Patent Law vs Property Law in Impression Prods. v. Lexmark Int’l.

by Dennis Crouch

I finally predicted something! The Supreme Court has now granted writ of certiorari in the pending patent exhaustion case of Impression Products, Inc. v. Lexmark International, Inc., SCT Docket No. 15-1189.  The two questions presented involve domestic and international exhaustion respectively.

The “patent exhaustion doctrine”—also known as the “first sale doctrine”—holds 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). This case presents two questions of great practical significance regarding the scope of this doctrine on which the en banc Federal Circuit divided below:

1. Whether a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoids application of the patent exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through the patent law’s infringement remedy.

2. Whether, in light of this Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013), that the common law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article—authorized by the U.S. patentee—that takes place outside of the United States exhausts the U.S. patent rights in that article.

Lexmark offered its rewriting of the questions as follows:

Section 271(a) of the Patent Act provides that “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.” 35 U.S.C. § 271(a) (emphasis added). The petition asks this Court to review two questions related to this provision:

1. This Court and the court of appeals have held that the sale of a patented article does not automatically confer unlimited “authority” for others to make, sell, or use that article where the patent rights actually conveyed are more limited in scope. E.g., Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175 (1938); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). Did the court of appeals correctly reaffirm its precedent in holding that Lexmark’s sale of a patented toner cartridge, subject to a lawful and express limitation, did not automatically convey unlimited authority that had been clearly denied?

2. This Court and the court of appeals also have held, in light of Congress’s decision to geographically limit the scope of patent rights and infringement liability to the United States, that a lawful sale abroad does not automatically confer unlimited “authority” to sell or import a patented article in the United States. E.g., Boesch v. Graff, 133 U.S. 697 (1890); Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001). Did the court of appeals correctly reaffirm its precedent in holding that Lexmark’s sale of a patented toner cartridge in a foreign country, pursuant to the laws of that country, did not automatically convey “authority” to sell and import that product in the United States?

57 thoughts on “Patent Law vs Property Law in Impression Prods. v. Lexmark Int’l.

  1. 8

    Exhaustion tracks the general common principle that post-sale restrictions on use or sale of a chattel are void. C.f., Kirtsaeng at 1363 citing 1 E. Coke, Institutes of the Laws of England § 360, p. 223 (1628)*.

    Yet the Federal Circuit decision in Lexmark, as before in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), both assume that one can sell a chattel and impose post sale use or sales restrictions. But such restrictions are void under the common law. Thus the contracts by which those restrictions are imposed are void.

    What the Federal Circuit has been doing is seeking to reconcile its view of the common law with its view on exhaustion. But its view of the common law and of contractual obligations is completely wrong. One cannot sell a chattel and by contract impose post sale restrictions on use and resale.

    *

    “[W]hen a statute covers an issue previously governed by the common law,” we must presume that “Congress intended to retain the substance of the common law.” Samantar v. Yousuf, 560 U.S. ___, ___, n. 13, 130 S.Ct. 2278, 2289-2290, n. 13, 176 L.Ed.2d 1047 (2010). See also Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783, 72 S.Ct. 1011, 96 L.Ed. 1294 (1952) (“Statutes which invade the common law… are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident”).

    The “first sale” doctrine is a common-law doctrine with an impeccable historic pedigree. In the early 17th century Lord Coke explained the common law’s refusal to permit restraints on the alienation of chattels. Referring to Littleton, who wrote in the 15th century, Gray, Two Contributions to Coke Studies, 72 U. Chi. L.Rev. 1127, 1135 (2005), Lord Coke wrote:

    “[If] a man be possessed of … a horse, or of any other chattell … and give or sell his whole interest … therein upon condition that the Donee or Vendee shall not alien[ate] the same, the [condition] is voi[d], because his whole interest … is out of him, so as he hath no possibilit[y] of a Reverter, and it is against Trade and Traffi[c], and bargaining and contracting betwee[n] man and man: and it is within the reason of our Author that it should ouster him of all power given to him.” 1 E. Coke, Institutes of the Laws of England § 360, p. 223 (1628).

