Lexmark Oral Arguments: A Boon to the Sticker Industry?

by Dennis Crouch

This is a follow-up on my earlier post on the oral arguments here:

The Cost of Getting the Law Right

On March 21, 2017, the Supreme Court heard oral arguments in the patent exhaustion case captioned Impression Prods., Inc. v. Lexmark Int’l., Inc., Docket No. 15-1189.  [Transcript: 15-1189_6468]  The two questions presented focus on downstream reuse/resale of a patented product and challenge the Federal Circuit’s rulings that: (1) a US patent is not exhausted when the patented product is sold subject to a no reuse/resale provision but instead can be asserted against downstream users/resellers who violate those original provisions; and (2) a US patent is presumptively not exhausted by an authorized and otherwise unreserved foreign sale of the patented product.  Petitioner Impression Prods., buys after-market ink cartridges, refills them and resells them and the patentee, Lexmark, is attempting to use patent rights to block that form of competition.

We can expect Justice Breyer to side with petitioners in this case:

JUSTICE BREYER: I think, that Lord Coke and his great principle of no alienation [restrictions] on chattels is being laughed at.

Truthfully, most of the oral arguments involve Justice Breyer explaining to other members of the court that Lexmark’s approach violate’s Lord Coke’s 300 year old maxims – “that’s been the kind of basic legal principle for an awfully long time.”  Lexmark’s primary answer: “the common law changed a lot after Lord Coke.”  In the two most recent IP Decisions by the Court – Star Athletica and SCA Hygiene – the majority ruled in favor of the IP rights-holder over Justice Breyer dissents in both cases.

Apart from Justice Breyer’s ‘heat’, the rest of the bench was clearly cold on this case – with few questions being asked of any of the parties.

 

In 2013, the Supreme Court decided the parallel copyright case of Kirtsaeng – siding with the accused infringers on the issue of international exhaustion.  A major difference though, is that exhaustion is codified by the copyright statute – but not in the Patent Act.

JUSTICE KENNEDY: Why hasn’t this been codified? . . . Too buys or what?  . . .

Arguing for the petitioner, Andrew Pincus avoided the question and instead focused on the long history of precedent.

MR. PINCUS: I think the Court’s enunciation of the rule in the cases prior to 1952 was very clear and specific. There’s really no doubt that when Congress enacted the law in 1952, it did so with the knowledge that there was the principle that I’ve recited, and the Bowman recitation is consistent with many, many decisions of this Court dating back to the 1800s that say the same thing, that when there is an authorized sale, the patent rights are exhausted. The Court said in some cases, the — the article falls out of the patent laws and all that applies is State law.

And most importantly, the Court’s sole decision upholding these sort of restrictions, A.B. Dick was expressly overruled a few years later in the motion picture patents case. So we not only have the Court’s consistent enunciation of the doctrine, we have the fact that there was this deviation and then an immediate correction.

Answering this same codification question for the Government, Mr. Stewart pointed to an implicit exception in 35 U.S.C. 154(a)(1). That provision provides “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”

MR. STEWART: The Court’s historic cases in the domestic exhaustion field have located the exhaustion principle in the language of the predecessors of what is now 35 U.S.C. 154(a)(1). That is the provision of the Patent Act that says the patent owner has the right to exclude others from making, using, selling, offering for sale, or importing the patented invention. And in addressing predecessor versions of that language, this Court said those exclusive rights in essence don’t encompass the right to control resale or use of a lawfully sold article.

Finally, upon his turn to argue Mr. Trela suggested the statute goes further – it “provides that infringement occurs when someone makes, sells, uses, offers to sell, or imports into this country a patented article without authority from the patent owner.”

The Lexmark oral arguments actually began with a realization that a loss here for the patentee is not a total loss because an enforceable contract may remain.

MR. PINCUS: The contract law, with its limitations, would allow the enforcement those restrictions if they were a valid contract. This is all about whether the patent law remedies apply.

[later]  CHIEF JUSTICE ROBERTS: Why is normal contract law and normal State law inadequate, for your purposes?

MR. TRELA: If your only remedy is contract and you can’t enforce these limitations downstream . . . there’s going to be an arbitrage.

JUSTICE BREYER: Why can’t you enforce the contract downstream?

MR. TRELA: Well, because you — you don’t have privity, Justice Breyer.

JUSTICE BREYER: Then why don’t you require the person who sells it to just resell it with the requirement that they promise not to, you know, whatever it is? . . . one of the reasons that it’s hard to get away with that is the antitrust laws in the contract area. And another reason is because Lord Coke said 300 years ago, you know, you get into a lot of trouble when you start trying to restrict this buyer who’s got the widget and he would like to use it as he wishes. Now, that’s been the kind of basic legal principle for an awfully long time.

 

Justice Alito offered some perspective on the extraterritoriality aspects of the case – noting the preference of the court for interpreting US statutes to avoid extraterritorial application.

JUSTICE ALITO: And it’s somewhat surprising to me that none of the briefs in this case talk about our cases regarding extraterritoriality. In recent years, we have said that a statute does not apply outside the United States unless it says that it applies outside the United States. I don’t see why that shouldn’t be the same for a common-law rule like the rule here. And if what’s involved here is the application of U.S. patent law abroad, where is the clear statement that the exhaustion rule applies outside of the borders of the United States? I don’t see where that can be found.

MR. PINCUS: Your Honor, I don’t think this is a question of extraterritorial application anything — any more than the issue in Kirtsaeng was a question of extraterritorial application of the Copyright Act.

The question here is whether the patentee’s acts outside the United States have an impact on its ability to enforce its rights within the United States. No one is saying that the sales outside the United States are governed by the U.S. patent law, they’re obviously not, just as the sales outside the United States under the Copyright Act are not governed by the Copyright Act.

In thinking through the patent infringement claim, one question is that of notice.  What notice is required to limit resale/reuse? Is notice only required at the point of first-sale, or must notice also be provided to subsequent purchasers.

JUSTICE KENNEDY: Can they put a sticker on the products — “Do not sell”? This would be a great boom to the sticker business, right?

Hard for me to predict an outcome at this point, but get your stickers ready.