Impression v. Lexmark: Supreme Court Reverses Federal Circuit, Limits Scope of Post-Sale Patent Rights

Impression Products, Inc. v. Lexmark Int’l, Inc., No. 15–1189, *2 (May 30, 2017) slip opinion hosted by supremecourt.gov.

On May 30, the Supreme Court completely reversed the Federal Circuit’s decision in Lexmark v. Impression, unequivocally stating 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.” Impression Products, Inc. v. Lexmark Int’l, Inc., No. 15–1189, *2 (May 30, 2017) slip opinion hosted by supremecourt.gov. Writing for the majority, Chief Justice Roberts explained that, with respect to both foreign and domestic sales, a sale of a patent owner or licensee exhausts the rights of the patent owner.

The facts of the case.

Lexmark sells two versions of its printer cartridges: full-priced cartridges that come with no conditions on purchase, and discounted cartridges (“Return Program”) that require the customer return the cartridge to Lexmark after it is empty. The discounted cartridges are equipped with a chip that prevents refill. Impression Products successfully circumvented the chip protection, refilled the Return Program cartridges, and resold the cartridges at a lower price. At no point did Lexmark authorize Impression to refill or resell their cartridges. Additionally, Lexmark objected to Impression’s importing, refilling, and resale of cartridges sold overseas. Lexmark sued Impression Products for patent infringement.

The Federal Circuit ruled that post-sale restrictions can be enforced through a patent infringement suit.

In Lexmark Int’l, Inc. v. Impression Products, Inc. Lexmark Int’l, Inc. v. Impression Products, Inc., 816 F. 3d 721 (Fed. Cir. 2016) hosted by scotusblog.com, the Federal Circuit first concluded that as long as use restrictions are “communicated to the buyer at the time of sale,” the patent owner’s rights are not exhausted, and the owner may continue to control use post-sale. The court then explained that overseas sales do no exhaust patent owners’ rights to control how their products are used, even if the patent owner authorized the sale. As Jason Rantanen explains for Patently-O, “the exhaustion rule was effectively default rule of patent law that the parties could contract around.” Essentially, downstream users and purchasers would be bound by the restrictions on the initial sale.

The Supreme Court completely reversed.

In an almost unanimous opinion, the Supreme Court reversed both decisions made by the Federal Circuit. Rather than grounding its decision in the 1952 Patent Act as the Federal Circuit did, the Supreme Court based its decision largely on common law principles.

All eight voting justices (Justice Gorsuch abstained) agreed that a domestic first sale exhausts the patent owner’s rights. Quoting United States v. Univis Lens Co., 316 U. S. 241, 250 (1942) hosted by justia.com, the Supreme Court held that therefore a patent holder “may not, ‘by virtue of his patent, control the use or disposition’ of the product after ownership passes to the purchaser.” Where the Federal Circuit had seen the conditional sale restrictions as the patent owner “withhold[ing] a stick from the bundle” of patent rights, the Supreme Court relied on United States v. General Elec. Co., 272 U.S. 476, 489 (1926) hosted by justia.com, and viewed the exhaustion doctrine as “a limit on “the scope of the patentee’s rights.” Drawing an analogy to the auto industry, Roberts expressed concerns that expansive post-sale patent rights “would clog the channels of commerce, with little benefit from the extra control that the patentees retain.”

In deciding that foreign sales exhaust patent rights, the Court leaned heavily on its decision and reasoning in Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013) hosted by Bloomberg Law. Kirtsaeng concerned the importation of foreign textbooks that were marked for foreign sale only. The copyright holder sued the reseller for copyright infringement. The Supreme Court, reversing the Second Circuit, ruled that the first-sale doctrine, under which copyright protections are extinguished after the first lawful sale, is not geographically confined to U.S. sales largely because it is a common law doctrine.. Similarly, In Lexmark, Roberts emphasized that Congress, in passing the Patent Act, did so “against the backdrop of the hostility toward restraints on alienation [that is] reflected in the exhaustion doctrine.”

Concurring in part and dissenting in part, Justice Ginsberg focused on the territorial nature of patent rights. She agreed with the majority that, with regard to domestic sales, the patent owner’s rights are exhausted. However, Justice Ginsberg argued that due to the territorial nature of patents, patent owners must obtain patent rights in individual countries. Thus the rights and privileges of the patent do not apply overseas, and therefore limitations such as patent doctrine should not apply either. Ginsberg’s dissent is reminiscent of her dissent in Kirtsaeng.

What does this mean for consumers, retailers, and patent owners?

Patent holders are still free to place restrictions on the post-sale use and resale of their products. However, the Supreme Court’s decision means that these agreements will have to be enforced through contract law rather than through a patent infringement suit. According to Jason Rantanen from Patently-O, contract law will be a more difficult way by which patent owners can enforce these post-sale agreements. There are a number of limitations placed on contract law, an important one being that contract enforcement must accord with public policy. Another important limitation is venue. Contract disputes of this nature are typically decided by state supreme and other federal courts, rather than the Federal Circuit.

As Kit Walsh of the Electronic Frontier Foundation notes, the Court’s decision may have implications for end user license agreements (“EULAs”). Walsh explains that if Robert’s logic that purchasers are generally to use and resell products is applied to digital goods, purchasers should be able to “resell and tinker with their digital goods to the same extent as purchasers of tangible property.”

Not everyone is pleased with the result. Writing for IPWatchdog, Stephen Kunin, Partner at Oblon, McClelland, Maier & Neustadt, L.L.P., notes that the effects of Lexmark may be particularly acute for patent owners who sell regulated products overseas at reduced prices overseas, for example, pharmaceuticals. The decision may also increase reliance on agencies such as the FDA. Also writing for IPWatchdog, Bob Stoll, Partner at Drinker Biddle, adds that the decision may mean that, to protect their U.S. markets, companies may not be able to offer reduced prices in foreign countries. However, as Roberts wrote, “the Patent Act does not guarantee a particular price, much less the price from selling to American consumers.”

Finally, Todd Dickinson, Senior Partner at Polsinelli, LLC, notes in a post for IPWatchdog that this decision could “accelerate further the apparent shift in some quarters from using patent protection to trade secrets” and could attempt to overrule this decision in upcoming treaty negotiations.