U.S. patents incentivize innovation by allowing patent owners to prevent others from making, using, offering for sale, selling, or importing their inventions into the United States for a period of 20 years. Patent owners are therefore able to maximize the financial reward for their innovations, without competition from would-be copycats. However, once the inventor sells one of its products, its patent rights are “exhausted” with respect to that product, meaning that the inventor can no longer restrict use of the product via patent laws. On May 30, 2017, in Impression Products, Inc. v. Lexmark Int’l, Inc., the Supreme Court confirmed that exhaustion applies regardless of whether the patent owner imposes any post-sale restrictions at the time of sale or where the product is sold.
In this case, Lexmark sold its patented toner printer cartridges in two groups: (1) Return Program cartridges, which were sold at a discount but required the user sign a contract agreeing to only use the cartridge once, and refrain from having it re-filled by a third party; and (2) full price cartridges that had no restrictions. Impression Products obtained used cartridges from Lexmark customers, re-filled them abroad, and then imported them into the U.S. When Lexmark sued Impression Products for patent infringement, Impression Products argued that Lexmark’s patent rights were exhausted by virtue of Lexmark’s initial sale of the cartridges. Lexmark disagreed, arguing that: (1) because U.S. patent laws only prevent infringing activities in the U.S., Lexmark’s foreign sales did not exhaust its patent rights; and (2) because Lexmark clearly communicated the restrictions on post-sale use or re-sale, Impression Products’ importation of refurbished cartridges –whether initially sold in the U.S. or abroad– was “without authority,” and therefore infringing.
The Court of Appeals for the Federal Circuit agreed with Lexmark, finding that because U.S. patent laws do not provide a monopoly outside of the U.S., the patent owner does not receive full compensation for its foreign sales, which are presumably at reduced prices because the patent does not preclude competition. Therefore, the foreign sale does not exhaust the patent rights. As for domestic sales, the Federal Circuit found that purchasing a patented product carries the presumption that the purchaser can freely use or resell the product, but that presumption does not apply when the seller imposes post-sale restrictions upfront.
The Supreme Court disagreed, noting that once the patent owner sells the product, it has received the financial reward that is the purpose of the patent laws. At that point, patent law yields to the common law principle against restraining alienation of chattels. Although the post-sale restriction may be enforceable against the original purchaser under contract law, Lexmark cannot enforce the restriction under patent law. Regarding foreign sales, the Court saw no reason to draw a distinction between domestic and foreign sales. The Court noted that patent law does not guarantee a particular price for the patented product, only that the patent owner receives one reward for each product–whatever the amount. By its ruling, the Court provided a bright line rule regarding patent exhaustion: once a patent owner has sold its patented product, it cannot use patent law to restrict post-sale use or re-sale of the product, regardless of where the sale occurred or whether the restrictions were made clear at the time of sale.