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Supreme Court Limits Owner Rights After a First Sale of a Patented Product

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Today, the Supreme Court issued its opinion in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189, 581 U.S. ___ (2017), and considered two important issues relating to patent exhaustion: whether post-sale restrictions can prevent the application of patent exhaustion, and whether foreign sales should be treated differently than domestic sales. The Court answered both questions in the negative. Chief Justice Roberts authored the majority opinion, which reversed an en banc decision of the Federal Circuit, and held that “restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.” Slip. op. at 5.

In the first part of the opinion, the unanimous Court (Justice Gorsuch did not participate in this decision) concluded that post-sale restrictions do not enable the patent owner to avoid application of the patent exhaustion doctrine. Focusing on the doctrine’s relation to the common-law doctrine against restraints on alienation, the Court stated that “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.” Id. at 7-8. In the Court’s view, the Federal Circuit’s Opinion which held that post-sale restrictions were valid contained “a misstep in . . . logic,” because “the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on the scope of the patentee’s rights.” Id. at 10 (citing United States v. General Elec. Co., 272 U.S. 476, 489 (1926)) (internal quotation marks omitted). Therefore, application of the doctrine of patent exhaustion is “ uniform and automatic,” and the first sale, “whether on its own or through a license . . . exhausts [the] patent rights, regardless of any post-sale restrictions the patentee purports to impose. ” Slip. op. at 13.

On the issue of whether foreign sales exhaust patent rights in the United States, a 7-1 majority of the Court applied reasoning from a recent copyright case, Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), and held that “an authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” Id. at 13. The Court rejected Lexmark’s argument that the patent rights should not be exhausted by foreign sales because of the “territorial limit on patent rights,” stating that “[e]xhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market.” Id. at 15. The Court also rejected a “middle-ground position” advocated by the U.S. in an amicus brief, that a foreign sale exhausts the patentee’s rights “unless those rights are expressly reserved.” Id. at 16-17. The Court concluded that the “sparse and inconsistent decisions” cited by the government for the express-reservation rule “provide no basis for any expectation, let alone a settled one, that patentees can reserve patent rights when they sell abroad.” Id. at 17. Therefore, the first authorized sale, whether in the U.S. or not, exhausts the patentee’s rights under the Patent Act.

Justice Ginsburg dissented from the Majority’s opinion regarding international exhaustion, arguing that because of the territorial nature of patent law, “it makes little sense to say that [a foreign] sale exhausts an inventor’s U.S. patent rights.” Slip. Op., Ginsburg, J., dissenting. Justice Ginsburg also disagreed with the Majority’s application of the reasoning in Kirtsaeng, and would have held that a foreign sale does not exhaust the patentee’s U.S. patent rights. Id.


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