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Supreme Court Not Too Tired To Rule On Exhaustion
May 31, 2017

MikeSnyder1By: Michael F. Snyder

On Tuesday, May 30, 2017, the United States Supreme Court issued another unanimous decision in an intellectual property appeal. In Impression Products, Inc. v. Lexmark International, Inc., No. 15–1189, the Supreme Court ruled that (i) 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, and (ii) an authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.

The case at issue involved toner cartridges. The patent owner, Lexmark, sells toner cartridges with microchips that prevent reuse of the cartridge. In addition, Lexmark ran a program for customers where, for lower-priced cartridges, the customer signs a contract agreeing to use a toner cartridge only once and to refrain from transferring the empty cartridge to anyone. When third party companies began to find ways to purchase empty cartridges and reuse and resell the cartridges, Lexmark sued several companies, including Impression Products, for patent infringement.

The case came down to whether either restricted sales or foreign sales exhausted Lexmark’s patent rights. The doctrine of patent exhaustion imposes a limit on a patent owner’s right to exclude. 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. Thus, a bona fide sale of a patented product “exhausts” (terminates) all patent rights.

In holding that patent rights were exhausted even by an attempted “restricted sale,” the Supreme Court reasoned that since patents create a legal monopoly for a limited amount of time, the patent monopoly cannot be extended by restrictions on sales. When something is sold (“alienated”), it would be against the public interest for the owner to retain rights.

As to the foreign sales, the Supreme Court reasoned that even though the Patent Act had territorial limits on the reach of patent rights, exhaustion is a separate limit on the patent grant and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. Exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate.

This decision may spur patent owners to come up with other creative ways to attempt to control the distribution of patented articles, such as leasing programs that do not pass title to a patented article. Congress may also act with regard to foreign sales of patented products, such as in the case of “grey market goods” reentering the United States after being sold abroad.