Absent any express restrictions on resale, anyone who purchases a patented product from the patent owner in the U.S acquires an implied right to use and resell (but not make) the product without being liable for infringement. Last week the U.S. Supreme Court agreed to consider whether someone who violates an express restriction on resale can be held liable under the patent laws. At the same time, the Court agreed to consider whether the rules are different if the purchaser bought the product from the patent owner overseas.
Impression Products buys used Lexmark printer cartridges, refills those cartridges with ink and then resells the refilled, used cartridges at a lower price than Lexmark sells new cartridges. Lexmark sued for patent infringement. To entice the courts to clarify the law, the parties made certain stipulations regarding the facts of the case. They stipulated that Lexmark has no contract with Impression Products and Impression Products is not bound by any contract Lexmark has with Lexmark’s customers. They stipulated that refilling the cartridges constitutes a repair rather than a reconstruction. They stipulated that some of the Lexmark cartridges Impression Products resells were originally sold as part of Lexmark’s “Cartridge Return Program” under which Lexmark offered a 20% price discount if the buyer agreed not to “reuse the cartridge after the toner runs out” and “not to transfer it to anyone but Lexmark once it is used.” They also stipulated that other Lexmark cartridges Impression Products refills and resells were first sold by Lexmark overseas.
The Court of Appeals for the Federal Circuit concluded that Lexmark, the patentee, may enforce under the patent law a restriction placed on the goods at the time of sale. The Federal Circuit decided, “A sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or re-sale does not confer on the buyer and a subsequent purchaser the ‘authority’ to engage in the use or re-sale that the restriction precludes.” The Federal Circuit further concluded a sale outside the United States of a patented item does not exhaust U.S. patent rights.
In seeking review of the Federal Circuit’s decision by the Supreme Court, Impression Products argued that the Federal Circuit’s decision conflicts with Supreme Court precedent and the issue has enormous practical implications that warrant resolution by the Supreme Court.
Congress and the courts have consistently tried to strike a balance between rewarding inventors and limiting market restrictions. Impression Products argues that “A key mechanism for establishing this balance is the ‘single reward principle’: that ‘the payment of a royalty once, or … the purchase of the article from one authorized by the patentee to sell it, emancipates such article from any further subjection to the patent.’” Impression Products further argues, “Once an article has been sold, the patentee has received its patent-law ‘reward’ for that article and any subsequent conditions on the article’s resale or use can only be enforced through contract law.” To hold otherwise, per Impression Products, would disrupt and potentially destroy secondary markets for used goods and allow the patent owner to extort unjust prices for new products.
There are, of course, arguments that support the balance struck by the Federal Circuit. For example, one can envision sales that would never be made in the first instance in the absence of such restrictions on use and resale. The discounts offered as part of the Lexmark Cartridge Return Program would never exist but for the restrictions on use and resale.
Philosophically, why should the first purchaser or first user of the product bear all the cost of rewarding the patent owner if the cost can be spread to all purchasers and users of the particular product so that the price associated with the first sale is lower?
Nikolai & Mersereau, P.A. can assist you with sales contracts and licenses involving restrictions on use and in the formulation of strategies related to the purchase, sale and distribution of products subject to all forms of intellectual property rights.