En Banc Court to Decide Two Important Exhaustion Issues

In a rare move, the Federal Circuit sua sponte ordered hearing en banc and additional briefing on questions related to patent exhaustion in Lexmark International, Inc. v. Impression Products, Inc., Nos. 14-1617, -1619 (Fed. Cir. Apr. 14, 2015).

The doctrine of “patent exhaustion” provides that the first authorized sale of a patented item “exhausts” a patentee’s right to control the post-sale activities of that item. This doctrine is based on the theory that a lawful buyer should be free to use the patented item without restriction from the patentee. Although the doctrine has a lengthy history, two recent Supreme Court decisions have highlighted several important issues. The Federal Circuit is now poised to resolve two of these issues en banc.

The first issue is whether the Federal Circuit should overrule Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), which held that foreign sales of a patented item do not exhaust patent rights in the United States (so-called “international exhaustion”). Impression asks the Court to overrule Jazz Photo based on the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012), which held that copyrighted, not patented, material sold abroad was exhausted under the Copyright Act’s first-sale provisions. The issue of international exhaustion has implications in today’s global economy where patented products may be sold abroad and imported to the United States.

The second issue is whether the Federal Circuit should overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), which held that the sale of a patented article made under a lawful restriction within the scope of the patent grant does not exhaust the patentee’s rights in the article. Mallinckrodt concerned the scope of a patentee’s right to condition authorized sales, holding that some restrictions, such as “single use only” restrictions, could preclude a finding of exhaustion. The district court found that the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), overruled Mallinckrodt, and Lexmark asks the Court to reverse the decision below and uphold both Mallinckrodt and Lexmark’s current post-sale provisions.

At issue is the enforceability of Lexmark’s cartridge “prebate” program in which an end user can either buy a full-price printer ink cartridge without any restrictions on its use or the user can buy a discounted cartridge on the condition that the cartridge is returned to Lexmark for disposal or refurbishment. Although neither party appears to challenge that the program created a valid contract between Lexmark and the sellers and end users of Lexmark’s products, the parties dispute whether Lexmark’s patent rights are exhausted or whether Lexmark can hold Impression liable for patent infringement after Impression bought, refurbished, and resold Lexmark’s patented cartridges.

The Federal Circuit has ordered briefing and an en banc hearing to resolve these two questions. While both of these questions are individually noteworthy, the en banc order makes this a case to watch.