Potential Implications of Supreme Court’s Patent Exhaustion Decision Leaves Uncertainty for Patent Owners

In Impression Products v. Lexmark International, No. 15-1189 (S. Ct. May 30, 2017), the Supreme Court reversed the Federal Circuit’s en banc decision that patent owners may enforce post-sale restrictions that are clearly communicated to purchasers of patented products and that international sales do not exhaust U.S. patent rights. In doing so, the Supreme 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 both domestic and foreign sales authorized by the patent owner.

In reaching this conclusion, the Court relied on its prior decisions on post-sale restrictions and the “common law principle against restraints on alienation.” Looking to the historical context, the Court explained that exhaustion was not a “presumption” that could be overridden by clearly communicated post-sale restrictions, but instead was a limitation on a patent owner’s rights that “functions automatically” and thereafter prevents a patent owner from using patent infringement to seek redress for breaches those restrictions. Although the Court held that a patent owner could not use patent infringement to enforce post-sale restrictions, it left open the possibility that contract law could be used to seek redress for violation of those restrictions.

The Court also held that exhaustion applies regardless of whether the sale took place in the United States or abroad. Looking again to common law principles, the Court explained that the general exhaustion principles were not geographically-dependent. The Court distinguished its prior Boesch v. Gräff decision, explaining that Boesch held only that an international sale does not exhaust a patent owner’s rights when the sale was made without the patent owner’s permission. Justice Ginsburg dissented from the international-exhaustion holding, stating that she would have found that an international sale does not exhaust U.S. patent rights because patent rights are jurisdiction-dependent.

This decision overrules two lines of Federal Circuit precedent and the result restricts a patent owner’s ability to enforce their patents against purchasers who violate conditions of sale. According to the Court, patent owners may seek redress through contract claims, but the viability of contract law as a viable remedy may depend on the state law of the contract. Choice of law provisions may, therefore, become more important in this regard.

In addition to contract law, the Supreme Court left open the possibility of enforcing patent rights against licensees who breach their license terms. Some forms of licenses, such as “shrink wrap” and “click wrap” licenses for software, may see increased popularity in other product fields to preserve a patent owner’s ability to control the use of their products. Such licenses, however, are also subject to contract principles and their viability as an enforcement mechanism remains to be seen.

The decision also raises uncertainty about international sales. Although the Supreme Court held that such sales exhaust U.S. patent rights, the economic differences between nations and weakening a patentee’s ability to charge the different prices in different jurisdictions may impact global pricing models as patent owners grapple with the possibility of having foreign-sold items imported to the United States and resold.

The Supreme Court’s decision will likely have significant impacts on the Federal Circuit’s jurisprudence as the patent community adjusts to the new landscape of the Supreme Court’s ruling.