A patent owner has the right to exclude others from making, using, selling, offering for sale, and importing a patented product. However, an unqualified sale of a patented product terminates the patent owner’s rights under patent law to control the patented article under the doctrine of patent exhaustion (also called the first sale doctrine). Historically, legal precedent permitted lawful restrictions on post-sale use or resale to preserve patent rights. Although a patent owner could not prevent redistribution of his patented product, he could place contractual restrictions on how customers used or distributed the patented product. A patent owner’s patent rights were deemed preserved against uses that violated such contractual restrictions. Additional legal precedent held that foreign sales did not exhaust U.S. patent rights.
 
The Supreme Court’s Lexmark Decision
The Supreme Court changed the law this past May in Impression Products Inc. v. Lexmark International Inc. Lexmark sold ink-toner cartridges for use in laser printers to customers worldwide. In an attempt to prevent unauthorized refilling and reselling of spent cartridges, Lexmark imposed a contractual obligation on U.S. customers to use a cartridge only once and to refrain from giving the empty cartridge to anyone but Lexmark. Impression Products purchased used cartridges from Lexmark’s customers, refilled them, and resold them in the U.S. at a lower price than Lexmark. Lexmark sued Impression Products for patent infringement. The Federal Circuit held that the patent exhaustion doctrine did not prevent Lexmark from retaining the right to enforce its patent against resale of its product if lawful restrictions where placed on such resale. The Federal Circuit also held that patent exhaustion only applied to Lexmark’s domestic sales. The Supreme Court granted certiorari and reversed the Federal Circuit, holding that a patentee’s decision to sell a patented product, domestically or abroad, exhausts all of the patent rights in the product.
 
How Lexmark Impacts the Medical Device Community
The Supreme Court’s decision affects technologies well beyond the refurbished printer cartridges at issue in Lexmark. Many medical devices are designed, labeled, and expressly sold as “single-use only.” For medical devices that are not “single-use only,” suppliers may still wish to restrict the downstream use, resale, or refurbishment in some manner. A medical device patent owner may wish to impose single-use and other restrictions for reasons of product efficacy, patient safety, or to meet specific FDA requirements. Medical device patent owners have relied for decades on the ability to impose lawful restrictions on post-sale use or resale, and to use patent rights to enforce such restrictions. Lexmark restricts the ability of these medical device patent owners to do so.
 
The World Post-Lexmark
The Supreme Court’s decision leaves open two avenues for a patent owner to exercise downstream control of patented products. First, restrictions on licensees remain lawful. An authorized sale by a licensee will extinguish patent rights to the same extent as an initial sale by the patentee, but an unauthorized sale will not extinguish such rights. A comparison of two recent district court cases illustrates this point. In Miics & Partners Am. Inc. v. Toshiba Corp.(D. Del. 2017), Miics licensed Samsung and Panasonic to sell LCD components. The license agreements prohibited Samsung and Panasonic from making end-user products with the LCD components. Samsung and Panasonic sold the LCD components to Toshiba and Funai, who incorporated them into end-user products. The district court dismissed Miics’ infringement suit against Toshiba and Funai because Miics’ rights in the asserted patents were exhausted by authorized sales. The license agreements limited Samsung’s and Panasonic’s ability to manufacture end-user products, but did not limit to whom Samsung and Panasonic could sell the licensed products. Compare Miics to Sunoco Partners Mktg. v. U.S. Venture Inc. (N.D. Ill. 2017). In Sunoco, as part of a litigation-driven settlement agreement, Sunoco granted Technics Inc. a covenant not to sue for past infringement. The district court held that Technics’ sale of accused infringing products to U.S. Venture prior to the lawsuit did not exhaust Sunoco’s patent rights; a sale must still be authorized by the patent owner to trigger patent exhaustion. Another district court in Chrimar Sys. v. Alcatel-Lucent Enter. USA Inc. (E.D. Tex. 2017) similarly reaffirmed that a license that restricts the licensee from selling products to particular third parties is still valid.
 
Thus, medical device manufacturers may be able to institute more complex licensing structures to impose certain post-sale restrictions on patented devices. But there are many as yet unanswered questions on how far such restrictions may extend. For example, can a patent owner avoid exhaustion by forming a separate manufacturing entity licensed to make and sell patented devices only to customers that will discard the device after a single use? Not likely, given that the Supreme Court’s Lexmark decision was an outgrowth of the law’s preference against restraints on alienation. Attempts to use a license to impose post-sale restrictions on purchasers that could not be imposed by the patent owner directly will be heavily scrutinized.
 
In addition to restrictions on licensees, the Supreme Court’s decision leaves open the possibility that post-sale restrictions are enforceable under contract law. Contract law may provide some help, but is largely an impractical remedy. Contract law cannot offer the same breadth of remedies to a patent owner as an infringement suit. A patent owner may impose contractual penalties on those with whom it is in privity of contract (i.e., direct customers) to dissuade the transfer of used single-use products or to encourage other post-sale restrictions on product use. The advisability of launching a lawsuit against a direct customer is questionable at best. As for subsequent purchasers, contract law is largely ineffective in enforcing contractual restrictions against those who were not parties to the original contract containing the restrictions. Even if there is contractual privity between the patent owner and a subsequent purchaser, available contractual remedies may provide only monetary damages, not the injunctive relief necessary to prevent reconditioned devices from entering the market. Moreover, preemption might bar some state law breach of contract claims. Efforts to enforce contractual restrictions may also run afoul of antitrust, patent misuse, and unfair competition law principles in the wake of Lexmark.
 
In short, Lexmark makes it difficult for a patent owner to go after downstream purchasers that disregard initial sales conditions. Accordingly, patent owners must adapt their strategies. Patent owners should focus pricing and royalty policies on the first authorized sale, remembering that an authorized foreign purchaser may import the patented product into the U.S. and any authorized purchaser may resell the product in the U.S. Suppliers of single-use products may want to incorporate technological limitations on further product use that make it impossible, or at least costly and impractical, for downstream purchasers to reuse or refurbish products (e.g., microchips that prevent reuse after a set time or event occurrence). For durable products, suppliers may want to lease in lieu of selling a patented product. A bona fide lease transaction may indeed avoid patent exhaustion, but will raise additional financial, accounting, liability, and insurance concerns. A purported lease that is no more than a thinly disguised sale is unlikely to avoid patent exhaustion.
 

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Cheryl Burgess is a partner in the Orange County, Calif., office of intellectual property law firm Knobbe Martens.