Amicus Curiae Brief — Impression Prods., Inc. v. Lexmark Int'l, Inc., 136 S. Ct. 2501 (2016) (No. 15-1189)

No. 15-1189 a

IN THE

Supreme Court of the United

IMPRESSION PRODUCTS, INC.,

Petitioner,

v.

LEXMARK INTERNATIONAL, INC.,

Respondent.

On Petrrion For A Writ or CERTIORARI TO THE UNITED

Srates Court or APPEALS FOR THE FEDERAL Crircurr

AMICUS CURIAE BRIEF OF THE

ASSOCIATION OF MEDICAL DEVICE

REPROCESSORS IN SUPPORT OF

IMPRESSION PRODUCTS, INC.

Rosrrt A. SURRETTE

Cc msel of Record

CHR STOPHER M. ScHARFF

McAnpreEws, HELD AND MALLoy, Lp.

500 West Madison Street, Suite 3400

(312) 775-8000

rsurrette@mcandrews-ip.com

Counsel for Amicus Curiae

COUNSEL PRESS 5 Bworw af Cnncueen

i

QUESTIONS PRESENTED

The “patent exhaustion doctrine”—also known as the

“first sale doctrine”—holds that “the initial authorized

sale of a patented item terminates all patent rights to that

item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553

U.S. 617, 625 (2008). This case presents two questions of

great practical significance regarding the scope of this

doctrine on which the sua sponte en banc Federal Circuit

divided below:

1.

Whether a “conditional sale” that transfers

title to the patented item while providing post-

sale restrictions on the article’s use or resale

circumvents the patent exhaustion doctrine

and therefore permits the enforcement of such

post-sale restrictions under penalty of patent

infringement.

Whether a sale of a patented article outside

of the United States—authorized by the U.S.

patentee— exhausts the U.S. patent rights

in that article, in light of this Court’s holding

in Kirtsaeng v. John Wiley & Sons, Inc., 133

S. Ct. 1351, 1363 (2013) that the common law

rule against restraints on alienation “makes no

geographical distinctions.”

it

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ...................... i

nd cdc ccdcnscveccceseasés ii

TABLE OF CITED AUTHORITIES .............. iv

INTEREST OF THE AMICUS CURIAE ........... 1

SUMMARY OF ARGUMENT..................... 4

bncccencetdebensscnssvccaucedasses 6

I. THE FEDERAL CIRCUIT'S DECISION

WILL SEVERELY IMPACT THE

MARKET FOR FDA CLEARED

REPROCESSED MEDICAL DEVICES...... 6

A. Patent Exclusion Power is Not Needed

as a Policy Matter to Protect the Safety

of Reprocessed Medical Devices.......... 6

B. The Federal Circuit’s “Conditional

Sale” Exception to Patent Exhaustion

C. The Federal Circuit’s Ruling That

Foreign Sales Do Not Result in

Patent Exhaustion Could Disrupt

International Secondary Markets. .... . . . 12

iii

Table of Contents

Page

D. The Federal Circuit's Decision Results in

Untenable Uncertainties for Third Party

Good Faith Purchasers of Products..... . 13

Il. THE FEDERAL CIRCUIT’S

“CONDITIONAL SALE” DOCTRINE

IS CONTRARY TO THIS COURT’S

150-YEAR-OLD PATENT

EXHAUSTION DOCTRINE ............... 16

A. This Court Has Uniformly Held that

Any “Authorized” Sale, Regardless

of Tangential Post-Sale Restrictions,

Triggers Patent Exhaustion ............ 16

1LTHE FEDERAL CIRCUIT’S

RATIONALE FOR ITS “CONDITIONAL

SALE” EXCEPTION TO PATENT

EXHAUSTION IS FLAWED............... 17

IV. THE FEDERAL CIRCUIT

INCORRECTLY HELD THAT

FOREIGN SALES DO NOT TRIGGER

PATENT EXHAUSTION ...............-.- 22

We GET Ser cccesevescncessntesseees 25

WwW

TABLE OF CITED AUTHORITIES

Page

Cases

Bloomer v. McQuewan,

ns cee ccecak eens ceeneeus 10

Boesch v. Graff,

EE MDs vc ncccccscceeescoscee 24

Ergowerz Int'l, LLC v. Maxell Corp. of Am.,

18 F. Supp. 3d 430 (S.D.N-Y. 2014) ............... 17

General Talking Pictures Corp. v.

