IP Law Daily Lexmark’s sales of toner cartridges ‘exhausted’ rights; cannot sue reseller for infringement
Tuesday, May 30, 2017

Lexmark’s sales of toner cartridges ‘exhausted’ rights; cannot sue reseller for infringement

By Thomas Long, J.D.

Inkjet toner cartridge manufacturer Lexmark International’s patent rights were exhausted upon Lexmark’s first authorized sale, either domestically or abroad, of its products to end users, the U.S. Supreme Court has held. Lexmark, therefore, could not sue a company that refilled and resold Lexmark cartridges, despite Lexmark’s efforts to place restrictions on purchasers’ use and transfer of the products. The decision represents another expansion of protections downstream users and sellers enjoy from IP infringement liability, following a 2012 decision in which the Court held that copyright infringement claims against an importer and reseller of textbooks lawfully acquired abroad were protected from infringement claims by the "first sale" doctrine. Chief Justice John Roberts wrote the majority opinion, which was joined by all Justices except Justice Ginsburg, who wrote an opinion concurring in part and dissenting in part, and Justice Gorsuch, who did not participate in the case (Impression Products, Inc. v. Lexmark International, Inc., May 30, 2017, Roberts, J.).

Lexmark owned patents that covered components of its toner cartridges and the manner in which they are used. Lexmark attempted to enforce its patents in a manner than prevented competing companies from acquiring empty Lexmark cartridges, refilling them, and reselling them to consumers at a lower price than that offered by Lexmark. To encourage consumers to return empty cartridges, it offered a discount price under a "Return Program." In exchange for a roughly 20 percent discount, purchasers were required to sign a contract agreeing to use the cartridge only once and to refrain from transferring the product to anyone but Lexmark. To enforce the single-use/no-sale restriction, Lexmark installed a microchip on the discounted cartridges that prevented reuse. Remanufacturers and resellers, including Impression Products, Inc., developed methods to counteract the effect of the microchips. Lexmark then filed suit against Impression Products for infringing its patents when it refurbished and resold the cartridges.

Patent exhaustion. The patent exhaustion or "first sale" doctrine provided that the authorized sale of a patented product generally exhausted the patent holder’s patent rights and prohibited suits against downstream users for patent infringement. The Court held that the patent exhaustion doctrine barred Lexmark from pursuing infringement claims against Impression Products, regardless of any restrictions Lexmark purported to impose. The doctrine applied both to U.S. sales and sales made abroad. The Court reversed a decision of the U.S. Court of Appeals for the Federal Circuit, sitting en banc.

The Federal Circuit had concluded that the uncodified doctrine of patent exhaustion was not disturbed by recent U.S. Supreme Court decisions, including a 2012 case establishing the applicability of the first-sale doctrine to copyright infringement claims over textbooks first sold abroad and then resold in the United States (Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351). According to the Federal Circuit, Lexmark could enforce otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale. The Federal Circuit held that Impression Products had infringed Lexmark’s patent by selling, in the United States: (1) remanufactured inkjet cartridges that had originally been sold outside of the U.S. and (2) cartridges that were first sold in the U.S. under Lexmark’s discounted Return Program, in violation of the program’s restrictions.

"Restricted" domestic sales. The High Court disagreed with the Federal Circuit on both points. First, the Court concluded that Lexmark had exhausted its patent rights in the cartridges sold in the U.S. under the "Return Program" the moment it sold them. Although the single-use/no-resale restrictions in Lexmark’s contracts with customers might have been clear and enforceable under contract law, they did not entitle Lexmark to retain patent rights in items that it chose to sell. Once a product is sold, it became the private, personal property of the buyer, with the rights and benefits of ownership. A patent owner can set prices and negotiate contracts with purchasers, but it cannot, by virtue of its patent, control the use or disposition of the product after ownership passed to the buyer. The sale of the product terminated all patent rights in that particular item, the Court stated. When it made a sale, the patentee received its reward under the patent laws for its invention; its patent rights then yielded to the common law principle against restraints on alienation of goods.

Citing Kirtsaeng, the Court pointed out that the concept of exhaustion had "an impeccable historic pedigree," going back to the "common law’s refusal to permit restraints on the alienation of chattels." Moreover, under longstanding precedent, a patentee did not retain patent rights in a product after selling it, even when the item was sold under an express restriction. Any rights retained by Lexmark under the Return Program were a matter of the contracts with its purchasers, not the patent law, the Court explained.

