Adam Barkl, MJIL Staff Member:

Barkl Photo Just over a week ago, the Federal Circuit heard en banc oral arguments in the case Lexmark International Inc. v. Impression Prods. Inc.[1] That case involves the foreign  sale by Lexmark of toner cartridges used in Lexmark’s printers. Lexmark’s customers have an option to either purchase cartridges at full price without use restrictions, or to purchase discounted, single-use cartridges under Lexmark’s “Return Program.” After exhausting the toner, a customer agrees to return the cartridge to Lexmark for remanufacturing or recycling.[2] The same restrictions on these single use cartridges apply to Lexmark’s customers and its authorized retailers. Various third parties, including foreign companies, hacked and replaced Lexmark’s computer chips that recognize a cartridge has been used and prevents its subsequent use in Lexmark’s printers. Some of these third parties then sold the “clone” cartridges under non-Lexmark labels. In response to this widespread piracy, Lexmark brought actions against various infringers in the U.S. District Court for the Southern District of Ohio.[3] Most defendants agreed to settlements with Lexmark. Impression, the sole remaining defendant, argued that Lexmark’s patent rights had been exhausted by their first authorized sale.[4]

The issue in that dispute, and the one discussed here, is whether Lexmark’s US patent was exhausted with its sale of the patented cartridges outside the US. The answer will have a big impact on the enforcement of US patent rights for companies who do business abroad. Under the “first sale doctrine,” an initial authorized sale by the patentee exhausts all rights to the patent.[5] The patentee has no remaining rights to enforce against subsequent users or sellers. However, the Federal Circuit in Jazz Photo reaffirmed that first sales abroad do not exhaust patent rights, “To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.”[6] Since then, the Federal Circuit has repeatedly rejected that a first sale abroad exhausts U.S. patent rights (“international exhaustion”).[7] However, that could soon change. In 2013, the Supreme Court decided Kirstaeng.[8] The Court there held that the exhaustion doctrine does apply to copies of a copyrighted work made abroad. While not specifically mentioning patent rights, the decision began to raise uncertainty about international exhaustion in the patent context.

The question many have had after Kirtsaeng is whether the same reasoning would now apply to patents, overturning the decision in Jazz Photo. The district court in the Lexmark case did not think so, finding, “Jazz Photo remains for now the controlling case on whether patent rights are exhausted by a first authorized sale abroad.”[9] The Federal Circuit is now considering the issue. There is a good chance that after the Supreme Court’s decision in Kirtsaeng, the Federal Circuit could rule the same way for patents. That decision would have broad impacts for patent owners, requiring patent owners to adjust licensing and litigation strategies based on the idea that foreign sales don’t exhaust patent rights. Companies across the US would have to revisit agreements, and tech transaction lawyers and licensing attorneys would have to deal with the aftereffects.[10] As companies increasingly go international, the decision will be big.  Patent exhaustion is “‘one of the most fundamental limits on IP rights,’”[11] and where things go from Lexmark will have “‘real impact in the marketplace.’”[12]

 


[1] Spotlight on Upcoming Oral Arguments, Federal Circuit IP Blog (Sept. 29, 2015), http://federalcircuitipblog.com/2015/09/29/spotlight-on-upcoming-oral-arguments-october-2015/.

[2] Dennis Crouch, Lexmark v. Impression: The Facts of the Case, Patently-O (Apr. 15, 2015), http://patentlyo.com/patent/2015/04/lexmark-impression-facts.html.

[3] Lexmark Int’l, Inc. v. Ink Techs. Printer Supplies, LLC, 9 F. Supp. 3d 830 (S.D. Ohio 2014).

[4] Crouch, supra note 2.

[5] Quanta Computer, Inc. v. LG Elecs, Inc., 553 U.S. 617, 625 (2008).

[6] Jazz Photo v. ITC, 264 F.3d 1094, 1105 (Fed. Cir. 2001).

[7] Matthew K. Blackburn, After Lexmark, Is International Patent Exhaustion on the Horizon?, Bloomberg BNA Big Law Business Legal Communities (June 23, 2015), https://bol.bna.com/after-lexmark-is-international-patent-exhaustion-on-the-horizon/.

[8] Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013).

[9] Supra note 3 at 837.

[10] Ryan Davis, En Banc Exhaustion Case May Make Enforcing Patents Harder, Law360 (Sept. 30, 2015), http://www.law360.com/articles/709266/en-banc-exhaustion-case-may-make-enforcing-patents-harder. See also, Blackburn, supra note 7 (suggesting ways for patent owners to adjust).

[11] Ryan Davis, Patent Cases to Watch in the 2nd Half of 2015, Law360 (July 16, 2015), https://www-law360-com.ezproxy.law.umn.edu/articles/679464/patent-cases-to-watch-in-the-2nd-half-of-2015.

[12] Davis, supra note 10.