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Lexmark Is Much Ado About Nothing — For Now
Law360, New York (February 18, 2016, 9:59 AM ET) --
Scott W. Doyle
Jonathan R. DeFosse
Ted M. Nissly
Last week, the Federal Circuit handed down its 10-2 en banc patent exhaustion decision in Lexmark
International Inc. v. Impression Products Inc. The Federal Circuit considered two issues. First, whether
the long-standing rule in Jazz Photo Corp. v. U.S. International Trade Commission that international sales
do not give rise to patent exhaustion should be overruled in light of the U.S. Supreme Court’s decision in
Kirtsaeng v. John Wiley & Sons (2012) concerning copyright exhaustion. Second, whether the rule from
Mallinckrodt Inc. v. Medipart Inc. that post-sale restrictions can be used to avoid patent exhaustion
should be overturned in light of the Supreme Court’s decision in Quanta Computer Inc. v. LG Electronics
Inc. (2008).
In a thorough 99-page opinion written by Judge Richard G. Taranto, the majority reaffirmed Federal
Circuit patent exhaustion precedent, finding that the recent Supreme Court decisions did not affect the
holdings in Jazz Photo or Mallinckrodt. A summary of the court’s analysis as well as commentary on the
case’s impact on patent law is set forth below.
Background of the Case
Lexmark makes and sells printers and toner cartridges for the printers. It sells the cartridges to both U.S.
and international customers. Lexmark offers a two-tiered pricing system such that a customer may (1)
purchase a cartridge with no use restriction at full price, or (2) purchase a cartridge subject to a singleuse/no-resale restriction at a discounted price. The purchaser of a restricted cartridge may not reuse or
resell the cartridge after the toner runs out. The purchaser can only return the empty cartridge to
Lexmark.
The defendant, Impression, bought used/spent Lexmark cartridges, refilled the cartridges with toner and
sold the cartridges to new customers. Lexmark brought suit against Impression in the United States
District Court for the Southern District of Ohio alleging infringement of patents covering the Lexmark
cartridges. There were two groups of cartridges at issue in the case: (1) restricted cartridges Lexmark
sold in the U.S., and (2) all cartridges (both restricted and unrestricted) that Lexmark sold
internationally.
In a motion to dismiss, Impression argued that Lexmark had exhausted its U.S. patent rights in the
cartridges by its initial sales of them. The district court granted Impression’s motion to dismiss for the
activity relating to restricted cartridges sold in the United States, finding that post-sale restrictions do
not prevent patent exhaustion under the Supreme Court’s decision in Quanta. By contrast, the district
court found that Lexmark did not exhaust its patent rights when it sold cartridges internationally,
despite the Supreme Court’s decision in Kirtsaeng.
Both parties appealed. The Federal Circuit sua sponte took the case en banc.
Patent Exhaustion — Domestic Sales
The Federal Circuit began its analysis of whether the domestic cartridge sales resulted in patent
exhaustion by revisiting the 1992 Mallinckrodt decision. In that case, a patentee sold medical devices to
hospitals subject to a single-use restriction. When hospital purchasers acquired the used medical devices
and reconditioned them for reuse, Mallinkrodt brought a patent infringement lawsuit. The hospital
purchasers responded that Mallinkrodt had exhausted its patent rights when it sold the devices to the
hospitals. The Federal Circuit disagreed, holding that a patentee can avoid exhausting its patent rights if
the patentee places post-sale conditions on the patented items that it sells. The Federal Circuit
explained that “selling a patented article subject to a single-use/no re-sale restriction that is lawful and
clearly communicated to the purchaser” does not “give the buyer, or downstream buyers, the
resale/reuse authority that has been expressly denied.” (Lexmark at 8). (Lexmark at 28).
The Federal Circuit then reviewed the Supreme Court’s 2008 Quanta decision. In that decision, the
Supreme Court focused on the sale of patented microchips by an authorized licensee, not a patentee,
and decided that “exhaustion applies to method claims.” (Lexmark at 29). The Federal Circuit held that
Quanta did not require overturning Mallinckrodt, nor finding that Lexmark exhausted its patent rights
despite the post-sale restrictions it placed on its cartridge sales. The Federal Circuit emphasized that
Quanta did not involve a patentee’s sale nor any type of conditional sale. (Lexmark at 28-29). Moreover,
the court noted that the Supreme Court patent exhaustion cases cited in Quanta do not address a
patentee’s post-sale restrictions. (Lexmark at 31-37).
