On May 30, 2017, the U.S. Supreme Court issued its long-awaited patent exhaustion decision in Impression Products v. Lexmark International, 137 S.Ct. 1523 (2017). In that opinion, the court held that any authorized sale by a patent owner exhausts all patent rights in the product sold, which prohibits a patent owner from enforcing post-sale restrictions through patent infringement suits. The court also held that exhaustion applies to foreign sales authorized by the patent owner. While the decision clarified the law of patent exhaustion, it also left many patent owners questioning whether any avenues remain to control downstream use and resale of patented products.
In Impression Products, the court identified some options that may be available to patent owners, such as reaffirming that contract law allows restricting a licensee’s authority to use or sell a patented product. Similarly, the court indicated that contract law might provide a mechanism to enforce post-sale restrictions on downstream purchasers. But while this may provide some hope to patent owners, it also raises other important questions: If a patent owner attempts to "license," rather than "sell," its products, how can it ensure that the "license" does not effectively become a "sale"? Similarly, if contract law permits enforcing post-sale restrictions, how can a patent owner ensure that such contracts are enforceable?
The answers to these questions are likely to shape the post-Impression Products landscape. This article summarizes the Impression Products decision and also looks at two enforcement questions and possible answers that might be gleaned from existing case law: When is a transaction properly viewed as a license rather than a sale, and are licenses attached to the product on sale (for example, shrinkwrap licenses) enforceable?
Lexmark manufactures and sells printers and printer cartridges in the United States and abroad. It sells cartridges in the United States under two purchasing options:
Impression Products collected the used return-program cartridges sold in the U.S. and abroad, refilled the cartridges, and resold them in the United States.
Lexmark sued Impression, alleging that the sale of the refurbished return-program cartridges and the importation and sale of foreign-sold cartridges in the Unites States infringed its U.S. patents. Impression responded that Lexmark’s sales of the cartridges both abroad and in the United States exhausted Lexmark’s patent rights. The Federal Circuit, who heard the case en banc, determined that none of Lexmark’s rights were exhausted. Impression then appealed to the U.S. Supreme Court.
The Impression Products Decision
The Supreme Court reversed the Federal Circuit’s decision, holding that "a patentee’s decision to sell a product exhausts all of its patent rights in that product, regardless of any restrictions the patentee purports to impose or the location of the sale."2
1. Authorized Sales Exhaust All Patent Rights Regardless of Intended Post-Sale Restrictions
First, the court held that while the restrictions in Lexmark’s return program might be enforceable under contract law, they do not entitle Lexmark to retain patent rights in the items sold. The court noted that the doctrine of patent exhaustion has its origins in the common law’s refusal to permit restraints on the alienation of goods and acts as a limitation on a patent owner’s right to exclude.
The court also rejected Lexmark’s argument that the Supreme Court’s decision in General Talking Pictures Corp. v. Western Electric Co. dictated a different result. In that case, the patent owner granted a license to sell patented products in a defined field of use. The court held that when the licensee sold the product outside its licensed field to a customer who knew the sale was unauthorized, both the licensee and customer could be sued for infringement. The court stated that patent licenses and product sales implicate different ownership concerns. Because licenses exchange rights, not goods, patent owners can restrict the licensee’s use or sale of covered products because the license does not transfer ownership. Although patent owners can restrict a licensee’s actions, those licensees cannot enforce post-sale restrictions on customers.
2. Patent Owner’s International Sales Exhaust U.S. Patent Rights
The court also held that foreign sales of patented products exhaust U.S. patent rights if the patent owner authorizes the sale of the product abroad. The court explained that exhaustion principles are not geographically dependent and relied on its recent copyright exhaustion decision in Kirtsaeng v. John Wiley & Sons, where it held that foreign sales of copyrighted material exhausted United States’ copyright protections. Thus, patent exhaustion applies regardless of where the sale occurred.
With respect to patent law, the Supreme Court’s decision is clear: When a patent owner sells a patented product, the patent owner cannot use patent infringement suits to enforce post-sale restrictions. The court left open, however, at least two options for patent owners wishing to exert some control downstream. First, the court reaffirmed a patent owner’s ability to restrict a licensee’s authority to use and sell patented items. Second, the court left open the possibility of enforcing restrictions through contract law.
