Earlier today the U.S. Supreme Court issued an opinion in Impression Products, Inc. v. Lexmark International, Inc. In an opinion authored by Chief Justice John Roberts, and joined by all members of the Court except Justice Ginsburg (concurring in part and dissenting in part) and Justice Gorsuch (who took no part in the case), the Supreme Court determined that when a patent owner sells a product the sale exhausts all 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 rights — both domestic and international.
For a complete summary of the decision please see: Supreme Court rules Lexmark sales exhausted patent rights domestically and internationally.
While the decision of the Supreme Court on the first issue, relating to domestic patent exhaustion, may not have been a shock given the Court’s 11+ year trend toward restricting the rights of patent owners, the ruling on the second issue relating to international patent exhaustion was at least somewhat surprising.
What follows is the instant analysis of a distinguished panel of industry experts and insiders who offered their first-take reaction to this most recent Supreme Court, and likely very important decision. As mentioned by several of the panel, significant questions arise with respect to pharmaceuticals that are often offered at lower prices abroad.
Senior Partner, Polsinelli, LLC
For the second time in barely two weeks, the Supreme Court once again overturned a 25- year- old precedent of the CAFC, and further restricted the rights of patent owners. This time, however, it could have more complicated commercial and international trade ramifications.
In Impression Products v. Lexmark, the Court addressed several questions about when domestic and international “exhaustion” and the “first sale doctrine” take precedence in IP law. In about as definitive language as we get from the Court these days: “[P]atent exhaustion is uniform and automatic.”
“We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale… [R]estrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.”
Why? Because “[p]atent exhaustion reflects the principle that, when an item passes into commerce, is should not be shaded by a legal cloud on title as it moves through the marketplace”, such “legal clouds” presumably being the here-to-fore enforceable patent-related contractual provisions in the sales and other agreements.
As is often the case, several collateral issues arise, especially with respect to the “foreign sales” section of the opinion.
First, given the current Administration’s stated goal of re-negotiating major multi-lateral trade agreements, such NAFTA and TPP, and possibly even recent bi-lateral free trade agreements, could an Administration, sympathetic towards the positions in their brief, nullify the effect of this case by treaty?
Furthermore, will it accelerate further the apparent shift in some quarters from using patent protection to trade secrets, especially given the recently-enacted Defend Trade Secrets Act, which specifically includes the ability in certain circumstances to enforce those rights extraterritorially of the U.S., and even get the Government help you do it?
Also of interest, was the short-shrift the Court gave the Government’s arguments, especially since it had requested their views in the first place. Calling precedent the Government relied on “sparse and inconsistent”, and “little more than ‘long ago’ on its side”, the Court continued to rule that while contract law could govern the first sale, any attempt to regulate it against a third party, such as with a traditional “reservation of rights” provision, would be “allowing patent rights to stick remora-like to that item as it flows through the market, and would violate the principle against restraints on alienation”.
Needless to say, the impact of this case on the ever-greater globalization of sales and manufacture could be profound. As we seem to say each time the Supreme Court rules in IP, stay tuned.
Todd Dickinson is a Senior Partner at Polsinelli, LLC, in Washington, DC, and is the former Under Secretary of Commerce for IP and Director of the U.S. Patent and Trademark Office.
Partner, Oblon, McClelland, Maier & Neustadt, L.L.P.
Today, the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc., Case No. 15-1189 in a 8-0 decision on disallowance of post-sale restrictions and a 7-1 decision on international patent exhaustion significantly expanded the first sale patent exhaustion doctrine both domestically and internationally. The Court held that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose. While the Court stated that clear resale restrictions in contracts between patent owners and their customers are enforceable under contract law, it may be impractical to be able to effectively enforce such contracts. The Court further held, citing Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, that an authorized sale outside the U.S. exhausts all rights under the Patent Act as well. As a result, restrictions and location are irrelevant for patent exhaustion; what matters is the patentee’s decision to make a sale.
