TAKEAWAY: An important decision is coming from the Supreme Court on the Patent Exhaustion doctrine—in particular, whether a patent is exhausted based on a conditioned sale or a foreign sale.
On March 21, 2017, the Supreme Court heard oral arguments in Impression Products, Inc. v. Lexmark International, Inc., addressing the application of patent exhaustion to conditioned and international sales. The doctrine of patent exhaustion limits a patentee’s ability to enforce its rights as to a patented product (or a product embodying a patented method) after there has been an authorized sale of the product. In the lower court proceedings leading to the Supreme Court, Lexmark contended that the accused infringer, Impression Products, was not permitted to re-sell altered versions of Lexmark’s patented printer cartridges because Lexmark’s initial (authorized) sale of those cartridges had been subject to post-sale conditions, including that buyers were not allowed to refurbish the cartridges or transfer cartridges to third parties. Lexmark had initially sold some of these cartridges outside of the United States, but also contended that those sales did not exhaust its patent rights because they were not domestic sales.
In an en banc consideration of the case, the Federal Circuit held that neither Lexmark’s conditioned sales nor its authorized foreign sales of its patented products exhausted its patent rights. During March’s oral arguments before the Supreme Court, however, the justices asked Lexmark probing questions as to why contract law would not provide Lexmark with an adequate ability to enforce its conditioned sales, thus possibly demonstrating some doubt as to whether conditioned sales should be an exception to patent exhaustion. In response, counsel for Lexmark noted that contract law is limited, because it requires privity between the parties to the contract. With respect to foreign sales, some of the justices seemed skeptical of mandating that such sales should trigger patent exhaustion in the face of the Patent Act’s silence on the subject—despite the Court’s decision in Kirtsaeng v. John W. Wiley and Sons, Inc., in which it unequivocally adopted international copyright exhaustion without outright statutory support from the Copyright Act.
If the Supreme Court holds that either a conditioned sale or a foreign sale exhausts a patentee’s rights, this case will have practical and economic implications across the board, and will require both patent owners and their competitors to adapt their patent portfolios, licensing practices, and contracts practices to a more restrictive definition of patent rights.