According to a recent Supreme Court decision, when it comes to the applicability of patent exhaustion, “restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.” In Impression Products, Inc. v. Lexmark International, Inc., the Supreme Court confirmed that the authorized sale of a patented article by a patentee exhausts all patent rights in that article, even where the patentee and the buyer agree to post-sale restrictions on the use and resale of the article. The Court also held that the authorized sale of a patented product abroad triggers patent exhaustion, just as a sale in the U.S. does.
The dispute in Lexmark concerns laser printer toner cartridge refurbishing. At issue are two groups of cartridges: 1) cartridges that Lexmark sold in the U.S. for which the buyers, in exchange for a discounted price, agreed to use once and not resell to third parties and 2) cartridges that Lexmark sold outside the U.S. Lexmark sued Impression Products, alleging Impression Products infringed Lexmark’s patents by refilling and selling these cartridges in the U.S. Impression Products, relying on the doctrine of patent exhaustion, countered that Lexmark’s sale of the cartridges to customers exhausted all of Lexmark’s patent rights.
Reversing an en banc Federal Circuit decision, the Supreme Court held that Lexmark’s sales of both groups of cartridges triggered patent exhaustion. With respect to the cartridges sold in the U.S., the Court rejected the Federal Circuit’s holding in Mallinckrodt, Inc. v. Medipart, Inc. (holding that a patentee can sell a patented article subject to a clearly communicated single-use/no-resale restriction and a violation of that restriction by the buyer or downstream buyers would constitute patent infringement). The Court found that the transfer of title in the cartridges terminated all patent rights, leaving Lexmark with, at most, a contract claim against the initial purchasers for violating the single use/no-resale restriction by providing the cartridges to Impression Products.
Turning to the cartridges sold abroad, the Court rejected the Federal Circuit’s reasoning in Jazz Photo Corp. v. International Trade Comm’n (holding that an authorized sale of a U.S. patented article abroad does not trigger exhaustion and prevent the patentee from asserting patent infringement against the buyer for importing, selling, or using the article in the U.S.). To the Court, the lack of protection afforded to the patentee by a U.S. patent when selling abroad was not a justification for treating foreign sales differently for exhaustion purposes.
Ultimately, the Court concluded that exhaustion ends the limited monopoly provided by U.S. patent law protecting an article once the patentee chooses to sell the article.
Under the doctrine of patent exhaustion, a sale of a patented article authorized by the patentee terminates all of the patentee’s patent rights in the article, regardless of whether: 1) that sale is in the U.S. or abroad; and 2) the patentee expressly attempts to retain some patent rights as a condition of the sale.
Thus, the Lexmark decision makes clear that patent law is not an effective tool for enforcing post-sale restrictions on patented articles. Patent owners aiming to exert post-sale, downstream control over their products should look to alternatives, such as contract law. Patent owners may also consider structuring transactions differently to avoid patent exhaustion all together. As noted above, only an authorized sale causes patent exhaustion. Patent licenses, rather than sales of the patented articles, may provide patent owners the ability to exert the downstream control that they seek.
Moreover, where patent owners elect to sell patented articles—both within and outside the U.S.—careful consideration of pricing will be required because the first sale is likely the only opportunity for profit. In addition, third parties may be able to successfully arbitrage the patented articles if, for example, they are sold in foreign jurisdictions at a discount to the price in the U.S.
Maximizing the protection and value of intellectual property assets is often the cornerstone of a business's success and even survival. In this blog, Nutter's Intellectual Property attorneys provide news updates and practical tips in patent portfolio development, IP litigation, trademarks, copyrights, trade secrets and licensing.