    A law that permits a copyright holder to control the resale or other disposition of a chattel once sold is similarly “against Trade and Traffi[c], and bargaining and contracting.” Ibid.

  2. 7

    Just a thought to mull over….

    If patents are not property, but are a public right, should the public benefit from any actual sale (besides things like tax – which also attach to personal property sales)…?

    What basis does exhaustion doctrine have, if not a property basis?

  3. 6

    Lexmark relies on Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175 (1938). But even that decision states that:
    “Petitioner puts its first question in affirmative form: The owner of a patent cannot, by means of the patent, restrict the use made of a device manufactured under the patent after the device has passed into the hands of a purchaser in the ordinary channels of trade and full consideration paid therefor.
    But that proposition ignores controlling facts. The patent owner did not sell to petitioner the amplifiers in question or authorize the Transformer Company to sell them or any amplifiers for use in theaters or any other commercial use. The sales made by the Transformer Company to petitioner were outside the scope of its license, and not under the patent. Both parties knew that fact at the time of the transactions. ” Page 304 U. S. 181

    1. 6.1

      That is, General Talking Pictures is about a purchaser of an unlicensed sale by a “field of use” licensee, not the patent owner.
      [It has been argued the “field of use” licenses, at least by area, are supported by the 35 USC 261 authorization to grant exclusive licenses to to .. “any specified part of the United States.”]

  4. 5

    An unusual amount of realistic commentary below re Mallinckrodt – it was amazing that these Fed. Cir. judges would try to reaffirm it and even extend it beyond its original specialized rationale.

    1. 5.1

      Paul, the Feds like to think they are something special in patent law — having inherited this arrogance from the CCPA. Even the Supreme Court publicly comment on this “attitude.”

      I long ago gave up on the idea that the court’s arrogance was peculiar to the judges involved. Rich (of that CCPA) died in the ’90s, but obviously, the attitude continues nearly two decades hence.

      1. 5.1.1

        This is a very unfortunate decision by the Supreme Court to grant cert. There is no claim construction in this entire case; and the original complaint lists more than 40 patents (a large set of method claims, kit-claims and product claims). Under Markman – in a case like this – a claim construction is required before moving on to determine liability. Whatever outcome this case will have, it will not be helpful to the patent community. In all prior SC and Federal Circuit cases dealing with patent exhaustion each time the lower court interpreted the patent-claims-in-suit. This cert. petition should be dismissed as improvidently granted.

        1. 5.1.1.2

          This case does not turn on the claims, so why would construction be required?

          What difference would any construction make if the plaintiff lacks standing to bring an infringement action against a specific defendant?

  5. 4

    RKS: Fourth, if the question is important enough to merit review, it’s important enough to merit review by a full panel of nine justices, and shouldn’t be taken up while the court could deadlock.

    So … four years from now?

    1. 4.1

      The second time in the same day you have made a comment regarding Supreme Court appointments that are at odds with the game and the players in the game…

      1. 4.1.1

        Try to spit it out, “anon.” You seem to want to say something but you just can’t find the words in the English language. Is it shame, or just the usual defect … [<— yes, that last bit is just for you]

        1. 4.1.1.1

          Are you really having that much difficulty noting that the incoming president will have a majority in the Congress?

          Try to spit it out, you say…

          Try to get a c1ue and leave the ad hominem aside until you do.

  6. 3

    I was going to pass on this thread, but that’s some first comment. Working backwards, should the court just shutter with 8 justices, or are there some cases worthy of hearing?

    The breadth of the question is actually pretty huge; if Lexmark’s activity is kosher, it opens up a million ways from Sunday to use the sledgehammer of patent infringement litigation to enforce ordinary commercial contracts. I’m sure the patent bar would appreciate that.

    This is a clear case where a bright line can be drawn. No post-sale restrictions are enforceable as patent infringement and the statue places no geographical limits on what may be an authorized sale.

    And to your first point last; there is no suitable question to answer to the subject matter problem presently to consider for cert.

