Exhaustion

In Impression Products, Inc. v. Lexmark International, Inc., the Supreme Court held that first-sale patent exhaustion applies to toner cartridges sold by Lexmark in the United States as well as overseas.

Stated the court (Chief Justice Roberts):

• A patentee is free to set the price and negotiate contracts with purchasers, but may not, 'by virtue of his patent, controll the use or disposition' of the product after ownership passes to the purchaser. The sale 'terminates all patent rights to that item.' [Internal citations omitted; emphasis in original.]
• [E]ven when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product.“
• In sum, patent exhaustion is uniform and automatic. Once a patentee decides to sell – whether on its own or through a licensee – that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a licensee.

On cross-boarder patent exhaustion, the court stated:

• Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee's decision to give that item up and receive whatever fee it decides is appropriate 'for the article and the invention which it embodies.'

Justice Ginsberg dissented, stating:

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In Helferich Patent Licensing v. NYTimes and JCPenney (Fed. Cir. 2015), the Federal Circuit found that content providers such as the New York Times must pay a patent royalty to Helfereich, who owns a patent for sending and receiving alerts to mobile phones, despite the fact that the manufacturer of the mobile phones at issue had already licensed the patents.

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The Supreme Court reversed the Fed. Cir., in Quanta Computer Inc., et al. v. LG Electronics, Inc. For a complete background to this case, refer to the LG v Quanta page. The following summarizes the Court's findings:

Legal principle: “The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.”

1. On whether the Intel Products are “patented,” i.e., embody the patented inventions:
   • “Nothing in this Court's approach to patent exhaustion supports LGE's argument that method patents cannot be exhausted. . . . [M]ethods . . . may be 'embodied' in a product, the sale of which exhausts patent rights.”
   • Quoting Univis: ”[T]he authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold.“
   • “Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts.”
2. On applicability of Univis: “In each case, the final step to practice the patent is common and noninventive: grinding a lens to the customer's prescription, or connecting a microprocessor or chipset to buses or memory. The Intel Products embody the essential features of the LGE Patents because they carry out all the inventive processes when combined, according to their design, with standard components.”
3. On relevance of secondary patents: “a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B.”
4. On what constitutes “an authorized sale,” the Supreme Court distinguished General Talking Pictures Corp. v. Western Elec. Co. ¹⁾: “The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel's authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.”
5. DICTA: “We note that the authorized nature of the sale to Quanta does not necessarily limit LGE's other contract rights. LGE's complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages. See Keeler v. Standard Folding Bed Co., ²⁾ ('Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as under the inherent meaning and effect of the patent laws.').”

• Supreme Court Decision (Cached copy) (Paper-saver version)
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The S.Ct. today denied review of McFarling, leaving a Federal Circuit decision in place holding that the patent exhaustion doctrine doesn't apply against next-generation seeds produced by legally-purchased patented seeds.

• Fed. Cir. review:
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• Summary and discussion of petition for cert.
  • cached copy of petition for cert.

On September 25, 2007, the Supreme Court granted cert. in Quanta v. LG Electronics and oral arguments will be heard on January 16, 2008.

• See the Quanta-LG page (currently under construction) for more info.