The Supreme Court Holds That Sales Made With Use Restrictions and Sales Made Outside the United States Exhaust the Patent Owner's Patent Rights in the Sold Articles

The exhaustion doctrine has been long used to limit the extent that a patentee can control the use or resale of a patented product that has been sold by the patentee. The doctrine states that when a patentee sells one of its products, the patentee can no longer control that item through the patent laws because the patentee's patent rights in the product are "exhausted" by the sale. The Supreme Court galvanized the defense of patent exhaustion in an opinion reversing an en banc determination of the Court of Appeals of the Federal Circuit. The Supreme Court held that both sales made with use restrictions and sales made with the authority of the patentee outside the United States exhaust the patent owner's patent rights in the sold articles.

In Impression Products, Inc. v. Lexmark International, Inc., referred to hereinafter as the Lexmark case, the U.S. Supreme Court recently clarified the scope and limits of the exhaustion doctrine by strongly asserting the strength of the exhaustion doctrine, based in part upon the long-standing common law "venerable principle" of refusing to permit restraints on the alienation of chattels.

In the Lexmark case, the plaintiff, Lexmark International, Inc., sold toner cartridges in the United States, at a discounted price, subject to an express single-use/no-resale restriction. Lexmark International, Inc. also sold toner cartridges overseas without any restrictions.

The defendant, Impression Products, Inc., acquired used Lexmark cartridges sold in the United States, and resold them in the United States in violation of the restriction. Impression Products also acquired used Lexmark cartridges that were sold overseas, and resold them in the United States. The defendant argued that Lexmark had exhausted its patent rights in the products once it had sold them – even though the products were sold with a restriction or were sold overseas. In an en banc decision, the U.S. Court of Appeals for the Federal Circuit held that neither Lexmark's restricted sales in the United States, nor its unrestricted sales overseas, exhausted Lexmark's patent rights in the toner cartridges. Therefore, Lexmark was able to pursue patent infringement claims against the defendant.

The U.S. Supreme Court reversed the Federal Circuit on both grounds and held that "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." The Court further held that "An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act."

In reaching its decision, the Supreme Court relied on a long history of legal decisions, including referring to statements from Lord Coke, dating back to the 17^th century. The Supreme Court was also influenced by the potential impact that post-sale restrictions could have on commerce, noting that a generic smartphone "could practice an estimated 250,000 patents."  The Court was clearly concerned that extending the patent rights beyond the first sale would "clog the channels of commerce."

The Court relied heavily on its recent decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 638 (2008), stating:

…And if there were any lingering doubt that patent exhaustion applies even when a sale is subject to an express, otherwise lawful restriction, our recent decision in Quanta Computer, Inc. v. LG Electronics, Inc. settled the matter. In that case, a technology company—with authorization from the patentee—sold microprocessors under contracts requiring purchasers to use those processors with other parts that the company manufactured. One buyer disregarded the restriction, and the patentee sued for infringement. Without so much as mentioning the lawfulness of the contract, we held that the patentee could not bring an infringement suit because the “authorized sale... took its products outside the scope of the patent monopoly.” 553 U. S., at 638. (emphasis added)

However, this current characterization of the contracts involved in the Quanta Computer decision is different than the description thereof in the Quanta Computer decision. As stated by the U.S. Supreme Court in the Quanta Computer decision, "Nothing in the License Agreement restricts Intel's right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts. It broadly permits Intel to 'make, use, or sell' products free of LG's patent claims." Based on this conclusion, the Supreme Court held in the Quanta decision that the LG patents were exhausted by Intel's sales of components to Quanta Computer. Thus, the Quanta decision seemed much more to turn on the fact that the sales by Intel were authorized sales made without restriction, rather than sales made with "express, otherwise lawful restriction," as now alleged in the Lexmark decision.

In distinguishing its reasoning from that of the Court of Appeals in the present Lexmark case, the Supreme Court stated that "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,'" citing United States v. General Elec. Co., 272 U. S. 476, 489 (1926). "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."

With regard to whether foreign sales exhaust a patentee's rights, the Court held that "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act." In this part of the decision, the Court relied on its recent decision in Kirtsaeng v. John Wiley & Sons, Inc., where it held that the “‘first sale’ [rule] applies to copies of a copyrighted work lawfully made [and sold] abroad.” 568 U. S., at 525. The Court stated that differ­entiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense: the two share a “strong similarity . . . and identity of purpose,” citing Bauer & Cie v. O’Donnell, 229 U. S. 1, 13 (1913).

Contract Law

In view of the Lexmark decision, when developing sales or licensing programs, it is important to consider including remedies in sales or license agreements that could be enforced outside of the patent laws, such as through a breach of contract action. For example, even if a sale exhausts the patent rights in a product, the patent owner or licensee may still incorporate enforceable contract rights in sales or licensing agreements associated with the sales. This much was recognized in the Lexmark decision: "[t]he 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."

Such a tool for enforcing post-sale restrictions in a patented product is also mentioned in footnote 7 of the Quanta decision.  In that footnote, the Court states that "…we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages."  128 S.Ct. at 2122.

In Arizona Cartridge Remanufacturers Assoc. v. Lexmark International Inc., 421 F.3d 981 (9th Cir. 2005), the Court found that a license agreement printed on the outside of a printer cartridge package created an enforceable contract between the manufacturer and the ultimate purchaser.¹ The Court found that the agreement was enforceable in spite of the plaintiff's argument that there was no privity between the purchaser and the manufacturer. The Court held that:

the contract on its face appears to be enforceable based on the district court's findings that consumers (1) have notice of the condition, (2) have a chance to reject the contract on that basis and (3) receive consideration in the form of a reduced price in exchange for the limits placed on reuse of the cartridge.

Id. at 988.

Thus, a situation may exist where a patentee has exhausted its patent rights in a product through a sale of the product, but may still retain some control through the use of contracts. Of course, enforcement of a contract would require some relationship between the patent owner and the defendant being sued. In contrast, if the patent owner's rights in the patent were not exhausted by the sale, no such privity would be required in a patent infringement action.

Conclusion

The confident language that the Supreme Court used in defending its decision leaves little doubt about the resulting strength of the exhaustion doctrine. As a result, patent owners desiring to control post-sale use of their products need to rely more heavily on contract than on such "single-use/no-resale" restrictions that were previously enforceable under patent laws.