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Federal Circuit Rejects International Exhaustion in Lexmark, Distinguishes Scotus' Copyright Ruling in Kirtsaeng

2/16/2016 Articles
The en banc Federal Circuit has issued a highly anticipated decision in Lexmark Intern., Inc. v. Impression Products, Inc., No. 2014-1617, slip op. (Fed. Cir. Feb. 12, 2016) (en banc).  The patent friendly decision reaffirms two key prior Federal Circuit opinions allowing patent holders to restrict downstream use of their products, and rejects the notion that a foreign sale exhausts U.S. patent rights – notwithstanding a recent Supreme Court decision holding to the contrary in the copyright context.  See Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013).  Lexmark will almost assuredly be appealed to the Supreme Court, which may well weigh in to determine whether the Federal Circuit has (once again) refused to properly apply its precedent.

Background

The judicially created doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.  Even following the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), issues relating to the scope of the patent exhaustion doctrine and the extent to which patent holders can place limits on its applicability and restrict the downstream use of their products have continued to vex patent litigants and the courts. 

The Lexmark Decision

In Lexmark, the Federal Circuit addressed (1) whether to overrule Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), and hold that an initial authorized sale of a patented product outside of the United States exhausts the patent rights of the patent holder just as a sale within the United States would; and (2) whether to also overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), in which the Federal Circuit had held that patent owners could place restrictions on sales of patented goods (for instance as “single use only”).

In a 10-2 decision, the Federal Circuit re-affirmed both Jazz Photo and Mallinckrodt.  The 99-page majority opinion written by Judge Taranto holds that these decisions remain good law notwithstanding the Supreme Court’s decisions in Kirtsaeng and Quanta.  In particular, the majority holds

First, we adhere to the holding of [Mallinckrodt], that a patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied….  Under Supreme Court precedent, a patentee may preserve its § 271 rights through such restrictions when licensing others to make and sell patented articles.  Mallinckrodt held that there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself. [¶]  Second, we adhere to the holding of [Jazz Photo], 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.  Jazz Photo ‘s no exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee’s sale presumptively exhausts its rights in the article sold.  A buyer may still rely on a foreign sale as a defense to infringement, but only by establishing an express or implied license – a defense separate from exhaustion, as Quanta holds – based on patentee communications or other circumstances of the sale.  We conclude that Jazz Photo’s no-exhaustion principle remains sound after the Supreme Court’s decision in [Kirtsaeng], in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing domestic acts.  Kirtsaeng is a copyright case ….

Slip op. at 9.

In distinguishing its holding here from Kirtsaeng, the Lexmark opinion emphasized an important distinction between the statutory scheme governing copyrights and that governing patents.  Id. at 21-22.  Whereas Congress included an exhaustion provision in the Copyright Act (see 17 U.S.C. § 109(a)), no such “congressionally prescribed exhaustion rule” exists in the Patent Act.  Id.

The dissent, written by Judge Dyk and joined by Judge Hughes, includes a discussion of numerous Supreme Court opinions, which the dissent claims mandate that Mallinckrodt and Jazz Photo be overruled.  The discussion of these same cases in both the majority and dissenting opinions is a fascinating example of judges emphasizing particular facts and holdings of the same cases to support their differing views.

Now the parties will fight on to the Supreme Court, which will once again have the opportunity to reject a patent-friendly Federal Circuit decision because it fails to adhere to Supreme Court precedent.  Notably, Justice Scalia (along with Justices Ginsburg and Kennedy) dissented from the majority opinion in Kirtsaeng, so it remains to be seen how his death may impact whether and how the Supreme Court weighs in on Lexmark.  Until the Supreme Court’s review, however, patent holders will continue to be able to place restrictions on the downstream use of their products.

Lexmark was the subject of our IP Roundtable discussions in December 2015: Lexmark v. Impression Products: Will (and Should) The En Banc Federal Circuit Move to International Patent Exhaustion? View outline.

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