The US Supreme Court has overruled the Federal Circuit and expanded the reach of the patent exhaustion doctrine. In Impression Products v. Lexmark (2015-1189), the Court reversed the Federal Circuit’s holding that a patentee’s rights are not exhausted when patented goods are sold domestically with a post-sale restriction or outside the United States. Applying its holding from Kirtsaeng v. John Wiley & Sons (2015-0375), which addressed the common-law origins of copyright exhaustion, the Court held in an opinion issued on May 30 (authored by Chief Justice John Roberts, with Justice Neil Gorsuch not participating) that exhaustion is a limit on the rights of patentees based on the common-law rule against restraints on alienation, rather than a presumptive grant of authority to the purchaser to use or resell a patented item. As a result, the Court ruled that a patentee’s rights are exhausted in both of the scenarios at issue.

Respondent Lexmark originally sued petitioner Impression Products, a reseller of refurbished printer ink cartridges, in April 2013, alleging that the company had infringed its patents by re-filling and re-selling Lexmark ink cartridges that a third party had modified to permit re-use (1:10-cv-00564). The printer manufacturer argued that Impression had violated a single-use/no-sale restriction imposed on buyers of the lower-cost cartridges refurbished by the company. Lexmark also alleged infringement through Impression’s re-sale of cartridges imported from foreign markets, in light of the fact that Lexmark had not given permission to import or sell them in the US.

Impression sought dismissal as to both infringement claims in separate Rule 12 motions filed later that year. In one of those motions, the company argued that Lexmark’s single-use/no-sale restriction was invalid under the Supreme Court’s 2008 decision in Quanta Computer, Inc. v. LG Electronics (2006-0937), asserting that the holding in that case prohibits patentees from restricting the use of patented products once sold. For the territoriality issue, it argued that the Federal Circuit’s decision in Jazz Photo v. ITC (1999-1431)—holding that the on-sale bar doctrine did not apply if the first sale of a re-manufactured item occurred outside the US—had been overruled by the Supreme Court’s opinion in Kirtsaeng, which held that the copyright first-sale doctrine is not limited to US sales. The district court granted Impression’s motion as to the single-use/no-sale restriction, but denied the territoriality motion, holding that the differences between copyright and patent law weighed against a finding that Kirtsaeng applied to patent exhaustion. While the copyright first sale doctrine is based in statute, the court noted that under patent law the first sale doctrine is judicially determined, further ruling that “Supreme Court precedent supports a territoriality requirement for patent exhaustion”.

On appeal, the Federal Circuit affirmed as to the territoriality issue in a February opinion, ruling that the foreign sale of a patented item “does not exhaust the patentee’s U.S. patent rights in the article sold” (2014-1617, 2014-1619). However, the court reversed the invalidation of the single-use/no-sale restriction, holding that its decision in Mallinckrodt v. Medipart (1990-­1138, 1990-­1272) had not been overturned by Quanta. Under Mallinckrodt, the court explained, “a patentee’s own sale of its patented article subject to a clearly communicated restriction does not confer authority to sell or use the article in violation of that restriction, i.e., does not exhaust the patentee’s § 271 rights against such conduct involving that article”. In contrast, Quanta involved a sale by a licensee, not a patentee, while the contract at issue in that case contained no single-use/no-sale restriction. Impression filed its certiorari petition the following month.

The Supreme Court began its opinion by rejecting the Federal Circuit’s “dismissively”-phrased characterization of the rule against restraints on alienation as “one common-law jurisdiction’s general judicial policy at one time toward anti-alienation restrictions”. Rather, the Court noted that “Congress has repeatedly revised the Patent Act against the backdrop of the hostility toward restraints on alienation”, with “[t]hat enmity . . . reflected in the exhaustion doctrine”. The Court then described “the inconvenience and annoyance to the public” that would occur in the absence of the first-sale doctrine, illustrating the rule through the example of a “shop that restores and sells used cars”. Such a business would only work if the owner can freely repair and resell vehicles, whereas “the smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale”.

