The U.S. Supreme Court’s May 30, 2017 decision in Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017), should provide some comfort for secured parties and the lawyers who advise them, but not too much comfort. Caution is still needed before lending against inventory manufactured pursuant to a patent, particularly if the debtor is a manufacturer.
The Lexmark case involved a claim of patent infringement against Impression. Lexmark manufactured toner cartridges. It sold some at full price and free of restrictions on resale and reuse. It sold other cartridges at a discount but subject to restrictions on resale and reuse. The restricted cartridges had a microchip that made them inoperative if they were refilled. Impression bought restricted cartridges, allegedly with knowledge of the restriction, altered or removed the microchip, and then refilled and resold the cartridges. Lexmark sued for patent infringement.
The district court had ruled that Lexmark’s initial sale exhausted its patent rights pursuant to the so-called first-sale doctrine. The Court of Appeals for the Federal Circuit reversed. It acknowledged the existence of the first-sale doctrine, but concluded that a sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer—or on a subsequent purchaser with knowledge of the restriction—the authorization to engage in the use or resale that the restri
Secured Parties Still Must Be Aware of Patent Rights in Goods
IN BRIEF
- A recent U.S. Supreme Court decision adopts an expansive view of patent exhaustion, and is welcome for secured parties that finance distributors or retailers that have purchased patented goods.
- Disposition of such goods by a secured party would not violate the patenteeís patent rights because those rights will have been exhausted by the patenteeís prior sale of the goods.
- The court was quite clear that the doctrine of patent exhaustion applies only when the patentee sells patented goods, however, not when the patentee licenses its patent rights.
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