United States: Supreme Courts Lexmark Decision Expands Scope Of Patent Exhaustion Defense

For the fifth time this session, and following fast on the heels of its landmark decision in TC Heartland v. Kraft Foods earlier in May, the Supreme Court again reversed the Federal Circuit. The case, Impression Products, Inc. v. Lexmark International, Inc., significantly expands the scope of the patent exhaustion doctrine. The doctrine of patent exhaustion limits the rights that remain available to a patentee following the initial authorized sale of a patented item. In a 7-1 opinion issued on May 30, the Supreme Court reversed the Federal Circuit analysis concerning both domestic and foreign sales, overturning more than two decades of precedent at the lower courts. It held that "a patentee's decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale."

Background

This case arises from a dispute between Lexmark, a manufacturer of printer cartridges, and resellers of its cartridges. Lexmark makes proprietary toner cartridges for printers, which it markets and sells both internationally and domestically. The Lexmark cartridges are sold either at full price, or at a discounted rate under its return program. Each return program cartridge carries a contractual single-use/no-resale obligation on the purchaser not to refill the cartridge with toner and reuse it. Other companies known as "re-manufacturers" acquire empty Lexmark cartridges (including ones sold under the return program) from purchasers in the United States and abroad, refill them with toner, and then resell them at lower prices.

Lexmark brought a patent infringement suit against several of these resellers. The litigation proceeded until only a single count of infringement remained against a single defendant, Impression Products. Impression Products did not contest the enforceability of Lexmark's patents, or that the patents covered the cartridges that Impression Products imported and sold. Rather, Impression Products contested liability based solely on the defense of patent exhaustion and moved to dismiss Lexmark's claim of infringement with respect to both cartridges sold domestically and those sold abroad.

With respect to cartridges that Lexmark sold domestically, the district court found that the doctrine of patent exhaustion barred Lexmark's claims, even for cartridges subject to the post-sale use restrictions of Lexmark's return program. For this holding, the district court relied on the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617 (2008), which the district court found overruled existing Federal Circuit precedent on patent exhaustion. With respect to cartridges that Lexmark sold internationally, however, the district court denied Impression Products' motion to dismiss and held that patent exhaustion did not apply. In particular, the district court found that Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519 (2013), which held that there was no geographical bar to the first sale doctrine under the Copyright Act, did not override Federal Circuit precedent rejecting theories of international patent exhaustion.

Both parties appealed. On appeal, an initial panel of the Federal Circuit sua sponte requested a poll on whether to consider this case en banc in the first instance, and a majority of the judges who are in regular active service voted for sua sponte en banc consideration. Sitting en banc, the Federal Circuit ruled in favor of Lexmark on both the domestic and international exhaustion issues, holding that the neither Quanta nor Kirtsaeng overruled the limits on patent exhaustion under prior Federal Circuit case law.

The Supreme Court Ruling: U.S. Sales

The Lexmark Court first considered the question of whether a patentee that sells a patented article domestically subject to express restrictions on a purchaser's right to reuse or resell the product may then enforce those restrictions by bringing a lawsuit for patent infringement. In examining this question, the Lexmark Court drew heavily from its prior patent exhaustion decisions in Quanta and United States v. Univis Lens Co., 316 U. S. 241 (1942). These cases uniformly held that the first authorized sale in the U.S. of a material object terminates patent rights associated with that object and leaves a patentee without the ability, under patent law, to control the use or disposition of the product after the initial sale. These cases, however, left open the possibility that a patentee may still be able to place contractual restrictions on the use of the items it sold.

With Lexmark, the Supreme Court slammed that door shut. Indeed, all eight Justices agreed that—under the patent exhaustion doctrine—Lexmark's sale of the cartridges extinguished the asserted patent rights, notwithstanding the contractual restrictions on reuse Lexmark attempted to place on the articles prior to sale. The Court based its decision not only on its prior patent exhaustion cases, but also on its copyright ruling in Kirtsaeng, which addressed the first sale doctrine codified at Section 109(a) of the Copyright Act. It explained its view that: "This well-established exhaustion rule marks the point where patent rights yield to the common law principle against restraints on alienation."

