February 2016

Patent owners have the right to prevent their goods, first sold overseas, from being refurbished and resold in the U.S., an appeals court ruled Friday.

Ruling in a dispute brought by Lexmark International Inc. over refurbished printer cartridges, the court said patent law enables limits to be placed on the resale of products that are first sold overseas. Those sales don’t exhaust U.S. patent rights, the U.S. Court of Appeals for the Federal Circuit in Washington ruled in a 10-2 decision. The closely-watched inkjet printer case hinged on the question of whether a patent owner can restrict what happens to its products after they are sold. It pitted the biotechnology, drug and crop industries against major Silicon Valley firms and sellers of refurbished auto parts and medical devices.

In siding with patent owners, Circuit Judge Richard Taranto cited drugs, which are often sold overseas at lower prices because of price constraints or medical needs.“The practice could be disrupted by the increased arbitrage opportunities that would come from deeming U.S. rights eliminated by a foreign sale made or authorized by the U.S. patentee,” Taranto wrote for the majority. “Development of new products frequently involves new combinations of existing components and technologies from around the world,” they argued in a court filing. Lexmark’s position “benefits the few U.S. patentees engaging in impermissible rent-seeking” by getting paid multiple times for the same product.

Qualcomm, Nokia

Not all tech companies agreed. Qualcomm Inc. and Finland’s Nokia Oyj, which have large numbers of patents and rely on licensing royalties to boost profit, backed Lexmark. The ruling “prevents goods intended for foreign markets from being imported into the United States and disseminated to the domestic market through unauthorized distributors in competition with the patentee’s own domestic sales,” the Biotechnology Industry Organization said in a filing backing Lexmark.

The Federal Circuit, which handles all patent cases, took up the issue after the U.S. Supreme Court in 2013 ruled that copyright owners can’t block the sale of so-called “gray market” goods — meaning products originally designed for overseas markets.The appeals court said that ruling doesn’t apply to patent law. Instead, it affirmed its own 1992 ruling that a sale of a product doesn’t automatically confer the right to resell a product, and a 2001 ruling that let the makers of disposable cameras restrict the resale of cameras that were emptied and refilled by a third party.

Cartridge Return

In this case, Lexmark sells cartridges at two prices. Consumers can pay one price and do whatever they want with the cartridge, or pay 20 percent less and pledge to return the cartridge to Lexmark. Most buyers opt for the lower price, and get a cartridge with a different type of chip. Companies gather those used cartridges, replace the chips, and then sell them to resellers. Impression Products Inc., the only reseller that remained in a lawsuit Lexmark filed, argued that Lexmark no longer had any patent rights to the cartridges.

The Federal Circuit ordered the trial judge to rule that Impression was infringing Lexmark’s patent rights. The case is Lexmark International Inc. v Impression Products Inc., 14-1617, U.S. Court of Appeals for the Federal Circuit (Washington).