Strike Three: Lexmark Can't Use Patents, Trademarks Or Copyright To Block Third Party Ink Cartridges
from the good-to-see dept
Printer companies have long used the fairly straightforward business model of “sell cheap printers, and make all the money by price gouging the ink.” As we’ve noted, one study found that a swimming pool filled with printer ink would cost you almost $6 billion at retail (and that was almost 15 years ago, so the number is likely much higher today). For this business model to function at truly monopolistic pricing levels, it requires that the printer manufacturers figure out ways to block third parties from selling cheaper ink for their printers. Lexmark has been among the most aggressive in doing so, and has gone for the intellectual property trifecta: abusing copyright, trademark, and patent laws to try to block third party ink sales. Back in 2004, it lost its attempt to abuse copyright law to block sales. In 2014, the Supreme Court told Lexmark to stop abusing trademark law to scare off customers of third party ink sellers. And, today, the Supreme Court has completed the triad and told Lexmark that it cannot abuse patent law to stop third party ink cartridges as well. In the process, the Supreme Court, once again, smacked down the Court of Appeals for the Federal Circuit (CAFC), the appeals court that is supposed to be the “experts” in patent law, but keep getting the basics wrong.
The specific issue here was one of patent “exhaustion.” That is, when a manufacturer (legally) sells a patent product, has it “exhausted” its rights to its patents regarding that particular product, or can it continue to hang onto those rights and block legal purchasers from doing things with it. This is important, if you believe in the right to actually own what you buy. Lexmark tried to argue that even after it sold its printers, it could block third party ink (or, in this specific case, laser toner) cartridges, by claiming that using such cartridges violated its patents. If you follow this stuff, you may remember two previous big Supreme Court cases, dealing with the concept of “exhaustion.” There was the Kirtsaeng case regarding copyright exhaustion (once you’ve sold a copyrighted work, you can’t stop the buyer from reselling it) and Quanta v. LG that said the same basic thing for patents.
But CAFC twisted itself in knots to argue that this case was different, saying that Quanta was only about blocking sales, and this case — titled Lexmark v. Impression Products at CAFC and now Impression Products v. Lexmark at SCOTUS — was different because it involved a “limited license” rather than a direct sale. That is, Lexmark basically sold its products with a license agreement, saying “hey, don’t use third party cartridges, and if you do, we effectively are pulling our patent license and will sue you for infringement.”
The Supreme Court is not impressed with the CAFC’s pretzel logic and notes that it’s pretty damn obvious that once you’ve sold a patented product, you’ve exhausted the right to pull back the license on that product and claim infringement:
We conclude that 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.
The Patent Act grants patentees the ?right to exclude others from making, using, offering for sale, or selling [their] invention[s].? … For over 160 years, the doctrine of patent exhaustion has imposed a limit on that right to exclude…. The limit functions automatically: When a patentee chooses to sell an item, that product ?is no longer within the limits of the monopoly? and instead becomes the ?private, individual property? of the purchaser, with the rights and benefits that come along with ownership…. A patentee is free to set the price and negotiate contracts with purchasers, but may not, ?by virtue of his patent, control the use or disposition? of the product after ownership passes to the purchaser…. The sale ?terminates all patent rights to that item.? …
This well-established exhaustion rule marks the point where patent rights yield to the common law principle against restraints on alienation. The Patent Act ?promote[s] the progress of science and the useful arts by granting to [inventors] a limited monopoly? that allows them to ?secure the financial rewards? for their inventions…. But once a patentee sells an item, it has ?enjoyed all the rights secured? by that limited monopoly…. Because ?the purpose of the patent law is fulfilled . . . when the patentee has received his reward for the use of his invention,? that law furnishes ?no basis for restraining the use and enjoyment of the thing sold.?
Simple, right? And, once again, the (unanimous) SCOTUS ruling is not kind to the lower judges at CAFC:
This venerable principle is not, as the Federal Circuit dismissively viewed it, merely ?one common-law jurisdiction?s general judicial policy at one time toward anti-alienation restrictions.? … Congress enacted and has repeatedly revised the Patent Act against the backdrop of the hostility toward restraints on alienation. That enmity is reflected in the exhaustion doctrine.The patent laws do not include the right to ?restrain[ ] . . .further alienation? after an initial sale; such conditions have been ?hateful to the law from Lord Coke?s day to ours? and are ?obnoxious to the public interest.?… ?The inconvenience and annoyance to the public that an opposite conclusion would occasion are too obvious to require illustration.?
