United States: Patent Rights Are Not Exhausted By Sales Outside The United States Or By Clearly-Communicated Post-Sale Restrictions

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.

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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