CASRIP Newsletter - Spring 2009, Volume 16, Issue 2
Quanta’s Changed Landscape of Patent Exhaustion: Static Control Components, Inc. v. Lexmark International, Inc.
by Amanda J. Carmany-Rampey
The doctrine of patent exhaustion “limit[s] the patent rights that survive the initial authorized sale of a patented item.” For validly conditioned sales, however, the Federal Circuit held in Mallinckrodt, Inc. v. Medipart, Inc. that “if the restriction on reuse was within the scope of the patent grant or otherwise justified, then violation of the restriction may be remedied by action for patent infringement.” The Supreme Court recently reviewed the Federal Circuit’s treatment of the doctrine of patent exhaustion in Quanta Computer, Inc. v. LG Electronics, Inc. While the Supreme Court reversed the Federal Circuit, holding that method claims may be exhausted by the sale of an item substantially embodying the patented method and that the sales of patented microprocessors and chipsets by LG’s licensee were authorized and thus subject to exhaustion, the Court did not directly address whether a conditioned sale of goods could exhaust patent rights. In fact, the Supreme Court did not even mention Mallinckrodt in its opinion, leaving open the question of whether a conditioned sale exhausts patent rights.
In Static Control Components, Inc. v. Lexmark Int’l, Inc., district court Judge Gregory F. Van Tatenhove reexamined a previous ruling on patent exhaustion involving conditioned sales of toner cartridges in light of the Quanta decision on a Motion to Reconsider an Interlocutory Order. Relying in part on Mallinckrodt, the court had previously determined that Lexmark’s patent rights were not exhausted by the sale of the cartridges to consumers under shrinkwrap license agreements. However, on reconsideration the court found that “Quanta has changed the landscape of the doctrine of patent exhaustion generally, and specifically the application of the doctrine to the facts of this case.” While acknowledging that the Quanta decision did not mention Mallinckrodt, the Static Control court nevertheless was “persuaded that Quanta overruled Mallinckrodt sub silentio.” Thus, the court reversed its prior ruling finding instead that patent exhaustion applies.
A. Factual Background
Lexmark sells printers and toner cartridges designed for use in its printers. The majority of Lexmark’s toner cartridges are sold through its “Prebate Program” or “Lexmark Return Program,” where consumers can buy toner cartridges at a discounted price in return for their agreement to use the cartridges only once and then to return the spent cartridges to Lexmark for remanufacturing and recycling. The terms of Lexmark’s prebate/return program are printed across the top of the cartridge boxes and provide that if the consumer does not agree to the terms of the prebate/return program, they can return the unopened package and alternatively purchase Lexmark cartridges without license restrictions at a “regular” (higher) price. Static Control Components sells parts and supplies, such as toner and microchips, to remanufacturers who recondition spent toner cartridges, some of which are subject to the terms of Lexmark’s prebate/return program, for resale.
B. Procedural History
The legal dispute between Lexmark and Static Control Components first began in 2002 when Lexmark sued Static Control Components for infringing Lexmark’s copyrighted “Toner Loading Programs” through the sale of SMARTEK microchips, which enabled the use of reconditioned cartridges in Lexmark printers. The litigation between the parties has involved numerous claims, counterclaims, summary judgment motions, and motions for judgment as a matter of law. At issue in this decision are Lexmark’s allegations of direct patent infringement and inducement of infringement against Static Control Components and Static Control Components’ defense of patent exhaustion. Previously, the court decided in an Interlocutory Order that the doctrine of patent exhaustion did not bar Lexmark’s patent infringement claims. However, on Static Control Components’ Motion to Reconsider the Interlocutory Order and under Federal Rule of Civil Procedure 54(b) the court reevaluated its prior decision in view of the Supreme Court’s pronouncements on the doctrine of patent exhaustion in Quanta Computer, Inc. v. LG Electronics, Inc., --- U.S. ---, 128 S.Ct. 2109 (2008).
III. The District Court’s Analysis
A. Patent Exhaustion
The Static Control court interpreted the Quanta decision as a material change in the law of patent exhaustion because “the [Supreme] Court asserted a broad understanding of patent exhaustion in the face of Federal Circuit case law that had narrowed the scope of the doctrine.” In analyzing the Quanta decision the court focused on language regarding distinctions between restrictions on the right to manufacture/sell a patented article and the right to use. After examining the cases relied upon by the Supreme Court in Quanta, the court concluded “the [Supreme] Court has consistently held that patent holders may not invoke patent law to enforce restrictions on the post-sale use of their patented products.” Thus, according to the Static Control court, a patent holder’s rights are exhausted upon “the first authorized sale to a purchaser who buys for use in the ordinary pursuits of life” regardless of any post-sale use restrictions imposed by a license.
Applying the Quanta decision to the facts of this case, the Static Control court determined that license terms of the prebate/return program did not impose restrictions upon the sale of the cartridges, but upon their post-sale use. The court found that the sales of the toner cartridges were unconditional because consumers were not required to agree to the terms of the prebate/return program prior to purchasing the toner cartridges. Thus, since the license restrictions merely addressed the post-sale use of the cartridges, patent exhaustion applied. In other words, Lexmark could not preserve its patent rights through its prebate/return program even though the consumer had notice of the license restrictions.
The Static Control court went on to flatly reject Lexmark’s arguments that Quanta merely confirmed that patent exhaustion applies to sales that are “both authorized and unconditional.” Instead, the court determined that Quanta implicitly overruled Mallinckrodt’s determination that “not all restrictions on the use of patented goods are unenforceable.” Further, the Static Control court was unpersuaded by the argument that patent rights are not exhausted in the case of a restricted license because the patentee, Lexmark, did not receive full value for its patented product. The Static Control court instead pointed out that similar reasoning was employed by the Federal Circuit in its review of the Quanta case and that the Supreme Court reversed the Federal Circuit without mentioning the issue of compensation—indicating that the level of compensation is not a consideration in determining patent exhaustion.
B. State Contract Law
Although the court found that patent exhaustion applied, it did not find, as Static Control urged, “that state contract law may not be invoked.” Previously, the court had found that Lexmark’s prebate/return program was akin to “the sort of adhesion licensing agreement” that were held to be valid in Hill v. Gateway 2000 and ProCD, Inc. v. Zeidenberg. , Following a footnoted comment in the Quanta decision, the court noted that Lexmark may still have state-law-based contract claims regarding the breach of the terms of the prebate/return program.
The Static Control court adopted an expansive view of the doctrine of patent exhaustion—choosing to interpret the Quanta decision broadly. The court found that the sale of patented goods, even when subject to valid license restrictions, exhausts patent rights. This interpretation of Quanta threatens to render unenforceable through patent law differential licensing schemes that attempt to distinguish separate fields of use for a patented item. Subsequent treatment of the district court’s reasoning in Static Control should reveal how the Quanta decision has changed both the landscape of patent exhaustion and the practice of restrictive licensing.
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