Abstract
Patent owners may sell patent articles under clearly-communicated, lawful restrictions on reuse or resale without exhausting their patent rights. And international sales of patented products do not exhaust patent rights in the United States unless authorized by the patent owner.
The Federal Circuit was recently asked to determine whether
recent Supreme Court decisions in Quanta v. LG Electronics and
Kirtsaeng v. John Wiley & Sons affected the viability of
two prior Federal Circuit decisions regarding a patent owner's
ability to restrict further sales and use of patented articles
after an authorized sale without exhausting the patent rights. The
first prior Federal Circuit decision, Mallinckrodt, Inc. v.
Medipart, Inc., held that a patent owner may restrict the
postsale use or resale of patented articles when the patent owner
directly sells the product to consumers. And the second Federal
Circuit decision, Jazz Photo Corp. v. International Trade
Commission, held that foreign sales of patented articles do
not permit the foreign buyers to import, sell, or use those
articles within the United States.
Recently, in Lexmark International, Inc. v. Impression
Products, Inc.,1 the Federal Circuit, sitting
en banc, reaffirmed its holdings in Mallinckrodt
and Jazz Photo, namely that a patent owner may enforce
clearly-communicated, lawful restrictions on a buyer's resale
or reuse of a patented article, and that foreign sales of patented
articles do not exhaust patent rights in the United States, unless
authorized by the patent owner.
Background
Lexmark manufactures printer cartridges that are sold both in
the United States and abroad. The cartridges are sold in the United
States under two purchasing options. Buyers can purchase a
"Regular Cartridge" at full price that is not subject to
any reuse or resale restrictions. Or alternatively, buyers can
purchase a "Return Program Cartridge" at a discount,
subject to the restriction that the buyer will not reuse the
cartridge and will not transfer the cartridge to anyone other than
Lexmark after the toner runs out. The Return Program Cartridge
program is enforced by a microchip that prevents reusing a refilled
cartridge.
Impression Products and the other re-manufacturers collected the
used Return Program Cartridges, "hacked" the microchip
that was supposed to prevent reuse, refilled the cartridges, and
resold them in the United States for use with Lexmark's
printers.
Lexmark sued Impression Products alleging that the sale of the
refurbished Return Program Cartridges and the importation and sale
of foreign-sold cartridges in the Unites States infringed its
patents.
Impression responded that Lexmark's sales of the cartridges
both abroad and in the United States, whether sold as Regular
Cartridges or as Return Program Cartridges, exhausted Lexmark's
patent rights, preventing Lexmark from alleging infringement.
Although the Federal Circuit's prior decisions in
Mallinckrodt and Jazz Photo weighed against this
defense, Impression argued that two subsequent Supreme Court
decisions in Quanta v. LG Electronics and Kirtsaeng v. John
Wiley & Sons compelled a different result and effectively
overruled the earlier Federal Circuit cases.
After initial briefing on appeal, the Federal Circuit issued an
order to hear the case en banc to determine whether its
earlier decisions were still viable after the Supreme Court's
decisions.
The Lexmark Decision
In a detailed and lengthy opinion, a majority of the Federal Circuit judges reaffirmed both the Mallinckrodt and Jazz Photo decisions. Two judges dissented.
Mallinckrodt Reaffirmed - No Patent Exhaustion from Post-Sale Restrictions
The majority held that the sale of a patented article subject to
"a clearly communicated, otherwise-lawful restriction as to
the post-sale use or resale" does
not exhaust the patent owner's rights
of the article sold or permit the purchaser to reuse or resell the
article if doing so violates that restriction.
The arguments presented by Impression and the government
differentiated sales by the patent owner from sales by a licensee,
taking the position that any sale by a patent owner is an
"authorized sale" for purposes of exhaustion. In
particular, Impression and the government relied upon the
formulation of the exhaustion doctrine that prevents restraints on
personal property. Impression and the government argued that the
Supreme Court's prior decisions made clear that when a
patent owner sells a patented article, the transfer of
title to the buyer exhausts the patent owner's rights and the
patent owner cannot further restrict the buyer's use of those
articles. This was distinguished from sales made by
licensees, where patent owners could restrict the
authority of a licensee to sell the patented products under certain
conditions.
