Don’t use that tone(r) with me: How first sale can exhaust IP rights
Article written by: Thomas Huthwaite, Thursday 22nd June 2017
This article discusses the legality of parallel importing in light of a recent US case. Impression Products acquired used Lexmark printer toner cartridges overseas, refilled, and then imported the filled cartridges into the US. Lexmark sued Impression for patent infringement, and was successful before the US District and Federal Courts. The US Supreme Court overturned those decisions; the majority held that Lexmark’s patent rights were exhausted by the first sale doctrine, regardless of any restrictions imposed on purchasers at the point of sale, and regardless of where the cartridges were first purchased.
New Zealand distributors, retailers and consumers often assume that parallel importing and resale of products is okay. And sometimes, it is.
The Trade Marks Act 2002 and Copyright Act 1994 allow for parallel importing, if the trade marked or copyrighted product was sold somewhere in the world with the trade mark or copyright owner’s authorisation.
This is known as the “first sale” or “exhaustion of rights” doctrine: the trade mark or copyright owner’s exclusive rights are exhausted upon the first authorised sale of the product (anywhere in the world). The purchaser of the product may then import, sell, and deal in the product as they see fit, without restrictions imposed by trade mark or copyright law.
However, the New Zealand Patents Act 2013 and Australian Patents Act 1990 are silent as to parallel importation or the exhaustion of rights. Instead, the Patents Acts grant a patentee the exclusive right to exploit the patented invention. This includes to: make, hire, sell, dispose, offer, use, or import the product.
So where does that leave distributors, retailers, and consumers – are they prevented from dealing in the patented products they have purchased from a patentee?
Courts in various countries are occasionally called to apply the exhaustion of rights doctrine in patent cases. In doing so, they often rely on common law principles of chattel ownership, alienation, and implied license, draw analogy to trade mark and copyright laws, and/or refer to broad policy for free trade.
In March 2017, US Supreme Court was called upon to decide the scope of the exhaustion of rights doctrine in relation to patent rights in the US. The result was an overwhelming victory in favour of the exhaustion of rights doctrine.
Impression Products Inc. v Lexmark International Inc.
Lexmark manufactures and sells printer toner cartridges worldwide, and owns patents that protect componentry of the toner cartridges. It provides two options to purchasers of its cartridges: the first option is to buy cartridges at full price, with no restrictions. The second option is to buy cartridges at a discounted price – but those cartridges are refilled through Lexmark’s “Return Program” and are sold with the express restriction that the purchaser can only return the cartridge to Lexmark.
Knowing about Lexmark’s restrictions on sale, a ‘remanufacturer’ by the name of Impression Products acquired Lexmark cartridges from outside the US at a low cost, refilled them, and imported those refilled cartridges into the US for sale to US consumers. Lexmark sued Impression for patent infringement.
Impression argued that the initial sale of the cartridges exhausted Lexmark’s patent rights, and that it was free to refill, resell, and import the cartridges as it saw fit.
Lexmark responded that sale outside of the US did not exhaust US patent rights because the US Patents Act is territorial and allows a patentee to exclude others from making, using, selling or importing the patented product. Lexmark had not given anyone permission to import, and had imposed specific restrictions on the use of the product, which, it argued, expressly reserved its exclusive rights. The US Federal Circuit agreed, and ruled in favour of Lexmark.
On appeal, the US Supreme Court, by a majority of 7:1 held that Lexmark exhausted its patent rights when it sold the cartridges, regardless of territory, and regardless of any restrictions imposed. Even if Lexmark’s sale restrictions were clear and enforceable under contract law, they did not allow Lexmark to retain any intellectual property rights in those products after the first authorised sale had taken place. In other words, when a patentee sells an item, that product becomes the “private, individual property” of the purchaser. This applies whether the authorised sale occurs within or outside the territory in which the patent has been granted.
Justice Ginsburg dissented in part, holding that an authorised foreign sale does not diminish the protections of US law, and does not result in any exhaustion of rights.
Could this apply in New Zealand and Australia?
It is possible that the same common law principles and reasoning from Impression Products v Lexmark could be applied in New Zealand and Australia. The position has not been rigorously tested here, so there is no precedent to apply as there was in the US. While there are certainly differences between our patent laws and those of the US, the conclusion of the US Supreme Court majority leaves a strong impression:
“Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.”
This article is intended to summarise potentially complicated legal issues, and is not intended to be a substitute for individual legal advice. If you would like further information, please contact a Baldwins representative.
 There are a few limited exceptions. For example, section 35(3) of the Copyright Act 1994 provides an exception to the parallel importation of a film within 9 months of the film first being made available to the public – allowing a small window in which only the authorised distributor is allowed to import the film.
 Roberts CJ, Kennedy, Thomas, Breyer, Alito, Sotomayor and Kagan JJ concurring; Ginsburg J concurring in part and dissenting in part; Gorsuch J taking no part in the decision.