United States: En Banc Federal Circuit Revisits Its Patent Exhaustion Cases

On February 12, 2016, the United States Court of Appeals for the Federal Circuit reaffirmed its precedent governing the patent exhaustion doctrine in an en banc opinion in Lexmark International Inc. v. Impression Products Inc.  In Lexmark, the Court addressed two key aspects of the patent exhaustion doctrine and whether recent Supreme Court decisions overruled Federal Circuit precedent. The Court confirmed that a patentee who sells a patented article under a clearly communicated, otherwise proper restriction on resale and reuse does not exhaust its section 271 rights to charge with infringement downstream buyers having knowledge of the restrictions. The Court also confirmed that a foreign sale of a patented article does not exhaust the patentee's U.S. patent rights, even if no reservation of rights accompanies the sale.

Background

Lexmark International, Inc. manufactures and sells printers and the associated printer toner cartridges. Lexmark owns a number of patents covering the toner cartridges and sells the cartridges domestically and abroad. Buyers of the cartridges are given an option to purchase either a "Regular Cartridge," sold at full price with no limitations on use, or a "Return Program Cartridge," sold at a 20 percent discount in exchange for the buyer's agreement that the cartridge will be subject to a "single-use/no-resale restriction." According to the terms of this restriction, the buyer must return the used cartridge only to Lexmark once the toner runs out. Impression Products, Inc. acquired the cartridges subject to the restriction after third-party modification of the cartridges enabled their reuse. Lexmark sued Impression for patent infringement based on Impression's acquisition and resale in the United States of reconditioned "Return Program Cartridges" and importation and resale in the United States of both foreign-sourced reconditioned "Return Program Cartridges" and "Regular Cartridges." Impression countered that all of Lexmark's U.S. patent rights had been exhausted based on the initial sale of the cartridges at issue.

Federal Circuit Decision

The Court decided to hear the case en banc to address whether the Supreme Court's recent decisions in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 625 (2008), and Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), overruled the Federal Circuit's standing precedent. Impression argued that the Federal Circuit's decisions in Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), and Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), were overruled by the Supreme Court's recent decisions in Kirtsaeng and Quanta.

The Court disagreed with Impression in both instances. The Court initially was urged to overturn Mallinckrodt based on a distinction between a patentee sale, as in Mallinckrodt and Lexmark, and a licensee sale, as in Quanta. In holding that Quanta did not overturn Mallinckrodt, the Court made clear that the Supreme Court in Quanta did not address a patentee sale at all or even an authorized sale subject to any resale restrictions or conditions. In so holding, the Court found no legal basis to disturb its ruling in Mallinckrodt. To do so would afford fewer rights to a patentee who makes and sells its patented articles versus a licensee given authorization to make and sell the patentee's articles. The Court concluded that "a patentee may preserve its section 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale."

With respect to Lexmark's foreign sales, the Court reaffirmed its Jazz Photo decision that patent exhaustion is not triggered by a foreign sale made by or with authority of the patentee of a U.S. patented article. This holding applies whether or not the authorized foreign sale contains a resale restriction. Impression argued that the Court should overturn Jazz Photo based on the copyright first-sale doctrine analyzed in the Supreme Court's Kirtsaeng decision. In Jazz Photo, the Federal Circuit held that a foreign sale of a U.S. patented article does not confer authority on a buyer to import the article and sell and use it in the United States, thus preserving the patentee's rights under section 271.

In other words, the patent exhaustion doctrine does not apply where the first sale is abroad − the patentee preserves its rights to sue for patent infringement a subsequent buyer who imports the article into the United States. Here, because Kirtsaeng dealt strictly with the copyright's statutory first-sale doctrine under 17 U.S.C. § 109(a), the Court found this decision inapplicable to an issue entirely governed by patent law. While the Copyright Act specifically allows copyright owners to engage in acts without the copyright holder's express authority, no such provision exists in patent law. As such, the Court found Kirtsaeng inapplicable to the Court's decisions regarding the patent exhaustion doctrine.

Judge Dyk, joined by Judge Hughes, issued a dissenting opinion in which he argued Mallinckrodt should be overturned because the Court's decision here could not be reconciled with Quanta thus failing to follow Supreme Court authority. Judge Dyk, however, agreed that a foreign sale does not exhaust a patentee's rights where the buyer has notice of the patentee's retention of U.S. patent rights.

Conclusion

In upholding its decisions in Mallinckrodt and Jazz Photo, the Federal Circuit reaffirmed the existing patent exhaustion rules that (1) even when no reservation of U.S. rights attaches to an authorized foreign sale, such sale will not trigger the patent exhaustion doctrine and (2) a patentee who sells a patented article under a clearly communicated, otherwise proper restriction on resale and reuse does not exhaust its section 271 rights to charge with infringement downstream buyers having knowledge of the restrictions.

The en banc decision purportedly provides clarity as to the interplay between the patent exhaustion doctrine and the extent to which a patentee may place restrictions and conditions on a patented article. The Court's majority opinion, in excess of 90 pages, thoroughly analyzes current precedent and policy considerations, and even tackles copyright versus patent law principles. So no one should be surprised if the Supreme Court decides to address the patent exhaustion doctrine in the near future. In the meantime, patentees would be wise to carefully review their contractual language with their buyers and licensees to craft a suitable solution to address potential patent exhaustion pitfalls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.