6. September 2017
John Moetteli, US & Swiss Patent Attorney-at-law [DC bar], Da Vinci Partners LLC

Lexmark and Patent Exhaustion in the US – A Comparison with Switzerland

Lexmark, a maker of disposable printing cartridges, sued Impression Products, Inc. for patent infringement because it arranged for the importation of grey market (parallel-imported) goods without Lexmark’s consent (see Impression Products, Inc. v. Lexmark International, Inc. 581 U.S. ____ (2017)). The US Supreme Court made clear that an importer cannot be found guilty of patent infringement if he imports a patented product which is placed in the stream of commerce outside of the US by the patent holder or a party who was licensed by the patent holder. The Court held that even if the restrictions in Lexmark’s contracts with its customers were clear and enforceable under contract law, they do not entitle Lexmark to retain patent rights i n a n item t hat it h as elected to sell, even if sold outside the US. «The Patent Act does not guarantee a particular price. In-stead, the Patent Act just ensures that the patentee receives one reward – of whatever it seems to be satisfactory compensation – for every item that passes outside the scope of its patent monopoly».
In Switzerland, exhaustion applies but in a more limited sense as Switzerland generally follows the principle of regional patent exhaustion as codified in a 2009 amendment of the Swiss Patent Law. Namely, since 2009, in Switzerland, patent exhaustion applies to non-medical products that have entered the stream of commerce in the European Economic Area (EEA), but not outside this area. For medical products, national patent exhaustion applies. For agricultural products, international patent exhaustion applies. Consequently, for many products, Switzerland provides a Swiss patent holder with broader rights than the US provides a US patent holder in that an importer of a product protected by a Swiss patent can be found guilty of infringement of the Swiss patent even if the patent holder or someone authorized by him placed the patented product in the stream of the EEA. Since Lexmark, the US would apply patent exhaustion to authorized sales wherever they may take place.
Therefore, it is clear that a patent only provides a limited ability to craft an enforceable global distribution and pricing plan. On the other hand, and importantly, the US and Switzerland, at least to the extent there is a contractual relationship, allow a patentee to revert to the tools of contract law to control pricing and limit parallel imports (assuming no unfair competition issues), given that exhaustion deals exclusively with the right to sue for infringement of IP rights. Consequently, in addition to patent rights, companies should strengthen their contractual rights by renegotiating distribution agreements so as to more effectively control grey market imports. In Lexmark, several sophisticated methods were used including contracting with customers and including a microchip that disabled the product when it ran out of ink. The problem however was that Lexmark could only contractually bind their immediate customers and not downstream purchasers. Ensuring that the customer takes action that limits the possibility of parallel importation can be accomplished in any number of ways. Revising service contract pricing so that pricing decreases as the number of returned, renewable products goes up may be helpful to incentivize the customer to return consumables. Voiding guarantees when unauthorized cartridges are used is another incentive. New technical means may also be effectively applied. Further, binding distributors to refuse sales to certain parties outside their regions could be useful. Providing that the distributor is obligated to provide information about sales and to cooperate in any investigation as to the source of parallel imports. A liquidated damages clause may also be included, which, if sales in breach of the contract are proven, obligates the distributor to pay a lump sum penalty which can offset the costs of enforcement.
In conclusion, since Lexmark, patent rights are now more susceptible to extinction on first sale. To a certain extent, since 2009, the same is true in Switzerland. Contract rights and incentives are therefore becoming more important tools to better ensure a more effective distribution and pricing plan, particularly for consumables that may be refurbished.