The Sale of a Patented Product Now Exhausts All U.S. Patent Rights

Lawrence M. Green

By Lawrence Green. A member of our Patent Practice Group

June 2017 IP Update

The Supreme Court has further limited the rights of patent owners, determining that, once a patentee sells a product either in the U.S. or abroad, it exhausts all of its U.S. patent rights in that product, regardless of any restrictions the patentee purports to impose.

The products at issue in Impression Products, Inc. v. Lexmark International, Inc. are toner cartridges used with laser printers.  Lexmark designs, manufactures and sells toner cartridges to consumers in the United States and around the globe.  It owns a number of patents that cover components of these cartridges and the manner in which they are used.

Lexmark structures its sales so as to encourage customers to return spent cartridges.  One way it does this is by selling cartridges at roughly a 20% discount through Lexmark’s return program.  A customer who buys cartridges through the return program owns the cartridges but, in exchange for the lower price, signs a contract agreeing to use the cartridges only once and to refrain from transferring the empty cartridges to anyone but Lexmark.

The purpose of this restriction is to prevent other companies, known as remanufacturers, from acquiring empty Lexmark cartridges, refilling them with toner and reselling them at a much lower price than the price for the new ones sold by Lexmark.

As we reported in 2016, the Federal Circuit, in an earlier stage of this litigation, held that Lexmark could lawfully reserve rights with respect to the patented cartridges as long as the reservation did not run afoul of other laws, such as the antitrust laws. This holding applied to cartridges sold both in the U.S. and abroad.

According to the Federal Circuit, reserving patent rights did not conflict with the common law’s antagonism to restrictions on a purchaser’s right to transfer his ownership rights because patent rights are part of the statutory regime that trumps common law.  The Federal Circuit defiantly reaffirmed its holding in Mallinckrodt Inc. v. Medipart, Inc. (1992), even though that decision had been effectively overridden by the Supreme Court’s 2002 decision in Quanta Computer, Inc. v. LG Electronics, Inc.

The Supreme Court was blunt in rejecting the Federal Circuit’s analysis. The lower court “got off on the wrong foot” with its view that the exhaustion doctrine does not require a patent owner to hand over its full “bundle of rights” whenever it sells a patented article:

The misstep in this logic is 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.” The 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. Exhaustion, however, extinguishes that exclusionary power.

The Supreme Court described the exhaustion rule as marking the point where patent rights yield to the common law principle against restraints on alienation, that is, on the transfer of ownership interests.  Rather than the statutory patent laws trumping this anti-alienation tradition of the common law, as the Federal Circuit suggested, the patent laws must be construed consistently with the common law hostility toward restraints on alienation.

The Lexmark opinion extends beyond our borders, holding that “an authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”  This part of the decision drew upon the Supreme Court’s 2013 ruling in Kirtsaeng v. John Wiley & Sons, Inc., which we reported at the time.  In that copyright case, the Court said that a U.S. publisher’s sale of a book outside the U.S. exhausts its right to control the sale of that book, making it legal for the purchaser to resell it in the U.S.

The only noteworthy precedent on the effect of foreign sales on exhaustion was Jazz Photo Corp. v. International Trade Comm’n (2001), in which the Federal Circuit held that foreign sales do not trigger exhaustion of US patent rights.  That holding is now overruled.

The Supreme Court summarized its reasoning regarding foreign sales:

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. . .Restrictions on location are irrelevant; what matters is the patentee’s decision to make a sale.

Still, the Supreme Court acknowledged that, in the licensing context, a patentee can impose restrictions that may be enforced under contract law. This is because a license does not pass title to a product:  “Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.”  The licensee can, for example, be restrained from selling the product to a specific category of customers.

The Supreme Court’s analysis would seem to authorize a patentee to impose post-sale restrictions on purchasers, so long as the rights are enforced through contract law and not through the patent laws. Indeed, Lexmark issued a statement, asserting that the decision confirmed that its return program can still be enforced under contract law, and that it planned to continue that program.

The implications of Lexmark could be far-reaching.  If a patent owner sells a product at prices much lower in some countries than in the U.S., third parties may purchase that company’s products abroad at the lower price, import them into the U.S., and resell them at a price below the U.S. price set by the patent owner.  Such a possibility may prompt many patent owners to rethink their global pricing structures or to avoid sales in certain countries altogether.

Patent owners must also evaluate the adequacy of their existing agreements with purchasers in light of the loss of patent rights wrought by the Lexmark decision.   This decision might even induce certain patent owners to consider licensing their products rather than selling them, although antitrust implications should be considered before embarking on such a strategy.  Finally, the decision could play havoc with ongoing patent infringement litigation, especially in cases involving gray market imports.