrictions to limit the applicability of the patent exhaustion doctrine.  Instead, a patentee will be forced to rely on contract law to enforce restrictions.  That would limit a patentee’s ability to enforce the restrictions against a third-party who was not a party to the original agreement containing the post sale restriction.  This decision will also restrict a patentee’s ability to prohibit the importation of patented items that the patentee sold abroad.

The Supreme Court’s decision rested on the common-law principles governing the rights inherent in the ownership of personal property.  The Court limited its decision to situations where a sale occurred, and did not address where the user of the property is acting pursuant to a license or lease from the patentee. The Court did observe, however, that if the licensee acts outside the scope of the license, by making an unauthorized sale, patent exhaustion would not apply and the patentee would retain the right to sue for patent infringement.