Patentees Prevail as Federal Circuit Upholds Limits to Patent Exhaustion

by Wilson Sonsini Goodrich & Rosati
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On Friday, February 12, 2016, the U.S. Court of Appeals for the Federal Circuit upheld limits to its patent exhaustion or "first sale" doctrine despite recent Supreme Court cases questioning the same. In an 129-page opinion authored for the majority by Judge Taranto, the 10-2 court relied on the language of the Patent Act, as well as Federal Circuit case law, to confirm that (1) a patentee that sells a patented article with resale/reuse restrictions does not forfeit its rights to charge the buyer that engages in restricted acts with infringement, and (2) a patentee that approves foreign sales—even without a reservation of rights—does not exhaust its U.S. patent rights. The Federal Circuit sua sponte took the case en banc in light of recent Supreme Court decisions finding that the first sale doctrine had exhausted IP protection.1

Background

Lexmark International, Inc. (Lexmark) is a manufacturer of printers and toner cartridges. Lexmark owns patents covering cartridges and the use of those cartridges, and makes "first sales" of those cartridges domestically and abroad to resellers and end users. Lexmark sells two types of cartridges: full-price "Regular Cartridges" and discounted "Return Program Cartridges." Regular Cartridges are not subject to resale/reuse restrictions—they can be refilled when empty and resold. Discounted "Return Program Cartridges" are subject to no-resale/single-use restrictions—they include a microchip that monitors toner levels and prevents refills. Third parties hack the microchip technology that restricts refills of the discounted Return Program Cartridges and sell them to resellers—including Impression Products, Inc. (Impression)—for use in Lexmark printers.

Lexmark sued Impression in the U.S. District Court for the Southern District of Ohio for direct and contributory infringement under 35 U.S.C. § 271, alleging that Impression acquired hacked cartridges and sold/imported the cartridges into the United States. Impression contested infringement liability on the ground that Lexmark had exhausted its U.S. patent rights in the cartridges by its initial sales. Impression filed a motion to dismiss Lexmark's claim of infringement involving the Return Program Cartridges that Lexmark had first sold within the United States. Although the Return Program Cartridges were sold under post-sale restrictions, the district court held that "those post-sale use restrictions do not prevent patent rights from being exhausted given that the initial sales were authorized and unrestricted." On this point, the district court concluded that the Supreme Court's 2008 decision in Quanta Computer, Inc. v. LG Electronics2 "overruled" the Federal Circuit's 1992 decision in Mallinckrodt, Inc. v. Medipart, Inc. "sub silentio."3 Accordingly, the district court dismissed Lexmark's infringement claims regarding the Return Program Cartridges sold in the United States. However, the district court held that patent exhaustion did not apply to the cartridges first sold abroad, and found Impression to have infringed where hacked and refilled Return Program Cartridges were initially sold abroad. Impression appealed, and Lexmark cross-appealed to the Federal Circuit.

The Federal Circuit's Decision

In an opinion that details the historical and policy implications of the sale and licensing of patented articles, the Federal Circuit described how sales might confer authority on the purchaser to take certain actions that would otherwise be infringing. The court distinguished patent law from copyright law—and relevant Supreme Court precedent—by noting that patent infringement is limited to "whoever without authority makes, uses, offers to sell, or sells any patented invention . . . infringes the patent."4 The Federal Circuit cites congressional supremacy and explains that Congress has never prescribed an exhaustion rule in patent law. The court concluded that the patentee preserves its rights to sue for infringement when "[a] sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the 'authority' to engage in the use or resale that the restriction precludes." In short, the court upheld Mallinckrodt and concluded that a "first sale" does not exhaust patent rights when the patentee has restricted the buyer's post-sale use. Accordingly, the clearly communicated refill restrictions that Lexmark placed on purchases of the Return Program Cartridges saved Lexmark from exhausting its patent rights through those sales.

Addressing the second question presented, i.e., whether Lexmark's foreign sales of its cartridges conferred authority to commit infringing acts on its buyers (and derivatively to Impression), the court determined that U.S. rights are not waived, "either conclusively or presumptively, simply by virtue of a foreign sale." The court analyzed, and ultimately upheld, its decision in Jazz Photo Corp. v. International Trade Comm'n,5 which held that patent exhaustion does not occur based solely on a foreign first sale. Moreover, the Federal Circuit distinguished Lexmark from the Supreme Court's Kirstaeng decision, which "says nothing about patent law; and does not address, even in the context of copyright law, the exhaustion question presented by the Patent Act." The Federal Circuit states plainly that "copyrights are different" and notes that the most serious real-world problems described in Kirtsaeng are unlikely to carry over to the patent arena. In addition, the Federal Circuit noted that applying a presumption of international exhaustion "would place a U.S. patentee's preservation of U.S. rights within foreign sovereign control." Accordingly, the Federal Circuit resisted applying a presumptive-exhaustion rule to foreign sales and affirmed the district court's finding that Impression had infringed Lexmark's patents despite the foreign sale.

The dissent, authored by Judge Dyk and joined by Judge Hughes, argues that post-sale restrictions are enforceable as a matter of state contract law and that the Federal Circuit "exceed[ed] our role as a subordinate court by declining to follow the explicit domestic exhaustion rule announced by the Supreme Court." The dissent also argues that presumptive-exhaustion should control international sales when the "authorized seller has not explicitly reserved the United States patent rights."

Practical Effects

The tension between recent Supreme Court case law and the Federal Circuit's opinion will likely spur Impression to seek certiorari. The Supreme Court may review Lexmark. In the meantime, patent owners seeking to avoid exhaustion of their U.S. patent rights through sales should consider imposing clearly communicated post-sale restrictions on purchasers, both in their own product sales and, in licensing arrangements, by requiring licensees to likewise communicate restrictions on purchasers. Buyers should consider negotiating licenses from sellers that clearly set forth the right to use, resell, or import to avoid unintended infringement disputes.

The presentation and content of post-sale restrictions also needs to be carefully considered. In Lexmark, the adequacy of Lexmark's notice of its single-use/no-resale restrictions was unchallenged. This leaves open the questions that would otherwise have arisen if the purchasers at issue had less than actual knowledge of Lexmark's restrictions. As to the content of a post-sale restriction, though also not at issue in Lexmark, the Federal Circuit specifically noted that a particular restriction may give rise to a patent-misuse defense, constitute an antitrust violation, or exceed the scope of the Patent Act's express grant of exclusive rights over patented articles.


1 See Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008); Kirstaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013).
2 553 U.S. 617 (2008).
3 976 F.2d 700, 704 (Fed. Cir. 1992).
4 25 U.S.C. § 271 (emphasis added).
5 264 F.3d 1094 (Fed. Cir. 2001).

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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