The Supreme Court overturned years of Federal Circuit precedent in Impression Products, Inc. v. Lexmark International, Inc. In Lexmark, the Court expanded the reach of patent exhaustion domestically and internationally.
This post will examine the Court's expansion of international patent exhaustion.
What is patent exhaustion?
When a patent owner sells a product that embodies its patented invention, it can't enforce the patent against subsequent buyers.
Can a foreign sale exhaust a US patent?
After Lexmark it does. This is a new development.
The Federal Circuit consistently held that foreign sales of products that embody inventions patented in the US cannot exhaust US-patent rights. That is no longer the case. Now, if a patent owner or a licensee sells a product embodying the patented invention abroad, that sale exhausts any US-patent rights the patent owner had in that product.
Why did international exhaustion matter in Lexmark?
Lexmark sold ink cartridges abroad for much less than it sells them in the US. Impression bought these cartridges, used. Impression would then resell them in the US—after refilling them—at a price lower than Lexmark's US price for ink cartridges.
The Federal Circuit—applying its precedent—held in favor of Lexmark. Even though Lexmark sold the cartridges, there was no exhaustion, because the sales were outside the US. Impression appealed to the Supreme Court.
The Supreme Court agreed with Impression and reversed. On this point of international patent exhaustion, only Justice Ginsburg dissented (Justice Gorsuch did not take part in the decision). Justice Ginsburg argued that the territorial nature of patents made international patent exhaustion impossible.
The effect on worldwide licenses
Before Lexmark, it was possible for patentees to sell their products at different prices abroad without worrying about how it would affect the US market. This is because patentees could assert their patents against unauthorized importers―even when those importers purchased the products through legal channels abroad.
Additionally, it was an open question whether a downstream purchaser who bought a product abroad from a worldwide licensee could rely on exhaustion when reselling the product in the US. The Federal Circuit case law indicated that patentees could assert their patent rights to prevent importation in these circumstances.
Now it is clear that downstream purchasers—who bought products from foreign customers of either the patentee or a licensee—can rely on patent exhaustion when importing those products into the US to defend against patent claims.
This should change royalty valuation for worldwide licenses—because now foreign sales will directly influence US-market prices.
What now?
Patentees should review all current licenses and determine what contract rights they have. Because even though patent exhaustion prevents enforcement of patent rights, contract rights remain.
Patentees should also consider providing products through licensing as much as possible, rather than via sale. The Court's opinion showed an openness to respecting the distinction between sale and license.
Patentees should consider how much of their patented products they can implement in software, which is easier to provide via a license—which prevents patent and copyright exhaustion—and is easier to protect with copyright. Because there is an international harmonization scheme and a better treaty regime for copyrights than patents, copyright protection may be a surer way to try to maintain competitive pricing in different global markets, while also maintaining IP protection.
After Lexmark, patentees will need to explore these options carefully to assess the effect on current licenses and future licensing strategy.