May 30, 2017

Patent Rights are So Anemic, They’re Exhausted on First Sale

The Supreme Court in Impression Products, Inc. v. Lexmark International, Inc., has once again reversed the Federal Circuit, holding that a sale of a patented product by (or on behalf of) the patent owner, whether in the U.S. or outside the U.S., exhausts the patent owner’s rights and allows any subsequent purchase to use the patented product without infringing the patent.  The Supreme Court allowed that the first purchaser might be bound by contractual restrictions imposed by the patent owner, but said that these restrictions do not apply to subsequent purchasers, in effect allowing the first purchaser to sell more that the first purchaser acquired.

Since its the Supreme Court,  the decision must be correct — but the Court did appear to get one thing wrong: in his opinion, Chief Justice Roberts said “extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain.”  While it may not have made a difference, the Court did not really examine the benefits of post sale restrictions.

In the case before it, post sale restrictions allowed Lexmark to make its products robust enough to be reused without fear that its own recycled products would be used against it.  While there are a number of strategies that Lexmark might employ post Impression Products, one would certainly be to redesign their products so that they can only be used once.  This may clog the landfills, but it allows Lexmark to capture the value of its innovation.

Another example of the benefits of post sale restriction is in pricing patented products for the local market.  A pharmaceutical manufacturer that sells a life saving daily medication for $2 in the U.S. might sell the same medication in a poorer country for less — this maximizes manufacturer’s revenue, and it makes the therapy more available.  However, in a world with patent exhaustion, the manufacturer has to consider the effect of the potential reimportation of the drug, and may have to deny access to the therapy at a locally affordable price.

One can imagine a number of similar scenarios where post-sale patent restrictions not only benefit the patent owner, but the public at large.  While it might “clog the channels of commerce” if the patent owner imposed restrictions that were not apparent from the product, it seems a minor burden if the product is prominently labeled with the restrictions, and contrary to the Supreme Court’s assessment, such restrictions can provide more than a “little benefit.”

In the wake of Impression Products, there are certainly strategies that patent owners can follow to avoid the negative effects of exhaustion.  Prominent placement of trademarks on products is one strategy: if Lexmark’s cartridges had an embossed message — “Genuine Lexmark Toner Inside” — could a third party refill the cartridges and sell them?  It may be possible to avoid the effects of foreign exhaustion through the use of separate entities, although this may require that manufacturing be moved off-shore, so that the U.S. patent owner imports the products for the U.S. market but does not otherwise participate in the manufacture and sale.

Congress should consider acting to restrict patent exhaustion, at least in the case of products that are prominently marked.  It should also consider restricting patent exhaustion for foreign sales.  These sales are often made in territories where the U.S. patent holder has no protection, and may even be facing competitive price pressure.  Finding that the importation into the U.S. of a product sold abroad is an infringement is no greater burden on commerce than finding the importation into the U.S. of a third party product is an infringement — it is already an expectation that moving a product across a border can be an act of infringement.

The Supreme Court’s decision in Impression Products makes it harder for patentees to wring the full value of their innovations from their commercialization.  However, there still are strategies that patentees can take to address the more aggressive application of exhaustion, and Congress should reweigh the burden on commerce versus the benefits of allowing patentees to retain some control over the patented inventions.