License v. Sale
Impression Products reaffirmed that patent owners can restrict a licensee’s ability to use or sell a patented product. Thus, one way to restrict the downstream use of a patented product could be to license it to a customer rather than sell it. This distinction, however, begs the question of when a transaction is a "license," thereby avoiding exhaustion, or a "sale," thereby invoking exhaustion.
The concept of licensing products rather than selling them is common in the software industry. But, despite being styled as licenses, questions often arise regarding whether customers are actually purchasing, not licensing, the software. Thus, the issue of when a transaction is a sale as opposed to a license has arisen frequently in copyright litigation involving software. While not patent cases, there are lessons that can be gathered from these cases that could inform the issue of patent exhaustion going forward.
Several circuit courts of appeal have addressed this issue, including the Ninth Circuit, Federal Circuit and Second Circuit. A recent decision from the Northern District of California summarized the Ninth Circuit framework from a trio of decisions—Vernor,3 UMG Recordings4 and Christenson5—as follows:
[In Vernor, the Ninth Circuit held that to] determine whether a software user is a licensee or an owner, [it] looks to whether the copyright owner: (1) "specifies that the user is granted a license"; (2) "significantly restricts the user's ability to transfer the software;" and (3) "imposes notable use restrictions." …
[I]n UMG Recordings, the Ninth Circuit further held that merely labeling an arrangement as a license, or stating that the copyrighted works were "not for resale," was not dispositive of the issue ….
Finally, in Christenson, the Ninth Circuit clarified … that "the party asserting a first sale defense must come forward with evidence sufficient for a jury to find lawful acquisition of title, through purchase or otherwise, to genuine copies of the copyrighted software." … Once established, "[t]o the extent that the copyright holder claims that the alleged infringer could not acquire title or ownership because the software was never sold, only licensed, the burden shifts back to the copyright holder to establish such a license or the absence of a sale."6
Similar to the Ninth Circuit, the Federal Circuit also attached less importance to formal title and focused instead on the restrictions placed on the customer’s rights.7 The Second Circuit similarly held that "formal title in a program copy is not an absolute prerequisite" to demonstrating ownership, and that courts should instead "inquire into whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy."8 As one California court put it, "in determining whether a transaction is a sale, a lease, or a license, courts look to the economic realities of the exchange."9
To the extent the holdings of these cases can be applied to the sale of patented products, it appears that a patent holder wishing to "license," rather than sell, a product will need to do more than just label the contract a "license." The patent owner will likely need to place significant restrictions on the customer’s use of the product. While placing such restrictions may be desirable, patent owners in some industries may find customers reluctant to accept such terms. Moreover, even if this option is legally available, if enforcing the license alienates customers, such restrictions may not be practical. Regardless, the development of the law in this area will be of significant interest for many patent owners.
Enforceability of Shrinkwrap Licenses
If a patent owner wants to license a patented product to a customer or simply wants to sell the product subject to restrictions enforceable under contract law, the question remains of how to create an enforceable contract with the consumer. One option commonly used in the software area for this purpose is the shrinkwrap license.10 Perhaps not surprisingly, the enforceability of shrinkwrap licenses has been litigated frequently in the software field. Thus, these cases may also provide some guidance for patent owners.
In general, several courts have stated that "'shrink wrap licenses' are no less enforceable than any other type of contract."11 To determine whether such agreements are enforceable, courts apply traditional principles of contact law.12 The applicability of traditional contract principles also includes "generally applicable contract defenses, such as fraud, duress, and unconscionability."13 Importantly, several courts have also found shrinkwrap licenses invalid "as contracts of adhesion, unconscionability, and/or unacceptable pursuant to the U.C.C."14
One important consideration for courts in determining enforceability has been "whether the party … had reasonable notice of and manifested assent to the agreement."15 The amount of notice, however, may vary by jurisdiction. In New York, for example, one court required that the "reasonably prudent user" have "inquiry notice."16 The court explained that this means that the contract—in that case a website—"must encourage the user to examine the terms 'clearly available through hyperlinkage,'" and that the link cannot be "buried at the bottom of a webpage or tucked away in obscure corners of the website."17 In other words, this court emphasized that the user accepting the agreement must know the terms of the agreement.
