The Supreme Court heard oral argument in Impression Products, Inc. v Lexmark Int’l, Inc. on March 21, 2017, and will issue an opinion before June 26, 2017. This short article summarizes the oral argument with a focus on the key points raised by the Justices and addressed by the parties. The audio of the oral argument can be found here and the transcript can be found here.
First, some background on the case. Lexmark sold two kinds of replacement printer cartridges – one that is resalable and the other subject to a single use restriction at a discounted price (the “single-use” cartridges). Impression purchased used cartridges sold by Lexmark in the United States and abroad. Impression then renewed the used cartridges including the single-use cartridges and sold them in the United States.
Lexmark had patented the cartridges and sued Impression for patent infringement based on 35 U.S.C. § 271, the provision providing: “whoever without authority . . . sells any patented invention, within the United States or imports into the United States any patented invention . . . infringes the patent.” 35 U.S.C. § 271.
There are two issues: (1) whether the exhaustion doctrine applies for a domestic sale where the patentee has imposed restrictions on how the customer can use the product and (2) whether any foreign sale triggers exhaustion. The exhaustion doctrine prescribes that the authorized sale of a patented object exhausts all patent rights in that object. Impression argues that Lexmark’s sale of a cartridge to a customer exhausted all patent rights in that cartridge and leaves Impression free to resell the cartridge without liability for infringement. Lexmark contends that the sale of a cartridge to a customer did not exhaust all patent rights in that cartridge because (1) Lexmark preserved all patent rights except the right to single-use in that cartridge and (2) none of Lexmark’s foreign sales could trigger exhaustion of U.S. patent rights.
Main themes in the oral argument:
No explicit codification; statutory basis
Justice Kennedy asked whether the absence of an explicit codification of the exhaustion doctrine suggests that “we should be somewhat cautious . . . in extending it.” (5:13-17)¹ Impression replied that Congress enacted the 1952 Patent Act “with the knowledge [of the exhaustion doctrine].” (6:1-6) In the foreign-sale context, Impression similarly argued that “the Patent Act should be read as if there were provisions stating the initial authorized sale of a patented item terminates all patent rights to that item.” (10:20-23)
The parties disagree as to the statutory basis of the exhaustion doctrine. Lexmark cited the Federal Circuit’s opinion and emphasized the “without authority” language in Section 271, “the origins and limits on the exhaustion doctrine” according to Lexmark. (29:24-30:2) The focus on the term “without authority” is critical to Lexmark and the Federal Circuit’s position as explained (and disagreed) by Impression: “[t]he Federal Circuit assumed that the exhaustion doctrine was grounded in the without-authority clause in Section 271(a) and that, therefore, Congress had given the patentee a veto over the scope of the exhaustion rule.” (9:3-8)
In Impression’s view, the exhaustion doctrine’s statutory basis is either Section 154(a) defining patent rights, or Section 282(b)(1) on defenses – “the Court’s exhaustion we think is best looked at in either of two ways; either as a limit on the 15(a) rights . . . a limit on . . . the scope of the patentee’s right to exclude[; or] Section 282(b)(1) a section called Defenses . . . [where] one of those defenses was absent of liability for infringement thereto in obvious incorporation of the preexisting exhaustion doctrine.” (9:11-22) The Government takes a similar position as Impression – Section 154(a)(1) is the exhaustion doctrine’s statutory basis which Congress has implicitly adopted through later acts.
