Patentee cannot control use or disposition of a product after giving up title
- An authorized sale gives up title, which exhausts the patent
- Restrictions on title post-authorized sale possible with contracts but not by patents, since giving up title takes product outside scope of patent
In Impression Products, Inc. v. Lexmark International, Inc., a patent exhaustion case decided on May 30, 2017, the Supreme Court reversed the Federal Circuit on patent exhaustion in holding that, when a sale of a product is authorized under a patent, the sale of the product exhausts the patent on that product. This is notwithstanding contractual restrictions on the title to the products that were authorized for sale.
The relevant facts are these: In exchange for a discounted price, Lexmark contractually restricted sales of print cartridges to a one-time use under a Return Program. Remanufacturers, including Impression, purchased spent cartridges returned by customers, then refurbished and resold them. Lexmark sued the remanufacturers for patent infringement. Impression defended against the infringement charges asserting patent exhaustion at the point of first sale.
Remedy Under Contracts, Not Patents
The Court found that the existence of a contract between Lexmark and its customers, and the absence of a contract between Lexmark and the remanufacturers including Impression, provided Lexmark with remedies; but under contracts and not patents. The Court deemed the contracts irrelevant in deciding the patent exhaustion question since the patent rights ended once Lexmark authorized the products to enter the stream of commerce, notwithstanding the contractual restrictions on the title to those products.
Patent rights end upon an “authorized sale,” the Supreme Court held. Op. 10 citing Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U. S. 24, 35 (1923). Once a product from such an authorized sale enters the stream of commerce it is beyond the scope of the patents. The Court explained that a patentee cannot control use or disposition of a product after giving up title in exchange for payment. Id. at 18. To hold otherwise would be to permit restraints on alienation of chattels which the common law refuses to permit. Id. at 14, 18. In the words of the Court “the sale transfers the right to use, sell, or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce.” Id. at 10.
This is not to say that contracts no longer play a role in preventing patent exhaustion. If the exclusionary right of a licensee is restricted by contract and the licensee makes a sale outside of those restricted exclusionary rights (e.g., makes a sale outside an authorized field of use or territory), that sale is not authorized and the patent is not exhausted. See General Talking Pictures (“stands for the . . . principle that, if a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee’s rights.”) Id. at 12, 13.
But products that enter the stream of commerce from an authorized sale are authorized sales under the patents even though the title may be restricted by contract. As authorized sales, they are no longer subject to patents. They are only subject to remedies outside of patents such as contracts. In the Lexmark decision, Lexmark came up with the short end of the stick not only on the patent exhaustion question. But also on the contractual end since its contracts were with customers and not remanufactures like Impression.
Combination and Method Patent Protections Unaffected
In addition to leaving undisturbed the use of contractual restrictions on field of use, territory, etc. (Id. at 12, 13 citing General Talking Pictures), the Lexmark decision leaves undisturbed the Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc. on the effect of an authorized sale on combination and method patents. Id. at 9 citing Quanta Computer, 553 U. S. 617, 638 (2008). In Quanta, the Supreme Court opined that combination and method patents are exhausted only to the extent the products sold are intended for use with the combination and method patents and required to use the product. An insightful signpost on this jurisprudence may be Justice Breyer’s famous question asked during oral hearings in Quanta which may be paraphrased as “what good is a bicycle pedal if I can’t use it on my bike?” If a product sold cannot be used except in practicing a combination or method patent, then those patents too are exhausted by the sale of the product. Hence, the use of contractual restrictions to carve out non-required combination and method patents from a license grant continue to play a critical role in minimizing exhaustion of combination and method patents.
Effects on Parallel Imports
Many in the patent community are particularly concerned that the Court’s decision will lead to a rise in parallel imports. For example, the pharmaceutical industry has spoken out that they may need to rethink sales of pharmaceuticals in foreign countries at reduced prices. However, even without an action for patent infringement on account of a patent exhaustion, parallel imports of pharmaceuticals will still need to comply with FDA regulations, albeit it is the FDA and not the companies that initiate and control those litigations. Following Kirtsaeng, many in the content industry moved towards software renderings of books (e.g., e-books) where there is no transfer of the title because the grant is a license. They have also developed technological protection measures to avoid DVDs bought in Europe from playing on American DVD players. A patentee can always charge higher pricing in the foreign countries so that parallel import issues are less important. The issue impacts mostly those companies whose cost of item in foreign market plus transport cost creates potential parallel import problems. For those companies, they could rely on, where possible, the analog of a license – namely, a lease to keep the title from being transferred and exhausting the patents. By leasing the product and requiring every sub-lessee to further lease the product down the chain, there may never be a sale that exhausts the patent. For other companies, the issue may amount to nothing more than updating best practices in their licensing business.
The take-away from Lexmark is this: If the licensee makes a sale within the license grant of authorized restricted exclusionary rights, the product sold enters the stream of commerce as an authorized sale. As such, the product can no longer be restricted by patents. They can only be restricted by contracts. But if a sale falls outside the license grant of authorized restricted exclusionary rights (e.g., is made outside a field of use or authorized territory; or inside a carve-out of combination and method patents not required to use the product), the patents will not be exhausted.