SCOTUS Watch: Supreme Court Redefines the Patent Exhaustion Doctrine

By Brent T. Yonehara

On May 30, 2017, the U.S. Supreme Court decided Impression Products, Inc. v. Lexmark International, Inc.[1], reversing the Court of Appeals for the Federal Circuit on the scope of the patent exhaustion doctrine, also known as the first sale doctrine, and unequivocably stated in its opinion 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 or the location of the sale.”[2]  This will greatly expand the definition of patent exhaustion.

The Court stated in its analysis by explaining that the Patent Act grants patent holders the right to exclude others from making, offering for sale or selling of the invention (emphasis added).[3]  However, this right to exclude has, at least, one limitation, namely the patent exhaustion doctrine.  When the patentee sells a product, that product no longer is a vestige of the patent monopoly, but rather the private property of the buyer.[4]  Consequently, patent rights are superseded by the principle against restraints on alienation.  The Court noted that while the Patent Act “promotes the progress of . . . the useful arts [] by granting to [inventors] a limited monopoly” to allow inventors to reap the windfall of that monopoly on their inventions.[5]

However, once the windfall of patent law is achieved, the law does not extend any restraint on the “use and enjoyment of the thing sold.”[6]  In other words, while a patentee can control price, negotiations, and sale terms of a product, the patentee cannot control the “use or disposition” of that product after it is sold to the buyer.[7]  Essentially, the sale “terminates all patent rights to the item.”[8]

Further, a contractual restriction will not extend the patentee’s patent rights to the product sold.  Once a patentee “sells a product, under an express restriction, the patentee does not retain patent rights in that product.”[9]

“Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace.”[10]

With this ruling, Impression Products will bring a level of consistency across other intellectual properties, most notably copyrights, where the Court recently held in favor of international exhaustion in the copyright first sale doctrine in its Kirtsaeng v. John Wiley & Sons, Inc.[11] case.  With these cases, the two intellectual properties described in the Patent and Copyright Clause of the U.S. Constitution[12] will have the first sale doctrine applied uniformly to both patent and copyright licensing.  The Court elucidated that the Patent Act, like the Copyright Act, allows for a state-sanctioned monopoly to inventors (and authors) for a limited period of time, and to recoop their investment in those intellectual and creative endeavors.  However, there are limits to that state-sanctioned right, and once a patentee has sold its first product based on its patent, the legal protections fall outside of the Patent Act and into other areas of law, like contracts or torts.[13]  Indeed, the Court further made clear that:

differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense [because] 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.”[14]

The decision was unanimous as to domestic patent exhaustion, and 7-1 as to international patent exhaustion, with only Justice Ruth Bader Ginsburg as the lone dissenter.  Impression Products will have a major impact on the patent licensing industry.  Specifically, licensing terms may need to be redefined, and could also severely impact licensing of pharmaceutical or medical device products which have extensive post-sale limitations built into the agreements.

[1] 581 U.S.___ (2017).

[2] Id., slip op. at 13.

[3] Id. at 5.

[4] Id. at 6.

[5] Id.

[6] Id. at 6 (citing United States v. Univis Lens Co., 316 U.S. 241, 251 (1942)).

[7] Id. (citing Univis, supra, at 250).

[8] Id. (citing Quanta Computers, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008)).

[9] Id. at 8 (citing Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 17-18 (1918)).

[10] Id. at 11 (citing United States v. General Electric Co., 272 U.S. 476, 489-490 (1926)).

[11] 568 U.S.___, 133 S. Ct. 1351 (2013).

[12] U.S. Const., Art. I, Sec. 8, Cl. 8: “. . . To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

[13] See Florian Mueller, Supreme Court rules against Lexmark on patent exhaustion, strengthening FTC/Apple cases against Qualcomm, Foss Patents, May 30, 2017 (“No overcompensation.  No overleveraging.  No double-dipping.  No restrictions that go beyond what the Patent Act allows.  That’s the message here.”).

[14] 581 U.S.___, supra, at___ (slip op. at 14-15) (citing Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 439 (1984)).