Supreme Court Curtails After-Market Reach of Patent Rights

On Tuesday (May 30, 2017), the U.S. Supreme Court curtailed the after-market reach of patent rights. The decision in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189 (S. Ct. May 30, 2017) (8-0; 7-1), reversed two longstanding rules by holding that there can be no patent infringement liability for using a patented item after

1. an authorized sale of the item, even if the downstream user violates terms and conditions embedded in the sale of the patented item, or
2. an authorized sale of the item outside the United States, even if the downstream user imports the patented item into the United States.

This decision may incentivize companies selling patented goods with a significant secondary (resale) market to re-structure their sales relationships as a license or lease instead of a sale.

The Supreme Court’s Decision

Under the doctrine of patent exhaustion, the first sale of a patented product cuts off the patent owner’s rights in the product sold, hence there can be no infringement for repair or resale of a patented article. In Impression Products, the patent owner, Lexmark, was relying on two exceptions to patent exhaustion established by the U.S. Court of Appeals for the Federal Circuit. First, since at least 1992, the Federal Circuit has ruled that a patent owner can avoid exhaustion by selling the patented article with a reservation of rights. Lexmark sold its patented ink cartridges at a discount if the purchaser promised to return the used cartridges to Lexmark, but some customers violated the agreement and gave used cartridges to Impression Products to refill and resell at a lower cost. Second, since at least 2001, the Federal Circuit has found that U.S. patent rights are not exhausted by an authorized sale of a patented article outside the United States. Lexmark sold its patented ink cartridges at a lower cost outside the United States, and Impression Products acquired those cartridges overseas, refilled them, and imported them into the United States. On both counts, the Federal Circuit held that Impression Products infringed Lexmark’s ink cartridge patents.

In reversing the Federal Circuit, the Supreme Court held that Lexmark’s patent rights were exhausted at the initial sale, both for domestic sales with a return condition and for international sales. For domestic sales, the decision distinguishes between a “sale” and a “license”: the former exhausting patent rights by releasing a product into the market, and the former retaining patent rights by “exchanging rights, not goods.” Slip op. at 11. With respect to international sales, the decision relies on Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013), which held that an authorized first sale of a copyrighted product anywhere on the globe bars a subsequent claim of U.S. copyright infringement against that copyright product. Slip op. at 13-14.

Key Implications

This decision impacts pricing, and many companies should consequently review their distribution model. Companies that discount patented products in foreign markets have lost patent protection against foreign buyers who sell product back into the United States and undercut domestic prices. Companies that sell patented products with post-sale conditions have lost patent protection against violations of those conditions. By contrast, companies that “license” their products (such as software-as-a-service and product leasing) will retain their patent rights because the lease or service is an exchange of “rights, not goods.”