Supreme Court Rules Patent Laws Can’t Be Used to Prevent Reselling

[KShine]

Not directly about LEGO, but it was something that could have had implications down the road.

https://www.nytimes.com/2017/05/30/business/supreme-court-patent-rights-lexmark.html

WASHINGTON — The Supreme Court on Tuesday placed sharp limits on how much control patent holders have over how their products are used after they are sold.

The case concerned Lexmark International, which makes toner cartridges for use in its printers. The court ruled that the company could not use patent law to stop companies from refilling and selling the cartridges.

Mark Lemley, director of the Stanford Program in Law, Science and Technology, said that anyone who refurbished, repaired or resold used products would now be protected from patent infringement claims. The ruling will also prevent manufacturers from forcing consumers to buy supplies only from the original source.

“It’s good for consumers,” Mr. Lemley said. “It’s going to reduce consumer prices.”

Lexmark sold the cartridges on the condition that they not be reused after the ink ran out. Impression Products, a small company in Charleston, W.Va., nonetheless bought Lexmark cartridges in the United States and abroad, refurbished and refilled them, and sold them more cheaply than Lexmark does.

Lexmark sued for patent infringement, and the United States Court of Appeals for the Federal Circuit, a specialized court in Washington, accepted both of its main arguments, concerning domestic and international sales.

The appeals court acknowledged that the general rule was that buyers of patented products could do with them what they wished. But it said the conditions Lexmark placed on the sale of its cartridges could be enforced as a matter of patent law for sales in the United States.

Chief Justice John G. Roberts Jr., writing for a unanimous Supreme Court on this point, disagreed. He said Lexmark could not use the patent laws to enforce the contractual conditions it placed on the sale of its cartridges. Under the doctrine of “patent exhaustion,” he wrote, once a patent holder sells an item, it can no longer control the item through the patent laws.

“The purchaser and all subsequent owners are free to use or resell the product just like any other item of personal property, without fear of an infringement lawsuit,” the chief justice wrote.

He used an illustration to make the point.

“Take a shop that restores and sells used cars,” Chief Justice Roberts wrote. “The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles. That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale.”

Printer makers like Lexmark and HP have long battled independent companies that refill ink and toner cartridges and sell them more cheaply than the manufacturers do. Inkjet printer ink is one of the world’s most expensive liquids, with Consumer Reports magazine estimating in 2013 that it cost $13 to $75 an ounce — more than top-class Champagne and many perfumes. A new Lexmark toner cartridge, with a suggested price of almost $200, sells for $138 at a major retailer. But a refurbisher currently sells a replacement for $72.

While Lexmark turned to the courts to stop the refill companies, HP resorted to technology, such as changing the internal software in the printers to recognize and block the use of unauthorized cartridges.

But the court’s decision will have ramifications far beyond ink, particularly for the import and resale of products like smartphones and name-brand drugs.

The justices essentially ruled that once products are sold, buyers can do what they want with them unless other laws intervene. In theory, the decision will allow a retailer like Costco Wholesale, which filed a brief for the defendant in the case, to buy high-tech goods at the cheapest price it can find worldwide, bring them to the United States and resell them to customers.

In a brief supporting Impression Products, Intel and other technology companies told the court that patent law should not be used to undermine an interconnected global economy. “A product may be designed in the United States; assembled in Singapore from parts made in Costa Rica, Israel and China; and then shipped to the United States for sale,” the brief said. “Intel’s multitier supply chain, for example, comprises more than 16,000 suppliers in over 100 countries. Likewise, more than 750 companies supply components from over 30 countries that are incorporated in iPhones and iPads.”

The appeals court had also ruled in favor of Lexmark on foreign sales, saying that patent holders could control what was done with their products after they were sold abroad and re-imported by buyers.

Chief Justice Roberts again disagreed, writing for the majority that the same basic principles applied. “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act,” he wrote.

In a 2013 Supreme Court copyright decision, Kirtsaeng v. John Wiley & Sons, the Supreme Court ruled that it was lawful to import and resell textbooks that were first sold abroad. Chief Justice Roberts wrote that making distinctions between patent and copyright protections “would make little theoretical or practical sense.”

The ruling on international sales is significant, legal experts said, because companies often sell their products abroad at lower prices on the condition that they will not be imported into the United States.

Justice Ruth Bader Ginsburg dissented from that part of the decision. “Patent law is territorial,” she wrote. “A foreign sale, I would hold, does not exhaust a U.S. inventor’s U.S. patent rights.”

Justice Neil M. Gorsuch did not participate in the case, Impression Products v. Lexmark International, No. 15-1189.

Edited May 31, 2017 by KShine