United States: Supreme Courts Lexmark Decision Expands Scope Of Patent Exhaustion Defense

For the fifth time this session, and following fast on the heels of its landmark decision in TC Heartland v. Kraft Foods earlier in May, the Supreme Court again reversed the Federal Circuit. The case, Impression Products, Inc. v. Lexmark International, Inc., significantly expands the scope of the patent exhaustion doctrine. The doctrine of patent exhaustion limits the rights that remain available to a patentee following the initial authorized sale of a patented item. In a 7-1 opinion issued on May 30, the Supreme Court reversed the Federal Circuit analysis concerning both domestic and foreign sales, overturning more than two decades of precedent at the lower courts. It held that "a patentee's decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale."

Background

This case arises from a dispute between Lexmark, a manufacturer of printer cartridges, and resellers of its cartridges. Lexmark makes proprietary toner cartridges for printers, which it markets and sells both internationally and domestically. The Lexmark cartridges are sold either at full price, or at a discounted rate under its return program. Each return program cartridge carries a contractual single-use/no-resale obligation on the purchaser not to refill the cartridge with toner and reuse it. Other companies known as "re-manufacturers" acquire empty Lexmark cartridges (including ones sold under the return program) from purchasers in the United States and abroad, refill them with toner, and then resell them at lower prices.

Lexmark brought a patent infringement suit against several of these resellers. The litigation proceeded until only a single count of infringement remained against a single defendant, Impression Products. Impression Products did not contest the enforceability of Lexmark's patents, or that the patents covered the cartridges that Impression Products imported and sold. Rather, Impression Products contested liability based solely on the defense of patent exhaustion and moved to dismiss Lexmark's claim of infringement with respect to both cartridges sold domestically and those sold abroad.

With respect to cartridges that Lexmark sold domestically, the district court found that the doctrine of patent exhaustion barred Lexmark's claims, even for cartridges subject to the post-sale use restrictions of Lexmark's return program. For this holding, the district court relied on the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617 (2008), which the district court found overruled existing Federal Circuit precedent on patent exhaustion. With respect to cartridges that Lexmark sold internationally, however, the district court denied Impression Products' motion to dismiss and held that patent exhaustion did not apply. In particular, the district court found that Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519 (2013), which held that there was no geographical bar to the first sale doctrine under the Copyright Act, did not override Federal Circuit precedent rejecting theories of international patent exhaustion.

Both parties appealed. On appeal, an initial panel of the Federal Circuit sua sponte requested a poll on whether to consider this case en banc in the first instance, and a majority of the judges who are in regular active service voted for sua sponte en banc consideration. Sitting en banc, the Federal Circuit ruled in favor of Lexmark on both the domestic and international exhaustion issues, holding that the neither Quanta nor Kirtsaeng overruled the limits on patent exhaustion under prior Federal Circuit case law.

The Supreme Court Ruling: U.S. Sales

The Lexmark Court first considered the question of whether a patentee that sells a patented article domestically subject to express restrictions on a purchaser's right to reuse or resell the product may then enforce those restrictions by bringing a lawsuit for patent infringement. In examining this question, the Lexmark Court drew heavily from its prior patent exhaustion decisions in Quanta and United States v. Univis Lens Co., 316 U. S. 241 (1942). These cases uniformly held that the first authorized sale in the U.S. of a material object terminates patent rights associated with that object and leaves a patentee without the ability, under patent law, to control the use or disposition of the product after the initial sale. These cases, however, left open the possibility that a patentee may still be able to place contractual restrictions on the use of the items it sold.

With Lexmark, the Supreme Court slammed that door shut. Indeed, all eight Justices agreed that—under the patent exhaustion doctrine—Lexmark's sale of the cartridges extinguished the asserted patent rights, notwithstanding the contractual restrictions on reuse Lexmark attempted to place on the articles prior to sale. The Court based its decision not only on its prior patent exhaustion cases, but also on its copyright ruling in Kirtsaeng, which addressed the first sale doctrine codified at Section 109(a) of the Copyright Act. It explained its view that: "This well-established exhaustion rule marks the point where patent rights yield to the common law principle against restraints on alienation."

The Supreme Court Ruling: Foreign Sales

Next, the Lexmark Court examined whether the doctrine of patent exhaustion applied to authorized sales of a product outside the United States and beyond the territorial reach of the Patent Act. The Federal Circuit had taken the view that exhaustion only applies following an authorized first sale within the United States. This had permitted patentees to enforce contractual restrictions up to the point of first authorized import.

