U.S. Doctrine of Patent Exhaustion – A summary of Lexmark International v. Impression Products(Taiwan)

Melanie Lo & Leo Wang
On February 12, 2016, in Lexmark International v. Impression Products, Case No. 14-1617, the Federal Circuit en banc reaffirmed two of its prior holdings: 1) that a patentee can restrict the reuse or resale of a patented product if clearly communicated to the buyer at the time of purchase; and 2) that sales outside of the United States do not trigger patent exhaustion. The validity of these previous holdings had been called into question by two subsequent Supreme Court cases: Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) and Kirtsaeng v. John Wiley & Sons, 133 S.Ct. 1351 (2013). In reaffirming its prior precedents, the Federal Circuit found that the Supreme Court had not implicitly overruled the cases that announced those principles.
Restricted Sales
Under the restricted sale holding, first announced by the Federal Circuit in Mallinckrodt v. Medipart, 978 F.2d 700 (Fed. Cir 1992), when a patentee sells a patented product it may restrict the use of the product to a single use, or may restrict the purchaser from reselling the product to another. If these restrictions are violated by the purchaser, the patentee can sue for patent infringement, not just breach of the sales contract. This is in contrast to the general principle, established by the Supreme Court more than 150 years ago, that if a patentee sells a product without any conditions, it cannot later control the use or resale of that product.
In this case, Lexmark held patents on printer cartridges. It sold such cartridges with the express conditions that they could not be reused after the toner ran out, and that the purchaser could not transfer the used cartridge to anyone but Lexmark. Despite these provisions, Impression, obtained used Lexmark printer cartridges, refilled them and sold them to consumers. Under the Federal CircuitÕs ruling, because the cartridges are being reused in violation of the terms of the initial sale, their sale by Impression (and others) constitute an act of patent infringement.
Patent Exhaustion
The Federal Circuit also addressed the issue of cartridges sold by Lexmark without a restriction on reuse, but sold outside of the United States. Following its previous holding in Jazz Photo v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), the Federal Circuit reaffirmed that the sale of a patented product abroad, even when made or authorized by the patentee, does not exhaust a patenteeÕs rights. Thus, the patentee can sue for infringement if those products are later imported into the United States.
In Jazz Photo, the products at issue were disposable cameras. The accused infringers acquired the camera bodies after the initial roll of film had been used and developed, inserted a new roll of film, and sold the cameras for reuse. Similarly, in Lexmark, parties refilled printer cartridges with toner before selling. In both cases, if the initial product was sold in the United States (and without a single-use only restriction), this activity was permissible, under the longstanding doctrine of patent exhaustion. On the contrary, if the products were first sold outside of the United States, the patent rights were not exhausted and the patentee could still assert them if the products were brought into the United States without the patenteeÕs permission.
Although both Jazz Photo and Lexmark involved refurbishment and reuse of a patented product, that fact was not critical to the holding on patent exhaustion. Even if the patented product was not changed in any way from how it was sold, the patentee could sue for infringement when it was imported into the United States. This is the opposite result from that reached by the Supreme Court in Kirtsaeng under copyright law, where the court held that books sold by the copyright holder outside the U.S. could be imported without being subject to a copyright claim. (The Federal Circuit did recognize that a buyer of a patented product overseas might be able to establish an express or implied license to the patent, but those are distinct defenses from the doctrine of patent exhaustion.)
Open Questions
Although this ruling keeps in place the current law on patent exhaustion and restricted sales, it leaves open several questions which the courts may have to face in future cases. In finding that the restriction on reuse was permissible, the Federal Circuit noted that all of the parties had adequate notice of the restrictions imposed by Lexmark. Thus it did not address any questions that might arise in cases where Òa downstream re-purchaser acquired a patented article with less than actual knowledge of such a restriction,Ó and whether the outcome might be different under those circumstances.
Equally important, while the decision establishes a bright-line rule that foreign sales do not lead to patent exhaustion, there is no such clear rule for determining the location of a sale. Not only is there no Òsingle, universally applicable fact that determinesÓ where a sale occurs, Òit is not even settled whether a sale can have more than one location.Ó Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 807 F.3d 1283, 1308 (Fed. Cir. 2015). Given the importance of determining the location of a sale to determine whether patent exhaustion applies, as well as increasingly global supply chains, this issue is likely to be raised in future cases.
