Exhausted: The Supreme Court Weakens Patent Owners' Rights to Enforce Post-Sale Restrictions on Patented Products

Patent owners have long imposed post-sale restrictions on their patented goods and relied on U.S. patent laws to enforce these restrictions. For instance, companies have sought to enforce “single use” restrictions on their medical devices and other products through U.S. patent laws, bringing patent infringement suits when these restrictions are violated. Further, many companies have relied on U.S. patent laws to engage in geographic price discrimination, selling items in foreign countries with markedly different pricing and conditions.

Reliance on U.S. patent laws to enforce post-sale restrictions is widespread, and it was well-established for decades that post-sale restrictions allowed a patent owner to preserve its patent rights. But not anymore. The U.S. Supreme Court recently issued a 7-1[1] ruling in Impression Prods., Inc. v. Lexmark Int'l, Inc. that eliminated patent owners' ability to rely on U.S. patent law to enforce post-sale restrictions following an authorized domestic or international sale of a patented article.[2] This departure from existing law may have profound implications for companies that seek to exert control over their products after placed into the stream of commerce.

The Impression Products Opinion: Another Supreme Court Opinion Reducing the Rights of Patent Holders

Impression Products involves a dispute regarding remanufactured printer-toner cartridges. Lexmark designs, manufactures and sells toner cartridges to consumers in the United States and overseas, and it owns several patents that cover both the toner cartridges and methods of using them. Lexmark sold these cartridges at two price points: (i) full price, with no restrictions, or (ii) at a discounted price, known as the “Return Program,” which required customers to sign a contract agreeing to use the cartridge only once and then return it to Lexmark. The company implemented this business model to prevent third parties from obtaining the empty cartridges, refilling them with toner and reselling them at lower prices than Lexmark’s discounted price. Lexmark also equipped the discounted cartridges with microchips that prevented reuse of empty cartridges. But a third-party reseller, Impression Products, developed a way of disabling the microchips in Lexmark’s cartridges, allowing it to refill and sell the refilled cartridges at significantly reduced prices. Impression Products also imported refilled Lexmark toner cartridges sold by Lexmark in other countries.

Lexmark sued Impression Products for patent infringement based on the importation and sale of the refilled cartridges. At issue before the U.S. Supreme Court was whether Lexmark had exhausted its patent rights in two situations: (i) when it sold the “Return Program” cartridges in the United States subject to an express restriction on the buyer’s right to reuse or resell the cartridge or (ii) when it sold its cartridges outside the United States. The Supreme Court overruled the Federal Circuit on both grounds, holding that the initial sale—domestic or international—of a patented product exhausts all patent rights, notwithstanding any restrictions the patent holder might attempt to place on the product.[3] It reasoned that, by choosing to sell a patented article, the patent owner has received his reward secured under the Patent Act and the patented article is no longer within the scope of his patent rights. Instead, the patented article becomes the private property of the purchaser.

Additionally, the Court concluded that the same “straightforward” reasoning applied to foreign sales because the patent exhaustion doctrine “has its roots in the antipathy toward restraints on alienation, and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales.”[4] Patent exhaustion triggers following an initial sale despite any price differences in domestic and foreign markets because “the Patent Act does not guarantee a particular price, much less the price from selling to American consumers,” but instead merely “ensures that the patentee receives one reward – of whatever amount the patentee deems to be satisfactory compensation for every item that passes outside the scope of the patent monopoly.”[5]

Moreover, since the initial sale exhausts the patent holder’s rights in the patented product, the Court found that the seller’s remaining rights are a matter of contract law.[6]

How Can Patent Holders Continue to Assert Control Over Patented Articles After the First Sale?

At its core, Impression Products stands for the proposition that any authorized sale of a patented product, either domestically or internationally, exhausts the patent holder’s rights in that product. Because companies can no longer use patent rights to enforce post-sale restrictions on patented articles, the question becomes what can patentees do to minimize Impression Products’ impact and maintain control over patented articles placed into the stream of commerce.

First, Impression Products provides that post-sale restrictions can still be enforced through breach of contract claims. For instance, Lexmark seemingly could have sued its customers that violated the provisions of its “return policy.” Though suing customers will rarely be a viable option from either a practical or business standpoint, companies may still benefit from strong contractual provisions restricting the manner and type of post-sale use of their products. This is because companies can bring suit against third parties that encourage or profit from the breach of these provisions under contract law or business tort theories, such as tortious interference or inducing breach of contract.

Alternatively, companies may consider restructuring how they put their patented article into the stream of commerce. For instance, lease or license options for a patented product are still available (as opposed to an outright sale of an item), and Impression Products recognizes that patent exhaustion does not apply in the case of a licensee that acts outside the scope of the license. Clear license terms could thus reserve some ability to sue for patent infringement. A lease may allow a patentee to restrict the use (and reuse) of the patented item. In addition, the lease could require the lessor to return the patented item or allow for a penalty for not returning the patented item. For instance, Lexmark could have leased its discounted cartridges to customers and maintained its patent rights. Well-articulated license terms could also provide a cause of action against third parties that encourage breach of license or lease terms, as mentioned above.

Finally, it is clear that contractual, leasing or licensing strategies will not provide viable options for certain patent holders. These patent holders may feel the impact of Impression Products most markedly. For example, patent owners, especially in the pharmaceutical industry, often sell their products at lower prices in poorer countries. Post-Impression Products, some fear that lower-priced products sold internationally will be imported back into the United States to compete with the higher-priced domestic supply. While FDA and similar regulatory bodies may be in a position to restrict importation of discounted drugs, not all industries are so heavily regulated; many patent owners may now be more reluctant to engage in geographic pricing, reconsidering how and where they sell their products overseas and discontinuing sales in regions where they cannot charge a high enough price.

Of course, reducing the availability of important products such as life-saving drugs in poor countries will be seen by many as a negative unintended consequence of Impression Products, and affected patent owners may now need to turn to other governmental and regulatory bodies to enforce post-sale restrictions now that U.S. patent rights are exhausted after all authorized sales.

Additional information on Impression Products appears in the June 2017 issue of the Drug and Device Bulletin >>

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[1] Specifically, the Supreme Court ruled 8-0 on domestic exhaustion and 7-1 on international exhaustion. Justice Gorsuch did not take part in the decision.

[2] Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S.Ct. 1523 (2017).

[3] Id. at 1529.

[4] Id. at 1527.

[5] Id. at 1537.

[6] Id. at 1531 (“The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.”) (emphasis added).