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IP Alert: Federal Circuit to Tackle Significant Patent Exhaustion Issues En Banc

April 17, 2015

The doctrine of patent exhaustion restricts patent owners from asserting patent rights against a patented article after the initial sale of the article by or on behalf of the patentee. The exhaustion doctrine is subject to a number of limitations and qualifications, and it has been evolving recently in light of several recent court decisions. 

On April 14, 2015, in Lexmark International v. Impression Products, Inc., the Court of Appeals for the Federal Circuit ordered an en banc hearing to consider two issues pertaining to patent exhaustion. Specifically, the court will consider whether the sale of a patented article outside of the United States gives rise to patent exhaustion within the U.S., and whether sales of a patented article made under a “single-use-and-return” contractual restriction will exhaust the patent owner’s rights to control the sale and use of that patented article.

The Lexmark decision is an appeal from two stipulated judgments issued by the U.S. District Court for the Southern District of Ohio. Those stipulated judgments are based on one order denying a motion to dismiss plaintiff Lexmark’s complaint as it alleges patent infringement of certain products initially sold overseas, and on another order granting a motion to dismiss the Lexmark’s complaint as it alleges infringement of certain products sold subject to a single-use contractual restriction. 

Lexmark is a major manufacturer of printers and toner cartridges used in those printers. It 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.

In the district court, Impression moved to dismiss Lexmark’s complaint. Impression argued that the initial sales of Lexmark’s cartridges outside the United States exhausted Lexmark’s patent rights. Impression also 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.

The district court held that the lawsuit could proceed. In regard to the extraterritorial sales, the court turned to a 2001 Federal Circuit decision, Jazz Photo Corp. v. United States International Trade Commission. In that case, the Federal Circuit had held that an authorized first sale must have occurred within the United States 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. Rejecting Impression’s arguments, the district court noted that the principals of copyright law and patent law are not necessarily interchangeable, and that the territoriality requirement of the Copyright Act is explicitly written into the statute and is grounded in judicial precedent. Conversely, no such statutory provision or legislative history of the patent exhaustion doctrine favored a non-geographical interpretation. 

The district court did, however, grant Impression’s motion to dismiss relating to the cartridges sold under the Return Program. Another 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 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. The district court held that Lexmark had not established that the distributors of the Return Program cartridges were restricted or conditioned, and therefore the sale of the cartridges exhausted Lexmark’s patent rights.

Following a stipulation of the parties, the district court then entered a stipulated judgment of infringement in favor of Lexmark with respect to the cartridges first sold outside the U.S., and it entered a stipulated judgment of non-infringement in favor of Impression with respect to the cartridges sold under the Return Program. Both parties appealed.

After hearing oral arguments from both parties, the Federal Circuit sua sponte ordered en banc consideration of the following 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 en banc Lexmark decision will be another significant decision under the doctrine of patent exhaustion. We expect the court’s ruling to be of interest to any parties that redistribute products or license parties to redistribute patented products within the U.S. 

Fitch Even attorneys will report on the Federal Circuit’s ruling on this case in a future alert. For more information, please contact Fitch Even partner Michael J. Krautner, the author of this 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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