On February 12, the U.S. Court of Appeals for the Federal Circuit issued its decision in the Lexmark v. Impression Products case. The end result is a resounding win for Lexmark, fellow printer OEMs, and other patent holders and a loss for Impression Products, the cartridge-remanufacturing industry, and others looking to see more limits placed on patent holders’ rights.

Lexmark issued the following statement. “We are pleased that the Court of Appeals for the Federal Circuit has confirmed the validity and enforceability of Lexmark’s Return Program license under U.S. patent law,” said Bob Patton, vice president and general counsel for Lexmark.  “The Lexmark Return Program has been and will always be about customer choice and sustainability.  Lexmark customers always have a choice between a full-price unrestricted cartridge or a Return Program cartridge, which can be used once and then returned only to Lexmark for remanufacturing or recycling.”

Mr. Patton added, “The Federal Circuit’s ruling will assist Lexmark in its efforts to combat the importation and sale of inferior toner cartridges that infringe our intellectual property rights and will further support Lexmark’s own environmentally-friendly remanufacturing program.”

Background

Both Lexmark and Impression Products appealed to the Federal Circuit in 2014 (see “Lexmark and Impression Products Appeal: Why You Should Care”), following decisions issued by Judge Michael R. Barrett in Lexmark’s toner cartridge patent-infringement lawsuit in the U.S. District Court for the Southern District of Ohio (see “Impressions Products Wins One, Loses One Motion to Dismiss Lexmark Lawsuit”). Lexmark appealed Judge Barrett’s final judgment entered in Impression Products’ favor and against Lexmark related to accused cartridges that are subject to Lexmark’s Return Program (aka Prebate) condition. Impression Products appealed the district court’s final judgment in Lexmark’s favor and against Impression Products on the issue of whether Lexmark had exhausted its patent rights in cartridges that were first sold outside the United States.

A panel of three Federal Circuit judges heard oral arguments in this case in March 2015 (see “Federal Circuit Hears Oral Arguments in Lexmark v. Impression Products”). Then, in April 2015, the Federal Circuit called for the full panel of judges to review the case, which is called an en banc hearing and is relatively rare (see “Federal Circuit Wants All Judges to Weigh In on Lexmark v. Impression Product Appeal” ”). The reason why the Federal Circuit called for the en banc hearing is that the case essentially boiled down to whether the court should overturn or uphold two of its prior decisions on patent exhaustion.

First, the Federal Circuit was deciding whether or not to overturn its decision in Jazz Photo Corp. v. International Trade Commission (2001) “to the extent it ruled that a sale of a patented item outside the United States never gives rise to United States patent exhaustion” in light of the Supreme Court’s decision regarding copyright law in Kirtsaeng v. John Wiley & Sons, Inc. (2012). The Jazz Photo decision said that to invoke the protection of the patent-exhaustion or first-sale doctrine, the authorized first sale had to occur in the United States. Impression Products argued that the first sale of a Lexmark cartridge overseas should exhaust the OEM’s patent rights, that Jazz Photo should be overturned, and that the district court’s decision finding that Impression Products’ remanufactured cartridges using cores sourced from outside the United States infringed Lexmark’s patents should be overturned. Lexmark countered that Jazz Photo should remain the law of the land, that it should retain patent protections in products sold overseas after first sale, and that the lower court’s decision on this issue should be upheld.

Second, the Federal Circuit was considering whether its decision in Mallinckrodt, Inc. v. Medipart, Inc. (1992) “to the extent it ruled that a sale of a patented article, when the sale is made under a restriction that is otherwise lawful and within the scope of the patent grant, does not give rise to patent exhaustion” should be overturned in light of the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc. (2008). In Mallinckrodt, the Federal Circuit held that patent holders can sell patented products with certain post-sale restrictions. Lexmark argued that it retains patent rights in cartridges sold with the Return Program restriction, that Mallinckrodt should be upheld, and that the district court wrongly decided that Impression Products’ remanufactured versions of Return Program cartridges did not infringe Lexmark’s patents. Impression Products argued that Mallinckrodt should be overturned, that the decision gave patentees additional rights to which they were not entitled under patent law, and that the lower court’s decision in Impressions Products’ favor on this issue was correct.

