By Kevin E. Noonan --
The U.S. Supreme Court handed down its decision today in Impression Products, Inc. v. Lexmark International, Inc., unsurprisingly reversing the Federal Circuit regarding the metes and bounds of the patent exhaustion doctrine. The Court ruled that the doctrine precludes a patentee from using the patent laws to enforce any agreement that restricted a purchaser's post-sale ownership rights in a patented article, and that the doctrine extended to patented products sold abroad. The decision reversed Federal Circuit precedent that permitted patentees to limit the scope of rights transferred to purchasers upon sale of a patented article, provided that such restrictions were "clearly worded" (Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)) and further expanded the scope of exhaustion to include sales made outside the U.S., which the Federal Circuit had held were outside the reach of exhausting U.S. patent rights (Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001)). The decision represents a culmination of the Court's delineation of the expansive scope of exhaustion regarding intellectual property rights that can be found in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) and (in the copyright context) Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013).
The case arose over the resale of laser printer toner cartridges, sold by Lexmark both in the U.S. and abroad. The cartridges were sold at a discount under an agreement that prohibited the buyer from selling the cartridges to any third party for reloading (with "a powdery substance, known as toner, that laser printers use to make an image appear on paper"). Each cartridge contained a chip that prevented third party reloading, but technology developed in ways that the microchip could be overridden. Petitioner/accused infringer Impression Products reloaded and sold Lexmark cartridges obtained from discount purchasers both foreign and domestic. The District Court dismissed Lexmark's infringement suit as to U.S. sales but permitted pursuit of a patent infringement remedy for foreign sales; the Federal Circuit affirmed as to foreign sales but also permitted Lexmark's infringement case to proceed for U.S. sales as well.
The Federal Circuit, relying on its (now-overruled) decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F. 2d 700 (Fed. Cir. 1992), held that the patent right included the right to impose "clearly communicated" post-sale restrictions that could be enforced by an infringement suit. The Court's basis for this opinion was that the law defines infringement as "making, using, selling, offering to sell, or importing" a patented article "without authority," and thus post-sale restrictions would comprise infringement because they denied the purchaser the requisite authority for unrestricted use. The Federal Circuit's application of the exhaustion principle was that it was presumptive but that the presumption could be expressly rebutted by such post-sale restrictions.
As for sales made abroad, the Federal Circuit relied on its (now also overruled) decision in Jazz Photo Corp. v. International Trade Commission, 264 F. 3d 1094 (Fed. Cir. 2001), where foreign sales did not preclude an infringement suit for unauthorized importation and sale of a patented article. This decision was based on the lack of the predicate benefit to the patentee of selling an article abroad that was protected by a U.S. patent, in view of the lack of extraterritorial effect of the patent: there was no patent premium received by the patentee under those circumstances, and thus the Court believed exhaustion was not justified.
The Supreme Court was presented with two questions: can a patentee impose an express restriction on use or reuse of a patented product sold in the U.S. that is enforceable under the patent laws, and does sale of a patented article abroad exhaust the patentee's right to restrict importation of a product sold abroad? The Supreme Court answered no to both questions, based on its view that patent exhaustion is a limitation on the patent right under the common law principle against restraints on alienating property. The Court's opinion as to U.S. sales was unanimous, in an opinion colorfully written with regard to the facts (e.g., "[n]ot blind to this business problem [of reloading cartridges to be sold at a lower price"; "Lexmark, however, was not so ready to concede that its plan had been foiled [i.e., by thwarting the microchip limitation on reloading]") by Chief Justice Roberts. Justice Ginsberg dissented with regard to foreign sales, which she believed should not exhaust U.S. patent rights. Justice Gorsuch did not participate in the decision.
