A question of patent law, now likely bound for the Supreme Court’s last word, concerns whether a patent owner retains any say over subsequent use and resale of a patented product once the product has been sold. That question arose recently in Lexmark International, Inc. v. Impression Products, Inc., a case that occasioned a flurry of amicus curiae briefs in the Federal Circuit Court of Appeals. The Federal Circuit, convening the full court at its own initiative, has delivered the opinion that “it depends.”
US law traditionally disfavors encumbering the sale of goods with conditions on any future sale – so called restraints on alienation. For example, the first-sale doctrine under the Copyright Act entitles the purchaser of a copy of a copyrighted work to sell or otherwise dispose of that work without authorization from the copyright owner. 17 U.S.C. § 109(a).
The US Patent Act, however, contains no such provision. But an uncodified judicial principle of long standing (enunciated by the Supreme Court in 1853) provides for “exhaustion” of a patent owner’s rights in a patented article as soon as the patent owner sells it. Oddly, the exhaustion doctrine, as interpreted thus far, does not apply if the product is sold by a licensee and the restrictions are imposed by the patentee under the license. One of the issues argued in Lexmark was whether that distinction should stand. Lexmark makes and sells printers and toner cartridges that contain patented features. Impression acquires used Lexmark cartridges, refurbishes them, and then resells them–in competition with Lexmark. Lexmark sued Impression for patent infringement.
The trial court in Lexmark acknowledged the Federal Circuit’s 1992 ruling in Mallinckrodt Inc. v. Medipart, Inc. that upheld a restriction—against reuse by the customer—imposed on the sale of a patented article (a nebulizer used for taking X-rays) when the restriction was otherwise lawful and within the scope of the patent grant[i]. The lower court held, however, that the Mallinckrodt decision had been effectively overridden by the Supreme Court’s unanimous 2002 decision in Quanta Computer, Inc. v. LG Electronics, Inc. The district court read Quanta as disallowing a restriction built into sales of a product subject to a patent, although in the Quanta case, the product was sold by a licensee of the patent owner rather than by the patentee itself.
Several facts in the Lexmark case sharpened the issues that came before the Federal Circuit on appeal, and those for which review is now being sought in the Supreme Court. For one thing, Lexmark has a two-tier pricing policy, whereby toner cartridges may be purchased either at full price, in which case no restriction on reuse or resale is imposed, or at a 20% discount, subject to an express single-use/no-resale restriction that requires the purchaser to return the used cartridge only to Lexmark. Moreover, the discounted single-use cartridges contain a special chip that must be replaced if the cartridge is conditioned for reuse, so no one can reasonably assert that they lacked notice of the condition attached to the sale. All of the cartridges subject to litigation, as it now stands, are of the discounted, single-use/no-resale variety.
A second twist is that some of the Lexmark toner cartridges reconditioned and resold by Impression were acquired outside the US. Patent exhaustion principles that are recognized under US law might not shield an importer from an assertion of patent infringement for the act of importing a patented article into the United States. And, indeed, the Federal Circuit adhered to its earlier holding in Jazz Photo Corp. v. International Trade Comm’n (2001) that when a patentee sells, or authorizes the sale of, a product outside the US, it does not authorize the buyer to import that product into the US.
After careful review of pertinent Supreme Court jurisprudence over the decades, the Federal Circuit held in Lexmark that a patent owner may lawfully reserve rights with respect to the patented article that it sells as long as the reservation doesn’t run afoul of other legal provisions such as antitrust law. Reserving patent rights does not, according to the Federal Circuit, conflict with the anti-alienation tradition of the common law because patent rights are part of a statutory regime that trumps common law. The Federal Circuit reaffirmed its holding in Mallinckrodt that a properly communicated restriction on downstream use of a patented product may be enforced by the patentee.
Two judges joined a dissenting opinion, coming to an opposite conclusion on the US prong of the Lexmark decision and highlighting a nuance of the foreign prong. As to a patentee’s right to enforce patent rights with respect to a product that the patentee has sold in the US, the dissent considered the Mallinckrodt precedent wrong as rendered in 1992 and contrary to Supreme Court exhaustion jurisprudence. As to foreign sales, the dissenting judges would hold that a foreign sale by the patentee should result in exhaustion of patent rights assertable in the US, unless expressly reserved. Their reasoning is grounded in policy considerations of enhancing competition that favor presumptive exhaustion by foreign sales.
Lurking beneath the surface of the Lexmark decision are some of the same considerations that informed the Supreme Court’s split decision in Kirtsaeng v. Wiley (2013), which held that books sold abroad may be imported into the United States over the copyright holder’s objection. Kirtsaeng, as we’ve reported, was based on copyright law, where the first-sale extinction of rights is acknowledged in the statute. Impression Products has now filed a petition for Supreme Court review of the Lexmark decision. The petition highlights the Supreme Court’s opinion in Kirtsaeng as a basis for overruling the Federal Circuit and also seeks a ruling that patentees may not impose restrictions on purchasers directly, only indirectly through license restrictions. If the Supreme Court decides to hear the case, it may strike a new balance between encumbering ownership and relinquishing exclusionary rights.
[i] The requirement that a restriction be “within the scope of that patent grant” means that, for example, a patent on a novel toothbrush may permit the patentee to require that the used toothbrush be returned to it for recycling, but may not require the purchaser to vote for Donald Trump.