Restricted Sales Do Not Exhaust Patent Rights Under Supreme Court Rulings

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83-3. Restricted Sales Do Not Exhaust Patent Rights Under Supreme Court Rulings

Lexmark Int’l Inc. v. Impression Prods., No. 2014-1617, 2014-1619, 2016 U.S. App. LEXIS 2452 (Fed. Cir. Feb. 12, 2016) (Before Newman, Lourie, Dyk, Moore, O’Malley, Reyna, Wallach, Taranto, Chen, Hughes, Stoll, and Prost, CJ.) (Opinion for the court, Taranto, J.). Click Here for a copy of the opinion.

Federal-Circuit-Building-335 copyLexmark sued Impression Products for infringing a patent related to printer cartridges.  Impression takes used Lexmark printer cartridges, refills them, and resells them.  Lexmark sells printer cartridges in two ways.  Some cartridges are sold without any restriction on refilling or reusing them.  Some cartridges are sold as part of a return program, subject to a single-use/no-resale restriction that is clearly marked on the outside of the box.  These cartridges cannot be resold or reused after use, but can only be returned to Lexmark.  The cartridges sold in the return program are sold at a discount.  Further, the cartridges sold in the return program contain a digital rights management (DRM) microchip that does not allow the cartridges to be used multiple times.

Impression Products purchases used return program cartridges in the US and internationally, and remanufactures them.  Further Impression Products is able to override the DRM microchip to permit the return program cartridges to be re-used.  Lexmark sued Impression for patent infringement based on Impression’s remanufacture of return program cartridges sold in the US, and for remanufacture of regular and return program cartridges sold internationally.  Impression asserted a single defense to infringement – that Lexmark’s sale of the return program cartridges both in the US and internationally exhausted Lexmark’s rights with respect to those cartridges.

The district court granted Impression’s motion to dismiss based on the return program cartridges in the US. It held that the conditional sales still exhausted Lexmark’s rights in the return program cartridges.  Although the Federal Circuit previously held that conditional sales did not exhaust patent rights in Mallinckrodt v. Medipart, the district court reasoned that the Supreme Court’s opinion in Quanta Computer, Inc. v. LG Electronics had overruled Mallinckrodt.

The district court denied Impression’s motion to dismiss based on the sale of return program and non-return program cartridges sold internationally.  Impression argued that the Supreme Court’s copyright exhaustion doctrine in Kirtsaeng v. John Wiley & Sons, Inc. was applicable to patents, and thus the sale of a patented product internationally exhausts the patentee’s rights in the US.  The district court held that Kirtsaeng was rooted in the statutory text of the copyright act (§ 109(a)) , and it did not affect the common-law patent exhaustion doctrine.  Instead, international sales do not exhaust patent rights in the US, citing the Federal Circuit’s opinion in Jazz Photo v. U.S. Int’l Trade Comm’n.

The Federal Circuit took the case en banc to review the applicability of the patent exhaustion doctrine under Mallinckrodt and Jazz Photo, in view of the Supreme Court’s decisions in Quanta and Kirtsaeng.  The Federal Circuit affirmed the holdings in Mallinckrodt and Jazz Photo, and distinguished them from the Supreme Court’s decisions. In Quanta, the Supreme Court was reviewing whether a patentee’s rights in a product were exhausted by a licensee’s sale of a product. Here, there was a restriction on the types of sales a licensee could make, but there were no restrictions on the goods sold to end users, and patent exhaustion still applied. Quanta thus did not overrule Mallinckrodt.

Second, Jazz Photo still applies because Kirtsaeng was rooted in the copyright statute, which expressly grants a right to resale to purchasers of copyrighted works.  There is no statutory corollary in the patent laws.  Thus, the federal circuit’s rule in Jazz Photo, that a sale abroad does not exhaust patent rights in the US, still applies.

The Federal Circuit thus affirmed the decision of the district court with respect to sales internationally, and reversed with respect to sales in the US.

Judge Dyk and Judge Hughes dissented.  Contrary to the majority, Quanta reaffirmed a long line of Supreme Court cases, holding that the authorized sale of a patented product – with or without restriction – terminated the patentee’s rights with respect to the product.  Specifically, any conditions or restrictions create a contractual relationship, but the patent rights are exhausted.  “In other words, a sale with restrictions could nonetheless be an ‘unconditional’ sale in which title passes, with the restrictions invalid under the patent laws because of exhaustion.” Further, the dissent argued that Kirtsaeng should be read to overrule Jazz Photo.  In Kirtsaeng, the Supreme Court recognized that the first sale doctrine is a common law doctrine grounded in the common law’s presumption against restrictions on the free exchange of goods. Thus, the same rule should be applied to patent law, which draws from the same common-law background as the copyright statute.

The Author

Robert Schaffer

Robert Schaffer is an intellectual property partner at Troutman Sanders. Bob applies more than 30 years of experience to IP counseling and litigation. His work includes patent procurement, strategic planning and transactional advice, due diligence investigations, district court patent cases, and Federal Circuit appeals. He regularly handles complex and high-profile domestic and international patent portfolios, intellectual property agreements and licensing, IP evaluations for collaborations, mergers, and acquisitions. In disputed court cases Bob’s work includes representing and counseling client in ANDA litigations, complex patent infringement cases and appeals, and multidistrict and international cases. In disputed Patent Office matters his work includes representing and counseling clients in interferences, reexaminations, reissues, post-grant proceedings, and in European Oppositions. For more information and to contact Bob please visit his profile page at the Troutman Sanders website.

Robert Schaffer

Joseph Robinson has over 20 years of experience in all aspects of intellectual property law. He focuses his practice in the pharmaceutical, life sciences, biotechnology, and medical device fields. His practice encompasses litigation, including Hatch-Waxman litigation; licensing; counseling; due diligence; and patent and trademark prosecution. He has served as litigation counsel in a variety of patent and trademark disputes in many different jurisdictions, and has also served as appellate counsel before the Court of Appeals for the Federal Circuit. Joe also focuses on complex inter partes matters before the U.S Patent and Trademark Office, inventorship disputes, reexaminations and reissues. His experience includes numerous interferences, a particular advantage in new U.S. Patent and Trademark Office post-grant proceedings. He also counsels on patent–related U.S. Food and Drug Administration issues, including citizen petitions, Orange Book listing, and trademark issues. For more information and to contact Joe please visit his profile page at the Troutman Sanders website.

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