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Supreme Court to Weigh In on Patent Exhaustion

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I. Introduction

The doctrine of patent exhaustion limits a patentee’s ability to control the use of patented articles after an authorized sale of those articles. The Supreme Court recently granted certiorari in Impression Products, Inc. v. Lexmark International, Inc. to review the Federal Circuit’s en banc decision regarding patent exhaustion.1 The specific questions that the Court will review are: (1) whether a patentee can use post-sale restrictions on the article's use or resale to avoid application of the patent-exhaustion doctrine and enforce such post-sale restrictions through the patent law’s infringement remedy; and (2) whether, in light of the Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc.,2 an authorized sale of a patented article that takes place outside the United States exhausts the U.S. patent rights in that article. The Supreme Court’s decision in this case could potentially expand patent owners’ rights and shift the power dynamic between patent owners and potential infringers.

II. The Doctrine of Patent Exhaustion

The Patent Act grants to patent owners a right to prevent others from making, using, selling, offering for sale or importing any patented invention within the United States during the term of the patent.3 The doctrine of patent exhaustion “provides that the initial authorized sale of a patented item terminates all patent rights to that item.”4 The unrestricted sale of a patented article, by or with the authority of the patentee, is said to “exhaust” the patentee’s right to control further sale and use of that article by enforcing the patent. In United States v. Masonite Corp., the Court explained that exhaustion of the patent right depends on “whether or not there has been such a disposition of the article that it may fairly be said that the patentee has received his reward for the use of the article.”5

Under the doctrine of patent exhaustion, “the authorized sale of a patented article gives the purchaser, or any subsequent owner, a right to use or resell that article.”6 Accordingly, when a patentee has sold a patented article, the buyer is authorized to engage in activities involving the article, such as resale, that might otherwise be considered infringing in the absence of exhaustion of patent rights.

III. The Lexmark Case

A. Background

Lexmark International, Inc. makes and sells printers and toner cartridges, and owns a number of patents that cover the printer cartridges and their use. Lexmark sells two types of cartridges: (1) Regular Cartridges, and (2) Return Program Cartridges. Regular Cartridges are sold at full price and the buyer is not subject to any restrictions on use; the Return Program Cartridges are sold at a discount and are subject to a single use/no resale restriction.

Impression Products, Inc. buys printer cartridges for resale in the United States. Lexmark first sold the cartridges at issue, some abroad and some in the United States. Some of the foreign-sold cartridges and all of the domestically-sold cartridges at issue were subject to the single-use/no-resale restriction. Impression acquired the cartridges after a third party physically modified them to to allow them to be reused, and then sold the cartridges it acquired in the United States and imported those it acquired abroad.

Lexmark sued Impression for patent infringement under 35 U.S.C. § 271, alleging infringement of two groups of products: (1) the Return Program Cartridges sold in the United States, and (2) all of the Lexmark cartridges sold abroad. Impression’s sole defense was patent exhaustion.7 In a pair of opinions issued on the same day, the District court held that Lexmark had exhausted its patent rights in cartridges sold in the United States, but had not exhausted their patent rights in the cartridges sold abroad.8

B. Federal Circuit Opinion

1. Domestic Post-Sale Restrictions

On appeal, a Federal Circuit Majority reversed the District court’s decision that Lexmark had exhausted its patent rights in the cartridges sold in the United States,9 holding “a sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the ‘authority’ to engage in the use or resale that the restriction preclude.”10 The decision reaffirmed the Federal Circuit’s holding in Mallinckrodt, Inc. v. Medipart, Inc., which held that a prohibition on reuse of a patented device was enforceable under patent law if the manufacturer’s restriction was reasonably within the patent grant.11 The Majority also cited General Talking Pictures Corp. v. Western Elec. Co. as support for their decision, in which the Supreme Court held that where the patentee had authorized a licensee to make and sell amplifiers for a specific purpose, but the defendant bought an amplifier with knowledge of the restriction and used it contrary to the restriction, the doctrine of patent exhaustion did not apply.12 The Majority reasoned that it would not make sense to allow post-sale restrictions for licensees but not for patentees. Finally, the Federal Circuit also rejected the District Court’s conclusion that the Supreme Court’s holding in Quanta Computers had overruled Mallinckrodt sub silentio.13 The Federal Circuit held that Mallinckrodt had not been implicitly overruled because Quanta did not involve a patentee sale or a sale subject to a restriction.14

2. “Foreign” Patent Exhaustion

The majority upheld the District Court’s ruling that Lexmark’s patent rights were not exhausted by the foreign sales.15 The Majority adhered to it’s holding in Jazz Photo Corp. v. Int’l Trade Commission., which held that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority.16 The Majority reasoned that a foreign sale does not confer authority to import the article into the United States because of the territorial nature of patent law. The basis for exhaustion is the patentee’s reward by the sale of the article, and “a foreign sale, standing alone, is not reasonably viewed as providing the U.S. patentee the reward guaranteed by U.S. patent law.”17 The Majority noted that the only Supreme Court decision directly addressing the effect of a foreign sale on U.S. patent rights, Boesch v. Graff, supports the decision.18 In that case, the defendants bought articles covered by a U.S. and German patent from a manufacturer in Germany authorized to sell the articles by German law, but the sale was not authorized by the U.S. patent owners.19 The Supreme Court held that the patentee’s rights had not been exhausted because the sale of articles in the United States under a U.S. patent cannot be controlled by foreign laws.20 The Majority distinguished Kirtsaeng, which held that held that the common-law doctrine barring restraints on alienation that is the basis of the exhaustion doctrine “makes no geographical distinctions,” because Kirtsaeng concerned the interpretation of a copyright statute governing the first-sale doctrine,21 and there is no analogous statute for patents.

