The U.S. Supreme Court recently issued a decision in Impression Prods., Inc. v. Lexmark Int’l, Inc.; a case pertaining to the resale of a patented product. The Federal Circuit had ruled that a US patent is not exhausted when the patented product is sold subject to a contractual provision not to reuse or resell; instead the US patent can be asserted against downstream users and resellers. Also, a US patent is presumptively not exhausted by an authorized and otherwise unreserved foreign sale of the patented product. The U.S. Supreme Court reversed those rulings, holding that US patents cannot be asserted against downstream entities after an authorized sale, and that an authorized foreign sale does exhaust US patent rights.
Briefly, patent exhaustion is a common law principle whereby once a product covered by a patent is sold, the patent rights with respect to that product can no longer be asserted. That is to say, even though a patent grants the holder the right to prevent others from making, using, selling, importing, or otherwise practicing the invention in the United States, none of those rights can be asserted against the particular product that was the subject of the sale.
Impression Products bought after-market toner cartridges, refilled them, and resold them. The patentee, Lexmark, wanted to assert its US patent rights to block those sales. Lexmark originally sold the cartridges at a discount, along with a “shrink wrap” agreement that the cartridges not be refilled. The used and refilled cartridges were sold in the US, and in some cases were imported into the US from foreign jurisdictions.
If you are not familiar with the concept of “grey market” goods; grey market refers to a legitimate product legally sold in a foreign jurisdiction, but then imported into the United States without the authorization of the original manufacturer, sometimes in violation of an agreement not to import. The issue usually comes up in trademark cases where a manufacturer has exclusive distribution agreements with distributers in the US for a certain product, and a third party outside the US legally purchases that product and then imports it into the US, or directly sells to consumers in the US who import it themselves. The concern for the manufacturer is that such importation can disrupt relationships with the legal distributers and cause havoc with the manufacturer’s warranty system; forcing them to repair or replace many times the number of products anticipated.
The Supreme Court found that the doctrine of patent exhaustion does apply to products sold under a specific provision not to reuse or resale the product. Furthermore, patent exhaustion is presumed to attach to foreign sales, even when the sale includes an express reservation of US patent rights. The Supreme Court appears to view patent exhaustion as an exact analog to the codified “first sale doctrine” of copyrighted works. We may reasonably expect future decisions on patent exhaustion to closely follow existing decisions related to the first sale doctrine of 17 U.S.C. § 109(a).
I will let more scholarly thinkers determine the larger implications of the Supreme Court’s decision; rather I will focus on what practical steps a business owner and patent holder should take in response.
The general principle of patent exhaustion appears to be: when a patentee decides to sell a patented article, either directly or through a licensee within the scope of the license, all patent rights with respect to that article are exhausted. A patentee should not rely on patent rights and infringement actions to impose the patentee’s will on downstream purchasers. Rather, patent rights should be viewed as a means of preventing patented articles from entering the marketplace without the patentee’s authorization. Once the patentee allows a patented article to enter the market, patent rights will be of limited use.
A contract connected to the transaction may create a contractual right, but cannot preserve patent rights. Contractual terms attempting to reserve US patent rights will probably not be affective. However, the Supreme Court did affirm the principle that an unauthorized sale does not exhaust patent rights. While the Supreme Court did not expressly state as such, I think the guiding principle is that “authorization” either exists or does not exist at the time of the sale; authorization cannot be based on what happens to the article after the sale. For example, a licensee can sell a patented article to a consumer within the scope of the license who then goes on to violate an agreement between the consumer and the licensee; patent rights are exhausted and only contractual rights remain. By contrast, where a license creates a well-defined geographical region where the licensee is authorized to sell and the sale occurs outside that region, patent rights may still be enforceable against the consumer for the same contractual violation if the consumer knew of the geographic restriction.
Patentees should focus the terms of their license agreements, both in the US and in foreign jurisdictions, toward what makes a sale authorized as opposed to unauthorized. Where post sale activity is a significant problem, the patentee may be better served relying on breach of contract rather than patent infringement.
Suiter Swantz IP is a full-service intellectual property law firm serving all of Nebraska, Iowa and South Dakota. If you have any intellectual property questions or need assistance with any patent, trademark or copyright matters and would like to speak to one of our patent attorneys please feel free to contact us.