Impression Products v. Lexmark International

Issues 

Does a “conditional sale” transferring title with post-sale restrictions on the use or resale of the item avoid the patent exhaustion doctrine, thus permitting a suit for infringement as a means of enforcing the post-sale restriction; and, does a foreign sale of a patented article exhaust the U.S. patent rights in that article?

Oral argument: 
March 21, 2017

The Supreme Court must decide whether Lexmark International, Inc., a company that manufactures toner cartridges for use in its printers, can use post-sale restrictions to prevent remanufacturers such as Impression Products, Inc., the defendant in this case, from refurbishing and reselling the cartridges. Petitioner Impression Products argues that under the patent exhaustion doctrine, all of a patent holder’s rights to a patented item are exhausted by the initial authorized sale of the item. Accordingly, Impression Products argues that the patent holder cannot place restrictions on how the patented article is used after its sale. Respondent Lexmark International, however, contends that Section 154(a) gives a patent holder authority to impose restrictions on the post-sale use of a patented item and allows a patent holder to transfer less than the complete patent rights to the buyer. Thus, a patent holder need not completely exhaust the patent after the sale. The ultimate decision by the Supreme Court may have an impact on the judicial doctrine of patent exhaustion and may potentially hinder the market for remanufactured patented goods.

Questions as Framed for the Court by the Parties 

The “patent exhaustion doctrine”—also known as the “first sale doctrine”—holds that “the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008).

The questions presented are:

  1. Whether a sale that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoids application of the patent exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through the patent law’s infringement remedy.
  2. Whether, in light of this Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013), that the common law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article—authorized by the U.S. patentee—that takes place outside of the United States exhausts the U.S. patent rights in that article.

Facts 

Lexmark International, Inc. is a company that makes and sells toner cartridges compatible with its printers. Lexmark owns several patents on the cartridges it produces. At issue in the case are cartridges initially offered for sale in the United States and abroad by Lexmark. Lexmark offers its customers the option to purchase what are called “Return Program Cartridges,” which are cartridges sold at a discount of twenty percent. These cartridges are subject to single-use, no resale restrictions. Under these restrictions, customers cannot reuse the cartridge after the toner runs out and may not return the empty cartridge to anyone but Lexmark. Impression Products, Inc., a small re-manufacturer in West Virginia, later acquired the cartridges at issue to refurbish and resell them. Impression Products purchased used toner cartridges from consumers and later cleaned, refilled, and resold them in violation of the single-use, no resale restriction. Impression Products also imported cartridges it acquired abroad for resale in the United States. Impression Products sold the toner cartridges to consumers at a substantial discount compared to what Lexmark’s original cartridges cost in the United States. In each case, it acted without the express authorization from Lexmark, the patentee.

In 2010, Lexmark sued Impression Products and several other re-manufacturers for direct and contributory patent infringement under 35 U.S.C. § 271. The only defendant remaining in this case is Impression Products. The infringement allegations pertain to two groups of cartridges; one group is made up of “Return Program Cartridges” that Lexmark sold in the United States with the restriction that they could not be resold or reused, and the second group consists of cartridges that Lexmark sold abroad but did not grant permission for anyone to import into, sell, or use in the United States. Impression Products contested liability on the ground that Lexmark had exhausted its U.S. patent rights in the toner cartridges by its initial sales of both groups. Impression Products presented this defense by filing motions to dismiss the infringement count for each of the two groups of cartridges at issue.

THE DISTRICT COURT’S ORDER AND THE PARTIES’ APPEALS

The district court granted Impression Products’ motion to dismiss as pertaining to the cartridges initially sold in the United States. The court held that under the Supreme Court’s ruling in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), a patentee cannot prevent its patent rights from being exhausted by imposing post-sale use restrictions when the initial sales were authorized and unrestricted. Thus, the court concluded that the sale of the Return Program cartridges to consumers for personal use removed the cartridges from the patent monopoly, notwithstanding the restriction notices contained on those cartridges. As the to the cartridges first sold abroad and subsequently refurbished and resold by Impression Products in the United States, the district court denied Impression Products’ motion to dismiss. The district court entered a judgment in favor of Impression Products as to the Return Program cartridges sold in the United States and in favor of Lexmark as to the cartridges sold abroad. Both parties appealed to the Federal Circuit.

