By Jennifer Van Doren, Partner, Morningstar Law Group
The U.S. Supreme Court issued its decision in Impression Products, Inc. v. Lexmark International, Inc. on May 30, 2017. In it, the Court continued its recent expansion of the patent exhaustion doctrine, delivering a blow to patent holders and finding that a patent holder (or “patentee”) cannot enforce patents against resellers after the first sale of the patented item, either in the United States (even under contractual restrictions against resale) or abroad. Lexmark International, Inc. sued refurbishers of its printer cartridges for patent infringement after the refurbishers: (a) resold cartridges that were sold in the United States under a contractual restriction against resale and (b) imported cartridges sold outside the United States, without authorization from Lexmark. In each scenario, the Court found that the first sale of the patented cartridges by Lexmark immediately and automatically exhausted Lexmark’s patent rights, leaving Lexmark with no patent rights or remedies against the resellers.
What does this case mean for patentees? The quick takeaways are as follows (with further analysis of the Court’s decision below):
1. Patentees should shore up their contracts to (a) ensure that any post-sale restrictions on the patented product are clear and enforceable (watch out for patent misuse!); and (b) ensure that they provide sufficient remedies for violations of post-sale restrictions.
2. Restrictions in patent licenses are more likely to be enforceable than restrictions in sales of patented products, so Patentees should consider their commercialization strategies and whether to adopt a licensing strategy over a sales strategy, where possible.
3. Patentees should analyze foreign sales strategies to ensure that importation of patented products by resellers would not weaken U.S. sales.
4. Patentees should consider trademark remedies for unauthorized resales of branded products.
5. As with most products, technological innovations are often better than legal remedies. (Note that Lexmark had installed a microchip on its cartridges to prevent reuse, but the remanufacturers found methods to counteract them.) Patentees should consider whether technological innovations will give them more control over the use and resale of their products than patent rights.
Lexmark International, Inc. (“Lexmark”) manufactures and sells patented toner cartridges to purchasers in the United States and outside the United States. Lexmark offers two purchasing options – first, an unrestricted cartridge at full price, and second, a single-use cartridge at a discounted price under a “Return Program.” To get the discounted price, the purchaser must sign a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark. Impression Products, Inc. (“Impression”) and other remanufacturers acquire empty Lexmark toner cartridges from purchasers in the United States and abroad, refill them with toner and then sell them, thus competing against Lexmark.
Lexmark sued Impression and other remanufacturers for patent infringement. Lexmark claimed that, with respect to the original sales of the cartridges in the U.S., because Lexmark had contractually and expressly prohibited reuse and resale of these cartridges (and Impression knew of these restrictions), Impression infringed the Lexmark patents when it refurbished and resold them in violation of the restrictions. With respect to the toner cartridges sold abroad, refurbished and imported by Impression, Lexmark claimed that Impression’s unlicensed importation of the patented cartridges infringed Lexmark’s exclusive patent right to import the products. In the lower court, the Federal Circuit ruled in favor of Lexmark with respect to both sets of cartridges, finding that the sales subject to express post-sale restrictions did not exhaust the patent with respect to those restrictions, and that the sales abroad did not exhaust Lexmark’s U.S. patent rights, holding that Lexmark could enforce its patents against Impression and other remanufacturers through patent infringement claims.
The U.S. Supreme Court reversed the Federal Circuit in a 7-1 decision, with Justice Ginsburg dissenting on the issue of whether a foreign sale of a product protected by a U.S. patent exhausts that U.S. patent.
The Court’s Analysis
As to the domestic sales of the Lexmark cartridges with contractual post-sale restrictions, the Court focused on the principle that “when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.” The Court found that while express restrictions on the uses and resale of a patented product in a contract for the sale of that product may be enforceable as a matter of contract law as to the contracting parties, the sale of the product exhausts the patent immediately and automatically, leaving the patentee with no ability to enforce the patent against the purchaser or any third parties, even for violation of the contractual restrictions. In other words, the contractual restrictions do not serve to preserve any patent rights or remedies, and once the patented product is sold, patent rights are exhausted.
