IP Law Daily Lexmark’s foreign sales and restricted U.S. sales did not exhaust patent rights in toner cartridges
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Friday, February 12, 2016

Lexmark’s foreign sales and restricted U.S. sales did not exhaust patent rights in toner cartridges

By Thomas Long, J.D.

Inkjet toner cartridge manufacturer Lexmark International’s patent rights were not exhausted upon the first authorized sale, either domestically or abroad, by Lexmark of its products to end users, the U.S. Court of Appeals for the Federal Circuit has held in an en banc decision (Lexmark International, Inc. v. Impression Products, Inc., February 12, 2016, Taranto, R.). The uncodified doctrine of patent exhaustion was not disturbed by recent U.S. Supreme Court decisions, including a case establishing the applicability of the first-sale doctrine to copyright infringement claims over textbooks first sold abroad and then resold in the United States. Under the doctrine, Lexmark could enforce otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale. Accordingly, reseller Impression Products, Inc., infringed Lexmark’s patent by selling, in the United States: (1) remanufactured inkjet cartridges that had originally been sold outside of the U.S. and (2) cartridges that were first sold in the U.S. under Lexmark’s discounted Return Program, in violation of the program’s restrictions.

Infringement dispute. Lexmark made and sold printers, and toner cartridges for its printers. A number of Lexmark-owned patents covered its cartridges and their use. The cartridges at issue were first sold by Lexmark, some abroad and some in the United States. Some of the foreign-sold cartridges and all of the domestically sold cartridges at issue were sold, at a discount, under the Return Program, subject to an express restriction that they would be used only once and would not be resold.

Impression acquired the cartridges in order to resell them in the United States—the restricted ones after a third party physically modified them to enable re-use in violation of the single-use/no-resale restriction. Impression resold the patented Lexmark cartridges in the United States, and it imported those it acquired abroad, without affirmative authorization from Lexmark and, for the restricted cartridges, in violation of the express denial of authorization to engage in resale and reuse. It was undisputed that Lexmark’s patents were valid and enforceable and that they covered the cartridges Impression was importing and selling.

Patent exhaustion doctrine. The patent exhaustion doctrine provides that the authorized sale of a patented product exhausts the patent holder’s patent rights and prohibits suits against downstream users for patent infringement. Unless the fact that Lexmark initially sold the cartridges constituted a grant of authority that made Impression’s later resale and importation non-infringing under the doctrine of exhaustion, Impression’s actions infringed under 35 U.S.C. §271, the court said.

In separate decisions involving first sales abroad and first sales in the U.S., respectively, the federal district court in Cincinnati found that: (1) the U.S. Supreme Court’s 2012 decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351, did not overturn the Federal Circuit’s 2001 decision in Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094, such that Lexmark’s patent rights were exhausted upon the first authorized sale abroad and (2) Lexmark’s patent rights were exhausted for patented cartridges that were first sold in the U.S. under the company’s discounted Return Program. With the parties’ agreement, the district court entered a stipulated final judgment. The judgment was (1) for Impression as to the Return Program cartridges whose precursors Lexmark had sold in the United States and (2) for Lexmark as to cartridges whose precursors Lexmark had initially sold abroad.

Both parties appealed. The Federal Circuit sua sponte ordered the appeal to be heard en banc and requested briefs on whether it should reverse prior cases holding that the exhaustion doctrine is not triggered when the first authorized sale is outside the United States and that the doctrine does not apply to “conditional” sales.

Patent Act’s treatment of first sales. Section 271 provides that whoever “without authority” during the term of a patent “makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention” engages in patent infringement. Nothing in the Patent Act superseded the Section 271 requirement of authority from the patentee before a person in Impression’s position was permitted to engage in the itemized acts without infringing. In this respect, the Federal Circuit stated, the Patent Act differed from the Copyright Act. The Copyright Act gives a right of sale to certain article owners; the Copyright Act’s infringement, importation, and exclusive-rights provisions are subservient to that express guarantee. In contrast, the Patent Act does not contain a congressionally prescribed exhaustion rule, let alone a provision making the express definition of infringement and rights to exclude subservient to such an exhaustion rule. In the Patent Act, the court explained, it was a conferral of “authority” by the patentee that was needed in order for the actions listed in Section 271(a) not to constitute infringement.

Conditional sales in the United States. Impression asserted that the Federal Circuit’s holding in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (1992), was at odds with subsequent Supreme Court precedent. In Mallinckrodt, the Federal Circuit held 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 by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied. According to Impression—and the district court—the U.S. Supreme Court, in Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008), held that any authorized sale exhausts patent rights and that any conditions on the sale, if they amount to valid agreements, are properly enforced via contract law, not patent law.

