En Banc Federal Circuit Rejects Rule of Automatic Exhaustion: Four Things You Should Know About Lexmark v. Impression

On February 12, 2016, the en banc Federal Circuit rejected arguments that foreign sales and sales under a single-use license automatically exhaust patent rights in a patented article. The U.S. government and a toner-cartridge remanufacturer had urged the Court, in this closely watched case, to roll back two of its exhaustion precedents in light of recent U.S. Supreme Court decisions.

In a 10-2 decision authored by Judge Richard Taranto, the Court refused, agreeing instead with printer manufacturer Lexmark International in its attempt to enforce patent rights in its toner cartridges. Under this decision—which stretched to 130 pages, counting Judge Dyk’s dissent—sales by patentees and licensees alike may contractually limit the scope of the patent rights conveyed to customers, and may sell patented products abroad without automatically or presumptively forfeiting their U.S. patent rights.

Lexmark’s infringement suit addressed two types of cartridges: “single-use” cartridges Lexmark initially sold in the United States, at a reduced price, subject to a license that required customers to use the cartridge only once; and cartridges Lexmark sold abroad. Impression acquired spent cartridges, replaced the microchips that limit the cartridges’ use with hacked chips, refilled the cartridges with its own replacement toner, and sold the cartridges in the United States without authorization.

When Lexmark sued for infringement of its exclusive right to sell the patented cartridges in the United States, Impression’s only defense was that Lexmark’s initial sale of the cartridges terminated, or “exhausted,” Lexmark’s right to enforce its U.S. patents. The exhaustion doctrine provides that the buyer of a patented article may, in certain circumstances, resell the article without infringing the patent. The district court held that the doctrine prevented Lexmark from enforcing the single-use restrictions in a patent-infringement suit, but allowed Lexmark to enforce its patent rights in foreign-sold cartridges resold by Impression in the United States.

On appeal, a three-judge panel of the Federal Circuit sua sponte ordered en banc briefing and argument. The Court also called for the views of the U.S. government, which sided (mostly) with Impression: It contended that patentees may not impose limited-use restrictions on articles they sell, and that foreign sales presumptively exhaust U.S. patent rights, though patentees may reserve their U.S. rights if they do so explicitly. The Federal Circuit disagreed—holding that Lexmark’s patent rights were not exhausted by either domestic sales subject to the single-use condition, or by foreign sales absent the patentee’s express release of its patent rights.

Here are four highlights from the Federal Circuit’s decision:

1. The “judge-made” exhaustion doctrine is rooted in the text of the Patent Act. There is no “exhaustion” provision in the Patent Act. As a result, many scholars and lawyers have treated the exhaustion doctrine as a judge-made defense that courts may shape in common-law fashion. The Federal Circuit’s decision, however, explained that any rights buyers have to make, sell and use patented articles derives from their “authority” to do so under the text of Section 271(a) of the Patent Act:

“[U]nless another provision of the Act provides otherwise, whoever ‘without authority’ during the term of a patent commits certain acts—‘makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention’—‘infringes the patent.’ 35 U.S.C. § 271(a).” 

Lexmark makes clear, therefore, that exhaustion doctrine is not simply a matter of judge-made law subject to congressional revision, but is in fact a direct reflection of Congress’s requirement that certain acts constitute infringement if done “without authority” from the patentee. The Federal Circuit expressly invoked congressional supremacy in tying Impression’s right to resell cartridges to the “authority” Lexmark granted in selling the cartridges in the first place.

2. Patent rights are distinctly territorial. Central to the foreign-sales issue was whether U.S. law would treat an unrestricted sale abroad to be a “sale” for purposes of U.S. exhaustion doctrine. In answering “no,” the Federal Circuit recognized that the basis for exhaustion is the principle that a sale compensates a patentee for the value of the patent rights in a product. That reward, the Court held, is the reward for parting with U.S. patent rights—and the same value cannot be presumed from the sale of a product abroad. Not only are patented products priced very differently between markets, but different legal regimes may significantly expand or contract the enforceable patent rights available in a given market. Just as U.S. law does not control patent rights abroad, the sale of patented items subject to foreign laws does not control domestic patent rights by exhausting the patentee’s exclusive rights in the United States.

3. Exhaustion doctrine does not distinguish the sales of practicing and non-practicing entities. At the core of the U.S. government’s position was a distinction between licensees and patentees. Under longstanding Supreme Court precedent, sellers may impose use restrictions on patented articles if they are licensed by the patentee to make or sell those items. But patentees that sell their patented articles themselves, the government argued, may not impose the same restrictions. In no uncertain terms, the Federal Circuit rejected this distinction as “unjustifiably formalistic,” “not founded in relevant economic substance,” and likely to “introduce practical problems” in distinguishing patentees, assignees, and exclusive and non-exclusive licensees. Future Federal Circuit litigants confronting arguments based on their status as practicing or non-practicing entities can certainly expect to confront Lexmark’s rejection of such distinctions, absent a firmer basis in text or precedent than was found here.

4. The Federal Circuit resists the invitation to throw out its precedent in light of recent Supreme Court decisions. Impression’s exhaustion arguments ran squarely and unapologetically against the law of the Federal Circuit. The Court’s 1992 decision in Mallinckrodt v. Medipart held that single-use restrictions are enforceable under patent law, so long as they did not offend other legal limits found in, for example, contract or antitrust law. And the Court’s 2001 ruling in Jazz Photo v. ITC established that the authorized sale of a U.S.-patented article abroad does not automatically exhaust U.S. patent rights if the product is subsequently brought into the United States.

Perhaps hoping to capitalize on well-publicized decisions of the U.S. Supreme Court reversing the Federal Circuit, Impression relied on two recent high-court opinions that, in Impression’s view, implicitly overturned Mallinckrodt and Jazz Photo. The Federal Circuit, however, disagreed. The Supreme Court’s 2008 decision in Quanta v. LG Electronics did not hold that any “authorized sale” exhausted patent rights regardless of use restrictions, the Federal Circuit held, because that case did not involve a limit on the buyer’s use and because the Supreme Court did not accept the Solicitor General’s express request in that case to overturn Mallinckrodt. And the Supreme Court’s 2013 copyright decision in Kirtsaeng v. John Wiley & Sons did not announce a foreign-exhaustion rule that extended to patent law, because the Court’s opinion rested on text and precedent unique to the Copyright Act and because patent regimes around the world are not nearly as harmonized as the copyright laws of most nations.

Many observers expected the Federal Circuit to embrace Impression’s arguments based on Quanta and Kirtsaeng in hopes of avoiding further confrontations with the Supreme Court. Instead, the Federal Circuit’s opinion meticulously distinguished those decisions and grounded the Court’s decision in a long line of Supreme Court and lower-court precedents extending back to the 19th Century.

Sidley’s Constantine Trela, Jr. argued the case for Lexmark before the en banc Court. Robert Hochman, Benjamin Beaton and Josh Fougere also represented Lexmark. The case is Lexmark International, Inc. v. Impression Products, Inc., No. 14-1617. 

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