Supreme Court’s Lexmark patent decision will harm consumers

Today, plane travel seems almost routine.

Gone are the days of the 1960’s and 1970’s where only the businessmen or the wealthy could afford to fly. The ability of almost everyone to get on a plane to visit relatives, go on vacation, attend an important event such as graduation or a wedding has been facilitated by low fares that airlines commonly offer.

Of course, as all of us know, those low fares are often non–refundable, non–exchangeable and come with a myriad of other restrictions. This stands in stark contrast to the olden days of flexible but unaffordable fares.

Yet, many of us are happy to trade away some flexibility in exchange for significant discounts. Conversely, those of us who care more about flexibility pay higher upfront fees, but are able to do many more things with their ticket.

The airlines’ ability to sell essentially the same product (trip from point A to point B) to different people at different prices has been a boon for everyone.

{mosads}The Supreme Court, however, has failed to appreciate this basic economic premise. In late May, the Court decided a seemingly obscure dispute between two printer cartridge manufacturing companies — Lexmark International and Impression Products. 

Lexmark not only manufactures printer cartridges, but has patents on certain technology involving these products. When selling its wares, Lexmark gave its customers a choice between paying full price and keeping the cartridges to do whatever the customer wanted with them, or enjoying a 20 percent discount, but with an obligation to return cartridges to Lexmark where they could be refilled with ink and resold.

Impression Products had a “better” idea. They decided to purchase spent cartridges from Lexmark’s customers (both in the U.S. and abroad), refill them with ink themselves and then undersell Lexmark. (Impression knew full well which cartridges were sold under the discount plan, because in order to refill those, Impression had to circumvent a security microchip installed by Lexmark).

When Lexmark got wind of Impression’s business, it sued, alleging that Impression was violating Lexmark’s patent rights, which vest Lexmark with the exclusive right to make, sell, or import patented products into the United States.

In response, Impression argued that when Lexmark sold its wares to its customers it “exhausted” its patent rights and that the customers could then resell the cartridges to whomever they wished.

The people who purchased the spent cartridges from Lexmark’s customers could, Impression argued, do the same.

The matter ultimately wound up in the Supreme Court and the question before the Justices was whether Lexmark could, by offering a discount to its customers, preserve some of the exclusive patent rights even beyond this sale.

Unfortunately, the Court ruled that Lexmark could not hold on to its patent rights once the sale was made. And while the lawsuit may seem like much ado about nothing, in reality it has serious consequences.

Many commentators hailed this decision as a victory for consumers who will now be able to reap the fruits of competition between Lexmark, Impression, and others. But the reality is not that simple.

As a result of the Supreme Court’s decision, companies will no longer sell their product at different prices to different customers, because they will know that once they sell, they will not be able to assert any rights over the product.

Thus, the companies will need to make all of their profits on the front end, rather than splitting them between the first and subsequent sales. 

And this means that those of us who used to enjoy that 20 percent discount will no longer be able to get it. Some products will simply become out of reach for a certain segment of consumers.

Making matters worse still, because the Supreme Court also held that even a sale outside of the United States exhausts U.S. patent rights, American companies will be wary of selling their wares at steep discounts to poor countries.

These companies will rightly be concerned that instead of going to their true destination, the wares (be they pharmaceuticals, foodstuff, technology, or whatever else) will be bought by middlemen and exported back into the United States.

The end result will be lack of access to medicine and technology by the poorest and the neediest people in the world. In short, what seems like a huge win for consumers today is likely to end up a significant loss in the long run.

If the airlines had to run their business in the same way that Lexmark now will, we would be back in the day of flexible and exchangeable tickets available to only a small sliver of the population.

Few would claim that such mandated flexibility is a “victory for consumers.”

It is no different in the world of patents. Absent legislative changes, the Supreme Court’s decision will make losers of us all.

Greg Dolin is Associate Professor of Law and Co-Director of the Center for Medicine and Law at the University of Baltimore School of Law.

The views expressed by contributors are their own and are not the views of The Hill.