In reaffirming its holdings in Malinckrodt and Jazz Photo, the Federal Circuit gave continued power to patent owners to use patent rights as a way to control the use of patented products even after they are sold by the patentee. This gives patentees more flexibility to engage in price discrimination, whether by selling at different prices in the U.S. versus abroad, or charging more for unlimited use of a product instead of a single use.
Purchasers of used or refurbished goods, however, will need to be careful whether the original sale contained restrictions that may leave them open to claims of patent infringement. Buyers of products manufactured overseas, unless they have licenses with the patent owners, may need to be concerned about patents covering the components of those products.
Although the en banc holding makes these rules settled law in the Federal Circuit, an appeal to the Supreme Court is pending. On June 20, 2016, the Supreme Court asked the United States Solicitor General to submit the governmentÕs views on whether the Supreme Court should accept the case. Give that the Solicitor General took positions contrary to the Federal CircuitÕs ruling, it seems likely that the Solicitor General will recommend taking the case, which will make the Supreme Court more likely to accept the case. If the Supreme Court does, a ruling would not be likely until 2017 at the earliest.
Taiwan Law Perspective
Article 59, Paragraph 1, Subparagraph 6 of Taiwan Patent Law is the major regulatory basis for the doctrine of patent exhaustion in Taiwan. A patentee is not allowed to assert patent rights under the following circumstance: “The use or resale of a patented product after it is sold by the patentee or made under the authorization of the patentee. The making and selling as stated above are not limited to acts done domestically.” The concept of the patent exhaustion is that after a patented product made or sold by the patentee itself or by another person authorized by the patentee is sold in the market for the first time, the right to the patented product has been exhausted since reasonable compensation and royalties has been obtained and no patent claim can be asserted again.
At the outset, unlike Lexmark International v. Impression Products, the international patent exhaustion doctrine is expressly adopted in Article 59 of Taiwan Patent Law. This means that not only patent rights will be exhausted because patented products are made or sold in the domestic market in Taiwan, but also the patentee’s patent rights will be exhausted even if the patentee makes and sells patented products in international markets outside of Taiwan. As a result, the patentee will not be able to prohibit the import of such products by others. Such doctrine of international exhaustion was not adopted until the Patent Law as amended came into effect on January 1, 2013 in order to avoid the issue of uncertain territories in which rights are exhausted when courts have to make a determination based on individual cases.
Currently, there is no court decision that clarifies the issue of whether a patentee may assert patent infringement claim against a user when a licensee or user violates such sales/usage restrictions which have been imposed by the patentee. According to the literal interpretation of legal provisions such as Article 59 of the Patent Law, a patentee shall not assert patent infringement for the “use or resale” of patented products made or sold by the patentee or another person under the consent of the patentee. Therefore, it is possible that the literal interpretation of Article 59 may lead to a conclusion that the patentee shall not assert patent rights again regardless of whether the patentee imposed any usage restriction at the time of licensing. However, actual court opinions still require concrete cases which will be determined by the court on a case-by-case basis.

Impact on Taiwanese OEM
The holdings on the doctrine of patent exhaustion and restricted sales in Lexmark International v. Impression Products undoubtedly have obvious impact on OEM operators in Taiwan, including how a licensee can be aware of the licensing terms and restrictions imposed by “different layers of licensors” for each stage in order to ensure that the use of patents will not violate “any licensed sale restriction.” Moreover, under the circumstance that OEM operators in Taiwan do not have equal negotiation power with branded companies, it is impossible for them to request licensors to provide non-infringement representations and warranties. Therefore, uncertain patent infringement risks will be ultimately passed through to ultimate downstream licensees. With respect to the holding that adopts the doctrine of patent exhaustion for domestic sales in the US, how to determine “US domestic sale” is also an indefinite concept and this has greatly increased the risk of patent infringement by licensees. We will suggest that Taiwan OEM operators pay close attention to the outcome of the appeal to the Supreme Court for this case and retain legal counsels to review the legal documents to avoid or minimize the potential legal risks.