- Federal Circuit Held No International Exhaustion of Patent Rights in a Product Sold Outside and Imported Back into the United States; Lawful Re-Sale or Use Restriction is Effective to Prevent Exhaustion of Patent Rights with Respect to Downstream Sales in Breach of the Restriction
- March 4, 2016 | Author: John Richards
- Law Firm: Ladas & Parry LLP - New York Office
- In a 10 - 2 decision on February 12, 2016, the U.S. Court of Appeals for the Federal Circuit en banc decided the case of Lexmark v. Impression. Deciding two issues, the court:
- upheld its 1992 decision in Mallickrodt v. Medipart that when a product is sold subject to a lawful re-sale or use restriction, this restriction is effective to prevent exhaustion of rights with respect to downstream sales in breach of the restriction, and
- held that the Supreme court’s decision in Wiley v Kirtsaeng, that there was international exhaustion in the copyright field when the owner sold copyrighted works abroad that were subsequently imported into the United States, did not apply to patented articles.
The case related to reconditioning of patented toner cartridges. Cartridges were sold by the patent owner in the United States either at “full price” or at a discount subject to an express single use/no resale restriction. Cartridges were also sold abroad by the patent owner, some, but not all of which were subject to the same restriction. The defendant sold reconditioned cartridges some of which were originally sold by the patent owner in the United States and some originally sold by the patent owner abroad.
On the question of domestic exhaustion, the 1992 decision by the Court of Appeals for the Federal Circuit in the case of Mallinckrodt v. Medipart attracted much attention as supposedly overturning a century of case law which had been widely viewed as standing for the proposition that a first sale of a patented product by the owner exhausted its right to sue downstream purchasers because it could be assumed that the patentee had obtained its reward for the invention in the price charged in that first sale. In Mallickrodt v. Medipart, patentee Mallinckrodt sold to various hospitals patented medical devices for the delivery of radioactive or therapeutic material for the diagnosis and treatment of pulmonary disease. The devices included the inscription “single use only.” After using the devices once, the hospitals sent the devices to Medipart for sterilization and reconditioning so that the hospitals could reuse the device. Mallinckrodt sued Medipart alleging patent infringement and inducement to infringe. The District Court granted Medipart’s motion for summary judgement based on non-infringement concluding “that violation of the ‘single use only’ notice can not be remedied by suit for patent infringement.” The Court considered that the first sale of the device exhausted the patentee’s rights in the device and that the cleaning of the device was a permissible repair and not an impermissible reconstruction.
In reversing this decision, the Federal Circuit considered that if Mallinckrodt’s restriction was a valid condition of the sale under the general law, it was not excluded from enforcement under the patent law.
The court considered that:
Unless the condition violates some other law or policy (in the patent field, notably [patent] misuse or antitrust law) ... private parties retain the freedom to contract concerning conditions of sale ... The appropriate criterion is whether Mallinckrodt’s restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.
The court stated that if the sale of the device was validly conditioned under the applicable law such as the law governing sales and licenses, and if the restriction on reuse was within the scope of the patent grant or otherwise justified, then violation of the restriction may be remedied by action for patent infringement. Invalid conditions in the first sale agreement that could result in exhaustion of the patentees rights were provisions relating to resale price maintenance and tying required use of unpatented goods with the purchased patented product.
In LG Electronics. Inc. v. Bizcom Electronics, Inc., the Federal Circuit again set out its view that the doctrine was only triggered by an unconditional sale of the item in question. It held that there was no exhaustion when the sale of microprocessors and chipsets was, in the Federal Circuit’s view, conditioned on their only being used in combination with components supplied by Intel, and the defendants used the purchased microprocessors and chipsets in breach of LG’s patents claiming a combination of microprocessors and other components. The Supreme Court granted certiorari and heard the case under the name Quanta Computer v. LG Electronics. The question was seen by many as presenting a broad question of whether patent rights were exhausted by all license agreements when the licensee sells products containing the patented invention or whether by placing restrictions on the original sale, the holder of the rights may receive royalties from all companies as the patented product continues through the manufacturing system if those restrictions are breached. In the end, the Supreme Court confined its holding to deciding that, contrary to the Federal Circuit’s view, the doctrine of patent right exhaustion can apply to method claims and to claims for combinations in which the component sold by or with the consent of the patentee is incorporated if the item sold “embodied” the patents in question. Despite extensive briefing on the question of whether sellers should be able to protect themselves from the doctrine of patent exhaustion by placing conditions on their sales, the Supreme Court declined to address the issue directly, simply finding that, on the facts of the case (which were unusual and involved several agreements), the original sale of the microprocessors was unconditional.
Following the Supreme Court’s decision, there has been academic discussion of whether, notwithstanding its lack of comment on the Mallinckrodt decision, the Supreme Court did in fact overrule it.