The implications for patent owners particularly those who sell patented products in foreign markets are considerable. This weakening of patent owner rights may result in patent owners seeking to raise prices for goods sold abroad, but for price regulated products such as pharmaceuticals it may not be so easy to do. Thus, patent owners may need to further rely on regulatory authorities to impose restrictions on products regulated by the FDA or other regulatory bodies to prevent importation of patented goods purchased at lower prices in foreign markets. Otherwise, patent owners will have to be very wary of selling large volumes of patented products in foreign markets where the likelihood is that they are being purchased at low costs for resale in the U.S. to compete with the domestic supply chain.
Stephen Kunin serves as an expert witness and consultant on patent policy, practice and procedure. Mr. Kunin served three decades at the USPTO, including 10 years as Deputy Commissioner for Patent Examination Policy.
Partner, Drinker Biddle
Today in Impression Products, Inc. v. Lexmark International Inc., the Supreme Court (SC) again upended at least 20 years of practice and again limited the effect of patents.
Simply stated the holding concludes that patentee’s decision to sell a product, internationally or domestically, exhausts all rights in the product.
The Supreme Court noted that there are still remedies under contract law. But a suit for patent infringement would have been much preferred to a suit for breach of contract for most patent owners. Privity issues arise and state jurisdictions are the norm in breach of contracts suits.
And it is the international exhaustion holding that is particularly troubling. Sales abroad act independently from the US patent system and there is no impact from the US patent system on those sales. Yet in this decision, the Supreme Court says that the foreign sale now diminishes patent rights in the US.
All sorts of goods, including life-saving pharmaceuticals, are sold at lower prices in poor nations. This decision will encourage powerful foreign groups to gather products up and send them back to the US to get the higher prices. Or, companies will not be able to lower prices and sell their products in those countries. Both the poor in distant lands and the innovators in the US will suffer.
Robert L. Stoll has more than 30 years of experience in intellectual property prosecution. Bob retired from the USPTO as Commissioner for Patents at the end of 2011 after a distinguished 34-year government career.
Patent Policy & Litigation Consultant
The Lexmark opinion has the potential to be one of the most important patent decisions the Court has issued. The Court has essentially held that patent rights cannot be used to enforce contracts. The proper claim for breach of contract is, perhaps unsurprisingly, breach of contract. The Court also seems to have rejected the idea that patents are intended to provide some sort of additional reward to the patentee (slip op. at 15):
Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate “for the article and the invention which it embodies.”
Business practices in a lot of industries may have to change dramatically as a result. While Lexmark’s restrictions are obviously unique to printer manufacturers, all sorts of industries use post-sale restrictions or licensing restrictions with patent infringement as the threat to enforce those contractual provisions.
Personally, I think this decision is right. But I expect there to be a lot of people upset about it, and a lot of businesses that are going to be rethinking the way they do things.
Matt Levy is the former Patent Counsel at the Computer and Communications Industry Association (CCIA). He is now a consultant on patent policy issues and patent litigation.
Director of IP Policy at BIO
The Court’s decision will change decades of established commercial practice essential to the U.S. economy. The Court provided no analysis of whether such sweeping changes are necessary or even beneficial. Instead, relying on theories of property rights articulated in the 17th Century—a time at which our country was burning people for witchcraft—and a superficial similarity to copyright law, the Court upends established practices, opening the floodgates of grey marketed products to the detriment of consumers in less affluent markets.
With respect to the domestic component, the Court’s decision greatly reduces the incentive for patentees to utilize conditional sales. This penalizes manufacturers who sell products at preferential prices to special users who could not otherwise afford the product. For example, manufacturers will have to rethink whether sales for “research use only” to universities at lower cost will continue to be commercially viable. This could make it more difficult for the end products of such research endeavors to be made available to the public.
