Friday, February 12, 2016

Lengthy en banc CAFC Lexmark decision maintains status quo on patent exhaustion

The beginning of the en banc opinion reads:

Congress has declared: “Except as otherwise provided
in [the Patent Act], whoever without authority makes,
uses, offers to sell, or sells any patented invention, within
the United States or imports into the United States any
patented invention during the term of the patent therefor,
infringes the patent.” 35 U.S.C. § 271(a); see id. § 154(a)
(granting patentee “right to exclude others” from itemized
actions). The doctrine of patent exhaustion (or “first sale”
doctrine) addresses the circumstances in which a sale of a
patented article (or an article sufficiently embodying a
patent), when the sale is made or authorized by the
patentee, confers on the buyer the “authority” to engage
in acts involving the article, such as resale, that are
infringing acts in the absence of such authority. There is
nothing “otherwise provided” on the issue in the Patent
Act. In that respect, the Patent Act differs from the
Copyright Act, whose infringement, importation, and
exclusive-rights provisions, 17 U.S.C. §§ 501, 602, 106, are
all subject to a separate, overriding statutory provision
that grants owners of certain copyrighted articles a right
to sell those articles “without the authority” of the copyright
holder, id. § 109(a).

In this case, all of the initial sales at issue were made
by the U.S. patentee, rather than by a licensee having
authorization from the patentee. Some of the initial sales
were made domestically, some abroad. All of the domestic
sales, and an unknown portion of the foreign sales, were
accompanied by clearly communicated restrictions on the
buyer’s reuse and resale.

We decided to hear this case en banc to consider
whether two decisions of this court concerning the uncodified
doctrine of patent exhaustion—one decision from
1992, the other from 2001—remain sound in light of later
decisions of the Supreme Court. Today we reaffirm the
principles of our earlier decisions.
First, we adhere to the holding of Mallinckrodt, Inc. v.
Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that a
patentee, when selling a patented article subject to a
single-use/no-resale restriction that is lawful and clearly
communicated to the purchaser, does not by that sale give
the buyer, or downstream buyers, the resale/reuse authority
that has been expressly denied. Such resale or reuse,
when contrary to the known, lawful limits on the authority
conferred at the time of the original sale, remains
unauthorized and therefore remains infringing conduct
under the terms of § 271. Under Supreme Court precedent,
a patentee may preserve its § 271 rights through
such restrictions when licensing others to make and sell
patented articles; Mallinckrodt held that there is no
sound legal basis for denying the same ability to the
patentee that makes and sells the articles itself. We find
Mallinckrodt’s principle to remain sound after the Supreme
Court’s decision in Quanta Computer, Inc. v. LG
Electronics, Inc., 553 U.S. 617 (2008), in which the Court
did not have before it or address a patentee sale at all, let
alone one made subject to a restriction, but a sale made
by a separate manufacturer under a patentee-granted
license conferring unrestricted authority to sell.
Second, we adhere to the holding of Jazz Photo Corp.
v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir.
2001), that a U.S. patentee, merely by selling or authorizing
the sale of a U.S.-patented article abroad, does not
authorize the buyer to import the article and sell and use
it in the United States, which are infringing acts in the
absence of patentee-conferred authority. Jazz Photo’s noexhaustion
ruling recognizes that foreign markets under
foreign sovereign control are not equivalent to the U.S.
markets under U.S. control in which a U.S. patentee’s
sale presumptively exhausts its rights in the article sold.
A buyer may still rely on a foreign sale as a defense to
infringement, but only by establishing an express or
implied license—a defense separate from exhaustion, as
Quanta holds—based on patentee communications or
other circumstances of the sale. We conclude that Jazz
Photo’s no-exhaustion principle remains sound after the
Supreme Court’s decision in Kirtsaeng v. John Wiley &
Sons, Inc., 133 S. Ct. 1351 (2013), in which the Court did
not address patent law or whether a foreign sale should
be viewed as conferring authority to engage in otherwiseinfringing
domestic acts. Kirtsaeng is a copyright case
holding that 17 U.S.C. § 109(a) entitles owners of copyrighted
articles to take certain acts “without the authority”
of the copyright holder. There is no counterpart to
that provision in the Patent Act, under which a foreign
sale is properly treated as neither conclusively nor even
presumptively exhausting the U.S. patentee’s rights in
the United States.

