May 30, 2017

Supreme Court Affirms Strength of First Sale Doctrine

By Douglas A. Robinson, Principal

The Supreme Court continued its streak of reversing the Federal Circuit, this time in Impression Products, Inc. v. Lexmark Int’l, Inc., a case involving the first sale doctrine (a/k/a patent exhaustion).

At the district court, Lexmark asserted patents covering printer cartridge components and their use.  Lexmark also sold printer cartridges covered by those patents, under two different pricing plans.  For a higher price, customer could re-fill the cartridges with ink without restriction.  Alternatively, Lexmark sold the cartridges at a lower price, but with a microchip that stop the cartridge from working if it were refilled.  The lower-priced cartridges also included a contract whereby the customer agreed to use the cartridge only once, and not to transfer the cartridge to anyone but Lexmark.  Defendant Impression came up with a way to defeat those microchips, allowing it to re-fill cartridges it obtained from Lexmark customers.

Lexmark sued Impression for patent infringement.  Lexmark argued that Impression’s filling and re-sale of cartridges sold in the U.S. violated Lexmark’s rights because the restrictions on re-sale were clearly communicated and Impression knew of them.  For cartridges that were initially sold abroad, Lexmark further argued that Impression violated Lexmark’s right to exclude others from importing infringing products.

The Supreme Court held that Lexmark’s initial sale of cartridges — whether in the U.S. or abroad — exhausted all of Lexmark’s patent rights in those products.

However, Lexmark still has potential breach-of-contract claims against its customers who transferred cartridges to Impression.

This decision seemingly eliminates patent protection as a way to control the gray market in patented goods.  Now, companies who sell their products at lower prices in developing countries (for example, pharmaceutical companies) will not be able to rely on patent protection to stop the importation of those products into the U.S.

The opinion is available here.