Last week, the Federal Circuit en banc ruled that the sale of a product abroad by a U.S. patent holder (or others) does not exhaust the patent owner’s U.S. patent rights, such as the right to exclude sale or importation of that product within the United States.  Further, the Federal Circuit ruled that, when a U.S. patent holder sells a product with expressed restrictions on resale or reuse of that product, the patent exhaustion doctrine does not preclude the patent owner from exercising its right to exclude resale or reuse of that product.  The Federal Circuit summarized its ruling as follows:

We hold that, when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of the sale, the patentee does not confer authority on the buyer to engage in the prohibited resale or reuse.  The patentee does not exhaust its § 271 rights to charge the buyer who engages in those acts–or downstream buyers having knowledge of the restrictions–with infringement.  We also hold that a foreign sale of a U.S.-patented article, when made by or with the approval of the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale.  Loss of U.S. patent rights based on a foreign sale remains a matter of express or implied license.

This is a lengthy decision that provides insight into the Federal Circuit’s view of not only the patent exhaustion doctrine, but the fundamental patent right to exclude and extraterritorial limits that preclude U.S. law from reaching into other countries and, importantly, that precludes laws of other country’s from limiting U.S. patent rights.

Below is a summary of the decision, but we recommend reading the entire decision (but set aside sufficient time to do so).

Background

Patent owner Lexmark makes and sells printers and printer ink cartridges used in those printers.  Lexmark’s patents covered its ink cartridges.  Lexmark sold the ink cartridges at issue at a discount subject to an express single-use/no-resale restriction that precludes transferring the used cartridge to anyone other than Lexmark in what it called a “Return Program Cartridge”.  Lexmark also sold “Regular Cartridges” at full price that did not have such restrictions.  Lexmark sold its ink cartridges in the U.S. and abroad.  Accused infringer Impression would acquire used Lexmark ink cartridges, refill them and resell the them in the U.S., which included importing such cartridges into the U.S..

Lexmark sued Impression for infringing U.S. patents that covered those ink cartridges.  Specifically, Lexmark alleged infringement based on (1) resale/resuse of Return Program Cartridges that Lexmark originally sold in the U.S. (but not the Regular Cartridges) and (2) resale/reuse and import of both Return Program Cartridges and Regular Cartridges that Lexmark originally sold outside the U.S..

Decision

The Court noted that three things in the case narrowed the focus of the decision:

1. The decision discusses ink cartridges that Lexmark sold to end users because the parties did not argue a distinction between those sales verses Lexmark sales to resellers (the first sale) that then sold those ink cartridges to end users.
2. The Court assumed that the first purchaser and Impression had adequate notice of the restrictions on resale/reuse (e.g., case does not present issue of bona fide purchaser with less than adequate notice).
3. The restriction on  resale/reuse was not alleged to be improper, such as patent misuse, antitrust or exceeding scope of patent grant.

Section 271(a).  The Court noted that the different acts of infringement listed under 271(a) each represent a separate form of infringement, stating: “Congress has thus prescribed that whoever, ‘without authority,’ does any of the listed acts–‘the making, using, offering to sell, selling, or importing of a patented invention,’ is an infringer.”[emphasis in original].  Thus, 271(a) requires “authority from the patentee before a person in [accused infringer] Impression’s position may engage in the itemized acts without infringing.”  The Court summarized this requirement as follows:

§ 271(a) by its terms requires that whoever engages in the enumerated acts receive permission from the patentee (directly or indirectly) for the acts being performed, which otherwise are infringing; and nothing in §271(a) constrains the patentee’s choices about whom to grant the required authority, if anyone, or about which acts (of manufacture, use, sale, etc.) to authorize, if any.

The Court found that the exhaustion doctrine under patent law must stem from § 271(a)’s “without authority” language, such as whether “sales confer authority on the purchaser to take certain actions–such as selling or using the purchased article in the United States or importing it into the United States–that otherwise would be infringing acts.”

Applying Mallinckrodt to Lexmark’s Own Domestic Sales.  The Court held that the Mallinckrodt decision required finding that the patent owner’s sales with restrictions on resale/reuse did not give rise to patent exhaustion that would permit  resale/reuse.  The Court first considered the General Talking Pictures case where a patent owner licensed an entity to make and sell amplifiers using the invention for a specific use (home radios), and the Supreme Court held that patent exhaustion did not bar finding infringement when another party purchased those amplifiers from the licensee for a different use (commercial use, not home radio).

The Court then considered the Mallinckrodt decision that supported applying the General Talking Pictures rationale when the original sale was made by the patent owner itself, rather than a licensee.   In Mallinckrodt, the patent owner sold medical devices to hospitals with a “single use only” restriction.  But some hospitals sent the devices out for reconditioning and reuse.  The Mallinckrodt court  held that it would put form over substance to allow restrictions placed on first sales by a licensee (as in General Talking Pictures) yet not allow them when the first sale is by the patent owner itself.  The Court summarized Mallinckrodt as follows:

Thus, unless a sale restriction is improper under some other body of law, whether within the Patent Act or outside it, a patentee’s own sale of its patented article subject to a clearly communicated restriction does not confer authority to sell or use the article in violation of that restriction, i.e., does not exhaust the patentee’s § 271 rights against such conduct involving the article.

