Posts Tagged: "Lexmark v. Impression Prods"

Like Lexmark, many technology companies rely on aftermarket revenue streams to fund ongoing investments in research and development needed to remain competitive in hotly contested technology markets. This model is prevalent in the software industry, where customers pay ongoing fees for software support, and in other industries in which manufacturers that sell durable goods offer aftermarket maintenance or service contracts… Without post-sale patent rights, Lexmark and others will need to alter their razors-and-razor-blades business models or adopt different strategies to safeguard the aftermarket revenue upon which they rely to remain competitive in fast-paced technology markets. Contract rights provide one avenue to protect aftermarket revenues, but companies that take this approach should proceed with caution to avoid antitrust liability.

The Supreme Court determined that when a patent owner sells a product the sale exhausted patent rights in the item being sold regardless of any restrictions the patentee attempts to impose on the location of the sale. In other words, a sale of a patented product exhausts all rights — both domestic and international… Notably, the Supreme Court rejected the Government’s international exhaustion compromise, which would have been to recognize that a foreign sale exhausts patent rights unless those rights are expressly reserved. The Supreme Court found this to be nothing more than public policy, focusing on the expectations between buyer and seller rather than on the transfer of patent rights as required by the patent exhaustion doctrine.

On March 21, 2017, the Supreme Court of the United States will hear oral arguments for the case of Impression Products, Inc. v. Lexmark International, Inc. The Court will decide: (i) whether the patent exhaustion doctrine applies in instances where a patented article is sold by the patent holder subject to a lawful and clearly communicated post-sale restriction; and (ii) whether the foreign sale of a U.S. patented article, authorized by the patent holder, exhausts the patent holder’s U.S. patent rights in that article.

The Federal Circuit took the case en banc to review the applicability of the patent exhaustion doctrine under Mallinckrodt and Jazz Photo, in view of the Supreme Court’s decisions in Quanta and Kirtsaeng. The Federal Circuit affirmed the holdings in Mallinckrodt and Jazz Photo, and distinguished them from the Supreme Court’s decisions. In Quanta, the Supreme Court was reviewing whether a patentee’s rights in a product were exhausted by a licensee’s sale of a product.

In a painfully long decision that at one point analyzed a 1628 statement of Lord Coke as relating to British common-law principles and what light that might shed on modern day patent exhaustion, the Federal Circuit held that when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale, the patentee does not confer authority on the buyer to engage in the prohibited resale or reuse. The patentee does not exhaust its rights to charge the buyer who engages in those acts—or downstream buyers having knowledge of the restrictions—with patent infringement. The Federal Circuit also held that a foreign sale of a U.S. patented article, when made by or with the approval of the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale. Loss of U.S. patent rights based on a foreign sale remains a matter of express or implied license.