The en banc hearing was held on October 2, 2015. For a thorough discussion of the hearing, see “Federal Circuit Holds En Banc Hearing in Lexmark v. Impression Products.” In the four months since then, the industry has been eagerly awaiting the Federal Circuit’s decision.

Decision Is In

The Federal Circuit issued its decision on February 12 and found in Lexmark’s favor. The court decided to “reaffirm the principles of our earlier decisions” and upheld both Mallinckrodt and Jazz Photo.

On Mallinckrodt, the court wrote, “We adhere to the holding … 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. Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized and therefore remains infringing conduct.” ‘

On the Jazz Photo issue, the Federal Circuit found, “We adhere to the holding … that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority.”

So, both Jazz Photo and Mallinckrodt will remain the law of the land—there has been no big reversal in current patent law in the United States.

The Federal Circuit has reversed the district court’s decision of non-infringement with regard to the Return Program cartridges that Impression Products sold and affirmed the lower court’s decision that Impression Products infringed by selling remanufactured cartridges using cores first sold abroad. The case was remanded back to the Southern District of Ohio for an entry of judgment of infringement. In addition, Lexmark was awarded its costs in this appeal.

What Does It All Mean?

Actionable Intelligence plans to bring readers additional analysis and commentary about this key decision next week. Until then, here are our initial thoughts.

The Federal Circuit’s decision to uphold Jazz Photo really changes nothing for remanufacturers doing business in the United States. Under Jazz Photo, it was already the case that remanufacturers looking to sell products in the United States had to use empty cores first sold in that country, so essentially we will just see the status quo maintained. Many, many cartridges remanufacturers, as well as other industries, would have liked to see Jazz Photo overturned. Being able to use cores sourced from anywhere in the world without risking a patent-infringement lawsuit or having your products stopped and turned around by U.S. Customs would have made remanufacturers’ businesses a lot less complex and would have reduced costs. But this is something remanufacturers can count of their wish list—at least for now.

The Federal Circuit’s decision in Mallinckrodt will in fact change how remanufacturers do business in the United States, at least when remanufacturing Lexmark’s cartridges. Two lower courts have found that Lexmark exhausted its rights in Prebate/Return Program cartridges, but in patent law cases the Federal Circuit sets binding precedent for the entire United States. Now, the Federal Circuit has indicated that firms that remanufacture Return Program cartridges do indeed infringe.

We have no insight into Lexmark’s legal strategy, but we imagine that Lexmark will now sue those selling remanufactured Return Program cartridges for patent infringement. Because Return Program SKUs are far, far more prevalent than non-Return Program SKUs, we imagine that much of the remaining Lexmark remanufactured cartridges business in the United States will dry up, aside from the line of Lexmark Compliant SKUs, which Lexmark apparently certifies is non-infringing (see “ILG Seeing Success with Lexmark Compliant Cartridges”). Lexmark is launching fewer and fewer non-Return Program cartridges with its product launches these days, and given the huge price disparity between the standard SKUs and the Return Program cartridges, there just isn’t a big base of non-Return Program SKUs to remanufacture.

The court’s decision upholding Mallinckrodt, however, would not seem to be applicable to other OEMs’ product lines. Unless, of course, other OEMs take note of this decisions and begin offering their own Prebate/Return Program-like cartridges.

Now all eyes are on Impression Products. Back in October, Ed O’Connor, Impression Products’ attorney, told us that whoever loses this case would likely appeal to the U.S. Supreme Court. Even if Impression Products does appeal, it is not certain that the Supreme Court will hear the case. But we expect that even though the Federal Circuit’s decision settles some big issues related to patent exhaustion, it is possible that the industry will face some suspense and uncertainty related to this case for some time to come.