The Patent Act describes infringement with the following deceptively simple sentence: “Except as otherwise provided in [the Patent Act], whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” This infringement rule has its limits, of course, including the “patent exhaustion” or “first sale” doctrine—once a sale of a patented item is made or authorized by the patent holder, the patent holder’s rights are exhausted, and the buyer acquires the “authority” to engage in acts involving the item, such as resale, that would be infringing acts in the absence of such authority. But what if the patent owner imposes a condition on the initial sale of the item, such as that the item may be used only once and may not be resold, and the item is resold despite this restriction?
On February 12, the Court of Appeals for the Federal Circuit (the “CAFC“) ruled, in Lexmark International, Inc. v. Impression Products, Inc., that a patent holder did not exhaust its patent rights under the terms and conditions that it imposed with respect to sales of its patented products (here, toner cartridges for printers). In so doing, the court: (i) reaffirmed its prior rulings on the exhaustion issues presented; and (ii) carefully wove a path around more recent Supreme Court decisions that some believe had effectively overruled those prior CAFC rulings. The Supreme Court now has the opportunity to clarify the resulting hodgepodge of appellate court rulings on patent exhaustion, as Impression Products, Inc. (“Impression“), which lost the case at the CAFC, has filed a petition with the Supreme Court for a review of the CAFC’s decision.
Lexmark International, Inc. (“Lexmark“) makes and sells printers and toner cartridges for its printers and owns a number of patents covering its cartridges and their use. It offers its buyers the choice of buying: (i) a “Regular Cartridge” at full price, in which case the buyer may reuse or resell the cartridge without restriction; or (ii) a “Return Program Cartridge,” at a discount of approximately 20 percent, subject to a single-use/no-resale restriction. Buyers may not reuse a Return Program Cartridge after the toner runs out and may not transfer it to anyone but Lexmark once it is used. According to the CAFC, “There is no dispute about the adequacy of notice to resellers as well as end users or the binding nature of the Lexmark-reseller agreements.” Lexmark sells its cartridges to end users as well as to “resellers” (such as distributors, dealers, and wholesalers). Finally, Lexmark sells its cartridges both in the U.S. (Return Program Cartridges only) and abroad (both Regular Cartridges and Return Program Cartridges). Each cartridge contains a chip that communicates with the printer in order to prevent used cartridges from being reused.
According to the CAFC, third parties successfully “hacked” the chips installed in the cartridges and replaced them with unauthorized chips that fooled Lexmark’s printers into thinking that the Return Program Cartridges could be refilled and reused. Several companies gather spent cartridges, replace the microchips, refill the cartridges, and sell them to resellers like Impression for marketing to consumers. Impression both sold used cartridges it had obtained in the U.S. (all of which were Return Program Cartridges and were initially sold by Lexmark) and imported into the U.S. both types of cartridges, which Lexmark initially had sold overseas.
Lexmark sued Impression in United States District Court for the Southern District of Ohio for infringement of its patents—for resale of the Return Program Cartridges in violation of the single-use/no-resale restriction, and for importation into the U.S. of both types of cartridges. Impression filed motions to dismiss the infringement claims, and District Court Judge Barrett granted the motion as to the Return Program Cartridges (finding that the patent rights had been exhausted by Lexmark’s initial sale) but denying the motion to dismiss as to the imported cartridges (finding no exhaustion). Both parties appealed, and the CAFC ordered that the appeal be heard and decided by the entire court, rather than the typical three-judge panel. The purpose of this rare procedural step was to require the entire CAFC consider its prior rulings in the area of patent exhaustion in light of more recent Supreme Court decisions on the subject and to determine whether its prior rulings were still viable.
CAFC , Supreme Court Precedents
In a 1992 case involving a single use/no resale restriction on a patented product (a device used to diagnose and treat pulmonary disease), Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), the CAFC upheld the restriction imposed by the patent holder, holding that there was no exhaustion of patent rights upon first sale. Almost a decade later, the CAFC ruled that there was no exhaustion (and, thus, that the patents were infringed) when patented single-use cameras manufactured by Fuji Photo Film Co., Ltd. were sold overseas, refurbished, and imported into the United States. Jazz Photo Corporation v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001).
In the interim, however, the Supreme Court has decided two significant cases in the “first sale” area. In Quanta Computer, Inc., v. LG Electronics, Inc., 553 U.S. 617 (2008), the Court decided a case involving the license by LG Electronics (“LG“) of its patent rights to a chip maker (Intel) under a license agreement that stated that no rights were granted to any third party to combine either LG’s or Intel’s products with products acquired from a source other than LG or Intel. Notably, the license agreement purported not to alter any of the usual rules of patent exhaustion. Intel sold its licensed chips to a computer maker (Quanta) for inclusion in its computers, and LG sued Quanta for infringement of its patents. The Supreme Court held that the sale by Intel of its chips to Quanta was an “authorized” sale under the license agreement and thus exhausted LG’s patent rights. See our previous Alert on the LG case here. The CAFC, in its Lexmark decision, however, stated that the ” facts defining the issues for decision [in LG], and the issues decided, were at least two steps removed from the [Lexmark] case. There were no patentee sales, and there were no restrictions on the sales made by the licensee.” Accordingly, the CAFC concluded that its decision in Mallinckrodt survived the Supreme Court’s ruling in LG.
In 2013 The Court was faced with another “first sale” case, this one involving not alleged patent infringement but the resale of books protected by U.S. copyright. In Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. ____, the family of a foreign student attending college in the United States purchased English-language versions of textbooks in Thailand and shipped them to the student in the U.S. for resale. The foreign-made books, although authorized by the copyright holder (and were not pirated versions), contained a statement that they are not to be taken into the United States (where the publisher sells them at a higher price than in Asia). The publisher sued the student for copyright infringement, and the student defended on the basis of the “first sale” doctrine. The Copyright Act contains a specific provision not found in the Patent Act that permits the owner of a particular copy of a copyrighted work to sell or otherwise dispose of that copy without infringing. The Supreme Court ruled that the importation and sale in the United States by the student did not infringe the copyright, as the resale was permitted by this statutory provision. The CAFC made much of the differences between the Copyright Act and the Patent Act in determining that Kirtsaeng did not implicitly overrule the CAFC’s earlier decision in Jazz Photo.
As mentioned above, Impression has filed a petition with the Supreme Court to request a review of the CAFC’s Lexmark decision. It remains to be seen whether the Supreme Court will grant Impression’s petition. If it does not (or, perhaps, even if it does), patent owners that sell or license their products to others and desire to place restrictions on the terms of the sale or license will continue to face uncertainty as to the validity of their sale or license terms. These patent holders would be advised to develop a sales or licensing strategy and negotiate the terms of their agreements, with the assistance of their counsel, that will best suit their objectives (and maximize the chances of being validated if ever challenged in court) in an environment of uncertainty.