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International Patent Exhaustion Is Argued to En Banc Federal Circuit

The en banc Federal Circuit on October 2, 2015, heard oral argument on whether the Court’s law on international patent exhaustion and conditional sales must be changed in light of recent Supreme Court decisions. Lexmark International, Inc. v. Impression Products, Inc., en banc Fed. Cir., No. 2014-1617, oral argument 10/2/2015.

Background

Lexmark makes and sells patented ink cartridges for its printers. It sell cartridges under one plan that permits buyers to use them as they wish, and at a discounted price under a "Return Program" plan that limits buyers to a single use of the cartridge and requires the cartridges to be returned to Lexmark for recycling. 

Lexmark brought infringement actions in the district court and the International Trade Commission against Impression Products and other makers of after-market ink cartridges for Lexmark printers. Most of the district court defendants settled the litigation with Lexmark.

As to Lexmark's action against Impression Products, the district court entered a stipulated judgment on Impression Products motion to dismiss. It held that Lexmark's patent rights in cartridges first sold in the United States were exhausted under Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), but that the rights were retained for cartridges first sold abroad under Jazz Photo Corporation v. International Trade Commission, 264 F.3d 1094 (2001).

On appeal, the Federal Circuit sua sponte granted en banc review of whether the appellate court's ruling on conditional sales in the U.S. must be overruled in light of Supreme Court's Quanta decision, and whether the appellate court's Jazz Photo ruling on international exhaustion must be overruled in light of the Supreme Court's ruling on copyright exhaustion in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012).

Impression Products Argument

Edward F. O'Connor of Avyno Law, appeared for appellant Impression Products, Inc., to address the conditional sale aspect of the case. He argued that a patent owner may not reserve any rights in a product covered by its patent after an authorized sale. To the extent that any post-sale restrictions can be found in this or other cases, he explained, such restrictions are no more than the patentee's attempt to obtain a benefit that is outside the scope of the patent claims. If the restriction exists at all, according to O’Connor, it exists under contract law, not under the patent law.

Judge Newman asked if it is outside the patent grant to limit the use of the patented product for health and safety reasons. O’Connor answered yes, explaining that such restrictions are readily available by contract or other federal laws and regulations. Judge Moore pointed out, however, that the Supreme Court in Gen. Talking Pictures Corp. v. W. Elec. Co., 305 U.S. 124 (1938), found patent infringement, not breach of contract, by both the licensee and the end user who used the product in a way that was outside the scope of the license. O’Connor’s answer was that the infringement remedy was available there because the sale was not authorized, i.e., the licensee was not authorized to sell to a purchaser it knew would use the product in a way contrary to the patent license. If the sale were authorized, the patent rights would have been exhausted, and there would have been no infringement remedy, he added.

Judge Prost asked if a sale subject to conditions can be deemed authorized. According to O’Connor, an authorized sale is one by the patentee or licensee, with or without conditions, but the sale is unauthorized if the licensee sells outside the scope of the license. An authorized sale, with conditions or without, exhausts patent rights and leaves no room for patent remedies against purchasers, O’Connor argued.

Computer Industry: Amicus Argument

Andrew Pincus of Mayer Brown, appearing for group computer companies, shared oral argument time with O’Connor to address the international exhaustion issue. He contended that the Supreme Court’s copyright decision in Kirtsaeng mandates the application of international exhaustion to patent law because that decision was based on the common law applicable to both patents and copyrights.

Judge Taranto questioned his reading of Kirtsaeng, pointing out that the Court repeatedly said it was deciding a statutory interpretation question on the Copyright Act’s first sale provision at 17 U.S.C. 109(a) which focused almost entirely on the location of manufacture rather than the location of sale. Since Patent Act includes no exhaustion text, how are we bound by the comments in Kirtsaeng on the text of the Copyright Act. Pincus said the Court is not bound by the textual comments on Section 109(a), but it is bound by the holdings about the common law of exhaustion that does not distinguish between copyrights and patent rights.

Judge Moore asked Pincus what he thought of the government’s argument that patent exhaustion results from a sale abroad unless the patent owner clearly and expressly reserves its rights to prevent importation of the foreign-sold articles. Pincus suggested that the government’s position on international exhaustion is inconsistent with its view that selling a patented product with conditions attached will not prevent exhaustion of patent rights over that product. Judge Lourie observed that a sale of a product covered by a U.S. patent is not a sale under the patent because there is no U.S. patent in that foreign territory. He questioned how U.S. patent rights could be exhausted by a sale, for example, in Germany where the seller has no enforceable U.S. patent rights to assert against the buyer.

Government Argument

Melissa N. Patterson, of the Justice Department, argued that the inquiry on international exhaustion and conditional sales should be the same: has there been a sale authorized under the U.S. patent grant; if so, all post-sale restrictions the vendor would impose are invalid, she contended.

Judge Chen pointed out that the purchaser in General Talking Pictures Corporation v. Western Electric Company, 304 U.S. 175, was held liable for patent infringement. Patterson said that was the result because the sale was not authorized, explaining that the licensee was not permitted to sell to those he knew would use the product commercially. Patent rights will not be exhausted by an unauthorized sale, she argued, but added that a patent owner can require a licensee to extract contractual promises from purchasers. In such a case, Patterson explained, contract law would provide remedies for the licensee based on its privity with the purchaser, but no patent right is enforceable against a buyer in an authorized sale.

