Lexmarks the Spot: The Federal Circuit Addresses Patent Exhaustion
On October 26, 1881, Wyatt Earp and his brothers, Morgan and Virgil, along with Doc Holliday met with Ike and Billy Clanton, Tom and Frank McLaury and Billy Claiborn, to engage in a form of conflict-resolution in a vacant lot off Fremont Street in Tombstone, Arizona Territory. Sheriff Johnny Behan’s efforts at mediation were ultimately unsuccessful, and the rest is history. The dispute between the parties had been long-standing, and it is not clear that there was a defining moment that made the final confrontation a certainty. Such cannot be said of the Federal Circuit’s holding in Lexmark International, Inc., v. Impression Products, Inc., No. 2014-1617, 2014-1619 (Federal Circuit, February 12, 2016)(en banc). In this decision, the Federal Circuit has undoubtedly set the stage for the Supreme Court to resolve issues related to Patent Exhaustion.
Lexmark sells printers and toner cartridges, and owns various patents related to the toner cartridges. Reusable cartridges covered by the patents were sold with restriction in the United States and abroad. The cartridges were subsequently acquired and sold by Impression after reconditioning by a third party, including those that had been sold abroad. The issue before the court was if Impression infringed under 35 U.S.C. §271, or whether the prior sale of the cartridges excused the sale under the doctrine of patent exhaustion. The backdrop of the case includes two Supreme Court Cases and two Federal Circuit cases. The Supreme Court cases are Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013) and Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Kirtsaeng is a Copyright case related to books sold abroad that were reimported into the United States and sold by petitioner, Kirtsaeng. The Court held in favor of the petitioner, relying on in part, a non-geographical view of the first sale doctrine. In Quanta, the Court reaffirmed the patent exhaustion doctrine laid out in United States v. Univis Lens Co., 316 U.S. 241, 53 USPQ 404 (1942). The Federal Circuit cases include Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001) and Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). In Jazz, the court ruled that foreign sales of cameras did not exhaust patent rights for those cameras in the United States. In Mallinckrodt, the court held that sales of items subject to lawful restrictions on post-sale use that are clearly communicated do not provide the authority necessary to engage in activity precluded by the restrictions.
The Federal Circuit requested that the parties address two issues:
(a) The case involves certain sales, made abroad, of articles patented in the United States. In light of Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), should this court overrule Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), to the extent it ruled that a sale of a patented item outside the United States never gives rise to United States patent exhaustion.
(b) The case involves (i) sales of patented articles to end users under a restriction that they use the articles once and then return them and (ii) sales of the same patented articles to resellers under a restriction that resales take place under the single-use-and-return restriction. Do any of those sales give rise to patent exhaustion? In light of Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), should this court overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F. 2d 700 (Fed. Cir. 1992), to the extent it ruled that a sale of a patented article, when the sale is made under a restriction that is otherwise lawful and within the scope of the patent grant, does not give rise to patent exhaustion?
In a 10-2 en banc decision, the Federal Circuit ruled in favor of Lexmark, finding infringement in the sale of cartridges first sold both in the U.S. and abroad. Specifically, the court held:
We hold that, when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale, the patentee does not confer authority on the buyer to engage in the prohibited resale or reuse. The patentee does not exhaust its §271 rights to charge the buyer who engages in those acts – or downstream buyers having knowledge of the restrictions – with infringement. We also hold that a foreign sale of a U.S.-patented article, when made by or with approval of the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale. Loss of U.S. patent rights based on a foreign sale remains a matter of express or implied license.
Despite the large plurality of the opinion, in view of the Supreme Court’s expansive view of the first sale doctrine in Kirtsaeng and Quanta, it is not entirely certain that the ruling will survive if reviewed at that level.
Lexmark obviously relates to the production of printer cartridges, and as such potentially affects everyone with a printer. However, the elephant in the room with respect to this case is the possibility that Kirtsaeng’s view of the first sale doctrine would be extended to patents, in particular, pharmaceutical patents. This could begin opening the door to the re-importation of drugs originally sold abroad (often at a deep discount, relative to the U.S.), at least from a patent law standpoint. This in turn would undercut the domestic sales and profits of drug manufacturers, impact their R&D efforts and perhaps have other, unintended consequences.
Such a decision by the Supreme Court would come at an interesting time. The death of Justice Scalia (a dissenter in Kirtsaeng), leaves an empty chair that will likely not be filled until next year. Superimposed on this are the effects of election year politics, a legislative branch eager to re-assert itself, and what appears to be a general drift in the United States electorate toward populism, on both sides of the political aisle. These may or may not have an effect. Time will tell.
 Slip op at 18.
 Slip op at 98.
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