Supreme Court expands domestic patent exhaustion
In an earlier post, I explained how the Supreme Court expanded international patent exhaustion in Impression Products, Inc. v. Lexmark International, Inc.
But the Supreme Court also expanded domestic patent exhaustion.
Federal Circuit precedent required an authorized sale in the United States for patent exhaustion to apply. Thus, a patentee could avoid exhausting its patent rights by selling its products outside the US or restricting the right of resale. Lexmark implemented both of these strategies.
Impression would buy used Lexmark ink cartridges from abroad and from the US to resell them. Lexmark sued Impression for patent infringement because (1) the initial buyers of the used US cartridges were not authorized to resell them, so their sale to Impression did not exhaust Lexmark's patent rights; and (2) Lexmark's foreign sales could not exhaust its US patent rights, so it could sue Impression for importing the foreign cartridges into the US.
The Federal Circuit agreed with Lexmark. But the Supreme Court did not. Invoking the common-law principle against restraints on alienation, Chief Justice Roberts—writing for the Court—held that restrictions on resale cannot prevent patent exhaustion.
The Court explained that the Federal Circuit got it wrong, because it started in the wrong place: believing that patent exhaustion was based on interpretation of the patent statutes' prohibition on sales "without authority," rather than on the common-law principle against restraints on alienation.
By overemphasizing "authority," the Federal Circuit wrongly assumed that a patentee could prevent exhaustion by reserving patent rights with respect to sales. But it was wrong. Once a patented product is sold, it leaves the ownership of the patentee, including the patentee's patent-ownership rights. Thus, a patent is exhausted with the first authorized sale, even if the patentee does not authorize resale.
So where does that leave patentees? If they can, they should license their products to maintain patent rights. In addition, they should review current and future sales contracts to evaluate whether restrictions—previously supported by Federal Circuit case law as patent rights—are still permissible or run afoul of anti-trust and other laws.