Supreme Court Rules That Restricted Sales of Patented Cartridges Exhaust Patent Rights

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Schwabe, Williamson & Wyatt PC

Impression Products, Inc. v. Lexmark International, Inc., Supreme Court Case 15-1189 (May 30, 2017)

The Supreme Court reverses an en banc Federal Circuit decision and rules that a “conditional sale” that ‎transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale ‎exhausts the patentee’s right to patent infringement relief. Therefore, while the patentee may retain ‎the right to sue for breach of contract, patent exhaustion prevents the enforcement of the post-sale ‎restrictions through the patent law’s infringement remedy. The Court cites a number of its older ‎decisions and rules that sellers cannot limit how purchasers of patented products use those products ‎and that patent rights are exhausted by any sale, regardless of where it takes place.‎

A United States patent entitles the patent holder to “exclude others from making, using, offering for ‎sale, or selling [its] invention throughout the United States or importing the invention into the United ‎States.” 35 U. S. C. §154(a). Whoever engages in one of these acts “without authority” from the ‎patentee may face liability for patent infringement. §271(a). When a patentee sells one of its ‎products, however, the patentee can no longer control that item through the patent laws—its patent ‎rights are said to “exhaust.” ‎

Respondent Lexmark designs, manufactures, and sells toner cartridges to consumers in the U.S. and ‎abroad. It owns a number of patents that cover components of those cartridges and the manner in ‎which they are used. When Lexmark sells toner cartridges, it gives consumers two options: One option ‎is to buy a toner cartridge at full price, with no restrictions. The other option is to buy a cartridge at a ‎discount through Lexmark’s “Return Program.” In exchange for the lower price, customers who buy ‎through the Return Program must sign a contract agreeing to use the cartridge only once and to refrain ‎from transferring the cartridge to anyone but Lexmark. ‎

Companies known as remanufacturers acquire empty Lexmark toner cartridges—including Return ‎Program cartridges—from purchasers in the U.S., refill them with toner, and then resell them. They do ‎the same with Lexmark cartridges that they acquire from purchasers overseas and import into the U.S. ‎Lexmark sued a number of these remanufacturers, including petitioner Impression Products, Inc., for ‎patent infringement with respect to two groups of cartridges. The first group consists of Return ‎Program cartridges that Lexmark had sold within the U.S. Lexmark argued that, because it expressly ‎prohibited reuse and resale of these cartridges, Impression Products infringed the Lexmark patents ‎when it refurbished and resold them. The second group consists of all toner cartridges that Lexmark ‎had sold abroad and that Impression Products imported into the country. Lexmark claimed that it ‎never gave anyone authority to import these cartridges, so Impression Products infringed its patent ‎rights by doing just that. ‎

Impression Products moved to dismiss on the grounds that Lexmark’s sales, both in the U.S. and ‎abroad, exhausted its patent rights in the cartridges, so Impression Products was free to refurbish and ‎resell them, and to import them if acquired overseas. The District Court granted the motion to dismiss ‎as to the domestic Return Program cartridges, but denied the motion as to the cartridges sold abroad. ‎The Federal Circuit then ruled for Lexmark with respect to both groups of cartridges. Beginning with ‎the Return Program cartridges that Lexmark sold domestically, the Federal Circuit held that a patentee ‎may sell an item and retain the right to enforce, through patent infringement lawsuits, clearly ‎communicated, lawful restrictions on post-sale use or resale. Because Impression Products knew ‎about Lexmark’s restrictions and those restrictions did not violate any laws, Lexmark’s sales did not ‎exhaust its patent rights, and it could sue Impression Products for infringement. As for the cartridges ‎that Lexmark sold abroad, the Federal Circuit held that, when a patentee sells a product overseas, it ‎does not exhaust its patent rights over that item. Lexmark was therefore free to sue for infringement ‎when Impression Products imported cartridges that Lexmark had sold abroad. Judge Dyk, joined by ‎Judge Hughes, dissented. ‎

Held: ‎ ‎1. Lexmark exhausted its patent rights in the Return Program cartridges that it sold in the U.S. ‎A patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any ‎restrictions the patentee purports to impose. As a result, even if the restrictions in Lexmark’s contracts ‎with its customers were clear and enforceable under contract law, they do not entitle Lexmark to ‎retain patent rights in an item that it has elected to sell. ‎

‎(a) The Patent Act grants patentees the “right to exclude others from making, using, offering for sale, ‎or selling [their] invention[s].” 35 U. S. C. §154(a). For over 160 years, the doctrine of patent ‎exhaustion has imposed a limit on that right to exclude: When a patentee sells an item, that product ‎‎“is no longer within the limits of the [patent] monopoly” and instead becomes the “private, individual ‎property” of the purchaser. If the patentee negotiates a contract restricting the purchaser’s right to ‎use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may ‎not do so through a patent infringement lawsuit. ‎

The exhaustion rule marks the point where patent rights yield to the common law principle against ‎restraints on alienation. The Patent Act promotes innovation by allowing inventors to secure the ‎financial rewards for their inventions. Once a patentee sells an item, it has secured that reward, and ‎the patent laws provide no basis for restraining the use and enjoyment of the product. Allowing ‎further restrictions would run afoul of the “common law’s refusal to permit restraints on the alienation ‎of chattels.” Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519, 538. As Lord Coke put it in the 17th ‎century, if an owner restricts the resale or use of an item after selling it, that restriction “is voide, ‎because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man.” ‎Congress enacted and has repeatedly revised the Patent Act against the backdrop of this hostility ‎toward restraints on alienation, which is reflected in the exhaustion doctrine. ‎