According to the Court, the Federal Circuit reached its incorrect result because it "got off on the wrong foot." The Federal Circuit reasoned that the exhaustion doctrine "must be understood as an interpretation of" the infringement provisions of Patent Act, which prohibited anyone from using or selling a patented article "without authority" from the patentee. In the Federal Circuit’s view, a patentee did not necessarily hand over the full "bundle of rights" every time it sold a product; it could sell the product while retaining its patent rights. The problem with this reasoning was that the exhaustion doctrine was not a presumption about the authority that came along with a sale; it was a limit on the scope of the patentee’s rights, the Supreme Court said. The right to use, sell, or import an item existed separately from the Patent Act. The Patent Act granted the patent holder an exclusive but limited right to prevent others from engaging in those practices; exhaustion extinguished that exclusionary power. The sale of a good transferred the right to use, sell, or import the item, and the buyer was free of any infringement liability. There was no exclusionary right left to enforce, the Court stated.

Foreign sales. Second, the Court rejected Lexmark’s argument that foreign sales of its cartridges did not trigger patent exhaustion in the absence of an express or implicit transfer of its patent rights. "An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act," the Court said.

Again analogizing the patent exhaustion doctrine to copyright law’s "first sale" doctrine as elucidated in the Kirtsaeng decision, the Court noted that, in both copyright and patent contexts, the concept of the exhaustion of IP rights originated in the common law’s refusal to permit restraints on the alienation of chattels. This common law doctrine made no geographical distinctions, the Court added. Nothing in the Patent Act indicated that Congress had intended to restrict the doctrine to domestic sales; in fact, Congress had done nothing to limit or alter the common law principle regarding patent exhaustion. It would make little or no sense to differentiate the patent exhaustion and copyright first sale doctrines, in the Court’s view, because the two doctrines shared a "strong similarity … and identity of purpose." Many products in everyday use were subject to both copyright and patent protections, and there was a "historic kinship" between patent and copyright law.

Lexmark argued that foreign sales should not exhaust its patent rights because the Patent Act did not give it exclusionary powers outside the borders of the United States. In the Court’s view, however, the territorial limits on patent rights provided no basis for distinguishing patent protections from copyright protections, since copyright protections did not operate extraterritorially, either. Moreover, exhaustion was a separate limit on the patent grant and did not depend on the patentee receiving a premium for selling the right to access the American market. Exhaustion was automatically triggered by the patentee’s decision to give the item up and receive whatever price it deemed appropriate for the item and the invention it embodied. Even if a patentee could not command the same price for its products abroad as in the United States, the Patent Act did not guarantee a particular price, much less the price from selling to American consumers. The right to exclude only ensured that the patent holder received one reward—of whatever amount the patent holder set as "satisfactory compensation"—for every item that passed outside the scope of the patent monopoly.

The Court rejected an argument made by the United States, as an amicus, that foreign sales should exhaust U.S. patent rights "unless those rights are expressly reserved."

"Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation," the Court said. "Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale."

Accordingly, the Federal Circuit’s decision was reversed, and the case was remanded for further proceedings.

Concurring and dissenting opinion. Justice Ruth Bader Ginsburg wrote separately to concur in the Court’s holding regarding domestic exhaustion. She dissented, however, from the majority’s holding on foreign sales, opining that a foreign sale should not exhaust a U.S. inventor’s U.S. patent rights because sales made abroad operated independently of the U.S. patent system.

Justice Ginsburg noted that she dissented from the opinion in Kirtsaeng extending the copyright first-sale doctrine to sales made abroad, but even if she subscribed to the majority’s reasoning in that case, Kirtsaeng should bear little weight in the patent context, she argued. The Patent Law contained no analogue to the Copyright Act’s first-sale provision, 17 U.S.C. §109(a). In addition, copyright protections—unlike patent protections—were harmonized across countries under the Berne Convention. Patent law, conversely, was territorial, and U.S. patent owners received no benefits of U.S. patent law when they sold goods abroad. Therefore, in Justice Ginsburg’s view, foreign sales of goods should not exhaust U.S. patent rights.

The case is No. 15-1189.

Attorneys: Andrew J. Pincus (Mayer Brown LLP) for Impression Products, Inc. Constantine L. Trela Jr. (Sidley Austin, LLP) for Lexmark International, Inc.

Companies: Impression Products, Inc.; Lexmark International, Inc.

MainStory: TopStory Patent

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