Impression Products, Inc. v. Lexmark International, Inc. (2017)

McDonnell Boehnen Hulbert & Berghoff LLP

The U.S. Supreme Court handed down its decision today in Impression Products, Inc. v. Lexmark International, Inc., unsurprisingly reversing the Federal Circuit regarding the metes and bounds of the patent exhaustion doctrine.  The Court ruled that the doctrine precludes a patentee from using the patent laws to enforce any agreement that restricted a purchaser's post-sale ownership rights in a patented article, and that the doctrine extended to patented products sold abroad.  The decision reversed Federal Circuit precedent that permitted patentees to limit the scope of rights transferred to purchasers upon sale of a patented article, provided that such restrictions were "clearly worded" (Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)) and further expanded the scope of exhaustion to include sales made outside the U.S., which the Federal Circuit had held were outside the reach of exhausting U.S. patent rights (Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001)).  The decision represents a culmination of the Court's delineation of the expansive scope of exhaustion regarding intellectual property rights that can be found in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) and (in the copyright context) Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013).

The case arose over the resale of laser printer toner cartridges, sold by Lexmark both in the U.S. and abroad.  The cartridges were sold at a discount under an agreement that prohibited the buyer from selling the cartridges to any third party for reloading (with "a powdery substance, known as toner, that laser printers use to make an image appear on paper").  Each cartridge contained a chip that prevented third party reloading, but technology developed in ways that the microchip could be overridden.  Petitioner/accused infringer Impression Products reloaded and sold Lexmark cartridges obtained from discount purchasers both foreign and domestic.  The District Court dismissed Lexmark's infringement suit as to U.S. sales but permitted pursuit of a patent infringement remedy for foreign sales; the Federal Circuit affirmed as to foreign sales but also permitted Lexmark's infringement case to proceed for U.S. sales as well.

The Federal Circuit, relying on its (now-overruled) decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F. 2d 700 (Fed. Cir. 1992), held that the patent right included the right to impose "clearly communicated" post-sale restrictions that could be enforced by an infringement suit.  The Court's basis for this opinion was that the law defines infringement as "making, using, selling, offering to sell, or importing" a patented article "without authority," and thus post-sale restrictions would comprise infringement because they denied the purchaser the requisite authority for unrestricted use.  The Federal Circuit's application of the exhaustion principle was that it was presumptive but that the presumption could be expressly rebutted by such post-sale restrictions.

As for sales made abroad, the Federal Circuit relied on its (now also overruled) decision in Jazz Photo Corp. v. International Trade Commission, 264 F. 3d 1094 (Fed. Cir. 2001), where foreign sales did not preclude an infringement suit for unauthorized importation and sale of a patented article.  This decision was based on the lack of the predicate benefit to the patentee of selling an article abroad that was protected by a U.S. patent, in view of the lack of extraterritorial effect of the patent:  there was no patent premium received by the patentee under those circumstances, and thus the Court believed exhaustion was not justified.

The Supreme Court was presented with two questions:  can a patentee impose an express restriction on use or reuse of a patented product sold in the U.S. that is enforceable under the patent laws, and does sale of a patented article abroad exhaust the patentee's right to restrict importation of a product sold abroad?  The Supreme Court answered no to both questions, based on its view that patent exhaustion is a limitation on the patent right under the common law principle against restraints on alienating property.  The Court's opinion as to U.S. sales was unanimous, in an opinion colorfully written with regard to the facts (e.g., "[n]ot blind to this business problem [of reloading cartridges to be sold at a lower price"; "Lexmark, however, was not so ready to concede that its plan had been foiled [i.e., by thwarting the microchip limitation on reloading]") by Chief Justice Roberts.  Justice Ginsberg dissented with regard to foreign sales, which she believed should not exhaust U.S. patent rights.  Justice Gorsuch did not participate in the decision.

