Supreme Court to Consider “International Patent Exhaustion” Issue

In a matter of tremendous importance to the international trade community, the United States Supreme Court last week agreed to consider the question of whether the sale of a patented article abroad “exhausts” a U.S. patent owner’s rights in the product. The issue will determine when patent owners may use the patent law to restrain the importation of patented goods on the “gray market” or used patented goods for refurbishing.

Court also agreed to determine whether and when patent owners canretain patent rights in goods by making “conditional sales” of those goods.

The case, Impression Products Inc. v. Lexmark involves a West Virginia company which refurbished and refilled used Lexmark toner cartridge “shells”. It acquired some of the shells domestically and others abroad.  Some of the domestic shells had been part of Lexmark’s “return” program under which the sold cartridges to customers at a lower price if they agreed to use the cartridge only once and return it to Lexmark.

The Federal Circuit, in a 10-2 en banc ruling, upheld a patent infringement judgment against Impression Products, holding that Impression had infringed Lexmark’s patents by refurbishing and selling (1) cartridges from the Lexmark return program, and (2) cartridges obtained abroad. Lexmark charged Impression with patent infringement in respect of both types of cartridges.

As to the “return program” cartridges, the Federal Circuit, citing its 1992 decision inMallincrodt v Medipart,  ruled that Lexmark could retain patent rights over the cartridges it sold by making the sale “conditional” upon the buyer’s using the cartridge only once.

As to cartridges refurbished abroad, the Federal Circuit relied upon its mysterious 2001 decision in Jazz Photov. United States International Trade Commission, recev held that only the sale of a patented article in the United States “exhausts” a patent owner’s rights in the article. This is so, the Federal Circuit said, even though the patent owners voluntarily sold its product abroad and received payment for the patented features.

Judges Timothy Dyk and Todd Hughes filed a strong dissent from the en banc majority opinion, arguing that “conditional” sales were abhorrent to common law principles, and that – as in the case of trademarks and copyrights – the authorized sale of a patented article anywhere in the world should exhaust the seller’s ability to use the patent law to further restrain sales.

The case will be briefed and argued in the coming months, and the Court should rule before its term ends in June 2017.


The Issues Before the Supreme Court

1.     The “Conditional Sale” Question

Precedents dating back to 17th Century English common law indicate that the law abhors “partial alienations” of personal property. The general rule is that when a seller has parted with its property through sale, and received payment for it, he has lost all rights in the good – including the right to control its resale or use.

The U.S. Government, which has filed briefs in the case, has argued against the idea of a “conditional sale”, and has argued that the Federal Circuit’s Mallinkrodt v. Medipart decision was wrongly decided.  This position has been supported by a number of business groups which have embraced the concepts of “owners’ rights”, and have pointed to a number of prior Supreme Court decisions suggesting that a valid sale and purchase of a patented device extinguishes the owner’s ability to use patent law to control further resale or disposition of the item.


2.     The “Foreign Exhaustion” Question

The notion that a foreign sale does not exhaust a U.S. patent holder’s rights in a product stems from a very brief, and not very well-supported, statement in the Federal Circuit’s 2001 Jazz Photo v. ITC decision.  Since that time, the Federal Circuit has reiterated that position in several cases; but many have questioned the rather thin basis for the Federal Circuit’s rule, In its 2008 decision in Quanta Computer v. LG Electronics Inc., the Supreme Court appeared to indicate that a foreign sale of a product could exhaust a patent owner’s rights, if the good in question was “practicing” the patent. Despite this, the Federal Circuit has continued to hold to the position that only a domestic sale exhausts patent rights.

In its 2013 decision in Kirtsaeng v. Wiley, the Supreme Court held that the authorized sale of a copyrighted work abroad exhausted the copyright owner’s rights to use copyright law to restrain resale or use of the work. The Supreme Court first noted that, under common law, the sale of a product exhausted the seller’s rights, and then examined a provision in the Trademark Act, concluding that it did not abrogate the common law rule.

Now, the Supreme Court appears ready to determine squarely whether, in the case of patents, a foreign sale exhausts the patent owner’s rights.  There is no statute explicitly governing patent exhaustion, so observers believe that the “common law” rule may be applied to patents, yielding a determination that all sales of a patented product, whether domestic or foreign, exhaust the patent holder’s rights.

The Impression Products case, when decided, will have a major impact on the importing community, and all firms dealing in patented goods.