Lexmark Goes Down, Looses At U.S. Supreme Court Vs. Reman Toner Ind.

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Date: Friday June 9, 2017 09:58:55 pm
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    Lexmark Goes Down, Looses At U.S. Supreme Court Vs. Reman Toner Industry.
    SCOTUS Bolsters Patent Exhaustion, This Time in Indelible Ink

    Scott Graham, The Recorder

    The handwriting has been on the wall for nearly 10 years: The Supreme Court does not smile on patent owners who try to exercise their rights beyond the first sale of their product.

    On Tuesday, reviewing a Federal Circuit en banc decision that held otherwise, the high court spelled it out in big block letters: “A patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale,” Chief Justice John Roberts Jr. wrote in a 7-1 ruling.

    The only voice of dissent in Impression Products v. Lexmark International came from Justice Ruth Bader Ginsburg, who argued that a sale overseas, where U.S. patent laws don't apply, shouldn't trigger exhaustion.

    It was the fifth unanimous or 7-1 decision reversing the Federal Circuit this year, following a couple of years where the nation's patent appellate court had seemed to be emerging from the high court's doghouse. The Supreme Court is still expected to rule in two more Federal Circuit intellectual property cases this term.

    Tuesday's decision involves recycled ink cartridges, but has broader implications for the global supply chain of technology components. It's a win for Mayer Brown partner Andrew Pincus, who argued the case for Impression Products. Impression buys used Lexmark print cartridges, refills them with ink and sells them at a discount. Lexmark had argued that Impression is infringing its patents, but the Supreme Court agreed with Impression that once Lexmark sold the cartridges the first time, it no longer held any patent rights.

    “Patents play a critical role in spurring innovation, but overbroad patent rights actually deter innovation and also hinder or even eliminate aftermarket competition, producing less choice and higher costs for consumers,” Pincus said in an emailed statement.

    To Roberts, the concept was as simple as an automobile salvage yard that restores used cars. Letting manufacturers maintain patent rights over auto components manufactured and sold long ago would disrupt the restoration business, he wrote. “Extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain,” the chief justice wrote. “And advances in technology, along with increasingly complex supply chains, magnify the problem,” he added, pointing to smartphones made up of parts that practice many thousands of patents.

    The Supreme Court hinted at this outcome in its 2008 decision Quanta Computer v. LG Electronics. Another clue came with 2013's Kirtsaeng v. Wiley, where the court held that the sale of books extinguish the copyright holder's interest.

    In the case decided Tuesday, U.S. District Judge Michael Barrett of Ohio cited Quanta in ruling for Impression in 2014.

    But the Federal Circuit reversed in a 99-page en banc opinion. Judge Richard Taranto's decision reaffirmed two Federal Circuit decisions in favor of patent owners: 1992's Mallinckrodt v. Medipart, which involved domestic sales, and Jazz Photo v. International Trade Commission, which covered overseas sales. Judges Timothy Dyk and Todd Hughes dissented, with Dyk warning that “we exceed our role as a subordinate court” by refusing to follow Quanta.

    Roberts sided with Dyk and Hughes on Tuesday. “If there were any lingering doubt that patent exhaustion applies even when a sale is subject to an express, otherwise lawful restriction, our recent decision in Quanta … settled the matter,” Roberts wrote.

    “And differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense,” he added.

    Sidley Austin partner Constantine Trela Jr. argued the case for Lexmark. General counsel Bob Patton said in a statement that the company is disappointed by the decision, but noted that the Supreme Court affirmed Lexmark's authority to contract with users to buy cartridges at a discount if they promise to return empty cartridges to Lexmark. “Accordingly, the Lexmark Return Program will remain largely unchanged and will continue to offer customer choice and promote environmental sustainability,” Patton said.

    Harness, Dickey & Pierce partner Matthew Cutler said Impression is the latest Supreme Court decision to remove another tool from the patent owner toolbox. He said the software industry has worked around the first-sale challenge by licensing software via shrinkwrap agreements rather than selling it. But he said other industries haven't yet figured out a formula for maintaining control post-distribution.

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