Lexmark Challenge to Patent Exhaustion Could Largely Disrupt Intellectual Property Precedent

Caroline M. Snell, KLJ Production Editor[1]

On March 21, 2017, the United States Supreme Court heard oral arguments in the case of Impression Products, Inc. v. Lexmark International, Inc.[2] This case considers the effect of the long-established patent exhaustion doctrine and its effect upon conditional sales.[3] In the intellectual property world, this decision could have profound influence.

At its core, the patent exhaustion doctrine operates so that a patentee’s rights to restrict the sale or disposition of a product are “exhausted” upon its first sale.[4] Thus, resale of the product subsequent to its first sale does not amount to an infringement of the patent, because the patent is no longer attached to the product. In effect, this makes the disposition of patented products easier to administer.

In Impression, the court will decide whether companies are able to contract around this doctrine.[5] In its brief, Lexmark argues it can.[6] In order to understand the arguments, however, one must understand the facts.

Lexmark is a manufacturing company headquartered in Lexington, Kentucky that “develops, patents, and sells printers, toner cartridges, and associated software.”[7] As part of its business model, Lexmark offers two ways to purchase its commercial grade toner cartridges—one can either purchase a single-use patented cartridge at a lower cost, or purchase an unlimited-use patented cartridge at its full price.[8] The single-use cartridge, thus, stipulates that the customer will not reuse or resell the cartridge after its emptied, because the lower price indicates that it is licensed for one use and one use only. Customers who choose this lower priced option are expressly conveyed this information, as it is displayed on the packaging of the cartridge in multiple languages, and Lexmark contends that all customers are aware of this before they make their purchase.[9]

Impression, in turn, is a business in Charleston, West Virginia that focuses on remanufacturing.[10] Impression “purchases [used] toner cartridges that were initially sold by Lexmark [. . . and] cleans, refills, and resells them to customers.”[11] Impression “sells its […] cartridges at a substantial discount to Lexmark’s new products, saving its customers significant sums.”[12]

The issue centers around whether Impression is able to legally resell the spent single-use Lexmark cartridges even though they were sold subject to a one-time use. Lexmark says it can, given that there was consideration in selling the cartridges at a lower price.[13] Impression says Lexmark can’t, given the patent exhaustion doctrine.[14] Impression argues that after its initial disposition, Lexmark can no longer have an interest in the product, because its reach has been exhausted, and the patent is no longer attached to the product.[15] For Impression, thus, there is a mandatory exhaustion of rights after its first sale, and its not subject to contracted terms.[16] Lexmark, though, doesn’t see it that way. For Lexmark, there was ample consideration in its lower price, and because of that, Lexmark retains the ability to keep its interest in the single-use cartridge.

The effect of this decision could have the potential to greatly affect the intellectual property community. If decided for Lexmark, the Court will have granted companies the authority to contract around the long-held and well-established patent exhaustion doctrine. While the court in the past has carved out exceptions to this doctrine, they have been greatly limited in scope.[17] Thus, if Lexmark is able persuade the court to rule in its favor, Lexmark will have resolved a way of legally keeping title to its cartridges even after disposition. In turn, this will allow Lexmark to better control the financial losses it takes to the remanufactures who use its spent cartridges against it. For Impression, this would mean it would no longer have legal title to be able to clean, refill, and resell Lexmark cartridges that were purchased for single-use, and instead will have to buy only unlimited-use cartridges, which could dig deeper into Impression’s pockets and profit margins. This decision, thus, will be far and wide for the intellectual property world, as companies will now know if a conditional sale is the way around the patent exhaustion doctrine.

[1] J.D. expected May 2018.
[2] Impression Products, Inc. v. Lexmark International, Inc., 816 F.3d 721 (Fed. Cir. 2016), cert granted, 137 S. Ct. 546 (2016).
[3] Id.
[4] See Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S. 617, 625 (2008) (stating that “the initial authorized sale of a patented item terminates all patent rights to that item.”).
[5] Impression, 816 F.3d 721.
[6] Brief for Respondent, Impression Products v. Lexmark International, Inc., 816 F.3d 721 (2016) (No. 15-1189).
[7] Id. at 4.
[8] Id.
[9] Id. at 5.
[10] Brief for Petitioner at 3, Impression Products v. Lexmark International, Inc. 816 F.3d 721 (2016) (No. 15-1189).
[11] Id.
[12] Id.
[13] Brief for Respondent at 9, Impression, 816 F.3d 721 (No. 15-1189) (“And all agree that the lower price of Return Program cartridges ‘reflects the value of the [more limited] property rights and interests conveyed.’”) (brackets original).
[14] Brief for Petitioner at 12, Impression, 816 F.3d 721 (No. 15-1189).
[15] Id.
[16] Id.
[17] See generally Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); Jazz Photo Corp v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001).

*Featured image provided by Bhavesh Chauhan, licensed under CC BY 2.5.