United States: Federal Circuit To Consider Limits Of ‘First Sale' Doctrine

The U.S. Court of Appeals for the Federal Circuit is poised to again consider one of the most fundamental limits on United States patent rights: the exhaustion of rights, or "first sale," doctrine. On Oct. 2, in Lexmark International Inc. v. Impression Products Inc., it will hear argument, en banc, on whether the U.S. Supreme Court implicitly overruled two of its long-standing precedents — Mallinckrodt Inc. v. Medipart Inc., and Jazz Photo Corp. v. International Trade Comm'n — that both limited when patent rights would be exhausted. At issue in Lexmark is the extent to which U.S. patent rights can be used to control downstream and international trade in the patentee's goods.

Generally, when a U.S. patent holder sells an article embodying the patent, its patent rights with respect to that article are "exhausted," meaning the patent cannot be enforced against the buyer or subsequent transferees for that particular article. Federal Circuit decisions created exceptions to the general rule. Its 1992 Mallinckrodt decision held that patent rights were not exhausted by a sale subject to a post-sale restriction or condition with respect to conduct violating the restriction. In 2001, Jazz Photo held that exhaustion of U.S. patent rights occurs by a first sale within the United States, so that a U.S. patentee could still claim infringement by importation of articles of solely foreign origin.

The Supreme Court's 2008 decision in Quanta Computer Inc. v. LG Electronics Inc. raised questions about the viability of the Mallinckrodt rule. Intel was licensed to make and sell products under LG patents, but was contractually required to give its customers written notice that the license does not extend to a product made by combining an Intel product with a non-Intel product. Quanta made computers that did that, which LG said infringed its patents. The Supreme Court held that Intel's sale to Quanta exhausted LG's patent rights, because LG authorized the sale, notwithstanding the mandated notice.

A 2013 copyright case, Kirtsaeng v. John Wiley & Sons Inc. , called Jazz Photo into question. It held that exhaustion of U.S. copyrights occurred by an authorized sale abroad. John Wiley authorized sale of English-language textbooks in Thailand which stated they were not to be taken (without permission) into the United States. Kirtsaeng imported used books from Thailand into the U.S. and resold them. The court held that Kirtsaeng could raise the defense of exhaustion of rights. After finding nothing contrary in the statute, it reasoned that the common law first sale doctrine was sound and recognized no territorial limits on its application.

In the case to be heard next month, Lexmark distributed its laser printer toner cartridges under two types of restrictions. First, customers could choose between "Return Program" cartridges," with a "single use only" contractual restriction and unrestricted "Regular" cartridges costing roughly 20 percent more. The restriction existed in end-user contracts and Lexmark required its authorized resellers to sell Return Program cartridges subject to the single-use restriction. Each Return Program cartridge has a chip that enforces the single-use restriction: When all the toner is consumed, the chip stores this fact; if the cartridge is later reinstalled, the chip will inform the printer that the cartridge is empty and disable printing with that cartridge. Second, Lexmark "regionalized" its cartridges via the same chip, meaning, e.g., that a cartridge sold in Europe would not work in a printer sold in North America.

Impression acquired spent Lexmark-made cartridges (first sold both in the U.S. and abroad), installed replacement chips that did not implement Lexmark's restrictions, refilled toner, and sold those cartridges in the United States. Lexmark alleged its patents covered the cartridges, giving rise to infringement.

Impression moved to dismiss, arguing that Lexmark's patent rights were exhausted by its first sale of cartridges in the U.S. and abroad. The district court held that Lexmark's sales abroad did not exhaust its U.S. patent rights under Jazz Photo and that Kirtsaeng had not overruled Jazz Photo. However, it said Lexmark's U.S. sales did exhaust its U.S. patent rights under the Supreme Court's Quanta decision.

Impression appealed and Lexmark cross-appealed. After the case was argued, the Federal Circuit sua sponte ordered the case be heard en banc addressing two issues: (a) In light of Kirtsaeng, should the court overrule Jazz Photo to the extent it ruled that a sale of a patented item outside the United States never gives rise to United States patent exhaustion? (b) The case involves (i) sales of patented articles to end users under a restriction that they use the articles once and then return them and (ii) sales of the same patented articles to resellers under a restriction that resales take place under the single-use-and-return restriction. Do any of those sales give rise to patent exhaustion? In light of Quanta, should the court overrule Mallinckrodt, to the extent it ruled that a sale of a patented article, when the sale is made under a restriction that is otherwise lawful and within the scope of the patent grant, does not give rise to patent exhaustion? The Federal Circuit invited the United States to file an amicus curiae brief on these issues.

Impression argues the Jazz Photo rule is not logically required and leads to undesirable outcomes. Kirtsaeng, it says, reached the same conclusion in rejecting a similar rule for copyrights and the Court's reasoning is equally applicable to patent cases. Impression further argues that Quanta effectively found that agreements whereby a patentee restricts a buyer's use of a patented product — like the "single use only" inscription in Mallinckrodt — are invalid if the patentee authorized the sale.

Lexmark argues that by statute and international agreement, patent rights are territorial, and because a U.S. patent does not protect sales abroad, those sales do not exhaust U.S. patent rights. Kirtsaeng, it says, arose under a statutory copyright regime with less territorial force and should not apply to patent rights.

The United States argues that the first authorized sale of a patented article in the United States wholly exhausts the patentee's exclusive rights in that article, notwithstanding any post-sale restriction from the patentee. However, a patentee may sell a patented article abroad while reserving its U.S. patent rights as to that article because a sale under foreign law does not require any authority under U.S. patent law. Other amicus curiae briefs have been filed from industry, scholars and bar associations.

On the surface, the en banc legal issues before the Federal Circuit — if intervening Supreme Court decisions overturn older panel decisions — appear routine. Complexity lies beneath the surface, however. For the court to weigh are the federal patent statute (and potentially international agreements), contract law, and common law limits on both of them (as interpreted by the Supreme Court, at least in part). In the background are policies implicated by the economic consequences for patent owners, competitors and resellers and consumers.

Whatever the outcome, the decision is one likely to impact not only legal doctrine, but also the real economy. The contour of the exhaustion of rights impacts the pricing and distribution arrangements patent owners can implement for their products, both within the U.S. and globally. For those trading in goods covered by copyrights, patents and other intellectual property rights, divergence among the exhaustion of rights legal regimes creates unwanted complexity and unpredictability. In any event, having uncertainty over the viability of the Jazz Photo and Mallinckrodt rules removed will be welcome for patent owners and other businesses needing to prepare agreements and product distribution plans.

Originally published in the Daily Journal on September 14, 2015. ​​​​​​​​​​​​​​

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