Tuesday, May 30, 2017

Observations on Impression Products v. Lexmark

This morning's opinion in Impression Products, Inc. v. Lexmark International, Inc. does not, directly, have anything to do with patent remedies, but the issues at stake are such important ones that I would be remiss not to say at least a few words about them on this blog.  To reiterate, in an opinion by Chief Justice Roberts, the U.S. Supreme Court today holds as follows:
This case presents two questions about the scope of the patent exhaustion doctrine: First, 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. And second, whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply. We conclude that 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.
(Justice Ginsburg dissented on the second question only, and the newly-appointed Justice Gorsuch didn't participate; otherwise the opinion was unanimous.)  Since I was one of the signatories of an amicus brief urging the Court to affirm the Federal Circuit (that is, to go the opposite way on the two questions described above), I am rather disappointed in the outcome.  Jason Rantannen has an excellent overview of the opinion on Patently-O, so I'll just focus on a few additional observations that so far have occurred to me:

1.  My principal policy concern going forward is that the United States' adoption of a regime of international exhaustion could result in drug companies pulling certain drugs from the market, or substantially raising their cost, in developing countries.  (For analysis, see this article and this op-ed by Ouellette & Hemel.)  As a moral issue, the marginal benefits to U.S. consumers that the opinion may now permit do not, in my opinion, outweigh the substantial risk to the health and well-being of the poor in other parts of the world.  Then again, maybe there will be other ways for drug companies to continue to price discriminate (charge a lower price in developing countries) without the risk of having the drugs exported to the U.S.  Professor Fred Abbott so argued in an amicus brief he filed, and I hope he's right.

2.  I'm also not so eager to condemn price discrimination, for the standard reasons that many economists aren't--i.e., that it's better than single-price monopoly pricing which reduces output and excludes those consumers who would be willing to pay a price above marginal cost.  That said, I understand that the welfare effects of second and third degree price discrimination can be ambiguous, and there is a recent paper by Elhauge and Nalebuff arguing that metering ties are generally welfare-reducing.  So maybe I'll be proven wrong here.  It will be interesting to see, going forward, if the Lexmarks of the world who are now unable effectively to engage in price discrimination (unless they figure some other way around the decision) will raise the prices of their products.

Clarification:  What I mean by that last sentence is that it will be interesting to see if the price Lexmark charges for its printers, or the price it charges low-usage consumers for ink, goes up.  In effect, henceforth Lexmark customers will buy refillable cartridges at a price I would expect to be lower than the price Lexmark previously charged for refillable cartridges but higher than the price it charged for nonrefillable cartridges.  Customers who use a lot of ink will be better off, but those who use only a little will be worse off, if what I understand to be the standard economic predictions come true.  Then again, maybe that isn't how things will work out in this particular market. 

3.  As for the opinion itself, I'm a little disappointed at the formalistic character of much of it--reliance upon Lord Coke's distaste for restraints on alienation and all that--and I'm not all that persuaded by the policy illustration the Court provides at pp. 7-8, where it writes:   
Take a shop that restores and sells used cars. The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles. That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale. Those companies might, for instance, restrict resale rights and sue the shop owner for patent infringement. And even if they refrained from imposing such restrictions, the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits. Either way, extending the patent rights beyond the first sale would clog the channels of commerce,with little benefit from the extra control that the patentees retain. And advances in technology, along with increasingly complex supply chains, magnify the problem.See Brief for Costco Wholesale Corp. et al. as Amici Curiae 7–9; Brief for Intel Corp. et al. as Amici Curiae 17, n. 5 (“A generic smartphone assembled from various high-tech components could practice an estimated 250,000 patents”).
To be sure, no one wants to see "the smooth flow of commerce . . . sputter," but is that really a realistic risk under a regime of national exhaustion?  The E.U., for example, follows an analogous rule of regional exhaustion, so that sales outside the E.U. don't exhaust the E.U. IP owner's rights; but it surely wouldn't be fair to say that commerce in the E.U. has ground to a halt.  To use the Court's example, car manufacturers would face an outcry from consumers if they tried to "restrict resale rights and sue the shop owner for patent infringement," thus suggesting to me that the market provides some discipline against this parade of horribles; and when it doesn't, antitrust law in an appropriate case might prevent a monopolist from using some type of restraint to expand or maintain the scope of its monopoly.  The exhaustion doctrine, in other words, as Professor Herb Hovenkamp has argued, often seems to be stricter than necessary to prevent monopolist abuses.  Finally, note that in the above illustration if any of the patents wasn't cleared in advance, the patent owner would still have a cause of action against any maker, user, or seller in the chain of commerce.  Just because someone buys or sells the car at retail doesn't ensure them against being sued (though again, and putting aside occasional demands by patent assertion entities which sometimes might be abusive, one doesn't see too many suits against retailers or consumers in this space).

