In the

Supreme Court of the United States







A. Legal background.

A patent provides important, but limited, legal protection to inventions for the specific purpose of promoting the general public welfare. The Constitu­tion's "Patent Clause itself reflects a balance be­tween the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the 'Progress of Science and useful Arts.'"

Thus, a patentee may preclude another from making, using, or selling an article that embodies its patented invention for the term specified in the Pa­tent Act. A patent holder can, in that sense, be said to possess a "monopoly" over the right to practice its patents.

That monopoly is limited by, among other things, the doctrine of patent exhaustion, which holds that the "authorized sale of a patented article gives the purchaser, or any subsequent owner, a right to use or resell that article." When title to the article "pass­es to the hands of the purchaser," the article "is no longer within the limits of the monopoly and the article "passes outside" of the patent mo­nopoly, and it "is no longer under the protection of the act of Congress".

That is because "the initial authorized sale of a patented item terminates all patent rights to that item", and "confers on the purchaser, or any subsequent owner, 'the right to use or sell' the thing as he sees fit". Patent exhaustion thus enables secondary re­sale and repair markets for patented goods.

The Federal Circuit has created two substantial exceptions to patent exhaustion. In Mallinckrodt, Inc. v. Medipart, Inc., the court held that a patentee may transfer ti­tle to the patented article and impose a post-sale re­striction on the article's resale or use that, notwith­standing the exhaustion doctrine, may be enforced by the patent laws. And in Jazz Photo Corp. v. Interna­tional Trade Commission, the court held that a patentee's U.S. pa­tent rights are not exhausted when the article is sold outside the United States in a sale authorized by the U.S. patentee.

B. Factual background.

This case concerns toner cartridges for laser printers-the component containing the ink used by the printer, which is replaced by a new cartridge when the ink is used up-and Lexmark's continued efforts to "dominate the market for cartridges com­patible with its printers."

Because a printer manufacturer often patents certain aspects of the toner cartridges used in its printers, the manufacturer may maintain a monopo­ly over the sale of new toner cartridges. Lexmark, a printer manufacturer, thus sells its new cartridges at a substantial premium, often charging several hun­dred dollars for a single cartridge. After a cartridge is spent, however, "remanufacturers" may "acquire used Lexmark toner cartridges, refurbish them, and sell them in competition with new and refurbished cartridges sold by Lexmark."

Impression Products, a small, family-owned business in Charleston, West Virginia, is one such remanufacturer. It purchases spent toner cartridges that were initially sold by Lexmark within the United States and in other countries. Impression Products then cleans, refills, and resells them to consumers. It sells its high quality cartridges at a substantial discount to Lexmark's new products, saving its customers signif­icant sums.

Lexmark, however, "would prefer that its cus­tomers return their empty cartridges to it for refur­bishment and resale, rather than sell those cartridg­es to a remanufacturer." It therefore offers its customers the option to purchase a "'Return Program Cartridge' at a discount of roughly 20 percent, subject to a sin­gle-use/no-resale restriction." These cartridges contain a restriction that "the buyer may not reuse the cartridge after the toner runs out and may not transfer it to anyone but Lexmark once it is used."

Lexmark maintains that its transfer of the Re­turn Program Cartridges to its customers constitutes a sale of property; it specifically disclaims any con­tention that the legal arrangement qualifies as a lease. According to Lexmark, a customer who purchases a "Return Program Car­tridge" "is not absolutely required to return the car­tridge to Lexmark."

C. Proceedings below.

In 2010, Lexmark sued several remanufacturers, including Impression Products, for direct and con­tributory patent infringement. Impression Products is the sole remaining defendant.

1. Impression Products moved to dismiss Lexmark's single claim of infringement in two sepa­rate motions-one directed to Return Program car­tridges first sold in the United States, and the other directed to cartridges first sold abroad. Impression Products contended that Lexmark's patent rights in the cartridges had been exhausted, and that its repair and resale of the cartridges was there­fore lawful.

