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IP Litigation

Exhaustion and the “Right to Repair”: Ownership Rights after Impression Products, Inc. v. Lexmark Intern., Inc.

June 22, 2017

IP Litigation

Exhaustion and the “Right to Repair”: Ownership Rights after Impression Products, Inc. v. Lexmark Intern., Inc.

June 22, 2017

Back to Fish's Litigation Blog

 

By: Veena Tripathi and Phillip Goter

Hailed by some as the “right to repair”, on May 30, 2017, the Supreme Court ruled that a seller’s patent rights are not valid beyond the first sale of the patented product. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017). Patent laws in the United States allow the patent holder to “exclude others from making, using, offering for sale, or selling [its] invention throughout the U.S. or importing the invention into the U.S.” 35 U.S.C. §154(a). If a party doesn’t oblige, it is liable for patent infringement. §271. When a patentee sells one of its products, those rights are “exhausted” and the new buyer inherits ownership rights. Historically, the Court has held that if the post-sale restrictions are legal, then contract law is sufficient to limit the buyer’s rights. Mallinckrodot, Inc. v. Medipart, Inc., 976 F. 2d 700 (1992). Further, the Court has long upheld the notion that a patentee does not exhaust its patent rights by selling items abroad. Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (2001), Dickerson v. Tinling, 84 F. 192 (1897), Dickerson v. Matheson, 57 F. 524 (1893). The Supreme Court’s decision in Lexmark abrogates both long-standing beliefs of ownership. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017).

The main dispute in Lexmark centered around remanufactured toner cartridges. Lexmark cartridge buyers were given one of two options: either buy a toner cartridge at full price, with no restrictions, or participate in a “return program” where, in exchange for a lower price, the consumer must agree to use the cartridge once and resell it only to Lexmark. Third-party companies, including Impression Products, purchase and refill empty cartridges. They also sell remanufactured cartridges domestically and abroad. Lexmark sued for patent infringement suggesting that (1) reselling cartridges in the United States subject to legally valid post-sale restrictions and (2) importing cartridges without authorization constituted infringement.

On December 2, 2016, the U.S. Supreme Court granted a writ of certiorari to hear Impression Products, Inc. v. Lexmark Intern., Inc. to settle the question of whether patent rights are exhausted after the patentee first sells a product. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 546 (2016). On May 30, 2017, the Supreme Court unanimously held 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”. Slip Op. at 2.

A Contract Does Not Displace Patent Rights in the U.S.

In writing for the majority, Justice Roberts explored the “historic pedigree” of the patent exhaustion doctrine to conclude that it supersedes any post-sale restrictions. Id at 1527. The Court relied on the ruling in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) to support its conclusion that Lexmark could not bring a patent infringement suit against Impression Products with respect to domestic sales governed by legally valid contracts. Lexmark argued that it retained patent rights because the limitations were disclosed in the “return-cartridge” agreements signed by the buyers of the cartridges.

The Supreme Court rebuffed this argument. The Supreme Court relied on the 2013 decision, Kirtsaeng v. John Wiley & Sons, to apply the “first sale” doctrine to patent law. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017), Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 525 (2013). In Kirtsaeng, the Court determined that the doctrine of copyright exhaustion applies after the first sale of the item. Kirtsaeng, 568 U.S. 519. In Impression Prods., the Court concluded that patent exhaustion and the doctrine of copyright exhaustion should be equated because the doctrines share a “strong similarity and identity of purpose”, thus rejecting Lexmark’s argument that its patent rights were not subject to exhaustion in domestic sales. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017), Boston Store of Chicago v. American Graphophone Co.246 U.S. 8 (1918), U.S. v. Univis Lens Co. 316 U.S. 249 (1938).

Fewer Limitations on Licensing

In reviewing the Federal Circuit’s decision, the Supreme Court also rejected the long-held notion patent exhaustion does not apply to licenses. In writing for the majority, Justice Roberts stated that “patent exhaustion is uniform and automatic”. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017). He further articulated that once a patentee decides to sell, regardless of whether it is through a license, that sale exhausts the patentee’s rights. If the patentee is “exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protection” because the exchange does not affect the free flow of commerce in the same way as post-sale restrictions. Id at 1538.

