In a landmark development earlier this week, the U.S. Supreme Court delivered a verdict that is likely to play a central role in shaping the theoretical understanding and practical application of the patent exhaustion doctrine by courts across the globe.
Writing for a near-unanimous court (Justice Ginsburg disagreed with one prong of the court’s conclusion), Chief Justice Roberts ruled that: (1) a patentee is denuded of all its rights over a patented invention the moment the invention is sold in the market by virtue of the patent exhaustion doctrine, notwithstanding the imposition of post-sale restrictions; and (2) the patent exhaustion doctrine applies the same way to foreign sales as it does to domestic sales.
In the course of this two-part post, I will try to unpack those two conclusions and explain why this decision is likely to have far-reaching practical ramifications even though the aforementioned two conclusions may at first blush come across as being highly technical.
The facts of this case are fairly straightforward. Lexmark, the plaintiff-respondent, is in the business of selling toner cartridges, which, to paraphrase the court’s language, contain the powdery substance used by laser printers to make images appear on paper.
It sells these cartridges in two main ways. Customers can either purchase the cartridges at the prevailing market price with ‘no strings attached’ or they can purchase them at a 20% discount with the critical caveat that the cartridges cannot be resold or reused once they run out of ink. Under the second approach, customers can get the cartridges refilled only by Lexmark.
In order to prevent the circumvention of this post-sale restriction, these cartridges come with a microchip that prevents their reuse once the toner in the cartridge runs out.
As the Court notes, Lexmark’s business model just spurred remanufacturers to get more creative. By devising a way to disable the microchip, they found a way to purchase and resell these cartridges and thereby make an end run around this post-sale restriction.
In 2010, Lexmark sued a large array of remanufacturers, arguing that their conduct fell foul of the post-sale restrictions explicitly embodied in its contracts of sale. Eventually, the last defendant left standing was Impression Products, which was in the business of purchasing these cartridges not only from American consumers, but also from Lexmark’s customers abroad and then reselling them after refurbishment.
After a procedural history that is not relevant for present purposes, the matter came before the Federal Circuit, the second highest court on IP matters in the United States, which ruled in Lexmark’s favour. Impression Products appealed, resulting in the judgment under discussion.
Domestic exhaustion and post-sale restrictions:
The Court first dealt with the question as to whether the sale of Lexmark’s cartridges in the United States exhausted its rights over them, despite the existence of post-sale restrictions.
It commenced its analysis by laying out the fundamental principles underpinning the patent exhaustion doctrine (“the doctrine”), noting that it is founded upon the idea that the sale of a patented product results in the termination of all rights that a patentee has over the product.
Adverting to Lord Coke’s famous statement that restraints on the alienation of a product once sold by the patentee, being against trading and contracting, are void, the Court went on to note that the doctrine has an impeccable historic pedigree.
Admonishing the Federal Circuit for its dismissive treatment of this ‘venerable’ principle, the Court emphatically asserted that any restraints on alienation are obnoxious to the public interest.
To substantiate its assertion that a large array of deleterious ramifications would flow from this doctrine being undermined, the Court gave an illustration of a shop that repairs and resells used cars. Noting that the fundamental reason why such a business functions smoothly is because the shop owner does not have to worry about the legality of his title over any of the products required for repair and resale, the Court noted that this entire business model would be put in jeopardy if this basic premise is called into question by virtue of patentees being allowed to retain their rights over the products involved in such a business.
Thereafter, the Court adverted to its 3 controlling precedents on this subject all of which are an authority for the proposition that any post-sale restriction cannot serve as the basis for the continuance of a patentee’s rights over its products once they are sold in the market.
While reversing the Federal Circuit’s conclusion on this count, the Court noted that the flaw in the former’s conclusion stemmed from its failure to properly appreciate the full import of the patent exhaustion doctrine. More specifically, the Court opined that the Federal Circuit wrongly viewed the doctrine as a presumptive rule when a patented product is sold, meaning thereby that this presumption can be displaced by the patentee reserving to itself some rights over the product at the time of sale.
Rather, the correct way to look at the doctrine, the Court opined, is to view it as a significant limitation on the patentee’s rights which cannot be tinkered with in any way.
The second part of this post can be viewed here.