By Stephen D. Milbrath
When you a buy an item that embodies a patented invention, say a patented tool or a computer with a patented chip set, can the patent owner impose a post-sale restriction on its use? And if so, can it even restrict your use or resale of the item if you purchased it overseas from the patent owner or its agent? These are two of many questions that are now before the Supreme Court in Impression Products, Inc. v Lexmark Int’l, Inc. , argued on March 21, 2017.[1]
The Court’s judicially fashioned “first sale” or “patent exhaustion” doctrine holds that the “initial authorized sale of a patented item terminates all patent rights to that item.” [2] Hence if the sale is unconditional, the patent owner cannot impose restrictions on downstream purchasers of the article embodying the invention. The unconditional sale “prevents the patent holder from invoking patent law to control post sale use of the article.” [3] But what if the patentee does seek to impose restrictions by contract with the buyer, and those restrictions are included in all subsequent purchases in the supply chain in clearly-expressed contract terms? Can those restraints be imposed on the initial buyer and all subsequent downstream purchasers? The Federal Circuit court of appeals held that such restraints are enforceable, and can enable the patentee to sue the importers and users of products sold in violation of the patent owner’s terms of initial sale. [4]
Lexmark owns a portfolio of patents directed to laser printers and the toner cartridges used in them. The company’s business model is to offer the printers to consumers at relatively modest prices, but to reap significant after-sale profits from the sale of its toner cartridges. A large after-market of toner cartridge remanufacturers consequently developed to compete with Lexmark by selling remanufactured cartridges at a significant discount. To thwart the competition, Lexmark then introduced computer microchips into its cartridges, hoping to prevent their unauthorized remanufacture. This measure, however, produced a long series of court battles over its toner cartridge software and the means of circumventing it, and resulted in a setback in the Supreme Court. [5] Lexmark persisted by adopting a new sales approach: customers were given the option to either purchase cartridges for full price but without resale restrictions or to buy cartridges at a discount but conditioned on the promise to return the cartridge to Lexmark alone after its use. Hence under the Lexmark program the end-user of the cartridge was contractually restricted from passing the cartridge on to a recharger for remanufacture and resale. Impression Products, Lexmark later contended, violated that restriction by buying the low-cost, returnable cartridges from customers, hacking the Lexmark microchips, and importing such cartridges for resale in the United States.
Because the Patent Act provides that “whoever without authority makes, uses, offers to sell, or sells any patent invention . . . or imports into the United States any patented invention[6]” Lexmark contended that Impression Products and other rechargers were liable for infringing its patents by making unauthorized sales of its toner cartridges in violation of its single-use-and-return contract restrictions. The Federal Circuit agreed. In the Supreme Court Impression Products, the government and a great many others argue that Lexmark’s contract restrictions on reuse of its patented articles, if permitted, would eviscerate the Court’s patent exhaustion doctrine, effectively allowing the sale of a patented item to be treated as, in effect, a non-sale, and thus allowing all manner of restrictions on downstream buyers in the supply chain. Because the initial sale “terminates all patent rights[7]” in the article covered by the patent, it is contended, Lexmark’s patent infringement claims against impression Products should be dismissed. This argument seeks the adoption of a categorical rule that all such single-use restraints, no matter how clearly expressed, are invalid. Some of the language in early Supreme Court opinions, read literally, may suggest that the exhaustion doctrine does indeed invalidate the Lexmark restraints, which involve a form of restraint on alienation, a long-condemned practice.
There are weighty arguments, however, for Lexmark’s position. For one, it has long been the law that contracting parties, including patent owners, are free to structure the terms of their contracts as they deem appropriate, absent some element of patent misuse, a violation of the antitrust laws, or some other clear legal prohibition. [8] It is difficult to understand why Lexmark would not be permitted to set the terms of its own bargain for the sale of its patented cartridges, even if those terms are aimed at frustrating the efforts of after-market rechargers, putting aside the possible antitrust implications of such measures. Hence a sale of such a patented article in violation of a clearly expressed promise that the buyer would return the cartridge after using it (rather than selling it to a recharger) would seem clearly to be an unauthorized sale and therefore an act of patent infringement. Likewise, the importation of such an article would seem clearly to be the importation of an unauthorized and therefore infringing item. Congress is free, moreover, to fashion legislation regulating the use by patentees of unfair means of restricting downstream buyers in the supply chain, should such steps prove necessary. A per se rule forbidding all such contract restrictions under the guise of the patent exhaustion doctrine, in this view, would seem to be reaching beyond the limits of the doctrine and, more importantly, the text of the Patent Act.
The Supreme Court will likely announce its decision in the next few months. In the meantime, the case reminds us to pay attention to the terms one accepts when authorizing the download or purchase of a patented article.
[1] Impression Products, Inc. v. Lexmark Int’l, Inc., Case No. 15-1198; https://www.supremecourt.gov/oral_arguments/argument_transcripts/2016/15-1189_6468.pdf.
[2] Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S.617,625 (2008).
[3] Id., at 638.
[4] Lexmark Int’l, Inc. v. Impression Products, Inc., 816 F.3d 721 (Fed. Cir. 2016) (en banc).
[5] Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2013) (holding that a large remanufacturer had standing to sue for false advertising to consumers over the Lexmark presale restraints).
[6] 35 U.S.C. §271(a) (emphasis added).
[7] Quanta, 553 U.S. at 625.
[8] E.g., United States v. Univis Lens Co., 316 U.S.241 (1942)(holding that the patent “monopoly” does not extend far enough to control the resale price of a patented article in violation of the Sherman Act)