For example, if an inventor licenses a patent to a manufacturing company, the inventor may impose restrictions on who the manufacturer can sell to. This may lead to three possible scenarios for an inventor:

(1)        If the manufacturer complies with the license when selling the item, the patentee has authorized the sale. As a result, the exchange is treated, for the purposes of patent exhaustion, like a normal sale. Therefore, a patentee’s rights are exhausted and the only recourse would be through contract law.

(2)        If the manufacturer sells the product to a buyer who refuses to comply with the limitations stated on the license, the sale would still exhaust all patents rights and the only recourse for the licensee would be through contract law.

(3)        In a separate scenario, if the inventor has not given authority for the manufacturer to make a sale, that sale cannot exhaust the patentee’s rights under the Patent Act.

In sum, although post-sale restrictions are not applicable to certain licenses, if an inventor does not give the manufacturer the authority to make a sale, the inventor maintains her rights. This distinction allows licenses to remain a viable option for maintaining control over a licensed patent.

Location Does Not Displace Patent Rights in Foreign Transactions

The Court then addressed whether an authorized sale outside of the U.S. had the same effect of exhausting all patent rights. Lexmark contended that it may sue for infringement in regards to foreign sales because foreign sales do not trigger patent exhaustion unless the patentee expressly or implicitly transfers or licenses its rights. Additionally, the Federal Circuit cited long-standing case law to suggest that patent holders may maintain patent rights in a foreign sale. The Federal Circuit concluded that relevant case law did not suggest patentees can maintain patent rights in foreign sales. Lexmark Intern., Inc. v. Impression Products, Inc. 816 F. 3d 721 (Fed. Cir. 2016).  However, the Supreme Court articulated that, “more is at stake when it comes to patents than simply the dealings between the parties” and restrictions and locations are irrelevant when it comes to the sale of patented goods, what is relevant is the patentee’s decision to make the sale. Impression Products, Inc. v. Lexmark Intern., Inc. 137 S. Ct. 1523 (2017)

Justice Ginsburg’s Dissent

In writing for the dissent, Justice Ginsburg suggests that an international sale does not exhaust U.S patent rights. Impression Prod., at 1539. The dissent relies on the principle that a U.S. inventor is not afforded protection aboard when they receive a U.S. patent. Id. This suggests that the sale abroad of a patented item operates independently of the U.S. patent system and should not be subject to exhaustion. Id. Justice Ginsburg relies on her dissent in Kirtsaeng to conclude that foreign sales should not exhaust U.S. copyright laws and that copyright laws and patent laws are not, “identical twins”. Impression Prod., at 1539 (quoting Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984)). As a result, patents should receive a higher degree of protection when considered in the context of a foreign sale. Impression Prod., at 1539.

Implications

The Supreme Court’s ruling sheds light on the future of patent law. The first holding abrogated the long-standing precedent in Mallinckrodot, Inc. v. Medipart, Inc. and the second holding abrogated Jazz Photo Corp v. International Trade Commission. This outcome will govern the way that patented goods are sold in the U.S. It affects the way and where businesses sell goods subject to U.S. patent protection and goods intended for the U.S. market. As a result, it makes determining the patent-holder important in an international context.

More recently, several consumer-focused organizations have understood the decision to bolster the “right to repair” for consumers and industries that are based on refurbishing products. In the majority opinion, Justice Roberts argues that the “smooth flow of commerce would sputter” if ownership rights extended beyond the first sale. Impression Prod., at 1532. In response, it is likely that there will be an uptick in licensing agreements to place restrictions on products that will protect inventions. Historically, the doctrine of patent exhaustion has held a far narrower scope, and this ruling solidifies that it has a far broader application than previously believed.

The case was remanded for further proceedings consistent with the opinion. There is no set date for the remanded trial.

Related Tags

ITC
SCOTUS
Supreme Court of the United States

Blog Authors

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Phillip W. Goter | Associate

Phillip Goter is an intellectual property attorney with extensive experience working with high tech clients in the computer software and hardware space. His keen familiarity with standards-essential cellular infrastructure, GPS, mobile apps, computer and network security, wireless...

Veena Tripathi | Summer Associate

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