THE SUPREME COURT SHOOTS DOWN THE CAFC – AGAIN

04.07.2017

In a case having potentially great impact, the U.S. Supreme Court has ruled in Impression Products, Inc. v. Lexmark International, Inc. that the doctrine of patent exhaustion applies to sales of a patented product sold anywhere in the world by the patent owner or its authorized representative. In other words, such a sale anywhere extinguishes all U.S. patent rights with respect to that particular item.

Lexmark sells patented toner cartridges for its printers. The cartridges refillable and resold, but when that’s done by third parties, it cuts into Lexmark’s sale of replacement cartridges. Lexmark thus sells it cartridges either at a full list price with no restriction as to reuse, or at a discount as part of a “Return Program” under which the buyer signs a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark.

Lexmark installs microchips in its Return Program cartridges that indicate when the cartridge is empty. The printer recognizes this and does not allow reuse of cartridges refilled by anyone except Lexmark. But enterprising third parties have reverse engineered the Lexmark microchips and have created replacement microchips that fool the printer into allowing reuse.

Impression acquires cartridges containing the replacement microchips, refills them and resells them in the United States at prices that undercut Lexmark’s prices.  Some of these cartridges were originally first sold in the U.S. while others were first sold elsewhere.

In ruling against Lexmark, the Court noted that the underlying basis for its decision was the common law rule going back hundreds of year against restrictions on use a buyer can make of something he has purchased. For cartridges originally first sold in the U.S., the Court relied on its own precedent extending back more than 160 years to the effect that a patentee can negotiate terms of sale with purchasers, but can only enforce such agreements under the law of contracts. The Court said its 2008 decision in Quanta Computer, Inc. v. LG Electronics, Inc. “settled the matter”.

As to cartridges first sold outside the U.S., the Court again focused on the common law origin of the exhaustion doctrine noting  that “[T]he common-law doctrine makes no geographical distinctions.”

The Court found no difference in principle between this case and its 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc., involving  import of books first sold outside the U.S. Although Kirtsaeng involved copyright law, the Court  found no theoretical or practical difference that would justify a different result.

Reactions by practitioners to the decision were swift, and, as to sales originally made outside the U.S., generally unfavorable. Some of these are discussed and referenced in our full post (here)

 

News & publications:
More Newsletters: