Impression Products, Inc. v. Lexmark International, Inc.

Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. 360 (2017), is a decision of the Supreme Court of the United States on the exhaustion doctrine in patent law in which the Court held that after the sale of a patented item, the patent holder cannot sue for patent infringement relating to further use of that item, even when in violation of a contract with a customer or imported from outside the United States.. The case concerned a patent infringement lawsuit brought by Lexmark against Impression Products, Inc., which bought used ink cartridges, refilled them, replaced a microchip on the cartridge to circumvent a digital rights management scheme, and then resold them. Lexmark argued that as they own several patents related to the ink cartridges, Impression Products was violating their patent rights. The U.S. Supreme Court, reversing a 2016 decision of the Federal Circuit, held that the exhaustion doctrine prevented Lexmark's patent infringement lawsuit, although Lexmark could enforce restrictions on use or resale of its contracts with direct purchasers under regular contract law (but not as a patent infringement lawsuit). Besides printer and ink manufacturers, the decision of the case could affect the markets of high tech consumer goods and prescription drugs.

Background

Factual setting

Lexmark International, Inc. makes and sells printers and toner cartridges for its printers. Lexmark owns a number of patents that cover its cartridges and their use. Lexmark sold the cartridges at issue in this case—some in the United States and some abroad.

Domestic sales

Lexmark's domestic sales were in two categories. A "Regular Cartridge" is sold at "list price" and confers an absolute title and property right on the buyer. A "Return Program Cartridge" is sold at a discount of about 20 percent, and is subject to post-sale restrictions: The buyer may not reuse the cartridge after the toner runs out and may not transfer it to anybody else. The first branch of the case turns on the legal status of these post-sale restrictions.

Lexmark manufactured the toner cartridges with microchips in them, which send signals to the printers indicating toner level. When the amount of toner in a cartridge falls below a certain level, the printer will not operate with that cartridge. Also, the printer will not operate with a Return Program Cartridge that has been refilled by a third party. Thus, Lexmark's technology prevented violation of the post-sale restriction against refilling the Return Program Cartridges. The Regular Cartridges do not have this anti-refill feature and can therefore be refilled and reused (but they cost 20 percent more).

"To circumvent this technological measure," however, "third parties have 'hacked' the Lexmark microchips. They created their own "unauthorized replacement" microchips that, when installed in a Return Program cartridge, fool the printer into allowing reuse of that cartridge. Various companies purchase used Return Program Cartridges from the customers who bought them from Lexmark. They replace the microchips with "unauthorized replacement" microchips, refill the cartridges with toner, and sell the "re-manufactured" cartridges to resellers such as Impression Products for marketing to consumers for use with Lexmark printers. Lexmark had previously argued in Lexmark International, Inc. v. Static Control Components, Inc. that replacing these microchips violated copyright law and the Digital Millennium Copyright Act (DMCA), but both federal and the Supreme Court have ruled against Lexmark, affirming that replacing the microchips is not in violation of copyright.

Imported cartridges

The second branch of the case involves cartridges that Lexmark sold outside the US. While some of the foreign-sold cartridges were Regular Cartridges and some were Return Program Cartridges, this branch of the case does not involve any distinction among the two types of imported cartridges.

Trial court decision

The district court granted Impression's motion to dismiss Lexmark's claim of infringement involving the single-use cartridges Lexmark had first sold in the United States.Lexmark Int'l, Inc. v. Ink Techs. Printer Supplies, LLC, No. 1:10-cv-564, 2014 WL 1276133 (S.D. Ohio Mar. 27, 2014). The district court concluded that the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc.. found exhaustion where "the Supreme Court determined that the agreements [at issue] broadly authorized Intel [the seller] to sell the licensed products without restrictions or conditions."2014 WL 1276133, at *5. The district court said "that Quanta overruled Mallinckrodt sub silentio," and therefore "those post-sale use restrictions do not prevent patent rights from being exhausted given that the initial sales were authorized and unrestricted."2014 WL 1276133, at *5-6.

The district court held, however, that the exhaustion doctrine did not apply to the cartridges that Lexmark had sold abroad. It said that international exhaustion did not apply to patents because Kirtsaeng v. John Wiley & Sons, Inc.,. which established international exhaustion in at least some cases, applied only to copyrights. The court therefore denied Impression's motion to dismiss Lexmark's claim of infringement involving the cartridges Lexmark had sold abroad.9 F. Supp. 3d at 838.

Government amicus curiae position

In its amicus curiae brief, the US Government argued that Mallinckrodt had been wrongly decided in 1992 and in any case it had been overruled sub silentio in Quanta. It stated: In the view of the United States, the first authorized sale of a patented article in the United States wholly exhausts the patentee's exclusive rights in that article, notwithstanding any post-sale restriction imposed by the patentee. The government also argued that the decision of Jazz Photo Corp. v. United States International Trade Commission (2001) should be partially overruled in light of Kirtsaeng insofar as it held that foreign sales can never exhaust US patent rights. When the patentee neither makes nor authorizes a foreign sale, as occurred in Boesch v. Graff,. it is proper to say no exhaustion occurred. But when the patentee makes or authorizes a foreign sale, and fails expressly to reserve its US rights, then exhaustion should be found. In the present case, Lexmark made the foreign sales and failed to expressly reserve its US rights; therefore, the sale exhausted the patent rights.

Federal Circuit decision

The parties each appealed. After a three judge panel had heard oral argument the Federal Circuit sua sponte set the case for argument en banc in the first instance and invited the filing of amicus curiae briefs.

Majority opinion

Judge Taranto, writing for a 10-2 majority, reaffirmed both of the prior Federal Circuit rulings. In summary, the court held:

First, we adhere to the holding of Mallinckrodt, Inc. v. Medipart, Inc. 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. . . .

Second, we adhere to the holding of Jazz Photo Corp. v. International Trade Comm'n, 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 no-exhaustion 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., in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing 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.816 F.3d at 726-27.

Domestic exhaustion

In this part of its opinion, the Federal Circuit reaffirmed its Mallincrodt decision and rejected contentions that Quanta had silently overruled it.

§ 271 abrogates common-law rule

The court began by distinguishing the Patent Act's and Copyright Act's respective approaches to infringement. in 17 U.S.C. § 109(a) the Copyright Act says, "Notwithstanding the provisions of section 106(3)," defining infringement by selling, a purchaser "is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession" of a purchased copy of a work. In contrast, the Patent Act contains no exhaustion provision. Therefore, the Patent Act requires a "conferral of 'authority' by the patentee . . . in order for the actions listed in § 271(a) not to constitute infringement." This means there must be "permission from the patentee" to avoid infringement. The court does not accept exhaustion as a form of "constructive" permission. Hence, if the patentee places explicit limits or conditions on its permission, they qualify the scope of the permission. This has the effect of limiting the common law.

General Talking Pictures rule applies to "conditional" sale

The court turned to the General Talking Pictures decision, which holds "that Lexmark would not have exhausted its patent rights in those cartridges, upon the manufacturing licensee's sale (the first sale), if a buyer with knowledge of the restrictions resold or reused them in violation of the restrictions." Although the government in its amicus curiae brief and defendant Impression argue "that a different result is required—that Lexmark automatically lost its patent rights—simply because Lexmark sold the Return Program cartridges itself, subject to the same communicated restriction, rather than having left the manufacture and sale to others under license," the court does not accept that:

We conclude otherwise, as we did in Mallinckrodt and subsequent decisions. A sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the "authority" to engage in the use or resale that the restriction precludes. And there is no sound reason, and no Supreme Court precedent, requiring a distinction that gives less control to a practicing-entity patentee that makes and sells its own product than to a non-practicing-entity patentee that licenses others to make and sell the product.

Quanta distinguishable and inapplicable