25 Oct 2017 in Newsletter
In the Wake of Impression Products, Take a Look at Your Business Agreements
In its recent Impression Products decision, the United States Supreme Court made abundantly clear that once a patent owner sells or authorizes the sale (by a licensee) of a patented product – anywhere in the world – it cannot use its patent to prevent the lawful purchaser from doing anything it pleases with that product. This ruling has potentially major ramifications for patent owners, patent licensees, and purchasers of those patented products, and upsets the business conditions and assumptions upon which many current contractual arrangements are based. In light of Impression Products, it is necessary to examine all contracts and other agreements relating to patented goods to make sure that they: (1) are still enforceable and (2) still make economic sense.
There exists under United States law a principle known as the “patent exhaustion” or “first sale” doctrine. Once a patentee sells or authorizes the sale of its product, its patent rights in that product are said to be “exhausted.” In Impression Products, the U. S. Supreme Court addressed two common business scenarios:
First, whether a patentee that sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through an infringement lawsuit. And second, whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply.
Answering both questions so as to limit the patent owner’s rights, the Court decided that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.”
Contracting parties (patent owners, patent licensees, exclusive distributors, and others in the commercial distribution chain) dealing with patented products need to consider how this change in law affects current business agreements and those contemplated for the future. In some instances, as the Supreme Court itself recognized, certain existing business models may no longer be commercially sensible or even viable. Many contracts may contain post-sale conditions or restrictions that are now unenforceable through means of a patent infringement lawsuit. Attempts to create patent-like contractual restrictions may run afoul of antitrust and competition law prohibitions against agreements made in restraint of trade. Other mechanisms for enforcing certain types of post-sale restrictions might still exist, but may be costlier, more cumbersome, or impractical in many instances, resulting in unforeseen consequences not contemplated when the affected contracts were negotiated.
Patent owners, as well as licensees and distributors of patented goods, should thus examine any existing contracts and licenses that include post-sale restrictions and/or contracts under which patented products are sold outside of the United States. Moreover, past or existing contracts should likely not be used as templates for future agreements. When reviewing these agreements, take into account the following issues:
Post-sale restrictions: A post-sale restriction is any condition or provision that is intended to affect the use or further sale of a product after the “first sale.” Restrictions (or restraints) include: limits on geographical places, regions, or countries where the patented product may be re-sold; limits or restrictions on particular uses of the patented product, including whether the product may be re-used more than a prescribed number of times; restrictions on who is allowed to purchase the product; specified resale prices; and prohibitions against alteration of the patented product, just to highlight a few possibilities. A patent holder can no longer use the patent to enforce any of these restraints in the United States. Without the authority of a patent, many of these restraints may give rise to antitrust concerns.
Contractual remedies: Patentees must also look at their downstream distribution channels. Even where contractual restrictions may be used, remedies for breach of contract are enforceable only between the parties to the contract. Depending upon the product and the industry practices, it may be feasible for the patent owner to negotiate separate restrictive contracts with downstream distributors or individual purchasers, or require its licensees to do so. While this may make sense in some industries, it will not in others. Moreover, contractual remedies typically do not include the sort of remedies available for patent infringement, such as injunctions, damages for willfulness, or in some cases, fee shifting or attorneys’ fees. Contractual claims and remedies may differ from state to state as well.
Antitrust Issues: As already noted, because a patent holder can no longer claim patent rights in products formerly protected by contractual post-sale restrictions, these formerly-enforceable restrictions may now run afoul of antitrust laws if the required elements of violations of such laws can be shown. Patent holders with the requisite market power in their industries should be especially concerned about the implications of any post-sale restrictions contained in existing contracts, where the “patent power” to require such restrictions no longer exists. Those without market power generally will not be faced with the same anti-competitive standard and need worry less about antitrust violations because potential customers have other options available in the upstream market. Know your market share and your competition, as these factors may play a role in whether post-sale restrictions are, or are not, viewed as anticompetitive and unlawful restraints of trade.
Leases: Determine whether a lease program can be used for commercialization and distribution of the patented product, rather than selling the product outright (with its attendant passage of title from seller to buyer). Patent rights are not exhausted by a lease of the patented product, generally speaking. In other words, where there is no authorized “first sale,” there is no patent exhaustion. Carefully drafted leasing provisions are required, however; the Supreme Court has already warned against disguising sales as leases. A plethora of accounting, tax, import/export, and other considerations may be raised by changing from a “sale” model to a true “lease” business model, as well.
Label licenses: Label licenses are commonly used in the biotechnology field. They are used to indicate that use of a product (whether or the product itself is covered by a patent) is covered by a patent, and can be used, for example, to limit the use of that product to research at a university or medical center and not for commercial use. Label licenses will likely now be enforceable through contract laws, not patent laws. Consider the ultimate buyer or the end user; if possible, find ways to bind the buyer to contractual provisions.
Patents on related products or parts of the same product: Consider whether the portions of the product can be patented separately and sold separately. For example, Gillette separately patents both its razor blades and its razors. A razor needs a razor blade to work. If Lexmark had a patent on the toner, it might prevent others from refilling its cartridges with infringing toner. Also, determine whether the sold product can be used more than one way. Obtain a patent on the better method.
Market considerations: If you determine that a sale rather than a lease is better suited to your business, consider selling first to markets where a higher price can be obtained, and then only later to lower-priced markets. This could effectively limit buyers in the higher-priced market from buying from previously sold products in the lower-priced markets. Consider whether different markets might use the product in different ways and whether it would make sense to configure different products for different markets and/or license OEM know-how and support for your products on a market-by-market basis.
Regulated industries: In some regulated industries, patent holders should review whether import laws will assist by restricting importation of certain goods. This may be particularly applicable in the pharmaceutical industry.
Licensees: A note of caution to exclusive licensees – what you thought was an exclusive license for a product may not effectively be so any longer. Third parties may now be able to bring previously sold products into your “exclusive” market without fear of an infringement suit from your licensor.
And for Defendants: A few final words for defendants in currently pending patent infringement lawsuits in which the patentee relies upon post-sale restrictions or sales outside of the United States as its basis for alleging infringement. First, the Supreme Court’s expansion of the “patent exhaustion” doctrine is now a defense to applicable allegations of patent infringement. Second, be mindful of tortious interference with others’ business agreements.
Please let us know if you would like us to review your agreements and/or discuss in-depth any of these issues with you.
 Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017)