Patent Exhaustion is Getting Exhausting

The Basics – What is Prior Art? (Part 1)
September 26, 2017

Patent Exhaustion is Getting Exhausting

Earlier this year, the US Supreme Court considered whether sales of a patented product exhausts (ends) the patent owner’s patent rights in that product.

 

In 2016 the Federal Circuit, the court created by Congress in the 1980s that historically has been the final word on patent law, affirmed that patent rights still could be applied to a sold product even after the sale.  However, continuing a pattern we will return to often, the Supreme Court reversed the Federal Circuit in its May ruling.

 

As such, patent law has, once again, been turned upside down, and here the impact goes beyond patents: it affects global sales strategies, the nature of revenue generation, and the costs of adequately protecting an invention around the world.

 

Quick Review of Salient Facts

This case involved the resale of printer cartridges by Lexmark, both in the US and abroad.  It is not surprising, even to those of us outside of the industry, that companies which sell printers significantly rely on revenue from the continuing sale of toner cartridges.  Given that cartridges require significantly less technology and infrastructure to produce than printers, it’s also not surprising that a robust cartridge filling and re-sale industry has developed.  Of course, these re-sellers threaten the revenue that the printer manufacturers depend on.

 

To try to fend off this threat, Lexmark implemented a contract that required purchasers to not re-sell their cartridges to anyone that would reload them.  Impression Products, however, still found a way to purchase these cartridges from Lexmark customers abroad and re-sell them into the US at lower prices. Rather than suing customers for breach of contract, Lexmark sued Impression Products for infringing its patents.

 

Why Does this Matter

OK, so even if you are familiar with patents, odds are you might not be familiar with “patent exhaustion”.  Does this matter to business leaders and innovators?  YES, and potentially a lot.  Now that the dust has settled around the opinion and the experts have weighed in, we can explain why and advise as to what you can do about it.

 

Getting specific, there actually are two important aspects of this decision that can significantly impact innovators.

 

The first is the limit of the scope of the exhaustion to a sale, which will be discussed in a different post, and the second is whether product sales outside the USA end patent rights for those products in the USA.  That’s our focus here.  The fact that the Supreme Court says that when a product is sold (again, more on that later) outside the USA, any US patent rights covering that patent are considered “exhausted” (that is, ended) even when the product is re-imported to the US, will have big impacts.

 

What impacts?

The world may be getting flatter, but it is still far from flat.  Products in the US are often significantly more expensive than products in emerging countries, even the big emerging markets such as China, Russia, Vietnam, and Brazil. Prior to this change, the law was that a company could sell into those markets, at a significantly lower price, but with the understanding that the products would not be re-imported to the USA.  This allowed companies to generate revenue at different price points around the world.

 

With this new Supreme Court ruling, companies can purchase these products at such lower costs outside the US, import them, and collect a portion of the difference in price.  Of course, price-conscious customers will start looking to such imported products rather than buying the original US product at a premium.  This is a big change and a big risk to manufacturers and innovators in general.

 

Unfortunately, what appears like the easiest “fix” is to price uniformly across the board.  This will likely drive down revenues on one side of the equation or the other (inside/outside the US).  Alternatively, and (arguably) just as detrimental, it will simply mean that technologies available in the “first world markets” remain generally unavailable in the big emerging markets and third world.

 

A secondary impact can be in terms of patent portfolio costs.  Most companies today file patents only in “first world” countries where sales prices are high, as these countries make up the lion’s share of total revenue.  Patent portfolios cost money, so companies can limit their costs while covering just the countries that provide the highest impact.  Often, however, sales in unpatented countries are at prices significantly lower than where a patent exists, given the prior ability of the company to lawfully exclude competition during the life of the patent.  If companies want to maintain this kind of model, won’t they have to file in more countries?  We expect in many cases they will, so expect to see an increase in patent filings in the big emerging markets.

 

Links

Impression Products, Inc. v. Lexmark International, Inc. (2017)

http://www.patentdocs.org/2017/05/impression-products-inc-v-lexmark-international-inc-2017.html

http://www.ipwatchdog.com/2017/05/30/supreme-court-lexmark-sales-exhausted-patent-rights/id=83824/

https://patentlyo.com/patent/2017/05/impression-exhausted-domestic.html