United States: Lower Courts Navigate Supreme Court's Patent Exhaustion Decision

On May 30, 2017, the US Supreme Court issued its influential decision in Impression Products, Inc. v. Lexmark, Int'l, Inc., 137 S. Ct. 1523 (2017). The landmark decision, which clarified the patent exhaustion doctrine and reversed decades of Federal Circuit precedent, has the potential to significantly impact both foreign and domestic transactions. The decision includes two significant holdings. First, "[o]nce a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license." Id. at 1535. Second, "an authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act." Id. Consequently, post-Impression Products, both restrictions and location are now irrelevant to determine whether a patentee has exhausted its rights. Indeed, a foreign sale now limits patent rights in the US.

In the six months since the Supreme Court's Impression Products decision, there have been a half dozen lower court decisions that have relied on it. There are lessons to be learned from litigants who have used the decision, and the patent exhaustion defense, successfully or, more often, unsuccessfully, to defend against claims of patent infringement.

In Impression Products, Lexmark made and sold toner cartridges in the US and abroad. It sold cartridges at full price with no restrictions and also discounted cartridges through a "Return Program" whereby customers agreed to only use the cartridge once. Companies such as Impression Products would acquire empty toner cartridges from the US and abroad, including "Return Program" cartridges; refill them with toner; and resell them.

Lexmark sued Impression Products for patent infringement for selling both the "Return Program" cartridges, which had restrictions on sale, and the cartridges Lexmark sold abroad that Impression Products imported into the US and resold. The US Court of Appeals for the Federal Circuit ruled for Lexmark with respect to both groups of cartridges, finding (i) a patentee may sell an item and retain the right to enforce, through patent infringement lawsuits, clearly communicated, lawful restrictions on post-sale use or resale; and (ii) when a patentee sells a product overseas, it does not exhaust its patent rights over that item. Id. at 1530-31.

Although Impression Products expanded the patent exhaustion doctrine, two district courts have found plaintiffs did not exhaust their rights through settlement agreements entered into with suppliers because sales to the defendants (customers of the suppliers) were expressly not "authorized" by the settlement agreements. Magistrate Judge John D. Love of the US District Court for the Eastern District of Texas found that the doctrine did not apply in Chrimar Sys. v. Alcatel-Lucent Enter. USA Inc., No. 6:15-CV-00163, 2017 U.S. Dist. LEXIS 122002 (E.D. Tx. Aug. 3, 2017), where plaintiff Chrimar specifically excluded from a settlement (and license) agreement with Alcatel-Lucent Enter (ALE) supplier Accton Technology Corp., products that Accton sold to companies currently in litigation with Chrimar. In Chrimar, after a final judgment against ALE, the defendant moved to modify the judgment because, it argued, Chrimar exhausted its rights when it licensed ALE's supplier Accton. The bulk of the parties' dispute revolved around two specific provisions from the settlement agreement: (i) a provision granting Accton the right to "make[], use[], offer[] to sell, or sell[], within the United States or import[] into the United States"; and (ii) a provision defining Accton sales to a company currently involved in litigation with Chrimar as "Unlicensed Products." The court explained that, unlike in Impression Products, this was not a post-sale restriction, but rather a sale that exceeded the scope of the license agreement; that it was therefore not authorized; and that therefore there was no basis to modify the judgment. Id. at *12-13.

Similarly, in Sunoco Partners Marketing & Terminals L.P. v. U.S. Venture, Inc., No. 15 C 8178, 2017 U.S. Dist. LEXIS 159109 (N.D. Ill. Sept. 27, 2017), the court distinguished sales that were not "authorized" under the settlement agreement. In Sunoco, the oil company settled with Technics Inc., which sells butane blenders and systems to gas and liquid processing facilities, and dismissed the company from the suit. The settlement agreement specified that it was not a license that pertained to future use by Technics or Technics' customers. Defendant U.S. Venture relied on the Technics settlement agreement in its motion for summary judgment, arguing that Sunoco exhausted its patents by settling with Technics and that the agreement was a retroactive authorization of the sale of patented systems from Technics to Venture. In opposing Venture's motion for summary judgment, Sunoco argued that patent exhaustion requires that the sale of a patented system be "authorized" when the sale occurs. The court agreed with Sunoco, finding that patent exhaustion requires an "initial authorized sale of a patented item[,]" and a "freedom from suit." Id. at *23. Explaining that "Impression Products had nothing to do with whether sales could be retroactively authorized. It concerned sales that were undisputedly authorized when they occurred; the question was whether the patent holder could retain some patent rights after a sale of a patented item and enforce those rights through an infringement suit," the court denied the motion. Id. at *30-31.

One court has, however, granted a motion for summary judgment of non-infringement, finding patent exhaustion based on a license agreement with defendants' suppliers because the court found the sale was "authorized." In MiiCs & Partners America, Inc. v. Toshiba Corporation, No. 14-cv-803, 2017 U.S. Dist. LEXIS 127745 (D. Del. Aug. 11, 2017), the plaintiff sued, among others, Funai Corporation and Toshiba for patent infringement.Both Funai and Toshiba purchased LCD panels from Samsung and Panasonic Corporation that are incorporated into the accused televisions, tablets, and laptops. However, Samsung and Panasonic had licenses to sell the LCD components from NEC Corporation of America, the prior owner of the asserted patents. In each license there was language limiting Samsung and Panasonic from making end-user products with the licensed parts. Samsung moved for partial summary judgment on Toshiba and Funai's behalf, and Funai moved for partial summary judgment of no infringement. Plaintiff MiiCs & Partners opposed, arguing that because the suppliers could not make end-user products themselves, sales of the licensed components to be put into end-user products were not authorized and could not exhaust their patent rights. Judge Andrews rejected that argument. Following the Supreme Court decision in Impression Products, he granted the motions for summary judgment of no infringement. Citing Impression Products, he wrote that "a patentee's authority to limit licensees does not...'mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws.'...'So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale,' and the patentee's rights are exhausted." Id. at *13.

The district court cases also remind us that procedure is important. In Huawei Technologies Co. Ltd. v. T-Mobile US, Inc., No. 2:16-CV-00055, U.S. Dist. LEXIS 184542 (E.D. Tx. Oct. 15, 2017), we learn that the patent exhaustion defense and the supporting agreements must be timely disclosed or you risk exclusion regardless of the strength of the defense. In Huawei, defendants' motion for summary judgment based on patent exhaustion was denied and the defendants were precluded from relying on a third-party agreement at trial that supported their patent exhaustion defense because they did not timely disclose the agreement as the basis for their patent exhaustion defense until two weeks after the close of fact discovery. Despite denying the defendants' motion, District Judge Robert Payne recognized the potential implication of the agreement, "[t]he third-party agreement is unquestionably important, as the evidence could support an exhaustion defense that would preclude a finding of liability for any infringement." Id. at *19. Thus, to be able to rely on the patent exhaustion defense on summary judgment and at trial, it is imperative to explore and disclose this defense early on in fact discovery to be able to take full advantage of the Supreme Court's decision and the breadth of the defense.

To date, while Impression Products significantly expanded the patent exhaustion doctrine, a majority of district courts presented with this defense have found it inapplicable. We will continue to monitor the development of this doctrine.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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