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Supreme Court Will Review Federal Circuit Decision on International Patent Exhaustion

The Supreme Court on December 2, 2016, agreed to review an en banc Federal Circuit decision that no changes to the Federal Circuit's law of patent exhaustion are required by the Supreme Court's decisions in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012), and Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).  Impression Products, Inc., v. Lexmark International, Inc., U.S., No. 15-1189, cert. granted 12/2/2016. 

The questions presented are: (1) 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; and (2) whether, in light of this court’s holding in Kirtsaeng that the common-law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article – authorized by the U.S. patentee – that takes place outside the United States exhausts the U.S. patent rights in that article.

En Banc Federal Circuit Decision 

In a 10-2 decision, the en banc 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. 816 F.3d 721 (2016).  It also held that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts absent patentee-conferred authority. Judge Dyk filed a dissenting opinion, which was joined by Judge Hughes, generally agreeing with the position argued in the government's amicus brief. 

The Justice Department told the Federal Circuit (and later the Supreme Court in urging review) that foreign sales may exhaust patent rights unless the patentee reserves its rights, and that Mallinckrodt Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), should be overruled because it erroneously held that patentees can impose servitudes on chattels with post-sale restrictions. 

AIPLA's amicus brief to the Federal Circuit argued that Kirtsaeng and Quanta require no change to the Federal Circuit law of patent exhaustion and conditional sales. ​Kirtsaeng, which interprets a copyright statute setting out the rights of an owner of a copy under the copyright "first sale" doctrine, is not controlling of the longstanding patent exhaustion doctrine set out in Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), according to the brief. The brief also argued that Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), which found that sale limitations in a Master Agreement rather than in a patent license failed to avoid patent exhaustion, was a case-specific application of the rules of conditional sales set out in Mallinckrodt, which reversed the district court's summary judgment of per se illegality. 

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, but that the rights were retained for cartridges first sold abroad under Jazz Photo
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
To read the Federal Circuit en banc opinions, click here