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The Federal Circuit Finds Foreign Sales Do Not Exhaust Patent Rights

Posted in Patent Law

In Lexmark International, Inc. v. Impression Products,Jo Dale Carothers 015_web Inc., No. 14-1617 (Fed. Cir. 2016), the U.S. Court of Appeals for the Federal Circuit decided en banc that a U.S. patent owner’s “first sale” of items in a foreign country does not exhaust the patent owner’s right to sue for patent infringement when those items are later imported into the U.S. In contrast, the Supreme Court in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013) came to a different conclusion under copyright law, finding that the “first sale,” or exhaustion, doctrine allows the owner of a copy of a copyrighted work, which was lawfully made in a foreign country, to import and sell that copy in the United States without further permission from the copyright owner. But, as the Federal Circuit recognized, patent law and copyright law are not always aligned.

The Lexmark dispute arose in conjunction with Lexmark’s toner cartridges for its printers. Lexmark offers its customers the choice of buying a “Regular Cartridge” at full price with no restrictions on its re-use/resale or a discounted cartridge, subject to a single-use/no-resale restriction. Lexmark sold some of the cartridges in the United States and some abroad. Some of the foreign-sold cartridges and all of the U.S.-sold cartridges at issue were sold subject to an express single-use/no-resale restriction.

Lexmark sued Impression for patent infringement after Impression purchased two categories of recycled Lexmark cartridges for resale in the United States. The first category consists of cartridges that Lexmark originally sold abroad, some with and some without the single-use/no-resale restriction, and Impression later imported into the United States for resale. The second category consists of cartridges that Lexmark originally sold in the United States subject to the single-use/no-resale restriction and were later acquired and resold by Impression.

Relying on the doctrine of patent exhaustion, Impression denied liability arguing that Lexmark’s “first sale” had exhausted its U.S. patent rights in all of the cartridges, thus permitting Impression to sell and import them. The doctrine of patent exhaustion, also known as the “first sale” doctrine, addresses the situation where a patented article (or an article sufficiently embodying a patent) is sold by the patent owner or with the authorization of the patent owner. Such “first sales” exhaust the patent owner’s rights to control future sales and use of the patented article and confer on the buyer the authority to engage in certain acts, such as reselling the patented article.

The Lexmark case raised two patent exhaustion questions. First, in light of the Supreme Court’s Kirtsaeng decision regarding copyright exhaustion, does an authorized foreign sale exhaust U.S. patent rights? Second, are post-sale restrictions allowed, or does the Supreme Court’s ruling in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), preclude post-sale restrictions because all patent rights are exhausted by the “first sale”?

In light of these two recent Supreme Court decisions, the Federal Circuit heard Lexmark en banc to consider whether two of its prior holdings regarding patent exhaustion were still good law. In both instances, the Federal Circuit reaffirmed its prior rulings.

As to the first category of cartridges, the Court concluded, consistent with Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), U.S. patent rights are not waived, “either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized” by a U.S. patent owner. Distinguishing Kirtsaeng, the Court noted that unlike the Copyright Act, the Patent Act does not contain a congressionally prescribed exhaustion rule, much less a definition of infringement subservient to an exhaustion rule.

As to the second category of cartridges, the Court also concluded, consistent with Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), “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 reaching its decision, the Court found that Quanta addressed a different issue.

Dissenting, Judge Dyk wrote that a foreign sale should exhaust U.S. patent rights absent an explicit reservation of those rights by the authorized seller. He further wrote that the majority’s opinion allowing post-sale restrictions, such as the single-use/no-resale restriction, cannot be reconciled with the exhaustion rule announced by the Supreme Court in Quanta.

There is little doubt that the Supreme Court will be asked to consider these patent exhaustion issues.