Retailers across the U.S. sighed with relief on Tuesday as a unanimous Supreme Court overturned an appeals court ruling that said printer maker Lexmark can use its patent monopolies to prevent other companies from selling ink refills without its permission.
The 8-0 decision, which came in one of the court's biggest business cases this term, affects not only the printer industry, but also consumers and any company that resells or repairs another company's products.
The case concerned Lexmark suing a small West Virginia company that modified the printer giant's cartridges in order to sell discount refills—a common practice but one Lexmark said infringed on its patent rights. In Lexmark's view, which companies should be able to attach conditions to the sale of their patented and sue anyone who violates those conditions in patent court.
Chief Justice John Roberts, however, didn't see it this way. He said letting companies put restrictions on their products in this fashion would hurt consumers ability to do what they like with the products they buy.
Using the example of an auto-repair shop, Roberts also warned that allowing companies to enforce patents in the secondary market would lead to uncertainty and expense:
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. Those companies might, for instance, re- strict resale rights and sue the shop owner for patent infringement. And even if they refrained from imposing such restrictions, the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits. (my emphasis)
Roberts also pointed to briefs submitted by Costco and Intel to note say that giving Lexmark new patent rights would further risk "clog[ging] the channels of commerce" given recent advances in technology and more complex supply chains.
"Exhausted" with patents
The court also addressed a second and related issue in the case: Can companies like Lexmark enforce their U.S. patent rights when someone buys their product legally overseas and then imports it into the U.S.? The answer to this question turned out to just as straightforward: no.
To support its position, from which Justice Ruth Ginsburg dissented, the court repeatedly referred to a legal idea known as "exhaustion"—the notion that an intellectual property owner should only gets one kick at the can when it comes to enforcing monopoly rights.
Roberts noted that Congress has long favored the idea of "exhaustion" because it's in keeping with longtime common law rules that frown on letting people put conditions on goods for sale in the market.
"As Lord Coke put it in the 17th century, if an owner restricts the resale or use of an item after selling it, that restriction “is voide, because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man," the Supreme Court wrote.
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The court concluded that Lexmark could not use patent laws to stop the cartridge refills but that it could sue its customers for breach of contract—though, in practice, the company might be reluctant to do that.
Bob Patton, the general counsel for Lexmark, said the company will not change its business strategy.
“While we are disappointed by today’s decision, we note that the Court confirmed that the Lexmark Return Program agreement remains clear and enforceable under contract law. Accordingly, the Lexmark Return Program will remain largely unchanged and will continue to offer customer choice and promote environmental sustainability," said Patton in a statement.
Meanwhile, an attorney for Impression Products, the West Virginia company that sold the refills, hailed the ruling.
"We are gratified that the Court today reaffirmed important limits on the scope of patent rights. Patents play an critical role in spurring innovation, but overbroad patent rights actually deter innovation and also hinder or even eliminate aftermarket competition, producing less choice and higher costs for consumers," said Andy Pincus of the firm Mayer Brown.
Tuesday's Lexmark ruling also amounts to yet another drubbing for the Federal Circuit Court of Appeals, which has been frequently criticized for rulings that expand the rights of intellectual property owners . The Supreme Court has unanimously overturned the court, which is charged with hearing every patent appeal in the country, numerous times in recent years, including another 8-0 ruling last week.