To protect your profits, you must rely on terms of the sales contract.
A Changed Landscape
In May of 2017, the Supreme Court altered the view of patent exhaustion that had been held for the previous 25 years. Historically, assignees were allowed to temper the limits of patent exhaustion, which eliminated their patent rights at the time of an authorized sale of the patented article, by imposing upon the purchaser restrictions for use, as long as they clearly presented those restrictions. In its jurisdiction over patent laws and cases, the Federal Circuit Court upheld this idea.
In the case of Impression Products, Inc. v. Lexmark International, Inc., Lexmark claimed that Impression Products was infringing on a toner cartridge patent by 1) reselling refilled toner cartridges as a re-manufacturer in the US, and 2) selling and importing back into the US cartridges that Lexmark had originally sold abroad. The sales contract between the two companies, Lexmark presented, prohibited Impression Products from reselling the cartridges and did not permit the import of the re-manufactured cartridges. Because these terms were named in the contract, and thus clearly presented per the rules of patent exhaustion, Lexmark saw the violation of the terms as patent infringement.
After examination of the case, the Supreme Court did not honor Lexmark’s assertion and took a step further to remove the issue from being one of infringement. It noted in its Slip Opinion: “The problem with the Federal Circuit’s logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is a limit on the scope of the patentee’s rights” (Slip Op, p.3). This changed the Federal Circuit standard on patent exhaustion, clarifying that the severance of patent ownership should be a clean cut when the patentee decides to sell the covered item.
What this Means for IP Value
Under patent exhaustion, also referred to as the “first sale doctrine,” a seller relinquishes all patent rights following the authorized domestic or foreign sale of a product. This could be a great risk, if not a sacrifice, for some patent holders. It closes doors and dams up the revenue stream. If they couldn’t hold full dominion over the intellectual property, a company might at least look for an avenue of continued revenue. Hence, the ability to impose restrictions on a patented article’s sale might have been an appealing strategy.
One of the lessons learned with Impression Products v. Lexmark is to not always rely on patent law to protect your financial return on your invention. If you, as the patent holder, choose to license or sell the item – whether a complete unit or components of a bigger system – then you must very carefully write the terms of sale in the contract. To protect your profits, you need to include the necessary parameters to limit the functions of the item’s purchaser/licensor.
Once the sale is finalized and legal, patent exhaustion takes effect. No patent law can prevent the purchaser from using or reselling the article as they see fit. If the purchaser/licensor breaks your written agreement, then you can litigate contract rights, but not patent rights. “If the patentee negotiates a contract restricting the purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may not do so through a patent infringement lawsuit” (Slip Op, p. 3).
So, with Impression Products v. Lexmark case, the Supreme Court not only decided to remove the imposed-restrictions consideration from its association with potential patent infringement, but also made it clear that this piece of common law should remain separate from patent law. When you are establishing a sales or licensing agreement for a piece of patented IP, consider how much authority you want to maintain over that item. Look ahead, and understand the purchaser’s/licensor’s intentions. How might their activities in the marketplace affect your business? Utilize the sales contract to support your IP rights. To protect your profits after patent exhaustion, you need to rely on yourself.