And then, to help the CAFC out, after quoting another case saying that this result is “too obvious to require illustration”… immediately provides an illustration. In other words, “hey CAFC, how can you be this stupid? You even need us to draw you a picture.”
But an illustration never hurts. Take a shop that restores and sells used cars. The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles. That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale. Those companies might, for instance, restrict resale rights and sue the shop owner for patent infringement. And even if they refrained from imposing such restrictions, the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits. Either way, 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. And advances in technology, along with increasingly complex supply chains, magnify the problem.
As an aside, this “illustration” being used to mock CAFC is likely to come in handy elsewhere. We’ve been writing a bunch lately about companies trying to kill off “right to repair” laws, and here’s the Supreme Court, in a unanimous decision written by the Chief Justice, using the right to repair as a fundamental and obvious point. “That smooth flow of commerce would sputter…” Indeed.
The opinion continues to smack down CAFC later, noting that it “got off on the wrong foot.”
The Federal Circuit reached a different result largely because it got off on the wrong foot. The ?exhaustion doctrine,? the court believed, ?must be understood as an interpretation of ? the infringement statute, which prohibits anyone from using or selling a patented article ?without authority? from the patentee…. Exhaustion reflects a default rule that a patentee?s decision to sell an item ?presumptively grant[s] ?authority? to the purchaser to use it and resell it.? … But, the Federal Circuit explained, the patentee does not have to hand over the full ?bundle of rights? every time…. If the patentee expressly withholds a stick from the bundle?perhaps by restricting the purchaser?s resale rights?the buyer never acquires that withheld authority, and the patentee may continue to enforce its right to exclude that practice under the patent laws.
The misstep in this logic is that 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.?… The right to use, sell, or import an item exists independently of the Patent Act. What a patent adds?and grants exclusively to the patentee?is a limited right to prevent others from engaging in those practices…. Exhaustion extinguishes that exclusionary power…. As a result, the sale transfers the right to use, sell, or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce.
There was a separate, but related question in the case as well, concerning “international” exhaustion. The above parts were about what happened to cartridges Lexmark sold within the US. But Lexmark had argued separately that products sold outside the US shouldn’t be subject to patent exhaustion, so if those cartridges were then sold back into the US, they should be subject to infringement cases, since the exhaustion had not occurred under US patent law (the same issue that came up under copyright in the Kirtsaeng case). And, here, SCOTUS (at 7 to 1, with Justice Ginsburg dissenting) found that the same applies to patent law, pointing to the ruling in Kirtsaeng, ans saying that the analysis is effectively the same here:
Applying patent exhaustion to foreign sales is just as straightforward. Patent exhaustion, too, has its roots in the antipathy toward restraints on alienation… and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales. In fact, Congress has not altered patent exhaustion at all; it remains an unwritten limit on the scope of the patentee?s monopoly…. And 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,? … and many everyday products??automobiles, microwaves, calculators, mobile phones, tablets, and personal computers??are subject to both patent and copyright protections…. There is a ?historic kinship between patent law and copyright law,? … and the bond between the two leaves no room for a rift on the question of international exhaustion.
The opinion also makes fun of the White House for weighing in on this case with little relevant to add, and with a confusion about the fact that patent law is based on the public interest, rather than as what’s in the best interest for the two parties in the transaction:
The Government has little more than ?long ago? on its side. In the 1890s, two circuit courts?in cases involving the same company?did hold that patentees may use express restrictions to reserve their patent rights in connection with foreign sales…. But no ?coalesc[ing]? ever took place: Over the following hundred-plus years, only a smattering of lower court decisions mentioned this express-reservation rule for foreign sales…. And in 2001, the Federal Circuit adopted its blanket rule that foreign sales do not trigger exhaustion, even if the patentee fails to expressly reserve its rights…. These sparse and inconsistent decisions provide no basis for any expectation, let alone a settled one, that patentees can reserve patent rights when they sell abroad.
The theory behind the Government?s express-reservation rule also wrongly focuses on the likely expectations of the patentee and purchaser during a sale. Exhaustion does not arise because of the parties? expectations about how sales transfer patent rights. More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee?s decision to make a sale.
As for Ginsburg’s dissent over international exhaustion, she also dissented from Kirtsaeng, and more or less repeats that argument here.
In the end, this is a big win for consumer rights, and blocks companies from trying to abuse patent law from restricting how people can actually use products they bought.