By Melissa A. McCurdy, Senior Associate, Standley Law Group LLP

Supreme Court Set to Decide Important Questions on the Scope of Patent Exhaustion in 2017

Impression Products, Inc. v. Lexmark International, Inc., is set for oral argument before the United States Supreme Court on March 21, 2017. The outcome of the case, which will address the scope of patent exhaustion, could have a serious impact on certain segments of business such as companies, like Impression Products, that refurbish used, patented products for resale (think phones, laptops, toner cartridges, etc.). It could also have an effect on the rights of consumers that purchase patented goods. The two specific questions pertaining to the doctrine of patent exhaustion that are going to be analyzed by the Court are: 1) whether a conditional sale that transfers title to a patented item, but which specifies post-sale restrictions on the item’s use or resale avoids application of the patent-exhaustion doctrine and therefore permits the enforcement of the post-sale restrictions; and 2) whether patent exhaustion will be triggered by a sale of the patented item (the sale being authorized by the patentee) when the sale occurs outside of the United States. The Federal Circuit has upheld post-sale restrictions on patented articles despite the doctrine of patent exhaustion and it has rejected the contention that patent exhaustion can be triggered by a foreign sale. We are about to find out whether the Supreme Court agrees with these applications of law.

The Facts of the Case

The Impression Products case involves patented toner cartridges that are used in laser printers. Printer manufacturers – such as Lexmark – sell the toner cartridges at a premium price and derive a significant component of their profits from those sales. A refurbishment industry has developed in which third parties, such as Impression Products, purchase used toner cartridges and refurbish them for resale. The refurbished toner cartridges are priced significantly lower than the new cartridges sold by the manufacturer. Lexmark has attempted to curb the refurbishment of its toner cartridges by offering its customers the option of purchasing “Return Program Cartridges” at a discounted price. The Return Program Cartridges come with a restriction that “the buyer may not reuse the cartridge after the toner runs out and may not transfer it to anyone but Lexmark once it is used.” Lexmark also offers its customers the option of buying toner cartridges at a non-discounted rate: the full-priced cartridges are sold without any use limitations. Lexmark offers its toner cartridges via two different channels: direct sales from Lexmark to the end user and sales by authorized resellers to the end user. In both channels, Lexmark requires compliance with the post-sale restrictions on “Return Program Cartridges.”

Despite the restrictions placed on the “Return Program Cartridges,” Impression Products was purchasing them as well as full-priced cartridges – some from within the United States and some from abroad – in order to refurbish them and sell them within the United States. So, Lexmark sued Impression Products for patent infringement. The two distinct groups of products alleged by Lexmark to infringe its patents are the Return-Program Cartridges that Impression Products bought, refurbished, and sold within the U.S., and all cartridges (Return Program Cartridges and full-priced cartridges) that Impression Products bought overseas, refurbished, and sold in the U.S. Impression Products asserts, as to both groups, that Lexmark’s claims of infringement fail in light of the doctrine of patent exhaustion.

The Legal Issues

There is no question that Impression Product’s position runs contrary to the Federal Circuit’s application of patent exhaustion. Specifically, the Federal Circuit has found that a patent owner can place post sale restrictions (with some specific exceptions) on patented articles because doing so purportedly flows from the patentee’s right to exclude others from making, using, or selling the invention during the term of the patent. See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). And, the Federal Circuit has also found that the sale of a patented article overseas does not exhaust the patentee’s rights even when the same sale – if made in the U.S. – would give rise to exhaustion. See Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001).

But, the Supreme Court’s relevant decisions indicate that Impression Products might nonetheless come out on top here. For example, the Supreme Court has explained in quite tenured precedent that “a patentee who has parted with a patented machine by passing title to a purchaser has placed the article beyond the limits of the monopoly secured by the patent act.” Bauer & Cie v. O'Donnell, 229 U.S. 1, 16-17 (U.S. 1913). And, the high Court’s decisions in United States v. Univis Lens Co., 316 U.S. 241 (1942)(owner of patents relating to multifocal lenses could not control the resale prices of lenses after they had been sold by the patentee to third parties that grinded the lenses into useable form) and Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008)(once the patent owner had granted a license to make and sell the patented computer products, and the licensee exercised its rights and made processors that essentially embodied the claimed inventions, the patentee had no power to prevent third parties from deciding where to source components used with the processors because the sale of the processors to the third parties exhausted the patentee’s rights) provide support for Impression Product’s contention that Lexmark relinquished any rights it may have had in its patented toner cartridges when they were sold to the end users.

With respect to the scope of patent exhaustion when the sale of the patented article has occurred overseas, the Supreme Court has recently found, in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), that the sale of a copyrighted work overseas triggers the first sale doctrine of the Copyright Act. Thus, when an authorized sale of a copyrighted work is made overseas, the first sale doctrine prevents the copyright owner from trying to preclude resale of the work within the U.S. While Kirtsaeng dealt with the statutory framework of the Copyright Act as opposed to the common-law doctrine of patent exhaustion, the decision was supported by the articulation of numerous practical problems that are prevented by the “first sale” doctrine and discussed the common-law roots of the doctrine in some detail. The practical problems referenced by the Court would seem to present themselves with equal force if patented goods purchased with the authority of the patent owner overseas, would nonetheless be subject to the patent owner’s rights upon import or sale into the U.S. This, taken with the Court’s decisions in Bauer, Univis, and Quanta, which each denied patent owners the ability to exercise control over patented articles after an authorized sale, suggest the Court might agree with Impression Products when it issues its Order later on this year.