In another chapter of its ongoing battle with the Federal Circuit (and the second in a week), the Supreme Court (SCOTUS, I will refer to the Federal Circuit as the CAFC) ruled last Tuesday in Impression Products v. Lexmark International that the sale of a patented product “exhausts” the patent-holder’s claim to derive patent revenue from that particular article. First, a brief background. Printer toner is like razor blades: companies charge extravagant prices for the toner without which their printers will not operate, while selling the printer itself fairly cheaply. Such a strategy creates secondary markets in toner, either in third party cartridges that are designed to be compatible with the printer, or in strategies for refilling used cartridges. Naturally, printer companies hate this, and so engage in all sorts of strategies to stop it. They warn consumers that using non-proprietary cartridges will cause poor print quality and void their warranty. They design their devices to try to detect off-brand toner, and refuse to operate if one is installed. These strategies tend to fail in court. In 2004, the 6th Circuit ruled that efforts to circumvent the cartridge-detection system did not violate the DMCA (= copyright law).
In last Tuesday’s case, Lexmark had sued a manufacturer of aftermarket ink cartridges, which had been taking used cartridges from either overseas markets or from consumers who had emptied them, refilling them, and then selling them. Lexmark argued that its exclusive rights should extend to the resold cartridges. The SCOTUS threw cold water on that argument, citing settled common law on property: when you sell something, you don’t get to derive revenue from subsequent sales. If Lexmark wanted to try to extend its patent rights, the company could contractually forbid users to give their spent cartridges to companies like Impression, for example, but that would be a matter of contract law, not property. But patents are a species of property, and patent rights are “exhausted” – i.e., end – when the patented product is sold.
“This case presents two questions about the scope of the patent exhaustion doctrine: First, whether a patentee that sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through an infringement lawsuit. And second whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply. We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale”
The decision was hailed as a victory for consumers. It aligns patent exhaustion jurisprudence more closely with copyright first-sale doctrine. It might (or might not) have implications for importing drugs into the U.S. Sarah R. Wasserman Rajec sums up the international issue as one substantially about strategies for price discrimination: “companies will no longer be able to use patent rights … to engage in geographic price discrimination between U.S. and foreign markets, and supply-chain-participants, resellers, and consumers will not be subject to the information costs associated with determining the provenance and travels of all articles of commerce they purchase.” She suggests that companies will likely move increasingly to licensing agreements: in other words (mine, not hers), the SCOTUS invocation of common law property will have the ironic effect of making licensing or other forms of entitlements more efficient (for efficiency and types of entitlements, this paper is fundamental), driving global trade in a more neoliberal direction.
I think a couple of things are worth noting, following my discussion of last week’s case. First, as I noted there, the Supreme Court has been trying to restrict patent rights for over a decade now. I noted there the Myriad decision, which held that an isolated DNA segment was not patentable purely because it had been isolated from its naturally occurring context. There was also a 2014 case that pushed back on software patents, expanding the area covered by “abstract ideas” (here the CAFC nearly completely fractured, but the plurality did restrict the patent claims). In 2012, SCOTUS reversed the CAFC on the question of (very roughly put) dosing information based on known behaviors of a drug, declaring that to be unpatentable subject matter. A 2010 case restricted business method eligibility (here the Court affirmed the CAFC, but rejected its reasoning).
These were all §101, subject matter eligibility cases, and in them, the Court is generally unanimous (or nearly so), and rejects either the result of the CAFC’s analysis, the reasoning behind it, or both. SCOTUS also fairly consistently refers to traditional judicial principles. But the pattern is more than just §101. Indeed, the unanimous 2006 KSR v. Teleflex expressed similar skepticism about obviousness (§103 of the statute). There, the question is whether a “person having ordinary skill in the art” (PHOSITA) in question would find the claimed innovation “obvious.” If so, the result is not patentable. Teleflex concerned innovation in accelerator pedals (don’t ask!), but the key part is the SCOTUS battle with the CAFC. The CAFC had developed a heuristic, the “TSM” test, which required evidence of “teaching, suggestion, or motivation to combine known elements in order to show that the combination is obvious” (in other words, you need to do more than show that the individual prior elements existed; there has to be some reason to think you’d bring them together). After crediting the CAFC with a “useful insight,” Justice Kennedy wrote for the unanimous SCOTUS:
“Helpful insights, however, need not become rigid and mandatory formulas; and when it is so applied, the TSM test is incompatible with our precedents. The obviousness analysis cannot be confined by a formalistic conception of the words teaching, suggestion, and motivation, or by overemphasis on the importance of published articles and the explicit content of issued patents. The diversity of inventive pursuits and of modern technology counsels against limiting the analysis in this way. In many fields it may be that there is little discussion of obvious techniques or combinations, and it often may be the case that market demand, rather than scientific literature, will drive design trends. Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility”
Thus, “But when a court transforms the general principle into a rigid rule that limits the obviousness inquiry, as the Court of Appeals did here, it errs.” I won’t attempt to detail the argument here, but the gist of it is that the CAFC read the component parts of TSM too rigidly and too narrowly, and thus sort of missed the obviousness test forest (the scope of the patent as a whole) for the trees of TSM. The Court doesn’t put it this way, but I think the reasoning echoes the way the idea/expression dichotomy operates in copyright: the specific invention may be patented, but the ideas behind it or the ideas that it expresses can make follow-on innovation obvious, and even encourage it: the relatively narrowly-defined “expressions” allow for lots of new expressions based on the underlying ‘idea” (thus Survivor expressed “reality TV,” which has done quite well for itself; for a good defense of this argument, see here).
Second takeaway from the Lexmark case: with the possible exception of KSR v Teleflex, it’s worth noting that the Court’s use of common law and established theories of property (as opposed to contract) in the cases here present exercises of juridical power in the Foucauldian sense. I’ve argued elsewhere that patents are best understood these days as biopolitical creations. The interaction between juridical and biopower is an important topic that doesn’t get as much attention as it should, and it can happen in various ways. In the school desegregation cases, for example, the Courts used common law equity principles to legitimate a biopolitical policy approach, giving judges or their appointees seats at the school policy-making table. In the case of patents, the Supreme Court is exercising juridical rules to limit the Federal Circuit’s more biopolitical approach to patents. There is of course a longer story to be told here, but it seems to me that the trend lines for patents are relatively clear.