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IP Alert: Federal Circuit Issues Major Decision on Patent Exhaustion in Lexmark v. Impression Products

February 12, 2016

Today, in Lexmark International v. Impression Products, Inc., the Court of Appeals for the Federal Circuit issued a significant en banc decision on two aspects of the doctrine of patent exhaustion. As reported in our alert last year, Lexmark is a manufacturer of printers and toner cartridges. Lexmark sued a number of defendants, including Impression Products, asserting that the defendants infringed certain Lexmark patents by acquiring, refilling, and selling used cartridges. Impression obtained and refilled used Lexmark cartridges that were sold outside the United States as well as cartridges sold under Lexmark’s “Return Program.” The Return Program (previously called the “Prebate Program”) allows customers to purchase patented Lexmark cartridges at a discount in exchange for an agreement to use the cartridge only once and then return the empty cartridge to Lexmark.

Impression contended that Lexmark’s Return Program is invalid under patent law because Lexmark’s patent rights were exhausted upon the initial sale, despite the express contractual single-use conditions of the Return Program. An earlier Supreme Court decision, Quanta Computer, Inc. v. LG Electronics, Inc., held that authorized sales of patented products can still exhaust patent rights, even if those sales are subject to restrictions. Lexmark argued to the contrary, asserting that Quanta Computer did not create a blanket rule against all post-sale restrictions. Lexmark also relied on a 1992 Federal Circuit decision, Mallinckrodt, Inc. v. Medipart, Inc., which held that a sale of medical equipment under a single-use restriction did not exhaust the seller’s patent rights in that product.

Lexmark also sold some toner cartridges outside of the U.S. A 2001 Federal Circuit decision, Jazz Photo Corp. v. United States International Trade Commission, had held that an authorized first sale must have occurred within the U.S. for exhaustion to apply. Impression argued that Jazz Photo was overruled by the 2012 Supreme Court decision in Kirtsaeng v. John Wiley & Sons, Inc., which determined that the Copyright Act’s parallel “first sale” doctrine did not have such a geographical limitation.

Last year, after hearing oral arguments from both parties, the Federal Circuit sua sponte ordered en banc consideration of these two issues:
  1. Should the court overrule Jazz Photo in view of Kirtsaeng to the extent that Jazz Photo ruled a sale of a patented item outside the U.S. never gives rise to U.S. patent exhaustion?
  2. Should the court overrule Mallinckrodt in view of Quanta Computer to the extent that Mallinckrodt 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?
The court today reached the following conclusions:

The court upheld the Return Program and held that there was no exhaustion: “[W]hen 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.”

The court further concluded that Jazz Photo remains good law even after Kirtsaeng. Kirtsaeng does not compel the reversal of Jazz Photo given differences between copyright and patent law. Consequently, the foreign sale of a U.S.-patented article, when made by or with the 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.

Fitch Even attorneys are reviewing the decision and will present further analysis in a forthcoming alert.

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Note: A Fitch Even attorney represented Lexmark in earlier litigation relating to the Lexmark Return Program, but no longer represents Lexmark. This alert does not purport to represent any position of Lexmark or Impression or to constitute an opinion on the merits of either party’s position in the pending lawsuit.

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