Supreme Court: Patent Owner's Authorized Sale of Patented Product Exhausts Patent Rights
On May 30, 2017, the Supreme Court in a 7 to 1 decision in Impression Products, Inc. v. Lexmark International, Inc. held a patentee's decision to sell a patented product exhausts all of the patent rights in the product.
Under the doctrine of patent exhaustion, also called the first sale doctrine, a patent owner's ability to control a patented product after it is sold has been restricted. Generally, the patent owner could not enforce his patent to prevent the redistribution of his patented product after he sells the product. However, he had been able to place contractual restrictions on how his customers used or distributed the product, and his patent rights were deemed preserved against uses that violated such contractual restrictions. In addition, courts had determined only products sold domestically exhausted patent rights, not products sold abroad.
This dispute arose from Lexmark's attempt to stop Impression Products from reselling Lexmark's printer cartridges. Impression Products purchased used printer cartridges from Lexmark's customers and others downstream from Lexmark's initial sale of the cartridges, domestically and abroad, to refill and sell at a lower price than new cartridges from Lexmark. To stop Impression Products from selling printer cartridges, Lexmark brought suit for patent infringement. Lexmark claimed Impression Products infringed on Lexmark's patent rights when Impression Products resold the printer cartridges. For the printer cartridges sold domestically, Lexmark argued the patent rights remained on the domestically sold printer cartridges because the contract U.S. purchasers signed when purchasing new printer cartridges contained a no-resale restriction. For the printer cartridges sold abroad, Lexmark argued the patent exhaustion doctrine did not apply, as had been the case under decades of U.S. case law. In defense, Impression Products argued Lexmark's sale of the printer cartridges, domestically and abroad, exhausted all the patent rights in the printer cartridges.
Before the case reached the Supreme Court, the Federal Circuit agreed with Lexmark and held the doctrine of patent exhaustion does not prevent a patent owner from retaining the right to enforce a patent against resale of a product if lawful restrictions where placed on such resale. The Federal Circuit also held that Lexmark did not lose its patent rights in the printer cartridges sold abroad, following established precedent that patent exhaustion only applied to sales made domestically.
The decision was appealed to the Supreme Court, which reversed the Federal Circuit. In addressing the printer cartridges sold by Lexmark domestically, the Supreme Court said "Lexmark exhausted its patent rights in these cartridges the moment it sold them." The Supreme Court explained the no-resale restriction contained in the contract signed by purchasers was only enforceable under contract law and did not allow Lexmark to retain patent rights in the cartridges once they were sold. The Supreme Court reasoned that once a patentee sells an item, the patentee has enjoyed the protections granted by the patent and there is no basis in patent law for restraining the continued use and enjoyment of the item sold. As a result, Lexmark has no remedy but against those with whom Lexmark is in privity of contract with, i.e., against its direct customers. In correcting the Federal Circuit, the Supreme Court noted the patent exhaustion doctrine limits the scope of the patentee's rights to exclude others from practicing the invention. Because a sale transfers the right to use a product, there is no exclusionary right left to enforce. Thus, the Supreme Court held "patent exhaustion is uniform and automatic. Once a patentee decides to sell . . ., that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose."
After concluding Lexmark exhausted its patent rights in the printer cartridges sold in the U.S., the Supreme Court addressed the printer cartridges sold abroad. The Supreme Court held "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act." The Supreme Court noted the close relationship between patent law and copyright law, where the first sale doctrine applies to sales made abroad, and said "differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense [as] [t]he two share a strong similarity . . . and identity of purpose."
In their concluding remarks, the Supreme Court explained "[e]xhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment . . . . 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."
Even in the wake of this Supreme Court decision, there still appears to be an exception or limitation to the patent exhaustion doctrine in the case of self-replicating technology, technology with the ability to make new copies of itself, such as seeds. See Monsanto Company v. Scruggs, 459 F.3d 1328 (Fed. Cir. 2006); Bowman v. Monsanto Co., 569 U.S. 278 (2013) ("the exhaustion doctrine does not enable [the infringer] to make additional patented soybeans").
Going forward, the impact of the Supreme Court's decision in Lexmark on licensing of patented technology may be profound. The Supreme Court said "[a]s long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale" and the patentee's rights in that item are exhausted. The few cases since the Supreme Court's decision in Lexmark, have primarily dealt with whether the sale at issue was authorized under a licensing agreement and therefore exhausted the patentee's rights in the sold article. See Chrimar Sys. V. Alcatel-Lucent Enter. USA Inc., 2017 U.S. Dist. LEXIS 122002 (E.D. Texas Aug. 3, 2017) (sale was not authorized by the licensing agreement and therefore did not exhaust the patentee's patent rights); Miics & Partners Am., Inc. v. Toshiba Corp., 2017 U.S. Dist. LEXIS 127745 (D. Del. Aug. 11, 2017) (licensing agreement contained no term restricting sales by the licensee and therefore the sales were deemed authorized, thus exhausting patent rights).