Western Elec. Co.,

iene phestnce obuces net 20

Harkness v. Russell,

es sb adcedesasbesbecnadeves 21

Henry v. A.B. Dick Co.,

Ng he ae eek eens 19

Intergraph Hardware Techs. Co. v. Dell, Inc.,

2009 U.S. Dist. LEXIS 3193 (E.D. Tex.

IT os Lcienbuebicabescbeeceeiosende 17

Jazz Photo Corp. v. Int’l Trade Commission,

264 F.3d 1094 (Fed. Cir. 2001) .......... 5, 18, 14, 22

Kirtsaeng v. John Wiley & Sons, Inc.,

133 S. Ct. 1861 (2018)...............2-0ee. passim

Vv

Cited Authorities

Mallinckrodt, Inc. v. Medipart, Inc.,

976 F.2d 700 (Fed. Cir. 1992) .............. passim

Motion Picture Patents Co. v.

Universal Film Mfg. Co.,

ccc ccccesepecoceccoese passim

Quanta Computer, Inc. v. LG Electronics, Inc.,

Ss oc bcc cccccesceccescoes passim

Sony Corp. of Am. v.

Universal City Studios, Inc.,

ee icc cicedcdesestccoesnee 23

Static Control Components, Inc. v.

Leamark Int'l, Inc.,

615 F. Supp. 2d 575 (E.D. Ky. 2009).............. 17

United States v. Univis Lens Co.,

a 10, 18, 19

Other Authorities

Alfred C. Server and William J. Casey,

Contract-Based Post-Sale Restrictions

on Patented Products Following Quanta,

64 Hastings L.J. 561 (Apr. 2013) ................ 17

vi

Cited Authorities

FDA Device Advice: Comprehensive Regulatory

Assistance, Reprocessing of Single-Use

Devices, http://www.fda.gov/MedicalDevices/

DeviceRegulationandGuidance/

ReprocessingofSingle-Use Devices/

(last visited April 15, 2016)....................-. 7

Herbert Hovenkamp, /nnovation and the

Domain of Competition Policy, 60 Ala.

oc cacoudunetkestekeberscccse 17

Richard H. Stern, The Unobserved Demise of

the Exhaustion Doctrine in US Patent Law,

15 Eur. Intel. Prop. Rev. 460-65 (1993)........... 11

Thomas G. Hungar, Observations Regarding

the Supreme Court’s Decision in Quanta

Computer, Inc. v. LG Electronics, Inc.,

IDEA—The Intellectual Property Law Review,

Vol. 49, No. 4 @June 7, 2009)... .. 2.2... 2c eens 17, 22

U.S. Government Accountability Office, GAO-

08-147, Reprocessed Single-Use Medical

Devices: FDA Oversight Has Increased, and

Avatlable Information Does Not Indicate that

Use Presents an Elevated Health Risk (Jan.

2008), available at http://www.gao.gov/products/

GAO-08-147 (last visited April 15, 2016)........... 9

Statutes

1

INTEREST OF THE AMICUS CURIAE

The Association of Medical Device Reprocessors

(“AMDR_”) is a trade organization consisting of member

companies that reprocess medical devices.’ Member

companies collect, clean, repair, and re-sterilize (among

other steps) discarded medical devices that can safely

be reused pursuant to FDA regulations. The devices

that AMDR member companies reprocess include used

cardiovascular, patient monitoring and compression

therapy, general surgery, and orthopedic devices, as well

as opened but unused devices. AMDR member companies

provide hospitals with safe and effective reprocessed

devices, which lower healthcare costs and reduce the

impact of medical waste on the environment.

