U.S. Supreme Court Broadens the Patent Exhaustion Doctrine in Impression Products v. Lexmark Int'l, Inc.

June 1, 2017 Advisory

In its most significant pronouncement on the patent exhaustion doctrine since Quanta v. LG Electronics, the U.S. Supreme Court reversed the Federal Circuit on the scope of both domestic and international patent exhaustion, holding that:

(i) Authorized sales of a patented product exhaust patent rights despite attempts by the patent owner to place restrictions on the patented product; and

(ii) Authorized sales both within the United States and internationally trigger the patent exhaustion doctrine.

In an opinion written by Chief Justice Roberts, the Court ruled that a seller or licensor may not use contractual restrictions to prevent the application of the patent exhaustion doctrine. The Court clearly stated: "We conclude 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." Slip Op. at 1. The Court based this decision on the rationale that "[p]atent 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." Slip Op. at 11.

Patent exhaustion, a fundamental doctrine of patent law, stands for the proposition that once a patent owner sells a patented product or licenses the underlying patent, there is no statutory basis for the patent owner to impose restrictions or secure royalties on the subsequent use of the product. See Adams v. Burke, 84 U.S. (17 Wall.) 453, 456 (1873); Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1852). The doctrine is intended to prevent a patentee from receiving a double royalty on a single instance of a patented invention.

Under the doctrine of patent exhaustion, also called "the First Sale Doctrine," "[a]n authorized sale of a patented product article exhausts the patent monopoly as to that particular article. Thus, a purchaser of such an article from the patent owner, or one licensed by the patent owner, may use or resell the product free of control or conditions imposed by the patent owner." 5 Donald S. Chisum, Chisum on Patents § 16.03[2][a] (2002); see also Adams, 84 U.S. at 456; United States v. Univis Lens Co., 316 U.S. 241 (1942); Intel Corp. v. ULSI Sys. Tech., Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993) ("The law is well settled that an authorized sale of a patented product places that product beyond the reach of the patent. The patent owner's rights with respect to the product end with its sale.").

Patent exhaustion is a particularly important issue for those engaged in patent licensing programs, since the decision to license an upstream entity in a vertical supply chain may impact the ability to license downstream entities. See, e.g., Patent Exhaustion Update: The Federal Circuit Allows Royalties from Different Entities in Supply Chain. A number of decisions have dealt with whether one may "contract around" the patent exhaustion doctrine by restricting the license grant or contractually restricting downstream uses.

The extent of authorization may be narrowed. For example, a patentee can license only within a particular field of use and then pursue infringement in another field of use without raising the patent exhaustion doctrine. See Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175, 181 (1938), aff'd on reh'g, 305 U.S. 124 (1938). This is left unchanged by Impression Products.

In the Quanta case, however, LG and Intel arrived at a license agreement whereby LG licensed Intel, but reserved the rights to pursue patent infringement claims against Intel customers who combined the licensed Intel chips with memory to allegedly infringe the LG patents at issue. The Supreme Court found that LG's infringement claims against its licensee's customers were barred by the doctrine of patent exhaustion: "The authorized sale of an article that substantially embodies a patent exhausts a patent holder's rights and prevents the patent holder from invoking patent law to control post-sale use of the article." Quanta v. LG Electronics, Inc., 533 US 617, 638 (2008).

After Quanta, there was debate whether earlier Federal Circuit case law that indicated that the patent owner could place restrictions on the product and thereby prevent the patent exhaustion doctrine from being triggered was still good law. See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703 (Fed. Cir. 1992).

In Impression Products, the Court resolved that "patent exhaustion is uniform and automatic. Once a patentee decides to sell – whether on its own or through a licensee – that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through the license." Slip Op. at 11-12. ("A patentee's authority to limit licenses does not, as the Federal Circuit thought, mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws. So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale.") The Court was careful to note that its decision does not preclude a patentee (or its licensee) from imposing and enforcing lawful restrictions on the use of patented items; such restrictions can be enforced through contract law, but not through the patent laws.

The other open question that the Court addressed was whether foreign sales of products covered by a US patent could trigger patent exhaustion. The Supreme Court recently addressed this question and found that foreign sales trigger exhaustion in the context of the copyright exhaustion doctrine in Kirstaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), but it was unclear until Impression Products whether the answer for patent law was the same. In concluding that exhaustion is a global doctrine, the Court harmonized copyright and patent law on this issue.

Some of the key practice pointers and takeaways from Impression Products include the following:

  • This case confirms that, while careful field-of-use licensing may be a viable technique to limit the authorization and therefore limit the application of patent exhaustion. Other techniques seeking to "contact around" exhaustion will be carefully scrutinized. Those used in Quanta and now Impression Products were found ineffective.
  • Existing licenses – which may have included restrictions designed to counteract the effect of exhaustion – should be reviewed to consider the effect of Impression Products. Consideration should be given as to whether a valid contractual restriction can serve the patentee's intention or if any purported restriction will be trumped by exhaustion. Consideration should also be given to whether a field of use restriction or some other restriction can be placed on licensees or their customers and what notice or contract is needed to bind the downstream customers to the restriction.
  • Companies that price discriminate and offer products at lower prices outside the U.S. will have to consider the effect on their businesses, if such foreign sales trigger exhaustion.

We will continue to track this and related developments.