Citing its 1942 opinion in United States v. Univis Lens Co., 316 U.S. 241, 250, the Court found that a patentee is free to set the price and negotiate contracts with purchasers, but may not “by virtue of his patent, control the use or disposition” of the product after a sale transfers ownership of the product to the purchaser. “In sum, patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee – that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license.”
Importantly, the Court distinguished between sales and licenses of patented items. Specifically, in a sale of a patented product, the patentee cannot and does not retain any patent rights via contractual restrictions on post-sale uses or resales of the patented product. Conversely, in a license of the patent rights, the Court acknowledged that a patentee can restrict the licensee’s use of the patent rights and patented product and thereby reserve or retain patent rights, enforceable against the licensee. In other words, a patentee can bring both patent infringement and contract claims against a licensee that violates restrictions on uses of the patent rights. For this reason, as a business strategy, a patentee may choose to license its products (as with software in the copyright context), rather than sell its products in order to preserve its patent rights and remedies against the licensee and downstream licensees.
With respect to the foreign sales, Lexmark argued that U.S. patents cannot be exhausted by foreign sales, where U.S. patent laws do not apply and are not enforceable. The Court disagreed, holding “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” The Court relied on the Common Law refusal to permit restraints on alienation of chattels without any geographic distinctions and on the Court’s similar analysis and conclusion in a copyright case involving foreign sales of a work subject to U.S. copyright rights. Specifically, the Court stated that “exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment.” In other words, the transfer of title, wherever it occurs, exhausts the patent. Notably, Justice Ginsburg dissented from this portion of the opinion, stating, “Because a sale abroad operates independently of the U.S. patent system, it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights. U.S. patent protection accompanies none of a U.S. patentee’s sales abroad – a competitor could sell the same patented product abroad with no U.S.-patent-law consequence. Accordingly, the foreign sale should not diminish the protections of U.S. law in the United States.”
Implications of this Decision
As summarized above, the Lexmark decision eliminates patent rights and remedies once a patented item is sold in an authorized sale, either by the patentee itself or a licensee authorized by the patentee to make the sale. Without patent rights to enforce post-sale restrictions, particularly against third parties with which the patentee does not have contractual rights, patentees must find other ways to protect their business models that involve post-sale restrictions if they want to continue to use them. This is particularly important for patentees of self-replicating biologics, such as seeds that are sold for planting in a single season under a “label license” or cell-lines sold with a reservation of patent rights.
In light of the Lexmark decision, the only way for a patentee to reserve any patent rights in a patented item (such as self-replicating biologics) may be through license restrictions, rather than sale restrictions. Even such license restrictions may be unenforceable through patent infringement suits if a court were to find that the patented item was sold or that title to the patented item was transferred, so careful analysis of the particular patent and careful drafting of the license is critical.
Also, even though the Court indicated that post-sale contractual restrictions between a patentee and a purchaser of a patented product may be enforceable, such restrictions likely will bear closer scrutiny after Lexmark. Indeed, patent misuse is often the other side of the patent exhaustion coin, in that attempts to contract around patent exhaustion may be viewed as patent misuse and thereby unenforceable and may have the effect of putting the patent itself at risk. Put simply, “patent misuse” is a patentee’s attempt to use a patent to restrain trade beyond what enforcement of patent rights would allow. So, it would seem that after Lexmark, if a patentee is not permitted to enforce its patent to restrict the use or resale of a patented item after the first sale, then a patentee could not contractually restrict a purchaser who takes title to the patented item from any use or resale of the patented item. Again, the Court did not analyze or draw any conclusions about the enforceability of Lexmark’s contractual post-sale restrictions, so this question remains unanswered. However, it is clear from the Court’s decision that a patentee has much more latitude to restrict the use or resale of the patented item through a license, rather than a sale.
Clearly, the Lexmark decision will cause patentees to stand back and examine their business models that involve sales of patented products. In addition to assessing whether to adopt a licensing strategy over a sales strategy, patentees should consider other ways to protect their post-sale business models, such as: (a) examining foreign sales of patented items to determine whether importation of such items for resale by competitors would threaten U.S. sales; (b) considering trademark remedies against resellers who are reselling branded products without authorization to use trademarks; and (c) developing technological measures to make patented products truly single-use products, unusable for subsequent uses.