23 May, 2017

A Lack of Patent Exhaustion - Discussing the Lexmark Case Ahead of US Supreme Court Hearing

Many IP rights give their owners a great deal or rights and capabilities to restrict the use of their rights by other parties, and arguably, rightfully so, as the creation is indeed theirs. Even though this might be the case at face value, the use and exploitation of those rights should still have certain limitations, for example, from preventing an author from allowing certain people from reading their book after they have purchased a copy. This doctrine is called the exhaustion of rights, which means that after a certain point, the rights held by the author or owner of a technology cease to apply, allowing for the party to use their products as they please. Exhaustion of rights is still a developing area of law, and an up-coming case in the US Supreme Court has been primed to tackle this in relation to patents, with the case having ramifications both ways irrespective of the decision. Looking ahead to the decision, it is important to discuss the Court of Appeal case decided over a year ago.

The case of Lexmark International Inc. v Impression Products Inc. dealt with the sale of refilled ink cartridges for computer printers by Impression, who purchased used cartridges from abroad to refill and resell in the US (having a third-party circumvent the protection mechanism preventing reuse in the cartridges). Lexmark holds patents in relation to these cartridges, and most of the cartridges had strict single-use/resale restrictions set by Lexmark both in the US and abroad. Impression had not sought permission to resell the cartridges in the US, and Lexmark subsequently took the company to court for patent infringement.

Under 35 USC section 271, only the patent holder is authorized to sell and import patented inventions in the US. Impression argued that the rights (undisputed to be valid and enforceable) had been exhausted after the first sale of the cartridges to the original consumer, and therefore their resale and importation would not be an infringement of the rights.  The Court disagreed, and saw that "...a patentee may preserve its § 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale". This would therefore allow Lexmark to assert its rights post-sale as per the stickers on the cartridges.

The Court focussed on the aspect of the provision that restricts the sale of the patented 'without authorization', as the lack authorization of resale through the sticker clearly leaves the buyer without rights. Conversely, the sale of an article without the reservation of rights would, arguably, have the right to resale the item. It all comes down to the language used during the sale process. The Court summarized their position, where "...[a] sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the "authority" to engage in the use or resale that the restriction precludes", following the decision in Mallinckrodt Inc. v Medipart, Inc.. This means that the patent owning party would retain the rights in the item if expressly and clearly communicated at the time of purchase, provided that no law or policy is violated through the retention of rights.

Patent exhaustion is a real plight! (Source: Good Little Robot)
The legislative position is not any different, according to the Court, from the common law position as set out in Kirtsaeng v John Wiley & Sons (discussed more here), which restricted the rights in items that have been sold (albeit in relation to copyright and not patent rights). The ultimate seller of patent rights can retain some rights in the sold items, which differs from copyright that does not offer the same varying set of rights.

The second question the Court had to grapple with was whether the sale of the items abroad conferred any authority to Impression to import the cartridges to the US and sell them there. Ultimately, following the Jazz Photo Corp. v International Trade Commission case, the Court determined that no legal rule to this effect existed. For there to be an ability to do so, Impression would have to have a licence, implied or direct, to do so, which in the case they did not have. Similarly to the above, the decision in Kirtsaeng does not apply in this instance either (where copyright protected works were bought abroad and imported for sale in the US), as the law in copyright affords an equivocal right to resell the items, which patent legislation does not give.

Ultimately, Impression's case failed and the Court found that they had indeed infringed Lexmark's rights.

Both Judge Dyk and Hughes dissented from the judgment, raising opposing views on both the applicability of Mallinckrodt and Jazz Photo.

In their view, in relation to the first argument of patent exhaustion, the decision in Quanta Computer Inc. v LG Electronics Inc. applies, which sets out that "...the initial authorized sale of a patented item terminates all patent rights to that item". The moment the item involving the patent has been sold with authorization, all rights in the patented aspect cease to apply, even in relation to resale. Additionally, in relation to the second argument, once the item was sold abroad (with no restrictions as to US patent rights), the rights in the patent works are exhausted. This is even more poignant, according to the judges, due to the sale by the patent rightsholder, and not a mere licensee.

The case, once decided by the Supreme Court, could potentially have huge implications to the sale and resale of goods incorporation patent rights in the US. Should the Supreme Court side with Lexmark, it could cause a huge cooling on the resale of products in the US, and an upswing on the incorporation of stricter sale terms in relation to patent rights in any given goods. This could cause prices to rise and items to be less readily available to consumers. On the opposite side, should the Supreme Court agree with Impression, patent rights could be hugely devalued in the US, especially when it comes to the sale of goods at first instance. This could mean higher up-front costs to protect against the loss on resales, but also release a whole swathe of second-hand markets for patent goods, particularly from abroad should the rights have been exhausted. No matter which way the case goes, it will be very important to both consumers and patentees alike, and shape the future of patent exhaustion for years to come.

Source: Gizmodo

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