The consequences of the Court’s ruling on international exhaustion run counter to decades of U.S. trade negotiations and will have countless unintended and unforeseen consequences. By extending U.S. patent law to foreign transactions that have nothing to do with the United States, the Court has called into question thousands of existing contracts between patentees and foreign distributors, many of which will now need to be renegotiated. Further, because regional pricing will now be virtually eliminated, consumers in less affluent markets will be disadvantaged. This will inevitably lead to an increase in grey marketed goods in the U.S. FDA regulations and emphasis on drug safety will currently mitigate the potential harm in the pharmaceutical sector, but other industries with less regulation will be immediately impacted. And it should be noted that, despite the Court’s suggestion to the contrary, this case itself illustrates that contract law will not be an effective alternative: Lexmark was not in privity with Impression Products, and therefore Lexmark could not have sued Impression Products for breach of contract. Lexmark’s recourse would have been to sue the individual consumers who entered into the Return Program contracts with Lexmark. Not only would suing individual consumers be unrealistic and expensive, but the remedies available to Lexmark and the ability of the individual consumers to satisfy judgments against them are unclear.
Partner, Kilpatrick Townsend
In two key holdings, the Court held that restriction on the sale or use of a patented product after the product is sold cannot be enforced via U.S. patent law, and that non-U.S. sales trigger patent exhaustion. What this means is that post-sale restrictions cannot be enforced in a lawsuit for patent infringement, but could still be enforced in an action for breach of contract. Writing for the Court, Chief Justice Roberts applied very traditional property rights principles to the sale of patented goods. Once a sale is complete, that is, once title is transferred in exchange for compensation, the patentee surrenders all patent rights in the product sold. If a patentee wishes to somehow limit the buyer’s use or resale of the product, the patentee must establish a contract with the buyer independent of the property sale. This surrender of rights applies even if a sale occurs outside the United States, and thus outside the jurisdiction of U.S. patent law. In practical terms, patentees wishing to limit the use or resale of their patented goods will need to come up with creative ways to form contracts with their customers, or even third-parties, that are both economic and enforceable.
Matthew Holohan has extensive litigation and appellate experience. He has represented clients in U.S. district courts, the U.S. International Trade Commission, and before the United States Court of Appeals for the Federal Circuit.
Partner, Baker Botts
Today, the Supreme Court endorsed the broader exhaustion of patent rights in two different areas,” said Baker Botts partner Michael Hawes, IP litigator in the firm’s Houston office. “First, the Court held that any sale by of an invention by a patent owner or its licensee exhausts the patent rights in that invention even if the buyer violates clear and enforceable contractual restrictions of that sale. Second, the Court held that sales outside the United States also exhaust patent rights to the same extent as sales in the United States. The ruling particularly hurts inventors who sell reusable products, such as the toner cartridges that were at issue in the case.
Michael Hawes is a intellectual property litigator who handles cases dealing with patent and copyright infringement, trade secret misappropriation, antitrust violations and violation of the IP provisions of employment agreements.
Professor of Law, Villanova University
The heart of this opinion is a distinction between sales and licensing of patented goods. Those who thought that restrictions could be enforced consistent with General Talking Pictures drew no distinction between a license and a “conditional sale.” The Supreme Court, however, found this distinction and made clear: licenses are not exhausted while conditional sales are. Of course, General Talking Pictures was about a license to make, and the Court seems to imply that a license to use is no different than a sale.
What remains to be seen is how industry (and the courts) will react to this distinction. Can Lexmark just change its contract terms to a license, so that customers do not buy the cartridges? Must it “license” directly to customers or may it license distributors to license retailers to license customers? May it only license for manufacture and any further distribution of cartridges can never be limited? Can one ever have a true lease of a patent product that leads to patent infringement for misuse (e.g. use outside of a specific region)? The answer to these questions will have far-reaching effects, not just on patented products but potentially on software licensing as well.
Professor Risch’s teaching and scholarship focus on intellectual property and internet law, with an emphasis on patents, trade secrets and information access.
