https://archive.org/details/LegalGeekEp106
The doctrine of patent exhaustion is a limit on a patent owner's rights. Although a patent owner has the right to economically capitalize on a patented product, that right is exhausted after the product is sold. In other words, bona fide purchasers of patented products can use and sell their product as they wish, without risk of a patent infringement claim from the patent owner.
A few months ago, we previewed this case by explaining Lexmark's legal theories and the economic reasons why it would fight for broad patent enforcement rights. Lexmark and other printer companies had made primary revenue sources from the replaceable print cartridges rather than printers themselves, so this was further efforts to protect their primary source of revenue.
There were two questions about patent exhaustion brought to the Supreme Court by how Lexmark does business.
First, Lexmark had a discount program called the Return Program where cartridges were sold at a lower price subject to contractual agreement that the buyer would return the cartridge when empty, and not transfer the cartridge to anyone other than Lexmark. Lexmark argued that these contractual restrictions allowed it to sue third party resellers like Impression who bought these Return Program cartridges and then refilled and re-sold them.
The Court disagreed with Lexmark on this point in an 8-0 decision. In short, the Court ruled that a patent owner's decision to sell a product exhausts all patent rights in that item, regardless of any restrictions placed in contracts associated with the sale. While Lexmark may be able to pursue breach of contract claims, there is no patent infringement claim in this circumstance thanks to patent exhaustion. These types of post sale restrictions in sale contracts and licenses have become common in the last 20 years, so there will be a lot of adjustments made in these commercial licenses and sale agreements to account for this clarification of the rules.
Second, Lexmark would sell their cartridges in other countries at different, often lower rates, and Impression would buy those cartridges and import them to the U.S. to sell them at higher prices, while undercutting Lexmark's prices here. Lexmark argued that this importation and sale could be stopped as patent infringement.
The Court also disagreed with Lexmark here, in a 7-1 decision. The majority drew parallels to the Kirtsaeng copyright decision from 2013 on the first sale doctrine as it applied to foreign sales of textbooks. The Court found no reason to treat first sales in patent and copyright differently, so patent exhaustion again applies to exhaust all rights of a patent owner after a sale, regardless of whether that sale is in the U.S. or not. Considering that many industries beyond printer companies sell products at differing rates based on the economies of the countries they sell in, this may cause a significant shift in how patent owners price their products worldwide.
The Bottom Line is, both of these parts of the decision make it clear that patent owners get one bite at the profit apple, so we should expect significant adjustments in how markets like the print cartridge business works moving forward. Thanks to this decision, patent exhaustion applies clearly across the board, leaving companies to rely on other non-patent causes of action like contracts to control their marketplaces.
Finally, in response to the main show's discussion about extending this decision to copyright contexts like John Deere's claims to control tractor software in their sold products, it's not that far of a stretch to imagine thanks to the foreign sales part of the decision being largely based on a prior copyright decision on the same issue. However, copyright provides a significantly different set of rights than patent, so while there are some parallel rules like first sale doctrines applied in both, there's no guarantee that courts will treat these different rights in exactly the same way. In short, the legal arguments will continue on the different copyright issues, but I would expect all IP owners to adjust their business contracts and licenses to account for whatever limits may be applied to patent and copyright rights, to cover themselves via contract law, if nothing else.
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