Supreme Court hears oral arguments in Impression Products v. Lexmark International

By Steve Brachmann
March 27, 2017

SCOTUS On Tuesday, March 21st, the U.S. Supreme Court heard oral arguments in Impression Products, Inc. v. Lexmark International, Inc. The case surrounding the sale and resale of printer ink cartridges will require the Supreme Court to decide whether U.S. law surrounding patent exhaustion allows post-sale restrictions and if sales of a patented article outside of the U.S. exhausts the U.S. patent rights in that article.

Arguing on behalf of petitioner Impression Products was Andrew Pincus who led off by noting that the first sale doctrine, in which an initial authorized sale of a patented item terminates all patent rights to that item, was a principle that goes all the way back to the 15th century. Common law refusal to enforce restraints on alienation of chattels, a principle which comes from Elizabethan-era jurist Lord Edward Coke, cloud the title a consumer has on a purchased good and hurt downstream secondary markets.

One of the questions raised in this case is whether post-sale restrictions on the sale of a patented item are enforceable under patent law instead of contract law. Although not codified into the terms of the 1952 Patent Act, Pincus argued that court precedent over the past 150 years reinforced the idea that such restrictions weren’t enforceable under patent law. In addition, the Court’s only deviation from this viewpoint, extending from the 1912 decision in Henry v. A.B. Dick Co., was overturned by the Court five years later. More recent cases, like the U.S. Court of Appeals for the Federal Circuit’s (Fed. Cir.) 1992 decision in Mallinckrodt, Inc. v. Medipart, Inc., have led some to believe that rules on limiting the patent exhaustion doctrine to be “displaced” according to Pincus, who cited amici briefs from Intel Corp. and the Association of Medical Device Reprocessors discussing this issues.

Pincus argued that the Federal Circuit’s decision to affirm Lexmark’s infringement claims erred in two respects. Although the Federal Circuit assumed that the without-authority clause of 35 U.S.C. Section 271(a) was an indication that Congress gave patentees a veto over the scope of patent exhaustion, Supreme Court cases prior to 1952 didn’t support this viewpoint. Instead, Pincus argued that 35 U.S.C. Section 282(b)(1) allowed absence of liability of infringement as a defense against patent infringement claims “in obvious incorporation of the preexisting exhaustion doctrine.” Additionally, Pincus argued that Fed. Cir. confused the separate concepts of a patentee’s ability to set the conditions of a first sale and the ability to set post-sale restrictions. “We think it’s quite clear that just as a patentee can decide for itself who it will sell to, it can impose as a condition of licensing, manufacturing and sales by others those same restrictions… But in either case, whether the sale by the patentee or the sale by the licensee, post-sale restrictions are invalid as long as it’s an authorized sale.”

The case before the Supreme Court also raises the question of international patent exhaustion, a point which wasn’t raised in any briefs filed in the case to the surprise of Justice Samuel Alito. “In recent years, we’ve been — we have said very — that a statute does not apply outside the United States unless it says that it applies outside the United States,” Alito said. “I don’t see why that shouldn’t be the same for a common-law rule like the rule here.” This issue gets to one of the two questions presented by the petitioner in asking the Supreme Court to determine whether its 2016 decision in Kirtsaeng v. John Wiley & Sons, Inc., which held that common law doctrine barring restraints on alienation makes no geographical distinctions, was applicable to patent law as it was in that case to copyright law. In arguing that the rule from Kirtsaeng should apply to this case, Pincus noted that the case included the same enunciation of a nongeographic rule and that the adverse effects of applying a nongeographic rule to sales outside of the U.S. could affect the global supply chain for patented articles. Pincus used examples of phones or cars assembled in foreign jurisdictions like China or Canada with parts coming from other foreign jurisdictions which could pose patent infringement after importation into the U.S.

“The consequence there would that — would be that if the final phone is sold into the United States, all of the sellers, resellers, and users of that phone would be subject to patent infringement liability if the U.S. rights were not expressly licensed — U.S. rights for sale not expressly licensed for just one patent in that huge conglomeration of patents that were embodied in that object.” – Pincus

Pincus was questioned by Justice Stephen Breyer on points raised by the other side in the case, namely that the first sale of an item isn’t covered by a U.S. patent in an international sale and so the patent holder may not have earned the full monetary compensation for that product if it is resold in the U.S. Pincus responded to that by citing the global supply chain context in which licensing firms know that they’re not getting value which is country-specific but rather “the average of the value in all the places where the patent is going to be used.” For end-use products, Pincus argued that there were nonpatent constraints which could ameliorate a patent owner’s claims and that Kirtsaeng supported the idea that price discrimination may not necessarily be protected by current U.S. patent law.