Dorsey & Whitney
Lexmark pushes its patent rights to the limit. It tried to restrict the use or resale of patented products after they have already been sold. Imagine if you could not resell the patented iPhone that you purchased because Apple continued to enforce its patent rights after it sold the product. This is what Lexmark tried to do with its printer cartridges. They did not want the defendant, Impression Product, Inc., to refurbish and resell patented Lexmark ink cartridges. But the Supreme Court held today that Lexmark pushed the patent law too far.
The Supreme Court found that Lexmark exhausted its patent rights under the “first sale” doctrine. The first sale doctrine states that a patented produce is sold, the purchaser may do what they please with the product. The Supreme Court confirmed it applies to sales made in the US and abroad. If a patent-holder like Lexmark wants to limit the rights of a purchaser, perhaps they can do so under contract law, but once they have made a sale, they can no longer bring an action under the patents statutes. Companies like Lexmark—that try to maintain control of a product after sale—may have to adjust their business models, but frankly, that is a relatively niche group, so it is unlikely to be a sweeping change on patent holders.
Case Collard is a partner at the international law firm Dorsey & Whitney who focuses on intellectual property disputes and developing strategies for safeguarding intellectual property rights.
Partner at Marshall, Gerstein & Borun LLP
There was little doubt that the Supreme Court would rule for Impression Products on both major issues, finding that a sale of product by a patent owner prevents the patent owner from using patent law to: enforce restrictions it placed on use of that product; or prevent import of that product into the US when the sale was made abroad. The lower court had relied on its own precedent in the face of Supreme Court cases that, while not exactly on point, were close enough to indicate that a reversal was highly likely.
The real question was how much leeway the Court would leave companies to achieve some of these goals by other means? While it is clear that some types of restrictions will now be impossible to achieve, the Supreme Court appears to have left open the possibility of using complex business structures, including licensing and even transferring patents to related parties, as a way to limit the effect of the decision. Case law in the coming years will have to sort out which strategies will actually have their desired effect. It is also important to note that Impression Products only limits the use of patent law to achieve those goals, so most companies will be taking a hard look at their agreements with customers and distributors, particularly those outside the US, if they want to limit use or importation of their products.
Another interesting question is how this case might drive changes in the healthcare industry. Manufacturers of prescription medication often sell their products at higher prices in the US than in other countries, using both patent law and a statutory restriction on importing prescription drugs, even where those drugs were made in the US. With the Impression Products decision undercutting patent law as a tool to prevent re-importation and President Trump and others criticizing the high cost of medication in the US, it is possible that there will be a movement to loosen the other statutory restrictions in this area in an attempt to lower US drug prices.
Mr. Gerstein has been selected as one of the “World’s Leading Patent Practitioners” from 2012-2016 and as one of the “World’s Leading Intellectual Property Strategists” for several years by Intellectual Asset Management (IAM) magazine.
Partner at Holwell Shuster & Goldberg LLP
The Supreme Court has once again changed a previously understood area of patent law—here, the right to limit a sale of a patented item to a single use and to preclude the importation of sales made abroad—and thrown it out the window. Patent exhaustion, also known as the first sale doctrine, is now a powerful defense with the potential to shake up not only the replacement cartridge business, but medical device and pharmaceutical businesses too. Patent owners will now need to sharpen their sales contract clauses knowing that they will only have contract law to protect resales and the importation of goods sold abroad.
John DiMatteo tries patent matters before federal courts and the International Trade Commission. He also handles Inter Partes Reviews (IPRs) and related complex U.S. Patent Office proceedings.
Partner at Robins Kaplan LLP
Today the Supreme Court again reversed the Federal Circuit’s holding that once an item is sold either in the United States or abroad all patent rights are exhausted. The winners from today’s decision are those companies that repurpose or reuse items that are covered by patents, such as the printer cartridges at issue in the case. Although the Court left open the possibility that patent holders could attempt to impose post-sale restrictions through contracts, this will be a very difficult thing to do in the consumer products arena.
