05 Jun 2017 in Newsletter
U.S. Patent Rights End With The First Sale Anywhere
By: Peter Schechter
From at least as early as the mid-19th century until the early 1990s, it was nearly uniformly understood that once a patented item was sold by or under the authority of the patentee, all patent rights as to the specific item sold were “exhausted.” This exhaustion rule or “first sale doctrine” was a feature of English (and subsequently American) law since the 17th century, being an expression of the general principle against “restraints on alienation.” (Stating the principle in simpler terms, “what’s mine is mine, and I can do whatever I please with it.”)
In 1992, a medical device company sold its patented goods with a “single-use restriction,” and then sued legitimate purchasers who ignored the restriction and re-used the item for patent infringement. A trial court ruled against the patentee, finding that all patent rights were exhausted by the first sale of the item, regardless of the single-use restriction. The United States Court of Appeals for the Federal Circuit (CAFC), mixing patent law and contract law concepts, reversed the trial court ruling and, for the first time, approved the use of patent law to control subsequent use and/or sale of patented goods after the first sale had already occurred. The centuries-old first sale doctrine was no longer valid in U.S. patent law.
On May 30, 2017, the U.S. Supreme Court ruled that the trial court decision back in 1992 was indeed the correct result (though this 2017 decision is of little benefit or interest to the losing defendant in that 1992 case). In Impression Prods., Inc. v. Lexmark Int’l, Inc., No. 15-1189 (U.S., May 30, 2017), a modern case involving laser printer toner cartridges, the Supreme Court turned back the clock, wiped out 25 years of CAFC patent law precedent, and restored the general principle that the first sale of a patented item authorized by the patent owner exhausts all further patent law rights. As the Court explained, “the purpose of the patent law is fulfilled … when the patentee has received his reward for the use of his invention.” The patentee’s “reward” is set by the patentee himself, either as the price of the patented invention if he is also the manufacturer, or by the royalty or other payment by his licensees upon their manufacture and sales of the patented item. Post-sale restrictions placed on patented items (such as “single use only” or “no resale”) are once again unenforceable through patent infringement lawsuits.
In Impression Products, the Supreme Court also ruled that first sale doctrine exhaustion of U.S. patent rights occurs upon sales authorized by the patentee anywhere in the world, not only in the U.S. It was widely expected that if the first sale doctrine was restored to its pre-1992 vigor, then “exhaustion” would not be geography-dependent, in view of the Court’s nearly-identical ruling in the copyright context of intellectual property rights.
The Impression Products decision curtails patent rights, but only to the same extent – apart from the international application of exhaustion – as they were restricted until 1992. There are myriad potential economic consequences, both foreseeable and likely unforeseeable, of the Court’s decision. In many situations involving the sale of reusable goods, the initial selling price may well go up. In some circumstances where the patented invention is sold at one price in one country and at a lower price in a second country, those prices may converge to the degree necessary to discourage purchase in the second country followed by export and resale in the first country, or a patentee might decide to stop selling in the second country entirely in order to protect its selling price in the first country. In the case of highly regulated products such as pharmaceuticals, this could present challenging issues requiring further legislative and/or administrative action.
Also, in some situations, patentees may seek to alter their business models to completely eliminate the “first sale” of reusable items, making all transactions “licenses” in which title never passes to the “licensee.” This approach is not without precedent; retail distribution of software products employing “shrink-wrap” or so-called “click-wrap” licenses are not deemed to be sales when done properly, despite appearing to be ordinary sales to most casual observers. Whether this technique passes muster under patent and/or contract law, or makes any sense under corporate or tax laws, in the U.S. as well as any other country where the products are distributed, must be determined on a case-by-case basis. One thing is absolutely certain: the Impression Products decision has created a lot of new work for lawyers in the years to come.