Finding a Place for Mallinckrodt and Conditional Sales in the Patent Exhaustion Doctrine: Will "lex" Mark the Spot?

• Publication year: 2015
• Author: GINO CHENG Winston & Strawn LLP

Finding a Place for Mallinckrodt and Conditional Sales in the Patent Exhaustion Doctrine: Will "Lex" Mark the Spot?

GINO CHENG Winston & Strawn LLP

The Federal Circuit is facing a rare opportunity to clarify and correct a muddled area of the law: contracting around patent exhaustion. After a panel hearing, the Federal Circuit ordered on April 16, 2015 sua sponte an en banc hearing of the patent exhaustion issues in Lexmark Int'l, Inc. v. Impression Prods., Inc.¹ The Lexmark case involves a patent owner's sales of patented printer cartridges to end users under the condition that they use the articles once and then return them, as well as Lexmark's sales of the same patented articles to its resellers requiring the resales to take place under the same restriction. The Federal Circuit will consider whether any of those sales gives rise to patent exhaustion in the U.S. In light of deep-rooted Supreme Court precedent,² the Federal Circuit should overrule en banc its previous decision in Mallinckrodt, Inc. v. Medipart, Inc.,³ to the extent it had 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.

INTRODUCTORY OVERVIEW AND POLICY CONSIDERATIONS

Without a clear line of demarcation defining exhaustion as occurring at the initial point of sale—whether within or outside of the U.S.—a purchaser or assembler might be unfairly encumbered by any post-sale restrictions that the licensor/rights holder unilaterally imposes. For example, the licensor/rights holder could attempt to limit the freedom of the purchaser or its downstream customers to enjoy the sold good by imposing conditions of use or restricting the number of uses, the duration of use, the class of users, the manner of disposal or recycling, etc., upon requirement of additional payments or threat of infringement litigation. In other words, despite the consummated purchase and transfer of ownership, the licensor/rights holder could exploit post-sale restrictions to extend its monopoly beyond the point of sale, either to manipulate the progression of the good as it moves through the supply chain, to extract additional remuneration at each level, or both.

The scenario identified above would allow a licensor/rights holder to exert—rather than relinquish—control via patent law over an article that has already been placed in the stream of commerce. Such acts, if permitted, would deprive manufacturers and consumers of the intended benefits of patent exhaustion cited in Supreme Court case law. The result would unfairly restrain trade, introduce uncertainty into completed transactions, obstruct the public's enjoyment of purchased technology, and unnecessarily inflate information and transaction costs.

A robust implementation of the "first sale" doctrine would close this loophole, drawing the line at the point of the initial authorized sale.⁴ After that point, purchasers and consumers alike would be free from the threat of double recoveries and the threat of enjoining uses of spent products arising from patent claims alleging the failure to comply with post-sale restrictions.

To the extent that Mallinckrodt endorses post-sale restrictions as vehicles through which patent owners may claim infringement, it is at odds with controlling precedent and the broader principles animating "first sale" doctrine, and should be overruled. This conclusion comports with the doctrinal aim of over a century's worth of Supreme Court case law striking down post-sale conditions and resisting encumbrances on chattel. Indeed, in 1917, the Supreme Court addressed and overruled Henry v. A.B. Dick Co.,⁵ an earlier case involving post-sale restrictions directly analogous to the restrictions in Lexmark.⁶ The Supreme Court decision in General Talking Pictures Corp. v. Western Electric Co.⁷ on which Mallinckrodt heavily relied, is inapposite and does not support the conclusion Mallinckrodt reached.⁸

To be sure, if Mallinckrodt had been a case of first impression and its outcome a hazarded growth from a void in Supreme Court case law, Quanta Computer, Inc. v. LG Electronics, Inc. is instructive of the opposite, intended trajectory of the exhaustion doctrine.⁹ In Quanta, the Supreme Court roundly rejected restraints on the end user's freedom to enjoy the acquired good for its intended purpose and running servitudes on articles beyond the point of sale. Accordingly, in light

[Page 17]

of Quanta, the sounder course lies in dispelling the notion that post-sale restrictions may revive patent remedies.¹⁰ Indeed, as the Federal Circuit recently affirmed in LifeScan Scotland, Ltd. v. Shasta Techs., LLC,¹¹ "[t]he basic principle underlying the Supreme Court's exhaustion cases is that the authorized transfer of ownership in a product embodying a patent carries with it the right to engage in that product's contemplated use." The fundamental protection of a consumer's right to use, resell, and otherwise dispose of legally purchased products —rooted in Supreme Court case law and English common law traditions of "impeccable historic pedigree"¹²—should not be shortchanged in favor of allowing patent holders to double-dip.

Indeed, it is irrelevant to patent exhaustion whether a sale of an embodying article is accompanied by a condition subsequent. Simply put, a sale is either authorized or it is not.¹³ Quanta confirms that "[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item" such that patent law remedies cannot be used to enforce post-sale restrictions.¹⁴ This rule avoids casting a "cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee," and promotes "the fundamental purpose of patent ex-haustion—to prohibit post-sale restrictions on the use of a patented article."¹⁵ For at least these reasons, Mallinckrodt no longer represents good law and should be overturned by the Federal Circuit en banc.

At worst, the Mallinckrodt decision is an improper departure from controlling case law precedent and traditional policy considerations. At best, it is a narrow, sui generis exception where public safety and sanitation concerns (rather than an inventor's commercial interest) tip the scales against the public interest in preventing restraints on trade and personal property, and thereby favors use of the embodying product only once.

HOW AND WHERE MALLINCKRODT WENT ASTRAY

Mallinckrodt sold radioaerosol nebulizer assembly kits trade-marked as "ULTRAVENT"¹⁶ to forty-nine different hospitals servicing thousands of patients.¹⁷ These nebulizer kits facilitated lung scans and helped administer drugs to patients.¹⁸ Mallinckrodt marked its kits with a "Single Use Only" notice prior to the time of sale.¹⁹ Mallinckrodt held five patents covering its kits.²⁰ Medipart replaced non-patented parts of the kits expended by the hospitals,²¹ by tasking another company—RSI—to recondition and irradiate the patented portions.²² Medipart resold these refurbished assemblies back to the hospitals²³ at a lower cost. Mallinckrodt then sued Medipart for directly infringing and for inducing the hospitals to infringe its patents.²⁴

Finding Mallinckrodt's patents exhausted, the district court granted summary judgment of non-infringement in favor of Medipart,²⁵ which ruling was reversed on appeal.²⁶ The Federal Circuit concluded that "the district court erred in holding that the restriction on reuse was, as a matter of law, unenforceable under the patent law."²⁷ Instead, it held that if the conditional sale was a valid sale under applicable contract law, "and 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."²⁸ The Federal Circuit remanded the case back to the lower court to assess whether the conditional sale was valid and the restriction enforceable. The parties then settled.

The Federal Circuit's decision in Mallinckrodt stands apart from the body of Supreme Court case law supporting patent exhaustion,²⁹ especially in light of Quanta and its outcome.

MALLINCKRODT RUNS COUNTER TO PRECEDENT AND SHOULD BE OVERRULED

Mallinckrodt passed over a century's worth of precedent that was and continues to be hostile to patent holders' attempts to profit from conditional sales. Since 1853, a long line of cases has established that an authorized sale of an invention exhausts the patent owner's monopoly.³⁰ After sale, title passes, and the patent owner's rights to control the future use of the patented invention come to an end. As a result, purchasers are entitled to take the sold article free of conditions and restraints, for use "in the ordinary pursuits of life."³¹

In Adams v. Burke,³² the Supreme Court confirmed that a lawfully sold item, once placed in the stream of commerce, exhausted the patent claims it embodied. The Court affirmed the dismissal of an infringement suit against an undertaker who had purchased a patented coffin lid from an assignee who was restricted to making, selling, and using such lids within a geographic area, the undertaker having subsequently used the coffin lid outside of that area. The Court reasoned that "[t]he true ground on which [the Supreme Court's early exhaustion cases] rest is that the sale by a person who has the full right to make, sell, and use such a machine carries with it the right to the use of that machine to the full extent to which it can be used...."³³ The Court held, "in the class of machines or implements we have described, when they are once lawfully made and sold, there is no restriction on their use to be implied for the benefit of the patentee or his assignees or licensees."³⁴ The Court concluded that the purchaser thus "acquired the right to this use of it freed from any claim of the patentee, though purchased within the...