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The Patent Exhaustion Defense and Foreign Sales
- 1. The Patent Exhaustion Defense and Foreign Sales: Impression Prods. v. Lexmark Int’l Mariko Kageyama University of Washington School of Law
- 3. Questions Presented #1: Patent Exhaustion Defense The patent exhaustion doctrine: The initial authorized sale of a patented item terminates all patent rights to that item. Quanta Computer, Inc. v. LG Electronics, Inc. (2008). 1. Does a "conditional sale" that specifies post-sale restrictions on the article's use or resale while transferring title to the patented item avoid application of the patent exhaustion doctrine and therefore permit the enforcement of such post-sale restrictions through the patent law's infringement remedy?
- 4. Questions Presented #2: Foreign Sales The common law first sale doctrine barring restraints on alienation makes no geographical distinctions. Kirtsaeng v. John Wiley & Sons, Inc. (2013) (under Copyright Act statutory provision). 2. Does a sale of a patented article, authorized by the U.S. patentee, outside of the United States exhaust the U.S. patent rights in that article? CVSG 10/12/2016; Cert. Granted 12/2/2016
- 5. Lexmark Opinions Below #1: Exhaustion • S.D. Ohio (2014) Quanta overruled Mallinckrodt (Fed. Cir. 1992). Exhausted. • Fed. Cir. (2016) (en banc) Reversed. Mallinckrodt still good. First sale does not confer downstream buyers authority expressly denied on original sale. Resale/reuse remain unauthorized and infringing under § 271. Dyk and Hughes Dissent – Exhausted under Quanta.
- 6. Lexmark Opinions Below #2: Foreign Sales • S.D. Ohio (2014) Kirtsaeng did not overrule Jazz Photo (Fed. Cir. 2001). • Fed. Cir. (2016) (en banc) Affirmed. Jazz Photo still good law. Non-exhaustion on foreign sales. Dyk and Hughes – Exhausted unless expressly reserved.
Editor's Notes
- This is a case revisiting the issue of the scope of the “patent exhaustion” doctrine. Additional layers to think about is foreign sales and how that international sales play out with the exhaustion. Basically it says patentees can enforce patent only up until the first sale of the patented product or product that embodies the patented method. So the exhaustion is a defense brought up by accused infringer to narrow the patentee’s right.
- One way to understand this case is an infringement action by original equipment manufacturers or OEMs, like Lexmark, versus corresponding aftermarket re-manufacturers or resellers, like Impression Products. If you think about today there is a huge after-market industry for refurbished products, exhaustion is a principle that protects you when you buy and later resell products without being held liable for patent infringement. This case centers on the toner cartridges used in laser printers. Lexmark has several patents directed to cartridges. Lexmark sells all of its cartridges domestically, as well as overseas. Lexmark runs the cartridge recycling program called Return Program. Consumers can buy supplies at a lower price but the terms of sales say these are subject to a restriction that bars buyers from either reusing the cartridges after the toner runs out or transferring empty cartridges to anyone other than Lexmark. Impression Products are in the business of buying empty cartridges, refurbishing them, and then selling them in the aftermarket. Lexmark sued Impression Products and several other ink suppliers in 2010, alleging that their sales of refurbished cartridges infringe on Lexmark’s patents.
- The case went to Federal Circuit in February 2016 and the certiorari was granted last December. Now this case is set for argument before the Supreme Court on March 21, in about a month!! The last time the Supreme Court reviewed the patent exhaustion issue was Quanta Computer v. LG Electronics, in 2008. Two questions are certified before the Supreme Court. Based on Quanta, the issue is whether a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article's use or resale avoids application of the patent-exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through the patent law’s infringement remedy. In other words, a patentee can bypass the exhaustion doctrine by putting specific restrictions on how buyers can use or resell the patented product, whether first buyers or downstream buyers? U.S. Acting Solicitor General (Ian Gershengorn) weighed in from policy standpoint. The government contends that the Supreme Court has long held that when a patentee authorizes the sale of a patented product, such sales should not restrict the subsequent sale of the product, and pre-empt the the terms of the sale about restrictions on the post-sale use or resale of the product . Instead, if the court affirms the Federal Circuit, that would substantially erode the exhaustion doctrine and negatively affect the system.
- The second question relates to another recent Supreme Court case, Kirtsaeng v. John Wiley & Sons (2013). The Supreme court reviewed the copyright first-sale doctrine, and decided that the common-law doctrine barring restraints on alienation “makes no geographical distinctions” and no matter where products are sold, that would trigger copyright exhaustion. But what about patent, instead of copyright? Does a sale of a patented article that was authorized by the U.S. patentee, sold outside the US exhausts the U.S. patent rights in that article? The federal government asserts that the Federal Circuit was wrong to hold that an overseas sale never exhausts U.S. patent rights in the patented product, but the Impression product’s argument that an authorized overseas sale always exhausts U.S. patent rights is equally erroneous. According to the government, the correct rule should be that U.S. patent rights are presumptively exhausted unless the terms of the foreign sale specifically provide otherwise.
- Next, I will briefly review the opinions below for each question. First, as for the first question of conditional sale, the Federal Circuit reversed the district court’s reasoning in terms of Quanta decision. The lower court’s reading of Quanta was that it implicitly overruled Mallinckrodt v. Medipart case, the medical device patent case, so the conditional sale does not broadened the patent rights. But the federal court reasoned differently, and decided that Mallinckrodt is still good and the first sale does not mean that patentee give downstream buyers authority that is expressly prohibited on the terms of the original sale. So that resale or reuse of such patented products remain unauthorized activities and infringing under section 271. That was a en banc court but Judge Dyk and Judge Hughes dissented and their view is that conditional sale exhausted all rights under Quanta.
- Moving on to the second question, the Federal Circuit affirmed the lower court’s opinion that the copyright first sale doctrine does not apply equally to the patent. The lower court differentiated copyright and patent exhaustion schemes. In Jazz Photo v. ITC case, Fuji Film’s single-use cameras’ patents were at issue, but the Ohio district court found that that case was not overruled by the copyright first-sale doctrine. The Federal Circuit basically affirmed the lower court and non-exhaustion is appropriate treatment for foreign sales in patent. On the other hand, dissent by Judge Dyk and Hughes, proposed a rebuttable presumption that authorized sale overseas is exhausted extraterritorially UNLESS patentee expressly reserve the rights. Solicitor General basically shares this view. About 20 or so amicus briefs have been filed so far, and most of them are in support for Impression Products favoring maximum exhaustion against broadening the patent rights beyond the first sale. So we will see what the Supreme Court has to say.