In its second far-reaching decision in just over a week, the Supreme Court, on May 30, 2017, limited how patent holders may restrict the use of their patented products after there has been an authorized sale.[1] At issue were limitations placed by Lexmark, the plaintiff, on purchasers of components of toner cartridges for printers and copiers and the manner in which they are used. Lexmark sold identical cartridges at t wo different prices. At the high price, the toner cartridges came with no restrictions. At the much lower price, purchasers had to agree, in writing, to use cartridges only once and to refrain from reselling them to anyone except Lexmark. Impression Products, the defendant, was a “remanufacturer,” buying used toner cartridges, recharging them, and selling them. The Federal Circuit, the court of appeals that hears patent cases, had held that a patent holder may sell a patented product and still retain its patent rights in that product, if the patent holder imposed clearly communicated, lawful restrictions on post-sale use or resale. In addition, overseas sales, according to the Federal Circuit, did not exhaust Lexmark’s patent rights, permitting Lexmark to prevent importation by Impression Products of remanufactured cartridges. The Supreme Court reversed on both points, holding that Lexmark exhausted its patent rights in the cartridges once they were sold, whether in the United States or overseas.

In light of this seemingly straightforward holding, many have thrown up their hands, despairing of imposing any post-sale limitations. That, however, may be an unduly pessimistic attitude. For one thing, the high court stated:

Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law. (Emphasis supplied.)

Impression Prods., Inc. v. Lexmark Int’l, Inc., No. 15-1189, 2017 WL 2322830, at * 10 (U.S. May 30, 3017).

Impression Products was not a party to any contract with Lexmark. Consequently, the enforceability of Lexmark’s contract restrictions on its customers was not at issue. Enforcing these contract rights may still be a viable option in some circumstances, but few manufacturers will relish the idea of suing their own customers in state court. Plus, except in the case of very expensive products, customer-by-customer suits would be hopelessly uneconomical. Perhaps manufacturers could pass on contractual restrictions, requiring resellers, such as retailers, to use contracts with post-sale restrictions. Then the manufacturers could force the resellers to enforce those post-sale contract restrictions. In that way, patent holders could sue resellers who failed to enforce those post-sale restrictions. The reality of the consumer goods marketplace, however, is that the negotiating leverage resides with the retailers, not the manufacturers.

In addition, despite the above-quoted language suggesting that post-sale restrictions may survive as a matter of contract law, the bulk of the Supreme Court’s rhetoric condemned post-sale restrictions as repugnant restraints on alienation. The Court stated:

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.’” Straus v. Victor Talking Machine Co., 243 U.S. 490, 501 (1917).

Lexmark, 2017 WL 2322830, at * 8.

A future Supreme Court might just condemn all attempts by patent holders, in their sales contracts, to impose post-sale restrictions.

A better approach would be to refrain from selling the product in the first place. If the manufacturer retains title to the product, merely granting use rights, as in a lease or a license, there has been no restraint on alienation because there has been no sale. The Court expressly stated:

A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. 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. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers.

Lexmark, 2017 WL 2322830, at * 11.

Of course, the problem is that “leases” of tangible products such as toner cartridges may not pass the smell test. Transactions that are truly sales, though dressed up in lease or license clothes, may simply be re-characterized as sales and subject to condemnation as restraints on alienation.

A more fruitful approach may be to license other embedded rights. In fact, Lexmark may have blown it. Justice Roberts, writing for the Court, observed:

To enforce this single-use/no-resale restriction, Lexmark installs a microchip on each Return Program cartridge that prevents reuse once the toner in the cartridge runs out.

Lexmark, 2017 WL 2322830, at * 6 (emphasis added).

Instead of including the microchip only as a breaking device, Lexmark could have sold the cartridges and licensed the computer programs embedded in the microchip. If the printers, to function, needed to read a block of copyrighted code embedded in the microchip, remanufacturers such as Impression Products would have needed to tamper with the code in either the microchip or the printer to make the remanufactured cartridges work. Doing so would be a copyright violation, and since the computer programs embedded in the printers and copiers would have been licensed with restrictions on reproduction, distribution and creation of derivative works, the remanufacturers would have faced a nearly insurmountable challenge in getting around these restrictions.

Today, except for the most rudimentary and mundane products, everything has, or could have, microchips with embedded computer programs. Manufacturers, therefore, should rethink how their products are sold and should consider, as a part of their packages, licenses of embedded computer programs. Care will need to be taken to make these so-called shrink-wrap or click-wrap licenses contractually enforceable, but if handled properly, post-sale restrictions may survive, even after the Impression Products decision.

Perhaps the more surprising holding was that overseas sales of patented products exhaust the patent holder’s rights, something that few anticipated. After all, patent laws are inherently territorial. Thus, there being no United States patent rights outside the United States to enforce, how can they be exhausted? Citing its recent copyright decision in Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), in which copyright law’s first-sale doctrine was extended to copies of works made and sold abroad, the majority of the Justices saw no reason to differentiate between patents and copyrights. As Justice Ginsburg correctly observed in her dissent, however, copyright protection, unlike patent protection, is harmonized across countries by virtue of the Berne Convention, which 174 countries have joined. Convention participants “agree to treat authors from other member countries as well as they treat their own.” A copyright holder, in the United States, therefore, has equivalent rights abroad to exhaust. There is no patent counterpart. Justice Ginsburg, therefore, had the weight of logic on her side, but, alas, hers is the minority position.

Justice Gorsuch took no part in the decision.

Additional Information

If you have any questions regarding patent rights, please contact your Kutak Rock attorney or a member of the Kutak Rock intellectual property group. 

----------------------------

[1] Impression Products, Inc. v. Lexmark Int’l, Inc., 816 F.3d 721 (Fed. Cir. 2016).