In some situations, courts have also permitted transactions, where the consumer pays for the product without seeing the terms, but has a period of time to review the terms afterwards and return the product if they do not accept the terms.18 In such cases, the law may require that the user is given notice of the terms and that the notice provides a period for the user to consider and return the product if they reject those terms.
Shrinkwrap licenses’ uneven history of enforceability in certain circumstances makes this an area of the law that patent owners will likely watch moving forward. Issues such as sufficiency of notice could make this an area of future litigation as patent owners attempt to retain control of their products downstream.
Although Impression Products made clear that patent law is not a viable mechanism to enforce restrictions after a sale, it appears that contract law provides at least some avenues to patent owners moving forward. Patent owners may be able to license their products subject to enforceable license restrictions. And for patent owners looking to license or sell their products subject to contractual restrictions, shrinkwrap licenses may provide one viable mechanism. As patent owners navigate the post-Impression Products landscape, the continued development of the law in these areas will be closely watched.
1 Impression Prods., Inc. v. Lexmark Int’l, Inc., No. 15-1189, slip op. at 2-3 (U.S. May 30, 2017).
2 Id., slip op. at 13.
3 Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010).
4 UMG Recordings, Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2011).
5 Adobe Sys. Inc. v. Christenson, 809 F.3d 1071 (9th Cir. 2015).
6 Microsoft Corp. v. A&S Elecs., Inc., No. 15-CV-03570-YGR, 2017 WL 976005, at *4 (N.D. Cal. Mar. 14, 2017) (discussing Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107 (9th Cir. 2010); UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1179 (9th Cir. 2011); and Adobe Sys. Inc. v. Christenson, 809 F.3d 1071, 1078-79 (9th Cir. 2015) (citations omitted, paragraphing added).
7 DSC Commc’ns Corp. v. Pulse Commc’ns, Inc., 170 F.3d 1354, 1360-61 (Fed. Cir. 1999).
8 Krause v. Titleserv, Inc., 402 F.3d 119, 123-24 (2d Cir. 2005).
9 SoftMan Prods. Co., LLC v. Adobe Sys., Inc., 171 F. Supp. 2d 1075, 1084 (C.D. Cal. 2001).
10 Generally speaking, a shrinkwrap license comes in the form of users accepting the terms of the license by opening the package or by not returning the product within a prescribed period. A variation on this type is the clickwrap license, where the user accepts the terms by clicking an acceptance before installing the software.
11 Novell, Inc. v. Unicom Sales, Inc., No. C-03-2785 MMC, 2004 WL 1839117, at *11 (N.D. Cal. Aug. 17, 2004); see also ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996); U.S. v. Drew, 259 F.R.D. 449, 462 n.22 (C.D. Cal. 2009) (noting that "Clickwrap agreements have been routinely upheld by circuit and district courts.") (quotation marks and citation omitted).
12 See Specht v. Netscape Commc’ns Corp., 150 F. Supp. 2d 585, 589 (S.D.N.Y. 2001).
13 Comb v. PayPal, Inc., 218 F. Supp. 2d 1165, 1170 (N.D. Cal. 2002).
14 Novell, Inc. v. Network Trade Ctr., Inc., 25 F. Supp. 2d 1218, 1230 (D. Utah 1997) (citing Step–Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir.1991); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir.1988); see SoftMan Prods, 171 F. Supp. 2d at 1075, 1084 (collecting cases, but not deciding the issue because buyer did not assent to contract); see also Lloyd L. Rich, Mass Market Software and the Shrinkwrap License, 23 Colo. Law. 1321 (1994).
15 Jallali v. Nat'l Bd. of Osteopathic Med. Exam’rs, Inc., 908 N.E.2d 1168, 1173 (Ind. Ct. App. 2009) (citation omitted).
16 Resorb Networks, Inc. v. YouNow.com, 30 N.Y.S.3d 506, 511, 51 Misc. 3d 975, 981 (N.Y. Sup. Ct. 2016).
18 Brower v. Gateway 2000 Inc., 246 A.D.2d 246, 251 (N.Y. App. Div. 1998) (agreeing that "cash now, terms later" agreements can be enforceable, but that no agreement exists until the period for acceptance expires).
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