With regard to resale of cartridges purchased in the U.S., the Court struck down any post-sale restrictions because it held that all patent rights were exhausted upon first sale. The basis for this decision was limited to patent law (the Court recognized that there might be a cause of action in contract law, however ineffective), and the opinion declares that the doctrine of patent exhaustion has been consistent in U.S. law for over 160 years, citing Bloomer v. McQuewan, 14 How. 539 (1853). The Court characterized the function of exhaustion to operate "automatically"; once a patentee sells a patented article that article becomes "private, individual property" of the purchaser subject to no further rights by the patentee. Patent law provides the patentee with the right to set prices and negotiate with purchasers over terms of sales, but the Court opined that once the sale is made the patentee does not have the right, under patent law, to "control the use or disposition" of the product, citing United States v. Univis Lens Co., 316 U. S. 241, 250 (1942). This principle was affirmed most recently by the Court in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617, 625 (2008), which the Court says should have removed "any lingering doubt that patent exhaustion applies even when a sale is subject to an express, otherwise lawful restriction."
The opinion cites its decision in Kirtsaeng regarding a similar principle ("the first sale doctrine," codified at 17 U. S. C. § 109(a)) in copyright law, which decision also cited "the common law's refusal to permit restraints on the alienation of chattels." The Court cites as ancient provenance of this "venerable principle" the common law in the 17th century (the Court citing Lord Coke to that effect) that disfavors if not affirmatively rejects (the opinion describing the common law attitude as "hostility," "antipathy," and "enmity") any restraint on the free alienation of chattels and other private property, which are "obnoxious to the public interest," citing Straus v. Victor Talking Machine Co., 243 U.S. 490, 501 (1917).
The opinion then provides as an illustration of the "annoyance and inconvenience" to the public that would result from the Court deciding otherwise an auto repair shop, where the component parts (should they be subject to post-sale restrictions) could leave open to patent infringement liability a mechanic for servicing a privately owned vehicle. "[The] smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale," according to the opinion (in a conclusion bolstered by amici briefs that used smartphones and other articles of manufacture constituting multiple patented components).
The opinion supports its conclusions with further citations to precedent (including Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 17–18 (1918) and Univis) which, although being resale price restriction cases brought under antitrust law, were decided on the grounds that such restrictions were an impermissible extension of the patentees right to exclude. And Congress has not seen fit to change the law, according to the Court; this inaction raises the presumption that Congress does not intend patented articles to be an exception to the common law rule limiting patent rights, citing Astoria Fed. Sav. & Loan Assn. v. Solimino, 501 U.S. 104, 108 (1991).
The Court expressly identified the Federal Circuit's error (where "it got off on the wrong foot") to be grounding its decision on the extent of the "authority" that the patentee grants a purchaser, which while presumptively plenary does not (under the Federal Circuit's now overruled precedent) need to be so. On the contrary, the Court found the patent exhaustion principle to be much more than a presumption -- it is an affirmative limit on the scope of a patentee's right to exclude, the Court citing United States v. General Elec. Co., 272 U.S. 476, 489 (1926) to this effect. The opinion sets out the principle: the right to own (and use, and sell) property exists outside the patent right, and the law grants to patentee but a limited exception to that right, which exception is exhausted by sale by the patentee of the patented article.
The Court states that the remedy if any must be found in contract, but recognizes that the party who would have infringement liability (remanufacturers like Impression Products) are not in privity with the patentee and thus contract law under these circumstances does not provide a remedy. Responding to arguments by Lexmark, the Court notes that licenses and licensees are different, the Court distinguishing case law with regard to these entities with cases involving post-sale restrictions (specifically, General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, aff 'd on reh'g, 305 U.S. 124 (1938), which involved violation of restrictions on licensees). The Court states that these situations do not implicate restraints on free alienation, because a patent license does not transfer title; it just "expands the club of authorized producers and sellers." "Because the patentee [in licensing] is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections," says the Court. A patentee can condition sale by a licensee to restrict post-sale use, but the opinion states that this is a also right limited by contract and not the patent law, citing Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 506–507, 516 (1917). The opinion succinctly states the scope of the exhaustion doctrine: "Patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license."
With regard to sales abroad, the Court cited its Kirtsaeng decision and found the same grounding in that case as here, in the unlawfulness of restraints on the alienation of chattels. Because this common law principle applies without regard to where the post-sale activity takes place, the distinction Lexmark (and Justice Ginsberg in dissent) made regarding foreign versus domestic sales disappears for the Court majority. The Court finds the application of these principles in the patent context "just as straightforward" as in copyright, and moreover, sees no "theoretical or practical" sense in differentiating between patent and copyright on exhaustion, citing the "many everyday products . . . [are] subject to both patent and copyright protections." The Court was unmoved by Lexmark's argument that, without patent protection a foreign sale would not command the patent premium on price, saying that "the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward—of whatever amount the patentee deems to be 'satisfactory compensation,'" citing Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661 (1895).
