Boundaries of Patent Exhaustion Defense Explored, Decided (For Now) In <i>En Banc Lexmark</i> Decision

Notwithstanding the myriad hypotheticals and factual scenarios presented to the court by the amicus curiae, the facts of Lexmark itself are simple and undisputed. Lexmark makes and sells patented printer cartridges both in the U.S. and abroad. All domestically-sold cartridges are sold at a discounted price, with a single-use/no-resale restriction imposed on the initial purchaser at the point of sale. Impression, meanwhile, acquires used Lexmark cartridges and resells them in the U.S. Lexmark sued Impression for patent infringement under 35 U.S.C. ”271(a) and (c), and Impression defended solely on the ground that Lexmark's initial “authorized” sales of cartridges exhausts its rights in those articles.

Before addressing the specific exhaustion issues at hand, the Lexmark majority opinion sets forth an analytical framework. Majority Opinion (Maj.) at 18-24. According to this framework, the exhaustion defense must be interpreted within the mandate of the 1952 Patent Act, which defines “infringement” under 35 U.S.C. '271(a) as making, using, selling, or importing patented articles “without authority.” Because, textually, the Patent Act provides no exhaustion rule, and no other exception to what is otherwise defined as “infringement” in '271(a), the majority concludes that the “without authority” language of '271(a) is the talisman of exhaustion. Maj. at 23.

With its statutory approach in mind, the majority first addresses Lexmark's domestic sales, the so-called ” Mallinckrodt issue.” In Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), a patent owner sold nebulizers to hospitals subject to a single-use restriction. Ignoring the single-use restriction, hospitals used the nebulizers and then transferred them to a third party reconditioner, who in turn refurbished and transferred them to a reseller. When the reseller sold the nebulizers in the U.S., the patent owner sued. The district court found that the reseller was liable as an infringer, and the Federal Circuit affirmed on the ground that the patent owner's rights were not exhausted by sales “conditioned” upon the single-use restriction. Id. at 703-09.

The Lexmark district court concluded that Mallinckrodt is no longer good law, citing Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Quanta involved a licensee's sale of patented microprocessors whereby the license agreement broadly authorized Intel to make and sell microprocessors, but also required Intel to provide notice to its purchasers that the license would not extend to certain specified uses. The Quanta Court concluded that notwithstanding the notice requirement, Intel's authority to sell the chips was not conditioned on the purchaser's ultimate use, and thus exhaustion applied to all of Intel's sales under the license. Id. at 638. As a general proposition, the Supreme Court explained that “[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article.” Id.

The Lexmark majority rejected the district court's conclusion concerning Mallinckrodt, noting that Quanta involved a notice requirement, not a post-sale restriction on use. Maj. at 29-32. In the majority's view, even if Quanta contains broad pronouncements that are arguably inconsistent with Mallinckrodt, those statements were not required for the Quanta holding and were not intended to have the “extraordinary doctrinal consequence” adopted by the district court. The majority further notes that the Quanta Court was squarely presented with the Mallinckrodt issue on the briefs and yet declined to address it, suggesting that the Court did not intend to overrule Mallinckrodt sub silencio. Maj. at 30-31. The dissent would hold otherwise, agreeing with the district court, Impression, the U.S. government, and numerous other amici that Mallinckrodt cannot be reconciled with Quanta. Dissent at 20.

The majority next canvasses older Supreme Court cases, going as far back as the mid-19th century, for direction on the Mallinckrodt issue, ultimately focusing on General Talking Pictures v. Western Elec. Co., 305 U.S. 124 (1938). In General Talking Pictures, the patent owner licensed a manufacturer to make and sell sound amplifiers for noncommercial use only . When the licensee sold amplifiers to a commercial movie theater, the patent owner sued and obtained a judgment of infringement against the theater , a holding that the Supreme Court affirmed. In the majority's view, General Talking Pictures stands for the proposition that patent owners can preserve patent rights after a first authorized sale by imposing post-sale use restrictions. Maj. at 41-42. The dissent points out, however, that General Talking Pictures involved an unauthorized sale by the licensee, which removes the possibility of exhaustion altogether. Dissent at 17-18. In response, the majority states that there is “no basis in the policy of the patent statute” for allowing patent owners to impose post-sale use restrictions on goods sold under limited license, while denying the same outcome when a patent owner sells patented goods itself without a licensee. Maj. at 42. Because the majority could find no Supreme Court decision compelling abdication of Mallinckrodt, and no basis in policy or the Patent Act to grant non-practicing entity owners stronger rights than practicing ones, it concludes that Mallinckrodt remains good law.

The second issue addressed in Lexmark involves Lexmark's foreign sales. Since 2001, the law of the Federal Circuit has been that “United States patent rights are not exhausted by products of foreign provenance.” Jazz Photo Corp. v. International Trade Comm'n, 264 F.3d 1094, 1105 (Fed. Cir. 2001). However, this holding came under increased scrutiny following Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013). In Kirtsaeng, the Supreme Court addressed foreign exhaustion in the context of the Copyright Act, and held that the lawful sale of a copyrighted work in Thailand exhausted the owner's rights in the United States. According to the Court, the Copyright Act does not modify the common law rule that once a copy of a work has been lawfully sold in the U.S. or abroad, “the buyer of that copy and subsequent owners are free to dispose of it as they wish.” Id. at 1355. This conclusion, the Court stated, is supported by the “impeccable historic pedigree” of the first sale defense, which favors free alienation of chattels and liberates courts from the “administrative burden of trying to enforce restrictions upon difficult to trace, readily movable goods.” Id. at 1363.

The Lexmark majority characterizes Kirtsaeng as an exercise of statutory interpretation unique to the Copyright Act. Maj. at 63-71. Although Kirtsaeng includes the Supreme Court's analysis of the common law principles of the first sale doctrine, the same analysis would not necessarily apply in the context of patent infringement under '271(a). The Lexmark dissent, too, agrees that Kirtsaeng does not overrule Jazz Photo, but only insofar as Jazz Photo holds that the foreign sale of a patented article will not necessarily exhaust the patent owner's U.S. rights. The dissent's view is that Kirtsaeng and other authorities counsel for a rule of “presumptive” foreign-exhaustion in the patent context, which presumption can be rebutted only by an express reservation of U.S. rights at the point of first sale. Dissent at 21, 29-30. As was the case on the Mallinckrodt issue, neither the majority nor the dissent identify Supreme Court or congressional guidance directly on point.

Conclusion

Although Lexmark's adherence to both Mallinckrodt and Jazz Photo is a blow to proponents of a robust patent exhaustion doctrine, Lexmark is not likely to be the final word. Lexmark's impact on international trade and commerce, coupled with powerful industry interest and a strong dissenting opinion, suggest that Supreme Court review is probable.

David Tellekson is a Partner in Fenwick & West LLP's Seattle office who focuses his practice on litigating patent cases and licensing disputes for clients in the areas of biotechnology, pharmaceuticals, polymer chemistry and medical devices. In addition to his trial work, he consults on patent strategy, opinions and due diligence. Phil Decker and Stefan Szpajda are associates in Fenwick & West LLP's Seattle office. Decker's practice emphasizes life sciences patent litigation and licensing. Szpajda focuses his practice on patent and trade secrets litigation.