The court rejected Impression's proposed distinction between a
patent owner's sales and sales made by a licensee or authorized
manufacturer. Its reasoning focused on the Supreme Court's
earlier decision in General Talking Pictures Corp. v. Western
Electric Co., which held that a buyer can infringe a patent
when it uses a patented article from a licensee in a way that is
prohibited by a known use restriction. In noting that a patent
owner may preserve rights against downstream buyers through lawful
restrictions on licensees, the court observed that "[i]t is
undisputed and clear . . . that Lexmark would not have exhausted
its patent rights" had it sold the Return Program Cartridges
through a licensee rather than directly to endusers. The court
examined the "longstanding Supreme Court precedent," the
court explained that a patent owner may preserve rights against
downstream buyers through lawful restrictions on licensees. For
example, neither party disputed that the Supreme Court precedent
held that "buyer, knowing of [a] restriction at the time of
purchase, subsequently uses the article in violation of the
restriction, the buyer is infringing," which permits a patent
owner to preserve certain rights by selling articles through a
manufacturer. The court pointed out that the position proposed by
Impression and the government would result in providing a greater
ability for non-practicing entities (who do not make or sell
products) to restrict reuse and resale of articles than practicing
entities (who make and sell the products). The court declined to
reach this result and concluded that it would be incorrect to
interpret an "authorized sale" differently for patent
owners and licensees when it found no such distinction in the
law.
The court also distinguished the facts in Lexmark from those in
Quanta and other Supreme Court precedent. Quanta
did not consider either a patent owner's sale or a
single-use/no-resale restriction, but rather considered the case
where a licensee sold products and was not restricted by the patent
owner in making those sales.
The court also explained that the infringement statute's
language that the use or sale of a patented article "without
authority" infringes a patent may permit a patent owner to
enforce "a clear denial of authority" on post-sale use,
provided the restriction is lawful. The court then explained that
it may be reasonable to treat a patentee's sale as
"presumptively granting 'authority' to the
purchaser to use [the article] and resell it," but noted that
exhaustion should not be used to confer the right to resell or
reuse an article where that right was expressly denied. The court
also considered the types of restrictions that might be applied by
a patentee, explaining that "restrictions that are otherwise
unlawful do not preserve patent rights." The court then
concluded that "the law does not forbid the patentee to do the
same when making and selling the articles itself." Thus, the
court held that a patent owner "may preserve its patent rights
against downstream buyers (with notice) through otherwise lawful
restrictions" for sales made by the patent owner.
Although the court reaffirmed its basic holding in
Mallinckrodt, it noted that several questions were not at
issue in this appeal. First, there was no distinction drawn between
Lexmark's sales to end-users and resellers of the cartridges.
Second, there was no dispute that the purchasers had adequate
notice of the single-use/no-resale restrictions before they
purchased the Return Program Cartridges. Third, Impression did not
allege that single-use/no-resale restrictions constituted patent
misuse, violated the antitrust laws, or exceeded the scope of the
Patent Act's grant of exclusive rights. The court, therefore,
declined to decide any of these matters.
Jazz Photo Reaffirmed - No International Patent Exhaustion
The majority also reaffirmed its holding in Jazz Photo,
that international sales of patented articles do not exhaust United
States patent rights, and do not permit the buyer to import, sell,
or use those articles in the United States unless authorized by the
patent owner. The court noted, however, that an express or implied
license could permit a foreign buyer to import, sell, or use the
cartridges in the Unites States—a defense that Impression did
not assert.