Finally, the Court rejected the "middle ground" advocated by the U.S. government (permitting U.S. patent rights to be expressly reserved for foreign sales) as being "largely based on policy rather than principle":
Exhaustion does not arise because of the parties' expectations about how sales transfer patent rights. More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee's decision to make a sale.
This decision (as the Quanta and Kirstaeng decisions before it) has important ramifications for biotechnology patent claims. There are two immediately evident examples: cases where a patentee having method claims and composition claims limits post-sale rights by a so-called "label license" for uses for a patented article; and cases where a patented article has the biological property of replication, where the license precludes use of replicates of the article after purchase. An example of the first type of situation are the limits placed on the practice of the polymerase chain reaction, based on patents to the amplification method and the thermostable polymerase. The restrictions were of two types: first, licenses to the method were granted only upon purchase of the polymerase and use of an "authorized" thermocyler. Second, the method (and for that matter, the polymerase) was not licensed for diagnostic uses, only for scientific research. Under the patent exhaustion doctrine set forth in the Lexmark opinion, it is likely that neither of these restrictions would be enforceable. First, although the polymerase has other uses that would not infringe the claims of the PCR method patent, it is likely that sale of the thermostable polymerase would exhaust the method claims as well, since the thermostable characteristic of the polymerase embodies essential features of the claimed invention. This is even more likely regarding the diagnostic use prohibition, since it represents the kind of restriction the Court prohibited in Adams v. Burke: "when a patented item is 'once lawfully made and sold, there is no restriction on [its] use to be implied for the benefit of the patentee.'" Adams, 17 Wall. 453, 457 (1873).
The second type of post-sale restrictions important to biotechnology are those that restrict use of a patented article that is capable of self-replication; the most (in)famous cases of this type are the Monsanto herbicide-resistant seed cases, where the "label license" prohibited replanting seed produced using the recombinant seed purchased from the company (albeit this situation is one where there is an express license between Monsanto and purchasing farmers and the third party aspects of the Lexmark case are not present). Monsanto won a Supreme Court challenge to its use of patent infringement lawsuits to enforce its right to restrict resale of patented soybeans, in Bowman v. Monsanto several years ago, involving a farmer who reused seed contrary to Monsanto's restrictions on reuse. The restrictions permitted under those circumstances may be limited to the unique nature of that invention, however, wherein producing more soybeans is the intended (and perhaps only) use of the invention. But Justice Kagen's opinion was qualified, wherein she noted that the Court's holding was "limited -- addressing the situation before us, rather than every one involving a self-replicating product" and adding that:
We recognize that such inventions are becoming ever more prevalent, complex, and diverse. In another case, the article's self-replication might occur outside the purchaser's control. Or it might be a necessary but incidental step in using the item for another purpose. . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.
It is clear, however, that the Supreme Court has eviscerated the Federal Circuit's interpretation of the effect of patent exhaustion on patent rights, and that in this as in many other areas, the Court has determined that its views are the correct (if not only) views regarding U.S. patent law.
Impression Products, Inc. v. Lexmark International, Inc. (2017)
Opinion by Chief Justice Roberts, joined by Justices Kennedy, Thomas, Breyer, Alito, Sotomayor, and Kagan; opinion concurring in part and dissenting in part by Justice Ginsburg; Justice Gorsuch took no part in the consideration or decision of the case
Hey Kevin,
I felt the domestic sale restriction portion of this case didn’t stand a chance in view of prior SCOTUS precedent but I was hopeful that SCOTUS might listen to the DOJ’s view that international sales were a very different matter in terms of exhaustion of U.S. patent right. But as you see, only one Justice (Ginsburg) saw the distinction. Also, how SCOTUS can make this ruling consistent with the earlier one in Monsanto is about on par with Breyer in Mayo and Thomas in Alice trying to reconcile those two decisions with Diehr.
