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Federal Circuit Declines to Disturb Established Precedent Regarding the Exhaustion of Patent Rights

On February 12, 2016, the Federal Circuit Court of Appeals issued a decision confirming two important aspects of the doctrine of patent exhaustion in the anticipated en banc decision in Lexmark Int’l, Inc. v. Impression Prods., Inc., Nos. 14-1617, -1619 (slip op.) (Fed. Cir. Feb. 12, 2016) (“Lexmark”). In a lengthy 10-2 decision, the court reaffirmed its prior decisions in Mallinckrodt and Jazz Photo. The first of these cases determined that post-sale limits on the use and resale of a product practicing a patented invention are permissible, and the second concluded that foreign sales of such a product do not exhaust a patentee’s U.S. rights to exclude. On Friday, the court declined to disturb these prior decisions in an important affirmation of a patentee’s U.S. patent rights.

In confirming that the 24-year-old Mallinckrodt decision got it right, the court rejected the contention that all sales by a patentee exhausts its rights as to the product sold, and compared direct sales by a licensee to a bilateral license agreement with the purchaser. The court distinguished the Supreme Court’s Quanta decision and relied on longstanding precedent that a patentee may, through restrictions on its licensees, limit the rights of downstream purchasers. In so holding, Judge Taranto, writing for the majority, explained that a patentee’s own sale of the patented article—instead of leaving the manufacture and sale of the article to others pursuant to a license—could not exhaust the patentee’s right to impose downstream restrictions.

The court also concluded that an extraterritorial sale of a patented good does not strip the patentee of its rights to restrict the claimed invention’s import into, or its sale or use within, the United States. This is because “a foreign market under foreign sovereign control [is] not equivalent to the U.S. markets under U.S. control.” Sale by a patentee within the United States “presumptively exhausts its rights in the article sold”—but the same presumption cannot be applied to foreign sales. The Federal Circuit accordingly rejected the defendants’ suggestion that the Supreme Court’s decision in Kirtsaeng, which assessed the effect of foreign sales on copyright protections under 17 U.S.C. § 109(a), should nonetheless govern a patent infringement dispute. In doing so, the court emphasized its 2001 pronouncement in Jazz Photo that foreign sales do not exhaust domestic patent rights.

This decision represents an important and substantial reaffirmation of long-settled Federal Circuit precedent regarding a patentee’s rights. Lexmark upholds both a patentee’s rights to limit post-sale, downstream use of its patented invention, and also recognizes established notions of domestic sovereignty over intellectual property protections. If it is appealed, observers will anxiously await the Supreme Court’s decision whether to review the Federal Circuit’s reasoning and result.

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Andrew DeVoogd