The Federal Circuit then devoted 21 pages to countering the position set forth in the government’s
amicus brief that sales restrictions can never preserve patent rights. In doing so, the Federal Circuit
analyzed additional Supreme Court case law stretching back to the 1850s and found that allowing a
patentee to preserve its rights against infringement by utilizing post-sale restrictions is consistent with
patent exhaustion precedent. (Lexmark at 38-42). The Federal Circuit also noted that Congress granted a
patentee the right to exclude others from practicing the patent, as opposed to the right to solely
practice the patent, and that therefore the sale of a patented device does not in itself affect the
patentee’s rights in the patent. (Lexmark at 42-46). The Federal Circuit then noted that no Supreme
Court decision has ever denied a patentee the ability to include permissible post-sale restrictions when
selling a patented article itself. (Lexmark at 46-52).
The Federal Circuit thus reaffirmed Mallinckrodt, finding that Quanta did not cover a patentee’s postsale restrictions on patented items. Moreover, after thorough analysis, the Federal Circuit found that
the holding in Mallinckrodt was consistent with all prior patent exhaustion precedent.
Patent Exhaustion — International Sales
The Federal Circuit began its analysis of whether international sales exhaust a patentee’s rights by
reviewing the 2001 decision in Jazz Photo. In that decision the Federal Circuit 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 in the absence of
patentee-conferred authority.” (Lexmark at 8). In Jazz Photo, the patentee, Fuji Photo Film, sold
disposable cameras in the U.S. and internationally. Jazz Photo refurbished used disposable cameras
overseas and imported them back into the United States for sale. The court held that the patentee’s
patent rights were not exhausted for the cameras initially sold overseas because patent exhaustion
occurs only upon the first sale within the United States. (Lexmark at 61).
The Federal Circuit then analyzed the Supreme Court’s 2013 decision in Kirtsaeng. In that decision, the
Supreme Court interpreted §109(a) of the Copyright Act, which allows the owner of a lawfully created
copy of a copyrighted work to re-sell the copy regardless of the place of manufacture, including copies
made internationally. (Lexmark at 63-71).
The Federal Circuit then held that Kirtsaeng’s interpretation of the Copyright Act does not apply to
patent law. First, the Federal Circuit noted that the Patent Act and Copyright Act grant different rights
and are not similar in scope or application. Specifically, the Patent Act grants a right to “exclude,” unlike
the Copyright Act. [Lexmark at 64]. Second, the Federal Circuit noted that the statutory provision
analyzed in Kirtsaeng has no counterpart in Patent Law. Moreover, the interpretation of that provision
does not hinge on the location of the first sale of the copy, so it is inapplicable to patent exhaustion
analysis. (Lexmark at 64-68). Third, the Federal Circuit explained that the copyright statute focuses on a
copyrighted work’s location of manufacture, which is not a factor in patent exhaustion analysis, and
therefore concerns a set of inapplicable, copyright-specific issues. (Lexmark at 69-71). Therefore, the
Federal Circuit found that Kirtsaeng is not controlling for patent exhaustion analysis.
The Federal Circuit then analyzed the logic and rationale of the statutory grant of patent rights. The
court found that the “statute gives patentees the reward available from American markets” and
therefore foreign sales cannot be a basis for patent exhaustion because a “patentee cannot reasonably
be treated as receiving that reward from sales in foreign markets.” (Lexmark at 71-73). Moreover, the
court highlighted the substantial differences in obtaining patent rights as compared to copyrights, i.e.
patents are awarded on a region-by-region basis after a lengthy examination process while copyright
protection is granted globally upon creation. (Lexmark at 74-81). The court also provided a thorough
analysis of statutory provisions and case law to show that the Jazz Photo holding is consistent with
historical precedent. (Lexmark 82-92).