The district court granted Impression Products' motion to dismiss as to the cartridges first sold in the United States. The court held that the Federal Circuit's ruling in Mallinckrodt had been overruled by this Court's decision in Quanta. In Quanta, the district court ex­plained, a downstream purchaser "had notice of the conditions of the sale of patented articles, yet the Supreme Court still held that the patent rights of the patentee had been exhausted after the first un­restricted authorized sale by its licensee." Thus, "under Quanta, * * * post-sale use re­strictions do not prevent patent rights from being exhausted when the initial sales were authorized and unrestricted."

Holding otherwise, the district court stated, would "create significant uncertainty for downstream purchasers and end users who may continue to be liable for infringement even after an authorized sale to the consumer has occurred." The court concluded "that the fully authorized sales of the Re­turn Program cartridges to consumers for use in the ordinary pursuits in life took the cartridges outside the scope of the patent monopoly despite the notices contained on those cartridges."

With respect to the cartridges first sold abroad, the district court denied Impression Products' motion to dismiss. The court described the "core dispute" on this issue as whether this Court's decision in Kirtsaeng v. John Wiley & Sons, Inc., "overturns" Jazz Photo. It concluded that this Court "did not intend to implicitly overrule Jazz Photo and that Jazz Photo remains controlling precedent on patent exhaustion abroad."

The district court entered a stipulated final judgment in favor of Impression Products as to the Return Program cartridges and in favor of Lexmark as to the cartridges initially sold abroad. Both parties appealed.

2. Prior to issuing a panel decision, the Federal Circuit sua sponte issued an order directing en bane hearing. The en bane court re­versed on the Return Program issue, reaffirming the validity of its Mallinckrodt decision; it affirmed on the foreign sales issue, reaffirming its Jazz Photo decision.

The Federal Circuit first observed that the par­ties had entered into agreements "narrowing" the "focus" of the dispute:

        The court observed that only a "single count of infringement" remained against Impres­sion Products, which does "not dispute the validity or enforceability of the patents."

        It also was undisputed that all relevant par­ties had adequate notice of the conditions Lexmark putatively placed on the Return Program cartridges.

        Lexmark did not assert that Impression Products' refurbishment of the cartridges­ that includes "the chip replacement and ink replenishment"-"results in new articles, which would be outside the scope of the ex­haustion doctrine."

The court concluded that this case therefore turns on two controlling legal questions. First, whether a patentee may impose post-sale restrictions on the use or resale of a patented article, enforceable under the Patent Act, even though the patentee or its licensee transfers title to the patented article in an authorized sale. And, second, whether a U.S. patentee's authorized sale of a pa­tented good abroad can ever exhaust U.S. patent rights.

With respect to patent-based post-sale re­strictions, the majority concluded that a patentee may enforce, under the patent law, a restriction placed on the good at the time of sale: "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." The majority held that Quanta did not overrule Mallinckrodt, and that Mallinckrodt is compatible with this Court's precedents addressing the exhaustion doctrine.

With respect to international exhaustion, the majority categorically held that patent exhaustion "cannot rest on a foreign first sale." It dismissed Kirtsaeng as limited to the "statutory question" whether the Copyright Act's first sale doc­trine applies abroad and concluded that the deci­sion's reasoning therefore "cannot be transposed to the patent-law setting." The majority con­cluded, in accord with Jazz Photo, that a sale outside the United States of a patented item cannot exhaust U.S. patent rights.

3. Judge Dyk, joined by Judge Hughes, dissent­ed. With respect to the patent-­based post-sale restrictions, the dissent stated that "Mallinckrodt was wrong when decided," because this Court has "repeatedly held that the authorized sale of a patented article exhausts all of the patent­ee's patent rights in that article." The dissent catalogued in detail the decisions of this Court conflicting with Mallinckrodt.

"In any event," the dissent added, Mallinckrodt "cannot be reconciled with the Supreme Court's re­cent decision in Quanta." In the dissent's view, the court of appeals "exceeded its role as a subordinate court by declining to follow the explicit domestic exhaustion rule announced by the Supreme Court." "The majority's justifications for refusing to follow Su­preme Court authority establishing the exhaustion rule misconceive our role as a subordinate court."

