On May 30, 2017, the U.S. Supreme Court set forth a bright-line patent exhaustion rule, holding that both domestic and foreign sales exhaust all rights under the Patent Act. Chief Justice John Roberts authored the opinion for the Court, which held unanimously on the issue of domestic exhaustion (8-0) and near unanimously on international exhaustion (7-1), ruling “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.” The Court overturned the Federal Circuit, which had sua sponte ordered hearing of the case en banc in light of related Supreme Court case law in the copyright context.¹

Background

Lexmark International is a manufacturer of printers and toner cartridges. Lexmark owns patents covering cartridges and makes “first sales” of those cartridges domestically and abroad to resellers and end users. Lexmark sells two types of cartridges: full-price “regular cartridges” and discounted “return program cartridges.” Regular cartridges are not subject to resale/reuse restrictions—they can be refilled when empty and resold. Discounted return program cartridges are subject to no-resale/single-use restrictions and include a microchip that monitors toner levels to prevent refills and reuse. Many third parties, including the petitioner, Impression Products, developed methods to defeat the microchip technology that restricts refills and marketed them to resellers for use in Lexmark printers.

Lexmark sued Impression for direct and contributory infringement under 35 U.S.C. Section 271 because contrary to sale restrictions, Impression refurbished and resold return program cartridges. Lexmark also alleged patent infringement by Impression for sales of all toner cartridges sold overseas and imported into the U.S. The district court held that although the return program cartridges were sold under post-sale restrictions, they “do not prevent patent rights from being exhausted given that the initial sales were authorized and unrestricted.” The district court dismissed Lexmark’s infringement claims for the return program cartridges sold in the U.S., but held that patent exhaustion did not apply to the cartridges first sold abroad. Accordingly, the district court found that Impression committed acts of infringement by selling, within the U.S., refilled return program cartridges initially sold abroad.

On appeal, the Federal Circuit ruled in favor of Lexmark for both return program cartridges sold domestically and abroad. The Supreme Court disagreed and reversed the Federal Circuit.

The Supreme Court’s Decision

The Supreme Court’s decision addressed two issues related to patent exhaustion. First, the Court considered whether a patentee that sells an item domestically completely exhausts its rights under patent law or whether it can reserve some rights by imposing an express restriction on the purchaser’s right to reuse or resell the product. The Supreme Court determined that as a matter of patent law, such post-sale restrictions are impermissible because “[w]hen a patentee chooses to sell an item, that product ‘is no longer within the limits of the [patent] monopoly’ and instead becomes the ‘private, individual property’ of the purchaser with the rights and benefits that come along with ownership.”² While the Federal Circuit reasoned that at the point of sale, some patent rights can transfer while others are retained, the Supreme Court declared in no uncertain terms that “[t]he sale ‘terminates all patent rights to that item.’”³ The Court explained that the Federal Circuit committed a misstep in logic by considering the exhaustion doctrine a “presumption” when it is instead a limit on “the scope of the patentee’s rights.”

The Court justified the result on public interest grounds, explaining that patent laws do not include the right to restrain further alienation after an initial sale and deemed such conditions “obnoxious to the public interest.”⁴ The Court held, based on Supreme Court jurisprudence and policy, that upon sale of Lexmark’s return program cartridges, the company exhausted all of its patent rights and only retained rights over the cartridges as a matter of contract.

Second, the Court considered whether a patentee exhausts its patent rights by selling its product outside the U.S., where American patent laws do not apply. Lexmark sued Impression for patent infringement for cartridges it sold abroad under the theory that foreign sales do not trigger patent exhaustion unless the patentee expressly or implicitly transfers its rights. Lexmark reasoned that this outcome was appropriate because U.S. patent law does not protect foreign sales, and “a patentee selling in a foreign market may not be able to sell its product for the same price that it could in the United States, and therefore is not sure to receive ‘the reward guaranteed by U.S. patent law.’”⁵ The Court disagreed. The Court reasoned that patent exhaustion is a common law principle that has not been narrowed by Congress to apply uniquely to domestic sales and therefore, its application to foreign sales is no different from domestic sales.⁶ The Court rejected Lexmark’s reasoning because “[e]xhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market.”⁷ The Court further explained that exhaustion occurs because in a sale “the patentee elects to give up title to an item in exchange for payment.”⁸

Justice Ginsburg authored an opinion concurring with the Court’s domestic exhaustion holding, but dissenting from the Court’s holding on international exhaustion. Justice Ginsburg explained that because U.S. patent law is territorial, a patent provides no protection abroad, “so it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights.”⁹ Justice Ginsburg distinguished patent exhaustion from copyright law, because patent law lacks an analogous statutory first-sale provision, and “copyright protections, unlike patent protections, are harmonized across countries.”¹⁰

Practical Effects

By overturning the Federal Circuit’s patent exhaustion doctrine, the Court has implemented a bright-line rule that exhausts all patent rights at the point of sale—whether domestic or foreign. However, post-sale restrictions as a matter of contract law are permissible, so long as the patentee does not rely on patent rights to encumber goods post-initial sale and infringement suits as an enforcement mechanism. Moving forward, clients that seek to impose post-sale restrictions on the products they sell should consider evaluating their sales contracts to ensure, where necessary, that both domestic and international sales contracts restrict product uses through clear contractual restraints that are independent of the seller’s patent rights. The Court’s reasoning indicates that such contractual restraints between a buyer and seller, or licensor and licensee, are permissible because liability attaches to a party of the agreement rather than liability floating on a cloud of legal uncertainty through the marketplace. At the same time, when acting as a product purchaser, in certain contexts clients can expect to see sellers attempt to impose additional—and more complex—contractual constraints on use as sellers attempt to work within the Court’s decision and address contractual privity-of-contract and enforceability questions. Accordingly, future disputes may revolve around those privity-of-contract and enforceability questions and could ultimately be heard by state supreme courts or regional federal circuit courts of appeal, rather than the Federal Circuit.

For more information on how the Supreme Court’s decision may impact your situation or circumstances, please contact any member of the patent litigation or technology transactions practices at Wilson Sonsini Goodrich & Rosati.

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