With regard to resale of cartridges purchased in the U.S., the Court struck down any post-sale restrictions because it held that all patent rights were exhausted upon first sale.  The basis for this decision was limited to patent law (the Court recognized that there might be a cause of action in contract law, however ineffective), and the opinion declares that the doctrine of patent exhaustion has been consistent in U.S. law for over 160 years, citing Bloomer v. McQuewan, 14 How. 539 (1853).  The Court characterized the function of exhaustion to operate "automatically"; once a patentee sells a patented article that article becomes "private, individual property" of the purchaser subject to no further rights by the patentee.  Patent law provides the patentee with the right to set prices and negotiate with purchasers over terms of sales, but the Court opined that once the sale is made the patentee does not have the right, under patent law, to "control the use or disposition" of the product, citing United States v. Univis Lens Co., 316 U. S. 241, 250 (1942).  This principle was affirmed most recently by the Court in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617, 625 (2008), which the Court says should have removed "any lingering doubt that patent exhaustion applies even when a sale is subject to an express, otherwise lawful restriction."

The opinion cites its decision in Kirtsaeng regarding a similar principle ("the first sale doctrine," codified at 17 U. S. C. § 109(a)) in copyright law, which decision also cited "the common law's refusal to permit restraints on the alienation of chattels."  The Court cites as ancient provenance of this "venerable principle" the common law in the 17th century (the Court citing Lord Coke to that effect) that disfavors if not affirmatively rejects (the opinion describing the common law attitude as "hostility," "antipathy," and "enmity") any restraint on the free alienation of chattels and other private property, which are "obnoxious to the public interest," citing Straus v. Victor Talking Machine Co., 243 U.S. 490, 501 (1917).

The opinion then provides as an illustration of the "annoyance and inconvenience" to the public that would result from the Court deciding otherwise an auto repair shop, where the component parts (should they be subject to post-sale restrictions) could leave open to patent infringement liability a mechanic for servicing a privately owned vehicle.  "[The] smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale," according to the opinion (in a conclusion bolstered by amici briefs that used smartphones and other articles of manufacture constituting multiple patented components).

The opinion supports its conclusions with further citations to precedent (including Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 17–18 (1918) and Univis) which, although being resale price restriction cases brought under antitrust law, were decided on the grounds that such restrictions were an impermissible extension of the patentees right to exclude.  And Congress has not seen fit to change the law, according to the Court; this inaction raises the presumption that Congress does not intend patented articles to be an exception to the common law rule limiting patent rights, citing Astoria Fed. Sav. & Loan Assn. v. Solimino, 501 U.S. 104, 108 (1991).

The Court expressly identified the Federal Circuit's error (where "it got off on the wrong foot") to be grounding its decision on the extent of the "authority" that the patentee grants a purchaser, which while presumptively plenary does not (under the Federal Circuit's now overruled precedent) need to be so.  On the contrary, the Court found the patent exhaustion principle to be much more than a presumption -- it is an affirmative limit on the scope of a patentee's right to exclude, the Court citing United States v. General Elec. Co., 272 U.S. 476, 489 (1926) to this effect.  The opinion sets out the principle:  the right to own (and use, and sell) property exists outside the patent right, and the law grants to patentee but a limited exception to that right, which exception is exhausted by sale by the patentee of the patented article.

The Court states that the remedy if any must be found in contract, but recognizes that the party who would have infringement liability (remanufacturers like Impression Products) are not in privity with the patentee and thus contract law under these circumstances does not provide a remedy.  Responding to arguments by Lexmark, the Court notes that licenses and licensees are different, the Court distinguishing case law with regard to these entities with cases involving post-sale restrictions (specifically, General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, aff 'd on reh'g, 305 U.S. 124 (1938), which involved violation of restrictions on licensees).  The Court states that these situations do not implicate restraints on free alienation, because a patent license does not transfer title; it just "expands the club of authorized producers and sellers."  "Because the patentee [in licensing] is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections," says the Court.  A patentee can condition sale by a licensee to restrict post-sale use, but the opinion states that this is a also right limited by contract and not the patent law, citing Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 506–507, 516 (1917).  The opinion succinctly states the scope of the exhaustion doctrine:  "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."

