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Federal Circuit Reaffirms Patent Exhaustion Doctrine

By: Andrew Swanson

In Lexmark Int’l, Inc. v. Impression Prods., Inc., 16 F.3d 721 (Fed. Cir. 2016) (en banc), the Federal Circuit was asked to determine the applicability of the doctrine of patent exhaustion in two contexts.  First, the court was asked to determine whether the sale of a patented article to end users under a restriction that is otherwise lawful and within the scope of a patent grant nonetheless gives rise to patent exhaustion.  The court held that a patentee may reserve its patent rights by selling a patented article under otherwise-proper restrictions on resale and reuse that are properly communicated.  Second, the court was asked to determine whether a sale of a patented item outside the United States gives rise to patent exhaustion for a U.S. patent.  The court held that the doctrine of patent exhaustion is not triggered by a foreign sale of a U.S.-patented article.

A patent gives the patentee the right to exclude others from engaging in certain acts–whoever “without authority” “makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention” infringes that patent.  35 U.S.C. § 271(a).  The patentee may, however, grant authority to another to engage in one or more of the enumerated acts, such that an otherwise infringing action is non-infringing.  The court notes that each of the enumerated acts is joined by the disjunctive “or,” such that the patentee may grant “authority” to engage in as few or as many of the enumerated acts as the patentee wishes.

Lexmark sued Impression for importing and selling printer cartridges covered by a number of Lexmark patents.  Lexmark offers its buyers a choice when purchasing printer cartridges.  A buyer may purchase a “Regular cartridge” at full price, or a buyer may purchase a “Return Program cartridge” at a discount.  Sales of the Regular cartridges were subject to no restriction on reuse or resale of the printer cartridges.  The Return Program cartridges were subject to a “single-use/no-resale restriction,” however.  Under the single-use/no-resale restriction “the buyer may not reuse the Return Program cartridge after the toner runs out and may not transfer it to anyone but Lexmark once it is used.”  Third parties gathered spent Return Program cartridges, replaced protective features that prevented the cartridges from being reused, refilled the cartridges, and sold the cartridges to resellers, such as Impression, for sale to consumers to use with Lexmark printers.

Lexmark alleged infringement for two groups of cartridges: (1) Return Program cartridges that Lexmark sold in the United States under the single-use/no-resale restriction; (2) all cartridges sold abroad by Lexmark, including both Regular and Return Program cartridges.  It was undisputed that the patents covering the cartridges were valid and enforceable, that both the first purchaser and Impression had adequate notice of the single-use/no-resale restriction, and that the restriction did not violate antitrust law or exceed the scope of the exclusive rights granted by the Patent Act.  Impression instead argued that Lexmark had exhausted its U.S. patent rights by its initial sale of the cartridges, regardless of the existence of any restriction and the location of the sale.

Impression filed a motion to dismiss Lexmark’s claims in the district court.  First, the district court granted Impression’s motion to dismiss the claims involving the Return Program cartridges first sold in the United States.  In finding for Impression on the issue of domestic sales, the district court distinguished articles manufactured and sold by a patentee from articles made and sold by a licensee. Second, the district court ruled against Impression regarding Impression’s argument that patent exhaustion applied to cartridges initially sold abroad.  As such, an initial, authorized foreign sale does not exhaust the patentee’s United States patent rights.  The Federal Circuit reversed the district court’s ruling regarding the domestically-sold Return Program cartridges.  The Federal Circuit affirmed the district court’s ruling regarding foreign sales of both the Regular cartridges and Return Program cartridges.

Patent exhaustion is a doctrine whereby a patentee confers authority to a purchaser to take certain actions, such as selling or using the purchased product in the United States, which action would be infringing without the authority from the patentee.  Under the doctrine of patent exhaustion, an unconditional sale “exhausts” the patentee’s right to control the purchaser’s use of the patented device.  In such an instance, the patentee’s rights in the patent are “exhausted” by the sale such that the purchaser may use or sell the purchased device without infringing the patent.  The patentee may preserve certain rights by communicating a lawful restriction as to post-sale use or resale, however, and such a communication does not confer “authority” to engage in the activity precluded by the communication.  So long as the restriction does not violate some other law or policy, such as antitrust law or engaging in patent misuse, then restrictions on the use of patented goods are allowable.

The Federal Circuit was asked to address two questions related to the doctrine of patent exhaustion.  First, does the doctrine of patent exhaustion apply to the domestic sale of a product by the patentee, even where an otherwise-lawful restriction has been clearly communicated?  Second, does a foreign sale of a U.S.-patented article trigger the doctrine of patent exhaustion?

In addressing the first question, the court reaffirmed the principles of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).  The court noted that Supreme Court precedent clearly leads to the conclusion that a patentee does not exhaust its patent rights upon a first sale where a buyer with knowledge of the restrictions resells or reuses the product in violation of the restrictions.  The court was urged to distinguish between patentee sales and licensee sales.  The argument behind the distinction was that “any sale of a patented article by a patentee, even when the rights granted are expressly restricted, is automatically an ‘authorized sale,’ causing the patentee to lose all § 271 rights in the item sold.”  As such, the argument goes that because Lexmark is both the patentee and the seller, Lexmark has necessarily authorized the sale, thereby exhausting its patent rights regardless of any express restrictions.  The court rejected the invitation to draw a distinction between patentee sales and licensee sales, however.

