Rejecting the Federal Circuit's en banc interpretation of the patent exhaustion doctrine, the US Supreme Court held that an authorized sale by a patent owner exhausts all patent rights in the item sold regardless of whether that sale was within the United States or abroad. Impression Prods., Inc. v. Lexmark Int'l, Inc., No. 15-1189 (May 30, 2017). The Court's decision overturns long-standing Federal Circuit precedent reaching the opposite conclusion. Justice Ruth Bader Ginsburg dissented in part, writing that she would not have found foreign sales to exhaust US patent rights.
Background
The underlying case involved patent-protected printer cartridges that were sold with a single-use restriction. There were two groups of single-use cartridges: cartridges sold inside the United States and cartridges sold abroad. Patent owner Lexmark accused Impression Products of infringement after Impression Products purchased depleted single-use cartridges inside and outside the United States from Lexmark's customers, and then refilled and resold the cartridges in the United States. Patent exhaustion was the sole defense raised by Impression Products. Because the single-use cartridges were initially purchased from the patent owner Lexmark, Impression Products argued that Lexmark's patent rights had been exhausted by the time Impression Products acquired the cartridges. Impression Products argued that exhaustion applied to both the domestically sold cartridges and to those sold abroad.
Post-sale restrictions cannot be enforced by patent law
The Supreme Court reversed the en banc Federal Circuit's decision that would have allowed post-sale restrictions to be enforced under the patent laws. The Court held instead that the first sale of a patented item under the patent owner's authority (whether by the patent owner or a licensee) automatically exhausts all patent rights in the item sold such that patent law may not be used to control the use or disposition of the item after the sale. The Court cited Lord Coke's 17th century description of the common law's refusal to permit restraints on the alienation of chattels for support, and noted that Congress had not only passed but also repeatedly revised the patent laws against this backdrop without changing the common law rule that an authorized sale exhausts all patent rights in the item sold, even if a patent owner attempts to impose a post-sale restriction. The Court also pointed out that its decision in Quanta Computer v. LG Electronics reached the same conclusion: Authorized sales subject to express, otherwise lawful restrictions nevertheless exhaust patent rights in the item sold.
Foreign sales also exhaust US patent rights
The Supreme Court also reversed the part of the lower court's decision that would not have allowed foreign sales to exhaust US patent rights, holding instead that any authorized sale, whether domestic or foreign, exhausts all of patent owner's rights under US patent law. This, the Court noted, was the same result it reached with respect to copyright law in Kirtsaeng v. John Wiley & Sons, Inc., and it is consistent with the common law's antipathy towards restraints on alienation. The Court also rejected the US government's proposed middle ground that foreign sales should exhaust US patent rights, unless the US rights are expressly reserved, because this proposed rule lacked support in settled law and wrongly focused on the parties' expectations about how the sale transferred patent rights, which would let the patent owner violate principles against free alienation.
Implications
The Supreme Court's decision expands the defenses available to an accused infringer in a patent litigation, assuming the patent owner (or its licensee) has made an authorized sale in the US or abroad, which is often a highly fact-dependent question. The decision also reverses long-standing Federal Circuit law that parties may have come to assume will apply when entering into commercial agreements, including complex international supply agreements. In light of this, parties should consider reviewing their agreements and revising as appropriate. Dentons lawyers are well-versed in on the subject of patent exhaustion and stand ready to assist you, in the United States and abroad, with any questions you may have on this and other patent issues.
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