By Jason Rantanen
Impression Products, Inc. v. Lexmark International, Inc. (2017) – Download opinion
In a straightforward and almost unanimous opinion authored by Chief Justice Roberts, the Supreme Court reversed the Federal Circuit on both domestic (8-0) and international exhaustion (7-1).
The Supreme Court’s opinion is summed up by a single sentence early on. “We conclude 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.” Slip Op. at 1. The underlying rationale is offered a bit later: “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.” Slip Op. at 11. With these two pronouncements, the Supreme Court has in one swoop both simplified patent law and added new complexities, challenges and opportunities to the innovation ecosystem.
Impression v. Lexmark involved, at its core, the question of whether restrictions placed on a patented product could be enforced through an infringement suit–often a more viable legal mechanism for the patent owner than an an action for breach of contract.
Under Federal Circuit precedent, the answer for over two decades was yes. The theory relied upon by the Federal Circuit in decisions such as Malkinkrodt, and reaffirmed by the en banc court in Lexmark v. Impression, was that the patent owner could decide to give away only some of its patent rights when it sold or authorized the sale of a patented product. As a result, the patent owner could sue a party who violated those restrictions for patent infringement because, the theory went, the purchaser did not possess the relevant set of patent permissions–the “sticks” in the “bundle of rights” that the patent owner possessed. Thus, for example, a patent owner could place a single-use only restriction on an ink cartridge or medical device and sue for infringement if the device were reused. In short, the exhaustion rule was effectively default rule of patent law that the parties could contract around.
The Supreme Court rejected this approach, basing its conclusion on common law principles of ownership as reflected in its 1853 decision in Bloomer v. McQuewan. “For over 160 years, the doctrine of patent exhaustion has imposed a limit on [patentees’ right to exclude others from making, using, offering for sale, or selling their invention].” Slip Op. at 5-6. “When 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.” Id., quoting Bloomer. While a patent owner may impose contractual restrictions, those restrictions are a matter of contract law, not patent law. “A patentee is free to set the price and negotiate contracts with purchasers, but may not, ‘by virtue of his patent, control the use or disposition’ of the product after ownership passes to the purchaser. United States v. Univis Lens Co., 316 U. S. 241, 250 (1942) (emphasis added).” Once a patent owner sells a patented product, it has obtained the patent reward and may no longer rely on patent law. Referencing its opinion in Kirsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538 (2013), the Court observed that exhaustion has “an impeccable historic pedigree,” a backdrop against which Congress has repeatedly revised and fine-tuned the patent law.
The Federal Circuit’s error was that it started from the wrong place: interpreting the infringement statute. But “the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on ‘the scope of the patentee’s rights.'” Slip Op. at 10, quoting United States v. General Elec. Co., 272 U. S. 476, 489 (1926) (emphasis added). The sale transfers the foundational rights to use, sell or import the product sold; it simultaneously exhausts the patent rights:
The right to use, sell, or import an item exists independently of the Patent Act. What a patent adds—and grants exclusively to the patentee—is a limited right to prevent others from engaging in those practices. See Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U. S. 24, 35 (1923). Exhaustion extinguishes that exclusionary power. See Bloomer, 14 How., at 549 (the purchaser “exercises no rights created by the act of Congress, nor does he derive title to [the item]by virtue of the . . . exclusive privilege granted to the patentee”). As a result, the sale transfers the right to use, sell, or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce.”
Exhaustion applies regardless of whether the patent owner sells the product or a licensee–even a licensee subject to restrictions by the patent owner. “A patentee’s authority to limit licensees does not, as the Federal Circuit thought, mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws. So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale.” Slip Op. at 11-12.
“In sum, 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 also held that foreign sales exhausted U.S. patent rights–in other words, a system of global exhaustion. This conclusion, too, was bolstered by a common law policy against restraints on the alienation of chattels.
Justice Ginsburg concurred with the Court’s holding on domestic exhaustion but dissented with respect to international exhaustion. She would hold that “A foreign sale…does not exhaust a U.S. inventor’s U.S. patent rights.”
What about Contracts? The Court’s Impression decision means that post-sale restraints on products will need to be enforced via contract rather than patent law. That matters because contract law is subject to a number of constraints, including both privity and various public policy-based limitations on enforcement. Patent law is not so limited. Outside of the core questions of infringement and validity, enforcement of patents is subject to relatively few such constraints–misuse being one rare (and rarely successful) exception. In addition, enforcement under contract law means that many cases involving post-sale restrictions will ultimately be decided by state supreme courts or other federal courts of appeal rather than by the Federal Circuit.
What’s left? Lexmark strikes a powerful blow against post-sale restrictions on products by negating the threat of infringement to enforce those restrictions. But it hardly eliminates such restrictions–to the contrary, the Court is clear that such restrictions may still be enforced under contract law. In addition, the Court’s opinion revolves around sales of products. Left unanswered is the role that patents will continue to play in non-complete transfers–licenses of a good or service rather than a sale.
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