IP News

SCOTUS Rules Patent Exhaustion Applies to Domestic and International Sales

In Impression Products, Inc. v. Lexmark International, Inc., decided last 30 May 2017, with the majority opinion written by Chief Justice Roberts, the U.S. Supreme Court ruled that regardless of location, when a patentee sells its products, it exhausts its patent rights thereto.

The plaintiff Lexmark International sold toner cartridges to consumers in the U.S. and all over the world. It owns patents that cover components of the toner cartridges and in the way they are used. However, it had a problem which caused its sales to decline: when toner cartridges run out of toner, they can be refilled and used again. This created an opportunity for remanufacturers to refill the cartridges and sell them at a lower price than Lexmark.

Lexmark structured its sales to encourage consumers to return the empty toner cartridges. Consumers could either buy the cartridges at full price, with no strings attached, or buy them at around 20% through a “Return Program” where buyers sign a contract to use the cartridges only once, and to refrain from transferring the empty cartridge to anyone but Lexmark. Many remanufacturers, however, kept acquiring empty cartridges domestically and internationally via importation of toner cartridges originally sold by Lexmark abroad.

In response to this, Lexmark sued a number of remanufacturers, including Impression Products, Inc. for patent infringement with respect to two different categories of toner cartridges: the Return Program Cartridges and the imported cartridges. With respect to the Return Program cartridges, Lexmark argued that because it expressly forbade the reuse and resale of cartridges, the remanufacturers violated its patents rights when they refurbished and resold the cartridges. As for the cartridges originally sold abroad and imported into the US by remanufacturers, Lexmark contended that the remanufacturers violated its patent rights by importing these cartridges without authority.

The U.S. Supreme Court disagreed with Lexmark’s arguments, and ruled that Lexmark’s patent rights over the two categories of cartridges were exhausted after the first sale; hence, it could not file a patent infringement case against Impression Products.

With respect to the Return Program cartridges, the Court stated that even if Lexmark’s restrictions in its contracts with its customers are enforceable under contract law, they do not entitle Lexmark to retain patent rights in an item it had already sold, based on the principle of exhaustion. Once a patentee sells an item, the Court ruled, it had enjoyed all the rights previously secured by that limited monopoly. Since the purpose of patent law is fulfilled when the patentee receives his reward for the use of invention, that law furnishes no basis for restraining the use and enjoyment of the thing sold. As such, even when a patentee sells an item under an express restriction, the patentee cannot enforce those restrictions via patent infringement suits.

As for the imported cartridges, the Supreme Court stated that an authorized sale outside the U.S. also exhausts the rights under the patent act. The Court pointed out that the issue of international exhaustion of intellectual property rights arose in the context of copyright law under the first sale doctrine—when a copyright owner sells a lawfully made copy of its work, it loses the power to restrict the purchaser’s freedom “to sell or otherwise dispose of…that copy.” The Court’s ruling in Kirtsaeng v. John Wiley & Sons stated that the first sale rule applied to copyrighted works lawfully made and sold abroad. This first sale doctrine is rooted in the common law’s refusal to permit restraints on alienations of chattel, and the Court emphasized that patent exhaustion had the same roots. The Court found little sense in distinguishing patent exhaustion and the first sale doctrine since the two share a strong similarity and identity of purpose.

Here, the U.S. Supreme Court revealed its stance against extending patent rights beyond the first sale in order to preserve the free flow of trade and commerce. In the words of Chief Justice Roberts: “Allowing patent rights to stick remora-like to [an] item as it flows through the market would violate the principle against restraints on alienation…Restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.

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