Patent Docs: Supreme Court expansion of patent-limiting doctrine puts branded drugs at risk

The U.S. Supreme Court at the end of the past term handed down a decision, Impression Products, Inc. v. Lexmark International, Inc., that greatly expands the doctrine of patent exhaustion. This equitable doctrine prevents a patent holder from restricting further sales or use of a patented invention once the patentee has received the benefits of her patent from a first sale. In its Lexmark opinion, the Court ruled that the doctrine precludes a patentee from using the patent laws to enforce any agreement that restricted a purchaser’s post-sale ownership rights in a patented article. The Court further decided that exhaustion arose even as a consequence of sales of patented products sold abroad, overturning precedent from the Federal Circuit that held that such products were outside the reach of exhausting U.S. patent rights.

A brief explication of the facts is sufficient to understand the Court’s judgment. Lexmark sells laser printer toner cartridges, both in the U.S. and abroad. These cartridges were sold at a discount under an agreement that prohibited the buyer from reselling the cartridges to any third party for reloading with new toner. Each cartridge contained a microchip that prevented third-party reloading, but technology developed in ways that the chip could be overridden. Impression Products reloaded and sold Lexmark cartridges obtained from discount purchasers, both foreign and domestic, and Lexmark sued for patent infringement.

The Federal Circuit held that the patent right included the right to impose “clearly communicated” post-sale restrictions that could be enforced by an infringement suit; while the exhaustion principle presumptively prevented such restrictions that presumption could be expressly rebutted by such post-sale restrictions. As for sales made abroad, the Federal Circuit held that foreign sales did not preclude an infringement suit for unauthorized importation and sale of a patented article, based on the fact that a patentee did not reap the benefits of patent protection for sales made abroad because U.S. patents have no extraterritorial effect.

Impression Products presented the Supreme Court with two questions: (1) Can a patentee impose an express restriction on use or reuse of a patented product sold in the U.S. that is enforceable under the patent laws? and (2) Does sale of a patented article abroad exhaust the patentee’s right to restrict importation of a product sold abroad? The Supreme Court’s decision that the answer to both questions is “No” was based on its application of the common law principle that disfavors restraints on buying and selling property. The Court stated that the patent exhaustion doctrine is grounded in this principle and that patent law does not abrogate this proscription. The Court struck down any and all post-sale restrictions for sales made either in the U.S. or abroad, holding that all patent rights were exhausted upon first sale. The Court's opinion as to U.S. sales was unanimous, with Justice Ginsberg dissenting with regard to foreign sales, which she believed should not exhaust U.S. patent rights.

The opinion succinctly states the scope of the exhaustion doctrine: “Patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license.” U.S. patent law rights conferred on a patentee are limited to the ability to set prices and negotiate with purchasers over terms of sales, but once the sale is made the patentee does not have the right, under patent law, to “control the use or disposition” of the product according to the Court. Patent exhaustion operates without regard to where the post-sale activity takes place, and thus foreign sales exhaust domestic patent rights as effectively as domestic sales do.

The significance of this decision to pharmaceutical products and the patents that protect their exclusivity arises from the aspect of the decision relating to exhaustion cause by foreign sales. Under the Court’s Lexmark decision, all foreign sales exhaust U.S. patent rights over the claimed goods. This exhaustion occurs regardless of the location or circumstances of the foreign sale. Thus, pharmaceutical products sold abroad under national price restrictions, or sold at a discount (compared to U.S. sales prices) due to local price norms or even for humanitarian reasons will operate to raise the exhaustion.

Under these circumstances, the ability to restrict or prevent re-importation of goods sold abroad may become the only legal basis for maintaining U.S. prices for branded drugs. For now under U.S. law foreign-sold, branded pharmaceutical products cannot be imported for resale. Increasing pressures on drug costs, however, raise a distinct possibility of some lessening or elimination of these protections, and with them, further uncertain effects on U.S. and global drug pricing.

Possible strategies for adapting to such circumstances occasioned by the Court’s Lexmark decision to reduce the economic effect of unfettered foreign sales include tailoring the amount of such sales to each market, so that there is not a great enough surplus for significant American resale to occur, or adjusting the price differential to minimize the economic advantage of re-importation while not severely reducing foreign sales or providing incentives for generic competition. In any case, the Court’s decision that a patentee cannot restrict resale of any patented product, while perhaps a sound application of U.S. common law may have unintended consequences that disrupt the economic incentives of innovator drug companies in ways that harm investment in what is already an extremely uncertain enterprise.

Kevin Noonan is a partner with the law firm McDonnell Boehnen Hulbert & Berghoff LLP and represents biotechnology and pharmaceutical companies on a myriad of issues. A former molecular biologist, he is also the founding author of the Patent Docs weblog, http://patentdocs.typepad.com/.