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Recycled Ink Cartridges and Issue of Patent Exhaustion

Posted on Sep 23, 2015 in Articles

This article originally appeared in The Legal Intelligencer on September 23, 2015.

“The palest ink is better than the best memory,” according to a Chinese proverb. Perhaps, but an important case that is set to go to oral argument next month might decide how much you will pay for that ink from recycled ink cartridges. In Lexmark International v. Impression Products, No. 14-1617 (which is currently being argued before the U.S. Court of Appeals for the Federal Circuit), Lexmark International Inc. seeks to control who can recycle and resell Lexmark ink cartridges. And what is the issue being litigated? Patent exhaustion.

The first authorized sale of a patented product “exhausts” the patent rights and terminates the patent owner’s ability to claim infringement damages. For example, if I purchase a patented mouse trap from a home improvement store (which is selling the mouse trap in an authorized manner), and I subsequently sell that mouse trap to my neighbor, then the patent owner cannot successfully assert a claim of patent infringement against me; the sale from the home improvement store “exhausts” the patent right.

Lexmark is a manufacturer of printers and printer ink (and toner) cartridges. Impression Products Inc. recycles and sells used Lexmark ink cartridges. Lexmark is arguing that only it can recycle its ink cartridges, because it owns the patents on those ink cartridges. Impression, however, is arguing that the first sale of Lexmark cartridges exhausts those patent rights, and therefore Impression should be able to sell recycled Lexmark cartridges freely.

To fully understand the issues in this case, consider the marketing concept of a “loss leader.” Near the beginning of the 20th century, a gentleman by the name of King Camp Gillette invented disposable razor blades and started giving away razor handles. He believed that if potential customers received the razor handles for free, then he could make a profit by selling them the blades. After several months of selling blades, Gillette recovered the cost of the handle and became profitable. The rest is history.

Printers are also sold as loss leaders. Printers are sold below cost and the manufacturers take an initial loss, hoping to make a profit by selling cartridges for the printers. Thus, Lexmark wants to be the sole source of its customers’ ink cartridges. Every purchase of a recycled Lexmark cartridge from Impression translates into a lost sale (and lost profit) for Lexmark.

As a result, Lexmark takes many steps to try to prevent a customer’s used print cartridge from falling into its competitors’ hands:

  • Lexmark sells two different types of printer cartridges: (a) a “regular cartridge,” which a customer may use (and recycle) however he or she wishes, and (b) a “return program cartridge,” which is 20 percent cheaper than the regular cartridge and requires the customer to agree that he or she will only return the cartridge to Lexmark after the cartridge ink has been depleted.
  • The packaging on each return program cartridge carries notice in multiple languages that the cartridge can only be returned to Lexmark. The notice also appears on Lexmark’s website.
  • Lexmark cartridges include a microchip with security features that prevents the cartridge from being recycled by a company other than Lexmark. Each microchip also includes a regional code, which prevents a cartridge sold in one geographic area from being used with a printer that was sold for use in another geographic area.
  • Lexmark cartridges are covered by U.S. patents.

Impression collected used Lexmark return program ink cartridges that had been originally sold to customers in the United States and abroad. Impression refilled the ink cartridges, replaced the microchips with microchips that defeated Lexmark’s security features, and resold the cartridges. Lexmark filed suit against Impression, claiming patent infringement. Impression argued patent exhaustion as its defense. The district court ruled that patent infringement had occurred by concluding that a sale outside of the United States does not exhaust patent rights. The Federal Circuit is currently conducting an en banc review of the case.

Lexmark has argued that the controlling law in this litigation is Fuji Photo Film v. Jazz Photo, 394 F. 3d 1368 (Fed. Cir. 2005). That case relates to the recycling of single-use “disposable” film cameras. That court held that U.S. patent rights can only be exhausted by sales within the United States. Impression has argued that Fuji has been overruled by Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351 (2013). In that case it was held that foreign sales exhaust rights under copyright law.

Lexmark has argued that Fuji is controlling despite Kirtsaeng, because Kirtsaeng is based on copyright law, Fuji is based on patent law, and “patent and copyright decisions are not interchangeable.” Impression has argued, however, that Kirtsaeng is relevant because “Kirtsaeng involves the extinguishment of property rights, and copyrights and patents both are subcategories of property rights.”

Lexmark has also argued for the Federal Circuit to rule in its favor based on Mallinckrodt v. Medipart, 976 F. 2d 700 (Fed. Cir. 1992), in which it was held that a patented product can be sold with restrictions to prevent patent exhaustion. More specifically, Lexmark has argued that the Federal Circuit held in Mallinckrodt “only that the patentee’s unconditional domestic sale of a product exhausts all U.S. patent rights in the product.” Impression has disagreed with that position, based on Quanta Computer v. LG Electronics, 553 U.S. 617 (2008). Quanta held that patent rights are exhausted when the authorized sale of a product occurs. Impression has argued that Quanta is controlling because “the Supreme Court has clearly held [by virtue of its opinion in Quanta] that a patent grant does not allow post-sale restrictions.”

Numerous parties have filed amicus briefs in this case, including (at the Federal Circuit’s request) the U.S. government. In its brief, the U.S. government concluded that “foreign sales authorized by the U.S. patentee exhaust domestic patent rights, but a U.S. patentee may expressly reserve his U.S. patent rights in such sales.”

Because patent exhaustion is a defense to infringement, the outcome of this case will have widespread applicability to patent enforcement. Given the monetary stakes, it would not be surprising if subsequent appeals to the U.S. Supreme Court are filed. The intellectual property community will be carefully watching the outcome of this dispute.

– by Lawrence Ashery

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