Questions Raised by the Lexmark Decision

“The Supreme Court has become an activist court when reviewing patent law and has repeatedly changed law that has been established for decades.”

Gavel questionU.S. law on international patent exhaustion was upended by the Supreme Court’s decision on May 30, 2017 in Impression Products v. Lexmark. The Supreme Court concluded 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 on the location of the sale.”

This holding changed decades of commercial practice that encouraged regional pricing in foreign countries, thus permitting consumers from developing nations to purchase products they would have otherwise been unable to afford. Sales abroad act independently from the U.S. patent system and vice versa, but in this holding, the Supreme Court further diminished patent rights in the U.S. U.S. Patent holders will now be reluctant to reduce their prices overseas as foreign operators may look for ways to gather the lower price products in those countries and send them back to the U.S. to get the higher prices, depriving the indigenous groups of the lower price products and cutting into the profits of the patent owners in the U.S.

There has been significant speculation about the implications of the decision. The Supreme Court itself mentioned that contract law could govern only the first sale because reservations would allow patent rights to “stick remora-like” to the item as it flows through commerce and would violate the principle against restraints on alienation. Privity with third parties is an issue in a contract analysis.

The opinion is fuzzy with respect to who authorizes the sale in a foreign country. It is possible for patent holders to structure their businesses so that foreign sales are not authorized by the U.S. patent holder and prevent international exhaustion in products based upon their inventions.

Licensing a product instead of selling it may also be a tool for avoiding international patent exhaustion. It is common to distribute software via license, and this might avoid international exhaustion, although it will not work for all products. For example, licensing a drug makes little sense. However, re-importation of a drug would be regulated by the FDA, and the conditions and chain of control of drugs might mitigate some of the international exhaustion issues there. As such, many companies are evaluating the extent of the decision on international exhaustion and how it affects their industries. Since companies have thousands of contracts already in place and the parties will have to reevaluate their positions going forward, this is causing mass confusion and restructuring of contracts and relationships.

Yet again, the Supreme Court has limited patent rights. The Supreme Court has become an activist court when reviewing patent law and has repeatedly changed law that has been established for decades.

A similar situation has occurred in patent subject matter eligibility decisions that have recently been handed down. In a series of opinions emanating from the Court in this area, we have been subjected to unclear standards which result in bad lower court decisions that have roiled that patent community and invalidated thousands of patents that were granted over the preceding decades.

There are harmful consequences to these actions and we are already beginning to see articles touting that the United States is losing its preeminent position as the best patent system in the world. Hopefully in its future decisions, the Supreme Court will be mindful of the effects its patent limiting decisions are having on domestic economic growth and job creation.


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Join the Discussion

8 comments so far.

  • [Avatar for Anon]
    October 24, 2017 07:12 am

    As this story slowly fades below the fold, I suppose that any discussion on the points that I have provided will need to await another day.

    I was hoping that Mr. Stoll would follow up given the distinguishing over control of secondary markets which is what is driving the large transnationals on this particular legal matter.

  • [Avatar for Anon]
    October 21, 2017 09:55 am

    I had very mixed emotions on reading this article by Robert Stoll.

    This is the second piece by Mr. Stoll (in a row) that I have had to pause and say to myself, “No, that’s not quite right.”

    Mind you, I found many items “to be right” in this piece. But the notion that the decision in Impression Products v Lexmark took away patent rights is most definitely NOT one of those things.

    So while I might agree with Mr. Stoll that the decision may have changed the understanding of many of those that had been practicing the geographical price differentiation model, the decision here – properly made in my humble opinion – does NOT in fact change patent rights in the least.

    When someone with a patent right sells something, that something is exhausted.

    THAT is the direct “patent right” issue on the table.
    THAT – as an issue – remains solid.

    Let’s not confuse the fact that large transnationals were able to “double dip” prior to the Lexmark decision as some form of “right” that they have lost. That double dipping was never an actual patent right.

    The underlying concepts that have now been (properly) applied were always there.

    If you as a patent holder decide to set your item into the stream of commerce you do so with the relinquishing of your patent hold.

    That is what “selling” has always meant.

    A separate, albeit not totally unrelated concept that bears further scrutiny (and bears such scrutiny OUTSIDE of the patent case as well) is the “fuzziness” that attaches to “licensing” that are really merely sales in disguise.

    By the way, Robert, leaning on “ encouraged regional pricing in foreign countries, thus permitting consumers from developing nations to purchase products they would have otherwise been unable to afford.” is NOT a strong position, as I would posit that this merely forces me as a US citizen to subsidize the profits of Big Corp under the guise of “benevolence” to third world countries.

    It is NOT that I desire to be callous to any third world person and actively seek to deny that person anything. It is more so that I – as a member of a first world nation – should not be forced to subsidize Big Corp’s overall profit schemes with the concomitant LARGER cost to me so that Big Corp can sell into that other market at lower margins. Big Corp still very much has the options – and can decide entirely on their own) where and for how much to sell their products.

    ALL that we are talking about here is that the control of the secondary markets – something never included in patent rights – has been truly freed from the grasp of the Big Corp transnationals.

    This action then very much distinguishes this particular Supreme Court decision from other Supreme Court decisions that DO touch on patent rights.

  • [Avatar for David]
    October 20, 2017 07:40 pm

    Night – SCOTUS put 101 back on Congress. So far, Congress has done nothing to clarify or fix.

  • [Avatar for Edward Heller]
    Edward Heller
    October 20, 2017 06:26 pm

    The problem is somewhat confined to distributors as opposed to end users. End users can resell via the likes of eBay, but they are not a major problem, unless they buy in bulk for resale, in which case, they become distributors. One can cut these folks off simply by not selling to them.

    It seems that one can manage transactions with distributors so that title remains in the “seller” until delivery to the end user. That way, the seller can control resale prices and conditions.

  • [Avatar for Night Writer]
    Night Writer
    October 20, 2017 03:47 pm

    @1 David: I would add take away Alice.

  • [Avatar for Paul F. Morgan]
    Paul F. Morgan
    October 20, 2017 10:16 am

    The Fed. Cir. Lexmark decision below was widely predicted in advance by impartial legal observers as begging for another unanimous Supreme Court reversal [based on prior Sup. Ct. decisions going back more than 140 years] and they got it.

  • [Avatar for Rahul Dutta]
    Rahul Dutta
    October 20, 2017 08:46 am

    The new or the old doctrine on the US Patent Exhaustion makes little impact on international patent licenses unless the international patent license web is supported by the respective national patents in those countries. The patent exhaustion doctrine by nature is nationally exhaustible as the rights-obligations equation initiated by the grant of patent is limited to the national laws domain.

  • [Avatar for David]
    October 19, 2017 11:37 am

    The Supreme Court is systematically undoing all of the insane Federal Circuit decisions that unbalanced the patent system, led to an absurd consolidation of cases in Texas, and forced Congress to take a flamethrower to Article III of the US Constitution by enacting post grant review.

    You are seeing a return to what the system was before the Federal Circuit destabilized it with one untethered policy decision (whether pro or anti patent) after another.

    Take away Texas, take away PTAB, what are you left with? A functional patent system.

    This is a return to the rule of law.