NYIPLA Proposes the Supreme Court Should Reaffirm That Conditional Sales of Patented Items Do Not Give Rise to Downstream Patent Exhaustion When the Conditions Are Violated

By Noah Leibowitz, Jonathan Sanders, and Michael Keenan

Noah M. Leibowitz, as counsel of record, Jonathan C. Sanders, Michael Keenan, Walter E. Hanley, Jr., Charles R. Macedo, David P. Goldberg, and Robert J. Rando were authors on the brief.   David P. Goldberg and Irena Royzman are Co-Chairs of the NYIPLA Amicus Briefs Committee, and Robert M. Isackson is the Committee’s Board Liaison.

On Wednesday, February 22, 2017, the New York Intellectual Property Law Association (the “Association”) filed an amicus brief encouraging the Supreme Court to rule in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189, that a patentee may impose otherwise valid, lawful conditions on the resale or reuse of a patented item, and enforce those conditions through the patent laws.  The Association’s position calls for the Court to reaffirm the Federal Circuit’s 25-year-old ruling in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that conditional sales are generally valid and enforceable through the doctrine of exhaustion, unless the condition runs afoul of an independent legal principle such as the antitrust laws.

The case concerns Impression’s alleged infringement of Lexmark’s patent rights in the resale of printer cartridges.  Lexmark sells cartridges under two different models: for unrestricted use at full price, and under a “single-use/no resale” provision at a significant discount.  Impression acquired certain cartridges that had been sold subject to the single-use restriction, and resold them in violation of that condition.  Finding that the Supreme Court’s decision in Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008), had silently overruled Mallinckrodt, the district court barred Lexmark’s infringement claims based in part on a finding that the initial authorized sale by Lexmark—even if conditional—had exhausted all patent rights in the item.  The en banc Federal Circuit reversed, finding that Quanta had not in fact overruled (or even addressed) Mallinckrodt and reaffirming Mallinckrodt’s rule that an otherwise valid condition, clearly communicated at the time of sale, may be enforced through the patent laws.

  In its amicus brief, available at https://www.nyipla.org/nyipla/AmicusBriefsNews.asp, the Association took the position that the Federal Circuit’s decision in Mallinckrodt was correct and has provided a sensible, consistent framework for lower courts to apply over the past quarter-century.    The Association laid out a number of reasons why upholding Mallinckrodt is consistent with the text and legislative history of the Patent Act, Supreme Court precedent, and the Court’s broader public policy interest in avoiding disruption of significant business markets that have relied on this longstanding authority.

First, the Association noted that Mallinckrodt is faithful to the text of the Patent Act itself.  The Act provides that “whoever without authority makes, uses, offers to sell, or sells any patented invention” may be liable for infringement.  The use of the word “or” in the statute clearly signifies that a patent owner may grant authority with respect to some, but not all, of the acts specified.  Similarly, the history of the Patent Act reinforces Congress’s intent that patentees should have flexibility in deciding whether and how to enforce patent rights against different levels of the supply chain, including specifically amendments to the Patent Act expressly authorizing claims for either direct or contributory infringement and expressly permitting certain types of conditional sales.  

Second, the Association explained that Mallinckrodt is consistent with the Supreme Court’s more recent decision in Quanta, which, far from overturning Mallinckrodt, in fact suggested that the exhaustion doctrine does turn on whether the patentee has conditioned resale or reuse.  While not directly addressing this issue, the Quanta Court repeatedly cited the absence of conditions on the licensee’s right to sell the patented item in finding the patentee’s rights exhausted, implying that the presence of such a condition would have been relevant to the analysis.  See, e.g., Quanta, 553 U.S. at 636-37 (“Nothing in the License Agreement restricts Intel’s right to sell . . . . No conditions limited Intel’s authority to sell . . . . Intel’s authority to sell its products embodying the LGE Patents was not conditioned . . . “).

The Association’s brief also discussed a number of earlier Supreme Court cases assessing patent exhaustion based on whether or not the patentee had imposed conditions.  For example, as early as 1872, in Mitchell v. Hawley, 83 U.S. 544 (1872), the Supreme Court declined to apply patent exhaustion where the patentee had imposed a temporal condition that was violated, noting that sales may be “made by the patentee with or without conditions.”  Id. at 548.  The Court continued to apply this framework over the next several decades, perhaps most prominently in the General Talking Pictures cases, where the Court enforced a restriction on the licensee against resale for commercial use, holding that, where “the restriction was legal and the [items] were made and sold outside the scope of the license, the effect is precisely the same as if no license whatsoever had been granted.”  General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, modified on reh’g, 305 U.S. 124, 126-27 (1938).

Finally, the Association identified several public policy reasons not to overturn Mallinckrodt at this late stage.  For instance, the Association argued that the Court should reject any artificial distinction between sales and licensing of a patented item in determining exhaustion.  The Supreme Court has never adopted any such distinction, and, because it is clear from the General Talking Pictures and other decisions that restrictions on licensee sales may be enforced through the patent laws, there is no reason to impose a contrary rule where the patentee manufactures and sells an item directly—particularly since the Patent Act grants the right to exclude others from practicing the invention, not to practice it oneself.  Indeed, such a rule would give greater rights to non-practicing entities in controlling downstream use than to patentees who practice the invention, and would be easily circumvented by simply contracting out manufacture and sale of the item.

More broadly, there are compelling reasons not to inject significant disruption into the resale markets at this point.  As the Federal Circuit noted in reaffirming Mallinckrodt, there is little evidence of widespread market harm from the existing rule during the 25 years in which Mallinckrodt has been in place, and independent restrictions such as the antitrust laws already exist to prevent unreasonable restraints on post-sale use.  Just as importantly, the interest in preserving settled precedent itself militates powerfully against overruling Mallinckrodt now.  As the Supreme Court has noted quite recently, in cases involving “property (patents) and contracts (licensing agreements) . . . considerations favoring stare decisis are ‘at their acme’ . . . because parties are especially likely to rely on such precedents when ordering their affairs.”  Kimble v. Marvel Entm’t, LLC, 135 S. Ct. 2401, 2410 (2015).

Post-sale conditions are not without benefit to the public, including the ability to charge lower prices where a user does not need the right to engage in product resales or reuses, as in this case.  There is simply no legal, logical, or policy interest that justifies straying from the doctrine of stare decisis here.