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Article: April 2018: Patent Litigation Update

Business Litigation Reports

U.S. Supreme Court Expands Scope of Patent Exhaustion Doctrine. Under the patent exhaustion doctrine, in the United States, after a patentee or its licensee makes an “authorized sale” of its patented product, the patentee’s rights under the U.S. Patent Act are “exhausted.” In other words, any downstream purchaser of the patented product is free to use or resell that product without further restraint from patent law. In Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017), the Supreme Court significantly expanded the scope of patent exhaustion, holding that the patentee cannot rely on U.S. patent law to enforce a contractual post-sale restriction against patented toner cartridges resold in the United States even if those cartridges where originally sold outside the United States. The Court advised patentees in this situation to instead bring claims for breach of contract, not patent infringement, against resellers and customers who violate contractual post-sale use restrictions.

In Impression Products, patent holder Lexmark manufactured and sold toner cartridges worldwide, and held several patents on components of those cartridges and the manner in which they were used. Lexmark encouraged its customers to return depleted ink cartridges to Lexmark after they ran out of ink by offering these customers the opportunity to purchase new cartridges at a discounted price, pursuant to a contract. Aware of this contractual post-sale restriction, cartridge reseller Impression Products acquired discounted cartridges originally sold in the U.S. as well as cartridges lawfully sold abroad, refilled them, and resold them to U.S. customers in contravention of this contractual restriction. Lexmark sued Impression Products for patent infringement.

Overturning a Federal Circuit en banc decision finding for Lexmark, the Supreme Court held that Lexmark exhausted its patent rights domestically and internationally upon its original sale of its cartridges, and could not use patent law to enforce any contractual post-sale use restriction because doing so would impose too great a restraint on the alienation of goods and “clog the channels of commerce.” Marking a significant change in the patent exhaustion doctrine, the Court held that Lexmark’s U.S. patent rights were exhausted regardless of whether the original sale occurred in the U.S. or abroad, holding that once Lexmark made an “authorized sale” of a patented cartridge anywhere in the world, Lexmark could not sue subsequent purchasers of that same cartridge for patent infringement after that cartridge was refilled.

The Court extended this same logic to authorized sales by Lexmark’s licensees, stating that a “patentee’s authority to limit licensees does not … mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws.” The Court explained that an “authorized sale” occurs whenever a licensee complies with the terms of the license when selling a patented product, and that for purposes of patent exhaustion the licensee’s sale is treated “as if the patentee made the sale itself.” For instance, although a patent license may require the licensee to have purchasers agree to a contractual post-sale use restriction, even if the licensee complies with this provision the sale “nonetheless exhausts all patent rights in the item sold.” The Court noted, however, that Lexmark may avail itself to other contract law remedies. For example, if a patentee grants a license that includes a post-sale use restriction, and the licensee sells the product to a purchaser (informing the purchaser of the restriction) who then violates this restriction, the patentee may have a viable breach of contract claim against the purchaser.

After the Supreme Court’s Impression Products decision, a patentee’s U.S. patent rights are exhausted in a patent product once an authorized sale of that product occurs anywhere in the world. Having significantly limited a patentee’s ability to use U.S. patent law to enforce post-sale use restrictions, patentees may need to reconsider their current patent portfolio licensing practices. For example, a patentee may consider including terms in its licensing agreements that restrict licensees from selling to known violators of the patentee’s post-sale use restrictions. If the license expressly names customers to whom a licensee cannot sell, and the licensee makes an unauthorized sale to one of these customers, courts may possibly determine that such an unauthorized sale does not exhaust the patentee’s patent rights.
That said, identifying those purchasers who violate their post-sale restrictions can be difficult and expensive, so patentees should put themselves in a position to be able to make use of contractual remedies as well. To ensure that a patentee has standing to prosecute a breach of contract claim, patentees need to make sure they have privity of contract with subsequent purchasers, and make them aware of the post-sale use restrictions at the time of purchase. For example, patentees could include provisions in their licensing agreements mandating that the licensee enter into a contractual agreement with subsequent purchasers that (1) requires a purchaser to agree to the post-sale use restrictions, and (2) names the patentee as a third-party beneficiary of such agreement.

Moving forward, the Court’s Impression Products decision will require patentees to reconsider their current licensing practices to ensure that their patent and contractual rights in their patented products are fully protected.