An opinion by Jon Cone.
This is a strange newsletter topic, but it concerns a matter that was argued before the Supreme Court this week and it affects all of our customers in one way or another. With only 8 Justices sitting, partisanship has been more practically avoided. Previously, the ninth Justice, the late Anthony Scalia was not known for siding with corporations against consumers. Further, he was an originalist that viewed corporations as citizens even though there is no mention of a corporation in the Constitution. He once said that, “like Social Security”, which he believed to be unconstitutional, “the according of corporations the rights of personhood is so deeply embedded in our socio-economic fabric, that it is unlikely the status quo could be reversed.” And this matter before the Court is certainly one between corporations who sell products and the private (liberty loving) citizens who purchase them.
On March 21, the court heard oral arguments in the Impression Products v. Lexmark case. The decision in this case has the potential to be a “major” decision with far reaching consequences that may effect how ALL products across all industries are some day sold and purchased.
This case involves whether a patent holder can put a restriction or a condition on a product such as “single use only” and by doing so retain the patent rights after the first sale. The second question being argued is does an authorized sale overseas exhaust the USA patent rights?
The short of these arguments is that Lexmark has been trying to circumnavigate the concept of patent exhaustion. Impression Products, which is a very small consumables company, believes that after an ink cartridge has been sold and used that the buyers of these cartridges can then turn around and sell them to Impression Products which refurbishes them, refills them with ink, and offers them for sale on the secondary market. Lexmark maintains that they restrict how their cartridges can be used and that a consumer is not free to dispose of it, refill it, nor sell it after it is empty. Lexmark sued Impression Products for patent infringement. A lower court sided with Lexmark and Impression Products was found in violation of Lexmark patents. The ruling was appealed and now finds itself in the highest court of the land. This Supreme Court ruling when it comes will have far reaching results affecting many industries other than printer consumables.
Normally, or as has been law, a patent becomes exhausted after it is used. After a patented product (such as an ink cartridge) has been sold by the OEM or by its authorized resellers, the patent is said to be exhausted. The patent can no longer be exercised by its holder. This limitation is also referred to as the exhaustion doctrine or first sale doctrine. The patent holder of an ink cartridge can legally prohibit other companies from making and selling this kind of ink cartridge, but it can not prohibit customers who have bought this ink cartridge from reselling it to third parties. Lexmark begs to differ. Certainly, all consumers in the USA believe that after they buy something, they have the right to do whatever the heck they want to with it. Many consumers in the USA earn a living by selling used products, or recycling used products into new and innovative forms that they resell. Certainly, many consumers enjoy the simple act of responsible recycling. That all maybe about to change.
What is at stake here are two arguments. First, can Lexmark (or any patent holder) prevent its customers from selling its used cartridges (or any patented product) to companies which refurbish and refill these cartridges and then offer them for re-sale. Lexmark thought it could if it put some wording on the packaging that they are being sold at a discount, reserving the value of the discount as their continued interest in the cartridge, and thereby preventing or allowing the customer of anything but returning it to Lexmark (who would then dispose of it). Second, if the patent is exhausted after first use in the USA – could Lexmark still prevent a cartridge first sold in Europe for example, from being reimported into the USA. In other words, if the patent is exhausted in Europe, could they get a second crack at it and claim the patent is not exhausted in the USA yet, and therefore prevent its entry into the USA in the form of a refurbished, pre-filled cartridge.
These matters have been settled in other cases. Why are ink cartridges so special? And it appears that several of the Justices were asking the same question.
Impression Products began oral arguments citing that that the first-sale or patent-exhaustion doctrine is an important principle that goes back centuries to common law and that the initial authorized sale of a patented item terminates all patent rights on that item, exhausting the patentee’s monopoly, and allowing the purchaser to use or sell that item however he or she so chooses.
Justice Kennedy questioned this as to whether Lexmark or other manufacturers can “impose restrictions enforceable under patent laws, such as on resale, repair, or reuse simply by stating such a restriction in the sales agreement.” Impression Products answered that when Congress enacted the Patent Act of 1952, “It did so with the knowledge that there was the principle that I’ve recited [patent exhaustion].” That the Patent law has not been codified as has the Copyright law, creates an environment in which Justice Anthony Kennedy asked Impression Products, “why hasn’t this been codified? …. Too busy or what? …. Did the failure to codify mean we should be somewhat cautious in extending … or in interpreting it?” That speaks volumes for how ill-defined the nature of the problems are before the court that the parties can’t even agree on the basis for the exhaustion doctrine.
More than one Justice challenged Lexmark asking why not simply rely on contract law, or why did Lexmark instead need patent law to enforce these restrictions? In other words, why is Lexmark dragging patent law into something that regards a simple contract between seller and buyer? Justice Roberts asked “Why is normal contract law and normal State law inadequate, for your purposes?” Justice Breyer asked “why can’t you enforce the contract downstream?” Lexmark answered they would lack privity (a contract) with downstream purchasers. Breyer replied, “Then why don’t you require the person who sells it to just resell it with the requirement that they promise to comply?”
