U.S. Supreme Court to Consider Patent Exhaustion Rules

SCOTUS recently added a major IP case to its docket involving the doctrine of patent exhaustion

The U.S. Supreme Court recently added another important intellectual property case to its docket. The justices granted certiorari in Impression Products, Inc. v. Lexmark International, Inc., which involves the doctrine of patent exhaustion and the permissibility of post-sale restrictions.

The Patent Exhaustion Doctrine and Post-Sale Restrictions

Under the Patent Act, patent owners have an exclusionary right that allows them to prevent others from making, using, selling, offering for sale or importing any patented invention within the United States during the term of the patent. The patent exhaustion doctrine, which is also frequently referred to as the “first sale doctrine,” addresses what happens to a patent owner’s rights after the patented article is sold.

Under the exhaustion doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008).

As the Supreme Court further explained, “the authorized sale of a patented article gives the purchaser, or any subsequent owner, a right to use or resell that article,” Bowman v. Monsanto Co., 133 S. Ct. 1761, 1764 (2013). In other words, a patent owner who authorizes a sale of a patented article can’t invoke patent law to enforce ongoing restrictions on the use or resale of that item, but rather must rely on contractual agreements. That brings us to the other issue in this case – post-sale restrictions.

Because of the exhaustion doctrine, many patent owners subject sales to certain restrictions via contract. As long as the restrictions are lawful and clearly communicated, the sale does not exhaust the rights that were reserved. This is commonplace in the drug industry, where drug companies typically sell certain drugs at cheaper prices outside of the U.S. and prohibit the resale of such products to the U.S. market.

Federal Circuit Decision in Impression Products, Inc. v. Lexmark International, Inc.

Lexmark International, Inc. (Lexmark) owns several U.S. patents related to printer toner cartridges, which it sells in the United States and overseas. Impression Products Inc. (Impression) lawfully acquired used Lexmark cartridges and resold them in the United States after they had been physically modified and replenished with ink. In response, Lexmark sued Impression for direct and contributory patent infringement. It alleged both a violation of the single-use/no-resale restriction on cartridges originally sold in the United States and unlawful importation of the cartridges originally sold abroad.

The district court dismissed the infringement claim involving cartridges originally sold in the United States, but declined to dismiss the infringement claim involving cartridges originally sold overseas. On appeal, the Federal Circuit Court of Appeals decided to hear the case en banc. The divided appeals court held that neither the domestic nor the foreign sales had exhausted Lexmark’s patent rights in the cartridges. In reaching its decision, the Federal Circuit reassessed the validity of its decisions in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) and Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001) in light of subsequent Supreme Court decisions.

With regard to Mallinckrodt, the appeals court concluded it is still good law, holding that a patentee may sell an article in the United States while retaining patent-law rights to enforce “clearly communicated, otherwise-lawful restriction[s] as to post-sale use or resale.” The Federal Circuit also reaffirmed Jazz Photo’s holding that foreign sales do not exhaust U.S. patent rights. It also rejected arguments that the Supreme Court’s decision in n Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), which involved copyright exhaustion, mandated that the Federal Circuit adopt a rule of automatic international patent exhaustion.

Supreme Court to Clarify First Sale Doctrine and Post-Sale Restrictions

The Supreme Court has agreed to consider the following questions regarding the doctrine of patent exhaustion:

• Whether a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoids application of the patent exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through the patent law’s infringement remedy.

• Whether, in light of this Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013), that the common law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article- authorized by the U.S. patentee-that takes place outside of the United States exhausts the U.S. patent rights in that article.

Oral argument has not yet been scheduled in the case, but is highly anticipated by legal practitioners and patent owners to gain insight into the justices thought process on the issues. The Court’s decision can significantly impact how companies do business in the future, and further, may require lawyers to review and revise prior agreements that contained post-sale restrictions if the Court answers in the negative on the first issue.

Do you have any questions about the case or the patent exhaustion doctrine? Would you like to discuss the matter further? If so, please contact me, Shane Birnbaum, at 201-806-3364.