On May 30, the Supreme Court of the United State issued its much-anticipated decision in the Impression Products v. Lexmark International matter. In a nearly unanimous ruling, the high court found in favor of Impression Products, a small remanufacturer based in Charleston, West Virginia. The decision settled a couple of hotly-contested issues related to when a patent holder’s patent protections are exhausted. The SCOTUS decision represents a major win for US remanufacturers and restricts certain patent holder rights that remans—as well as others—had been fighting for years.
The two issues disputed in the Impression Products v. Lexmark International case centered on whether there were circumstances that allowed US patent holders to retain their patent rights after the first authorized sale of a patent-protected product.
First, the high court was asked to settle if a patent holder can put restrictions or conditions on a product, such as “single-use only,” and thereby retain patent rights after first sale. Second, the court was asked if a patentee retains its US patent rights after an authorized sale occurs outside of the US. In siding with Impression Products, the high court answered a resounding “no” to both questions.
The Legal Questions
To understand the issues at the center of Impression Products v. Lexmark International, we need to look at two earlier rulings from the US Court of Appeals for the Federal Circuit. Both decisions preserved a patentee’s protections after the first authorized sale of a patented product. In their 1992 Mallinckrodt v. Medipart ruling, judges on the federal appeals court found that patent holders retain certain protections on patented articles sold with a “lawful and clearly communicated” single-use/no-resale restriction. In 2001, the appellate court once again sided with US patent holders in Jazz Photo Corp. v. International Trade Commission, finding that patent holders retain their patent rights on articles that are first sold abroad.
Being on the wrong side of the Mallinckrodt and Jazz Photo decisions has had big implications for US remanufacturers like Impression Products. Over the years, various OEMs have based lawsuits on these rulings, which have been codified into rock-solid case law. More than one hardware manufacturer had used Mallinckrodt and Jazz Photo to successfully argue in US courts that they retained patent protections on empty ink and toner cartridges. By retaining these protections, the rulings impacted the remanufacturing industry’s access to its most vital raw material—empty cartridges.
Lexmark based part of its Impression Products case on the Mallinckrodt decision, asserting that patents on its Return Program toner cartridges remained enforceable even after the first sale. Customers purchasing Return Program SKUs agree to return their spent cartridges to Lexmark and the OEM gives them a discount on the initial purchase price for the promised return. Lexmark successfully argued in lower courts that under Mallinckrodt, it retained its patent protections on Return Program SKUs because of the single-use/no-resale restriction. If a third-party such as Impression Products remanufactured a Return Program cartridge, the patents on the cartridges were violated during the process thanks to Mallinckrodt.
The Jazz Photo decision was based on the notion that US patents are only relevant and enforceable within the US. Because US patent laws end at the water’s edge, US patents are not exhausted if the first sale of a product occurs outside of the United States. Under Jazz Photo, Lexmark argued that it retained its patents on empty cores from cartridges first sold outside of the US. If these cores were returned to the US and remanufactured, as Impression Products had done, the remanufacturer infringed the OEM’s patents.
The Long Road to SCOTUS
The Impression Products v. Lexmark International case that would ultimately come before the U.S. Supreme Court began in 2010. At that time, Lexmark filed a patent-infringement suit in the U.S. District Court for the Southern District of Ohio against a number of companies marketing third-party supplies. Although Impression Products was not one of the companies named at that time: the original 2010 suit involved a total of 26 companies, including third-party supplies manufacturers and their distributors and channel partners. All of the firms eventually settled with Lexmark. The case remained open, however, because Lexmark’s suit included so-called unidentified “John Doe” defendants that the OEM planned to name in an amended complaint.
In 2012, Lexmark sent letters to numerous third-party supplies firms accusing them of patent infringement by allegedly remanufacturing Return Program cartridges or cores sold outside of the US. The OEM offered the companies the choice of settling or being named defendants in an amended filing to the still-open case in the Ohio court. While dozens of companies settled with Lexmark, there were some holdouts. In 2013, Lexmark made good on its threat and filed an amended lawsuit naming the holdouts as defendants. Impression Products was among the firms named as a new defendant.
Eventually, the new companies named in the case opted to settle with Lexmark—all except one, the West Virginian reman. This set the stage for the original Lexmark v. Impression Products case, which was heard in the Southern District of Ohio court in 2014. The court found in Lexmark’s favor on one key issue (that Impression Products infringed by selling remanufactured cartridges using empties first sold overseas, in which Lexmark retained its patent rights), and found in Impression Products’ favor on another (that Impression Products’ sale of remanufactured Return Program cartridges did not infringe Lexmark’s patents because Lexmark had exhausted its patent rights in these cartridges).
Apparently, neither party was satisfied with the Ohio court’s split decision. In 2014, both companies appealed the decision to the US Court of Appeals for the Federal Circuit. In February 2016, the appellate court ruled in Lexmark’s favor and reaffirmed its Mallinckrodt and Jazz Photo decisions. Impression Products immediately appealed the decision. The Supreme Court agreed to hear Impression Products v. Lexmark at the end of last year.