In short, the Federal Circuit reaffirmed Jazz Photo, finding that the Supreme Court’s copyright opinion in
Kirtsaeng was not applicable to a patent exhaustion analysis. Importantly, the court enumerated the
numerous differences between patent and copyright law, in turn highlighting the general inapplicability
of copyright concepts to patent law jurisprudence.
Dissent
In dissent, Judge Timothy B. Dyk, joined by Judge Todd M. Hughes, asserted that “Mallinkrodt was
wrong when decided” and “cannot be reconciled with” Quanta and that “a foreign sale does result in
exhaustion if an authorized seller has not explicitly reserved the United States patent rights.” (Dissent at
2).
As to patent exhaustion for domestic sales, Judge Dyk argued that the common law and historical
Supreme Court precedent supports a finding that patent rights are always exhausted upon the sale of a
patented item in the United States and that Quanta reiterated this rule. (Dissent at 2-13). In view of this
clear precedent, he declared that the “majority’s justifications for refusing to follow Supreme Court
authority establishing the exhaustion rule misconceive our rule as a subordinate court.” (Dissent at 1320).
As to patent exhaustion for international sales, Judge Dyk disagreed with the majority’s analysis of
Supreme Court precedent, which he argued clearly shows that the patent exhaustion inquiry should
focus on whether the patentee reserved its U.S. rights at the time of the international sale. (Dissent at
20-24). He also acknowledged the difference between copyright and patent law, but argued that
“Kirtsaeng provides significant guidance and cannot be dismissed as simply a copyright case.” (Dissent at
26-30).
Lexmark’s Impact
On its face, Lexmark merely reaffirms the Federal Circuit’s holdings in Mallinckrodt and Jazz Photo. The
court’s patent exhaustion precedent regarding both domestic and international sales thus lives on, at
least for now. The Federal Circuit’s decision, however, foreshadows the potential for a future showdown
in the Supreme Court and, perhaps, another retooling of well-established Federal Circuit precedent by
the Supreme Court.
The majority’s 99-page opinion provides a thorough and meticulous analysis of Federal Circuit
precedent, Supreme Court precedent, statutory interpretation and policy considerations, as well as an
examination of the applicability of copyright principles to patent law. As such, the opinion can be viewed
as an attempted bulwark against any Supreme Court consideration of patent exhaustion issues. By
contrast, the dissent’s criticism of the majority as disregarding Supreme Court precedent and forgetting
its role as a “subordinate court” can certainly be viewed as an invitation to the Supreme Court to step in
and review the Federal Circuit’s precedent. The government’s opposition to the use of post-sale
restriction to avoid patent exhaustion is also likely to weigh on the Supreme Court in deciding whether
to grant certiorari. If the Supreme Court agrees to review the Lexmark decision, the case would provide
another opportunity to continue the recent trend of paring back the ability of patent holders to
successfully pursue infringement litigation.
Pending potential Supreme Court review, Lexmark highlights some best practices that patent holders
should follow to avoid patent exhaustion. In particular, although the Federal Circuit has held that
international sales do not result in exhaustion, a patent holder would still be well advised to clearly
reserve its U.S. patent rights in making sale abroad. While such a reservation may not currently be
necessary retain U.S. patent rights, it would be sufficient even under the more restrictive approach
favored by the dissent.
Furthermore, given the possibility that the Supreme Court will address patent exhaustion issues in the
near future, patentees may wish to explore alternative contractual relationships with “buyers,” such
that the patentee retains the title to any patented goods. In such relationships (e.g. a cable company
leasing a DVR to cable customers) there is no first sale, thereby rendering the exhaustion issue moot.
Such a solution may not be suitable for every type of patented good, but it may provide a workaround
that provides certain patentees security in an unstable patent exhaustion landscape.
—By Scott W. Doyle, Jonathan R. DeFosse and Ted M. Nissly, Fried Frank Harris Shriver & Jacobson LLP
Scott Doyle is a partner in Fried Frank's Washington, D.C., office and head of the firm's intellectual
property litigation group. Jonathan DeFosse is a partner and Ted Nissly is an associate in the firm's
Washington office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
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