This Court accordingly has long held that, even when a patentee sells an item under an express, ‎otherwise lawful restriction, the patentee does not retain patent rights in that product. See, e.g., ‎Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617. And that well-settled line of precedent ‎allows for only one answer in this case: Lexmark cannot bring a patent infringement suit against ‎Impression Products with respect to the Return Program cartridges sold in the U.S. because, once ‎Lexmark sold those cartridges, it exhausted its right to control them through the patent laws. ‎

‎(b) The Federal Circuit reached a different result because it started from the premise that the ‎exhaustion doctrine is an interpretation of the patent infringement statute, which prohibits anyone ‎from using or selling a patented article “without authority” from the patentee. According to the ‎Federal Circuit, exhaustion reflects a default rule that selling an item “presumptively grants ‘authority’ ‎for the purchaser to use it and resell it.” But if a patentee withholds some authority by expressly ‎limiting the purchaser’s rights, the patentee may enforce that restriction through patent infringement ‎lawsuits. ‎

The problem with the Federal Circuit’s logic is that the exhaustion doctrine is not a presumption about ‎the authority that comes along with a sale; it is a limit on the scope of the patentee’s rights. The Patent ‎Act gives patentees a limited exclusionary power, and exhaustion extinguishes that power. A ‎purchaser has the right to use, sell, or import an item because those are the rights that come along ‎with ownership, not because it purchased authority to engage in those practices from the patentee. ‎

‎2. Lexmark also sold toner cartridges abroad, which Impression Products acquired from ‎purchasers and imported into the U.S. Lexmark cannot sue Impression Products for infringement with ‎respect to these cartridges. An authorized sale outside the U,S., just as one within the U.S., exhausts ‎all rights under the Patent Act. ‎

The question about international exhaustion of intellectual property rights has arisen in the ‎context of copyright law. Under the first sale doctrine, when a copyright owner sells a lawfully made ‎copy of its work, it loses the power to restrict the purchaser’s right “to sell or otherwise dispose of . . . ‎that copy.” 17 U. S. C. §109(a). In Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519, this Court held that ‎the first sale doctrine applies to copies of works made and sold abroad. Central to that decision was ‎the fact that the first sale doctrine has its roots in the common law principle against restraints on ‎alienation. Because that principle makes no geographical distinctions and the text of the Copyright Act ‎did not provide such a distinction, a straightforward application of the first sale doctrine required ‎concluding that it applies overseas. ‎

Applying patent exhaustion to foreign sales is just as straightforward. Patent exhaustion, too, ‎has its roots in the antipathy toward restraints on alienation, and nothing in the Patent Act shows that ‎Congress intended to confine that principle to domestic sales. Differentiating between the patent ‎exhaustion and copyright first sale doctrines would also make little theoretical or practical sense: The ‎two share a “strong similarity . . . and identity of purpose,” Bauer & Cie v. O’Donnell, 229 U. S. 1, 13, and ‎many everyday products are subject to both patent and copyright protections. ‎

Lexmark contends that a foreign sale does not exhaust patent rights because the Patent Act ‎limits a patentee’s power to exclude others from making, using, selling, or importing its products to ‎acts that occur in the United States. Because those exclusionary powers do not apply abroad, the ‎patentee may not be able to sell its products overseas for the same price as it could in the U.S., and ‎therefore is not sure to receive the reward guaranteed by American patent laws. Without that reward, ‎says Lexmark, there should be no exhaustion. ‎

The territorial limit on patent rights is no basis for distinguishing copyright protections; those ‎do not have extraterritorial effect either. Nor does the territorial limit support Lexmark’s argument. ‎Exhaustion is a distinct limit on the patent grant, which is triggered by the patentee’s decision to give a ‎patented item up for whatever fee it decides is appropriate. The patentee may not be able to ‎command the same amount for its products abroad as it does in the U.S. But the Patent Act does not ‎guarantee a particular price. Instead, the Patent Act just ensures that the patentee receives one ‎reward—of whatever it deems to be satisfactory compensation—for every item that passes outside ‎the scope of its patent monopoly. ‎

This Court’s decision in Boesch v. Gräff, 133 U. S. 697, is not to the contrary. That decision did ‎not, as Lexmark contends, exempt all foreign sales from patent exhaustion. Instead, it held that a sale ‎abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the ‎transaction. That just reaffirms the basic premise that only the patentee can decide whether to make ‎a sale that exhausts its patent rights in an item. ‎

Finally, the U.S. advocates what it views as a middle-ground position: that a foreign sale ‎exhausts patent rights unless the patentee expressly reserves those rights. This express-reservation ‎rule is based on the idea that overseas buyers expect to be able to use and resell items freely, so ‎exhaustion should be the presumption. But, at the same time, lower courts have long allowed ‎patentees to expressly reserve their rights, so that option should remain open to patentees. The ‎sparse and inconsistent decisions the Government cites, however, provide no basis for any ‎expectation, let alone a settled one, that patentees can reserve rights when they sell abroad. The ‎theory behind the express-reservation rule also wrongly focuses on the expectations of the patentee ‎and purchaser during a sale. More is at stake when it comes to patent exhaustion than the dealings ‎between the parties, which can be addressed through contracts. Instead, exhaustion occurs because ‎allowing patent rights to stick to an already-sold item as it travels through the market would violate the ‎principle against restraints on alienation. As a result, restrictions and location are irrelevant for patent ‎exhaustion; what matters is the patentee’s decision to make a sale. ‎

Reversed and remanded. ROBERTS, C. J., delivered the opinion of the Court, in which ‎KENNEDY, THOMAS, BREYER, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. GINSBURG, J., filed an ‎opinion concurring in part and dissenting in part. GORSUCH, J., took no part in the consideration or ‎decision of the case.‎

Read the full opinion

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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