In the Federal Circuit’s view, Quanta was distinguishable from Mallinckrodt. In Quanta, the Court did not have before it or address a patentee sale at all, let alone one made subject to a restriction; rather, Quanta involved a sale made by a separate manufacturer under a patentee-granted license conferring unrestricted authority to sell. Therefore, Quanta had no bearing on the issue of restricted sales by a patentee. In the Federal Circuit’s view, Quanta did not undermine the holding in Mallinckrodt that a patentee can preserve its patent rights through restrictions on its sales. The court concluded that a patentee may preserve its Section 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions.

The court noted that Supreme Court precedent allowed a patentee to preserve its patent rights by authorizing a manufacturing licensee to make and sell a patented article under an otherwise-proper restriction, including a restriction on the buyer’s post-purchase use. It saw no reason to make a distinction in cases in which the products at issue were made and sold by the patentee itself. Moreover, Impression had not claimed that the restrictions at issue violated antitrust, patent-misuse, or similar constraints, and there was no evidence that the Federal Circuit’s longstanding interpretation of the exhaustion doctrine had resulted in harms in the marketplace.

Accordingly, the Federal Circuit reversed the district court’s judgment of non-infringement as to the cartridges first sold in the United States under Lexmark’s Return Program. The case was remanded for entry of a judgment of infringement in favor of Lexmark.

Sales abroad. With respect to the cartridges first sold abroad, the Federal Circuit concluded, as it did in Jazz Photo, that there was no legal rule that U.S. rights are waived, either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized by a U.S. patentee. In Jazz Photo and subsequent cases, the Federal Circuit held that the foreign sale of a U.S.-patented article, when the sale was either made or authorized by the U.S. patentee, did not, standing alone, confer on the buyer “authority” to import the item into the United States or to sell and use it in the U.S., and therefore did not save those acts from being infringing under Section 271(a).

The Supreme Court’s decision in Kirtsaeng did not undermine the no-exhaustion conclusion of Jazz Photo, the Federal Circuit said. The text construed inKirtsaeng had no counterpart in the Patent Act. In Kirtsaeng, the Court interpreted Section 109(a) of the Copyright Act, which states that “the owner of a particular copy … lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” The Court held that Section 109(a)’s guarantee applied to copies manufactured outside the United States. Kirtsaeng, the Federal Circuit reasoned, said nothing about patent law; furthermore, even in the context of copyright law, it did not address the question of whether a sale constituted a grant to a buyer of authority to engage in otherwise-prohibited acts of importation, sale, and use.

Accordingly, the Federal Circuit analyzed the exhaustion issue in its own patent-law context, without regard to Kirtsaeng. The Patent Act question, the court said, was whether a foreign sale of a U.S.-patented article made or authorized by a U.S. patentee, standing alone, conferred on the buyer authority to import the article into the United States and sell and use it in the U.S., even though such an act would be infringing in the absence of authority.

“The best answer to that question, we conclude, is that such a foreign sale does not confer such authority,” the court stated. “A U.S. patentee, simply by making or authorizing a foreign sale of an article, does not waive its U.S. rights to exclude regarding that article, either conclusively (no matter how clear the reservation of U.S. rights) or only presumptively (subject to sufficiently clear preservation of U.S. rights).”

Accordingly, the Federal Circuit affirmed the district court’s judgment of infringement as to the cartridges first sold abroad.

Dissenting opinion. Circuit Judge Timothy B. Dyk wrote in dissent, joined by Circuit Judge Todd M. Hughes. In Judge Dyk’s view, Mallinckrodt and Jazz Photowere no longer good law. Mallinckrodt, he opined, was wrong when decided and, moreover, could not be squared with Quanta, which, Judge Dyk said, established an explicit domestic exhaustion rule.

Judge Dyke wrote that he would retain Jazz Photo insofar as it held that a foreign sale did not in all circumstances lead to exhaustion of United States patent rights. However, in his view, a foreign sale did result in exhaustion if an authorized seller had not explicitly reserved the U.S. patent rights.

The case is Nos. 2014-1617 and 2014-1619.

Attorneys: Constantine L. Trela, Jr. (Sidley Austin LLP) for Lexmark International, Inc. Edward F. O’Connor (Avyno Law, P.C.) for Impression Products, Inc.

Companies: Lexmark International, Inc.; Impression Products, Inc.

MainStory: TopStory Patent FedCirNews

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