In 2001 in Jazz Photo Corp. v. ITC, a case relating to import of camera bodies that had been repaired in China, some of the cameras having been sold originally in the United States and some outside of it, the Federal Circuit, apparently sua sponte held:
Underlying the repair/reconstruction dichotomy is the principle of exhaustion of patent right. The unrestricted sale of a patented article, by or with the authority of the patentee “exhausts” the patentee’s right to control further sale and use of that article by enforcing the patent under which it was first sold. In United States v. Mansonite Corp, the Court explained that exhaustion of the patent right depends on “whether or not there has been such a disposition of the article that it may fairly be said that the patentee has received his reward for the use of the article”. ... United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.
However, in LG Electronics, Inc. v. Hitachi, Ltd. (2009), the Northern District of California noted that in the Quanta case noted above, the Supreme Court had been aware that some of the sales took place outside the United States and by not making any distinction with respect to sales inside and outside the United States, it applied the doctrine to sales outside the United States. In Fujifilm Corp. v. Benun, the Federal Circuit held that, notwithstanding some district court holdings to the contrary, the views expressed in Jazz Photo were still good law following the Supreme Court’s Quanta decision.
On March 25, 2013, the Supreme Court denied certiorari in Ninestar Technology Co. v. U.S. International Trade Commission when invited to consider “whether the initial authorized sale outside the United States of a patented item terminates all patent rights to that item.” The Federal Circuit had affirmed without opinion a decision of the International Trade Commission to exclude refurbished toner cartridges that had originally been sold abroad by the owner of the U. S. patent. However, when Ninestar disregarded the exclusion order and sanctions against it were sought, Ninestar argued that Quanta’s overruling of the Federal Circuit’s Jazz Photo decision eliminated the basis for it to obey the exclusion order. The Federal Circuit disagreed and Ninestar had sought Supreme Court review, but as noted, the Supreme Court decided not to take the case.
Prior to this, in 2013, the Supreme Court had considered the question of international exhaustion in a copyright case, Kirtsaeng v. John Wiley. It held that the 1976 Copyright Act’s language regarding the “first sale” doctrine (or “exhaustion”) allowed the unauthorized importation into the United States of products embodying copyrighted works if the copyright owner authorized the original sale overseas, irrespective of where those products were manufactured. The Court found that 17 USC 109(a) and 17 USC 602(a) provide a statutory basis for this conclusion. 17 USC 109 gives “the owner of a particular copy or phonorecord lawfully made under this title” the right “to sell or otherwise dispose of the possession of that copy or phonorecord”. A majority of the court found that the words ‘lawfully made under this title” in 17 USC 109 extended to products made outside the United States. Hence international exhaustion applied in copyright.
THE PRESENT CASE
In April 2015, the Federal Circuit sua sponte announced that it would consider en banc the questions of whether the Supreme Court’s holding in international exhaustion under copyright law in Kirstaeng v. John Wiley and Sons was also applicable to patent rights and whether Mallinckrodt v. Medipart should be overruled in view of the Supreme Court’s decision in Quanta Computer v. LG Electronics.
THE MAJORITY OPINION
The court’s opinion was authored by Judge Taranto. 35 USC 271(a) states “whoever without authority makes, uses or sells any patented invention, within the United States during the term of the patent therefor, infringes the patent” . Judge Taranto noted that the key words here for both questions being considered were “without authority”.
On the question of domestic exhaustion, Judge Taranto concluded that the Supreme Court’s decision in Quanta Computer v. LG Electronics had been made on the basis that there was no lawful restriction imposed on the original sale and so the Court had not decided the issue of whether imposition of such a restriction affected the application of the first sale doctrine.
He noted that in both the Quanta decision and in Bowman v. Monsanto ( a case relating to planting seeds and growing plants therefrom where the seeds had been obtained from plants grown from seeds obtained from the patent owner), the Supreme Court had referred to “initial authorized sales” as giving rise to exhaustion. In its arguments in Lexmark, the government had taken the view that in contrast to sales by licensees where the patent owner had the right to control sales, almost any sale by the patentee was an “authorized sale”. Judge Taranto saw this as reading too much into the Supreme Court’s use of the “authorized sale” language. He noted:
Under longstanding Supreme Court precedent, a patentee may preserve its patent rights against downstream buyers by arranging with someone else, even a nonexclusive licensee, to make and sell patented articles, under clearly stated restrictions on post-sale activities. There is no good reason that a patentee that makes and sells the articles itself should be denied the ability that is guaranteed to a non-practicing-entity patentee. No precedent requires a contrary conclusion.
In its decision in Quanta, the Supreme Court had referred extensively to its 1943 decision in United States v. Univis Lens Co, as providing basis for its decision that the patent owner’s rights had been exhausted by the first sale. However, Judge Taranto saw the rationale of Univis as being limited to the conclusion that a vertical price-control restriction was ineffective to preserve patent rights after sales of articles embodying the patents. It did not stand for the proposition that other types of post-sale restrictions destroyed the patent owner’s right to enforce a patent against downstream purchasers where the initial purchaser had breached a lawful restriction on its activities.
