GOING ONCE….SOLD…GOODBYE, PATENT RIGHTS

The sale of a patented article anywhere in the world will exhaust the patent holder’s patent rights.

The Supreme Court has strengthened the doctrine of patent exhaustion, based on the common law concept of not allowing restraints on alienation of chattels.  Once a patented article is sold, inside the U.S. or internationally (outside the reach of U.S. patent law,) a patent owner no longer has any patent rights on that article.  The Court’s decision was issued Tuesday May 30, 2017, and except for Justice Ginsburg’s concurrence and dissent in part, was unanimous.  (Justice Gorsuch did not take part in the consideration or decision.)  The Court’s opinion can be found at Impression Products, Inc. v. Lexmark International, Inc.

This case grew out of a dispute between Lexmark and Impression over the domestic sale of Lexmark laser printer toner cartridges refurbished by Impression.  The cartridges were initially sold by Lexmark domestically and overseas.

In an attempt to control the re-sale of their cartridges, Lexmark ran a “Return Program,” which offered a 20% discount in exchange for signing a contract agreeing to use the cartridge once only, and to return the empty cartridge to Lexmark.  Cartridges sold under the Return Program had microchips installed to prevent reuse of empty cartridges.  Remanufacturers developed ways to counteract the microchips, refill, and resell the tagged cartridges.

Lexmark sued Impression for patent infringement on its practice of purchasing used Lexmark toner cartridges in both the U.S. and overseas, refilling with toner, and reselling the refurbished cartridges to consumers in the U.S. at a significant price reduction.

The Court found 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.”  Lexmark’s attempted restrictions and the location of the sale were considered irrelevant by the Court.  They found that, “what matters is the patentee’s decision to make a sale.”

Tracing the common law doctrine of restraints on alienation of chattels back to, at least, Lord Coke’s 1628 statement of the doctrine, the Court found that “[p]atent 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.”

An analogy was drawn by the Court to their recent copyright case regarding foreign sales (Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 591 (2013)) to reason that it would “make little theoretical or practical sense” to differentiate between the patent exhaustion and copyright first sale doctrines, and therefore they included foreign sales under the patent exhaustion doctrine.

The impact of this decision on chattels such as life changing pharmaceuticals covered by U.S. patents which are frequently sold at lower prices abroad, especially in third world countries, will be interesting.  Which party will suffer the most, U.S. patentees or the foreign ill?

Sam Burkholder is a member and intellectual property attorney at Capitol City TechLaw.  His practice covers a range of issues, including patent prosecution and counseling.  He can be reached at sburkholder@capcitytechlaw.com.

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