Following oral arguments, the Court of Appeals for the Federal Circuit took the case en banc. On February 12, 2016, the Federal Circuit Court concluded that a sale made under a clearly communicated restriction as to post-sale use or resale does not give the buyer or any subsequent purchaser the right to engage in the use or resale that the restriction precludes. In addition, the Federal Circuit concluded that U.S. patent rights are not automatically waived simply by a sale of the patented good by the U.S. patentee abroad.

On March 21, 2016, the parties filed a writ of certiorari, which was granted on December 2, 2016.

Analysis 

COMMON LAW EXHAUSTION DOCTRINE AND THE STATUTORY FRAMEWORK OF THE PATENT ACT

Impression Products, Inc. argues that under the patent exhaustion doctrine, the initial authorized sale of a patented item exhausts all patent holders’ rights to that item. Accordingly, Impression Products contends that, contrary to the Federal Circuit’s holding, a patent holder cannot in any way limit the use of a patented item post-sale, after the item has already become the property of the buyer.

Lexmark International, Inc., however, argues that pursuant to Section 154(a)(1) of the Patent Act, an initial sale of a patented item need not necessarily give the buyer unlimited authority to use the patented item. Lexmark International notes that Section 154(a), which gives a patent holder the “right to exclude others from making, using, offering for sale, or selling the invention” is disjunctive, and, thus, the rights enumerated in Section 154(a) are separate and distinct. Accordingly, Lexmark International argues that a patent holder must be able to transfer less than all patent rights to the buyer and does not need to completely exhaust the patent.

Impression Products, however, argues that Section 271(a) of the Act does not authorize a patent holder to impose patent-based post-sale restrictions. Impression Products contends that patent exhaustion is a limit on the patent rights that always survives the initial authorized sale of a patented item. Impression Products argues that the Federal Circuit’s reasoning was misguided because Section 271(a)’s references the rights that a patent holder has before a first sale, and thus it says nothing about the exhaustion limitation. Impression Products contends that if a patent holder engaged in an authorized sale, the patented item becomes the possession of the buyer, and the patent holder can no longer claim the monopoly after the sale.

Lexmark International, however, points to the language of Section 154(a), which, among other things, prohibits sale of a patented item “without authority [of the patent holder].” Lexmark International argues that this is the language that defines the boundaries of the patent exhaustion doctrine because a patent can only be infringed when a buyer acts without the patent holder’s authority. Lexmark International contends that patentees can transfer either some or all their authority through a sale. Lexmark International argues that if a patent holder denies authority through clear and lawful restrictions, such denial of authority must be respected.

QUANTA AND THE SUPREME COURT’S OTHER PRECEDENTS ON PATENT EXHAUSTION

Impression Products argues that the Court’s precedents Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), and United States v. Univis Lens Co., 316 U.S. 241 (1942), show that patent exhaustion is mandatory, not optional, and cannot be circumvented. Impression Products argues that Univis has established that a patent holder may not enforce any patent-based post-sale restriction on the sold item. Impression Products contends that Univis stands for the proposition that, following a first authorized sale, a patent holder cannot exercise any patent-based restrictions because he has given up his monopoly.

Lexmark International asserts that Impression Products’ interpretation of Univis as too broad. Lexmark International instead argues that by refusing to enforce the specific price restriction in Univis, the Court simply established that patent law does not give patent holders the right to control resale prices. Lexmark International contends that Univis merely distinguished between a patent holder’s statutory right under Section 154(a) to exclude others from selling and using the patented invention, and the non-existent, non-statutory right to fix resale prices that is not enumerated in Section 154(a).

