February 24, 2016
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U.S. Patent Rights Not Exhausted by Patent Owner’s Lawful Restricted Sale of Product or by Sale of Product Abroad
Lexmark asserted that patent exhaustion did not apply to sale of refilled “Return Program” cartridges - and those sales were infringing - because the cartridges were originally sold by Lexmark with an explicit restriction, based on the Federal Circuit’s precedent in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). Impression Products argued that the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) implicitly overturned Mallinckrodt.
Lexmark also asserted that importation into the U.S. and resale of refilled cartridges that Lexmark sold abroad infringed its U.S. patents because the foreign sale did not give rise to exhaustion, based on the Federal Circuit’s precedent in Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001). Impression Products argued that Jazz Photo had been implicitly overturned by the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013) (where a 6-to-3 majority said people may import and resell textbooks that were first sold abroad because the copyright in the books was exhausted).
The case was initially argued before a panel of three judges on March 6, 2015. Following the oral argument the Federal Circuit sua sponte ordered the case to be heard en banc in order to address the two issues.
Mallinckrodt Upheld – Quanta Did Not Overturn Restricted Sale Single-Use Licenses
Thus, the Federal Circuit adhered to the holding of Mallinckrodt that a patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied. Specifically, the court looked to the “without authority” language of 35 U.S.C. § 271(a) and found that:
The Federal Circuit further noted that it has long been recognized that a patentee may preserve its patent rights through similar restrictions when licensing others. The court reasoned that there is no sound legal basis for denying the same ability to the patentee. The court noted that a contrary finding:
While the court held that a patentee may preserve its patent rights by an express denial of resale/reuse authority, it recognized that exhaustion is presumed:
Jazz Photo Upheld – Foreign Sales Do Not Exhaust U.S. Patent Rights
The Federal Circuit explained that the Supreme Court’s decision in Kirtsaeng did not control the case here. The court stated that the patent exhaustion question presented here and the analysis both were different from those in Kirtsaeng which related to the copyright statute. In particular, the court found:
While the court found that exhaustion cannot rest on a foreign first sale, it noted that an express or implied license might be found based on the circumstances of particular foreign sales.
The dissent also would have only retained Jazz Photo insofar as it holds that a foreign sale does not in all circumstances lead to exhaustion of U.S. patent rights. In the dissent’s view a foreign sale does result in exhaustion if an authorized seller has not explicitly reserved the U.S. patent rights. This was also the position advocated by the U.S. Government during the proceedings.
For example, with respect to use restrictions, the Federal Circuit noted that it did not have before it the questions that would arise, whether under principles governing bona fide purchasers or otherwise, if a downstream re-purchaser acquired a patented article with less than actual knowledge of such a restriction. Thus, the question of whether a first purchaser or a subsequent re-purchaser had adequate notice of a restriction is likely to be a heavily fact-intensive inquiry which will affect the determination of whether a patentee has preserved its right.
Also, the Federal Circuit did not consider whether the particular restrictions at issue gave rise to a patent-misuse defense, constituted an antitrust violation, or exceeded the scope of the Patent Act’s express grant of exclusive rights over patented articles because Impression Products did not challenge the restrictions on those grounds. Accordingly, those defenses may be available to challenge restrictions imposed by patentees in other cases.
With respect to foreign sales the Federal Circuit’s no-exhaustion conclusion leaves undisturbed the availability of an express - or implied - license defense to infringement. In addition, facts concerning the “regional” character foreign-sold products should be explored. As the court noted, the district court’s rationale as to the unavailability of exhaustion did not depend on the facts in the record that Lexmark identifies as suggesting the “regional” character of its foreign-sold cartridges, and those facts went unexplored in the district court.
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