4. As to whether there will be ways to get around Impression Products by structuring more transactions as licenses, or by trying (somehow) to enforce contracts against purchasers or asserting state-law claims for tortious interference with contract . . . for now, I'm somewhat skeptical that any of these alternatives will be very effective.  And the bulk of the case law so far hasn't favored Lexmark's efforts to engage in price discrimination via the Digital Millennium Copyright Act.  On the other hand, the U.S. FDA still takes the position that the importation of drugs for personal use from abroad is illegal, though to my knowledge it doesn't enforce this rule very strictly, so I expect we'll see marginally more drug imports from Canada going forward.  (Maybe some day we will enact our own universal health care system and render that workaround superfluous, but prospects don't look very good at the moment, unfortunately.  My apologies for all the editorializing here today, which I trust will be, for different reasons, about equally offensive to both the right and the left.)

Update:  Maybe I'm just an outlier here, but to have an important rule of law determined in the year 2017 based in part on Lord Coke's views on restraints on alienation strikes me as just a tad absurd.  Cf. O.W. Holmes, The Path of the Law ("It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV.").  Coke flourished some 200 years after the reign of Henry IV, but nonetheless . . .


  1. Prof. Cotter,
    As I encountered a breaking news on this decision, I thought I could find some valuable insight from this blog; thank you for your valuable comments.

    As your student, please let me ask two questions that struck me, though I have not yet read this court opinion:

    1. I thought that this new caselaw can be easily avoided by imposing contractual obligation at the time of sale. However, I note your comment: "4. As to whether there will be ways to get around Impression ... I'm somewhat skeptical that any of these alternatives will be very effective." Can I have more details on why you think so?

    2. I was reminded of Monsanto case we discussed during the class where held is that the farmer, who bought seed beans from Monsanto, raised them, and planted the beans he harvested therefrom, infringed Monsanto's patent. I recall that the main reason was that the defendant, the farmer, infringed the patent, not by violating his obligation under the sale condition, but by making the patented product, the seed bean. Nevertheless, I believe this case should be reveresed under this new caselaw because Monsanto cannot control the farmer's use of the seed bean sold. Can I have your comments on this thought?

    Thank you so much, in advance.

    1. Hello Inseong, nice to hear from you. Here are my thoughts for now.
      1. On the first issue, I don't think it's going to be easy for Lexmark to sue its purchasers for breach of contract--maybe some large-scale purchasers, but not smaller ones--and doing so is likely to generate bad feeling even if it suing them is feasible. Suing the remanufacturers for tortious interference with contract may be feasible, but (1) there might be questions whether the obligation not to resell the cartridges is a valid contract (I'm initially inclined to think it is, but there might be questions like the ones raised in ProCD v. Zeidenberg), and (2) it might be difficult, though not necessarily impossible, to prove damages, which is one of the elements of that tort. (Can Lexmark be sure whether any given purchaser would have bought replacement cartridges from Lexmark, but for the breach, and if so in what amount?) The licensing option might work; it's fair to say that people are thinking through this very carefully right now. The Supreme Court didn't seem to think that Lexmark could get around exhaustion by licensing instead of selling its cartridges, and that may be right, but for deeper analysis I'd refer to you some of the blog posts I linked to earlier today, especially the one by Ouellette & Hemel and the first one by Gene Quinn.

      2. As for Monsanto v. Bowman, in that case the Court held that exhaustion didn't apply because the farmer remade the invention by planting the seed. I think that holding is still sound. The first sale exhausts the use and sale rights in the article, but not the making right. (Further, repair is a permissible use but reconstruction is an impermissible making.)

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  3. Thank you for your detailed and prompt answer, Prof. cotter.

    I have further questions regarding Monsanto case: Bowman used, not made, the patented products, seed beans purchased from Monsanto at the time when he planted the seed beans and harvested beans, which may not be controlled by Monsanto under Lexmark. Accordingly, Bowman may freely dispose of, e.g., sell, eat, the harvested beans. So far, correct?

    Then, does Bowman's use of the harvested beans as new seed bean constitute an infringement of Monsanto's patent? It sounds unreasonable that, while a type of use of a product may not constitute an infringement of a product claim, another type of use of the product may constitute an infringement of the product claim.

    Please let me have your thoughts once more.

    Thank you.

    1. Yes, that's the holding of the case as I understand it. Bowman's defense was that he was merely using the seed, and that this was permissible under the exhaustion doctrine, but the Supreme Court concluded that because he was making new seed he was liable. Although the exhaustion doctrine generally allows you to use a patented article that you have purchased, you can't use it to make additional copies of that patented article.