06/25/2018

Lexmark, The Overruling of Mallinckrodt and The Future of Restraints on Alienation For Patented Goods


Lexmark, The Overruling of Mallinckrodt and The Future of Restraints on Alienation For Patented Goods

James B. Kobak, Jr.

The Supreme Court in its recent Lexmark decision ruled unanimously (with Justice Gorsuch not participating) that a patent owner could not enforce contractual restrictions on resale of patented products in domestic transactions through patent infringement suits because all patent rights were exhausted by the first sale. This decision, authored by Chief Justice Roberts, rejected the theory, articulated by the Federal Circuit in Mallinckrodt v. Medipart, Inc. more than twenty five years ago: that a patent owner could circumvent exhaustion by conditioning a grant of its patent rights in a sales agreement as a legitimate means of obtaining compensation for the value of its invention. The Supreme Court decisively rejected the logic and the treatment of earlier precedent used in the Mallinckrodt opinion along lines that I had criticized at the time and others have criticized since to little avail, until now, over a quarter century later.

The Lexmark decision is carefully limited to the effect exhaustion has in denying patent law remedies against non-contracting parties. Justice Roberts’ decision seemed to assume that post-sale restrictions might often be enforceable under applicable state law. But the logic and wording of the decision raise questions about future enforceability of some contractual post-sale restrictions under both state and federal law.

Lexmark will require many businesses to rethink and revamp their sales and distribution practices. Enforcement of restrictions directly against downstream purchasers or users will be difficult and often impractical in many circumstances and perhaps, in some circumstances, not achievable at all. Enforcement of certain restrictions even against some direct purchasers could be preempted by analogy to Kimble v. Marvel Entertainment in which the Supreme Court recently reaffirmed that state law remedies for contractual royalties for expired patents are preempted. In addition, the logic and wording of Lexmark raise the prospect that some efforts to enforce restrictions might now be vulnerable to antitrust, patent misuse and (in some states) unfair competition law principles in a way that they have not been in several decades – in large part because of the Federal Circuit precedent built around the Mallinckrodt decision that has now been overruled in Lexmark. These possibilities pose complications and risks for patent owners seeking to control downstream sale or reuse or repair of patented goods. But first a brief synopsis of Lexmark.

99 J. Pat. & Trademark Off. Soc’y 609(2017)

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