US Supreme Court alters patent exhaustion law
A surprise decision from the US Supreme Court appears to have fundamentally altered the law on patent exhaustion in the US.
The case concerned the “remanufacture” of print cartridges. In the US Lexmark offered consumers two different options when buying printer cartridges. Consumers could opt to pay for a “full price” cartridge, or could instead purchase a discounted “Return Program” cartridge which came with a contractual obligation to return the cartridge to Lexmark.
Impression is a company which engages in the remanufacture of empty cartridges. They would refill the empty cartridges with toner and resell them. Impression acquired the empty cartridges from a number of sources, including Lexmark Return Program cartridges sold in the US, and cartridges sold by Lexmark abroad which were subsequently imported by Impression into the US.
Lexmark, which owns a number of patents that cover the cartridges, sued Impression for infringement of those patents in respect of the two groups of cartridges. For the US-sourced Return Program cartridges, Lexmark argued that because contractual obligations with the consumer expressly prohibited the reuse and resale of these cartridges, Impression Products had infringed the Lexmark patents when it refurbished and resold them. For the cartridges sold by Lexmark abroad and imported into the US Lexmark argued that, as it had never given anyone authority to import these cartridges, Impression was infringing its patents by doing so.
Impression moved to dismiss in respect of both groups on the grounds that Lexmark’s sales, both in the US and abroad, had exhausted Lexmark’s patent rights in the cartridges and accordingly Impression should be free to import, refill and resell them.
The District Court granted the motion to dismiss for the domestic Return Program cartridges but denied the motion for the imported cartridges. Subsequently, the Federal Circuit ruled for Lexmark, refusing the motion to dismiss with respect to both groups of cartridges.
US Supreme Court decision
In a near-unanimous decision, the Supreme Court reversed the Federal Circuit on both the Return Program cartridges (8-0) and the imported cartridges (7-1).
On the Return Program cartridges, the court rejected Lexmark’s contention that the contractual obligations on the cartridges granted them the right to sue under patent law, stating:
We conclude that Lexmark exhausted its patent rights in these cartridges the moment it sold them. The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.
In other words, while the existence of a contractual obligation may well allow for an action under contract law, it does not prevent the sale from exhausting the patent rights in the cartridge.
Similarly, in respect of the imported cartridges the court held that patent exhaustion holds up even in respect of foreign sales. The court drew an analogy to a recent US Supreme Court case, Kirtsaeng v John Wiley & Sons, which held that it was legal to import foreign textbooks into the US despite the publisher’s contention that the importation infringed copyright.
The court succinctly summarised their decision stating:
In sum, patent exhaustion is uniform and automatic. Once a patentee decides to sell – whether on its own or through a licensee – that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license.
This judgment is likely to have far reaching consequences in how inventors seek to protect their intellectual property. What is especially notable is that the court did not appear to place any geographic restrictions on patent exhaustion, in marked contrast to the position in the UK where patent exhaustion only applies to authorised sales within the European Economic Area.
The judgment did, however, leave a number of questions unanswered. In particular, the Court did not rule on the role that patents may continue to play when an incomplete transfer of a good or service has occurred under various licencing agreements such as product-as-a-service business models which have become increasingly popular in recent years.