Contract remedies v. patent remedies
Early in the oral argument, Impression responded to Chief Justice Roberts’ question and confirmed that “[t]his [case] is all about whether the patent law remedies apply.” (4:19-20) During the argument, Impression stated that “nothing in the exhaustion doctrine prevents parties from reaching those agreements and enforcing them as a matter of contract law.” (24:10-14)
Lexmark’s position is that the exhaustion doctrine is in line with “the goals of the Patent Act [which] is for that new technology to be used wherever it’s useful, wherever . . . it would increase consumer welfare.” (32:14-19)
Chief Justice Roberts and Justice Breyer questioned Lexmark’s position. Justice Breyer, in particular, responded to Lexmark’s lack-of-privity argument by asking “why don’t you require the person who sells it to just resell it with the requirement that they promise not to, you know, whatever it is?” Justice Breyer opined that notwithstanding the policy of rewarding the inventors, patent law does not serve to allow price discrimination in every instance so a patent owner could make the most money:
But to go back to your basic point underlying this, of course, any monopolist, including a patent monopolist, would love to be able to go to each buyer separately and extract from each buyer and user the maximum amount he would pay for that particular item. . . . . But by and large, that’s forbidden under many laws, even though it does mean slightly restricted output, and it also means a lower profit for the monopolist. (35:21-36:6)
In response, Lexmark argued the fact that “patent rights are conveyed by means of contract . . . doesn’t mean that if that contract is breached, it’s only a contract remedy.” (51:14-15) Also, Lexmark pointed out that a patentee “can’t get an injunction” under contract law. (52:4-6) Policy: protect the customers
In the context of exhaustion by foreign sale, Impression depicted the potential danger of no exhaustion: “if that final phone is sold into the United States, all of the sellers, resellers, and users of that phone would be subject to patent infringement liability if the U.S. rights were not expressly licensed.” (12:24-13:6)
Justice Breyer, citing the “300 years of restraints on alienation” law, expressed a similar concern: “[o]ne of the problems was that people who buy these things, namely, those who go into grocery store or whatever, don’t know that they can’t bring it back to the U.S., or they don’t know that they can’t do this or they can’t do that or have to have the red sign or whatever.” (28:13-18)
The Government’s response is that the customers have to assume the risk of infringement, a risk that is “not a function of exhaustion law” and a risk that “is there and it’s not avoidable.” (39:16-22) The Government additionally said that a customer’s infringement risk “is not a practical concern because . . . [p]atent litigation is too expensive, and most commercial enterprises don’t . . . want to go around suing consumers.” (39:16-22)
Lexmark agreed with the Government and additional noted the protection of customers by the warranty of non-infringement under UCC 2-312. (44:2-9)
Policy: give the patentee adequate reward
In the context of foreign sale, Impression argued that a foreign sale authorized by the patentee would exhaust all of the patentee’s patent rights in the sold objects. (12:1-8)
Impression’s proposition faced a bout of questions from Justice Breyer on whether the patentee received any reward for his US patent rights. Justice Breyer used an example of the sale of a widget in German by a patentee owning both a US patent and a German patent covering that widget. Justice Breyer opined that the patentee “ha[s] just received money for that first sale under, let’s say, a German patent, and they have not received any money on this American patent.” (14:13-23)
Impression, in response, advanced two arguments. First, the contract remedies are sufficient. Second, a patentee’s wish to charge different prices for sales in different countries is essentially price discrimination that “may not necessarily be something that’s guaranteed under the patent laws.” (18:2-8)
Lexmark sided with Justice Breyer and further noted the exhaustion doctrine’s rationale. Lexmark explained that, under the exhaustion doctrine, a domestic sale by a patentee is the reward and quid pro quo for taking that article out of the “monopoly of the US patent.” (40:21-24) According to Lexmark, that rationale is inapplicable in the foreign-sale context – “the article [sold overseas] is not coming out from under the monopoly of the U.S. patent, because it wasn’t in it to begin with, again, because the U.S. patent has no force overseas.”
On this issue, Justice Sotomayor offered an interesting distinction between patent rights and the embodying article, opining that the reward is adequate. Using the same example as Justice Breyer used, Justice Sotomayor stated that “the whole concept of the first-sale doctrine, in my mind, is that the value is whatever you get for that product,” and that “whether you have a U.S. patent or a German patent or a whatever patent, you’re still getting value for that idea, for that discovery, for that whatever creative moment that you have that results in this final product [by selling that product].” (18:17-25)
As noted above, the Supreme Court will grapple with the underlying policies and the potentially significant influence of this decision. An opinion will issue before the end of the term June 26, 2017.
¹All references are to the transcript of the oral argument, available here.
Craig Countryman is a Principal in the Southern California office of Fish & Richardson and was named a 2016 Rising Star by Law360, was named to the “Top 40 Under 40” lists in both the Daily Journal and the San Diego Daily Transcript, and was distinguished as a...