C. Dissent

Judges Dyk and Hughes dissented from the Majority opinion on both the restricted domestic sales and the foreign sales.22 Regarding the restricted domestic sales, the Dissent argued that Mallinckrodt was wrong when decided and cannot be reconciled with Quanta.23 The Dissent stated that the Supreme Court has repeatedly and unequivocally said that the first authorized sale removes the article from patent protection.24 In Quanta, the Supreme Court “expansively held that [t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.”25 The Dissent argued that General Talking Pictures is inconsistent with the Majority’s holding, because in General Talking Pictures, the licensee made and sold the products in violation of the license terms.26 The sale by the licensee therefore was not authorized, and thus could not exhaust the patentee’s rights.27

In regards to the foreign sales, the Dissenting judges would have held that a foreign sale does not always exhaust U.S. patent rights, but should result in exhaustion if the seller does not explicitly reserve U.S. patent rights.28 The dissenting judges argued Boesch did not hold that foreign sales cannot exhaust patent rights because in Boesch, there was not a sale authorized by the U.S. patent holder.29 Rather, the sale was only authorized by German law.30 Further, all lower court decisions before Jazz Photo held that there was no exhaustion when the sale was made by an entity not holding U.S. patent rights or when the foreign seller clearly reserved U.S. rights.31 The dissenting judges felt that Kirtsaeng, while not dispositive, provides significant guidance.32 The policy concerns underlying the copyright decision in Kirtsaeng are the same in patent law.33 However, the Dissenting Judges noted that differences between patent and copyright law require “an accommodation between the interests of the rights holders and the unsuspecting buyer” by allowing patentees to reserve U.S. patent rights when making foreign sales.34

D. Certiorari-Stage Arguments

The arguments advanced by the parties to the Supreme Court largely mirrored those of the Federal Circuit Majority and Dissenting opinions, with the following items of interest.

First, Impression argued in its Petition for Writ of Certiorari that Kirtsaeng recognized the common law rule against restraints on alienation of property,35 and that as there is no applicable patent statute here, the common law controls.36 Thus, Impression contends that all foreign sales exhaust U.S. patent rights.37

Next, in their amicus briefing, the United States argued, consistent with the Federal Circuit dissent, that the Supreme Court should adopt a rule of presumptive international patent exhaustion, while allowing the patentee to explicitly reserve its U.S. patent rights.38 However, the United States argues that Kirtsaeng is not controlling.39

IV. Conclusion

Critics of the Federal Circuit’s decision argue that the ruling dramatically expanded patent rights in contradiction of recent Supreme Court rulings, while proponents contend the decision simply reaffirmed settled Federal Circuit precedent. The Supreme Court’s decision in this case has the potential to alter a longstanding, uncodified doctrine of patent law, so the patent community will surely be watching this case closely this year.

1 Impression Products, Inc. v. Lexmark International, Inc., 816 F.3d 721 (Fed. Cir. 2016), cert. granted, 84 U.S.L.W. 3563 (U.S. Dec. 2, 2016) (No. 15-1189).
2 Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013).
3 See 35 U.S.C. § 271(a)(defining such actions as infringing); see also 35 U.S.C. 154(a) (granting patentee “right to exclude others” from itemized actions).
4 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008).
5 316 U.S. 265, 278 (1942). See, e.g., Intel Corp. v. ULSI Sys. Tech., Inc., 995 F.2d 1566, 1568, 27 USPQ2d 1136, 1138 (Fed. Cir. 1993) (“The law is well settled that an authorized sale of a patented product places that product beyond the reach of the patent.”).
6 Bowman v. Monsanto Co., 133 S. Ct. 1761, 1764 (2013).
7 Impression agreed that the patents covered the cartridges and that the patents were valid and enforceable.
8 See Lexmark International, Inc. v. Ink Technologies Printer, 9 F.Supp.3d 830 (S.D. Ohio 2014); Lexmark International, Inc. v. Ink Technologies Printer, 2014 WL 1276133 (S.D. Ohio 2014).
9 Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721, 774 (Fed. Cir. 2016).
10 Lexmark, 816 F.3d at 735.
11 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).
12 General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, opinion on rehearing at 305 U.S. 124 (1938).
13> Lexmark, 816 F.3d at 737.
14 Id. at 737.
15 Id. at 774.
16 Jazz Photo Corp. v. Int’l Trade Comm’n., 264 F.3d 1094 (Fed. Cir. 2001)
17 Lexmark, 816 F.3d at 762.
18 Boesch v. Graff, 133 U.S. 697 (1890).
19 Id. at 702.
20 Id. at 702-03.
21 Kirtsaeng, 133 S.Ct. 1351.
22 Lexmark, 816 F.3d at 774 (Dyk, J., dissenting).
23 Id.
24 Id. at 775.
25 Id. at 778.
26 Id. at 782.
27 Id.
28 Id. at 784.
29 Id.
30 Id.
31 Id. at 784-85.
32 Id. at 786.
33 Id. at 786-87.
34 Id. at 788.
35 Petition for Writ of Certiorari, Impression Products, Inc. v. Lexmark International, Inc., 2016 WL 1130030, at *25 (2016) (No. 15-1189).
36 Id. at *26.
37 Id.
38 Brief for the United States as Amicus Curiae, Impression Products, Inc. v. Lexmark International, Inc., 2016 WL 5957534, at *15 (2016) (No. 15-1189).
39 Id. at *21.

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