The Federal Circuit reaffirmed the principles of Mallinckrodt and overturned the district court’s ruling as to Return Program cartridges first sold in the United States.  In Mallinckrodt, a patentee sold a medical device subject to a single-use restriction.  Some purchasers sent used devices to Medipart for refurbishing and Mallinckrodt sued Mediprt for infringement due to the reuse in violation of the single-use restriction.  The Federal Circuit found that a sale subject to a lawful, clearly communicated single-use/no-resale restriction does not give rise to patent exhaustion such that buyers, or downstream buyers, have the reuse/resale authority that was expressly denied previously.

The district court had relied on Quanta Computer, Inc. v. LG Electronics, Inc., 552 U.S. 617 (2008), as implicitly overturning Mallinckrodt as to a patentee’s sale of a patented article subject to a lawful single-use/no-resale condition.  Quanta involved sales made to a manufacturer by a manufacturing licensee, not a patentee.  The patentee had authorized the manufacturing licensee to make and sell the articles at issue, and the authorization was not subject to any conditions.  The Federal Circuit distinguished Quanta by noting that Quanta involved no patentee sales and there were no restrictions on the sales made by the licensee.  The manufacturer in Quanta raised the argument that patentees may preserve patent rights through lawful restrictions.  The Court in Quanta responded to the manufacturer’s argument by concluding that there were no restrictions placed on the first sale of the articles, not that there was any meaningful distinction between patentees and licensees for purposes of patent exhaustion.  The Federal Circuit thus concluded that the principles of Mallinckrodt remain after Quanta, such that a patentee may place lawful restrictions on the sales of patented articles regardless of whether the articles are made or sold by the patentee or a licensee.

The Federal Circuit concluded that the principle of Mallinckrodt remains good law.  As such, “a patentee may preserve its § 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale.”  No practical reason exists to distinguish between sales made by the patentee and sales made by a manufacturing licensee.  In fact, the court found that a distinction between patentee sales and licensee sales was “unjustifiably formalistic, [and] not founded in relevant economic substance.”  Therefore, a patentee may preserve its exclusionary rights detailed in § 271 of the Patent Act through the use of a clearly communicated, otherwise-lawful restriction.  A use in violation of the restriction can thus constitute infringement of the patent.

In addressing the second question the court reaffirmed the principles of Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094 (Fed Cir. 2001).  In Jazz Photo, the Federal Circuit concluded that “there is no legal rule that U.S. rights are waived, either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized by the patentee.”  In Jazz Photo, the defendant, Jazz Photo, was importing refurbished disposable cameras originally sold by or with the authority of Fuji Photo Film.  The Federal Circuit found that the doctrine of patent exhaustion does not apply to products originally sold abroad, though the circumstances of the sale may confer an express or implied license.  As such, a foreign sale alone is insufficient to trigger the doctrine of patent exhaustion.  A foreign first sale thus fails to “confer on the buyer ‘authority’ to import the item into the United States or to sell and use it here,” in the absence of an express or implied license.

Impression argued that the Supreme Court decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013), undermines the no-exhaustion holding of Jazz Photo.  In Kirtsaeng, the Court addressed the statutory copyright first sale doctrine, and determined that owners of copyrighted articles may take certain actions with the authority of the copyright holder.  However, the Federal Circuit found Kirtsaeng inapplicable for several reasons, including that Kirtsaeng is a copyright case that did not address any patent law, and more specifically, Kirtsaeng failed to address the exhaustion issue at hang in Lexmark, even in the context of copyright law.  The Federal Circuit concluded that Kirtsaeng was not controlling; instead, the question of patent exhaustion resulting from foreign sales “requires a separate analysis in its own legal setting” distinct from copyrights.

The Federal Circuit concluded that the principle of Jazz Photo remains good law.  As such, “[a] U.S. patentee, simply by making or authorizing a foreign sale of an article, does not waive its U.S. rights to exclude regarding the article.”  The Federal Circuit went on to explain that the patent grant is a “market reward,” and that the market within which the reward is realized is necessarily the U.S. market subject to U.S. laws.  The territorial nature of patent systems provides a strong indication that the first sale doctrine should not apply to purely foreign sales, as the patentee will not have received the same market award through the foreign sale.  The court went on to differentiate the standards required for obtaining a patent to those required for obtaining a copyright, and noted that copyrights are generally easy to acquire and that governmental standards vary considerably less for copyrights than for patents.  Foreign sales in the context of copyrights are thus distinguishable from foreign sales in the context of patents.  The court further discussed the differences between foreign markets and U.S. markets and the practical effects that would result from foreign sales triggering the doctrine of patent exhaustion.  The court concluded that a foreign sale of a U.S. patented article does not exhaust the patentee’s U.S. patent rights in the article sold, even where there is no express reservation of U.S. patent rights.  The Federal Circuit thus affirmed the district court’s judgment of infringement as to all cartridges initially sold abroad, even though there was no express reservation of U.S. patent rights by Lexmark for the foreign sales.

The doctrine of patent exhaustion extinguishes a patentee’s ability to exert further control over a patented article after an authorized sale of the article.  The patentee may, however, reserve its patent rights by selling the patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale.  The sale of a patented article may be so restricted regardless of whether the seller and manufacturer are themselves a patentee or a licensee.  In addition, where a foreign sale is made by or with the approval of the U.S. patentee, the foreign sale does not exhaust the patentee’s U.S. patent rights, even when no reservation of the rights accompanies the sale.  A foreign sale may cause a loss of U.S. patent rights only through an express or implied license.

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