United States: The En Banc Federal Circuit Holds That Patent Rights Are Not Exhausted By Prior Restricted Sales Or By Foreign Sales

On February 12, 2016, in a 10-2 decision, the en banc Federal Circuit ruled on two major issues related to patent exhaustion, a doctrine allowing purchasers of goods embodying patented inventions in authorized sales to make certain uses, including resales, that would otherwise give rise to patent infringement. Lexmark Int’l, Inc. v. Impression Prods., Inc., No. 2014-1617 (Fed. Cir. Feb. 12, 2016) (en banc). The majority opinion held that, “when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale, the patentee does not confer authority on the buyer to engage in the prohibited resale or reuse” and thus “does not exhaust its § 271 rights to charge the buyer who engages in those acts—or downstream buyers having knowledge of the restrictions—with infringement.” The court also held that “a foreign sale of a U.S.-patented article, when made by or with the approval of the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale.”

Lexmark embraces a very strong view of patent rights and a narrow view of the scope of exhaustion. It affirms that patent holders have wide latitude to segment and control distribution in the market channels for products covered by patents. This latitude is particularly wide with respect to limiting the import into the United States of patented goods sold in authorized sales in foreign markets even where restrictions on resale were not proven to have been communicated to foreign buyers. Even so, the court left open the possibility that foreign sales, under the right circumstances, may incorporate an implied license to import and use the product within the United States.

The majority opinion, written by Judge Taranto, and the dissenting opinion, written by Judge Dyk and joined by Judge Hughes, totals approximately 130 page and underscores the significance of the issues at stake. Suffice it to say that a detailed summary and complete analysis are beyond the scope of this short note. Whether one agrees with it or not, the majority opinion is a tour de force in its analysis and dissection of relevant precedent. Although it’s likely that Supreme Court review will be sought, it’s not entirely clear whether the Court will disturb the Federal Circuit’s rulings. So, stay tuned for further developments.

Restricted Sales in the U.S. Do Not Exhaust Patent Rights

When the Federal Circuit sua sponte granted en banc review, one of the two issues it addressed was whether the court should overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), which held that a restricted, lawful sale of a patented article does not give rise to patent exhaustion. Now, the full court has reaffirmed that holding. The majority methodically addressed each argument raised by the opponents of Mallinckrodt.

First, the court disposed of the Mallinckrodt issue as it had been framed. The United States, as amicus, posited that the issue turned on the distinction between an authorized sale by a patent owner versus an authorized sale by a licensee. The government had argued that patent rights are exhausted if the sale is by the patent owner, but not exhausted if the sale is by a licensee.

Rejecting the government’s argument, the court held that 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 precludes.” Slip op. at 25. As the court explained, the Supreme Court had held that “a patentee can preserve its patent rights by authorizing a manufacturing licensee to make and sell a patented article under an otherwise-proper restriction, including a restriction on the buyer’s post-purchase use,” relying on General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, op. on rehearing at 305 U.S. 124 (1938). And the Federal Circuit concluded that neither the statutory framework (35 U.S.C. §§ 154 and 271) nor any policy arguments provided any basis for making a distinction between patentee sales versus licensee sales. In fact, as the Federal Circuit majority noted, under the government’s theory, “[n]on-practicing entities would have greater power to maintain their patent rights than practicing entities.” Slip op. at 42.

The Federal Circuit also rejected the argument that Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) effectively overturned Mallinckrodt. The court concluded that:

Quanta did not involve the issue presented here. The facts defining the issues for decision, and the issues decided, were at least two steps removed from the present case. There were no patentee sales, and there were no restrictions on the sales made by the licensee. . . . . The two main issues decided by the Court in Quanta have no bearing on the issue of restricted sales by a patentee. The Court decided that exhaustion applies to method claims. . . . And the Court decided ‘the extent to which a product must embody a patent in order to trigger exhaustion.’ . . . . Only the third issue addressed by the Court in Quanta concerns restrictions on sales—though not patentees’ sales—and the Court’s discussion of that issue does not undermine Mallinckrodt’s ruling that a patentee can preserve its patent rights through restrictions on its sales.