Turning to international exhaustion, the dissent concluded that the majority's categorical holding­ and Jazz Photo-are wrong. The dissent determined that a foreign sale author­ized by a U.S. patentee would not, "in all circum­stances," exhaust U.S. patent rights. It adopted the position advanced by the United States-holding "that the foreign sale should result in exhaustion if the authorized seller does not explicitly reserve its United States patent rights."



Patent exhaustion is a bedrock principle of pa­tent law: "Under the doctrine, 'the initial authorized sale of a patented item terminates all patent rights to that item'", and "confers on the pur­chaser, or any subsequent owner, 'the right to use or sell' the thing as he sees fit". Exhaustion thereby "prevents the patent holder from invoking patent law to control post-sale use of the ar­ticle."

Patent exhaustion is vital to competition. With­out it, patentees could opt to eliminate resale and re­pair markets for used, legally-purchased, patented goods.

1. A patentee may not avoid patent exhaustion by selling its goods with putative post-sale re­strictions attached. The Federal Circuit's contrary conclusion-which would permit circumvention of patent exhaustion at will-is incorrect.

To begin with, patent exhaustion serves as a mandatory "limit" on the scope of the patentee's rights. It operates on a simple principle: the pa­tentee is entitled to set the value of his or her reward for a particular patented article at the time of the first authorized sale, but after receiving that reward, the patent monopoly ceases as to the article sold.

An optional exhaustion regime would gut the fundamental purpose and operation of the doctrine. This Court has therefore rejected legal rules that would permit patentees to effect an "end-run around exhaustion."

Indeed, the Court has on numerous occasions held unenforceable patent-based post-sale restraints indistinguishable from Lexmark's resale ban. The Court's holdings in Univis and Quanta are each independently dispositive of that question. And those decisions reflect a long line of consistent determina­tions by this Court. To be sure, the Court briefly changed course in a single decision-Henry v. A.B. Dick Co.-which endorsed post-sale restrictions. But the Court expressly overruled A.B. Dick a mere five years later, confirming that post-sale restrictions may not be enforced through the patent laws.

To justify its contrary view, the Federal Circuit pointed to a purported distinction between sales by patentees and those by licensees. In fact, patent ex­haustion applies identically, without regard to whether a good is sold by a patentee or licensee. If the patentee has authorized the sale, then the first­-sale exhaustion doctrine applies.

That result is fundamental to enable competitive resale and repair markets for patented goods. Under the legal rule adopted below, any patentee could choose to foreclose completely all resale and repair markets for its patented products.

2.  A patentee may not circumvent patent ex­haustion by selling its goods outside the United States. The Federal Circuit's conclusion that a for­eign sale can never exhaust U.S. patent rights is in­correct.

Kirtsaeng held that sales abroad exhaust U.S. copyrights. In reaching that result, the Court consid­ered the contours of the common law, as identified by Lord Coke. It concluded that "the common-law doc­trine makes no geographical distinctions." That statement addressed property law and the exhaustion doctrine generally-not copyright ex­haustion specifically. Because patent exhaustion is solely a common-law doctrine, Kirtsaeng's understanding of the common law necessarily governs the result here.

The Court's holding in Quanta confirms that there is no foreign-sale exception to patent exhaus­tion. That result is likewise consistent with the prin­ciple that a patentee is entitled to a single reward for the sale of its patented goods.

The Federal Circuit's contrary conclusion injures U.S. consumers, industry, and workers alike. It au­thorizes U.S. patentees to engage in price discrimi­nation, charging U.S. consumers more than foreign consumers for the same goods. It injects costly uncer­tainty into the complex supply chain, creating undue costs for industry. And, finally, the Federal Circuit's approach creates a perverse incentive for patentees to manufacture their goods outside the United States.



The judgment of the court of appeals should be reversed.