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June 02, 2017

Supreme Court Says "You Buy It, You Own It"

Stites & Harbison Legal Update, June 2, 2017

In a majority opinion authored by Chief Justice Roberts in Impression Products, Inc. v. Lexmark International, Inc., the Supreme Court in a nearly unanimous opinion held “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.” In so doing the Supreme Court created a bright line rule and reversed an en banc Federal Circuit opinion and erased years of patent infringement jurisprudence. Justice Ginsberg concurred in part with the majority with respect to sales in the United States, but dissented with respect to sales outside the country. Justice Gorsuch took no part in the consideration or the decision of the case.

The case arises from the practices computer printer manufacturer and toner supplier Lexmark’s attempt to protect its “razor and blade” economic model. Lexmark, like many other computer printer manufacturers, sells its laser printers near or below cost and attempts to make its money on the sale of consumables, primarily laser toner cartridges which contain toner – the “ink” that makes the letters and images appear on the page. For anyone who has had to purchase a laser toner cartridge knows, it’s a relatively expensive proposition. An industry was born to recycle and refill those laser toner cartridges at a lower price.

As the court noted, [w]hen toner cartridges run out of toner they can be refilled and used again. This creates an opportunity for other companies—known as remanufacturers—to acquire empty Lexmark cartridges from purchasers in the United States and abroad, refill them with toner, and then resell them at a lower price than the new ones Lexmark puts on the shelves.”

Lexmark did not like that. Indeed, Lexmark was one of the most aggressive companies attempting to thwart this aftermarket of cheap, reused and refilled toner cartridges. One way it sought to protect its economic market was by patenting the laser toner cartridges and having the customer contractually agree to use it only once and refrain from transferring the empty cartridge to anyone other than Lexmark.

Lexmark has been actively litigating cases with remanufacturers since 2004. The instant case arises from a group of cases filed in 2010 – which Impression Products took all the way to our highest court arguing that Lexmark’s attempt to sue remanufactures for patent infringement went too far. The Supreme Court agreed. In a complete victory for the remanufacturers, the court stated, “A patentee is free to set the price and negotiate contracts with purchasers, but may not, ‘by virtue of his patent, control the use or disposition’ of the product after ownership passes to the purchaser.” (citing the 1942 case of United States v. Univis Lens Co., 316 U.S. 241, 250 (1942). After reviewing the public policy against restraints on alienation and favoring free flow of goods and its prior cases on patent exhaustion, the court concluded that for sales in the United States “… that this well-settled line of precedent allows for only one answer: Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. 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 patent law.

With respect to Lexmark’s sales of its cartridges outside the United States, it fared no better. The court ruled that patent rights are exhausted by the fact of a sale – not the location of where the sale occurred. “Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for a payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. … what matters is the patentee’s decision to make a sale.”

All patent holders will be impacted by the breadth and scope of this landmark decision, particularly those who use patents to help price segment different markets.

Related Capabilities
Intellectual Property Litigation Intellectual Property & Technology Patent Prosecution & Protection