This is a repost of commentary by Donald Chisum and Janice Muller of Chisum Patent Academy.
In Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189, — S. Ct. —-, 2017 WL 2322830 (May 30, 2017), the Court, in an opinion authored by Chief Justice Roberts, held that a patent owner’s sale of a product exhausts its U.S. patent rights in the product “regardless of any restrictions” the patent owner “purports to impose or the location of the sale.”
Per the Court, patent exhaustion traced back to the common law’s antipathy toward alienation restraints on chattels; it had not been altered by Congress and remained as an “unwritten limit on the scope of the patentee’s monopoly.”
Thus, when a patent owner sells a product (in this case, a toner cartridge for a printer) covered by a patent with a contract restricting the buyer to a single use of the product and barring resale, and a company acquires, refurbishes, and resells the product, exhaustion bars the patent owner from suing the company for infringement of the patent. It does not matter that the restrictions are otherwise not unlawful and are clearly expressed. The patent owner’s rights, if any, are under contract law. (The same rule applies when a sale is by a licensee authorized by the patent owner to sell a product with restrictions on use.)
Similarly, when an owner of a U.S. patent sells a product covered by the patent outside the United States, the patent owner cannot assert infringement when the product thereafter is imported into the United States by a third party.
Justice Ginsburg dissented, but only on the issue of international exhaustion. Justice Gorsuch did not participate.
Domestic Restricted Sales; Licensing
We see little positive from the perspective of patent owners in the Court’s analysis of exhaustion by restricted domestic sale. Based on its prior decisions dating back to 1853, which in turn relied on the earlier common law antipathy toward restraints on alienation of chattels (that is, items of personal property), the Court determined that exhaustion of patent rights is “uniform and automatic” and attaches to a sale of a product, even if the sale is subject to a lawful restriction. The patent owner’s remedy for violation of the restriction, if any, is under contract law.
The Impression Products Court did not discuss whether exhaustion attaches from a restricted transfer that could be considered less than a “sale” that passed ownership. An example would be a “license” to use a product in a restricted manner, the patent owner retaining title to the product and hoping to be able to use the threat of infringement to enforce the restriction. In its discussion, the Court did link exhaustion to avoidance of a “cloud on title” as an item “moves through the marketplace.” That suggests that only transfers of full ownership trigger exhaustion.
The Court did confirm a patent owner’s ability to grant restricted licenses. It posited as an example a license requiring that a licensee sell a product only for noncommercial use. If the licensee complied with the license, for example, by requiring a purchaser to sign a contract with the restriction, then exhaustion attached. The patent owner could not sue a purchaser for infringement even if the purchaser violated the restriction by putting the product to commercial use. On the other hand, if the licensee did not comply, the patent owner could treat any sale as unlicensed and sue the licensee for infringement and could sue a purchaser who knew of the license breach.
The Court’s discussion of restricted licenses left open an important question: what if the purchaser did not know? Generally, direct infringement is a strict liability offense: one who uses or resells an infringing item is liable for patent infringement regardless of knowledge or intent. But the Court did not so state in Impression Products.
In the second part of the Impression Products opinion, the 7-1 majority held that patent rights cannot be used to stop the importation into the United States of items that the patentee has first sold abroad. For the first time, the “international exhaustion” rule now applies to limit U.S. patent rights.
In our view, the international exhaustion aspect of the majority’s opinion is analytically far weaker than the domestic exhaustion portion. The majority facilely extends its domestic exhaustion analysis to the exceedingly more complicated international exhaustion question, holding summarily that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” One wonders whether the Court would have reached the same result if it had confronted these issues in two separate cases (that is, one dealing with the domestic exhaustion question and the other the international exhaustion issue).