Impression Products, however, argues that the Court nevertheless rejected the conditional sale doctrine in favor of a strong exhaustion doctrine in Quanta. Impression Products contends that although the buyer in Quanta received notice about post-sale restrictions on the patented item, the patent holder could not enforce these post-sale restrictions because of the exhaustion doctrine. Thus, Impression Products argues that the Court in Quanta rejected the conditional sale doctrine. Impression Products argues that because the Federal Circuit’s holding implies that patent exhaustion may be subject to conditions, it departs from existing precedent.

Lexmark International, on the other hand, asserts that the Court made clear that any legal restrictions imposed by the patent holder before selling a patented item should be upheld. Lexmark International argues that Quanta could not have rejected the conditional sale doctrine, because no conditional sales were at issue—the patent holder’s authority to sell was unrestricted in that case. Therefore, Lexmark International argues that Quanta cannot stand for the proposition that there can be no limitations to the exhaustion requirement. Moreover, Lexmark International argues that the Court’s other precedents, such as Mitchell v. Hawley, 83 U.S. 544 (1872), established that a sale may be made by the patent holder with or without conditions. Lexmark International contends that only where the sale is without any conditions, exhaustion must follow.

Both Impression Products and Lexmark International, however, seem to agree that there is no reason to distinguish between licensees and patentees when it comes to patent exhaustion. ;

SALES OUTSIDE OF THE UNITED STATES AND THE EXHAUSTION DOCTRINE

Impression Products argues that a sale outside the United States, if authorized by the U.S. patentee, exhausts U.S. patent rights. Impression Products contends that the doctrine of exhaustion must apply to foreign sales just like it applies to domestic sales because the doctrine of exhaustion makes no geographical distinctions. Moreover, Impression Products argues that because the Patent Act does not in any way provide otherwise or override the doctrine of exhaustion, the Court must presume that there should be no geographical scope limitation.

Lexmark International, however, argues that foreign sales do not automatically confer authority to the buyer and, thus, exhaust patent rights. Lexmark International contends that the Patent Act expressly limits the rights granted under a U.S. patent to the geographic confines of the United States—the Act confers rights “throughout the United States,” bars importation “into the United States,” and references liability for infringement “within the United States.” Thus, the Act is territorial and so the patent exhaustion doctrine should be too. Lexmark International argues that because the U.S. patent law did not impose any legal restrictions on the item’s sale abroad, the foreign sale of a patented item does not eliminate the legal restrictions imposed by the U.S. patent. Essentially, Lexmark International contends that because U.S. patent law has no effect outside U.S. territory, the buyer in a foreign territory can already sell similar items without any permission from the U.S. patent holder.

Discussion 

END-RUN AROUND THE EXHAUSTION DOCTRINE

Impression Products argues that the Federal Circuit’s holding would permit patentees to circumvent the exhaustion doctrine at will by selling their goods with post-sale restrictions attached. This would transform the patent exhaustion doctrine from a mandatory doctrine into an optional limitation to patent rights.

Lexmark International argues that Impression Products’ mandatory exhaustion proposal would create loopholes through which licensees could escape liability for patent infringement. In addition, Lexmark argues that permitting patentees to control their patent rights through post-sale restrictions facilitates consumer choice by allowing consumers to purchase only those rights that suit their needs.

EFFECT ON RESALE AND REPAIR MARKETS

Impression Products argues that patent exhaustion is vital to competition because it prevents the patent holder from invoking patent law to control all post-sale use of the product. Impression Products argues that allowing patentees to make such post-sale restrictions would dramatically expand the scope of the patent monopoly. Impression Products maintains that without the enforcement of the exhaustion doctrine in post-sale restriction cases, patentees could eliminate all competitors in the resale and repair markets for their used, patented goods, after their initial authorized sale. For instance, the Auto Care Association and the International Imaging Technology Council, in support of Impression Products, argue that a decision in favor of Lexmark International would threaten the rights of the auto repair industry because it would allow auto manufacturers to restrict its customers from reselling its cars or restrict used car sales only to “authorized” retailers, thereby controlling the prices at which these goods are resold in the secondary market. The Association of Medical Device Reprocessors, in support of Impression Products, argues that if original manufacturers can avoid the patent exhaustion doctrine by including “single-use” restrictions, then the savings that hospitals and healthcare providers realize through the use of reprocessed medical devices will be lost, likely resulting in higher treatment costs for patients. In addition, if the patent exhaustion doctrine were optional, patentees could forbid users from repairing their patented product or restrict repairs to authorized repair shops. Impression Products points out that free markets for used goods are important to the economy because owners need to be able to sell goods when they no longer have a use for them, or alternatively, acquire used goods they need at a discounted price.

