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Federal Circuit “Tones Down” Efforts to Expand Patent Exhaustion

February 8, 2016
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by Shawn Leppo and David Marcus

In a rare instance in which all judges participated, the Federal Circuit issued a ruling earlier this month, in Lexmark International, Inc. v. Impression Products, Inc., on the legal issue of patent exhaustion for both domestic and foreign made goods.

Lexmark makes and sells printers and toner cartridges covered by a number of patents. These cartridges are sold both within the U.S. and in foreign markets. The domestically-sold cartridges (and some of the foreign-sold ones) were sold at a discount subject to an express single-use/no-resale restriction.  Impression, a competitor, acquired both domestically-sold and foreign-sold cartridges, refilled the cartridges with toner, and then resold the cartridges in the United States.  Lexmark sued Impression for patent infringement, while Impression defended on grounds that Lexmark’s patent rights were exhausted by the original sale of those cartridges.

The doctrine of patent exhaustion (sometimes also referred to as the “first sale” doctrine) essentially provides that when a patented article is lawfully sold, the purchaser of the patented article may resell or use the article in a manner that would otherwise infringe the patent owner’s rights.  In Lexmark, the full court upheld two long-standing decisions on this subject, finding that patent exhaustion applies only in limited circumstances and that conditional sales and foreign sales are not among those.  While normally upholding prior rulings would not be considered particularly newsworthy, the Lexmark decision is somewhat surprising because many commentators believed that these Federal Circuit precedents were inconsistent with more recent Supreme Court decisions.

In reviewing an issue of domestic patent exhaustion, the Supreme Court in 2008 ruled (in Quanta v. LG Electronics) that the exhaustion doctrine applies to authorized sales of components that substantially embody a process patent and reaffirmed that the right to sell is exhausted by a single, unconditional sale.  Once sold, a product is carried outside the monopoly and is free of every subsequent restriction the patent owner may have attempted to put upon it.  In Lexmark, the majority of the Federal Circuit determined that the Supreme Court’s reasoning in that case was confined to unconditional sales only, not conditional sales and leases.  Because Lexmark purported to sell its cartridges subject to certain conditions, its rights were not exhausted when it sold those cartridges domestically and thus Impression’s subsequent sale of the refilled versions of those same cartridges was not permissible.

Turning next to patent exhaustion relating to foreign sales, the Federal Circuit was faced with a 2013 Supreme Court decision, Kirtsaeng v. John Wiley & Sons, Inc., a copyright case holding that the first sale doctrine applies even to goods manufactured outside the United States.  Thus, copies made legally anywhere could be freely imported into and resold in the United States.  The Federal Circuit sidestepped this issue in the Lexmark decision, rationalizing that differences between copyright and patent were so significant that the Supreme Court’s reasoning in Kirtsaeng was inapplicable to patent law (an idea the Supreme Court has often rejected in considering other intellectual property cases).

Thus, at least for the moment, the sale of a patented article abroad – regardless of any conditions on sale – does not exhaust the patent owner’s rights in the U.S. market unless the purchaser can show circumstances that also imply a license to import the patented product into the U.S. for use or resale.

In light of the Lexmark decision, it appears patent owners may continue to use restrictive contract terms to limit a purchaser’s rights to resell or reuse patented articles within the U.S. and may also continue to protect their U.S. markets from the importation of gray market goods even in the absence of such restrictions.

The Federal Circuit was not unanimous in Lexmark and the dissent went to great lengths to demonstrate why the decision was squarely at odds with controlling precedent from the Supreme Court.  The significance of patent exhaustion in an increasingly global marketplace suggests this case may itself wind up in front of the Supreme Court for a definitive ruling on the matter.  Given the importance of the rights in question and the reasonable possibility that the Lexmark decision may be reversed or limited, patent owners may wish to consult with patent counsel to plan ahead for such an occurrence.  Some steps that might be considered include, when practical, licensing patented products instead of selling them outright and/or explicitly reserving patent rights in the United States when negotiating for the sale or lease of products in foreign markets.


© 2016 McNees Wallace & Nurick LLC
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