In the

Supreme Court of the United States

IMPRESSION PRODUCTS, INC.,  Petitioner,

v.

LEXMARK INTERNATIONAL, INC., Respondent.

 

BRIEF FOR RESPONDENT

STATUTORY PROVISIONS

35 U.S.C. 154(a)(1) provides:

Every patent shall contain a short title of the in­vention and a grant to the patentee, his heirs or assigns, of the right to exclude others from mak­ing, using, offering for sale, or selling the inven­tion throughout the United States or importing the invention into the United States, and, if the invention is a process, of the right to exclude others from using, offering for sale or selling throughout the United States, or importing into the United States, products made by that pro­cess, referring to the specification for the particu­lars thereof.

35 U.S.C. 261 provides:

Subject to the provisions of this title, patents shall have the attributes of personal property ....

Applications for patent, patents, or any interest therein, shall be assignable in law by an instru­ment in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right un­der his application for patent, or patents, to the whole or any specified part of the United States.

35 U.S.C. 271(a) provides:

Except as otherwise provided in this title, who­ever without authority makes, uses, offers to sell, or sells any patented invention, within the Unit­ed States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

INTRODUCTION

The Patent Act specifies the rights of patentees: "to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States." If others do any of these "without au­thority" from the patentee, they infringe the patent.

Patent "exhaustion" occurs when the patentee and buyer agree to an unrestricted sale of a patented item. Such sales grant buyers full "authority" to use, sell, offer to sell, and import that item, and they de­liver patentees a full reward for the invention embod­ied in it. Nothing in the Patent Act, precedent, or sound policy, however, mandates a one-size-fits-all approach that requires patentees to convey and buy­ers to pay for rights neither wants to exchange. When buyers and sellers agree to a lower-priced sale that limits a buyer's "authority" and the patentee's con­comitant reward, such sales do not automatically ex­haust all the patentee's rights. Rights that the pa­tentee withheld and the buyer chose not to acquire were never transferred.

That is true for both domestic and foreign sales. Domestically, patentees and buyers may agree to convey limited "authority" within the scope of a pa­tentee's rights. Interna­tionally, the sale of a product under foreign law does not even implicate-much less extinguish-a patent­ee's rights under U.S. law. The distinctly territorial Patent Act establishes a patentee's right to exclude others "throughout the United States," to conveyor deny authority "within the United States," and to bar imports "into the United States." Those U.S. rights do not block foreign use of an invention before a sale, and the invention's foreign sale corresponding­ly does not extinguish any U.S. rights. If the parties agree, sales abroad may authorize use or sale in the United States, but nothing in the Patent Act suggests they must do so. Allowing patentees and buyers to exchange only the rights they want has facilitated healthy domestic and foreign trade in patented goods.

Yet Impression now proposes to change the law and impose an unalterable rule: every patentee­ authorized sale of a patented article anywhere in the world, no matter what the agreed terms of sale, must transfer all U.S. patent rights over that article. Pur­chasers could not agree to acquire less, no matter how clearly and no matter what the economic and ef­ficiency benefits-even if they intended to use the product only once, or only in a foreign country. Im­pression's position is based entirely on a patchwork of incomplete and out-of-context quotations that Im­pression has stitched into its preferred policy of worldwide automatic exhaustion. This Court's actual holdings, as Judge Taranto painstakingly explained for judges below, do not support Impression's novel proposal.

Even if this Court were free to craft a federal com­mon law of patents, Impression's mandatory ­exhaustion proposal should be rejected. It would cre­ate illogical, market-distorting loopholes for licensees. It would excuse blatant and large-scale unauthorized sales, while ensnaring only the most innocent con­sumers as infringers. It would discourage sales in na­tions with weak patent systems by making those sales an automatic and mandatory grant of authority to import and sell patented products, including medi­cines, in the United States. And it would ask judges, rather than elected officials or trade negotiators, to reshape an international economy that has operated in reliance on existing doctrine for decades.

STATEMENT

A. Lexmark's Sale Of Patented Products.

Lexmark is a Kentucky-based manufacturer that develops, patents, and sells printers, toner cartridges, and associated software. It competes with larger companies like Hewlett-Packard in the commercial-printing market. To make its prices and products attractive to sophisticated, high-volume cus­tomers, "Lexmark offers buyers a choice" between single-use and unlimited-use commercial-grade car­tridges. The latter are full price, not sub­ject to any restrictions, and may be disposed of or re­used as buyers see fit. Alternatively, for roughly 20 percent less, customers who have no interest in reus­ing spent cartridges may buy "Return Program" car­tridges. These patented cartridges are designed and licensed for a single use, with a microchip that disa­bles printing once all toner is consumed. As the parties stipulated, the reduced price of the Return Program cartridges reflects the value of the property interest and use rights conveyed to the purchaser under the express terms of Lexmark's con­ditional sale contract and single-use license.

