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Supreme Court Rules That Restricted Sales of Patented Cartridges Exhaust Patent Rights

May 30, 2017

Overview

Impression Products, Inc. v. Lexmark International, Inc., Supreme Court Case 15-1189 (May 30, 2017)

The Supreme Court reverses an en banc Federal Circuit decision and rules that a “conditional sale” that ‎transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale ‎exhausts the patentee’s right to patent infringement relief. Therefore, while the patentee may retain ‎the right to sue for breach of contract, patent exhaustion prevents the enforcement of the post-sale ‎restrictions through the patent law’s infringement remedy. The Court cites a number of its older ‎decisions and rules that sellers cannot limit how purchasers of patented products use those products ‎and that patent rights are exhausted by any sale, regardless of where it takes place.‎

A United States patent entitles the patent holder to “exclude others from making, using, offering for ‎sale, or selling [its] invention throughout the United States or importing the invention into the United ‎States.” 35 U. S. C. §154(a). Whoever engages in one of these acts “without authority” from the ‎patentee may face liability for patent infringement. §271(a). When a patentee sells one of its ‎products, however, the patentee can no longer control that item through the patent laws—its patent ‎rights are said to “exhaust.” ‎

Respondent Lexmark designs, manufactures, and sells toner cartridges to consumers in the U.S. and ‎abroad. It 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: One option ‎is to buy a toner cartridge at full price, with no restrictions. The other option is to buy a cartridge at a ‎discount through Lexmark’s “Return Program.” In exchange for the lower price, customers who buy ‎through the Return Program must sign a contract agreeing to use the cartridge only once and to refrain ‎from transferring the cartridge to anyone but Lexmark. ‎

Companies known as remanufacturers acquire empty Lexmark toner cartridges—including Return ‎Program cartridges—from purchasers in the U.S., refill them with toner, and then resell them. They do ‎the same with Lexmark cartridges that they acquire from purchasers overseas and import into the U.S. ‎Lexmark sued a number of these remanufacturers, including petitioner Impression Products, Inc., for ‎patent infringement with respect to two groups of cartridges. The first group consists of Return ‎Program cartridges that Lexmark had sold within the U.S. Lexmark argued that, because it expressly ‎prohibited reuse and resale of these cartridges, Impression Products infringed the Lexmark patents ‎when it refurbished and resold them. The second group consists of all toner cartridges that Lexmark ‎had sold abroad and that Impression Products imported into the country. Lexmark claimed that it ‎never gave anyone authority to import these cartridges, so Impression Products infringed its patent ‎rights by doing just that. ‎

Impression Products moved to dismiss on the grounds that Lexmark’s sales, both in the U.S. and ‎abroad, exhausted its patent rights in the cartridges, so Impression Products was free to refurbish and ‎resell them, and to import them if acquired overseas. The District Court granted the motion to dismiss ‎as to the domestic Return Program cartridges, but denied the motion as to the cartridges sold abroad. ‎The Federal Circuit then 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. Because Impression Products knew ‎about Lexmark’s restrictions and those restrictions did not violate any laws, Lexmark’s sales did not ‎exhaust its patent rights, and it could sue Impression Products 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. Lexmark was therefore free to sue for infringement ‎when Impression Products imported cartridges that Lexmark had sold abroad. Judge Dyk, joined by ‎Judge Hughes, dissented. ‎

Held: ‎ ‎1. Lexmark exhausted its patent rights in the Return Program cartridges that it sold in the U.S. ‎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. As a result, even if the restrictions in Lexmark’s contracts ‎with its customers were clear and enforceable under contract law, they do not entitle Lexmark to ‎retain patent rights in an item that it has elected to sell. ‎

‎(a) The Patent Act grants patentees the “right to exclude others from making, using, offering for sale, ‎or selling [their] invention[s].” 35 U. S. C. §154(a). For over 160 years, the doctrine of patent ‎exhaustion has imposed a limit on that right to exclude: When a patentee sells an item, that product ‎‎“is no longer within the limits of the [patent] monopoly” and instead becomes the “private, individual ‎property” of the purchaser. If the patentee negotiates a contract restricting the purchaser’s right to ‎use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may ‎not do so through a patent infringement lawsuit. ‎

The exhaustion rule marks the point where patent rights yield to the common law principle against ‎restraints on alienation. The Patent Act promotes innovation by allowing inventors to secure the ‎financial rewards for their inventions. Once a patentee sells an item, it has secured that reward, and ‎the patent laws provide no basis for restraining the use and enjoyment of the product. Allowing ‎further restrictions would run afoul of the “common law’s refusal to permit restraints on the alienation ‎of chattels.” Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519, 538. As Lord Coke put it in the 17th ‎century, if an owner restricts the resale or use of an item after selling it, that restriction “is voide, ‎because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man.” ‎Congress enacted and has repeatedly revised the Patent Act against the backdrop of this hostility ‎toward restraints on alienation, which is reflected in the exhaustion doctrine. ‎

This Court accordingly has long held that, even when a patentee sells an item under an express, ‎otherwise lawful restriction, the patentee does not retain patent rights in that product. See, e.g., ‎Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617. And that well-settled line of precedent ‎allows for only one answer in this case: Lexmark cannot bring a patent infringement suit against ‎Impression Products with respect to the Return Program cartridges sold in the U.S. because, once ‎Lexmark sold those cartridges, it exhausted its right to control them through the patent laws. ‎

