On May 30, 2017, the Supreme Court issued its decision in Impression Products v. Lexmark (available here). The Court decided two issues. First, if a patentee sells an item under an express restriction on the purchaser’s right to reuse or resell the product, the patentee cannot enforce that restriction through an infringement lawsuit. Second, a patentee exhausts its patent rights by selling its products outside of the United States, where American patent laws do not apply. The Court concluded that “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 or the location of the sale.”
In the case, Lexmark sold its toner cartridges for “full price” (which allowed the purchaser to do as it wished with the cartridges) and at 20% off through Lexmark’s “Return Program” (which required the purchaser to refrain from transferring the empty cartridge to anyone but Lexmark). To enforce this restriction, Lexmark installed a microchip on each Return Program cartridge that prevents reuse once the toner in the cartridge runs out.
Toner remanufacturers acquired Return Program cartridges and figured out a way around the microchips. The remanufacturers then sold the used cartridges to purchasers. Lexmark’s contracts, of course, were not with the remanufacturers, but with the original purchasers.
Lexmark sued remanufacturer Impression Products for patent infringement with respect to two groups of cartridges – one group concerning Return Program cartridges sold by Lexmark within the United States, and the second group concerned Return Cartridges that Lexmark sold overseas (and that Impression subsequently imported into the United States). Impression asserted exhaustion as a defense—according to Impression, Lexmark’s sales inside and outside of the United States exhausted Lexmark’s patent rights in the cartridges, so Impression could refurbish, resell and import them.
The Federal Circuit, sitting en banc, ruled for Lexmark with respect to both groups of products. The Supreme Court reversed, ruling against Lexmark with respect to both groups.
With respect to the United States cartridges, “The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” “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.”
The Court noted that patentees may still impose restriction on licensees:
A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.
In the end, “[o]nce 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.”
With respect to the second question – overseas sales – the Court found that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”