In May 2017, the US Supreme Court has made a significant ruling on patent exhaustion in Impression Products, Inc. v Lexmark International, Inc., which further limits a patent owner’s ability to control the use of patented products after sale.

What is Patent Exhaustion Right?

Patent exhaustion is a patent doctrine that limits the extent to which patent holders can control an individual article of a patented product after a so-called “authorised sale”. Once an authorised sale of a patented article occurs, the patent holder's exclusive rights to control the use and sale of that article are said to be "exhausted," and the purchaser is free to use or resell without owing any liability to the patent holder. Patent exhaustion doctrine has been widely adopted in civil law countries.

Impression Products, Inc. v Lexmark International, Inc.

Background

Lexmark International, Inc. (“Lexmark”) designs, manufactures and sells toner cartridges to consumers in the United States and abroad, and owns a number of patents that cover components of those cartridges and the manner in which they are used. When Lexmark sells toner cartridges, it gives consumers two options: (1) to buy a toner cartridge at full price, with no restrictions; or (2) to buy a cartridge at a discount through Lexmark’s Return Programme. Customers who buy through the Return Programme must sign a contract agreeing (i) to use the cartridge only once and (ii) to refrain from transferring the cartridge to anyone but Lexmark. However, remanufacturing companies, such as Impression Products, Inc. (“Impression”), acquire empty Lexmark toner cartridges, some of which are the Return Programme cartridges, from purchasers in the United States, refill them with toner, and then resell them (at a price cheaper than Lexmark’s).

Remanufacturers do the same with Lexmark cartridges that they acquired from purchasers overseas to import the refilled cartridges into the United States. Lexmark suffered loss and sued a number of these remanufacturers, including Impression, for patent infringement with respect to the two groups of cartridges.

For the first group, Lexmark argued that, because it expressly prohibited reuse and resale of these cartridges, Impression infringed the Lexmark patents when it refurbished and resold them. For the second group, those cartridges that Impression had acquired abroad, Lexmark claimed that it never gave anyone authority to import these cartridges, so Impression infringed its patent rights when Impression imported the cartridges.

Impression moved to dismiss Lexmark’s claim on the grounds that Lexmark’s sales, both in the United States and abroad, exhausted its patent rights in the cartridges, so Impression was free to re­furbish and resell them, and to import them if acquired overseas.

Earlier decisions

At the District Court, the judge granted the motion to dismiss as to the domestic Return Program cartridges, but denied the motion as to the cartridges sold abroad.

At the Federal Circuit, the judge ruled for Lexmark with respect to both groups of cartridges. Beginning with the Return Program cartridges that Lexmark sold domestically, the Federal Circuit held that a patentee may sell an item and retain the right to enforce, through patent infringement lawsuits, clearly communicated, lawful restrictions on post-sale use or resale. Given the fact that Impression knew about Lexmark’s restrictions and those restrictions did not violate any laws, Lexmark’s sales did not exhaust its patent rights, and thus Lexmark could sue Impression for infringement. As for the cartridges that Lexmark sold abroad, the Federal Circuit held that, when a patentee sells a product overseas, it does not exhaust its patent rights over that item. Therefore the judge held that Lexmark was free to sue for infringement when Impression imported cartridges that Lexmark had sold abroad.

Supreme Court decision

At the Supreme Court, Chief Justice Roberts, writing for the majority, explained 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.” Reasoning that “[a]llowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation,” the Supreme Court overruled the Federal Circuit’s decades old interpretation of the patent exhaustion doctrine.

First, the Supreme Court unanimously decided (8-0) that exhaustion applies regardless of any restrictions the patentee purports to impose through, for example contractual terms. Second, the Supreme Court held (7-1) that exhaustion applies to foreign sales and that a patentee’s decision to sell a product exhausts all of its rights, regardless of the location of the sale. The Lexmark decision marks another opinion from the Supreme Court that seemingly detracts from the rights of patent owners.

Conclusion

In the US, the Lexmark decision would significantly affect the ruling in potential, as well as ongoing patent cases, as patent owners can no longer rely on its patent right to “exclude others from making, using, offering for sale, or selling invention throughout the US or importing the invention into the US” after an authorised sale. This may trigger shifts in licensing and IP ownership arrangement as patent owners try to find ways to continue the practices no longer permitted after the Lexmark decision.