Using Patent Rights to Control Medical Devices Post-Sale—Not So, Says Supreme Court

Learn more about the landmark Supreme Court decision that has important implications for medical device manufacturers.

Baldassare Vinti, Esq.

Last month, the U.S. Supreme Court issued a precedential decision likely to impact medical device manufacturers that have relied on patent rights to impose post-sale restrictions (e.g., single use restrictions, importation/exportation limitations, etc.) on their products. 

In Impression Products, Inc. v. Lexmark International, Inc., the Supreme Court addressed two specific questions concerning the use of patent law to enforce post-sale restraints: (i) whether a patent holder that places specific restrictions on how a buyer may use or resell a patented product may enforce such post-sale restrictions through the patent law's infringement remedy; and (ii) whether the sale of a patented product outside the United States exhausts the patent holder’s rights in its product. 

Relying on the doctrine of patent exhaustion—a doctrine that places limitations on a patent owner’s rights upon the sale of a patented product—the Court answered “no” to the first question and “yes” to the second, overturning long-standing precedent reaching the opposite conclusion. As a result, device manufacturers that have traditionally relied on patent rights to protect their aftermarket revenues need to reassess both patent and non-patent (e.g., contractual, licensing, etc.) options with respect to post-sale restrictions.  

Background

Although the outcome of this case may have serious implications for the medical device industry, its origin stems from the printer industry. Printing products manufacturer Lexmark International sold certain of its printer cartridges with a notice on the packaging stating that the cartridges could not be reused or transferred to third parties. Cartridges featuring this notice were part of a program wherein purchasers would receive a discount on the cartridge purchase price in exchange for returning the cartridges after they became empty. Impression Products, a cartridge remanufacturer, acquired cartridges that were part of this program in violation of Lexmark’s restriction. Impression Products also acquired cartridges sold abroad by Lexmark and resold them in the United States. 

Lexmark sued Impression Products for patent infringement in district court in Ohio on the grounds that Impression Products’ acquisition and resale of used cartridges constituted infringement of Lexmark’s patent covering those cartridges. Impression Products moved to dismiss Lexmark’s case on the grounds that any legal control that Lexmark had over its cartridges ceased at the point Lexmark sold them. The district court agreed with Impression Products and ruled that Lexmark’s sales in the United States exhausted its patent rights, notwithstanding the restrictions it placed on those products at the time of sale. Accordingly, Lexmark did not have the right to bring a patent infringement action against Impression Products as to cartridges that Lexmark sold in the United States. With respect to cartridges which Lexmark sold abroad, relying on prior cases holding that an authorized first sale must occur in the U.S. in order for exhaustion of patent rights to occur, the district court found that Lexmark’s sales abroad were not exhausted. The court, therefore, ruled that Lexmark could sue Impression Products for patent infringement on those products.  

On appeal, the patent appeals court, the U.S. Court of Appeals for the Federal Circuit, reversed the district court’s finding that Lexmark’s U.S. sales were exhausted, ruling that a patentee may enforce, under the patent law, a restriction placed on the good at the time of sale. With respect to Lexmark’s international sales, the Federal Circuit affirmed the district court’s ruling that a sale outside the United States of a patented item does not exhaust U.S. patent rights. Impression Products appealed the Federal Circuit’s decision to the Supreme Court.

The Supreme Court’s Ruling

Given the importance of the issues presented in the case, several industry groups and manufacturers submitted amicus briefs to the Supreme Court. Those that filed briefs in support of Lexmark’s position included the Medical Device Manufacturers Association, the Pharmaceutical Research and Manufacturers of America, the Biotechnology Innovation Organization, Medtronic PLC, Zimmer Biomet Holdings, Inc., etc. Those that filed briefs in support of Impression Products included the Association of Medical Device Reprocessors, the Association of Service and Computer Dealers International, Inc., the North American Association of Telecom Dealers, etc.

On March 21, 2017, the U.S. Supreme Court heard oral argument from Impression Products, Lexmark, and the U.S. government. Impression Products argued that the exhaustion of patent rights after a first sale is based in legal principles that have existed for hundreds of years and pointed to precedent that post-sale restrictions are not enforceable via use of patent law. Lexmark countered with the argument that a sale with restrictions does not exhaust a patent holder’s patent rights because the Supreme Court has held in the past that patent owners have the ability to license less than all of their patent rights, such as by field of use. Lexmark further argued that there is no decision by the Supreme Court that says that a patentee necessarily has to sell everything it has. In response to Chief Justice Roberts’ question as to why contract law and state law were inadequate to enforce post-sale restrictions on use, Lexmark responded that no privity would exist between a downstream repurchaser and the patent owner, thereby limiting the patent owner’s ability to enforce a post-sale restriction against the repurchaser. 

