** LEGAL UPDATE **
Owners of patents may need to revisit their licensing agreements, as well as their strategies for selling their patented products. On May 30, 2017, the U.S. Supreme Court handed down its much-anticipated decision in Impression Products, Inc. v. Lexmark International, Inc.
The case involves the doctrine of patent exhaustion. This doctrine provides that once an item is sold, subsequent owners are free to use, resell, or alter the product in any way that it sees fit, without fear of an infringement lawsuit. For many years, patent owners have tried to restrict that doctrine through “post-sale” terms, essentially restrictions on how subsequent owners could use a patented product. In Lexmark, the Supreme Court has overturned prior law to narrow the ability of patent owners to engage in this practice with impunity.
Under federal law (35 U. S. C. §154(a)), a patent owner has the ability to “exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States.” Whoever engages in one of these acts without authority from the patentee may face liability for patent infringement under 35 U.S.C. § 271(a). This right is not without limitation, however; patent rights are “exhausted” once the patent owner sells one of its products.
The U.S. Court of Appeals for the Federal Circuit (which is the federal appeals court charged with overseeing appeals of patent-related cases) has long held that patent owners can prevent “patent exhaustion” if they impose certain post-sale limitations on how patented items are used. These restrictions, the Federal Circuit has indicated, can allow owners to maintain certain aspects of their patent rights after the sale. With this rule in place, owners were able to set their pricing and licensing policies with the certainty that they could earn revenue from multiple sales; not just the first.
Against this background came the Lexmark case. The Lexmark company produces reusable printer toner cartridges, on which it owns a number of patents that cover components of those cartridges and the manner in which they are used. It charges customers a lower price for these cartridges, by about 20%, if the customers agreed to return them to the company after they were used. This system, Lexmark argued, allowed it to maintain its patent rights over the cartridges.
Lexmark found itself in litigation with Impression Products, a company that refills Lexmark cartridges in violation of the post-sale agreements that Lexmark makes with its consumers. Lexmark also sells its cartridges abroad, which Impression Products acquired from purchasers and imported into the United States. Lexmark then tried to sue Impression for infringement for this conduct. In other words, Lexmark attempts to impose restrictions on the ways that their cartridges can be used after their initial sale in order to maintain its exclusive patent rights.
In considering the case, the Federal Circuit allowed Lexmark’s post-sale restrictions. It held that a patent owner “may preserve its patent rights against downstream buyers [through]… restrictions, by licensing others to make and sell its patented articles. We conclude that the law does not forbid the patentee to do the same when making and selling the articles itself."
That court further held that patent exhaustion occurs only after the first sale within the United States, and not a “foreign” first sale (that is, when an item protected by U.S. patent is sold internationally). This appellate decision maintained the status quo of the post-sale doctrine that the Federal Circuit has pronounced for decades.
The Supreme Court granted certiorari to answer the questions of (1) whether the sale of a patented product that specifies post-sale restrictions on the product's use or resale is permitted under the patent exhaustion doctrine; and (2) whether an international sale of a patented product exhausts patent rights in that product.
In considering the first question, the Court reversed the Federal Circuit and held that Lexmark had indeed exhausted its patent rights from the moment it sold its cartridges. It could not continue its rights through post-sale terms. “[E]ven if the restrictions in Lexmark’s contracts with its customers were clear and enforceable under contract law,” the Court decided, “they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.”
Second, the Court held that Lexmark had exhausted its patent rights through its sales internationally. It could not sue Impression Products for patent infringement with respect to cartridges sold outside the United States. “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act," the Court decided. “[R]estrictions and location are irrelevant for patent exhaustion; what matters is the patentee’s decision to make a sale.”
Put differently, the Lexmark case held that the sale of a patented item exhausts any rights in the patent, whether the sale occurs domestically or internationally.
Like many of the Supreme Court’s patent cases, the Lexmark decision is complex and its long-term effects are difficult to predict. But the change in Federal Circuit precedent suggests that patent owners are likely to reconsider the terms of their licensing deals that relied on the enforceability of post-sale restrictions. In other words, because the Supreme Court has limited the ability of owners to collect revenue from a patented product after the initial sale, companies may increase their licensing rates to create more revenue and defray potential losses.
Effective date: May 30, 2017