Federal Circuit re-affirms its patent exhaustion decisions en banc: Post-sale restrictions allowed, foreign sales not presumed to exhaust

by Dentons
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The en banc Federal Circuit by a vote of 10-2 held that patent exhaustion can be avoided by otherwise lawful post-sale contractual restrictions and that foreign sales of a patented item are not presumed to exhaust patent owner’s rights in the United States. Lexmark Int’l, Inc. v. Impression Products, Inc., No. 14-1617, -1619 (Fed. Cir. Feb. 12, 2016) (en banc). The dissent would have found post-sale restrictions invalid and that foreign sales exhaust patent owner’s rights in the United States absent an express reservation. The Federal Circuit’s 99-page majority decision may not be the last word on these issues if the Supreme Court is asked to grant certiorari later this year.

Background. Lexmark sold printer cartridges in the United States under two pricing models; either for full price with no restrictions or for 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. The sole defense Impression Products raised was patent exhaustion. Because the restricted-use cartridges were initially purchased from Lexmark, Impression Products argued that Lexmark’s patent rights had been exhausted by the time Impression Products acquired the cartridges. Impression Products argued the restricted-use agreement was invalid and that foreign sales exhausted Lexmark’s patent rights.

Post-sale restrictions allowed. 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. [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.

Foreign sales not presumed to exhaust. 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 § 109(a) of the Copyright Act. The Federal Circuit agreed and re-affirmed 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.

Implications. While the Federal Circuit’s decision makes it more likely that post-sale restrictions will be upheld and that foreign sales will not exhaust patent owner’s rights in the United States, patent exhaustion questions are highly fact-dependent. Parties and counsel addressing these questions must continue to 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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