Tuesday, May 30, 2017

On Toner Cartridges and Gray Market Imports

The United States Supreme Court has made it easier for discount retailers and "off-brand" Amazon resellers to import and sell refurbished goods, which is good news for bargain seekers.

First, a little background. Intellectual property rights like patents, trademarks, and copyrights are a deal that inventors, artists, and brand innovators make with the United States government. To promote the activity of these creative enterprises, the government grants a limited monopoly on the sale or exploitation of the work. That is why you can't make a copy of Star Wars Rogue One for 95 years, at which time it will fall into the public domain. Similarly, you can't start making your own version of the latest antibiotic because the company that put in the effort on research and development most likely owns the patent.

But, the scope of intellectual property rights is limited. With respect to patents, the law give the patent holder the "right to exclude others from  making, using, offering for sale, or selling" the invention. However, the law includes an exception that applies when the patentee sells the item. At that point, the product is the private individual property of the purchaser, who acquires all the rights of ownership, including the right to re-sell that item. This is why although you can resell your smartphone, you can't reproduce it. The same goes for music files and your trademarked running shoes. This is the rule of exhaustion.

In Impression Products, Inc. v. Lexmark Int'l, Inc., the United States Supreme Court had to decide whether Lexmark could contractually prohibit purchasers of toner cartridges from reselling them. Lexmark did this to keep the cartridges out of the hands of companies like Impression Products, that refurbish, refill, and resell the cartridges at a discount and in direct competition with Lexmark.

To discourage this activity, Lexmark set up two sales channels. In one channel, customers paid "full price" for an unrestricted toner cartridge. In the other channel, called the "Return Program," Lexmark offered a 20% discount in exchange for adding a microchip to the cartridge. The chip contained software that prevent the reuse of the cartridge. In this channel, the purchaser contractually agreed not to transfer the cartridge to anyone other than back to Lexmark. While this was a clever strategy, third parties figured out how to circumvent the chip, allowing the resellers to continue in business.

Lexmark sued Impressions for patent infringement, arguing that it did not acquire the right to use or sell the cartridge. The idea here is not unreasonable. By taking part in the Return Program, the purchaser acquired limited rights and did not acquire the right to resell the cartridge. Under normal principles of commercial law, the purchaser cannot resell more rights than it acquired. Thus, the resale should violate the patent. The Court of Appeals for the Federal Circuit agreed and held in favor of Lexmark.

The Supreme Court, via Chief Justice Roberts, took a different path. The analysis starts with a quotation from 17th Century Lord Coke who said that "in an owner restricts the resale or use of an item after selling it, that restriction 'is voide, because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man." According to the Court, this is more than an old statement of common law. Rather, it is a principle that Congress has allowed to remain in the patent laws. Without the exhaustion principle, we would not have used car dealers because patentees for individual parts might sue the dealership for repairing and reselling the car and the parts it contains. Consequently, the express reservation of rights by the patentee to the original purchaser does not give the seller a continuing interest in that item.

One additional wrinkle in this case was that some of the cartridges were first sold outside the United States. Thus, the Supreme Court had to decide whether the foreign sale exhausted the U.S. patent rights. Lexmark argued that exhaustion as a result of a foreign sale would interfere with the U.S. market and prevent it from reaping the full value of its patent monopoly. The Supreme Court was unmoved. It said, "the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward--of whatever amount the patentee deems to be 'satisfactory compensation' . . . --for every item that passes outside the scope of the patent monopoly." In other words, Lexmark got paid for those sales outside the U.S. at whatever price it deemed appropriate.

This is the second in a series of Supreme Court victories for parallel importers, also known as gray market importers. The first involved copyrights in textbooks. You can read that here. On the trademark front, the law is more complicated and depends on whether the merchandise is materially different than the products sold in the United States and on whether the trademark was applied outside the United States under the control or ownership of the U.S. trademark holder. If you are interested in that, start here.

Overall, this will permit the free market in the resale of patented goods. That is, as I said, good news for discount retailers and small-scale entrepreneurs. Patentees may adjust quickly, though. The decision makes it clear that this result only applies to sales. If the good is transferred subject to a license and ownership stays with the patentee, then the licensee has no right to resell the item. Expect future toner cartridges to come with license agreements.

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