Patent Exhaustion Redux: A Sale Is a Sale Is a Sale–And Once Sold, It’s Gone. The Supreme Court Reaffirms the Scope of Patent Exhaustion

On May 30, 2017, in Impression Products, Inc. v. Lexmark International, Inc.,[1] the U.S. Supreme Court held that patent exhaustion applies to sales made anywhere in the world, thereby extinguishing the patent owner’s rights under patent law once the patent owner sells a patented product. For the second time in little more than a week, the Supreme Court voted overwhelmingly to reverse the Federal Circuit, applying the same reasoning to authorized sales of patented items as the Court did to a copyright owner’s sale of copyrighted items.[2] Post-sale restrictions may still be viable, but as a matter of contract law, not patent law.

The Impression Products case involves the sale of toner cartridges for laser printers. Lexmark sells toner cartridges throughout the world. In the United States, Lexmark has a “Return Program,” according to which a cartridge purchaser has the option of paying a higher price in return for unconditional ownership of the cartridge, or of paying a lower price and agreeing to use the cartridge only once. Lexmark installs a microchip in each cartridge to prevent reuse once the cartridge is spent.[3] Cartridge “remanufacturers” figured out how to counteract the microchips and enable re-use of the spent cartridges.

The Supreme Court looked separately at Lexmark cartridge sales in the United States, and sales outside the United States. With respect to sales in the U.S., the Court differentiated between a contractual right to restrict usage of a purchased product, and the patent right that attaches to that product. [4] The Court held that a sale of a patented item terminates all patent rights to that item, [5] because the sale gives the patentee his/her reward for the use of the invention. [6] In reaching that conclusion in this case, the Supreme Court held that Lexmark cannot bring a patent infringement suit to enforce the single-use/no-resale provision accompanying its “Return Program” cartridges. [7]

Fundamentally, the Court said that the Federal Circuit “got off on the wrong foot” (and thus had to be reversed) because the Federal Circuit failed to look at patent exhaustion as a limit on the scope of patent rights. The Court recognized that post-sale restrictions maybe permissible, but as a matter of contract law, not patent law.[8] The Court further differentiated a sale – which involves a change of title – with a license – which involves a bundle of rights less than a sale.[9]

Looking next at Lexmark’s sales of toner cartridges abroad, the Supreme Court held that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”[10] The Court applied the same reasoning that it did in Kirtsaeng, a copyright case, holding that a territorial limit on patent rights is not a sound basis for distinguishing them from copyright protections, which do not have any extraterritorial operation either. [11] The Court distinguished an old “international patent exhaustion” case, Boesch v. Graff, [12] as standing for the proposition that a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction. [13] Because it was Lexmark who made the sales in the present case, the Court was able easily to distinguish Boesch.

Takeaways

The Supreme Court’s ruling likely will have little to no effect on software, which tends to be licensed rather than sold, so that exhaustion should not apply. For other products, how many “sticks” in the overall bundle of rights are conveyed in the transaction is the key.

Query whether it would make sense in the future for cartridge manufacturers to try to license (or lease), rather than sell their products. This approach would involve effectively reversing the pricing on toner cartridges. For example, the cartridge manufacturer may charge a reduced amount for a limited-duration “lease” of a print cartridge. A purchaser would have the right, at the end of the lease, to turn in a spent cartridge for no fee, or to complete the purchase for an additional amount (which might even include a complimentary refill). The cartridge “lessee” would not have the right to sell the spent cartridge to a third party, leaving open the possibility of an action for patent infringement.

Because of the economics of the computer printer business, printers often are sold for minimal amounts, and become, in effect, “Personal Cartridge Licenses,” because the money for the manufacturer is in the consumables, not in the hardware. It is reasonable to expect that cartridge manufacturers would want to preserve the economics of their business as much as possible. The lease approach may not make sense in all industries involving consumables. However, when a consumables manufacturer goes to the trouble (as Lexmark does) of policing the disposition of toner cartridges, leasing rather than selling might make sense.

[1] 2017 U.S. LEXIS 3397 (May 30, 2017).

[2] Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013).

[3] Impression Products, 2017 U.S. LEXIS 3397 at *13-14.

[4] Id. at *18.

[5] Id. (citing Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008)).

[6] Id. at *18-19 (citing United States v. Univis Lens Co., 316 U.S. 241, 250 (1942)).

[7] Id. at *23-24.

[8] Id. at *24-25.

[9] Id. at *26-27.

[10] Id. at *29.

[11] Id. at *32.

[12] 133 U.S. 697 (1890).

[13] Impression Products, 2017 U.S. LEXIS 3397 at *33.

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