Supreme Court Expands Exhaustion Doctrine While Preserving Non-Patent Remedies

May 31, 2017

Summary

The Supreme Court yesterday reversed the Federal Circuit Court of Appeals and ruled that a patent owner’s sale of a patented product exhausts all patent rights, regardless of where the sale occurred and notwithstanding any restrictions (e.g., single-use limitations or prohibitions on resale) that the patent owner purports to impose. The decision in Impression Products, Inc. v. Lexmark International, Inc. is likely to have a considerable impact on the way in which parties approach foreign sales of patented products. Yet it is unlikely to have a profound impact on most patent owners’ already-limited ability to enforce use or resale restrictions.

Patent owners now have fewer options to prevent patented products sold abroad from being imported into the United States. While patentees can still impose contractual restrictions that prohibit resale and/or bar importation into the United States, they will no longer be able to use patent infringement suits as a way of enforcing those restrictions. Instead, patent owners will need to rely on breach of contract or other traditional state law theories.

Background

Patent exhaustion (also known as the “first sale” doctrine) limits a patent owner’s ability to control how purchasers use patented products after buying them.

In this case, Lexmark sold printers along with two types of patented replacement toner cartridges: “regular cartridges” and “return program cartridges.” Lexmark sold regular cartridges in the U.S. and abroad without restricting how buyers could use or resell the products. It sold return program cartridges in the U.S. at a significant discount (approximately 20 percent) and subject to an express single-use/no-resale restriction. Customers who purchased return program cartridges were not permitted to refill them or transfer empty units to anyone other than Lexmark. Impression Products obtained spent return program cartridges and cleaned, refilled, and resold the cartridges in the United States.

Lexmark sued Impression for patent infringement. The district court found that Lexmark had exhausted its patent rights in the return cartridges initially purchased in the U.S., but not those purchased outside it. On appeal, the Federal Circuit held en banc that Lexmark’s patent rights were not exhausted in any of the return cartridges, whether sold inside or outside the U.S.

Supreme Court's Decision

Yesterday, the Supreme Court reversed the Federal Circuit and held that Lexmark was barred from bringing a patent suit against sellers of remanufactured cartridges even if it had originally sold the cartridges outside the United States or conditioned on a no-refill requirement.

With respect to the “international exhaustion” issue, the Court looked to its recent decision in Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), which found the analogous “first sale” copyright doctrine applicable to copies of works made and sold abroad.

With respect to the “conditional sale” issue, the Court cited its 2008 decision in Quanta Computer v. LG Electronics, which a number of commentators and district court judges had previously cited as implicitly overturning an earlier Federal Circuit decision that had accepted “one-time use” restrictions as a way to avoid exhaustion.

The Court emphasized that yesterday’s decision focused only on whether patent owners can file patent infringement cases to enforce such restrictions. It left open the possibility of enforcing restrictions as a matter of contract law.

Takeaways

The Court’s ruling on foreign sales may prove to have an important but measured impact, especially on U.S. patent owners lacking corresponding patent rights outside the United States. Companies lacking such foreign rights may need to choose either not to do business outside the United States, or run the risk of “gray market” imports interfering with the domestic market. By contrast, companies with foreign rights can at least attempt to price their products so as to capture their full value at the time of the initial sale.

In some cases, however, there are other ways to restrict importation. For example, there are extensive restrictions on importing pharmaceuticals into the United States—especially in cases where the drug was originally manufactured domestically and later exported. Yesterday’s decision does not impact these barriers to re-importation.

The Court’s ruling on use and resale restrictions is less likely to have a significant impact on the marketplace. Even before yesterday’s decision, it was difficult in practice to establish a true “conditional” sale. For example, the Federal Circuit had repeatedly held that alleged conditional sales were actually unrestricted—and thus exhausting—because the purported limitations were not part of an enforceable contract. Instead, the ostensible restrictions—appearing on stickers or product packaging—did not reflect any meeting of the minds between buyer and seller.

In cases where there actually is an enforceable contract restricting future uses, yesterday’s decision bars patent owners only from using patent law to enforce such restrictions. It leaves them free to pursue contract claims against entities that violate supply or distribution agreements to which they and the patent owners are parties—regardless of the location of the initial sale. In certain instances, patent owners may also pursue tortious interference claims against third parties downstream (e.g., companies that collect toner cartridges from Lexmark customers).

Please feel free to contact us if you have any questions or would like to discuss how this decision affects your IP strategy.