The Supreme Court Ruling: Foreign Sales

Next, the Lexmark Court examined whether the doctrine of patent exhaustion applied to authorized sales of a product outside the United States and beyond the territorial reach of the Patent Act. The Federal Circuit had taken the view that exhaustion only applies following an authorized first sale within the United States. This had permitted patentees to enforce contractual restrictions up to the point of first authorized import.

On the question of international exhaustion, the Supreme Court revisited the teaching of its 2013 Kirtsaeng decision. Kirtsaeng held that the first sale doctrine under the Copyright Act applies to authorized copies of a copyrighted work sold abroad. And, with Lexmark, the Supreme Court extended the Kirtsaeng holding to the patent context.

Writing in dissent, Justice Ginsburg disagreed with the majority on its patent exhaustion holding. As the protections of the Patent Act have no extraterritorial effect, Ginsburg argued, "it makes little sense to say that such a sale exhausts an inventor's U.S. patent rights." This echoed the same position that Justice Ginsburg took when writing in dissent in Kirtsaeng, where she argued that a foreign sale should not exhaust United States copyright protections.

Interplay with Prior Ruling on Scope of Patent Rights Exhausted

The Lexmark ruling builds upon the Court's earlier Quanta decision. In its 2008 Quanta decision, the Supreme Court considered the question of what patent rights were in fact exhausted when an article is sold, tackling a complex fact pattern where the asserted patents covered a system, only a portion of which had been sold in the U.S., and methods, which had not been practiced in the U.S. prior to practice by the end user. There, the Federal Circuit had found that exhaustion may apply to apparatus claims where the sale is of a component of a patented apparatus, if there are no other substantial uses of the component. But it had also held that the sale of a device cannot exhaust a patent holder's rights in a method because the doctrine of patent exhaustion does not apply to method claims at all.

The Supreme Court unanimously reversed the Federal Circuit's holding as to method claims. The Court noted that, while "[i]t is true that a patented method may not be sold in the same way as an article or device, [m]ethods nonetheless may be 'embodied' in a product, the sale of which exhausts patent rights." Quanta also held that the patent exhaustion doctrine applied if the item sold is only a component of a device but "the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts." In other words, if an item "embodies essential features of the patented invention," including method claims, and "their only reasonable and intended use was to practice the patent," the sale of the item will exhaust the claim.

The Lexmark decision does nothing to disturb the Quanta framework. Accordingly, under the combination of Lexmark and Quanta, patent exhaustion applies where critical components of a claimed apparatus or method are sold by the patentee either domestically or internationally.

Lexmark Limitations on Exhaustion

The Lexmark Court suggested two situations where patent exhaustion may not apply.

First, because the doctrine depends on an initial sale, it may not apply where a patentee distributes a patented article pursuant to license, as opposed to in an outright sale. As the Court noted, "[a] patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale." After all, "a license is not about passing title to a product, it is about changing the contours of the patentee's monopoly." By contrast, "[p]atent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace." It is, of course, common to distribute software, firmware, and other technology via license rather than sale, and thus patent exhaustion may be inapplicable for such distributions.

Second, patent exhaustion may also not apply where the unauthorized sale of a patented article occurs. The Lexmark Court addressed this exception in discussing General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 175 (1938), a key precedent that the Federal Circuit relied upon for its holding that a patentee could use post-sale restrictions to avoid exhaustion. The General Talking case concerned a situation where a patent licensee knowingly made sales outside the scope of its license. There, the Supreme Court had held that, because the licensor did not authorize the licensee's sales, those sales did not extinguish the licensor's patent rights, and the patentee could still bring suit for infringement. The Lexmark Court found the unauthorized nature of the patentee's sales distinguished General Talking totally: "if a patentee has not given authority for a licensee to make a sale," the Court reasoned, "that sale cannot exhaust the patentee's rights."

Takeaways

The specific exceptions for licenses and unauthorized sales aside, the Lexmark decision lays down a clear rule of broad application: "When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership." And, when used in combination with the teaching of Quanta, Lexmark will give resellers and other patent defendants a powerful defense against claims by plaintiffs that sell patented articles and components.

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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