On the issue of exhaustion for sales made in the United States, the U.S. Deputy Solicitor argued that, if a lawful sale has occurred, a patent owner can find recourse through contract or commercial law, not patent law as the patent right has been exhausted. On the question of international exhaustion, the government made clear that it was not advocating a rule under which a patentee could unilaterally impose downstream restrictions on a good that was legally imported and sold in the United States; rather, according to the government, U.S. patent rights must be explicit in a contract.

On May 30, 2017, the Supreme overturned the Federal Circuit’s ruling. First, the Court ruled 8-0 that a patent owner may not use the patent law’s infringement remedy to enforce post-sale restrictions on a product sold in the United States. In so ruling, the Court found the Federal Circuit decision contrary to the long-established line of legal precedent that supports the patent exhaustion doctrine. The Court held that, once a patent owner decides to sell a covered product, whether through its own sales channels or through those of a licensee, that sale exhausts its patent rights:

Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: the patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers . . . Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections. A patentee’s authority to limit licensees does not, as the Federal Circuit thought, mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws. So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. That licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself. The result: The sale exhausts the patentee’s rights in that item . . . A license may require the licensee to impose a restriction on purchasers, like the license limiting the computer manufacturer to selling for non-commercial use by individuals. But if the licensee does so—by, perhaps, having each customer sign a contract promising not to use the computers in business—the sale nonetheless exhausts all patent rights in the item sold.

Second, the Court ruled 7-1 that an authorized sale outside the United States exhausts all rights under the Patent Act as a sale within the United States.  In its opinion, the Court recognized that a patent owner may not be able to collect the same amount for its products internationally as it does in the United States. However, the Court deemed this irrelevant to the issue of exhaustion of patent rights:

But the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward . . . for every item that passes outside the scope of the patent monopoly.

Justice Ruth Bader Ginsburg concurred in part and dissented in part with the majority. She agreed with the majority on domestic exhaustion of U.S. patent rights, but dissented on the issue of international exhaustion. In her opinion, a foreign sale does not exhaust a U.S. inventor’s U.S. patent rights. She noted the territoriality of the U.S. patent system in supporting her rationale, stating that “[w]hen an inventor receives a U.S. patent, that patent provides no protection abroad.” She further added:

Because a sale abroad operates independently of the U.S. patent system, it makes little sense to say that such a sale exhausts an inventor’s U.S. patent rights. U.S. patent protection accompanies none of a U.S. patentee’s sales abroad—a competitor could sell the same patented product abroad with no U.S.-patent-law consequence. Accordingly, the foreign sale should not diminish the protections of U.S. law in the United States.

Impact of the Court’s Ruling

The Supreme Court’s ruling in Impression Products raises the question amongst medical device manufacturers of how best to protect their aftermarket revenues. The Supreme Court left open contract law principles as a vehicle to impose post-sale restrictions, which would include the use of structured licensing transactions. In practice, Impression Products means that medical device manufactures are expected to consider issues such as sale versus license, limitations on distribution channels, control over international distribution, chain-wide licensing structures, contractual remedies, and ramifications of selling foreign products at discounted prices. Another consideration that is particularly important in the medical device space is the impact that Impression Products will have on a manufacturer’s ability to police the goodwill of its products sold in the United States and abroad. While it may be too soon to know the full impact of Impression Products on the medical device industry, the decision certainly requires manufacturers that have relied on post-sale restrictions to consider its impact on existing and future business dealings involving aftermarket sales.

Baldassare Vinti is a partner in the Patent Law and Intellectual Property Groups at Proskauer. His practice focuses on litigating patent and intellectual property cases in federal and state courts, as well as before the International Trade Commission.  He can be reached at bvinti@proskauer.com.

Alexander Roan, associate at the firm, assisted in the preparation of this article.

[Image courtesy of STUART MILES/FREEDIGITALPHOTOS.NET]

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