22 June, 2017

Printing on the Wall - US Supreme Court Rules on Patent Exhaustion

Discussed on this blog only a few weeks ago, the US Supreme Court decision in Lexmark can have huge ramifications for both patent holders and sellers of those products all over the world. When and if at all patent rights exhaust after the sale of a product, be it in the US or abroad, is an important question and will set clear boundaries for both buyers and sellers, potentially impacting the price and availability of products and services all over the world. Many IP practitioners have been waiting for the decision by the Supreme Court, who released it only some weeks ago.

By way of a brief primer, the case of Impression Products Inc. v Lexmark International Inc. concerned the resale of printer ink cartridges, for which Lexmark owned several patents, which they also designed and manufactured. Impression Products bought used cartridges both abroad and in the US, refilled them and resold them; however, Lexmark set conditions on the cartridges during their sale, preventing their reuse and resale by other companies. Lexmark took Impression to court, and the matter ended up with the Supreme Court, who were set to decide a major point of patent law, as to when patent rights have been exhausted (if at all) after the sale of the product containing the patent rights.

The first question the Court tackled was whether the sale of the cartridges in the US did indeed exhaust their rights in the patented aspects of the goods. 35 USC section 154(a) confers the right to make and sell patented products, but the provision does not set any express limitations on the right. However, case law has established that "[w]hen a patentee chooses to sell an item, that product “is no longer within the limits of the monopoly” and instead becomes the “private, individual property” of the purchaser, with the rights and benefits that come along with ownership". The law therefore has limits on the control that a patent holder can exert on products within their monopoly. After discussing the historical context of patent exhaustion, the Court swiftly determined that "…Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law".

This rationalisation makes sense to this writer, since a near perpetual, inexhaustible patent right in products, even post-sale, could have huge ramifications on the resale market, and potentially even anti-competitive uses (which the prevention of the resale of cartridges by a competitor could be construed as). The Court summarised its position on this: "…patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license".

The Court then moved onto the issue of the importation and sale of cartridges bought abroad. This question has not been addressed much under patent legislation, but has been discussed in the Supreme Court decision in Kirtsaeng, which established that the first sale of a copyright protected work would exhaust the rights in that work, even if imported from abroad and sold in the US (having been initially made and sold lawfully).

The Supreme Court faced the wrath of
patent holders after the decision
Under the common law concept of exhaustion, as discussed in Kirtsaeng, there is no territorial restriction on the fact. A sale abroad would be, arguably, exhaustion of rights within the US, and would therefore allow the importation of those goods into the US without infringement. According to the court, the copyright concept of exhaustion would not be distinguishable from patent exhaustion, as this would "…differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense [as] …the two “share a strong similarity and identity of purpose". The person buying the goods abroad is not buying the patented rights, according to the court, and that "…exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate". The court therefore concluded that Lexmark's rights were exhausted when the cartridges were sold abroad, and Impression would not be infringing their rights by importing the goods to the US.

Justice Ginsburg was the only judge to dissent. In her view, patent rights were purely territorial, and that "…[b]ecause a sale abroad operates independently of the US patent system, it makes little sense to say that such a sale exhausts an inventor’s US patent rights". This would open the door for competitors to potentially sell those patented products in the US with no legal recourse by the patent holder. Arguably, Justice Ginsburg's perspective is wholly justifiable, and this writer would raise concerns over this fact as well. If patent rights are fully exhausted in the event of a foreign sale, there would be very few restrictions on doing exactly the above by competitors. Finally, she disagreed with the majority's application of Kirtsaeng with patent rights, as "…[a]lthough there may be a “historical kinship” between patent law and copyright law… the two “are not identical twins". The legislative framework for copyright and patents does differ, and a straightforward application of copyright concepts to patents might not be possible as the law stands today.

The decision is a very important one, and will have clear and strong implications to patent holders who rely on the retention of rights in the US, irrespective of where the products were sold. Time will only tell whether this opens the Pandora's Box of reselling "infringing" products in the US; however, this writer is certain that other avenues will be used for the sale of patented products, such as contractual vehicles, rather than relying on pure rights retention.

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