On the question of international exhaustion, the Supreme Court revisited the teaching of its 2013 Kirtsaeng decision. Kirtsaeng held that the first sale doctrine under the Copyright Act applies to authorized copies of a copyrighted work sold abroad. And, with Lexmark, the Supreme Court extended the Kirtsaeng holding to the patent context.

Writing in dissent, Justice Ginsburg disagreed with the majority on its patent exhaustion holding. As the protections of the Patent Act have no extraterritorial effect, Ginsburg argued, "it makes little sense to say that such a sale exhausts an inventor's U.S. patent rights." This echoed the same position that Justice Ginsburg took when writing in dissent in Kirtsaeng, where she argued that a foreign sale should not exhaust United States copyright protections.

Interplay with Prior Ruling on Scope of Patent Rights Exhausted

The Lexmark ruling builds upon the Court's earlier Quanta decision. In its 2008 Quanta decision, the Supreme Court considered the question of what patent rights were in fact exhausted when an article is sold, tackling a complex fact pattern where the asserted patents covered a system, only a portion of which had been sold in the U.S., and methods, which had not been practiced in the U.S. prior to practice by the end user. There, the Federal Circuit had found that exhaustion may apply to apparatus claims where the sale is of a component of a patented apparatus, if there are no other substantial uses of the component. But it had also held that the sale of a device cannot exhaust a patent holder's rights in a method because the doctrine of patent exhaustion does not apply to method claims at all.

The Supreme Court unanimously reversed the Federal Circuit's holding as to method claims. The Court noted that, while "[i]t is true that a patented method may not be sold in the same way as an article or device, [m]ethods nonetheless may be 'embodied' in a product, the sale of which exhausts patent rights." Quanta also held that the patent exhaustion doctrine applied if the item sold is only a component of a device but "the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts." In other words, if an item "embodies essential features of the patented invention," including method claims, and "their only reasonable and intended use was to practice the patent," the sale of the item will exhaust the claim.

The Lexmark decision does nothing to disturb the Quanta framework. Accordingly, under the combination of Lexmark and Quanta, patent exhaustion applies where critical components of a claimed apparatus or method are sold by the patentee either domestically or internationally.

Lexmark Limitations on Exhaustion

The Lexmark Court suggested two situations where patent exhaustion may not apply.

First, because the doctrine depends on an initial sale, it may not apply where a patentee distributes a patented article pursuant to license, as opposed to in an outright sale. As the Court noted, "[a] patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale." After all, "a license is not about passing title to a product, it is about changing the contours of the patentee's monopoly." By contrast, "[p]atent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace." It is, of course, common to distribute software, firmware, and other technology via license rather than sale, and thus patent exhaustion may be inapplicable for such distributions.

Second, patent exhaustion may also not apply where the unauthorized sale of a patented article occurs. The Lexmark Court addressed this exception in discussing General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 175 (1938), a key precedent that the Federal Circuit relied upon for its holding that a patentee could use post-sale restrictions to avoid exhaustion. The General Talking case concerned a situation where a patent licensee knowingly made sales outside the scope of its license. There, the Supreme Court had held that, because the licensor did not authorize the licensee's sales, those sales did not extinguish the licensor's patent rights, and the patentee could still bring suit for infringement. The Lexmark Court found the unauthorized nature of the patentee's sales distinguished General Talking totally: "if a patentee has not given authority for a licensee to make a sale," the Court reasoned, "that sale cannot exhaust the patentee's rights."

Takeaways

The specific exceptions for licenses and unauthorized sales aside, the Lexmark decision lays down a clear rule of broad application: "When a patentee chooses to sell an item, that product is no longer within the limits of the monopoly and instead becomes the private, individual property of the purchaser, with the rights and benefits that come along with ownership." And, when used in combination with the teaching of Quanta, Lexmark will give resellers and other patent defendants a powerful defense against claims by plaintiffs that sell patented articles and components.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
31 Aug 2017, Seminar, California, United States

In this legal series for technology startups, each session will cover an important legal topic relevant to your technology startup company such as securing finance, executive compensation, corporate formation, and intellectual property.

6 Sep 2017, Seminar, California, United States

The headlines have been quick to proclaim the Supreme Court’s recent decision in TC Heartland v. Kraft Foods as a “game-changing” event that is “already remaking the patent litigation map.”

11 Sep 2017, Seminar, Chicago, United States

As the world’s economies grow increasingly integrated, the international tax laws of the U.S. impact a greater percentage of businesses and transactions. These international tax rules affect not only large U.S. and foreign-based multinationals, but also increasingly affect mid-sized and smaller firms, financing transactions, mergers and acquisitions, and other commercial activity.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.