Slip. op. at 29–30. Moreover, in the Federal Circuit’s view, “[i]nferring disapproval of Mallinckrodt by the Supreme Court in Quanta is unwarranted” because the Court said nothing about Mallinckrodt or its successor case B. Braun Medical even though, in Quanta, “the government prominently featured an argument that Mallinckrodt was incorrect and should be repudiated.” Slip. op. at 30.

These observations set the stage for the core of the court’s analysis. Quanta had formulated the exhaustion doctrine as follows: “The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008); see also Bowman v. Monsanto Co., 133 S. Ct. 1761, 1764 (2013) (“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.”). What does “authorized sale” mean? Those who maintained that Mallinckrodt should be limited, if not overturned, argued that a sale by a patentee was, by the mere act of the sale, authorized and so triggered exhaustion, permitting resales even in the face of a restriction unilaterally imposed by the patentee and known to the purchaser. The argument distinguished licenses, for there the licensor patentee would contractually define the ambit of authorization in the scope of the license, making sales outside of scope unauthorized.

The Federal Circuit firmly rejected this argument, concluding “that a patentee may preserve its § 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.” Slip op. at 38. Parsing Quanta, Bowman, and other Supreme Court articulations of the exhaustion doctrine, the majority found that such precedents did not require the interpretation advanced by the government or Impressions. In fact, the majority maintained that its conclusion “follows naturally from the statute.” Under the controlling language of “without authority,” reasoning that “a clear denial of authority leaves a buyer without the denied authority.” Id. at 38. While, in the court’s view, “[t]he exhaustion rule for unrestricted sales readily fits the language of § 271(a),” (emphasis in original), “it is quite a different matter to treat a sale as conferring on the buyer the very authority that is being denied through clearly communicated restrictions.” Id. at 38. Further, according to the majority the “essential tradeoff of the patent system—to provide a market-based reward in exchange for disclosure—is equally applicable whether the patentee sells or licenses another to make and sell.” Id. at 42. In addition, the majority warned that the “proposed distinction would also introduce practical problems. Where would the line be drawn along the spectrum from original patentees to assignees (e.g., regional assignees) to exclusive licensees (exclusivity being possible as to some but not all of the § 154 rights) to nonexclusive licensees?” Id. at 43.

Finally, the majority rejected any contention that antitrust law or “Lord Coke’s description of English general personal-property judge-made law” mandates a contrary conclusion. Similarly, the court considered the pragmatic “real-world consequences” and concluded that there was “no basis for predicting the extreme, lop-sided impacts the Court found plausible” in the copyright context of Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013). Rather, the court recognized the benefits of the sales restrictions here, in which Lexmark had “a plausible legitimate interest in not having strangers modify its products and introduce them into the market with the quality of modifications (including ink refills) not subject to Lexmark’s control: lower quality of remanufactured cartridges could harm Lexmark’s reputation.” Slip op. at 56–57. Though this almost sounds like a goodwill protection basis for enforcing restrictions to trigger infringement liability, the Federal Circuit maintained that reputational and similar “interests are hardly unrelated to the interests protected by the patent law—the interests both of those who benefit from inventions and of those who make risky investments to arrive at and commercialize inventions, trademark or goodwill” Slip op. at 57. Since Impression had not “claimed that the restrictions at issue violate antitrust, patent-misuse, or similar constraints” that would invalidate the restrictions, those restrictions could be given effect.>1

In dissent, Judge Dyk “agree[d] 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. Dissenting op. at 2. He also noted that “[p]ost-sale restrictions were enforceable only as a matter of state contract law.” Id. at 5. Reviewing the same Supreme Court precedent as that majority, as well as additional cases, Judge Dyk concluded that “The rule articulated in the Supreme Court’s cases is consistent with the common law rule against restraints on the use or alienation of chattels.” Id. at 12.

A Foreign Sale, Even Without Restrictions, Does Not Exhaust U.S. Patent Rights

The second issue addressed by the en banc court was whether a foreign sale, made without any communication of a reservation of U.S. patent rights, triggers patent exhaustion, and whether to overrule Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), in view of the copyright case Kirtsaeng. The court held no:

[W]e adhere to the holding of Jazz Photo . . . 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 . . . . 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.

Slip op. at 8-9.