Lexmark customers can choose whether to buy sin­gle-use cartridges. Customers who do so agree with Lexmark, in an "express and enforceable contractual agreement," to comply with the single-use license. Those customers also agree that they will return the patented cartridge only to Lexmark for remanufacturing or recycling." The sin­gle- use design of each cartridge is clearly displayed, in multiple languages, on the outside packaging of a Return Program cartridge and on the cartridge itself. It is "undisputed that all end users receive adequate notice of the restriction supporting the discounted price before they make their purchases."

Lexmark's foreign-sold cartridges are also explicitly limited: the microchips are "regionalized" according to the geographic areas in which Lexmark does busi­ness. A cartridge sold in Europe, for instance, will not function in a printer sold in North America. Regionalization helps Lexmark defend against piracy and gray-market suppliers by making it harder for third parties to arbitrage products between different global markets. In addition, many for­eign cartridges are sold under the same Return Pro­gram terms of sale as domestic cartridges.

 

B. Impression's Infringement.

Despite the express limitations on these sales, li­censes, and the products themselves, third-party re­sellers like Impression acquire, hack, and resell Lexmark cartridges. Impression made two types of unauthorized sales at issue here: single-use cartridg­es initially bought in the United States and cartridg­es bought abroad.

In both instances, resellers acquire spent cartridg­es, hack their microchips to override the single-use and/or regionalization settings, fill the cartridges with toner, affix their own labels, and sell the modi­fied cartridges in the United States. hese steps exceed the scope of the rights Lexmark's customers acquired when they bought lower-priced, single-use cartridges or regionalized, foreign-sold cartridges.

Lexmark sued Impression (and other unauthorized resellers) for infringement. Every defendant, save Impression, admitted infringement and settled. Im­pression likewise admits that Lexmark's patents are valid and cover the cartridges it sells. Impression's only defense is that Lexmark "exhaust­ed its U.S. patent rights in the cartridges by its ini­tial sales of them." According to Impression, it has the "authority" to hack and resell Lexmark's patented goods simply because Lexmark sold them to others, notwithstanding the limited authority Lexmark con­veyed to buyers.

C. Decisions Below.

The district court rejected Impression's position that foreign sales exhausted Lexmark's U.S. patent rights, but adopted Impression's position that domes­tic sales did so despite the single-use agreement and license. Impression stipulated to final judgment of infringement for its sales of foreign cartridges, and the parties cross-appealed. After Impression agreed that its defenses were foreclosed by circuit precedent, the court of appeals took the case en banco.

By stipulation, the parties narrowed this dispute significantly:

1.    The lower price of single-use cartridges reflects the value of the limited property interest and use rights Lexmark conveyed..

2.    The single-use agreements between Lexmark and its customers are valid and enforceable contracts.

3.    The "adequacy of the notice is unchallenged," avoiding questions regarding "a downstream re-purchaser" that claimed "less than actual knowledge of such a restriction."

4.    Impression does not contend the single-use re­striction "exceeds the scope of the patent" or violated antitrust laws.

5.    Impression "did not preserve an implied­ license defense."

The court of appeals ruled for Lexmark on both the domestic and foreign questions. Judge Taranto's do­mestic-sales ruling for judges reaffirmed "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." The Patent Act's text, this Court's holdings, widespread reliance interests, and the illog­ical disparity between licensee and patentee sales all precluded Impression's proposed move to mandatory automatic exhaustion.

As to foreign sales, the court unanimously held that sales outside the United States do not automatically terminate U.S. patent rights. It rejected Impression's position that Kirtsaeng's application of the Copyright Act's statutory first-sale provision to foreign-made works silently determined the Patent Act's effect on foreign-sold articles. The territorial nature of the Pa­tent Act and the Paris Convention's international pa­tent regime, rather, meant that the sale of a patented product in another jurisdiction can, but does not nec­essarily, grant authority under U.S. patent law. In that regard, a ''buyer may still rely on a foreign sale as a defense to infringement" if a li­cense authorized U.S. use or sale-a defense Impres­sion did not raise.

Two dissenting judges would have broadened the circumstances under which domestic and foreign sales terminate U.S. patent rights. The dissent con­tended that patentees, unlike licensees, necessarily lose all patent rights when they sell a patented arti­cle in the United States, regardless of any express agreement. or foreign sales, the dissent rejected Impression's automatic­ exhaustion position, but would have held that a for­eign transaction must have "explicitly reserved the United States patent rights" to avoid exhaustion.

