Patent Exhaustion and Private Law Goes to the Supreme Court — Patrick Goold

Post by Patrick Goold

Sir Edward Coke’s Institutes of the Lawes of England, first published in 1628, rarely influences the direction of modern U.S. patent law. But that might be about to change. This December, the Supreme Court of the United States granted certiorari in the case of Impression Products, Inc. v. Lexmark International, Inc., Supreme Court Docket No. 15-1189, concerning the scope of the patent exhaustion doctrine. The case will interest readers of this blog because it highlights the conceptual and doctrinal relationship between IP exhaustion and common law rules regarding restraints on alienation.

The case involves the ongoing battle over refurbished printer toner cartridges. Lexmark International makes printer toner cartridges, over which it owns a number of patents. These cartridges fall into two types: “Regular Cartridges” are sold at full price; while “Return Program Cartridges” are sold at a discount but come with a “single-use/no-resale” restriction, meaning the buyer may neither reuse nor resell the cartridge after the toner has run out. Lexmark sells these cartridges both domestically in the U.S. and abroad. In 2014, Lexmark sued Impression Products for patent infringement. Impression Products had previously: (1) bought domestically-sold Return Program Cartridges, modified by third parties to allow refilling, and resold them in the U.S.; and (2) imported and resold both Regular and Return Program Cartridges from foreign markets. Lexmark maintained both of these actions infringed their U.S. patent rights under § 271 of the Patent Act. Impression argued that both of these acts were non-infringing due to the Patent Exhaustion doctrine, which holds that “the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008). John Golden has discussed the case in a prior New Private Law Blog post.

Earlier this year, the Federal Circuit found both acts to constitute patent infringement. Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721 (Fed. Cir. 2016) (en banc). Regarding the domestically sold Return Cartridges, Impression Products conceded that under the prior Federal Circuit precedent of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), the exhaustion defense must fail. Mallinckrodt previously upheld the validity of such post-sale restrictions on the grounds that such a “conditional sale” does not “authorize” the buyer to perform any acts that otherwise would be infringing. However, Impression Products argued, and the District Court had agreed, that the recent Supreme Court case of Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) had overruled this precedent. The Federal Circuit, however, found that Quanta had not overruled Mallinckrodt. Not only did Quanta not cite Mallinckrodt, but the case was distinguishable on the grounds that, in Quanta, (i) the licensee (not the patent holder) made the sales, and (ii) the relevant licensing agreement between the patent holder and the licensee imposed no post-sale restrictions. Furthermore, in upholding the validity of post-sale restrictions on patented products, the Federal Circuit found the common law rules against restraints on alienation to be of little guidance. Despite the common law’s hostility to such restraints, the Federal Circuit found that a “patent-specific statutory analysis must govern here.” Lexmark International, Inc., 816 F.3d at 752. According to the Federal Circuit, Congress chose to grant the patent holder broad rights to control and use the patented article, subject only to the case where the patent owner authorizes the buyer to perform otherwise infringing acts.

Regarding the importation of foreign-sold cartridges, the Federal Circuit upheld its previous precedent, Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), that a sale of a patented product abroad does not exhaust U.S. patent rights. The court found Jazz Photo remained good law despite the recent Supreme Court decision of Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013). In Kirtsaeng, the Supreme Court was required to interpret § 109 of the Copyright Act (permitting the “owner of a particular copy or phonorecord lawfully made under this title . . . to sell or otherwise dispose of the possession of that copy…”) to determine whether the sale of a copyrighted work outside the US would exhaust US copyrights in that work, such that importing the work into the US would no longer be an infringement. This provision codified the previously common-law “first sale” doctrine. The Supreme Court held that “[w]hen a statute covers an issue previously governed by the common law,” then it would presume Congress had intended to retain the substance of the common law rules, absent evidence to the contrary. Kirtsaeng, 133 S. Ct. at 1363 (internal citations omitted). Citing Coke, the court found the common law had long prohibited restraints on alienation, and furthermore, that this common law rule made “no geographical distinctions.” The court held, therefore, that copyright’s first sale doctrine likewise did not make any “geographical distinctions” and this situation was unaltered by the doctrine’s codification. Thus it was decided that sale of the copyrighted work abroad exhausts US copyrights in the copy. The Federal Circuit distinguished Kirtsaeng because it involved the Copyright Act and thus did not determine the patent-specific question before it.

Earlier this month, the Supreme Court granted Impression Product’s petition for cert to decide two questions: (1) Whether a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoids application of the patent exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through patent law’s infringement remedy, and (2) Whether, in light of this Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013), that the common law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article—authorized by the U.S. patentee—that takes place outside of the United States exhausts the U.S. patent rights in that article.

The case promises to be interesting for New Private Lawyers for at least three reasons. First, the case highlights how private law often contains doctrines and concepts, which, if applied in IP, would arguably lead to normatively desirable outcomes. As Impression Product’s petition for certiorari argues: “since at least the seventeenth century, the common law has strongly disfavored restraints on alienation of chattels because they interfere with the functioning of secondary markets.” At least as a prima facie matter, recreating that rule in patent law today arguably could lead to a more competitive market for toner cartridge refills. Perhaps this is a case where a page of history is worth more than a volume of logic?

Second, the case demonstrates the fascinating hybrid (part-statutory, part-common law) nature of IP law. While the source of patents and copyrights are statutory – the Patent Act and the Copyright Act, respectively – cases like Kirtsaeng and Lexmark illustrate how many of the fundamental doctrines in this subject are judge-made. In an age of statutes, it is perhaps surprising to find that even a heavily statute-dominated area like IP still relies significantly on judge-made doctrines.

And finally, Lexmark may be yet another case where the Supreme Court uses private law principles to help resolve pressing IP problems. In previous years, we have seen the Supreme Court rely on “traditional principles of equity” to determine when injunctive relief ought to be granted (eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394 (2006)); examine “background tort principles” to help clarify divided infringement law (Limelight Networks, Inc. v. Akamai Technologies, Inc. 134 S.Ct. 2111, 2118 (2014)); and turn to property law to determine how definite patent claims must be (Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120 (2014)). Lexmark may be the next case in this trend. Readers interested in this are encouraged to attend the upcoming IP, Private Law, and the Supreme Court conference co-organized by the Project on the Foundations of Private Law at Harvard Law School and the Intellectual Property Law Program at the George Washington University Law School, to be held in DC on March 10, 2017. More information is available here.