Justice Sonia Sotomayor questioned Pincus over the potential negative effects which could be created by the rule supported by the petitioner in this case. As for safety concerns caused by the importation of drugs or medical devices, Pincus argued that the U.S. Food and Drug Administration (FDA) has broad regulatory authority to deal with those issues. As for the disruption of settled expectations, Pincus cites case law from Alice in a way that will likely rankle readers of this blog:

“If you look it the Alice case, for example, that obviously had tremendous implications for both the patentees and for people who had entered into license agreements and were paying money for patents that turned out to be invalid. But that was just a consequence of this Court getting the law right.” – Pincus

Appearing next in oral arguments was deputy U.S. solicitor general Malcolm L. Stewart supporting reversal in part and vacatur in part. In response to a question from Justice Anthony Kennedy on why the exhaustion doctrine hasn’t been codified into law, Stewart noted that exhaustion principles have arisen in past Supreme Court cases from 35 U.S.C. Section 154(a)(1), the provision of U.S. patent law giving patent owners the right to exclude others from making, selling or importing articles covered by a patent. Stewart cited the Supreme Court’s 1913 decision in Bauer & Cie. v. O’Donnell, stating that it provided the “proper interpretation” of the right to vend, which “does not encompass the right to set resale prices.” Although Stewart acknowledged it was true that U.S. patent law did not contain a provision on the scope of exhaustion as is seen in the Copyright Act, he added that Section 154(a)(1) confers the rights of exclusivity which have supported patent exhaustion principles without requiring codification of exhaustion in patent law.

Stewart also opined that Fed. Cir. erred in applying the 1938 Supreme Court decision in General Talking Pictures Corp. v. Western Electric Co., a case which dealt “not with simply a restriction on the use that purchasers could make after an article had been lawfully sold” but rather “with the conditions on which its patentee’s licensee could sell the article in the first place.” If the licensee sells a patented article in a way that’s not authorized, no lawful sale has taken place and patent rights have not been exhausted, but if a lawful sale occurs than a patent owner can find recourse through contract or commercial law, not patent law as the patent right has been exhausted. If the seller of an ink cartridge wants to negotiate a deal in which a customer agrees to a single use of a patented cartridge, ownership of a patent covering the cartridge does not afford the patent owner any greater right to enforce restrictions than the seller of unpatented private property would have under contract law, according to Stewart.

As to the international exhaustion question, Stewart noted that the federal government believes that a U.S. patent owner should have rights to royalties in the U.S. market but needs to make that point explicit in a licensing contract:

“We’re not advocating a rule under which simply by manufacturing and selling overseas, the patentee could impose continuing downstream restrictions on the use of the good once it has been legally imported and sold into the United States… If Lexmark had said, we’ll sell you these cartridges in Canada and you are authorized to import them into the United States and sell them in the United States, but they are still for one use only and you need to put labeling on the package warning your consumers ‘one use only,’ in our view, that restriction would be no good because there would be authorized importation into the United States, authorized sale in the United States. And at that point, the Court’s domestic exhaustion cases would kick in.” – Stewart

Following Stewart was Constantine Trela, arguing on behalf of respondent Lexmark International. Trela agreed with the government in a limited sense in that the Federal Circuit properly looked to the statute to find origins and limits on the exhaustion doctrine. However, Trela noted that questions remained as to what constituted an authorized sale which exhausts rights to a patented article:

“When a patentee sells a product without saying anything about it, normally the — the normal understanding is, well, you’re selling everything you have. But there’s no — there’s no decision of this Court that says that a patentee necessarily has to sell everything he has.” – Trela

Trela argued that the Supreme Court has held in the past that patent owners have the ability to license patent rights, such as by field of use as was held in General Talking Pictures, or geographically as was held in 1872’s Mitchell v. Hawley. “But when — when patent rights are conveyed with a product, we’re told, the parties lose that freedom… They have to sell all or nothing,” Trela said. He went on to cite updated IP licensing guidelines jointly released in January by the Federal Trade Commission (FTC) and the U.S. Department of Justice which stated that limitations to intellectual property licenses may serve procompetitive ends by allowing the licensor to efficiently and effectively exploit property. This, Trela said, squared with an amici brief from a group of 44 law, economics and business professors which noted that a semiconductor chip may have variable value based on the product supply chain in which it is used.

Contract law does not provide an adequate remedy for the downstream limitations which are the right of patent owners, Trela argued in response to questioning from Chief Justice John Roberts. Following with the microchip example, Trela argued that an inability to enforce downstream limitations on a patent license causes a patent owner to lose out on profits from chips marketed to the video camera market which are later resold to the computer market.

