United States: Federal Circuit Rules Its Precedents On Domestic And International Patent Exhaustion Principles Not Changed By Supreme Court Cases

Lexmark International, Inc., v. Impression Products, Inc., Case Nos. 14-1617, -1619 (Fed Cir, Feb. 12, 2016) (en banc) (Taranto, J., joined by Prost, CJ and Newman, Lourie, Moore, O'Malley, Reyna, Wallach, Chen and Stoll, JJ) (Dyk, J. dissenting, joined by Hughes, J.)

In April 2015, the U.S. Court of Appeals for the Federal Circuit sua sponte ordered an en banc consideration of the issue of international patent exhaustion in the case Lexmark International, Inc. v. Impression Products, Inc. At the time, the Federal Circuit rule pertaining to international patent exhaustion,  which dates back to the 2001 Federal Circuit decision in Jazz Photo ( IP Update, Vol. 4, No. 9), was facially inconsistent  with the international exhaustion principles pronounced by the Supreme Court of the United States in 2012 in the copyright context; Kirtsaeng v. John Wiley & Sons ( IP Update, Vol. 15, No. 5). The Federal Circuit ruled there was no U.S. patent exhaustion based on an authorized sale abroad while the Supreme Court copyright rule was essentially the opposite.

In its order for en banc review, the Federal Circuit also noted the apparent tension between its 1992 Mallinckrodt decision (finding single use/no resale restrictions by patent owner to be lawful) and the Supreme Court's 2008 Quanta Computer decision ( IP Update, Vol. 11, No. 6) as to whether patent owners can restrict the scope of exhaustion attended the sale of a patented article.

Thus, the parties were ordered to file new briefs addressing the following issues:

  • Should this court overrule Jazz Photo Corp. v. International Trade Commission?
  • The case involves (1) sales of patented articles to end users under a restriction that they use the articles once and then return them; and (2) 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 Computer, Inc. v. LG Electronics, Inc.,..., should this court overrule Mallinckrodt, Inc. v. Medipart, Inc.,..., 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? ( IP Update, Vol. 18, No. 4)

On February, 12, 2016, the en banc Federal Circuit issued its long awaited (10-2) decision, reaffirming the court's prior rulings in Mallinckrodt and Jazz Photo [i.e., respectively that (1) a seller can use its patent rights to block resale and reuse of a product, and (2) authorized sales of a product abroad does not exhaust the U.S. patent rights associated with that product].

Thus, applying this decision, U.S. courts faced with similar issues will likely rule that a foreign sale of a product by a patent owner does not exhaust its U.S. patent right. And, in terms of domestic resale/reuse, U.S. courts will continue to presume that while the sale of a product made without express restriction is delivered free from any resale or reuse restrictions, if a reuse/resale restriction is expressly imposed by the patentee that also manufactures the product only on downstream subsequent purchasers, those restriction(s) may be binding upon subsequent owners—notwithstanding they may have no contractual agreement or relationship whatsoever with the patentee.

The majority opinion by Judge Richard G. Taranto (92 pages) explained and rationalized in great length why Mallinkrodt and Jazz Photo  remain good law, notwithstanding the Supreme Court's intervening decisions in Quanta Computer and Kirtsaeng v. John Wiley & Sons.

In doing so, the Federal Circuit rejected arguments that foreign sales and unrestricted first sales of an item that had post-first sale use restrictions automatically exhaust patent rights in a patented article. Both the U.S. government and a toner-cartridge remanufacturer had urged the court to reconsider its exhaustion precedents in light of the intervening Supreme Court decisions.

The case arose in the context of a printer manufacturer, Lexmark, enforcing patent rights in its toner cartridges. Lexmark's infringement suit addressed two types of cartridges: "single-use" cartridges Lexmark initially sold in the United States, at a reduced price, subject to a box-top label license that notified customers to use the cartridge only once; and cartridges Lexmark sold abroad. Impression acquired spent cartridges repaired the cartridges such that they could be used again, and sold the cartridges in the United States without Lexmark's "authorization."

When Lexmark sued for infringement, Impression responded that Lexmark's initial sale of the cartridges in the distribution chain without any restriction on resale terminated or "exhausted" Lexmark's right to enforce its U.S. patents. The district court held that the doctrine prevented Lexmark from enforcing the post-sale single-use restrictions in a patent-infringement suit, but allowed Lexmark to enforce its patent rights in foreign-sold cartridges resold by Impression in the United States, because the first sale occurred abroad.

Mallinckrodt

As explained by the majority, a patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful and clearly communicated to the ultimate purchaser, does not by that sale give the downstream buyers the resale/reuse authority that has been expressly denied. Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized, and therefore remains infringing conduct under the terms of § 271. Under Supreme Court precedent, a patentee may preserve its § 271 rights through such restrictions when licensing others to make and sell patented articles; Mallinckrodt held that there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself. We find Mallinckrodt's principle to remain sound after the Supreme Court's decision in Quanta Computer..., in which the court did not have before it or address a patentee sale at all, let alone one made subject to a restriction, but a sale made by a separate manufacturer under a patentee-granted license conferring unrestricted authority to sell.

Jazz Photo

Here, the majority explained 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. Jazz Photo's no-exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee's sale presumptively exhausts its rights in the article sold. A buyer may still rely on a foreign sale as a defense to infringement, but only by establishing an express or implied license—a defense separate from exhaustion, as Quanta holds—based on patentee communications or other circumstances of the sale. We conclude that Jazz Photo's no-exhaustion principle remains sound after the Supreme Court's decision in Kirtsaeng, in which the court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing domestic acts. Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts "without the authority" of the copyright holder. There is no counterpart to that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee's rights in the United States.

The Dissent

In a 30-page dissent, Judge Timothy B. Dyk (joined by Judge Hughes), argued that "Mallinckrodt was wrong when decided, and in any event cannot be reconciled with the Supreme Court's recent decision in Quanta Computer..... We exceed our role as a subordinate court by declining to follow the explicit domestic exhaustion rule announced by the Supreme Court."

The dissent also faulted the majority's "presumption-based approach to international exhaustion that would treat exhaustion as a default rule," although the dissent "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" it parted way with the majority in arguing that "a foreign sale does result in exhaustion if an authorized seller has not explicitly reserved the United States patent rights."

Practice Note

A Supreme Court cert petition appears to be likely. Perhaps in contemplation of such action, the lengthy majority opinion meticulously distinguishes not only the two intervening Supreme Court cases discussed above, but a long line of precedents extending back 200 years. In terms of domestic exhaustion, the Federal Circuit's primary rationale is that Quanta did not hold that, regardless of use restrictions, any "authorized sale" exhausted patent rights, because Quanta did not involve use restrictions, and because the Supreme Court did not accept the Solicitor General's express request in that case to overturn Mallinckrodt. As for foreign exhaustion, the Federal Circuit explains that the Kirtsaeng copyright decision did not extend to patent law, because that opinion rested on text and precedent unique to the Copyright Act.

As the dissent notes, the case presents obvious tensions between Quanta and Mallinkrodt as well as between Kirtsaeng and Jazz Photo.

Federal Circuit Rules Its Precedents On Domestic And International Patent Exhaustion Principles Not Changed By Supreme Court Cases

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