Significant Change in Patent Exhaustion From the Supreme Court

Posted on Jun 21, 2017 in Articles

This article originally appeared in The Legal Intelligencer on June 19, 2017.

When was the last time you sold your used car and worried about infringing the patent rights of the manufacturer? My guess is you would say “never.” It’s not as if people are selling their pre-owned cars on eBay or Craigslist (for example) and being sued for patent infringement by the likes of GM, Ford or Toyota. But think about it—the modern automobile includes tons of technology that is covered by literally thousands of patents. And U.S. patent law permits a patent owner to “exclude others from making, using, offering for sale, or selling its invention throughout the United States …,” (35 U.S.C. Section 154(a)). If patented technology is sold “without authority” from the patent owner, then patent infringement has ­occurred (35 U.S.C. Section 271(a)). So why is there no lawsuit every time a used car is sold?

Enter the doctrine of “patent ­exhaustion.” The first authorized sale of a patented product “exhausts” the patent rights, thus ­terminating the patent owner’s ability to pursue patent infringement damages for that product. After an authorized ­transaction ­involving a patented product has occurred, the patent owner cannot make an infringement claim for a subsequent sale of that product.

Patent exhaustion is the concept that prevents the average consumer from being sued for patent infringement when they ­resell any used patented product. But the concept was recently scrutinized by the U.S. Supreme Court, with a reversal of the U.S. Court of Appeals for the Federal Circuit, and an important outcome in Impression Products, Inc. v. Lexmark International, 581 US ____ (2017)).

Lexmark is a well-known manufacturer of printers and print cartridges. Their ­cartridges can be purchased in one of two ways: a “full-price” option where the ­purchaser can do anything they wish with the cartridge after it has been used; or a ­discounted (by about 20 percent) ­”return program” option where the purchaser agrees to use the cartridge only once and then return the used cartridge to Lexmark for recycling. Lexmark includes a ­microchip in their return program cartridges that is intended to prohibit unauthorized reuse and recycling. At the time this article was written, Lexmark’s website described both options.

Impression is a print cartridge ­recycler. They ­collect used and return program versions of Lexmark’s cartridges, defeat the microchip, refill the cartridges, and resell them at substantially lower prices than Lexmark charges.

Lexmark sued Impression (and other recyclers) on two bases. They argued that reuse and resale of return program cartridges originally sold in the United States violated Lexmark ­patents ­because the ­cartridges were sold with express ­prohibitions against reuse and resale. They also argued that importation of any used Lexmark cartridge into the United States constituted patent infringement because Lexmark had never given ­authorization for importation. As the lawsuit moved forward, Impression became the sole defendant.

Impression argued that Lexmark’s ­initial sale of each cartridge “exhausted” the ­patent rights, and therefore Lexmark no longer had a cause in action for patent infringement against Impression.

The Federal Circuit had sided with Lexmark, but the U.S. Supreme Court reversed. The Supreme Court held that when Lexmark sold their printer cartridges, Lexmark exhausted their patent rights.

First, the Supreme Court addressed the issues relating to the recycling of ­discounted return program cartridges sold in the United States. “For over 160 years,” wrote the Supreme Court, “the doctrine of patent exhaustion has imposed a limit on the right to exclude by asserting a patent … The limit functions automatically; When a patentee chooses to sell an item, that product “is no longer within the limits of the patent monopoly … A patentee … may not, by virtue of his patent, control the use or disposition of the product after ownership passes to the purchaser.”

To illustrate the point, the court gave the example of a repair shop that restores and sells used cars. If companies that make the parts in a car could keep their patent rights after the first sale, then the “smooth flow of commerce would sputter” and ­”extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the ­patentees retain.”

To be even more direct, the court ­explained it had long been held that when a “patentee sells an item under an express restriction, the patentee does not retain patent rights in that product” (see Boston Store of Chicago v. American Graphophone, 246 U.S. 8, 17-18 (1918)). And in 2008, in Quanta Computer v. LG Electronics, 553 U.S. 617, 638 (2008) the court held that the patentee could not bring an infringement suit because the “authorized sale … took its products outside the scope of the patent monopoly.”

Next, patent infringement relating to ­recycling of cartridges—imported from overseas—was addressed. In a recent copyright case, Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013), an international sale of copyrighted material had occurred, and under the copyright first sale ­doctrine (a concept similar to patent ­exhaustion), ­”exhaustion” was the result. The Impression opinion drew strong analogies between both forms of “international exhaustion” and stated as follows: “Applying patent ­exhaustion to foreign sales is just as straightforward … Differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense: The two share a strong similarity … and identity of purpose … and many everyday products … are ­subject to patent and copyright protections …” The court concluded that Lexmark’s international sale of the printer cartridges ­exhausted the patent rights.

Justice Ruth Ginsburg concurred in part and dissented in part. While she agreed with the majority regarding domestic exhaustion, she disagreed over the issue of international exhaustion. Patent law and copyright law, she argued, are not the same, and a ­conclusion in one area of the law should not have been a basis for a conclusion in the other.

While Lexmark may still have a remedy available to them in contract law, the Impression decision precludes their ability to seek damages for patent infringement based on the facts of the case. Patent exhaustion applied because Lexmark had made an authorized sale, but perhaps a licensed transfer would be looked upon differently. Regardless, this decision changes how the doctrine of patent ­exhaustion has been ­understood for almost 20 years—which is why the opinion ­attracted significant ­attention.

– By Lawrence E. Ashery