“First Sale” Exhausts Patent Rights

In a case of keen importance to sellers of refurbished products such as auto parts and medical devices, last month, in Impression Products, Inc. v. Lexmark International, Inc., ___ U.S. ___ (2017), the Supreme Court of the United States held that the patent rights of Lexmark, a popular maker of printer ink cartridges, were exhausted with Lexmark’s first sale of the cartridges. As noted in Bloomberg News, the opinion takes away an important tool used by companies to control the marketplace. The Court ruled that Lexmark, as a patent holder, could not, after the first sale of its products, invoke patent law against another manufacturer for refurbishing and reselling Lexmark cartridges. The ruling came despite restrictions imposed by Lexmark on the reuse or resale of its cartridges. For example, Lexmark had created a “return program” giving customers who purchased cartridges a 20 percent discount when they returned the cartridges. Lexmark had gone to the length of installing a microchip in the cartridges that was designed to prevent reuse of the cartridges and thereby discourage customers from reselling them to manufacturers such as Impression Products. Impression Products was able to neutralize the microchip and refurbish and resell Lexmark cartridges. Not surprisingly, such a practice serves to undercut the price that Lexmark can charge for its new cartridges.

The Court ruled that while Lexmark might be able to enforce its contracts with customers under state contract law, it did not retain patent rights once the cartridges had been sold. “We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale,” the Court opined. Whether or not Lexmark will alter its strategy and pursue its customers under state contract law is unknown.  Such a move would undoubtedly get the attention of the consuming public, but could conceivably backfire against Lexmark.

As reported by the ABA Journal, biotechnology, drug, and agricultural industries supported Lexmark’s position, while sellers of refurbished products – as well as Silicon Valley companies such as Google – supported Impression Products in the lawsuit.