     Good answers might eventually work into the view of the CAFC, but until they get into some kind of order on eligibility, I don’t see the USSC doing anything but watching for awhile.

    As anon might say; wrong, wrong, wrong, and wrong.

    1. 3.1

      Re: “This is a clear case where a bright line can be drawn. No post-sale restrictions are enforceable as patent infringement and the statue places no geographical limits on what may be an authorized sale.”

      If that bright line should be drawn, then Congress should be the one to draw it, not the courts. Economists might note it’s a pretty inefficient bright line to draw. It would needlessly preclude transactions between willing parties. And what would be the public policy reason for doing so? Just to have a bright line rule? Bright line-ism for its own sake does not good law make.

      1. 3.1.1

        It would needlessly preclude transactions between willing parties.

        What “transactions” are “precluded”?

        1. 3.1.1.1

          As between patentholder and buyer willing to assent to patentholder’s restrictions, of course. If exhaustion cannot be contracted around, patentholder has to keep invention to himself out of legit paranoia, buyer can’t buy Useful Thing that Patentholder’s Competitor Shouldn’t Have, and nobody wins except for economic inefficiency.

          1. 3.1.1.1.1

            If exhaustion cannot be contracted around

            We can contract until the cows come home. And if I buy patented X from you and breach your shrink-wrap contract by selling X to Y, you can sue me for breach. But there’s nothing “economically efficient” about allowing you to, e.g., sue Y for patent infringement. It’s convenient for you, sure. But it’s not all about you.

            1. 3.1.1.1.1.1

              I agree with Malcolm – Robert, where does this ownership in perpetuity notion come from? The exhaustion doctrine is nothing more than a natural result of patents having the aspect of property.

              (Hmmm, I wonder if the courts could even apply such a property-centric doctrine if patents are deemed public rights, as the grounds for exhaustion would disappear)

          2. 3.1.1.1.2

            Robert, As between patentholder and buyer willing to assent to patentholder’s restrictions

            Thus, from your view, the buyer is subject to a breach of contract action if he refills?

            Can you lay out the breach of contract action for us and cite a case in support?

      2. 3.1.2

        Whya?

        Absent a realistic political benefit, Congress does not usually respond to district court activity- esp. involving points of patent doctrine arcana. This is about as appropriate a matter for an appellate court as you may find.

        Economists don’t like alienation or unpredictable friction in transactions. Firms have all kinds of contractual recourse that need not include the horrific panoply of patent litigation.

        Public policy entirely supports quashing this scheme, hard, as it will be, 8 or 9 to zero.

        1. 3.1.2.1

          What is the “scheme” to which you refer?

          This isn’t arcana. Exhaustion doctrine is a major aspect of patent law that finds no basis in statute. It seems like if it’s a big enough deal for SCOTUS to look at it, then it should be something (in theory) that Congress should take the time to get right. (Granted, Congress doesn’t do much of anything these days. But putting that aside…)

          1. 3.1.2.1.1

            Robert, Exhaustion doctrine is a major aspect of patent law that finds no basis in statute.</i?

            Beg to differ.

            From the beginning, the rights of the patent owner were to prevent others from making using or selling the invention. The question is whether the authorized buyer infringes by using or selling the thing bought.

            It seems natural to construe the statute to be consistent with the common law that prohibited post-sale use or sales restrictions because Congress enacted the statutes with a presumed understanding of the common law. The Supreme Court has even held that the US statutes are to be construed to be consistent with Common Law, and that includes the patent statutes. See, e.g., Pennock v. Dialogue.

            The original exhaustion cases were decided on this basis, IIRC.

            1. 3.1.2.1.1.1

              Robert, Exhaustion doctrine is a major aspect of patent law that finds no basis in statute.

              Beg to differ.

              From the beginning, the rights of the patent owner were to prevent others from making using or selling the invention. The question is whether the authorized buyer infringes by using or selling the thing bought.

              It seems natural to construe the statute to be consistent with the common law that prohibited post-sale use or sales restrictions because Congress enacted the statutes with a presumed understanding of the common law. The Supreme Court has even held that the US statutes are to be construed to be consistent with Common Law, and that includes the patent statutes. See, e.g., Pennock v. Dialogue.

