U.S. Supreme Court to Examine Patent Exhaustion Doctrine

By: Califf Cooper

The U.S. Supreme Court has recently chosen to weigh in on the patent exhaustion doctrine.  In the United States, the patent exhaustion doctrine, also known as the first sale doctrine, prevents a patent holder from recovering for infringement after an authorized sale of the patented article.  In other words, the patent holder’s exclusive rights to control the use and sale of the patented article are “exhausted” after a patented article is sold for the first time, and the purchaser is free to use or resell the patented article.  The United States Court of Appeals for the Federal Circuit has established two exceptions to this rule.  First, a patent holder can include a post-sale reuse or resale restriction in its terms and conditions accompanying the sale of a patented article.  Such a restriction allows a transfer of title to the patented article but restricts the reuse or resale of the patented article.  The second exception is the foreign sales exception–a foreign sale of the patented article does not exhaust a patent holder’s U.S. patent rights.  The U.S. Supreme Court will determine if these exceptions are still viable going forward.

On December 2, 2016, the Supreme Court granted Impression Products, Inc.’s (“Impression”) petition for a writ of certiorari appealing a Federal Circuit en banc decision that held that Lexmark International, Inc. (“Lexmark”) did not exhaust its U.S. patent rights because Lexmark’s sales were either foreign sales or subject to a post-sale single-use/no-sale restriction.

The defendant in the case, Impression, refurbishes Lexmark toner cartridges and sells them in direct competition with Lexmark.  Lexmark brought a suit for patent infringement for these sales.  The Federal Circuit held that Lexmark’s U.S. and foreign sales did not amount to patent exhaustion.  The U.S. Supreme Court will determine whether: (1) foreign sales exhaust U.S. patent rights, and (2) patent law can be used to enforce post-sale single-use/no-sale restrictions.

The Supreme Court’s ruling will have major implications on the secondary markets that depend on the ability to resell patented products.  If the U.S. Supreme Court upholds the Federal Circuit’s ruling that “conditional sales” do not exhaust patent rights, then patent holders could technically limit the secondary market for patented goods with post-sale/no-sale restrictions.  In such a case, an unknowing purchaser of a patented article that was initially sold with a post-sale/no-sale restriction could be subject to a patent infringement action.  This uncertainty for downstream purchasers is a cause for concern.  Additionally, products with a plethora of components and subcomponents, such as smartphones, can be covered by hundreds of patents requiring an importer to know the origin of each component and subcomponent so as to avoid a patent infringement action when the product arrives in the States.  These issues have been the concern of several amicus briefs, including one filed by the U.S. government.

Stay tuned, the U.S. Supreme Court’s ruling will likely issue by June 2017.