On February 12, 2016, the Federal Circuit issued its en banc opinion in Lexmark International Inc. v. Impression Products Inc., addressing whether its long-standing rules on two key aspects of patent exhaustion remain sound in light of more recent decisions of the Supreme Court.  The Federal Circuit reaffirmed its earlier decisions, confirming that a patentee’s U.S. patent rights are not exhausted by a foreign sale of a patented item and that clearly-communicated, otherwise lawful restrictions on resale and reuse do preserve the patent owner’s rights to charge buyers who engage in those acts with infringement.

Background

Lexmark sells patented toner cartridges for use in Lexmark’s printers.  Customers have a choice to purchase from Lexmark either a “Regular Cartridge,” sold at full price without limitations on use, or a “Return Program Cartridge,” sold at a discount in exchange for the customer’s agreement that he will use the cartridge only once and will return the empty cartridge only to Lexmark.  Lexmark sued Impression Products for infringement, based upon toner cartridges that Impression Products remanufactured from Lexmark cartridges that were (a) first sold by Lexmark in the U.S. as “Return Program Cartridges” and (b) first sold by Lexmark outside the U.S., either as “Return Program Cartridges” or “Regular Cartridges.”  Impression Products argued that Lexmark’s U.S. patent rights had been exhausted with respect to all such cartridges.

Impression Products acknowledged that its positions ran counter to existing Federal Circuit law in Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), and Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), but argued that those cases had been overruled by more recent Supreme Court decisions.  Specifically, Impression Products advanced  that Jazz Photo, which held that a foreign sale does not exhaust U.S. rights, had been implicitly overruled by the Supreme Court’s copyright decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), and that Mallinckrodt, which established that an authorized sale of a patented article made under a lawful restriction within the scope of the patent grant does not exhaust the patentee's rights, was overturned by the Supreme Court’s patent exhaustion decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). 

The district court disagreed with Impression Products on the issue of foreign sales, holding that Jazz Photo was still controlling, but agreed that, under Quanta, Lexmark’s patent rights as to all domestic sales were exhausted, regardless of restriction.

On appeal, the Federal Circuit sua sponte granted en banc review on the implications ofKirtsaeng and Quanta.

Federal Circuit Opinion

The en banc Court rejected all of Impression Products’ arguments on appeal, and found that the holdings of both Jazz Photo and Mallinckrodt are unaffected by the Supreme Court’s subsequent decisions.

First discussing restricted-use sales, the Federal Circuit found Quanta to have no bearing onMallinckrodt.  The Court focused on Mallinckrodt’s reliance on the Supreme Court’s 1938 decision in General Talking Pictures Corp. v. Western Electric Co., 304 U.S.175.  General Talking Pictures held that a patentee maintained its rights where a manufacturing licensee had made a first sale under restriction, and a buyer had used the product in violation of the restriction.  Here, the Court held that there was no reason to decide the instant case, which deals with a patentee’s sale, differently, holding that such conclusion would afford fewer rights to a patent owner that makes and sells articles themselves than what is granted to a non-practicing entity patentee.  The Court further declined to interpret any sale by the patent owner as an exhausting “authorized sale,” stating that such a reading would be inconsistent with 35 U.S.C. § 271(a), which prohibits sale or use of a patented article “without authority.”  Rather, the Court concluded that “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.”

On the issue of foreign sales, the Court reaffirmed the holding of Jazz Photo that exhaustion of U.S. patent rights is not triggered by a foreign sale.  While Impression Products had argued that Kirtsaeng was directed to common law principles, the Court disagreed, and found that Kirtsaeng was directed to interpretation of the Copyright Act.  The Court noted that the copyright statute explicitly makes the rights of the copyright holder subservient to 17 U.S.C. § 109(a), which applies extraterritorially, while the Patent Act contains no counterpart language.  The Court found that Kirtsaeng was simply an interpretation of § 109(a), and had no bearing on the foreign exhaustion question presented by the Patent Act.  The Court also found no reason to extend the Copyright Act’s rationale to patents, stating that patent exhaustion is keyed to the idea that the patentee has received a reward from a sale in American markets, which would not be afforded by a foreign sale.  The Court further distinguished patent law as being especially territorial, and observed that patent laws vary considerably, to the extent that patent owners may choose not to seek protection in other countries.

The Court also made efforts to determine “what we can reliably gauge about the likely real‑world consequences of one answer or another” on the issue of foreign sales.  In so doing, the Court concluded it had not been shown that substantial problems arose under theJazz Photo rule.  On the other hand, the Court found the overturning Jazz Photo could cause significant disruptions in established practices, citing as an example the pharmaceutical industry, in which the practice of selling medicines outside the U.S. at substantially lower prices than in the U.S. “could be disrupted by the increased arbitrage opportunities that would come from deeming U.S. rights eliminated by a foreign sale made or authorized by the U.S. patentee.”   

Dissent 

Judge Dyk, dissenting, took the position that Mallinckrodt cannot be reconciled with the Quanta decision.  Quanta, as argued by the dissent, uses the term “unconditional” to refer to “a sale in which title passes, not to a sale in which no restrictions are imposed.”  Therefore, the dissent opined that Lexmark’s restricted sales within the U.S. would give rise to domestic exhaustion.  On the issue of foreign exhaustion, the dissent agreed with the majority that Kirtsaeng does not compel that the exhaustion rules for copyrights and patents be identical, but did find Kirtsaeng to provide guidance, and came out in favor of a “presumptive exhaustion rule,” under which a foreign sale would result in exhaustion unless the authorized seller explicitly reserves its U.S. patent rights.  This position was taken by the Government in its amicus brief, and expressly considered and rejected by the majority.