This is now the second time that SCOTUS has ignored DOJ’s recommendation in a patent case, the other being Mayo, an abysmal ruling that flouts the express language in the statute (35 USC 101). It simply reflects, again, the anti-patent bias of SCOTUS generally, and Breyer in particular. May be it might get Congress’ attention about how out step SCOTUS is on the express patent law, especially in the international trade context, if one of the USTR 301 List countries filed a complaint in the International Court in the Hague that the Mayo/Alice framework puts the U.S. in violation of one of its international treaty obligations (TRIPS)-one can only hope! If something doesn’t happen soon to reverse what is now a decade long trend of generally patent owner adverse decisions by SCOTUS, innovation by the Davids is going to completely crater in America.
Posted by: EG | May 31, 2017 at 06:09 AM
As to the first question, the panel decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) was never trustworthy law to begin with. It was widely criticized at the time for inconsistency with prior Sup. Ct. decisions. Also being a unique fact situation of enforcing single use of a medical device for health reasons.
Conservatives should note which justice was the only pro-patent-owner supporter on the second question.
Posted by: Paul F. Morgan | May 31, 2017 at 10:04 AM
One additional consequence for the U.S. pharmaceutical industry has been discussed here before:
http://www.patentdocs.org/2014/11/how-the-kirtsaeng-decision-could-ruin-the-us-branded-drug-industry.html
The Lexmark decision only exacerbates the possibility for mischief in this regard.
Posted by: Kevin E. Noonan | May 31, 2017 at 01:25 PM
SCOTUS fumbles on international exhaustion. What a surprise.
Posted by: Atari Man | May 31, 2017 at 01:29 PM
Mr. Morgan,
The thought that Ginsburg was the lone voice against international exhaustion is "pro-patent-owner" is indeed amusing.
Of course, one simply can realize that her choice was far less "pro-patent-owner" and far more "let the US people subsidize the lower costs of good in 'poor' countries," and thus the "magnanimous nature" loses a bit of its shine.
Posted by: Skeptical | May 31, 2017 at 01:54 PM
Hey Kevin,
Another possibility for "mischief" caused by this decision in terms of drug innovation is it may move off-shore, where drug development is (or is perceived to be) less expensive, regulatory or otherwise. In other words, R&D jobs in America in the drug arena could likewise head off-shore-that may be happening anyway, but this decision could accelerate that process.
Posted by: EG | May 31, 2017 at 03:51 PM
Dear Atari: they had little choice, in view of Kirtsaeng.
Posted by: Kevin E. Noonan | May 31, 2017 at 04:09 PM
Kevin, I disagree. Copyright and patent, while sharing some similarities, are different. Patents remain territorial, but copyright protection is essentially international (due to treaties governing copyright). If they can find differences between the early computer patent cases and Alice in support of the latter decision, they could surely have found sufficient differences here to distinguish over Kirstsaeng.
Posted by: Atari Man | May 31, 2017 at 10:09 PM
Hey Kevin,
I agree with Atari Man-SCOTUS did have a choice (as reflected by Ginsburg's dissenting opinion) to distinguish Kirtsaeng, but chose not to do so. In Kirtsaeng, the first sale doctrine is expressly written into the copyright law-but there is no corresponding first sale expressly written into the patent law. Once again, SCOTUS is legislating from the bench, and is once again putting the US at serious risk of being held in violation of TRIPS-how do you think a company outside the U.S. is going react when it's told its U.S. patent rights are exhausted by sales it makes outside the U.S.?
Posted by: EG | June 01, 2017 at 05:40 AM
Atari Man,
You may disagree, but there exists no "One World Order" sense of law and even for treaties, law - even copyright law - remains a sovereign-centric item.
You also seem to think (without providing a basis for such) that distinguishing over Kirstsaeng is something that SHOULD have been done.
I don't see why (other than a particularly desired End - I see that).
Posted by: skeptical | June 01, 2017 at 06:54 AM
"R&D jobs in America in the drug arena could likewise head off-shore-that may be happening anyway, but this decision could accelerate that process."
