US Ends Post-Sale Patent Rights

On 30 May, the US Supreme Court handed down yet another in a long series of rulings that cut back on the rights of patent owners. This time, the high court made it far more difficult for patentees to impose post-sale restrictions on the use or resale of their patented goods. The ruling should boost parallel imports into the US, increase competition throughout the American economy, lower prices for US consumers, and hurt the bottom line of many companies.

The ruling in Impression Products, Inc. v. Lexmark International, Inc. [pdf] focused on a legal doctrine that is over 160 years old. The doctrine of patent exhaustion holds that once a patented item is sold – with the patentee’s authorization – the patent rights in that item are exhausted. The buyer is free to use, resell, or modify the item, and the patentee has no say in the matter.

But what if the patentee authorizes the sale only if the item remains subject to continuing post-sale conditions? If the buyer, or a subsequent repurchaser, violates the post-sale condition, can the patentee sue for patent infringement?

Yes, the Federal Circuit declared [pdf]. It held that because Lexmark had sold some of its laser printer cartridges on the condition that, when empty, the cartridges must be destroyed or returned to Lexmark, a competing firm committed patent infringement when it purchased the used cartridges, refilled them with toner, and then resold them.

The Supreme Court reversed. By 8-0 (with Justice Neil Gorsuch not participating because he joined the Court after oral argument), the high court declared that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose.”

This decision was based on a centuries-long legal policy to protect the free flow of commerce. “The patent laws do not include the right to ‘restrain[ ] … further alienation’ after an initial sale; such conditions have been ‘hateful to the law from Lord Coke’s day to ours’ and are ‘obnoxious to the public interest,’” the Court declared.

Escape Clause

“This ruling will affect industries across the board,” said Ronald Abramson, a partner in the law firm of Lewis Baach Kaufmann Middlemiss PLLC. It protects the right of consumers to modify, repair, and resell the items they have purchased. It protects the freedom of businesses to repair and modify products made by others. It fosters competition in aftermarket goods, which is likely to lower prices for razor blades, printer cartridges, and other products.

The decision is important not just for its economic impact, but because of its effects on patent law. “This is the first time in a long time that an authoritative court has distinguished patent rights from contract rights and said that you can’t make up your own contract rights to affect patent rights,” said Abramson. “This breathes some new life into restraints on alienation, which have been ignored by the Federal Circuit for the last 25 years. It also opens up the door to antitrust and patent misuse, [two other legal limits on patentees] which have withered under the Federal Circuit.”

Yet Impression Products seems to give many patentees a simple way around patent exhaustion. Because exhaustion occurs only once there is an authorized sale of a patented item, companies like Lexmark can simply structure their transactions as licenses, not sales. “The Supreme Court made clear that patentees can impose [post-transaction] restrictions on licensees,” said Prof. Lisa L. Ouellette of Stanford Law School. “It is an easy out for many products.”

Many software companies already use this technique; they claim not to sell software to consumers, but to license it. These licenses typically restrict who can use the software and how. This allows software firms to (among other things) maintain market segmentation. They charge students a low price and large companies a high price for the same software, secure in the knowledge that the license forbids students from reselling their copies of the software to businesses.

It should be noted that software companies typically rely on copyright, not patent law. Violators of their license restrictions thus face liability for copyright infringement. However, after the Supreme Court’s Impression Products decision, many companies will examine whether they can create similar license restrictions based on patent law.

Global Exhaustion

Impression Products also addressed a second aspect of patent exhaustion: Are US patent rights exhausted if the first authorized sale is made outside the US? Yes, the Supreme Court ruled, 7-1.

This puts the US in an unusual position. It is the only large nation to adopt global exhaustion of patent rights.

Such global exhaustion might seem unfair to US patentees, since they often sell their patented items outside the US at lower prices than in the US. Allowing global exhaustion thus enables lower-priced goods to be imported into the US, undercutting patentees’ domestic sales.

The Supreme Court, however, was unmoved by this problem, finding that once a patentee made an authorized sale, it had received its payment for the item and was entitled to nothing more. “Exhaustion … does not depend on the patentee receiving some undefined premium for selling the right to access the American market,” the Court explained. Instead, “exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate.”

Moreover, the Court declared, such exhaustion is needed to protect the free flow of commerce, regardless of where the first sale takes place: “Patent exhaustion … has its roots in the antipathy toward restraints on alienation … and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales.”

Finally, since the high court had previously recognized global exhaustion for US copyrights, the Justices felt that the same rule should apply to US patents. “There is a ‘historic kinship between patent law and copyright law,’ … and the bond between the two leaves no room for a rift on the question of international exhaustion,” the Court declared.

Many scholars found that last argument rather weak. “Copyright law and patent law are really two different animals,” said Abramson. “[For one thing,] copyright law is far more internationalized than patent law.” Because patent protections vary far more from country to country, “it is debatable whether patents should have international exhaustion,” he said.

The Good, the Bad, and the Drugs

The ruling removes one important barrier to parallel imports into the US: Companies can no longer assert that such imports violate their patent rights. It will thus be far harder for many firms to continue to engage in geographical segmentation – charging higher prices in the US than elsewhere.

This puts many international businesses in a bind. If they continue geographical segmentation, lower-priced parallel imports will hurt their US sales and put downward pressure on their US prices. If they discontinue geographical segmentation, however, they must either lower their prices in the US or raise them elsewhere. Either choice would likely decrease their profits, while the latter step would also probably reduce their global sales and market share.

Thanks to the threat of parallel imports, US consumers should benefit from lower prices on many items – but alas, not drugs. At least, not any time soon. Because even without the patent barrier, “there are still complicated and hairy Food and Drug Administration regulations about what drugs can be put into the US stream of commerce,” said Prof. Arti Rai of Duke Law School. “Congress will probably have to do something about the FDA’s statutory and regulatory barriers before there could be any significant parallel import of drugs.”

Image Credits: Nick Youngson