This being the case, in his view a “clearly communicated, otherwise lawful restriction” did not result in the first purchaser having “authority” to make further sales in contravention of that restriction, whereas a sale without such a restriction presumptively did give authority to resell a patented product obtained from the patentee. He concluded:
A patentee already may preserve its patent rights against downstream buyers (with notice) through otherwise-lawful restrictions, by licensing others to make and sell its patented articles. We conclude that the law does not forbid the patentee to do the same when making and selling the articles itself.
On the question of international exhaustion, Judge Taranto pointed out that the patent statute has no provisions similar to those of the Copyright Act limiting the patent owner’s exclusive rights or the right to sue for infringement. This being the case,
The Patent Act question is whether a foreign sale of a U.S.-patented article made or authorized by a U.S. patentee, standing alone, confers on the buyer authority to import the article into the United States and sell and use it here, even though such an act would be infringing in the absence of authority. The best answer to that question, we conclude, is that such a foreign sale does not confer such authority. A U.S. patentee, simply by making or authorizing a foreign sale of an article, does not waive its U.S. rights to exclude regarding that article, either conclusively (no matter how clear the reservation of U.S. rights) or only presumptively (subject to sufficiently clear preservation of U.S. rights).
Judge Taranto supported this conclusion by noting the essentially territorial nature of patent rights (in contrast to copyright) and the different pricing considerations that a seller had in various countries which meant that:
a foreign sale, standing alone, is not reasonably viewed as providing the U.S. patentee the reward guaranteed by U.S. patent law. Such a sale is not reasonably viewed as itself a waiver by the patentee of its U.S. patent rights to prevent the buyer or others from bringing that article into the United States and selling or using it to satisfy a U.S.-market demand that the patentee could otherwise help satisfy at U.S.-market prices, as guaranteed by the Patent Act.
This was consistent with the provisions in TRIPs declining to try to harmonize the law on international exhaustion in the patent field and the specific provisions on exhaustion in the Free Trade Agreements negotiated by the United States with Morocco, Australia, and Singapore.
Consequently no doctrine of international exhaustion applied in U.S. Patent Law.
A dissent authored by Judge Dyk and joined by Judge Hudges took the view that Mallinckrodt had been wrongly decided because, although the Supreme Court had in 1912 adopted similar reasoning to that of Mallickrodt in Henry v. A.B. Dick, it had expressly overruled that decision five years later in Motion Picture Patents Co. v. Universal Film Manufacturing Co. Judge Dyk opined that contrary to the majority view, Motion Picture Patents was not confined in its application to situations where the restriction imposed on the first purchaser was unlawful, but rather that there was exhaustion irrespective of any post-sale restriction imposed in the first sale. Furthermore, even if this were not the case, the Supreme Court’s 2008 decision in Quanta Computer Inc. v. LG Electronics Inc which had upheld the principle of earlier Supreme Court decisions that any unconditional sale of a patented product by the patent owner exhausted the patent owner’s right to sue downstream purchasers for infringement. In Judge Dyk’s view, the majority had misunderstood what the Supreme Court had meant when it referred to an unconditional sale. This did not mean a sale without restrictions on the purchaser, simply a sale that passed clear title in the goods rather than, for example, a sale as a form of security device, which he saw as being the normal meaning of the term when it had first been used. Finally, even if there was a logical inconsistency between the Supreme Court’s view that breach of restrictions imposed on a licensee could result in the patentee being able to sue downstream purchasers for infringement but breach of conditions imposed on a purchaser did not give that right, this was no reason for the Federal Circuit to fail to follow Supreme Court case law, In the view of Judges Dyk and Hughes therefore, domestic sales by the patentee always exhausted the patentee’s right to sue subsequent purchasers for infringement.
As to whether foreign sales should have the same effect, Judge Dyk accepted that there was a difference both in the statutory basis and the real world situation between patents and copyrights. In particular copyright granted an effective world-wide right whereas what was protectable by way of patent differed from country to country. Judge Dyk did, however, opine that sale by the patent owner anywhere in the world granted the purchaser an implied license to import into the United States, but that this implied license could be negated by clearly expressed terms barring import into the United States at the time of sale, thus in effect adopting a view similar to that of the Japanese Supreme Court in the Jap Auto case.
The holding on domestic exhaustion is likely to remain controversial, especially since the two “unlawful” restrictions mentioned in Mallinckrodt, resale price maintenance and tying may no longer be unlawful in view of the Supreme Court’s decisions in Leegin Creative Leather Products Inc v. PSKS Inc (holding that resale price maintenance agreements were not per se antitrust violations) and Independent Ink Inc v. Illinois Tool Works Inc (holding that, for a tye-in to be unlawful, the plaintiff must prove that the defendant has market power in the tying product). Reliance may, perhaps be made on Univis for the proposition that breach of a resale price maintenance provision does not result in the downstream seller becoming liable as a patent infringer, but even that does not seem certain. On the facts of the Lexmark case, it seems “fair” that exhaustion did not apply. The original purchaser was given a choice as to whether it wanted cartridges at a discount, in which case it had no right to resell or to pay a higher price and avoid that restriction. There seems no good reason why downstream purchasers should be entitled to profit from breach of the limitation so-imposed. In other cases, the equities might not be so clear.