Lexmark International, Inc. manufactures, designs and sells toner cartridges to US customers and those abroad. As part of its business practices, Lexmark utilizes a “Return Program” whereby customers may purchase a toner cartridge at a reduced price by signing a written contract and agreeing to using the cartridge once before transferring the cartridge only to Lexmark.
Remanufacturing companies such as Impression Products, Inc. sometimes acquire the used Lexmark toner cartridges from Lexmark customers, refill them with toner and then resell them in the US and abroad. In light of this phenomenon, Lexmark sued multiple remanufacturers, including Impression, on the grounds of patent infringement with respect to the toner cartridges in the Return Program and all the toner cartridges Lexmark sold abroad and that Impression imported into the country.
In District Court, Impression’s motion to dismiss on the grounds that Lexmark’s sales, both in the US and abroad, had exhausted its patent rights was granted with respect to the Return Program cartridges but dismissed its motion as to the cartridges sold abroad. Subsequently, the Federal Circuit ruled for Lexmark with respect to both groups of cartridges thus enabling Lexmark to sue for infringement.
The US Supreme Court ruled that Lexmark exhausted its patent rights upon sale regardless of the restrictions it sought to impose on its Return Program. With respect to the sales abroad, the Court ruled that exhaustion is not restricted to sales in the US but what matters is the patentee’s decision to make a sale.
The focus of this article is to take a closer look at the exhaustion principle and to shed light on the Supreme Court’s reasoning with respect to its departure from the Federal Circuit’s interpretation of this principle.
The Patent Act and Exhaustion Principle
In securing one’s unique commercial rights in a given invention, the United States Patent Act entitles a patentee to have the exclusive right for a 20 year period to “exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States. In order to enforce its unique rights, a patent holder is given the opportunity to pursue a remedy for patent infringement against those who unlawfully make, use, offer for sale, or sell the patentee’s invention without authority.
Against the backdrop of these fundamental patent rights sits the principle of patent exhaustion. The patent exhaustion doctrine speaks to the underlying principle that once a patentee sells one of its products it can no longer “exclude” others and as a result the patent right is deemed to be exhausted. The exhaustion doctrine finds its roots in the common law principle against restraints on alienation whereby 17th Century jurisprudence sought to eliminate the restriction and resale of items after they are sold.
Drawing from these common law roots, the Lexmark Court remarked that “Congress enacted and has repeatedly revised the Patent Act against the backdrop of the hostility toward restraints on alienation.” Justice Roberts’ delineation of the relationship between common law principles and the Patent Act helped shaped the majority opinion in Lexmark while clarifying the current limits of the exhaustion doctrine.
Was the Federal Circuit’s Reasoning Suspect?
Prior to Lexmark, there existed a non-uniform body of federal cases each reaching different conclusions with respect to the boundaries of patent exhaustion. In analyzing the Lexmark facts at the Federal Circuit level, the Supreme Court concluded that the Federal Circuit improperly interpreted the exhaustion principle because it relied on the interpretation of the infringement statute’s language that prohibited anyone from making, using, offering for sale, or selling the patented article “without authority” from the patentee.
By interpreting the exhaustion principle in this manner, the Federal Circuit was essentially viewing the patentee’s sale restriction as one stick in its bundle of patent rights thereby allowing the patentee to reserve its right of enforcement under patent law.
In Lexmark, Justice Roberts clarified that the “misstep in this logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on ‘the scope of the patentee’s rights.’” Summarily, the Court pointed out that “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 or through a license.”
Turning to the issue of whether the exhaustion principle applied to the toner cartridges sold outside the United States, the Lexmark court concluded that “an authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” In reaching this conclusion, the Court drew from the “first sale doctrine” in Copyright Law whereby the rule “applie[d] to copies of a copyrighted work lawfully made [and sold] abroad.”
Despite the careful scrutiny of the first sale doctrine language at 17 U.S.C. §109(a), the Court found itself tracing the first sale doctrine origination to the common law’s “restraint on the alienation of chattels.” That “common-law doctrine makes no geographical distinctions.”
The common law analysis and similarities between copyright law and patent law solidified the Court’s decision to remand the Federal Circuit’s previous decision and conclude that Lexmark had effectively exhausted its patent rights in the US and abroad.
Patent Exhaustion and Lexmark
The exhaustion principle in this case was not dependent on whether Lexmark received a premium on selling its toner cartridges in the United States or the type of rights the buyer expected to receive. Rather, the Lexmark court concluded that Lexmark had exhausted its patent rights by virtue of its decision to make a sale. What remains to be seen is what effects post-sale restrictions in contract law would have on parties in a similar circumstance.