In the context of that policy objective, the Court proceeded to explain how its prior holdings support the rule that “even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product”. That principle, the Court held, was “settled” by its decision in Quanta, in which it held that the “authorized sale” of products subject to a post-sale restriction “took [the patentee’s] products outside the scope of the patent monopoly”. Turning to the case at hand, the Court concluded that “this well-settled line of precedent allows for only one answer” as to the sale of Lexmark cartridges subject to the single-use/no-sale restriction: Lexmark cannot sue Impression Products for patent infringement, with any rights Lexmark has retained under that restriction a matter of contract law.

By so ruling, the Court rejected the Federal Circuit’s argument that exhaustion is merely a presumptive grant of authority to the purchaser that the patentee can narrow by conveying less than the “full bundle of rights”, such as through the omission of resale rights. This was, the Court explained, a “misstep in . . . logic”: A patent is not an affirmative grant of authority to use an invention, but rather grants the limited right “to prevent others from [using, selling, or importing an item]”. That exclusionary power is “extinguishe[d]” by exhaustion. Furthermore, the Court clarified that patent exhaustion does not affect the rights of patentees to grant licenses. While exhaustion dictates that “when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace”, a license does not involve passing title; rather, “it is about changing the contours of the patentee’s monopoly”, in the sense that the patentee agrees not to exclude a licensee from practicing a patent. As such, “[b]ecause the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections”. However, the Court noted that licenses can still trigger exhaustion, explaining that a “licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself”.

Turning to the question of international exhaustion, the Court again invoked its decision from Kirtsaeng. In that case, the Court found that the copyright first-sale doctrine—which establishes that copyright owners that sell a copy of their work lose the power to restrict the purchaser’s freedom “to sell or otherwise dispose of . . . that copy”—also originated in the common-law rule against the restraint of alienation. Since that rule makes no geographical distinctions (and nor does the statute codifying the first-sale rule, 17 U.S.C. Section 109(a)), the Court ruled that the first-sale doctrine applied to overseas sales. “Applying patent exhaustion to foreign sales”, the Court continued, “is just as straightforward”, due to the shared common law origins of the patent exhaustion and first-sale doctrines. Given the “strong similarity . . . and identity of purpose” between the two doctrines, the Court concluded that “the bond between the two leaves no room for a rift on the question of international exhaustion”.

Lastly, the Court also rejected a “middle-ground” position as to international exhaustion advocated by the United States, in an amicus brief filed in October by former Acting Solicitor General Ian Gershengorn following an invitation by the Court. While the US rejected Impression’s argument, characterized in the brief as a “proposed rule of automatic international patent exhaustion”, it also asserted that the Federal Circuit had been wrong to uphold Jazz Photo and its rule “that foreign sales never exhaust U.S. patent rights” (emphasis in original). Rather, the government argued that the correct rule was one of “presumptive exhaustion”, the approach prior to Jazz Photo, under which a patentee may only “reserve his U.S. rights as part of a foreign sale if he does so expressly”. Here, the Court declined to accept this argument as based on largely based “on policy rather than principle”. The Court rejected the prior precedent cited by the government in support of the “express reservation” principle, dismissing those cases as a set of “sparse and inconsistent decisions [that] provide no basis for any expectation, let alone a settled one, that patentees can reserve patent rights when they sell abroad”. Additionally, the Court rejected the theory underlying the government’s argument, under which presumptive exhaustion should be triggered due to a foreign buyer’s “legitimate expectation” that “a sale conveys all of the seller’s interest in the patented article”. Rather, the Court noted simply that “[e]xhaustion does not arise because of the parties’ expectations about how sales transfer patent rights”, and observed that “[a]llowing patent rights to stick remora-like to [a sold] item as it flows through the market would violate the principle against restraints on alienation”.

Justice Ruth Bader Ginsburg concurred in part and dissented in part. While she agreed with the majority’s holding as to domestic exhaustion, she rejected its decision as to foreign sales. Stating that “[p]atent law is territorial”, and that “a sale abroad operates independently of the U. S. patent system”, she argued that “it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights”. Although Justice Ginsburg acknowledged that she dissented in Kirtsaeng, then asserting that “that a foreign sale should not exhaust U.S. copyright protections”, she argued that regardless of one’s position regarding the outcome in that case, such reasoning “should bear little weight in the patent context”, noting that substantively, patent and copyright law “are not identical twins”.