The Supreme Court Rewrites the Patent Exhaustion Doctrine in Impression Products, Inc. v. Lexmark International, Inc.

• Publication year: 2017
• Pages: 30

46 Colo.Law. 30 The Supreme Court Rewrites the Patent Exhaustion Doctrine in Impression Products, Inc. v. Lexmark International, Inc. Vol. 46, No. 11 [Page 30] The Colorado Lawyer December, 2017

INTELLECTUAL PROPERTY LAW

By KEVIN E. MCREYNOLDS AND JOHN T. LEE.

The U.S. Supreme Court rewrote the limits of the patent exhaustion doctrine in Impression Products, Inc. v. Lexmark International, Inc. This article examines the opinion and its potential implications.

Patents grant their holders the exclusive rights to make, use, sell, or import an invention into the United States for 20 years.^[1] But in addition to this time limit, patents are subject to a potentially much larger circumscription, the patent exhaustion doctrine, which terminates a patent holder’s rights in an item after selling it.^[2] The practical significance of this doctrine dwindled over the last few decades as patent holders imposed post-sale restrictions by reserving particular rights when selling their products, and the U.S. Court of Appeals for the Federal Circuit found such reservations could be enforced through infringement actions.^[3]

But this entire regime must be rethought after the Supreme Court’s landmark decision Impression Products, Inc. v. Lexmark International, Inc., which overturned decades of Federal Circuit precedent and rewrote the limits of the patent exhaustion doctrine.^[4] In rejecting the Federal Circuit’s view of this doctrine as a “presumption” to be rebutted, the Supreme Court hearkened back to basic precepts of property rights and the ability of buyers to use products as they see ft, including where products were originally sold overseas.^[5] This article explores the (almost) unanimous decision in Impression Products and its potential consequences.

Post-Sale Restrictions before Impression Products

The Supreme Court’s application of the patent exhaustion doctrine dates back to before the Civil War.^[6] In Bloomer v. McQuewan, the Supreme Court established that this limitation automatically applies “when the machine passes into the hands of a purchaser” because it passes outside the limits of the monopoly “and is no longer under the protection of the act of Congress.”^[7] As this doctrine continued to develop, the Supreme Court clarified that a patent holder cannot “by virtue of his patent, control the use or disposition” of a product after ownership passes^[8] because sale “terminates all patent rights to that item.”^[9]

More recently, however, the Federal Circuit suggested that the patent exhaustion doctrine could be limited by agreement.^[10] The key case in this area, Mallinckrodt, Inc. v. Medipart, Inc., involved a medical device that was subject to a “single use only” restriction.^[11] In violation of this condition, hospital purchasers sent the device to another company for reconditioning, enabling hospitals to use the device again, and Mallinckrodt sued for infringement.^[12] The Federal Circuit rejected the defendants’ claims of patent exhaustion because the restriction here withheld the rights not transferred and “[u]nless the condition violates some other law or policy (in the patent field, notably the misuse or antitrust law . . .), private parties retain the freedom to contract concerning conditions of sale.”^[13] Thus, after Mallinckrodt, courts often referred to the patent exhaustion doctrine as applying to only “unrestricted” sales.

In another line of precedent, the Federal Circuit also found the exhaustion doctrine territorially limited.^[14] In Jazz Photo Corp. v. International Trade Commission, the defendants refurbished disposable cameras originally sold overseas by the patentee (Fuji Photo) and then imported the repaired cameras into the United States.^[15] The Federal Circuit agreed that this conduct infringed Fuji Photo’s U.S. patent rights and rejected the plaintiff’s claims of patent exhaustion.^[16] In so holding, the Federal Circuit emphasized that “United States patent rights are not exhausted by [foreign sales].”^[17] The Federal Circuit reiterated this ruling in a later related infringement action, further explaining that the exhaustion of U.S. rights was not triggered by “[t]he patentee’s authorization of an international first sale.”^[18]

The Supreme Court rejected both lines of precedent in Impression Products.

How a Case about Printer Cartridges Changed the Patent Exhaustion Doctrine

The dispute in Impression Products centered on printer cartridges and businesses that refilled the toner in used cartridges (remanufacturers).^[19] T o avoid competing with remanufacturers, Lexmark sought control over its used cartridges through a two-tiered pricing structure.^[20] It charged “full price” for unrestricted cartridges, but it offered a significant discount for “Return Program” cartridges, which purchasers were required to return and that contained a microchip that prevented reuse.^[21]

Despite those efforts, Impression Products obtained Return Program cartridges, counteracted the microchip, and sold the refilled cartridges.^[22] Impression Products also obtained used cartridges overseas, which it remanufactured and then sold in the United States.^[23]

Lexmark sued Impression Products for patent infringement for both sets of cartridges (Return Program and overseas).^[24] More specifically, Lexmark claimed Impression Products infringed its exclusive right to sell its patented products (Return Program cartridges) and its right to import its products into the United States (overseas cartridges), both for direct infringement (under 35 USC § 271(a)) and for contributory infringement (under 35 USC § 271(c)).^[25] In response, Impression Products claimed Lexmark exhausted its patent rights in the cartridges when it sold them.^[26] Lower courts struggled with these issues and reached inconsistent results.^[27]While the district court dismissed the Return Program claim and allowed the overseas claim to proceed, a divided en banc Federal Circuit ruled for Lexmark on both issues.^[28]

Applying its own precedents, the Federal Circuit majority found that (1) the patent exhaustion doctrine creates a presumption against post-sale restrictions that was overcome by Lexmark’s clearly communicated and lawful Return Program restrictions, and (2) overseas sales did not exhaust Lexmark’s U.S. patent rights, thus protecting its exclusive right to obtain the patent’s “rewards” for selling in the American market.^[29]

The Supreme Court overturned both parts of the Federal Circuit decision in sweeping terms that, as discussed below, reshaped the contours of the patent exhaustion doctrine.

Rule Against Restraints on Alienation Underlies Patent Exhaustion

In reversing the majority’s opinion, the Supreme Court challenged the very foundation of the Federal Circuit’s precedent and understanding of the patent exhaustion doctrine.^[30] Rather than agreeing that any type of implicit “presumption” arose from the Patent Act, the Court found that the patent exhaustion doctrine was based in fundamental property law concepts—the law’s abhorrence of restraints...