More importantly, the court recognized the market-based reasons for rejecting a foreign-exhaustion rule. “The statute gives patentees the reward available from American markets,” the court explained, and “[a] patentee cannot reasonably be treated as receiving that reward from sales in foreign markets.” Slip op. at 71. The court recognized that “American markets differ substantially from markets in other countries,” due in part to disparities in wealth and policies on market regulation and patent protection. Id. at 73-76. “For those reasons, a foreign sale, standing alone, is not reasonably viewed as providing the U.S. patentee the reward guaranteed by U.S. patent law.” Id. at 76.

Continuing its analysis, the majority turned to Supreme Court and appellate precedent. Only one case, Boesch v. Graff, 133 U.S. 697 (1890), directly addressed the question and held that U.S. patent rights are not exhausted by a foreign sale. The Federal Circuit recognized that the ruling did not “preclude an accused infringer from establishing that the U.S. patentee actually gave it a license, expressly or by implication.” Slip op. at 78–79.

Additionally, the fact that “Congress did act in three specific instances formally to guarantee a U.S. patentee the right to retain its U.S. rights despite selling abroad” was further evidence that U.S. rights are not exhausted by a foreign sale. Slip op. at 82. The majority cited Congress’ decisions in passing TRIPS, the related international agreement, and the more recent Trans Pacific Partnership. Id.

The majority also detailed the likely real-world consequences of maintaining the rule in Jazz Photo. The court observed that “[o]verturning Jazz Photo would plausibly cause significant disruption of existing practices adopted under the contrary law established by Jazz Photo and decades of prior case law.” Slip op. at 94.

All that said, the majority emphasized that, even under the Jazz Photo rule, the lack of exhaustion does not preclude the possibility that foreign sales establish a license, either express or implied. See slip op. at 85–92. Citing numerous appellate court decisions, the majority’s analysis explained past cases undertook “some assessment of the particular circumstances and language of foreign sales to determine if the U.S. patentee gave permission for importation.” Id. at 92.2

Again, Judge Dyk, along with Judge Hughes, disagreed with the majority. The dissent “would retain Jazz Photo insofar as it holds that a mere foreign sale does not in all circumstances lead to exhaustion of United States patent rights.” Dissenting op. at 21. But the dissent would agree with the government’s argument “that the foreign sale should result in exhaustion if the authorized seller does not explicitly reserve its United States patent rights.” Id. The dissent contended that “the centerpiece of the majority’s holding,” i.e., that Boesch announced “a doctrinal blanket ban on foreign exhaustion,” was not correct. Id. Judge Dyk also noted that “every one of the lower court decisions before Jazz Photo applied exactly the rule for which the government argues.” Id. at 22. In short, in Judge Dyk’s view, “the necessary accommodation between the interests of the rights holder and the unsuspecting buyer can only be achieved by the government’s proposal to put the burden on the U.S. rights holder to provide notice of a reservation of U.S. rights to the purchaser, an approach supported by the earlier lower court decisions and legislative action.” Id. at 29.

Footnotes

1. Importantly the court noted three aspects of Impression's arguments narrowed the court's focus. "First, we discuss only Lexmark's sales to end users (and the resales and reuses deriving from those sales), because neither party has made an argument for distinguishing Lexmark's sales to resellers. Second, we take as a premise that both the first purchaser and Impression as a repurchase had adequate notice of the single-use/no-resale restriction before they made their purchases; the adequacy of that notice is unchallenged. Thus, we do not have before us the questions that would arise, whether under principles governing bona fide purchasers or otherwise, if a downstream re-purchaser acquired a patented article with less than actual knowledge of such a restriction. Third, Impression has not contended that the particular restriction at issue gives rise to a patent-misuse defense, constitutes an antitrust violation, or exceeds the scope of the Patent Act's express grant of exclusive rights over patented articles, 35 U.S.C. §§ 154, 271." Slip op. at 13.

2. For a general analysis of the doctrines of exhaustion, first sale and implied license, see §§2:35-2.38 and Chapter 10 of Nimmer and Dodd, Modern Licensing Law (Thomson West--2015-2016 ed.)

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Volpe and Koenig, P.C.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Volpe and Koenig, P.C.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions