United States: Patent Exhaustion Case Could Have Enormous Impact On Multinational Businesses

Last Updated: October 25 2016
Article by Michael D. Stein

Earlier this year, the Federal Circuit ruled en banc in Lexmark v. Impression,1 the most significant exhaustion ruling since the Supreme Court's Quanta decision.2 In response to Impression's cert. petition, the Supreme Court called for the views of the Solicitor General. The U.S. has now filed its brief, recommending cert. be granted on both questions. Consistent with its views before the en banc Federal Circuit, the U.S. agrees with Judge Dyk's dissent, and recommends strengthening the exhaustion doctrine, effectively overruling the Federal Circuit's long-standing decisions in Mallinckrodt and Jazz Photo.3 The two issues at stake relate to post-sale limits on use and resale, and whether foreign sales exhaust a patentee's U.S. rights.

The Solicitor General's recommendations make a cert. grant highly likely in this important case, which goes to the heart of two of the Supreme Court's favorite patent topics: the scope of the patent right and the extraterritorial effect of U.S. patents. The strategic impact on large multinational businesses, complex licensing deals and so on is potentially enormous.

The questions presented are:

  1. Whether a U.S. patent owner may invoke patent law to enforce restrictions on the use or resale of a patented article after the first authorized sale of the article in the United States.
  2. Whether and under what circumstances a U.S. patent owner may authorize the sale of a patented article in a foreign country, either under a foreign patent or otherwise in accordance with foreign law, while reserving its exclusive rights under U.S. patent law.

Both of these issues have to do with the extent to which the patent holder can limit and control a grant of "authority" under 35 U.S.C. § 271. Consistent with the patent rights being negative, the statute gives patent owners one main lever in parceling out the right: granting "authority" to exercise the invention. The sale of a patented article, by operation of law, includes authorization to dispose of that article – the so-called first sale doctrine.

Oftentimes in business-to-business deals (and occasionally in the consumer market), the patent owner does not want its customer to have this kind of unlimited authority – because the customer could compete in undesired markets, resell to competitors or do any number of other bad things. (This all applies similarly to situations where a patent owner licenses another party, who in turn sells the patented articles.) So contracts involving patent rights typically attempt to tightly control the scope of that grant of authority (time, field, implementation, products, reciprocal conditions, exclusivity and so on). But can that control of authority be extended from the licensor to the licensee and then to those parties the licensee in turn deals with? We learned from Quanta that it is tricky to exercise control over the downstream market, but now the U.S. is proposing to the Supreme Court to make it nearly impossible to exercise that control.

Similarly, the U.S. is proposing that sales abroad should presumptively exhaust U.S. patents – even though the statutory patent right is "within" the U.S. This is a little less drastic than the first issue, because express efforts to reserve U.S. rights should help in most situations to overcome the presumption.

The record in this case is heavily focused on the consumer market, involving scenarios with consumables and generic competition for consumables. The potential impact on complex licensing deals and multinational business-to-business commerce may escape the Supreme Court, so hopefully amicus briefings will help with that.

To conclude, this is a case that could have an enormous impact on large multinational businesses and complex licensing deals. Time will tell whether the Supreme Court will overrule the Federal Circuit's long-standing decisions in Mallinckrodt and Jazz Photo, which generally favor patentees.

Footnotes

1 Lexmark International, Inc. v. Impression Products, Inc., Nos. 14-1617, -1619 (Fed. Cir. Feb. 12, 2016).

2 In Quanta v. LG Electronics, 553 U.S. 617 (2008), the Supreme Court did not address a sale by the patentee (LGE). Instead, Quanta involved a sale made by a manufacturing licensee (chip maker Intel), which the patentee had authorized to make and sell the articles at issue (chips for installation in computers that would then be covered by LGE's patents). And the patentee's authorization to the licensee to make sales was not subject to any conditions, much less conditions to be embodied in those sales.

3 See Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992), and Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001).

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