Patent Exhaustion: A Win for Printer-Ink Refillers and Another Rebuke to the Federal Circuit

Originally published by Sim Israeloff.

Just a week after reversing the Federal Circuit’s longstanding interpretation of patent venue in TC Heartland LLC v. Kraft Foods Group, No. 16-341 (May 22, 2017), the Supreme Court again reversed the Federal Circuit, this time with respect to patent exhaustion.

U.S. patent laws entitle a patent holder to prevent others from making, selling, or importing the patented invention “without authority” from the patentee.  35 U. S. C. §§ 154(a), 271(a).  However, patent rights end or exhaust once a patented product is sold.  A purchaser may freely reuse or resell the product without infringing on the patent.  The Supreme Court has now held that a patentee cannot retain patent controls after a sale by prohibiting buyers from reusing or reselling the patented items.  It also held that products sold overseas exhaust patent rights and preclude a patentee from claiming infringement when the products are later imported and resold in the U.S. without the patentee’s authority.

Lexmark sells patented toner cartridges for laser printers.  Remanufacturers like Impression Products buy empty Lexmark cartridges in the U.S. and overseas, refill them, and sell them at lower prices than Lexmark charges.  Lexmark tried to prevent customers from selling used cartridges through a Return Program in which it sold cartridges at a discount in exchange for an agreement that the buyer would not reuse or resell the cartridges.  Lexmark sued Impression Products and others claiming that they were infringing Lexmark’s patents by refilling Return Program cartridges, and by importing and filling overseas-sold cartridges.

Lexmark argued that its patent rights had not exhausted because it had not authorized reuse and resale of Return Program cartridges, nor given authority to import cartridges sold overseas at lower prices because they did not carry patent protection until they were brought into the U.S.  Impression Products argued that all patent rights as to cartridges that had once been sold were exhausted.

The Federal Circuit, sitting en banc, held for Lexmark as to both issues.  Lexmark Intn’l, Inc. v. Impression Products, Inc., 816 F. 2d 721 (Fed. Cir. 2016).  It held that, unlike an ordinary sale, Lexmark’s Return Program sales were restricted and thus resales were “without authority.”  As to cartridges sold abroad, the circuit held that patent exhaustion did not arise because the sales were made where American patent laws do not apply.  It reasoned that the patentee did not receive the rewards allowed by the patent laws from selling in an American market.

The Supreme Court disagreed.  It held that once an item is sold, the patentee has “enjoyed all the rights secured” by the patent law and has no further right to restrain the use of the product through that law.  The Court traced the doctrine to the common-law rule against restraints on alienation, citing Lord Coke’s writings from the 17th century.  The Court disagreed with the Federal Circuit’s belief that the exhaustion doctrine was merely an interpretation of the patent law’s prohibition on selling a patented product “without authority.”  Instead, exhaustion is a limit on the scope of the patentee’s own rights under the patent laws.  Thus, even if Lexmark’s contracts with its customers were enforceable under contract law, they did not allow Lexmark to retain patent rights items it had sold.

The Court further held that sales outside the United States exhaust all rights under the patent laws, analogizing to the “first sale doctrine” from copyright law.  That doctrine provides that once a copyright owner sells a copy of its work, it loses the power to restrict resales even if the first sale was made abroad.  Applying patent exhaustion to foreign sales was just as straightforward because nothing in the Patent Act indicates that the “borderless common law principle” of exhaustion should be limited to domestic sales.

The decision was 7-1 with Justice Gorsuch not participating.  Justice Ginsburg concurred as to the domestic sales but dissented as to international exhaustion.

Impression Products, Inc. vs. Lexmark International, Inc., No. 15-1189 (May 30, 2017)

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