United States: En Banc Federal Circuit Limits Patent Exhaustion

In Lexmark International, Inc., v. Impression Products, Inc., the en banc Federal Circuit upheld a patent holder’s rights against exhaustion under two circumstances: (1) where the patent holder had sold a patented article with “clearly communicated, otherwise-lawful restrictions” and (2) where the patent holder had sold a U.S.-patented article abroad without an express or implied license under the U.S. patent. The 92 page majority opinion authored by Judge Taranto and the 30 page dissenting opinion authored by Judge Dyk and joined by Judge Hughes suggest that the Federal Circuit expects the Supreme Court to take up the issue of patent exhaustion for review.

The Lexmark Sales At Issue

The sales at issue were Lexmark’s sales of its patented toner ink cartridges for printers. The domestic sales at issue were "Return Program” cartridges which were sold “subject to a single-use/no-resale restriction,” and cost about 20% less than “Regular” cartridges sold without restriction. The foreign sales at issue included both Return Program cartridges and Regular cartridges.

The Majority Stands By Mallinckrodt

In deciding the first issue, the en banc majority “adhere[d] to the holding of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that a patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied.”

The majority noted the settled principle that “a patentee may preserve its § 271 rights through … restrictions when licensing others to make and sell patented articles,” and determined that recent Supreme Court decisions, including Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), did not change the finding in Mallinckrodt that “there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself.”

The Majority Stands By Jazz Photo

In deciding the second issue, the en banc majority “adhere[d] to the holding of Jazz Photo Corp. v. International Trade Comm'n, 264 F.3d 1094 (Fed. Cir. 2001), 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.”

The majority distinguished the recent Supreme Court decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), largely on the basis that that case was a copyright case, not a patent case, and interpreted a very different statute, 17 U.S.C. § 109 instead of 35 U.S.C. § 271.

The majority noted that an express or implied license may arise from a foreign sale “based on patentee communications or other circumstances of the sale,” but set the default rule as no exhaustion.

Judge Dyk’s Dissenting Opinion

Judge Dyk and Judge Hughes disagreed with the majority on both issues.

As to the first issue, Judge Dyk writes:

I agree with the government that Mallinckrodt was wrong when decided, and in any event cannot be reconciled with the Supreme Court's recent decision in Quanta …. We exceed our role as a subordinate court by declining to follow the explicit domestic exhaustion rule announced by the Supreme Court.

As to the second issue, Judge Dyk would adopt an opposite default rule:

I would retain Jazz Photo insofar as it holds that a foreign sale does not in all circumstances lead to exhaustion of United States patent rights. But, in my view, a foreign sale does result in exhaustion if an authorized seller has not explicitly reserved the United States patent rights.

From Printer Ink To Pharmaceutical Products

The foreign sale issue seems to be particularly relevant to pharmaceutical companies. Indeed, the majority discussed the potential impact on the pharmaceutical industry if Jazz Photo were overturned:

There seems to be no dispute that U.S.-patented medicines are often sold outside the United States at substantially lower prices than those charged here and, also, that the practice could be disrupted by the increased arbitrage opportunities that would come from deeming U.S. rights eliminated by a foreign sale made or authorized by the U.S. patentee.

The majority noted that even “a 2003 World Trade Organization decision made with the agreement of the United States,” where the WTO “waived certain TRIPS patent-recognition provisions in order to allow certain countries to import generic versions of needed medicines …. took care … to condition the waiver on agreement by the importing countries "to control re-exportation of drugs they import in this fashion."

(Judge Dyk states in his dissenting opinion that “[e]ach bilateral trade agreement cited by the majority requires preservation of U.S. patent rights only where the U.S. rights have been expressly reserved.”)

Any court that revisits Jazz Photo also should consider the implications in view of increasingly divergent laws on patentable subject matter. The patentability of a product in a given country may impact decisions to enter the market, the conditions of sale, and pricing. Uncertainty as to whether a foreign sale could exhaust U.S. patent rights would make these complicated decisions even more complicated.

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.

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