An authorized sale exhausts all patent rights in the item sold.

In Impression Products Inc. v. Lexmark International, Inc. No. 15-1189, May 30, 2017, the Supreme Court found that patent exhaustion is “uniform and automatic” in connection with an authorized sale of a patented item (Slip Opn. at 13).  Indeed, whether the authorized sale is made by the patentee or a licensee, or whether the sale is made in the U.S. or abroad, the sale exhausts “all patent rights” in the item “regardless of any post-sale restrictions the patentee purports to impose.” (Id. at 6, 13). The Federal Circuit had previously held that an authorized sale also had to be “unconditional” for patent exhaustion to apply.  The Impression Products decision removed that requirement.

As discussed below, while the Court was clear that patent exhaustion is “automatic” following an authorized sale – granting purchasers unfettered “use and enjoyment” of the item sold – some questions remain regarding the legal, and practical, application of that rule.

Contractual enforcement of post sale restrictions?

The Supreme Court did not rule out patentees relying on contract law to enforce post-sale restrictions. There may be practical difficulties with that approach, however.  For example, a patent owner may lack privity with downstream purchasers, precluding direct enforcement of post-sale restrictions.  And the increased transaction costs of contracting with all purchasers makes the contractual approach less attractive for patent owners. Further, purchasers may balk at restrictive contract terms. Overall, contract law does not provide a patentee with the same leverage as patent rights do.  Indeed, it is telling that Lexmark brought a patent suit and not a breach of contract claim.

License or sale?

The Supreme Court explained that a patent owner can place restrictions on licensees, but not purchasers. This is because a patentee is free to grant only some of its patent rights to a licensee. And, if a licensee makes a sale outside the scope of its license, a patentee can sue for infringement.

The question of whether a patentee can use a license, rather than a sale, to restrict the use of patented items downstream remains. The answer to that question may differ depending upon the industry and technology at issue. For example, it may be practically difficult to use licenses in the printer cartridge business, but they are common in many other technology areas, including a wide range of computer software.  Perhaps we will see more companies replacing sales with licenses in an attempt to increase revenue generation from their patent portfolios.

No restriction on “use and enjoyment” unless use creates a new copy of the patented item.

Once the patentee decides to sell a patented item, patent law provides “no basis for restraining the use and enjoyment of the thing sold.” (Slip Op. at 6). But, other patent exhaustion cases remind that, depending upon the type of technology at issue, “use and enjoyment” of a purchased item is not always entirely free. Bowman v. Monsanto Company, 133 S. Ct. 1761 (2013) provides a good example.  There, Bowman completed an authorized purchase of Monsanto seed, but Monsanto was allowed to use its patent rights to restrict Bowman from planting the purchased seed.  That was because the Monsanto seed was a “self-replicating” technology – by planting the seed Bowman would have necessarily created a second copy of the seed.  So, the “use and enjoyment” described in Impression Products does not include any use that would necessarily create a new copy of a patented article.

Repair versus reconstruction

If we take the rule from Monsanto and apply it to the printer cartridge facts in Impression Products, there are a few more interesting questions.  For example, would refilling printer cartridges ever change from permissible “use and enjoyment” to the impermissible creation of a copy of the invention?  Of course, between the Supreme Court and the Federal Circuit, there is extensive case law on just that question, the so-called “repair versus reconstruction” line of cases. See, e.g., Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961); Jazz Photo Corp. v. United States ITC, 264 F.3d 1097 (Fed. Cir. 2001).   It will be interesting to see if the broad language in Impression Products regarding a purchaser’s rights has any effect on the line between permissible repair and impermissible reconstruction that those cases have drawn.

Clear rule, hazy application.

While the Supreme Court drew a clear line in the sand regarding the rights of authorized purchasers of patented items, the complex nature of commercial contracting and sales ensures that the application of this clear rule is less straightforward, both from a legal and a commercial perspective.