Supreme Court Finds Foreign Sales Exhaust Patents on Gray Market Imports
Any sale in the U.S. or abroad exhausts a patent holder’s rights to sue gray market importers for infringement, the Supreme Court said in a decision issued May 30 (here). Overturning a Federal Circuit decision from 2016, the Supreme Court held Lexmark cannot sue a remanufacturer of its printer cartridges, Impression Products, for importing and selling refilled cartridges that had already been sold in foreign countries and in the U.S. under a no resale agreement.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
The high court considered two separate channels through which Impressions had obtained the spent printer cartridges. One avenue was through buying the cartridges U.S. consumers had obtained via Lexmark’s “Return Program,” which offered lower prices in return for an agreement that the spent cartridges could only be resold back to Lexmark for refilling. The second situation was spent cartridges Impressions had purchased from consumers abroad. Impressions bought, refilled and then imported both types of cartridges into the U.S. for sale to consumers.
Contrary to the Federal Circuit (see 1603040026), the Supreme Court ruled that Lexmark could not sue for patent infringement based on its no resale restrictions. Though patent holders have the right to exclude goods that infringe its patents, that right is constrained by the doctrine of patent exhaustion, it said. When the good is sold, it “becomes the ‘private, individual property’ of the purchaser, with the rights and benefits that come along with ownership,” the Supreme Court said. “Lexmark exhausted its patent rights in these cartridges the moment it sold them. The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell,” it said.
Patent exhaustion also occurs when a good is sold abroad, the Supreme Court said. “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act,” it said. The court’s majority opinion, signed by seven of the eight justices that heard the case, noted that it already came to that conclusion with respect to the “first sale” doctrine for copyrights (see 13032521). “Differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense: The two share a “strong similarity ... and identity of purpose,” the Supreme Court said.