Trela also raised issue with the way that the Supreme Court had interpreted Lord Coke in Kirtsaeng, noting that “the common law changed a lot after Lord Coke.” Although 17th century common law may have been suitable for determining geographic restrictions on patented articles, precedents in Mitchell and General Talking Pictures hold that patent licensees could not convey the right to use patented articles in a way which was authorized by the patent owner:

“That’s why I say you have to ask, an authorized sale of what? It’s — it’s the physical product along with the particular rights that may — that the patentee has agreed to release with respect to that particular article.” – Trela

As to concerns over the effects of patent rights on downstream markets if not exhausted after the first sale, Trela argued that those concerns weren’t practical. The costs of patent litigation and an unwillingness to sue their own consumers would keep most corporations from asserting patents against end-users, even if those consumers suspected they were buying cheap knockoffs.

As to the question over international exhaustion, Trela cited the amici brief filed by the federal government which rejects the point from Impression Products’ petition for writ that the Supreme Court’s Kirtsaeng rule on exhaustion after international sale applies to this case:

“It said that U.S. patentee is entitled to one premium for forfeiting his exclusive right under U.S. law to prevent the sale of his patented article in the United States. And that’s really been the premise of the exhaustion doctrine.” – Trela

Because a U.S. patent couldn’t be enforced overseas, sales outside of the United States don’t lift legal restraints that limit what the buyer can do with a purchased article. A sale of a patented article in Germany exhausts the rights to any German patents covering the article, but that German sale doesn’t exhaust U.S. rights, according to Trela. This clashes with Impression’s proposed rule that a first authorized sale exhausts U.S. patent rights regardless of which market the article is sold into. Further, concerns over downstream consumer markets and unwitting patent infringement by end-users weren’t applicable in this case which involved parties who were aware that there were single-use limitations on the ink cartridges sold by Lexmark. Arguments that any ruling which didn’t align with Kirtsaeng would create different rules for copyright and patent were misguided, Trela reasoned, as patent law already varies widely between foreign jurisdictions while copyright is virtually identical across the world under the Berne Convention.

“I think that this is a particular area to move cautiously because what you’re talking about here are, you know, international trade matters where the Impression rule would essentially put the United States — basically, the United States would be saying unilaterally, blanket international exhaustion is great. Let’s do it. Do we care if other countries reciprocate? Apparently, we don’t because we’re just willing to do it because we’re good guys. That’s not the way international trade issues like that should be decided.” – Trela

Domestically, allowing conditional sales and conditional licenses to be enforceable under patent law fosters innovation beyond the first sale, Trela argued. He cited an amici brief filed by the Pharmaceutical Research and Manufacturers of America (PhRMA) which stated that pharmaceutical firms relied on no patent exhaustion caused by foreign sales in order to promote further innovation in drug development.

Trela also argued against the U.S. government’s point that U.S. patent rights must be explicit in a contract, stating that there’s no reason that a German automaker which holds U.S. patents must negotiate U.S. rights for a sale of cars to an entity in Slovakia; U.S. patent rights shouldn’t factor into negotiations between foreign partners. “And that approach would also make the enforceability of U.S. patent rights dependent on — really, on the whims of foreign governments and on the details of foreign law,” Trela added. Compulsory licensing rules in India, for example, could undermine the rights of a U.S. patent owner to assert a patent domestically. The rule would help sophisticated U.S. companies who have larger legal teams and would work the rule into contracts in a much better way than smaller companies could.

Although patent rights are conveyed by contract, infringement should cause a remedy under patent law and not contract law, according to Trela. Contract remedies don’t allow for injunctive relief available under patent law. Because Lexmark’s only contact with Impression is limited to this lawsuit, Lexmark cannot claim privity and the company doesn’t want to recoup its monetary losses by suing individual customers.

Pincus had reserved some of his time and responded after Trela’s comments, reiterating concerns over downstream market activity if patent rights weren’t exhausted after an authorized sale. As to the differences between patent and copyright law, Pincus argued that it was very sensible for copyright and patent rights to be exhausted at the same time when an authorized sale occurred overseas. Further, it could encourage further activity identified in Intel’s amici brief involving patent assertion entities bringing what that tech firm called “unwarranted suits against customers.”

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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There are currently 1 Comment comments.

  1. Paul F. Morgan March 28, 2017 11:13 am

    A nit, but “enforceable under patent law instead of contract law” ? is not actually the issue here. It is “enforceable under patent law in addition to contract law” ?