Seeking to confirm the government’s position, Judge O’Malley put it this way: if the patentee chooses to sell directly for purpose A, but not purpose B, that’s not enforceable under the patent law, but if it takes the added step and expense of going through a licensee, the restriction can be enforced under the patent laws against the downstream user. Patterson replied that patent law enforcement is available only where the downstream sale by the licensee is unauthorized, i.e., outside the scope of the license, Patterson explained. She added that the patent owner can protect its patent enforcement rights by limiting the authorizations provided in the license.

Judge Lourie asked if there is an inconsistency in the government’s approach to exhaustion in the conditional sales setting and in the foreign sales setting. Patterson said there is not, pointing out that the territorial nature of U.S. patent law requires a different approach to sales abroad that permits patent owners to expressly reserve rights.

Lexmark Argument

Constantine L. Trela, of Sidley Austin, argued for Lexmark that the Mallinckrodt and Jazz Photo correctly stated the patent law on conditional sales and international exhaustion and need no revision.  Judge Dyk asked what Supreme Court case supports Mallinckrodt.  It is supported by Mitchell v. Hawley, 83 U.S. (16 Wall.) 544 (1872), according to Trela, which states  that an authorized sale may include a restriction on use, and that the violation of the restriction created infringement liability. 

The government states that authorization is a critical question for sales by both patent owners and licensees, Trela noted, but he said the position overlooks a critical question: "authorization of what." There may well be an authorized sale, he acknowledged.  But since from we know from Adams v. Burke, 84 U.S. (17 Wall.) 453 (1873), that patent rights are separable and divisible, Trela maintained that a patent owner can authorize a sale under one patent right but not another.

Judge Dyk's answer to the question, "authorization of what," was the item sold." Trela responded that Lexmark sold the cartridge itself at a discounted price, together with a single-use-and-return license. The purchaser has the alternative to purchase the cartridge at the regular price with the right to use forever and ever however it sees fit. Why isn't that an illegal tie, Judge O'Malley asked. Trela answered that tying violations typically involve the use of the the patent to leverage the sale of an unpatented item, which is not this case at all; he also pointed out that Section 271(d)(5) of the Patent Act expressly states that, absent market powers and antitrust issues, tying is not patent misuse.

Judge Taranto asked if this transaction, as a practical matter, looks more like a lease than a sale. Trela conceded that, but for the requirements of the UCC, the transactions have similarities to a lease, However, he pointed out that Lexmark does not consider it a contract violation if the customer chooses to toss the cartridge into the garbage instead of returning it to Lexmark for recycling. And what happens if a purchasing customer lies to a licensee about complying with the imposed restrictions, Judge Taranto asked. In that case, the patentee retains its patent rights after the sale, according Trela, because any use beyond the scope of a license is an infringement, whether by a licensee or by a downstream buyer. There is no case that says a patentee that sells necessarily sells everything, according to Trela, and a licensee cannot convey more than he has.

On the Jazz Photo question, Judge Moore asked why Kirtsaeng isn't dispositive, notwithstanding the Federal Circuit case law finding no international exhaustion. It is not dispositive, according to Trela, first because Kirtsaeng was a copyright case and not a patent case, and second because the decision was based on a statutory construction of the phrase "lawfully made under this title" at 17 U.S.C. 109(a). He rejected the argument that the Court's starting point was the common law, explaining that the Court simply wanted to determine if Congress meant to import into the copyright statute any territorial limitations from the common law.

Patent Act is territorial in a way that the Copyright Act is not, Trela stated, pointing out that copyrights don't depend on examination but rather comes into existence when and wherever a work is created. By contrast, patent rights differ from country to country in patentability terms and scope, Trela explained, adding that the U.S. amicus brief conceded patents to be territorial. He maintained that logically a foreign sale should not exhaust U.S. rights because the foreign transaction has nothing to do with the U.S. patent. 

Biotech Industry: Amicus Argument

Barbara Fiacco, of Foley Hoag, argued for amici Biotechnology Industry Organization and CropLife International. She stressed that the significance of this case goes far beyond the issues for printer cartridges or computer software. With respect to international exhaustion, Fiacco pointed out that many of her clients sell product at lower prices in developing countries.

Judge Taranto asked why the default rule on international exhaustion should not be what is proposed by the government, i.e., that exhaustion applies unless the patent owner makes an express reservation. Fiacco answered that the law should not permit a multinational license to be conveyed through silence. Judge Dyk asked why a notice from the patentee would be a problem. The notice requirement would upend settled expectations of over 15 years that U.S. patent rights are not conveyed by a foreign sale, particularly with a retrospective application of such a rule. On the question of retrospective application, Judge Taranto asked how the impact on patent owners should be determined. The principal difficulty, Fiacco replied, is the consequence of a new rule with respect to downstream purchasers with whom the patent holders have had no contact. It is essential to retain a way to enforce regional pricing and prevent arbitrage by regional importers looking for opportunities, she added. 

As to products with a short shelf life, why wouldn’t there be an opportunity to give the notice suggested by the government for new products under new sales agreements, Judge Taranto asked. It would be a very complicated undertaking for the range of products represented by these companies, Fiacco answered. Judge Lourie mentioned that many products may not have a short shelf life, and that sales in as many as 150 different countries would mean complying with the laws of all of those countries on drug approvals, and the reservation of rights may not be permitted under those laws.

To hear a recording of the oral argument, click here.