Federal Circuit Reaffirms Its Longstanding Patent Exhaustion Rules

On Friday, February 12, 2016, the Federal Circuit issued a 10-2 en banc decision in Lexmark International, Inc. v. Impression Products, Inc., declining to reverse its precedential rulings on two principles of patent exhaustion. The majority opinion, authored by Judge Taranto, reaffirmed the holdings in Jazz Photo Corp. v. International Trade Comm'n, 264 F.3d 1094 (Fed. Cir. 2001), that a foreign sale of a patented item does not exhaust the patentee's U.S. patent rights, and in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) that sale of a patented item under otherwise lawful and clearly communicated post-sale restrictions on resale and use, does not exhaust the patentee's 35 U.S.C. § 271 rights to charge a buyer with patent infringement if the buyer engages in the restricted acts. In a decision that could be reviewed by the Supreme Court, the full Federal Circuit found that the patent exhaustion rules in Jazz Photo and Mallinckrodt remain sound in light of recent Supreme Court decisions in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), and Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S. 617 (2008). The decision underscores the ongoing importance of explicit restrictions on the resale of patented products, and suggests that contracting parties to international sales and licensing agreements should clearly delineate the terms permitting or restricting the import of patented articles into the U.S.

Lexmark makes and sells toner cartridges for its printers and owns a number of patents that cover the toner cartridges and their use. Lexmark offers buyers a choice to purchase a "Regular Cartridge" at full price without any restrictions on use, or a "Return Program Cartridge" sold at a discount, but subject to the restriction that the customer will only use the cartridge once and will return the used cartridge only to Lexmark. Lexmark sued Impression Products for patent infringement, alleging that Impression Products (i) imported into the U.S. cartridges purchased from Lexmark outside of the U.S. without permission from Lexmark to do so, and (ii) acquired and sold in the U.S. spent "Return Program Cartridges" which were subject to the restriction on resale and use. Impression Products did not dispute that its actions infringed Lexmark's U.S. patents, but argued that Lexmark's U.S. patent rights had been exhausted with respect to all such cartridges.

On the issue of foreign sales, Impression Products argued...