The admittedly venerable principle that the law abhors restraints on alienation is the overriding theme of the Court’s decision. In the second part of its opinion, however, the Impression Products majority assumes without any meaningful analysis that Lord Coke’s disfavor of restraints on alienation carries equal weight for foreign transfers of goods protected by U.S. intellectual property. It never satisfactorily explains how that 17th century principle of English law that governed acreage and cattle applies to a complex 21st century system of multi-national patenting that lacks significant international harmonization. Ironically, the majority unfairly criticizes the Federal Circuit (Taranto, J.) for “dismissively” viewing the principle as “merely ‘one common-law jurisdiction’s general judicial policy at one time toward anti-alienation restrictions.’” The best the Supreme Court majority can do to support its position is rely on Congressional silence, hardly a compelling argument: “nothing in the text or history of the Patent Act shows that Congress intended to confine the borderless common law principle to domestic sales.”
As dissenting Justice Ginsburg reminds us, patent protection is decidedly territorial. The existence of a U.S. patent has no relevance to sales of the patented invention outside the United States. So how can a foreign sale trigger exhaustion of the U.S. patent rights for the sold item? As Justice Ginsburg correctly observes, “[b]ecause a sale abroad operates independently of the U.S. patent system, it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights.”
The Impression Products majority seemed hell-bent to shoehorn the patent case before it into the copyright law framework of its 2013 Kirtsaeng decision. Kirtsaeng turned largely on the interpretation of 17 U.S.C. §109(a), the first sale provision of the copyright statute. No counterpart provision exists in the patent statute. As Justice Ginsburg observed, although copyrights and patents may be “historical kin” they are surely not “identical twins.” Patent law has no international harmonizing agreement like the Berne Convention, which effectively affords U.S. copyright holders automatic protection for their works in all other Berne member countries without formalities or fees. In contrast, the Paris Convention for the Protection of Industrial Property (e.g., patents and trademarks) expressly recognizes the independence of national patents in its Article 4bis. Unlike the international copyright regime implemented by the Berne Convention, there is absolutely no automatic or free patent protection for U.S. patentees in foreign countries. If they want foreign patent protection, U.S. entities must ultimately enter the patent system of each foreign country, with the time, expense, and disclosure obligations that that decision entails.
The Impression Products majority scoffed at the notion that the price at which a patented product is sold in the United States reflects a “reward” to the patentee for having entered, navigated and prevailed in the U.S. patent system. But that concept holds historic provenance in our patent system. Consider Abraham Lincoln’s famous assertion that “[t]he patent system added the fuel of interest to the fire of genius.” Judge Giles Rich wrote in his dissent in the CCPA’s 1967 decision In re Kirk that “[c]onsidering quid pro quo, if we must . . . it is one of the legal beauties of the system that what is given by the people through their government— the patent right— is valued automatically by what is given by the patentee. His patent has value directly related to the value of his invention, as determined in the marketplace.” As Judge Taranto observed of Judge Rich’s statement in Kirk, a patent’s value is “inherently a market reward.” And under the U.S. patent statute, that reward is “explicitly the reward available from American markets subject to American laws, a reward obtained by selling or authorizing sales in those markets.” The Supreme Court majority proclaims that “the right to exclude just ensures that the patentee receives one reward—of whatever amount the patentee deems to be ‘satisfactory compensation’ . . . for every item that passes outside the scope of the patent monopoly.” The majority’s fallacy is to lump together all U.S. and foreign patents on an invention as a single “patent monopoly,” again ignoring the territoriality of patent law and the recognized independence of different national patents.
For better or (probably) worse, the Impression Products decision is now the law of the land, but what is its practical long-term impact? It certainly gives a green light (from a patent law perspective) to the “grey market.” It is not clear to us what non-patent regulatory protections a U.S. patent holder has to protect itself from grey market imports, but such diverted products are clearly a subject of deep concern to the U.S. pharmaceutical industry. BigPharma likely has many other tools besides patent law to keep grey market products from coming into the United States and undercutting prices there, but non-regulated industries (like those that make printer cartridges) may not. Although the Impression Products decision is said to be pro-consumer, its lasting impact may be to discourage U.S. manufacturers from selling their U.S.-patented products abroad. If correct, that result decidedly does not favor consumers.