Supreme Court Curtails Patent Holders’ Ability to Enforce Post-Sale Restrictions, Overturning Longstanding Federal Circuit Precedent

(Impression Products, Inc. v. LEXMARK INTERNATIONAL, INC.)

In a nearly unanimous opinion, the Supreme Court recently limited the rights of patent holders to enforce post-sale restrictions on how patented products may be used, reversing a prior decision by the U.S. Court of Appeals for the Federal Circuit.

The case involved a dispute between Lexmark International, Inc., a manufacturer of toner cartridges used in laser printers, and Impression Products, Inc., a “remanufacturer” in the business of acquiring empty toner cartridges from Lexmark’s customers in the United States and abroad.  Impression would refill used cartridges with new toner and resell them in the United States at a lower price than new cartridges available from Lexmark.

Lexmark sought to stop Impression and other remanufacturers from engaging in this practice by selling its cartridges to customers under “single-use/no-resale” contracts.  In exchange for a discount on the new cartridges, customers signed a contract agreeing to use the cartridge only once and to refrain from transferring the used cartridge to anyone other than Lexmark. (Downstream remanufacturers like Impression, however, were not parties to these contracts.) Lexmark installed a microchip in its cartridges to prevent the cartridges from being reused in an attempt to enforce its contractual restrictions, but the remanufacturers developed methods to circumvent this technical obstacle.

In 2010, Lexmark sued Impression for patent infringement, arguing that because it expressly prohibited the reuse or resale of the cartridges, Impression infringed Lexmark’s patents when it refurbished and resold them. With respect to the cartridges Impression had acquired abroad, Lexmark claimed that Impression had infringed its patent rights by importing them into United States without Lexmark’s permission.  Impression argued that when Lexmark initially sold the cartridges, it had exhausted its patent rights and had no authority to restrict how the cartridges were used after the first sale.

The Federal Circuit sided with Lexmark. Relying on Federal Circuit precedent dating back to 1992, it held that a patent holder may sell an item and retain the right to enforce, through a patent infringement lawsuit, “clearly communicated lawful restrictions as to post-sale use or resale.”

The Supreme Court reversed, however, and sided with Impression. It held that while Lexmark’s contracts may be enforceable against its customers, Lexmark retained no patent rights in the cartridges after it elected to sell them.

In reaching this conclusion, the Supreme Court observed that the purpose of the Patent Act is to “promote the progress of science and the useful arts by granting to inventors a limited monopoly” that allows them “to secure the financial rewards” of their inventions. Once the patent holder sells an item, the Court reasoned, the purpose of the patent law is fulfilled.  After the patent holder has “received his reward,” the law “furnishes no basis for restraining the use and enjoyment of the thing sold,” and to allow post-sale restrictions would clash with the common law principle against restrains on alienation of private, individual property.

As an illustration of how post-sale restrictions would harm the public interest, the Court pointed to the example of a shop that repairs and resells used cars:

The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell them. That 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.

The Court held that this rule applies regardless of whether the patent holder sells the product, or its licensee sells the product; that is, once title to the product passes to the purchaser, the patent holder’s rights are exhausted. This is because “[p]atent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.” The Court further held that the rule applies whether the sale occurs abroad or within the United States. (Justice Ginsberg dissented on this point, but concurred with the Court’s holding with respect to domestic sales triggering patent exhaustion).

The Supreme Court’s decision represents a dramatic shift from the Federal Circuit’s longstanding precedent. The decision weakens the rights of patent holders and could have complex implications on the markets for everything from cellular phones to pharmaceuticals. Going forward, manufacturers will have to rely on contract law to enforce post-sale restrictions, rather than patent law. Patent holders may still use licenses to place restrictions on how products are used—for example, a software developer could license its products for non-commercial use only, and if the licensee breached the terms of the license by selling the product for commercial use, the patent holder could still sue the licensee for infringement. It could not, however, sue end users who purchased the product from the licensee. The Court’s decision may also have a substantial impact on international trade and globalization. Companies that sell patented products internationally may now have to be warier of third parties importing their products into the United States for resale at low prices.

On the other hand, the Court’s decision benefits consumers both by expanding their rights to freely use, repair, and resell products they have purchased, and by promoting competition that could result in lower prices. Finally, in light of the Court’s 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc.—a case which involved similar issues under the “first sale doctrine” in copyright law—the Court’s decision appears to be part of a broader trend of interpreting intellectual property law in a way that favors freer aftermarkets for consumer goods.