The court first considered Impression's argument that Jazz
Photo was overruled by Kirtsaeng, a Supreme Court
case finding that foreign sales exhausted copyright rights in the
United States. The court explained that the section of the
Copyright Act at issue in Kirtsaeng, relates to the
disposition of articles manufactured under the copyright
holder's authority. The Supreme Court held that the ability to
dispose of those authorized copies "applies regardless of the
place of manufacture as long as the maker of the copies had
permission from the copyright owner to make them." The court
noted that this section of the Copyright Act is not analogous to
any provision in the Patent Act, and that a decision interpreting a
statutory provision of the Copyright Act does not automatically
carry over to patent law. The court thus found that
Kirtsaeng did not apply to patent law.
The court next considered and rejected an argument put forth by the
U.S. government—that foreign sales presumptively exhaust U.S.
patent rights, but that a patent owner may expressly reserve those
rights at the time of sale. The court explained that the reasoning
behind precluding foreign sales from exhausting U.S. patent rights
stems from the recognition that a patent provides a reward in the
U.S. market for patent owners. Because of market differences in
foreign countries, sales in a foreign country do not necessarily
provide a similar reward in the United States. Instead, a foreign
sale, regardless of whether the patent owner expressly reserves its
rights in the United States, does not permit the buyer to import,
use, or sell the article in the United States unless it has
authority to do so from the patent owner.
Dissent
Judge Dyk, joined by Judge Hughes, dissented from the decision
of the majority. Judge Dyk would adopt the U.S. government's
positions that Mallinckrodt was wrongly decided, and that
Mallinckrodt cannot be reconciled with the Supreme
Court's decision in another recent case. Summarizing the
Supreme Court's precedent on the so-called "exhaustion
doctrine," Judge Dyk asserted that only one case, which was
overruled a few years after being decided, departed from the
principle that a sale exhausts a patent owner's rights in the
article sold. The dissent reasoned that the subsequent cases from
the Supreme Court explain that once a patented article was sold, it
passed "beyond the confines of the patent law," and a
patent owner could not place "qualifying restrictions" on
subsequent use to keep the article under the patent laws. According
to the dissent, the Supreme Court's language of
"conditional sale" turns on whether title passes from the
patent owner or licensee to the buyer, not one that permits
conditions to be placed on the buyer's use of the product. The
dissent noted that the Supreme Court's precedent draws a
"distinction between restrictions on sales (impermissible) and
restrictions on licensees (permissible)," and asserted that it
is outside of the Federal Circuit's to remove that distinction.
Thus, the dissent would have found that the post-sale restrictions
by Lexmark were unenforceable.
The dissent would also have adopted the government's position
that "a foreign sale does result in exhaustion if an
authorized seller has not explicitly reserved the United States
patent rights." The dissent reasoned that exhaustion should be
presumed where, as here, the patent owner makes the foreign sales,
and distinguished the case relied on by the majority as one where
neither the U.S. patent owner nor its licensee made the foreign
sale. The dissent then analyzed several lower court opinions prior
to Jazz Photo, which it asserted confirm the
government's interpretation. Reviewing the trade agreements
cited by the majority, the dissent interpreted those agreements to
also require a reservation by the patent owner to preserve U.S.
rights. The dissent further found the reasoning on exhaustion of
copyrights in Kirtsaeng persuasive and would have applied
the same reasoning to patents such that a foreign sale exhausted a
U.S. patent owner's rights, except where those rights were
expressly reserved, because such a rule could protect both the
patent owner's interests and protect unsuspecting foreign
buyers interests in their property.
Strategy and Conclusion
This case reaffirms two prior decisions of the Federal Circuit,
but leaves unresolved questions about its scope as to when patent
rights may be exhausted. While this case reaffirms that
clearly-communicated, otherwise-lawful restrictions on sales by
patent owners are enforceable, patent owners need to consider the
boundaries of such restrictions and whether any attempts to impose
such restrictions are clearly communicated and lawful.
Patent owners should also consider whether an implied or express
license is created by the sale, which could exhaust the patent
owner's rights.
Furthermore, given the scope and potential importance of this case
it is important to realize that Supreme Court review and a
different outcome may be possible.
Footnote
1. The Lexmark opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/Lexmarkenbanc.pdf.
Originally published by LES Insights.
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