With regard to sales abroad, the Court cited its Kirtsaeng decision and found the same grounding in that case as here, in the unlawfulness of restraints on the alienation of chattels.  Because this common law principle applies without regard to where the post-sale activity takes place, the distinction Lexmark (and Justice Ginsberg in dissent) made regarding foreign versus domestic sales disappears for the Court majority.  The Court finds the application of these principles in the patent context "just as straightforward" as in copyright, and moreover, sees no "theoretical or practical" sense in differentiating between patent and copyright on exhaustion, citing the "many everyday products . . . [are] subject to both patent and copyright protections."  The Court was unmoved by Lexmark's argument that, without patent protection a foreign sale would not command the patent premium on price, saying that "the Patent Act does not guarantee a particu­lar price, much less the price from selling to American consumers.  Instead, the right to exclude just ensures that the patentee receives one reward—of whatever amount the patentee deems to be 'satisfactory compensation,'" citing Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661 (1895).

Finally, the Court rejected the "middle ground" advocated by the U.S. government (permitting U.S. patent rights to be expressly reserved for foreign sales) as being "largely based on policy rather than principle":

Exhaustion does not arise because of the parties' expecta­tions about how sales transfer patent rights.  More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law.  Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment.  Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation.  Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive.  As a result, restrictions and location are irrelevant; what mat­ters is the patentee's decision to make a sale.

This decision (as the Quanta and Kirstaeng decisions before it) has important ramifications for biotechnology patent claims.  There are two immediately evident examples:  cases where a patentee having method claims and composition claims limits post-sale rights by a so-called "label license" for uses for a patented article; and cases where a patented article has the biological property of replication, where the license precludes use of replicates of the article after purchase.  An example of the first type of situation are the limits placed on the practice of the polymerase chain reaction, based on patents to the amplification method and the thermostable polymerase.  The restrictions were of two types:  first, licenses to the method were granted only upon purchase of the polymerase and use of an "authorized" thermocyler.  Second, the method (and for that matter, the polymerase) was not licensed for diagnostic uses, only for scientific research.  Under the patent exhaustion doctrine set forth in the Lexmark opinion, it is likely that neither of these restrictions would be enforceable.  First, although the polymerase has other uses that would not infringe the claims of the PCR method patent, it is likely that sale of the thermostable polymerase would exhaust the method claims as well, since the thermostable characteristic of the polymerase embodies essential features of the claimed invention.  This is even more likely regarding the diagnostic use prohibition, since it represents the kind of restriction the Court prohibited in Adams v. Burke:  "when a patented item is 'once lawfully made and sold, there is no restriction on [its] use to be implied for the benefit of the patentee.'"  Adams, 17 Wall. 453, 457 (1873).

The second type of post-sale restrictions important to biotechnology are those that restrict use of a patented article that is capable of self-replication; the most (in)famous cases of this type are the Monsanto herbicide-resistant seed cases, where the "label license" prohibited replanting seed produced using the recombinant seed purchased from the company (albeit this situation is one where there is an express license between Monsanto and purchasing farmers and the third party aspects of the Lexmark case are not present).  Monsanto won a Supreme Court challenge to its use of patent infringement lawsuits to enforce its right to restrict resale of patented soybeans, in Bowman v. Monsanto several years ago, involving a farmer who reused seed contrary to Monsanto's restrictions on reuse.  The restrictions permitted under those circumstances may be limited to the unique nature of that invention, however, wherein producing more soybeans is the intended (and perhaps only) use of the invention.  But Justice Kagen's opinion was qualified, wherein she noted that the Court's holding was "limited -- addressing the situation before us, rather than every one involving a self-­replicating product" and adding that:

We recognize that such inventions are becoming ever more prevalent, complex, and diverse.  In another case, the article's self-replication might occur outside the purchaser's control.  Or it might be a necessary but incidental step in using the item for another purpose.  . . .  We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.

It is clear, however, that the Supreme Court has eviscerated the Federal Circuit's interpretation of the effect of patent exhaustion on patent rights, and that in this as in many other areas, the Court has determined that its views are the correct (if not only) views regarding U.S. patent law.

Impression Products, Inc. v. Lexmark International, Inc. (2017)
Opinion by Chief Justice Roberts, joined by Justices Kennedy, Thomas, Breyer, Alito, Sotomayor, and Kagan; opinion concurring in part and dissenting in part by Justice Ginsburg; Justice Gorsuch took no part in the consideration or decision of the case

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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