The issue:

The litigation progressed to the point at which no defendant
remained except Impression, and only the single
count of infringement remained against Impression.
Impression came to agree that the patents covered the
cartridges it was importing and selling, and it did not
dispute the validity or enforceability of the patents. It
contested liability for infringement on just one ground,
namely, that Lexmark had exhausted its U.S. patent
rights in the cartridges by its initial sales of them.

Impression presented its exhaustion defense by filing
motions to dismiss the infringement count, one motion for
each of the two groups of cartridges at issue. For each
motion, Impression did not contest that, under this court’s
governing law, its exhaustion defense must fail: Mallinckrodt
for the cartridges initially sold in the United States,
Jazz Photo for the cartridges initially sold abroad. But it
argued that the Supreme Court’s more recent decisions
had made Mallinckrodt and Jazz Photo no longer good
law. In a pair of opinions issued the same day, the district
court agreed with Impression about Mallinckrodt but
disagreed about Jazz Photo.

The the district court

Despite that recognition of what Quanta involved, the
district court concluded “that Quanta overruled Mallinckrodt
sub silentio.” Id. at *5, *6. Although Return Program
cartridges were sold under post-sale restrictions on
reuse and resale, the district court held that “those postsale
use restrictions do not prevent patent rights from
being exhausted given that the initial sales were authorized
and unrestricted.” Id. The court thus dismissed the
infringement claim regarding Impression’s actions involving
Return Program cartridges Lexmark had sold in the
United States. Id. at *7.

As to cartridges Lexmark had sold abroad, the court
held that exhaustion did not apply, i.e., did not render
Impression’s imports and domestic resales of those cartridges
non-infringing. (...)

The court recognized, and Impression
did not dispute, that “under Jazz Photo, an
initial authorized sale of a patented product outside of the
United States would not exhaust the patent rights of the
patent holder.” Id. at 833. It then examined the Supreme
Court’s decision in Kirtsaeng and rejected Impression’s
contention that Kirtsaeng “overturns the Federal Circuit’s
decision in Jazz Photo, 264 F.3d 1094, such that
Lexmark’s patent rights were exhausted upon the first
authorized sale abroad.” Foreign Sale Opinion, 9 F. Supp.
3d at 834 (footnote omitted).
The court stated that “[t]he Supreme Court’s decision
was rooted in interpretation of a statutory provision of
copyright law,” namely, 17 U.S.C. § 109(a). Foreign Sale
Opinion, 9 F. Supp. 3d at 833. The district court noted
the absence from Kirtsaeng of any discussion of exhaustion
in the patent field and the Supreme Court’s
longstanding recognition that copyright law and patent
law are not interchangeable. Id. at 835 (citing BobbsMerrill
Co. v. Straus, 210 U.S. 339, 346 (1908)). I

Within the CAFC decision:

The requirement of “authority” in order to avoid infringement,
in its natural meaning, refers to a grant of
permission. Logically, permission might come from
Congress, whether outside the Patent Act or within the
Patent Act itself, as reflected in § 271(a)’s “[e]xcept as
otherwise provided in [the Patent Act]” language, which
explicitly bows to other contrary sections of the Patent
Act. But it is undisputed that no other statutory provision
applies in this case. See U.S. Br. 5; compare 35
U.S.C. § 262 (each joint owner of a patent may engage in
making, using, selling, offering to sell, and importing
without authority from other owners). Nothing in the Act
supersedes the § 271 requirement of authority from the
patentee before a person in Impression’s position may
engage in the itemized acts without infringing.
In this respect, the Patent Act differs from the Copyright
Act. In the copyright statute, Congress included a
provision giving a right of sale to certain article owners,
17 U.S.C. § 109(a), and made the infringement, importation,
and exclusive-rights provisions all subservient to
that express guarantee.4

