PATEnT EXHAuSTiOn RuLing iMPACTS vALuE
Intellectual Property Section Chairs: Debra D. Larsen- GrayRobinson, P. A. & Cole Carlson- GrayRobinson, P. A.
Purchasers may pay higher prices to offset the costs of the growing gray markets.
© Can Stock Photo / bedo
Once you purchase a product, do what you want with it! That statement is the result of Impression Products, Inc. v. Lexmark Int’ l, Inc., 137 S. Ct. 1523( 2017), where the U. S. Supreme Court examined the applicability of the doctrine of patent exhaustion. Patent exhaustion basically states that a patent owner loses all rights to a patented product once it is sold. In Impression Products, the Court was presented with two issues:( 1) whether a patent owner can use a patent infringement suit to enforce contractual restrictions on the purchaser’ s right to resell or reuse the patented product; and( 2) whether a patent owner exhausts its patent rights by selling the product in a foreign country. Id. at 1529.
Historically, a patent owner was allowed to sue for patent infringement when it attached contractual restrictions to a purchaser’ s subsequent use or sale of a patented product and then that purchaser violated those restrictions. See Mallinckrodt, Inc., v. Medipart, Inc., 976 F. 2d 700, 709( Fed. Cir. 1992). A patent owner
also retained the ability to bring a patent infringement suit against a purchaser who imported the product and sold it within the United States. See Jazz Photo Corp. v. International Trade Commission, 264 F. 3d 1094( Fed. Cir. 2001). Thus, before Impression Products, the patent owner had more control than the purchaser.
But in an 8-0 decision on the issue of contractual obligations and a 7-1 decision on the issue of foreign sales( Justice Ginsberg dissented), the Court held that“ a [ patent owner’ s ] decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the [ patent owner ] purports to impose or the location of the sale.” Impression Products, 137 S. Ct. at 1529. That is, the doctrine of patent exhaustion applies to products that are sold regardless of any restrictions the patent owner imposes or the location of the sale. The Court reasoned that the doctrine applied to both issues because at its essence, the exhaustion doctrine“ marks the point where patent rights yield to the common law principle against restraints on alienation.” Id. at 1531.
The Impression Products decision is a massive win for purchasers, and a new obstacle for patent owners. Many business models will change. For example, pharmaceutical companies typically charge higher drug prices domestically compared to internationally, which will likely facilitate the development of“ grey markets,” meaning sales initially made abroad will be resold domestically at dramatically reduced costs. It is thus likely that patents will become devalued as the incentive to innovate will be stifled by the reality of smaller profits.
So, while the purchaser is the immediate victor in the Impression Products decision, the larger patent owners may eventually structure their pricing scheme to be uniform throughout the industry. That is, purchasers may pay higher prices to offset the costs of the growing grey markets. Interestingly, the Impression Products decision largely impacts the pharmaceutical industry at a time when domestic drug prices are a fiery topic for political debate. Coincidence?
Author: Cole Carlson- GrayRobinson, P. A.
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