'; Supreme Court rules in favor of broad ‘patent exhaustion’

Supreme Court rules in favor of broad ‘patent exhaustion’

July 21, 2017

Addressing the question of whether a patent owner can control a patented product after an initial sale of the product, the Supreme Court recently held in Lexmark v. Impression Products that purported post-sale restrictions cannot be enforced through a patent infringement lawsuit.

“The Court’s broad endorsement of the principle of patent exhaustion is a major victory for the numerous companies that sell products that include patented components by potentially negating the threat of an infringement suit,” says Wesley O. Mueller, a member in Leydig’s Chicago office.

Lexmark manufactures and sells printer cartridges, at a discounted price, with a restriction that prohibits purchasers from reusing or transferring them. Notwithstanding that limitation, Impression buys and refurbishes those discounted cartridges to sell on the aftermarket. Impression also buys and refurbishes cartridges that were first sold by Lexmark outside the U.S.

In the district court, Impression successfully argued that patent exhaustion prohibited Lexmark’s post-sale restriction for discounted cartridges sold in the U.S. and abroad. Also known as the “first sale” doctrine, patent exhaustion is the principle that an initial authorized sale of a patented item terminates all patent rights to that item because title in the patented item has transferred.

An en banc U.S. Court of Appeals for the Federal Circuit sided with Lexmark, however, confirming support of the “conditional sale” doctrine, which allows a patent owner to retain rights in a patented product after its sale, provided the restrictions are “clearly communicated.”

The Supreme Court disagreed. Writing for the Court, Chief Justice Roberts stated that “Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.”

Accordingly, “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.”

The Court made no distinction between domestic and international sales, holding that “patent exhaustion is uniform and automatic.”

Mueller cautions that post-sale restrictions on patented products aren’t entirely dead– they just cannot be used as the basis of an infringement suit.

“The Court noted that its decision was simply one of patent law, not contract law,” Mueller says. “A patentee remains free to set contractual limitations, which can be enforced in a breach of contract claim.”