General Talking Pictures is cited

Most importantly, the Court squarely held in the General
Talking Pictures case that a patentee could preserve
its infringement rights against unauthorized uses by
restricting manufacturing licensees’ authority to sell for
such uses. General Talking Pictures Corp. v. Western
Elec. Co., 304 U.S. 175, opinion on rehearing at 305 U.S.
124 (1938). Companies holding patent rights in certain
amplifiers (AT&T, Western Electric, RCA) licensed the
American Transformer Company to make and sell amplifiers.
The Transformer Company “was a mere licensee
under a nonexclusive license, amounting to no more than
‘a mere waiver of the right to sue.’” 304 U.S. at 181
(quoting De Forest Radio Telephone & Telegraph Co. v.
United States, 273 U.S. 236, 242 (1927)). The license
permitted sales only “for radio amateur reception, radio
experimental reception, and home broadcast reception,”
not “for use in theaters as a part of talking picture equipment.”
Id. at 180. The Transformer Company nevertheless
sold amplifiers to General Talking Pictures for
theater use in violation of the restriction, and General
Talking Pictures “had actual knowledge that [the Transformer
Company] had no license to make such a sale.” Id.
When the patentees sued General Talking Pictures (the
buyer) for infringement, the Supreme Court, based on
Mitchell, affirmed the judgment of infringement. Id. at


A patentee exercises its congressionally granted
rights only when it invokes its power to exclude others,
not when it sells its product. Similarly, the congressionally
granted right to exclude may be viewed as being shared
by certain exclusive licensees, who, in appropriate circumstances
(e.g., with joinder of the patent owner), may bring
infringement actions against others to enforce exclusivity.
See Independent Wireless, 269 U.S. at 464–69 (discussing
cases); 8 Chisum § 21.03[2]. But an exclusive licensee, in
merely selling (or making, using, etc.) a patented article,
is not exercising any power conferred by the patent statute.
That is a fortiori true of a non-exclusive licensee, like
the licensee in General Talking Pictures, which has no
exclusivity protections at all. Thus, although the government’s
assertion that “licensees stand in patentees’
shoes” in sharing certain patent-granted rights is true in
a significant respect as to exclusive licensees, U.S. Br. 8, it
is not true as to non-exclusive licensees—like the licensee
in General Talking Pictures. Accordingly, a patentee’s
ability to preserve its patent rights (rights to exclude) by
arranging for sales to be made by a non-exclusive licensee,
like the Transformer Company, cannot rest on a
premise that “licensees exercise a portion of the patentee’s
rights.” U.S. Br. 8

The Goodyear rubber patents arise in footnote 10:

In Chaffee, which involved Goodyear’s rubber patents,
the Supreme Court rejected the defendants’ invocation
of the Bloomer principle, again in a term-extension
context, explaining that there was no evidence that the
defendants had ever received any authority to practice the
patented invention. 63 U.S. (22 How.) at 222–24.

Light bulbs also arise

In United States v. General Electric Co., 272 U.S. 476
(1926), the Supreme Court rejected the government’s
antitrust challenge to (among other things) General
Electric’s licensing of Westinghouse to make and sell
patented lamps under terms controlling resale prices. See
Fed. Trade Comm’n v. Actavis, Inc., 133 S. Ct. 2223, 2232
(2013) (describing General Electric). In making a general
point about patentee sales (not involved in the case), the
Court said: “It is well settled, as already said, that where
a patentee makes the patented article, and sells it, he can
exercise no future control over what the purchaser may
wish to do with the article after his purchase. It has
passed beyond the scope of the patentee’s rights.” 272
U.S. at 489 (citing cases). We read that language to deem
“settled” only what was settled in the cited precedents—a
patentee’s sales without restrictions exhaust patent rights
in the item sold. The cited cases are Adams, Bloomer v.
McQuewan, Hobbie, Keeler, and Mitchell. They do not go
beyond that proposition.



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