              The original exhaustion cases were decided on this basis, IIRC.

              1. 3.1.2.1.1.1.1

                I can’t make sense of what you’re trying to say, but it seems like you’re blurring statutory law and judge-made law. I don’t think there has ever in the history of history been a common-law patent, so when Congress sets up a statutory patent regime and doesn’t say anything about exhaustion, but then the courts come along and start cumulating default rules on top of it, there is no reason why private parties shouldn’t be able to override those rules by agreement between themselves. Pennock v. Dialogue is about validity, not about transactions between private parties, and the holding of that case was eventually incorporated into section 102 of the Patent Act, whereas exhaustion has never been so codified.

                1. Bob, Pennock holds that the English cases on patent law are authority, but not binding, on the construction of US statutes.

                  “[W]here English statutes, such for instance, as the statute of frauds, and the statute of limitations; have been adopted into our own legislation; the known and settled construction of those statutes by courts of law, has been considered as silently incorporated into the acts, or has been received with all the weight of authority. Strictly speaking, that is not the case in respect to the English statute of monopolies; which contains an exception on which the grants of patents for inventions have issued in that country. The language of that clause of the statute is not, as we shall presently see, identical with ours; but the construction of it adopted by the English courts, and the principles and practice which have long regulated the grants of their patents, as they must have been known and are tacitly referred to in some of the provisions of our own statute, afford materials to illustrate it.” link to scholar.google.com

                  Now the rule that one cannot sell personal property and retain restrictions on it use is from England and was featured in Kirtsaeng in the court’s recent case on the copyright statutes. I suggest the same reasoning would adopt the English rule into interpreting US patent statutes per Pennock.

                2. Ned,

                  Your “version” won’t help you here – as noted a little while back on Mr. Quinn’s blog, the US formation of patent law simply did not adopt all of England’s patent law concepts. Hewing too closely to the “but they did that in England” is just not dispositive (it may be helpful in certain areas and aspects of law, but there is no such “rubber stamp” that you can make up suppositions and “parallels” on the fly.

          2. 3.1.2.1.2

            Exhaustion doctrine is a major aspect of patent law that finds no basis in statute.

            Well, there is that common sense aspect to the doctrine and the fact that it’s been around for about 150 years.

            It’s the lawyers trying to get around the doctrine with licensing schemes while relying on patent law for enforcement which is mucking things up.

            1. 3.1.2.1.2.1

              Pretty sure that it is the businessmen (and not the lawyers) who are thinking up the schemes.

              Your source of cognitive dissonance shines through.

          3. 3.1.2.1.3

            The scheme is the use of the patent laws as a pretext to curtail ink-cartridge refillers lowering sales of OEM cartridges. Did you read the case?

            If Lexmark wants their carts back, they can lease them, and there is no patent question. But they want the benefits of a sale without the loss of the patent power inherent in selling.

            1. 3.1.2.1.3.1

              The “lease” issue is another can of worms.

              Far too many things that are in fact sales are disguised as leases and those contrivances should be quashed.

    2. 3.2

      Mr. Snyder,

      You supply a few answers “from me,” but it is not certain what those “wrong, wrong, wrong, and wrong” answers pertain to.

  7. 2

    I don’t know why the Supreme Court is taking up nonsense like this while foregoing . . . the question of whether a patent for intellectual property is a public right or a private right.

    Perhaps the 5-4 vote in Stern v Marshall gave the Court reason for pause?

  8. 1

    I don’t know why the Supreme Court is taking up nonsense like this while foregoing questions of subject-matter-eligibility, obviousness, and other more pressing issues that would do a lot more to help clarify the patent law and bring certainty to patent rights and stability to the patent system. First, there should be no question that it should be possible to contract around default rules established by courts. Second, the only thing that SCOTUS could do by getting involved is inject further uncertainty into the system and muddle the law. Third, whether the breadth of touch of this issue to practical transactions is worth SCOTUS review is questionable. Fourth, if the question is important enough to merit review, it’s important enough to merit review by a full panel of nine justices, and shouldn’t be taken up while the court could deadlock. But the court won’t deadlock. If you want a prediction, affirmed 8-0.