The Court held that the Supreme Court’s Quanta decision did not overturn Mallinckrodt, because the Quanta case did not involve a sale subject to any restriction; rather, Quanta involved a licensee’s sales that “was not subject to any conditions.”

Thus, following the Mallinckrodt rationale, the Court ruled that “a patentee may preserve its § 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale.”

Accordingly, the Court held that, where Lexmark itself sold ink cartridges with resale/reuse restrictions, patent exhaustion did not bar Lexmark from asserting infringement based on the resale/reuse of such cartridges.

Applying Jazz Photo to Lexmark’s Foreign Sales.  The next issue considered is, assuming no express or implied license, whether foreign sales made by the patent owner without communicating any reservation of U.S. rights confers authority to import, sale or use the product within the United States.  The Court first reviewed its Jazz Photo decision.  That case involved cameras sold overseas, refurbished and imported into the United States for resale and use.  Such sales outside the United States was held not to have exhausted the patent holder’s U.S. patent rights.  Thus, “[e]xhaustion cannot rest on a foreign first sale, but an express or implied license might be found based on the circumstances of particular foreign sales.”

The Court also ruled that the reward for a U.S. patent is based on “American markets”, which reward is not received from foreign sales:

The statute gives patentees the reward available from American markets.  A patentee cannot reasonably be treated as receiving that reward from sales in foreign markets, and exhaustion has long been keyed to the idea that the patentee has received its U.S. reward.

Thus, what the statute expressly provides to a U.S. patentee is the reward available from the right to exclude “in the United States.”  The reward is inherently a market reward: “it is one of the legal beauties of the system that what is given by the people through their government–the patent right–is valued automatically by what is given by the patentee.  His patent has value directly related to the value of his invention, as determined in the marketplace.”  And the market reward, under the statute, is explicitly the reward available from American markets subject to American laws, a reward obtained by selling or authorizing sales in those markets.  [emphasis in original; citations omitted].

The Court further noted differences between American markets and markets in other countries, stating:

American markets differ substantially from markets in many other countries, and not just because of disparities in wealth that can lead to dramatically different prices (especially for low-marginal-cost products).  Government policies differ dramatically, including policies on price regulation and, most particularly, polices on the availability and scope of patent protection.  Patents involve costly government-approval processes, and the standards vary.

***

Given the varying standards, and the separate examination processes and fees, a U.S. patentee may choose not even to seek patent protection in particular foreign countries.  And those seeking protection may not obtain it, or may not obtain protection comparable to that of the U.S. patent.  In either event, foreign sales in such circumstances may not occur under protections likely to produce market returns comparable to the reward contemplated by our patent law.  Such country-to-country differences in patent law, moreover, are only part of the likely differences affecting foreign sales, supplementing differences in economic circumstances and in governments’ price and other non-patent regulations bearing on sales.

Thus, “a foreign sale, standing alone, is not reasonably viewed as providing the U.S. patentee the reward guaranteed by U.S. patent law.”

The Court further ruled that there is not even a presumption that a patentee’s unrestricted sale abroad would exhaust U.S. patent rights.  The reasons for this included concerns that foreign laws might prohibit making such restrictions and, thus, such foreign laws could interfere with U.S. patent rights:

A U.S. patentee that wishes to reserve its U.S. rights may not be able to do so.  For a foreign sale, the required reservation is an act in a foreign country.  And the foreign sovereign, or local governments in the country, may prohibit sellers from stating reservations of rights that would make importation into and sale in the United States more difficult.

A presumptive-exhaustion rule would place a U.S. patentee’s preservation of U.S. rights within foreign sovereign control.  For doctrinal reasons already emphasized, we should avoid attributing to Congress such a ceding of control over domestic rights to foreign sovereigns without clearer reason than we have seen here.  The Supreme Court’s final statement of its rationale in Boesch says as much: “The sale of articles in the United States under a United States patent cannot be controlled by foreign laws.”  Indeed, such foreign control of U.S. rights is a mirror image of projecting U.S. patent rights into foreign sovereigns’ territories.  The Supreme Court has long recognized that the latter is strongly disfavored in reading the Patent Act.  And since Boesch, the Court has twice recognized the symmetric impropriety of reading the Patent Act to allow projection of foreign sovereigns’ decisions to control rights in U.S. territory: “Our patent system makes no claim to extraterritorial effect; ‘these acts of Congress do not, and were not intended to, operate beyond the limits of the United States, and we correspondingly reject the claims of others to such control over our markets.” [internal citations omitted]

Thus, the Court held that patentee sales abroad do not exhaust their U.S. patent rights.

[View source.]