On the second question of whether international sales exhaust U.S. patent rights, Impression Products argued, “The Patent Act should be read as if there were provisions stating the initial authorized sale of a patented item terminates all patent rights to that item.” and “There’s certainly nothing in the Patent Act that limits exhaustion to sales by U.S. patentees within the United States.” Justice Alito answered “It’s somewhat surprising to me that none of the briefs in this case talk about our cases regarding extraterritoriality. In recent years, we’ve … said … that a statute does not apply outside the United States unless it says that it applies outside the United States. I don’t see why that shouldn’t be the same for a common-law rule like the rule here. And if what’s involved here is the application of U.S. patent law abroad, where is the clear statement that the exhaustion rule applies outside of the borders of the United States? I … don’t see where that can be found.”
Interestingly, the United States (which is representing Patent law) supports Impression Products and wants to see a lower courts decision vacated (which is why this is at the Supreme Court now.) The United States believes that the correct rule is that U.S. patentees who authorize sales of patented articles abroad will exhaust their rights unless they expressly reserve these rights at the time of sale. Both Justices Breyer and Kennedy wondered how that could be done. Kennedy said, “do we put a sticker on the product? If so, that would be a boon for sticker companies.”
Many of the aftermarket attorneys left the courtroom believing that the first question of patent exhaustion is a “slam dunk” for consumers; a consumer has the right to do whatever they want with an ink cartridge once they have bought it. The second question on International Patent Exhaustion may be tricky. However, Justice Sotomayor stated that she saw no reason to treat patent rights differently than copyrights as the matter of copyright exhaustion has been recently defined in another Supreme Court case. Most of the Justices indicated that they favor a clear-cut case for exhaustion. And this may bode well for consumers, or it may be a heyday for patent holders.
Probably, the most significant aspect weighing on the minds of the Justices is whether to further protect 21st-century innovation policy (protectionism for patents) and remove any and all restrictions on corporations no matter the economic consequences to consumers. There is no easy out for the Court. Neither Lexmark nor Impression Products is presenting an argument that will allow the Justices to limit their decision. Considering how this Court has sided towards innovation policy in the past, that may not bode well for consumers. In any event, we will not hear more from this case any sooner than June.
Although InkjetMall sells third party consumables it is not in the business of selling patented products. The patented products that are being argued are not similar to what we sell, and the ruling one way or the other would not directly affect the products we sell. But, a ruling for Lexmark would severely reduce the size of the aftermarket plastics industry by eliminating the majority of its business and probably lead to the collapse of a 3rd party consumables industry. It would also cause USA landfills to fill to capacity with every single ink cartridge becoming illegal to reuse, refill or recycle other than with the manufacturers who have demonstrated they have no tolerance for ReUse.
Having said that, I am more concerned with my next car, my next coffee maker, my next rice cooker, my next bicycle, my next camera, my next anything innovative. With a decision to protect corporate innovation and allow (if not encourage) restrictions on patents, new items may someday be sold with a disclaimer preventing my choice of consumables or or to resell or dispose of the products I purchased. Think of a world filled only with items that when you buy them you really do not fully own them, can not sell them used, nor recycle them, but only return to the seller when you are done consuming it. In this way, corporations could squeeze out every excess dollar from American consumers by removing the secondary market. No more eBay! No more flea markets. Just a vast underground of illegal secondary market commerce taking place where consumers sell used gadgets to other consumers under threat of imprisonment (think of the street scene in Blade Runner where even reptiles had been patented; everything was patented.)
What if I wanted to recycle an innovative plastic yogurt container by removing the manufacturer’s Brands and artwork and printing my own to modify and convert them into garden seed sprinklers that I sold to others? I could be prevented from doing that by a restrictive or non-exhausting patent in the form of a printed foil liner contract I tore off before I stirred up the mango-apricot from its bottom. Likewise, I could be prevented from selling the containers on eBay to others, or giving them to a plastics recycler. If I can’t really own a yogurt container or an ink cartridge, then I am not free to recycle it, or refill it, or use it as a paper weight, or plug it and use it as a fishing line bobber. What kind of world would it be without thrift stores?
These are liberties we take for granted after we part with our hard earned monies. We buy things and we are free to do with them what we want. Lexmark disagrees with that premise, and they are arguing it all the way to the Supreme Court. When the Court had nine Justices it routinely sided for corporations and 21st century innovation policy rather than consumer protection. So, we are in a peculiar situation right now. With the absence of the 9th and certainly very conservative Justice Scalia, there’s a very narrow opportunity for consumers. And one can not possibly know where potential 9th Supreme Court nominee Judge Goresuch stands on such matters because he has refused to answer questions during his confirmation hearings.
Stay tuned, buy generic, floss regularly, and wear sunscreen, and support 3rd parties.