SUMMARY OF ARGUMENT

I. The Patent Act defines the parameters of the ex­haustion doctrine. Patentees receive a particular set of distinct rights to "exclude others" from making, selling, offering to sell, using, or importing their in­vention, and an infringer is anyone who does any of those things "without authority." An infringement claim therefore asserts that the defendant lacked "authority" to act. The affirma­tive defense of exhaustion maintains that a prior sale conferred the requisite "authority." And because the rights to exclude and infringement remedy go hand­-in-hand, a patentee's exclusive rights limit the scope of the "authority" it can withhold or convey.  

Sales can (and often do) convey full authority over patented articles, and the proceeds of such sales fully reward patentees for-and thus "exhaust"-their rights over those articles. Alternatively, as this Court held long ago, sales can convey less than full authori­ty, in which case the patentee's (smaller) reward ac­counts only for the particular rights conveyed with respect to that item. In all events, however, the Pa­tent Act does not allow patentees to leverage their patents to secure rights that exceed the statutory grant. That is exhaustion in a nut­shell.

Impression is accordingly liable for infringement. All parties agree that the rights at issue were "within the scope of the Patent Act's express grant of exclu­sive rights over Lexmark's patented articles." And all agree that the lower price of Return Program cartridges "reflects the value of the more limited property rights and interests conveyed." Lexmark did not convey to its customers "authority" that its customers chose not to acquire.

Impression reads this Court's decisions to create an atextual rule that sales by patentees (but not licen­sees) must always convey full authority. But Impres­sion's tortured explanations of this Court's holdings make clear that this senseless schism does not exist. Nor would Impression's revisionism serve any larger purpose. Impression's sky-would-fall predictions are belied by the courts' long-ago rejection of automatic exhaustion, which has not inhibited trade or com­merce. Given the disruption Impression's approach would create for specific reliance interests and com­merce generally, there is "no reason to depart from the  statute and precedent."

II. Sales of U.S.-patented articles under foreign law do not implicate U.S. patent rights at all-much less automatically extinguish them.

Unlike an unrestricted domestic sale, the foreign sale of a U.S.-patented product does not reward the patentee for lifting any U.S. legal restrictions, be­cause the U.S. patent never imposed any restrictions on the product's foreign sale or use to begin with. The Patent Act, and U.S. patents granted under it, have no extraterritorial force.

Rather, the Act speaks in expressly territorial terms: it confers rights "throughout the United States," bars importation "into the United States," and establishes liability for infringement "within the United States." The absence of corresponding rights or limitations in for­eign jurisdictions reflects obligations, spanning from the 1883 Paris Convention to recent U.S. trade agreements, under which the legal force of a patent issued in one country is confined within that coun­try's borders. Nothing in the Act departs from this distinctly territorial regime to automatically confer U.S. rights based on a sale under foreign law.

Yet that is the novel policy Impression proposes here: any authorized foreign sale would always ex­haust all U.S. patent rights. Even if the patentee and buyer expressly agreed to transfer only foreign rights, and even if the U.S. patentee valued U.S. rights much more highly than the foreign buyer, Impression would force the patentee to convey (and the buyer to pay for) U.S. patent authority. The only support Im­pression marshals for this extreme view is an 1885 district court ruling, a 2006 footnote about substan­tial embodiment, and a 2012 interpretation of the Copyright Act.

Those decisions never confronted the statutory lim­its or precedent at issue here. This Court's decision in Boesch v. Graff, (1890), and a long line of decisions applying it, recognize the separate for­eign and U.S. rights at issue when a party like Im­pression attempts to import and sell a patented arti­cle based only on a sale abroad. Those precedents, moreover, also recognize the patentee's ability­ repeatedly obscured by Impression, but explicitly rec­ognized by the court below-to expressly or impliedly license U.S. sale or use through a foreign transaction. Nor can the economic and foreign-policy consequences of automatic worldwide exhaustion-which are signif­icant and contested-justify a decision by this Court that would remove the question from the political process.

The United States agrees with this understanding of the statute and precedent. Yet it proposes a com­promise position that foreign sales would presump­tively transfer U.S. rights. That policy preference, however, finds no support in the statutory text, this Court's precedent, or the logic of the Government's own acknowledgement of the fundamentally territo­rial nature of the international patent regime.

 

CONCLUSION

For the foregoing reasons, the Court should affirm the judgment of the court of appeals.