On Friday, December 2, 2016 the US Supreme Court decided to review a case involving two important patent exhaustion questions: (1) can foreign sales exhaust US patent rights and (2) can patent law be used to enforce restrictions on the use of patented items after the first authorized sale. Impression Products, Inc. v. Lexmark International, Inc., 816 F.3d 721 (Fed. Cir. 2016), cert. granted (US Dec. 2, 2016) (No. 15-1189).
Earlier this year, the Federal Circuit decided en banc that foreign sales do not exhaust US patent rights and that otherwise lawful post-sale restrictions are permissible on the use of patented items after the first authorized sale. The Federal Circuit’s decision drew numerous amicus filings, including by the United States government, which argued that the decision was incorrect on both counts because (i) foreign sales should exhaust US patent rights unless the US rights are expressly reserved and (ii) post-sale restrictions are not permissible after the first authorized sale of a patented item.
Briefing and arguments should occur in the first half of 2017. A decision will likely issue by the end of the Supreme Court term in June 2017. If the Supreme Court reverses the Federal Circuit, the decision may have far reaching consequences. In the meantime, there are steps patent owners and accused infringers can take to prepare.
Potential impact and consequences of Supreme Court review
The Federal Circuit has maintained since 2001 that foreign sales cannot exhaust US patent rights. Numerous significant commercial contracts assume that “no-foreign exhaustion” is the default rule. Likewise, the Federal Circuit has permitted post-sale restrictions on the use of patent items to be enforced via patent law since 1992. Patent owners have relied on these doctrines and have used post-sale restrictions to control after-market use of their products. The Supreme Court has now been asked to reconsider both rules, which could upend decades of standing precedent and have a significant impact on the longstanding business operations of many companies and individuals.
How companies and individuals can protect themselves
In planning for the Supreme Court decision, patent owners may consider several steps to protect themselves, including careful planning and appropriately structured restrictions. Accused infringers should watch this case closely and continue to take full advantage of situations in which a patent holder fails to protect its rights adequately.
Patent exhaustion questions are highly fact-dependent. Parties and counsel addressing these questions must give careful and thoughtful consideration to the particular language of any sales contracts and license agreements involved, and to the particular circumstances of any sales, including foreign sales. Dentons lawyers are well-versed in this subject matter and stand ready to assist you in the United States and abroad with patent exhaustion questions and other patent issues.
Summary of Federal Circuit’s opinion
We begin with a useful summary of the patent exhaustion issues presented in the Impression Products v. Lexmark case and the Federal Circuit’s en banc decision from February 2016, which is now being reviewed by the US Supreme Court. By way of background, patent exhaustion (also known as the “first-sale doctrine”) limits the scope of patent rights by terminating all patent rights to a patented item after the first authorized sale of that item under patent owner’s authority. The patent exhaustion doctrine, for example, allows resale of patent items in the secondary market without interference from the patent owner. The issues presented en banc to the Federal Circuit were (1) whether patent owners could impose by contract post-sale restrictions on the use of a patented item after the first authorized sale, and (2) whether foreign sales of a patented item can exhaust US patent rights.
The 99-page Federal Circuit majority opinion held in a split decision that (1) patent exhaustion can be avoided by otherwise lawful post-sale contractual restrictions, and (2) foreign sales of a patented item are not presumed to exhaust patent owner’s rights in the United States. This ruling gives patent owners greater control over the use of their patented products after the first sale. The dissent argued post-sale restrictions cannot prevent exhaustion of patent rights and foreign sales will exhaust a patent owner’s rights in the United States absent an express reservation.
Lexmark sold printer cartridges in the United States under two pricing models: some were sold at full price with no restrictions and some were sold at a discounted price with restrictions on resale and reuse. Defendant Impression Products purchased depleted restricted-use cartridges inside and outside the United States, and refilled and resold them in the United States. Impression Products presented a patent exhaustion defense on the basis that Lexmark sold the restricted-use cartridges to Impression Products, and thus Lexmark’s patent rights had been exhausted whether those sales occurred within or outside the US Impression Products further argued the restricted-use agreement should not permit Lexmark to enforce its patents for cartridges it authorized to be sold to Impression Products.
On the issue of post-sales restrictions, the district court found the Federal Circuit’s 1992 decision in Mallinckrodt, Inc. v. Medipart, Inc., which held valid a post-sale restriction requiring a buyer to return a patented nebulizer after a single use, was silently overruled by the Supreme Court’s 2008 decision in Quanta Computer, Inc. v. LG Electronics, Inc., and ruled in favor of Impression Products. The Federal Circuit disagreed and reversed.
The Federal Circuit held a sale that includes a clearly communicated, otherwise lawful restriction on the post-sale use or resale of a patented item does not provide the buyer or a subsequent purchaser with any authority beyond that provided in the initial restricted sale. Accordingly, use or resale of a patented item in violation of a post-sale restriction is unauthorized and is an infringement of the patent owner’s rights. The Federal Circuit distinguished Quanta as at least two steps removed: The Supreme Court did not address a sale made by a patent owner that was subject to a post-sale restriction, and did not distinguish between the activities of a patent owner and those of a licensee. Rather, the patent owner in Quanta granted unrestricted authority to sell to a licensee that was not exceeded in the sales that were found to invoke exhaustion. Citing older Supreme Court case law (General Talking Pictures Corp. v. Western Electric Co. (US 1938)) finding no-exhaustion for items sold by a licensee outside an authorized field of use, the Federal Circuit concluded there was no basis for denying a patent owner the same ability to reserve certain rights to itself and to limit the use or resale of a patented item after its initial sale.
On the issue of exhaustion based on foreign sales, the district court ruled that the Supreme Court’s 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc., which held that foreign sales of copyrighted items exhausted the copyright owner’s rights in the United States, did not apply to patent law, as there is no corresponding codification of the exhaustion doctrine in patent law as is present in Section 109(a) of the Copyright Act. The Federal Circuit agreed and reaffirmed its 2001 decision in Jazz Photo Corp. v. International Trade Commission, holding that foreign sales of patented items do not presumptively exhaust the patent owner’s rights in the United States. The Federal Circuit found Kirtsaeng inapplicable because it dealt with interpretation of the Copyright Act, not the judicially created doctrine of patent exhaustion.
The Supreme Court granted certiorari and will consider whether foreign sales exhaust US patent rights and what affect post-sale restrictions have on a patent owner’s ability to enforce its patents on patented items after the first authorized sale. A decision may issue by the end of the Supreme Court term in June 2017.