    1. 1.1

      Robert: First, there should be no question that it should be possible to contract around default rules established by courts.
      Crouch: Then bring a contract claim.

      Robert: The only thing that SCOTUS could do by getting involved is inject further uncertainty into the system and muddle the law.
      Crouch: The law is already quite muddled following Quanta, although I do lack confidence that this case will bring clarity.

      1. 1.1.1

        Crouch: then bring a contract claim.
        Moocow: what if the product ends up in the hands of someone with whom there’s no privity of contract?

          1. 1.1.1.1.1

            Sue for what? Consequential damages? Assume my patented product has research and commercial applications. I sell you my product cheap, “for research use only.”
            You then turn around and resell it to 3rd Party, no questions asked. And 3rd Party uses it for commercial purposes, making lots of $$$.
            Do you think it would be better if I came after you under contract, trying to recover damages caused by 3rd Party’s conduct? And because there’s no basis to enjoin 3rd Party, more damages would continue to accrue? How is that better than just allowing me a patent remedy?

            1. 1.1.1.1.1.1

              Yes it would be better.

              The contracting party (presumably) has full notice of what it contracted for. The third party bought a legitimate good that it has no reason to think violates anyone’s rights (specifically, the rights of the manufacturer of the good).

              We do not expect goods to be saddled with the dead hand of control by the manufacturer, which is what would happen if patent rights could be asserted even if the goods were lawfully sold by the patent owner. The transaction costs/problems that such a system would raise (especially where the goods are valued at small sums) are significant enough that the law generally does not allow them.

              (As a side note, if they were allowed, how could anyone ever be certain the goods they purchased were free of any restriction, or if they had a restriction, what those restrictions were? Such a world would raise significant antitrust concerns, and would significantly impede the free flow of goods.)

              Generally, where the law does allow a restriction on a good, it requires clear notice (consider e.g. easements and security interests, and when those things are/are not enforceable).

              1. 1.1.1.1.1.1.1

                We do not expect goods to be saddled with the dead hand of control by the manufacturer,

                Monsanto gleefully begs to differ.

                1. Yes, I was wondering where Monsanto was on this. Their take is that once they patent something, they control anything and everything related to it in perpetuity, and that it is okay to saddle poor and 3rd world countries with dependence on their product to the coutries’ further financial detriment.

                2. “Their take is that once they patent something, they control anything and everything related to it in perpetuity, and that it is okay to saddle poor and 3rd world countries with dependence on their product to the coutries’ further financial detriment.”

                  Not after the patent expires…

          2. 1.1.1.1.2

            Prof. Crouch, the position advanced stands in stark contrast to contract law resolutions.

            Robert’s position rings in a perpetual right (sort of what Monsanto got away with).

            As I noted, the doctrine at question is tied to the (then?) understood notion that patents and items protected under patents were fully property, and that a sale of an item was a sale unrestricted.

            So what happens now that some have argued that patents are not property at all, but are public rights? The nexus that the exhaustion doctrine depended upon is gone.

            So too then, the exhaustion doctrine itself?

    2. 1.2

      Reversed 8-0. Mallinckrodt ignored previous SCOTUS and Fed Cir cases holding to the contrary. All but 2 or 3 commentators believed Quanta overturned Mallincrodt (albeit sub silencio). Short opinion, Fed. Circ. smackdown again.

      1. 1.2.1

        Short opinion, Fed. Circ. smackdown again.

        I’m not so sure about the short opinion but I expect this will be at least a 6-2 smackdown.

        1. 1.2.1.1

          MM, who on the court could possibly side with Lexmark? They would have to put ideology over the law. Who is like that on the court?

          1. 1.2.1.1.2

            They would have to put ideology over the law. Who is like that on the court?

            You are kidding, right?

            How about all eight?

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