Living In A Post-Lexmark World: What Happens Next?

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Date: Tuesday June 20, 2017 11:12:30 am
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    Living In A Post-Lexmark World: What Happens Next?

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    The U.S. Supreme Court is considering whether to put an end to the “conditional sale” doctrine, which allows a patent holder to sell a patented invention with post-sale restrictions that limit the way the invention may be used or resold. Companies that sell certain patented goods have long relied on the conditional sale doctrine in structuring their business models. 

    The conditional sale doctrine, however, conflicts with the “patent exhaustion” doctrine, which says that all patents rights are exhausted when a patented good is sold. Critics of the conditional sale doctrine argue that an authorized purchaser should be free to use or resell a patented good without risk or liability for patent infringement. If the Supreme Court agrees, companies that rely on the conditional sale doctrine will have a more difficult time enforcing their post-sale contract rights.

    Antitrust & Competition Partner at Bryan Cave Jake Kramer recently sat down with Inside Counsel to discuss what happens next in this post-Lexmark world. Kramer works on all phases of antitrust litigation and provides pragmatic advice to clients on a broad array of antitrust issues. 

    Companies that adopt a “razors and razor blades” business model, including those that sell printers and medical devices, have relied on patent rights for a long time to protect vital aftermarket revenue streams. For example, per Kramer, in exchange for a price reduction, Lexmark customers agreed that they would use its patented toner cartridges only once before either returning or destroying the cartridges. So, adopting this business model allowed Lexmark to sell its printers at a low cost and earn higher margins on toner cartridges. 

    Today, the total cost to own a Lexmark printer varies depending on how much printing takes place because consumers who print few documents pay lower combined prices for printers and toner cartridges. So, Lexmark could rely on aftermarket revenue from toner cartridge sales to fund its ongoing efforts to innovate and stay competitive by developing better printers. 

    “Before it was abolished by the Supreme Court in the Lexmark decision, the conditional sale doctrine allowed Lexmark to protect its business model through patent infringement claims against companies that refill and resell its printer cartridges in violation of its agreements with consumers,” he explained. “Now, Lexmark has only the rights arising from its agreements with customers, which are difficult to enforce against third parties.”

    The general rule is that all patent rights are exhausted upon the first sale of a patented product. According to Kramer, the conditional sale doctrine was an exception to the rule, allowing patent owners to impose post-sale restrictions disclosed to their customers at the time of sale. In the Lexmark decision, the Supreme Court eliminated this exception. The decision does not affect contracts that create post-sale restrictions, however, those restrictions can no longer be enforced through patent infringement claims. 

    “Now that the Supreme Court has abolished post-sale patent restrictions, companies that relied on their patents are left only with contract and business tort claims to enforce such restrictions,” he said. “Many companies would be loath to sue their own customers for breach of contract, and it is difficult to prevail on tortious interference and unfair competition claims against third parties.” 

    When patent owners impose post-sale restrictions, customers are required to agree to abide by the restrictions at the time of sale. This type of agreement can be enforced against the buyer in a breach of contract action—if the seller is willing to sue its own customers, according to Kramer. A third party that induces buyers to violate their contracts can be sued for tortious interference or unfair competition, but these types of claims are difficult to win. Among other problems, the standards vary from state to state, and the seller must prove that the third party used “improper means.” 

    Kramer said, “In theory, a company that enjoys a dominant position in the market in which it sells a patented invention could violate the antitrust laws by continuing to impose post-sale restrictions in contracts with its customers, particularly if those restrictions exclude aftermarket competition.”

    In the short term, consumers are going to see lower prices and more choices in aftermarkets, according to Kramer. And, in the long term, the decision could slow innovation and increase prices, leaving consumers worse off.  

    “The total cost to own a printer includes the price of both the printer and toner cartridges, and Lexmark’s high-margin toner cartridge business allows it to sell printers at lower margins, making printers more affordable,” he said. “On top of that, the total cost to own a printer goes up or down depending on use, as those who print more documents purchase more toner cartridges.”

    Lexmark might respond to the Supreme Court’s decision by increasing the price of its printers to generate the revenue it needs to maintain its competitive position in an industry that requires constant innovation. If Lexmark is forced to increase the prices of its printers to remain competitive, fewer people will be able to purchase printers, and the cost to own a printer will no longer be based on usage. 

    So, what will living in a Post-Lexmark World be like? 

    “The Supreme Court’s decision in the Lexmark case should be quite disruptive,” explained Kramer. “On one hand, companies that have relied on patent rights to enforce post-sale restrictions will need to alter their business models or find alternative ways to enforce their post-sale restrictions, subject to limitations imposed by antitrust law. On the other hand, third parties that offer aftermarket alternatives should flourish and can operate without fear of infringement claims.

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