Supreme Court Holds Sale of Patented Product Exhausts All Patent Rights

June 13, 2017 | Insights

In a nearly unanimous opinion issued Tuesday, the U.S. Supreme Court held “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 [sic] the location of the sale.” This ruling reversed years of Federal Circuit precedent that allowed patent owners to impose restrictions on the sale of patented products and seek remedies under patent law when those restrictions were violated.

Impression Products, Inc. v. Lexmark International Inc. concerned whether Lexmark could impose restrictions on the use of its printer cartridges after sale. Specifically, Lexmark had a “Return Program” by which a consumer would purchase the printer cartridge at a discounted rate but sign a contract preventing that consumer from using the cartridge more than once or transferring it to anyone but Lexmark. Companies like Impression Products acquired empty printer cartridges (both domestically and overseas), refilled them with toner, and resold them to consumers. Lexmark sued Impression Products for patent infringement based on that practice. Relying on principles of exhaustion, the district court granted a motion to dismiss as to Return Program cartridges sold domestically but denied the motion as to ones sold overseas. The Federal Circuit held that because Impression Products knew about Lexmark’s restrictions on the sale of the Return Program cartridges, Lexmark’s sales did not exhaust its patent rights in the cartridges sold in the U.S. On the other hand, the Federal Circuit held that Lexmark’s sale of Return Program cartridges overseas did not exhaust its patent rights, and Lexmark was free to sue for patent infringement once Impression Products imported those products into the U.S.

The Supreme Court addressed two questions regarding the scope of the patent exhaustion doctrine:

  1. Whether a patentee that sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through an infringement lawsuit; and
  2. Whether a patentee exhausts its patent rights by selling its product outside the United States where American patent laws do not apply.

With respect to Return Program cartridges sold in the United States, the Supreme Court concluded that Lexmark exhausted its patent rights the moment it sold those cartridges. The exhaustion doctrine operates as an automatic limit on the right to exclude present in 35 U.S.C. § 154(a), which grants patentees the “right to exclude others from making, using, offering for sale, or selling [their] inventions.” Lexmark’s sales terminated all patent rights in the cartridges sold under the Return Program and deprived Lexmark of any further control over the product under patent law because ownership immediately transferred to the purchaser. In reaching this conclusion, the Supreme Court referenced its recent decision in Kirtsaeng v. John Wiley & Sons, Inc., a case concerning the bounds of the exhaustion doctrine in copyright law and noted that the exhaustion doctrine in both areas of law goes back to the historic prohibition on restraints on the alienation of chattels—that is, the legal doctrine that prohibited a seller from restraining what a buyer later did with what it purchased. Ultimately, the Supreme Court relied on its precedent in Quanta Computer, Inc. v. LG Electronics, Inc., where it held that the patentee could not bring an infringement suit because an “authorized sale . . . took its products outside the scope of the patent monopoly.” For these reasons, the Supreme Court held that Lexmark could not maintain a patent infringement suit for violation of the contractual restrictions it placed on the sale of its printer cartridges in the United States.

In reversing the Federal Circuit, the Supreme Court noted that the Federal Circuit’s logical misstep was in focusing on exhaustion as related to the authority for selling rather than as a limit on the scope of the patentee’s rights. A patentee’s right to limit licensees does not mean that a patentee can impose post-sale restrictions on purchasers that are enforceable through the patent laws. Further, so long as a licensee complies with the terms of the license, sale by a licensee is an authorized sale that exhausts the patentee’s rights.

Turning to the question of sales overseas, the Supreme Court again reversed the Federal Circuit and held: “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” In its reasoning, the Supreme Court again relied on analogy to its copyright exhaustion decision in Kirtsaeng, which held that the “first sale [rule] applies to copies of copyrighted work lawfully made [and sold] abroad” and the origination of both the patent exhaustion and copyright exhaustion doctrines in the common law’s refusal to permit restraints on the alienation of chattels. The historic basis in that common law tipped the scales toward international patent exhaustion.

The Supreme Court’s ruling today is simple—“patent exhaustion is uniform and automatic.” Following Impression Products, an authorized sale of a patented product exhausts all patent rights in that product irrespective of any restrictions placed on that sale. Enforcement of post-sale restrictions therefore cannot come through a patent infringement suit but rather must be brought under contract law principles.