Once Again the Supreme Court Smacks Down the United States Court of Appeals for the Federal Circuit

In its ruling in Impression Products, Inc. v Lexmark International, Inc., the Supreme Court once again issues a unanimous ruling overturning an over-broad interpretation of patent asserted by the United States Court of Appeals for the Federal Circuit (Aka the "Patent Court")

A week ago they overruled the Patent Courts rules allowing plaintiffs to sue in the most gonzo patent venue in the nation, and this time they explained to the court that patent exhaustion is mandatory, not optional.

For the lay person, patent exhaustion means that the patent holder only gets one bite of the apple, so (for example) if a chip is manufactured either by the patent holder or by a manufacturer who pays license fees, they cannot charge the person who bought that chip to put in their widget.

In this case, Lexmark was using its patent to enforce a license to prohibit reselling the cartridges by toner refilling firms.

The Patent Court ruled that the patent exhaustion was basically a "default rule" which only applied to the degree that there were no other related restrictions, and the Supreme Court called bullsh%$ on this in no uncertain terms, noting that the Federal Circuit's interpretation would mean that used car dealers and auto mechanics could be locked out of business with this interpretation.

Once again, SCOTUS was unanimous in its repudiation of an excessively expansive views of patents:

Looking for a landmark ruling on patent exhaustion, the patent community got just that in the Supreme Court’s decision this morning in Impression Products, Inc. v Lexmark International, Inc. The court has been deciding a steady diet of patent cases for much of the last decade and has been rejecting the U.S. Court of Appeals for the Federal Circuit’s rulings in those cases almost routinely; the Federal Circuit is now 0 for 5 in the current term, by far the worst record of any of the federal courts of appeals. Most of those decisions reflect a cautious reluctance on the part of the court to say more than is necessary to decide the case before it, founded on an evident reluctance to wreak far-reaching and destabilizing consequences on the innovative markets for which patent doctrine is so important. In this case, by contrast, the opinion of Chief Justice John Roberts displays a confident and assertive verve, full of quotable maxims certain to populate the U.S. Reports for decades to come. More surprisingly, the opinion attracted the votes of all the eight active justices except for Justice Ruth Bader Ginsburg (who dissented only from the court’s resolution of the cross-border question discussed at the end of the post).

The case involves the doctrine of “exhaustion,” under which a patentholder’s rights to enforce its patent ordinarily are “exhausted” with regard to any particular object at the moment the patentholder sells the object. As applied to this case, for example, Lexmark’s rights to control the use of its patented refillable print cartridges would be “exhausted” when it sells those cartridges to retail buyers, even if Lexmark conditions the sale on the promise that the buyer will not refill the cartridge. That, at any rate, is the argument of Impression Products, which makes a business out of refilling Lexmark cartridges in violation of those agreements. Lexmark’s argument, by contrast, supported by a quarter-century of Federal Circuit precedent, is that modern commerce requires that innovators have the flexibility to devise contracting structures that segment the market into separate sectors, each of which gets a different price commensurate with the uses to which products will be put in that sector.

The court could hardly have been more unequivocal in its broad embrace of a mandatory doctrine of exhaustion. For the court, the doctrine seemed to devolve ineluctably from the first principles of the law of patents:

When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership. A patentee is free to set the price and negotiate contracts with purchasers, but may not, by virtue of his patent, control the use or disposition of the product after ownership passes to the purchaser. The sale terminates all patent rights to that item.

The court praised the “impeccable historic pedigree” of the exhaustion doctrine, tracing its lineage back to the common law’s refusal to permit restraints on the alienation of chattels.” With a flourish of rhetorical excess, the court suggested that post-sale conditions on alienation “have been hateful to the law from Lord Coke’s day to ours and are obnoxious to the public interest. The inconvenience and annoyance to the public that an opposite conclusion would occasion are too obvious to require illustration.”

………

In the end, though, the opinion shows a Supreme Court persuaded that the Federal Circuit did not merely err in some detail or nuance, but was as fundamentally misguided as it was when it came up with the venue rules discarded just last week in TC Heartland LLC v. Kraft Foods Group Brands, LLC. At bottom, when the court is minded to destroy the status quo, it knows how to do it, and this opinion provides a textbook exemplar. It will take years before we can observe the transactional structures that will emerge to protect the interests that have relied on the Federal Circuit’s lax rules about patent exhaustion. About the only thing we can say about them is that it will be harder, much harder, to implement them than it was before this sure-to-be-landmark decision.

Had this decision been directed by Quentin Tarantino, this opinion would have involved Samuel L. Jackson saying, "Motherf%$#er," loudly and repeatedly.

The Federal Circuit really needs to be shut down.  It is a complete clusterf%$# that has literally supported the patenting of a rainy day.

It is a court of hammers, which naturally see everything as a nail.