Do you care to expand on this point, because I am not following the argument here. If, as you say, R&D is less expensive in some other place than the U.S., I can understand why a rational and self-interested company might move the R&D to that other jurisdiction. I cannot understand, however, why exhaustion law would play any part of that decision. Exhaustion attaches when the product is *sold*, not when the R&D is done.
Posted by: GrzeszDeL | June 01, 2017 at 09:44 AM
"If they can find differences between the early computer patent cases and Alice in support of the latter decision, they could surely have found sufficient differences here to distinguish over Kirstsaeng."
Like EG, I have to agree with Atari Man here and disagree with our distinguished host. The SCotUS was not *compelled* to reach this result by their Kirtsaeng decision. They could easily have said that Kirtsaeng was a statutory interpretation case, and that there is no statutory language here to compel the same outcome.
They chose to make a mistake in Kirtsaeng, and then they chose to make a second mistake in Lexmark. Do not let them off the hook easy by saying it was all just one mistake. They deserve double opprobrium for a twice-made error.
Posted by: GrzeszDeL | June 01, 2017 at 09:47 AM
GrzezDel,
Unless of course, one does not think that EITHER were mistakes...
Maybe the opprobrium should be directed elsewhere...
Posted by: Skeptical | June 01, 2017 at 05:08 PM
This decision bothers me in many ways, not the least of which is that it strikes me as inconsistent with SCOTUS' general trend over the last several years to limit the extent to which US patent law applies beyond US borders. If your US patent isn't enforceable in the US against acts done outside the US, why should acts done outside the US exhaust a patentee's rights in the US?
But I have a different question. If a foreign *sale* exhausts a US patentee's rights, what would be the effects of a foreign *gift*? I suppose that per the CAFC's Lifescan v Shasta decision, the answer to that would be "yes", but perhaps I've overlooked something.
Posted by: Dan Feigelson | June 01, 2017 at 08:19 PM
Hey GrzeszDeL,
Point well-taken, let me try a different aspect where "mischief" will likely occur: drug sales/distribution in "poorer" regions, e.g., Africa. If sales/distribution in such regions could cause exhaustion of U.S. patent rights, why would anyone want to do drug sales/distribution in those regions where prices would need to be even lower than in those regions (e.g., Canada, Europe, etc.) where drug price controls already lower drug pricing?
Posted by: EG | June 02, 2017 at 08:44 AM
"If sales/distribution in such regions could cause exhaustion of U.S. patent rights, why would anyone want to do drug sales/distribution in those regions where prices would need to be even lower than in those regions (e.g., Canada, Europe, etc.) where drug price controls already lower drug pricing?"
Definitely. This is one of the problems of an international exhaustion regime. It was bad enough with copyright, but the effect of curtailing book sales, or DVD sales in poor nations is limited. Now that the rot has spread to patents, it will affect drug sales and heavy equipment sales, and this will have much more of a deleterious effect on the world's poorest.
Posted by: GrzeszDeL | June 02, 2017 at 09:41 AM
"If a foreign *sale* exhausts a US patentee's rights, what would be the effects of a foreign *gift*?"
As you say, I think we have to expect that *any* release of a patented article into the stream of commerce, anywhere in the world will exhaust the patent rights. We talk casually of "first sale," but the CAFC confirmed in Lifescan that a sale is not actually necessary.
Truth be told, I find this aspect the least worrisome part of the business. It really is unreasonable to expect downstream buyers to know whether they are purchasing an item that was sold to their seller or gifted to their seller.
Posted by: GrzeszDeL | June 02, 2017 at 09:47 AM
Where is this "poor nations deserve that which they cannot afford" mindset coming from?
Sorry if this is callous, actually, not sorry at all, but the scheme in place that creates an artificial arbitrage and prevents the natural emergence of secondary markets comes at a FORCED price to those of us in the US.
Such forced "altruism" in the (thin) hopes that some of the effects of Big Corp playing this game may result in the poor countries obtaining things that they otherwise would not is a form of world socialism at its worst - an Ends (even as noble as "helping the poor") that comes at the illicit Means that serve the benefits of the Big Corp, at the expense of the US Citizen, is something that is simply wrong.
Let me repeat this:
Maybe the opprobrium should be directed elsewhere...
Posted by: Skeptical | June 02, 2017 at 07:44 PM