No Second Bite of the Patent Apple by Patent Owner, Says Supreme Court

No Second Bite of the Patent Apple by Patent Owner, Says Supreme Court

Summary:

On Tuesday, May 30, 2017, the Supreme Court issued a decision in Impression Prods., Inc. v. Lexmark Int’l, Inc., that eliminates a patentee’s patent rights in a product sold by the patentee.  The Supreme Court held that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.”

Lexmark International, Inc. (“Lexmark”) designs, manufactures, and sells toner cartridges to consumers in the United States and around the globe.  It owns several patents that cover components of those cartridges and the manner in which they are used.  Lexmark sells some cartridges in the United States through its Return Program, pursuant to which a customer purchases the cartridge at a discount price and agrees to use it only once and to refrain from transferring the empty cartridge to anyone but Lexmark.
 
Impression Products, Inc. (“Impression”) acquires empty Lexmark cartridges from purchasers in the United States and abroad, refills them, and then resells them at a lower price than new Lexmark cartridges.  
 
Lexmark sued Impression and other defendants in U.S. District Court for patent infringement for: (1) refilling and selling cartridges sold domestically under Lexmark’s Return Program; and (2) refilling of Lexmark cartridges sold abroad and importing them back into the United States for sale.  
 
Impression moved to dismiss the suit based on the doctrine of patent exhaustion, arguing that Lexmark had exhausted its patent rights by selling the cartridges in the United States and abroad.  The District Court granted Impression’s motion as to domestic sales of cartridges under Lexmark’s Return Program but denied its motion regarding importation for sale in the United States of refilled Lexmark cartridges originally sold abroad by Lexmark. 

On appeal, the Court of Appeals for the Federal Circuit, based on its own precedents, ruled for Lexmark with respect to both groups of cartridges.  Impression appealed to the United States Supreme Court.    
 
The Supreme Court first dealt with the cartridges sold domestically under the Return Program.  Reiterating the “well-established exhaustion rule [that] marks the point where patent rights yield to the common law principle against restraints on alienation,” the Court rejected the Federal Circuit’s rationale, pointing out that this “venerable principle is not, as the Federal Circuit dismissively viewed it, merely ‘on common-law jurisdiction’s general judicial policy at one time toward anti-alienation restrictions.’”  (Emphasis added.)  The Court emphasized that the exhaustion doctrine is “a limit on ‘the scope of the patentee’s rights.’”
 
The Court then stated that “[t]his Court accordingly has long held that, even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product.”  Recognizing that the precedents involved practices that violated the antitrust law at the time of the decisions, the Court emphasized that “it was the sale of the items […] that prevented the patentee from enforcing those resale price agreements through patent infringement.”  The Court held that “this well-settled line of precedent allows for only one answer: Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges.”
 
Turning to the sales abroad issue, the Court cited its own precedent in the context of copyright law.  According to the Court, the copyright first sale doctrine exhausts a copyright owner’s right to “restrict the purchaser’s freedom ‘to sell or otherwise dispose of that copy.’”  The Court found that “the first sale doctrine originated in ‘the common law’s refusal to permit restraints on the alienation of chattels. That ‘common-law doctrine makes no geographical distinctions.’”  In the Court’s opinion, “[a]pplying patent exhaustion to foreign sales is just as straightforward ... [because patent exhaustion] has its roots in the antipathy toward restraints on alienation.”  
 
Thus, the Court held that “[a]n authorized sale outside the United States […] exhausts all rights under the Patent Act.” In making its holding, the Court rejected Lexmark’s argument that patent exhaustion does not apply to foreign sales because a patentee  “is not sure to receive ‘the reward guaranteed by U.S. patent law.’”  The Court pointed out that “[e]xhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market.”
 
The Supreme Court  makes it clear that a patentee cannot assert patent infringement claims against a reseller after it makes a lawful sale of its product, regardless of where the sale took place.  To limit the resale of a patented item, a patentee may rely on other legal theories such as breach of contract.  This in turn creates the need to draft and structure a sales agreement accordingly.  Alternatively, a patentee may consider drafting its patents to cover the refurbishment/reconditioning of  an item covered by the claim of a patent after its initial sale.  
 
Saul Ewing attorneys regularly assist clients with patent matters, including patent prosecution, licensing, sales agreement, and patent enforcement.  If you have any questions about this Client Alert or would like more information, please contact Peter Lauro, Weiguo (Joe) Zhou, one of the other attorneys in our Intellectual Property Practice, or the attorney in the firm with whom you are regularly in contact

 

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