The Supremes Speak
Chief Justice Roberts wrote the opinion for the majority and he restated the two key questions involving patent exhaustion that I described earlier. The first question before the Supreme Court, he said, was “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.”
The second question, according to the Chief Justice, was “whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply.” Chief Justice Robert wrote that the court found “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.”
Regarding the Return Program cartridges, Chief Justice Roberts wrote that “Lexmark exhausted its patent rights in these cartridges the moment it sold them.” He indicated, however, that under contract law Lexmark could put single-use/no-resale restrictions on Return Program cartridges. If it so chooses, Lexmark is free to file suit against its customers if cartridges are not returned and the Return Program agreement is breached contractually, but no claims can be made under patent law. On the question of whether Lexmark retained its patent rights on products first sold overseas, the court said clearly and succinctly, “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”
The Supreme Court’s opinion, delivered by Chief Justice John Roberts, was joined by Justices Anthony Kennedy, Clarence Thomas, Stephen Breyer, Samuel Alito, Sonia Sotomayor, and Elena Kagan. Justice Ruth Bader Ginsburg wrote an opinion concurring in part with the majority’s decision but also dissenting in part. Her dissension related to how the court reached its decision regarding foreign exhaustion of patent protections and indicated that she agreed with the appeal court’s decision. The court’s newest justice, Neil Gorsuch, did not take part in the case.
So What?
Inside—and outside—of the office imaging industry, the Supreme Court’s ruling is a big deal. Overturning Mallinckrodt and Jazz Photo at one fell swoop fundamentally changes US patent law. It’s truly bad news for OEMs. For at least a decade, lawyers for more than one hardware manufacturer have relied heavy on these decisions to successfully sue scores of aftermarket supplies firms for infringing OEM patents.
Lexmark looks to be the biggest loser. The firm’s Return Program is unique to Lexmark, so losing the protections provided by Mallinckrodt will be especially painful. The firm’s supplies business will suffer additional ill effects from the Supreme Court’s ruling. Supplies revenue at Lexmark enjoyed a nice uptick as the company signed agreements with a multitude of US third-party supplies vendors back in and around 2012. Part of the settlements that I read required companies to stop selling products that infringed Lexmark patents. Without Mallinckrodt and Jazz Photo, the availability of non-infringing Lexmark remans should grew smartly, and I bet companies that inked deals with the OEM will begin moving to these now non-infringing products.
Though still a big deal, the recent Supreme Court ruling will not impact the industry the way it could have 10 or 15 years ago. If the initial decisions, especially Jazz Photo, had gone differently, that would have truly changed the game for US remanufacturers. Back then, the competitive landscape was very different than it is today. There were many more remanufacturers, and having access to a larger pool of empties would have made life easier for many of them. Moreover, because the price of empties is determined largely by core availability, the price of empties would have been lower. And of course not having to worry about lawsuits arising from Mallinckrodt and Jazz Photo would have lowered stress levels for many US remans.
Today, US remanufacturers are coping with new challenges. OEMs have developed new means to retain share. MPS programs, smart chip technology, anti-clone firmware updates, and marketing programs aimed at promoting the use of original cartridges have all proven effective strategies for hardware manufacturers to protect their aftermarket business. In addition to facing new challenges from OEMs, US remanufacturers face new threats from non-OEM vendors that were not an issue 15 years ago.
Rather than battling with domestic competitors, the last remaining US remans now must compete with low-priced imports that are produced in factories with dirt-cheap fix costs that are not achievable in the US. Some of these foreign products are manufactured with little or no regard for OEM patents and are based on totally new cores rather than legitimately remanufactured from spent OEM cartridges. While I’m certain that the repeal of Mallinckrodt and Jazz Photo will bring down the pricing of empties, there is no way that the price of legitimate empties will drop so dramatically that cartridges remanufactured in the US will be able to compete with imported, infringing, new-build compatibles.
In an ironic twist, it may be that the Supreme Court’s decision to overturn Mallinckrodt and Jazz Photo will actually hurt US remanufacturers. The aggressive stance that OEMs have taken on remanufactured cartridges based on cores from cartridges that were first sold overseas has helped the domestic remanufacturing industry. Some of the OEM suits resulted in restrictions being placed on the importation of infringing products from overseas. Many customers that had purchased cartridges legitimately remanufactured overseas turned to domestic remanufacturers to stay on the right side of the old patent law as well as face supply chain problems brought on by import restrictions. Without Jazz Photo, I suspect that many foreign factories will seek new opportunities in the US, which will put new pressures on domestic remanufacturers.
It will be interesting to see how the Supreme Court’s ruling on Mallinckrodt and Jazz Photo plays out. For good or ill, the ruling is bound to be felt across the industry.
