Patent Law Alert – Supreme Court Undercuts Patent Owners’ Ability to Restrict Resale of Goods or Bar Gray Market Imports
On May 30, 2017, the U.S. Supreme Court reversed the Federal Circuit and set new boundaries on a patent owner’s ability to use its patent rights to limit or restrict: (1) the resale of patented products previously sold in the United States and/or (2) the import of patented products into the United States after the products were sold with the patent owner’s authorization elsewhere. See Impression Products, Inc. v. Lexmark Int’l, Inc., Case No. 15-1189 (“Lexmark”). This decision extends the doctrine of “patent exhaustion” to severely limit the ability of a patent owner to use its patent rights to control future resale and imports of patented products after any authorized first sale of these products, anywhere in the world.
The Patent Act grants to a patent owner the “right to exclude others from making, using, offering for sale or selling [products covered by a patentee’s] invention.” 35 U.S.C. § 154(a). But when the patentee sells or authorizes the sale of its patented products, the patent rights in those sold products are said to “exhaust”; the patentee then can no longer employ U.S. patent law to control, limit or extract additional payment for the sold products if they are resold in the U.S. or imported into the U.S. The Supreme Court held that even when a patentee sells a patented item under an express contractual restriction against resale or importation, the patentee does not retain patent rights in the sold item. Thus, the patentee is unable to bring a patent infringement action to prevent resale or importation of patented goods that were initially sold or otherwise authorized to be sold by the patentee.
In Lexmark, the patent owner Lexmark International, Inc. designed, manufactured and sold toner cartridges in the United States and abroad. Consumers purchased the toner cartridges at full price or, as an option, purchased the cartridges at a discounted price on the condition that the used cartridges be returned only to Lexmark. Impression Products, Inc. and other remanufacturers acquired the used cartridges, refilled them with toner, and resold the cartridges. Some of the refilled cartridges were imported into the U.S. before they were sold to consumers.
Lexmark responded by bringing a patent infringement lawsuit asserting its toner cartridge patents against the remanufacturers and resellers, as well as the importers of the refurbished cartridges. The Federal Circuit considered this case on an appeal from the district court, and reaffirmed its 25-year old precedent in Mallincrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), to hold that a patentee does not automatically “exhaust” or extinguish all patent rights upon first sale of the patented items, and may further restrict post-sale use or resale by bringing an infringement lawsuit against violators.
The Supreme Court disagreed, and reversed the Federal Circuit’s decision. The Supreme Court majority held that once a patentee sells a patented item, “the purpose of the patent law is fulfilled [by providing] the patentee [with] his reward for the use of his invention.” Drawing upon similarities with copyright law and decisions, the Supreme Court further held that a patentee may not stop imports of products that have been sold with the patentee’s authorization outside the United States. Therefore, even when a patentee holds no patent monopoly rights in another country, and sells its products abroad at a significant discount, the patentee is still considered to have “enjoyed all the rights secured” by its patent rights, and cannot further use its patent rights to bar the imports and resale of the previously sold products.
While the Lexmark decision limits patentees from pursuing patent infringement actions against importers of “gray market” goods, that is goods that were lawfully sold outside the U.S., or other resellers of otherwise authorized goods, patentees may still rely on contractual restrictions in their agreements with customers. However, contract law has its limitations and the terms of a contract may not be enforceable against entities that are not in privity with the patentee.