“Federal Circuit Sidesteps Supreme Court Twice in Exhaustion Ruling”

February 15, 2016
Client Alert

In its February 12, 2016, decision in Lexmark Int'l, Inc. v. Impression Prods., Inc., the Federal Circuit sitting en banc reaffirms two of its major pro-patentee precedents on patent exhaustion in the face of recent Supreme Court decisions that arguably require the opposite result.

In the first part of Lexmark, the majority holds that a patentee may sue for infringement when its products have been transferred or reused in violation of restrictions under which the patentee originally sold the products, as it held in the Mallinckrodt case in 1992. Many commentators believe that the Supreme Court implicitly overruled Mallinckrodt in 2008 in Quanta Computer, where it held that a patentee’s restrictions on its licensee did not avoid exhaustion of its patents, which occurs when a patentee or its licensee makes a first sale of a patented product. The Lexmark majority distinguishes Quanta and other Supreme Court exhaustion cases primarily by contrasting the facts in those cases with those in Lexmark, even though there is broad language in Supreme Court cases that can be read as preventing a patentee from enforcing post-sale restrictions through infringement cases.

In the second part of Lexmark, the Federal Circuit holds that sale of a patented item outside the United States does not exhaust U.S. patent rights on that item, as the court held in its 2001 Jazz Photo decision. In doing so, the majority holds that the Supreme Court’s 2013 Kirtsaeng decision, which found U.S. copyrights exhausted by sales from the copyright holder outside the U.S., was inapplicable, primarily because copyrights have a different statutory framework than exists for patent law.

Given the Supreme Court’s interest in patent cases, a vigorous dissent in Lexmark that relies on a number of Supreme Court precedents, including Quanta and Kirtsaeng, and the position of the Justice Department that Quanta overruled Mallinckrodt, it would not be surprising to see the Supreme Court take up Lexmark in its next term.

Those businesses that rely on post-sale restrictions when selling patented products or use their patent rights to prevent products they introduce in foreign markets from being brought to the U.S., may want to consider other business and agreement structures to achieve their goals, on the possibility that the Supreme Court will once again alter long-standing tenets of exhaustion law.

Those interested in the decision or its impact may contact an attorney at Marshall Gerstein.

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