Lexmark International argues that Impression Products offers no evidence to support its prediction that a holding in Lexmark International’s favor would foreclose secondary and repair markets. Lexmark International argues that Impression Products’ concern for these kind of extreme post-sale restrictions will never come to fruition because consumers who are sensitive about the resale value and the cost of repair will not agree to sales agreements which limit these activities. For example, patentees will not be able to make unduly restrictive agreements because “sane” purchasers will not pay for overly restricted products. The Medical Device Manufacturers Association, in support of Lexmark International, argues that “single-use” post-sale restrictions are important to medical device manufacturers because they ensure that manufacturers comply with the performance and safety-related conditions that are placed on the use of their patented devices. Thus, the Medical Device Manufacturers Association argues that single-use restrictions are necessary to ensure patient safety in the medical device industry.

SINGLE REWARD

Impression Products argues that the Federal Circuit’s holding is incompatible with the longstanding, fundamental principle that a patentee is only entitled to a single reward for the sale of a patented good. Impression Products maintains that patent-based post-sale restrictions would enable a patentee to demand multiple rewards for the same good, even after a good is sold. For instance, the patentee could demand a royalty payment each time the patented good is resold. Impression products argues that multiple rewards would have a negative impact on consumers because it would increase the transaction cost of producing goods composed of patented articles. In addition, Impression Products contends that post-sale restrictions would force businesses and consumers to expend extra resources to determine whether the patentee’s property rights permit their use of a patented good. Thus, Impression Products urges that the patentee should only be entitled to determine the amount of his or her award at the time of first-sale, but once that sale is made, patent right ought to be exhausted.

Lexmark International argues that its position does not produce double recoveries for patentees, in the same way that a patentee who leases a product does not receive more than one reward simply because they are paid more than once. Furthermore, Lexmark International contends that there is no requirement that a patentee’s “single reward” must come in the form of one payment at the time of the initial sale.

INTERNATIONAL EXHAUSTION & PRICE DISCRIMINATION

Impression Products argues that international exhaustion benefits American workers, consumers, and industry. Impression Products contends that a foreign-sale exception to the patent exhaustion doctrine would injure U.S. consumers because it would authorize U.S. patentees to engage in price discrimination, charging U.S. consumers more than foreign consumers for the same goods. Instead, Impression Products maintains that if a patentee chooses to sell its patented products abroad at a lower price, American consumers should be legally permitted to purchase those goods for use in the United States, without being held liable for patent infringement.

Lexmark International argues that international exhaustion would discourage patentees from selling their patented products in countries with weak patent systems because sales there would automatically authorize the import and resale of the patented product in the United States. Lexmark International warns that extending copyright exhaustion to foreign sales would harm consumers in under-developed nations because it would make it increasingly difficult for patentees to sell their product in foreign markers, per the purchasing power of the market’s consumers. In addition, Lexmark International points out that adopting a mandatory worldwide exhaustion doctrine would undermine commitments that the U.S. has made under international agreements. For example, under the 1883 Paris Convention for the Protection of Industrial Property, the United States and 175 other signatories have agreed that the legal force of a patent issued in one country is limited to that country.

INCENTIVE TO MANUFACTURE GOODS ABROAD

Impression Products argues that without international exhaustion, patentees will have an incentive to manufacture their goods outside of the United States to avoid the exhaustion doctrine.

Conversely, Lexmark International argues that Impression Products’ concerns about manufacturing incentives are entirely speculative because the place of sale, not the place of manufacture, is what matters under the Patent Act.

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Acknowledgments 

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