Contract Violation Restricting Resale Constitutes Patent Infringement

In Lexmark International Inc. v. Impression Products Inc., 2014-1617 (Fed. Cir. February 2016) (available here), the Court of Appeals for the Federal Circuit held that when a patentee sells a patented article under contract having otherwise-proper restrictions on resale and reuse of the patented product, which contract is communicated to the buyer at the time of sale of the patented product, the buyer cannot engage in the prohibited resale or reuse and the patentee has authority to lawfully restrict the resale and reuse of the patented product. The Federal Circuit also held that a foreign sale of a U.S. patented article, when made by or with approval from the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale.  The loss of U.S. patent rights based on a foreign sale remains a matter of express or implied license.  

Lexmark makes and sells printers and toner cartridges.  Lexmark owns a number of patents that cover the toner cartridges and their use.  Lexmark sold printer cartridges domestically and over seas, at a discount, subject to an express single-use/no-resale contractual restriction.  Defendant Impression acquired the printer cartridges at issue in order to resell them into the United States after a third party physically modified them to enable reuse in violation of the single-use/no-resale contract restriction.  Impression acted without affirmative authorization from Patentee Lexmark and in violation of the express denial of authorization to engage in resale and reuse.  Lexmark sued Impression for patent infringement under 35 U.S.C. §271.

Defendant Impression asserted a defense of patent exhaustion and questioned the validity of Federal Circuit case law in light of recent Supreme Court cases.

The Federal Circuit Court found that the resale or reuse, when contrary to known, lawful limits on the authority contractually conferred at the original sale, remains unauthorized, infringing conduct under 35 U.S.C. § 271.  The patentee does not exhaust its statutorily explicit §271 rights “to sell” the patented product by the first sale of the patented item.  Therefore, a patentee may charge the buyer with patent infringement (for violating the patentee’s right §271 “to sell” the patented product) when the buyer engages in those acts.  Also, any downstream buyers who have knowledge of the “no resale” contract restrictions   may be charged with infringement.

The Federal Circuit adhered to its holding in 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 contractual restriction, that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or any downstream buyers, the right to resell or reuse because such “no resell or reuse right” was expressly denied.  Under Supreme Court precedent, a patentee may preserve its 35 U.S.C. § 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.  

The Federal Circuit also adhered to its decision in 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.  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.

Defendant had argued that the recent Supreme Court cases of  Kirtsaeng and Quanta suggested that the first sale of the patented item exhausted patentee’s rights and released the defendant from the contractual restrictions.  “The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008); see also  Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013)(exhaustion under the Copyright Act).

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