‎(b) The Federal Circuit reached a different result because it started from the premise that the ‎exhaustion doctrine is an interpretation of the patent infringement statute, which prohibits anyone ‎from using or selling a patented article “without authority” from the patentee. According to the ‎Federal Circuit, exhaustion reflects a default rule that selling an item “presumptively grants ‘authority’ ‎for the purchaser to use it and resell it.” But if a patentee withholds some authority by expressly ‎limiting the purchaser’s rights, the patentee may enforce that restriction through patent infringement ‎lawsuits. ‎

The problem with the Federal Circuit’s logic is that the exhaustion doctrine is not a presumption about ‎the authority that comes along with a sale; it is a limit on the scope of the patentee’s rights. The Patent ‎Act gives patentees a limited exclusionary power, and exhaustion extinguishes that power. A ‎purchaser has the right to use, sell, or import an item because those are the rights that come along ‎with ownership, not because it purchased authority to engage in those practices from the patentee. ‎

‎2. Lexmark also sold toner cartridges abroad, which Impression Products acquired from ‎purchasers and imported into the U.S. Lexmark cannot sue Impression Products for infringement with ‎respect to these cartridges. An authorized sale outside the U,S., just as one within the U.S., exhausts ‎all rights under the Patent Act. ‎

The question about international exhaustion of intellectual property rights has arisen in the ‎context of copyright law. Under the first sale doctrine, when a copyright owner sells a lawfully made ‎copy of its work, it loses the power to restrict the purchaser’s right “to sell or otherwise dispose of . . . ‎that copy.” 17 U. S. C. §109(a). In Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519, this Court held that ‎the first sale doctrine applies to copies of works made and sold abroad. Central to that decision was ‎the fact that the first sale doctrine has its roots in the common law principle against restraints on ‎alienation. Because that principle makes no geographical distinctions and the text of the Copyright Act ‎did not provide such a distinction, a straightforward application of the first sale doctrine required ‎concluding that it applies overseas. ‎

Applying patent exhaustion to foreign sales is just as straightforward. Patent exhaustion, too, ‎has its roots in the antipathy toward restraints on alienation, and nothing in the Patent Act shows that ‎Congress intended to confine that principle to domestic sales. Differentiating between the patent ‎exhaustion and copyright first sale doctrines would also make little theoretical or practical sense: The ‎two share a “strong similarity . . . and identity of purpose,” Bauer & Cie v. O’Donnell, 229 U. S. 1, 13, and ‎many everyday products are subject to both patent and copyright protections. ‎

Lexmark contends that a foreign sale does not exhaust patent rights because the Patent Act ‎limits a patentee’s power to exclude others from making, using, selling, or importing its products to ‎acts that occur in the United States. Because those exclusionary powers do not apply abroad, the ‎patentee may not be able to sell its products overseas for the same price as it could in the U.S., and ‎therefore is not sure to receive the reward guaranteed by American patent laws. Without that reward, ‎says Lexmark, there should be no exhaustion. ‎

The territorial limit on patent rights is no basis for distinguishing copyright protections; those ‎do not have extraterritorial effect either. Nor does the territorial limit support Lexmark’s argument. ‎Exhaustion is a distinct limit on the patent grant, which is triggered by the patentee’s decision to give a ‎patented item up for whatever fee it decides is appropriate. The patentee may not be able to ‎command the same amount for its products abroad as it does in the U.S. But the Patent Act does not ‎guarantee a particular price. Instead, the Patent Act just ensures that the patentee receives one ‎reward—of whatever it deems to be satisfactory compensation—for every item that passes outside ‎the scope of its patent monopoly. ‎

This Court’s decision in Boesch v. Gräff, 133 U. S. 697, is not to the contrary. That decision did ‎not, as Lexmark contends, exempt all foreign sales from patent exhaustion. Instead, it held that a sale ‎abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the ‎transaction. That just reaffirms the basic premise that only the patentee can decide whether to make ‎a sale that exhausts its patent rights in an item. ‎

Finally, the U.S. advocates what it views as a middle-ground position: that a foreign sale ‎exhausts patent rights unless the patentee expressly reserves those rights. This express-reservation ‎rule is based on the idea that overseas buyers expect to be able to use and resell items freely, so ‎exhaustion should be the presumption. But, at the same time, lower courts have long allowed ‎patentees to expressly reserve their rights, so that option should remain open to patentees. The ‎sparse and inconsistent decisions the Government cites, however, provide no basis for any ‎expectation, let alone a settled one, that patentees can reserve rights when they sell abroad. The ‎theory behind the express-reservation rule also wrongly focuses on the expectations of the patentee ‎and purchaser during a sale. More is at stake when it comes to patent exhaustion than the dealings ‎between the parties, which can be addressed through contracts. Instead, exhaustion occurs because ‎allowing patent rights to stick to an already-sold item as it travels through the market would violate the ‎principle against restraints on alienation. As a result, restrictions and location are irrelevant for patent ‎exhaustion; what matters is the patentee’s decision to make a sale. ‎

Reversed and remanded. ROBERTS, C. J., delivered the opinion of the Court, in which ‎KENNEDY, THOMAS, BREYER, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. GINSBURG, J., filed an ‎opinion concurring in part and dissenting in part. GORSUCH, J., took no part in the consideration or ‎decision of the case.‎

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