This decision will certainly open up new business opportunities. One area sure to see an increase is the re-importation into the US of goods sold overseas where there is a price differential between the price of the product in the US and the price of the product in the foreign country.
Ronald J. Schutz is the Chair of the Robins Kaplan National IP and Technology Litigation Group, Managing Partner of the New York office, and a member of the firm’s Executive Board.
Partner, Finnegan Henderson
The decision today from the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc., while not wholly unexpected, places some real limitations on a patent holder’s ability to control the use of a patented product after it is sold. In rejecting the enforceability of post-sale restrictions under the patent laws, the Court has effectively limited a patent holder to using the tools available under state contract law to impose restrictions on its customers. In some cases, however, those tools will not be up to the task. Often, imposing contractual conditions throughout the stream of commerce will be difficult, if not impossible. And even if one can impose such conditions, it will often be impractical to actually sue these customers for any breach of those conditions. As a result, companies may need to rethink the manner and the terms on which their products are sold. On the other hand, in reaffirming where patent rights must, as the Court put it, “yield to the common law principle against restraints on alienation,” the Court has removed a potential burden on consumers who might be purchasing products subject to conditions of which they are unaware.
Similarly, in holding that U.S. patent rights can be exhausted by sales outside the U.S., the Court also restricted a patent owner’s ability to set different terms of sale in different countries. In particular, the ability to price products differently based on the territory in which they are sold becomes substantially more difficult as one may now more easily purchase a product at a lower price outside the U.S. and bring it into the U.S. for resale. Again, this is likely to cause some companies to reconsider how they sell their products and on what terms. In some cases, companies may reconsider whether to sell in certain territories at all if they cannot command a high enough price. On the other hand, as the Court noted, the patent laws do not guarantee the patent holder a right to price discriminate. In this way, the ruling may prove beneficial to consumers in some circumstances. So, overall, while the decision of the Court is clear, dealing with the impact of the decision, for at least some patent holders, will be much less so.
Brian Kacedon’s practice focuses on patent and technology licensing and litigation. He has also assisted several leading technology companies in negotiating and drafting licenses for wireless technologies.
The Supreme Court dealt another blow to patentees by holding that the exhaustion doctrine is not a “default rule” which may opted out of by expressly limiting the purchaser’s rights. However, all is not lost for patentees looking to enforce resale restrictions as the Court left open the option of enforcement by breach of contract action under state law.
With respect to international sales, the Supreme Court held that an authorized sale outside the United States, just as one domestically, exhausts all rights under the Patent Act. Patent exhaustion stems from the common law principle against restraints on alienation, and the Court held that nothing in the Patent Act shows that Congress intended to confine that principle to domestic sales.
Baldo’s practice focuses on litigating patent, false advertising, trade secret, trademark and contractual matters in federal and state courts and before the International Trade Commission.
W. Edward Ramage
Shareholder, Baker Donelson
The Supreme Court has just told businesses that they get one bite at the apple under patent law, and need to receive whatever compensation they want for the sale of a patented product with the initial sale. While enforcement of post-sale restrictions under contract law remains a possibility, such a course of action is unlikely to be cost-effective, or to reach business competitors that are not parties to the contract. The initial response may be the elimination of offerings like Lexmark’s “Return Program,” which can lead to higher prices across the board. Alternatively, as patent exhaustion is based on the sale of a product, businesses may look at changing their business model from sales to the licensing of a good or service, although this will not work in all cases.
W. Edward Ramage is a patent attorney concentrating his practice in the areas of patent and intellectual property law and litigation, including the protection and management of intellectual property asset portfolios.
 A “remora” is a suckerfish which attaches itself to larger fish or whales, and, while often mutally-beneficial, is apparently hard to dislodge. In slang, it can also refer to the sycophantic entourage, e.g. as to a celebrity.