“The Supreme Court has become an activist court when reviewing patent law and has repeatedly changed law that has been established for decades.”
U.S. law on international patent exhaustion was upended by the Supreme Court’s decision on May 30, 2017 in Impression Products v. Lexmark. The Supreme Court concluded 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 on the location of the sale.”
This holding changed decades of commercial practice that encouraged regional pricing in foreign countries, thus permitting consumers from developing nations to purchase products they would have otherwise been unable to afford. Sales abroad act independently from the U.S. patent system and vice versa, but in this holding, the Supreme Court further diminished patent rights in the U.S. U.S. Patent holders will now be reluctant to reduce their prices overseas as foreign operators may look for ways to gather the lower price products in those countries and send them back to the U.S. to get the higher prices, depriving the indigenous groups of the lower price products and cutting into the profits of the patent owners in the U.S.
There has been significant speculation about the implications of the decision. The Supreme Court itself mentioned that contract law could govern only the first sale because reservations would allow patent rights to “stick remora-like” to the item as it flows through commerce and would violate the principle against restraints on alienation. Privity with third parties is an issue in a contract analysis.
The opinion is fuzzy with respect to who authorizes the sale in a foreign country. It is possible for patent holders to structure their businesses so that foreign sales are not authorized by the U.S. patent holder and prevent international exhaustion in products based upon their inventions.
Licensing a product instead of selling it may also be a tool for avoiding international patent exhaustion. It is common to distribute software via license, and this might avoid international exhaustion, although it will not work for all products. For example, licensing a drug makes little sense. However, re-importation of a drug would be regulated by the FDA, and the conditions and chain of control of drugs might mitigate some of the international exhaustion issues there. As such, many companies are evaluating the extent of the decision on international exhaustion and how it affects their industries. Since companies have thousands of contracts already in place and the parties will have to reevaluate their positions going forward, this is causing mass confusion and restructuring of contracts and relationships.
Yet again, the Supreme Court has limited patent rights. The Supreme Court has become an activist court when reviewing patent law and has repeatedly changed law that has been established for decades.
A similar situation has occurred in patent subject matter eligibility decisions that have recently been handed down. In a series of opinions emanating from the Court in this area, we have been subjected to unclear standards which result in bad lower court decisions that have roiled that patent community and invalidated thousands of patents that were granted over the preceding decades.
There are harmful consequences to these actions and we are already beginning to see articles touting that the United States is losing its preeminent position as the best patent system in the world. Hopefully in its future decisions, the Supreme Court will be mindful of the effects its patent limiting decisions are having on domestic economic growth and job creation.