Does a foreign sale of a product practicing a U.S. patent (or substantially embodying a U.S. patent) ever exhaust the U.S. patent holder’s rights? Can importers or resellers facing infringement allegations in U.S. courts successfully raise international patent exhaustion as a defense?

These questions have garnered significant interest in the pending appeal of Lexmark v. Impression Products – in which the entire active bench of the Federal Circuit will hear arguments on these issues – to the tune of over twenty filed amicus briefs, including those submitted by the New York Intellectual Property Law Association, AIPLA, Licensing Executives Society (U.S.A. and Canada), Inc., Intellectual Property Professors and American Antitrust Institute, Quanta Computer, Acer, HTC, LG Electronics, Dell, Google, Intel, Newegg, Samsung Electronics, Xilinx, SK Hynix, Costco, and Texas Instruments.

Background

The Lexmark case involves the alleged infringement by resellers of Lexmark’s patented printer inkjet cartridges. Lexmark first sold its cartridges – embodying claims of various U.S. patents that it held – outside of the U.S., where they were acquired and remanufactured by foreign defendants. These refurbished cartridges were subsequently sold to other defendants, who then, in turn, sold the cartridges to customers in the U.S. On the issue of whether Lexmark’s original foreign sale exhausted Lexmark’s right to subsequently sue for patent damages once the same products were resold into the U.S., the District Court Judge for the Southern District of Ohio followed the Federal Circuit’s precedential decision from 2001, Jazz Photo. Because Jazz Photo held that the authorized first sale must have occurred within the U.S. for exhaustion to apply, the District Court Judge concluded that Lexmark’s foreign sales did not exhaust its ability to sue in the U.S. for patent infringement.

Deprived of their international patent exhaustion defense and arguing that the Federal Circuit’s Jazz Photo opinion is no longer good law in light of a recent, 2012 Supreme Court decision on international copyright exhaustion, Kirtsaeng, the defendants appealed. On appeal and after oral arguments had been made before a three­judge panel, the Federal Circuit ordered, on its own volition, the international exhaustion issue to be heard by all eleven of its active appellate judges. They will hear oral arguments on October 2, 2015.

Potential Grounds for Overruling Jazz Photo

Various third parties (amici) have argued that Jazz Photo, imposing territorial restrictions,should be overruled in light of Kirtsaeng, even though Kirtsaeng related directly to copyright law and did not mention patents. The reasoning is that the exhaustion doctrines for both patent and copyright arise from a common spring and drive to the same common law goal – to prohibit the restraint against trade or against the alienation of all chattels, not just intellectual property, much less certain types of intellectual property. For at least four centuries – since the days of Lord Coke in the U.K. – the common law has protected the right of consumers to resell legally purchased products. The twin doctrines of patent exhaustion and “first sale” in copyright continue today to apply this common­law rule to articles that embody intellectual property.

After considering the exhaustion issue in the context of copyrights, where exhaustion principles are partially codified in statute (although the statute relevant to exhaustion does not implicate extra­territoriality), the Supreme

Court reaffirmed the centuries­old common­law origin of the “first sale” doctrine in Kirtsaeng, holding that the defense applies to the importation of copyrighted works lawfully made and sold (i.e., authorized) abroad. The Court reasoned that Congress, by its silence, did not intend to do away with international dimension of exhaustion espoused in the common law.

The Federal Circuit in Lexmark faces the analogous question in the patent context – whether the common­law exhaustion doctrine applies to a foreign sale authorized by a U.S. patent holder. Various amici argue that it does. The same ancient rule that the Supreme Court held controlling in Kirtsaeng has equal – if not greater – force when viewed in the context of U.S. patent law, in which the exhaustion doctrine arises wholly from common­law principles rather than from statute.

Various amici also argue that the wisdom of common­law international exhaustion ensures clarity in negotiating licenses in an increasingly borderless world. A U.S. patentee should not be able to thwart common­law exhaustion principles simply because a fully authorized article changes hands (i.e., with the approval of the U.S. patent holder) outside of the United States. Such a geographical distinction would summarily negate the U.S. patent holder’s authorization, ignores that authorization as well as the realities of the worldwide marketplace, and undermines predictability in commercial transactions.

In addition, these amici caution that a seemingly arbitrary geographic restriction would permit patentees who have authorized sales to extract multiple rewards on consumers’ use and/or resale of the same article, providing the very type of double­dipping denounced in earlier decisions by the Supreme Court in Quanta Computer v. LGE (2008) and by the Federal Circuit in Tessera v. ITC (2011). Of note, the Quanta Computer case also involved the foreign sales of embodying products, which did not rescue from the domestic patent holder’s rights from being exhausted, consistent with the outcome in Kirstaeng.

One Possible Outcome

The Federal Circuit may find Kirtsaeng’s common­law analysis not merely persuasive but controlling and hold that the authorized foreign sale of an article that practices or substantially embodies a U.S. patent exhausts the patentee’s rights in the U.S. So holding would ensure that once an authorized sale occurs, the patent holder will not get “a second bite” at the proverbial apple merely because one or more parts of the deal was – accidentally or deliberately – structured to occur in one geographic location versus another.

But whichever way the Federal Circuit decides, the adjudication promises more certainty in the global marketplace, should reconcile the conflicting outcomes reached in Jazz Photo and Quanta Computer, and hopefully will provide guidance to every entity in an increasingly global supply chain as to their respective liabilities under U.S. patent law.