The Food and Drug Administration (FDA) regulates

companies that market medical devices in the United

States, including medical device reprocessors. Before a

reprocessed medical device can be marketed or sold, a

third-party reprocessor must demonstrate—and the FDA

must agree—that the reprocessed device is substantially

equivalent in terms of safety and efficacy to the predicate

1. No party or its counsel authored this brief in whole or in

part, or contributed money to fund preparing or submitting this

brief. No person or their counsel, other than the amicus party

or its members (Stryker Sustainability Solutions, Inc., a wholly-

owned subsidiary of Stryker Corporation, Medline ReNewal,

Innovative Health, Vanguard AG, and Hygia Health Services),

contributed money intended to fund preparing or submitting the

brief. Respondent Lexmark International, Inc. filed a letter of

blanket consent to amici. Petitioner Impression Products, Inc.

granted consent to amicus curiae AMDR on April 13, 2016 via

electronic mail, a copy of which is being submitted herewith.

2

originally-manufactured device. A third-party reprocessor

must comply with the same requirements that apply to

original equipment manufacturers, including:

Registering all reprocessed products

¢ Obtaining premarket approval

¢ Verifying quality assurance

Submitting adverse event reports

Tracking devices whose failure could have serious

outcomes

¢ Correcting or removing from the market unsafe

devices

* Meeting manufacturing and labeling requirements

¢ Submitting the reprocessing facilities to regular

inspection

The savings realized through the use of reprocessed

single-use devices allows hospitals and healthcare

providers to cut costs significantly and redirect those

funds toward hiring more medical professionals or

investing in improved patient care. Many of the hospitals

with whom AMDR members work are able to save more

than $1 million annually by purchasing AMDR members’

reprocessed single-use devices. Smaller community

hospitals report saving more than $250,000 annually.

3

The reprocessing services offered by AMDR members

also have a drastic positive effect on the environment.

AMDR members help hospitals divert millions of pounds

from local landfills per year. On average, medical device

reprocessing can divert over 50,000 pounds of medical

waste from a single hospital each year—the equivalent

weight of more than five elephants. Regulated medical

waste, also known as “red bag” waste, costs up to 5-10

times more to dispose of than regular solid waste.

If, however, an original manufacturer can avoid the

patent exhaustion/first sale doctrine simply by including a

“single-use” restriction with the sale of a patented product,

then reprocessors of such devices would risk liability

for patent infringement. Consumers and businesses,

including the hospitals that AMDR members serve, would

be forced to purchase a new replacement device from the

manufacturer and to dispose of new devices that have

only been used once (which may otherwise be able to be

reprocessed for multiple uses). Similarly, if foreign sales

do not trigger U.S. patent exhaustion, manufacturers

would be able to exact multiple payments for a single

sale of a product (e.g., when it is originally sold abroad

and again when imported or sold into the U.S.) or engage

in more aggressive discriminatory pricing. If the Court

does not reverse the decision of the Federal Circuit,

healthcare costs would multiply, medical waste would pile

up, and competition in the medical device market would

be reduced.

AMDR, therefore, seeks to provide this Court with

the perspective of an industry that the decision in this

case would significantly impact. Specifically, AMDR

submits this amicus curiae brief in support of Petitioner

4

Impression Products, Inc., to address both Questions

Presented.

SUMMARY OF ARGUMENT

For over 150 years, this Court has recognized the

patent exhaustion doctrine as a defining boundary of the

scope of the limited monopoly afforded by a patent. Under

the patent exhaustion doctrine, an authorized sale of a

product substantially embodying the patented invention

exhausts the patent right. Put another way, after title of

a patented product passes to a purchaser through a sale

authorized by the patentee, the purchaser and any down-

stream purchaser or user are free under patent law to use,

dispose of, or repair the product.

The Federal Circuit’s en banc decision, however,

effectively eliminates the patent exhaustion doctrine.

This Court had articulated the doctrine as a limit on a

patentee’s ability to control post-sale use of a patented

product—regardless of a patentee’s desire to control

post-sale activity, patent exhaustion prevented it from

doing so. The Federal Circuit, however, would make patent

exhaustion an optional result—if a patentee does not want

patent exhaustion to be triggered by a sale, it need only

provide “clearly communicated” post-sale restrictions.

A patentee could also use the Federal Circuit’s decision

to exact multiple payments from successive owners of

the same product originally sold outside of the United

States—contrary to the purpose of patent exhaustion.

By first reaffirming its earlier decision in Mallinckrodt,

Inc. v. Medipart, Inc., 976 F.2d 700, 702-706 (Fed. Cir.

1992), the Federal Circuit addressed the impact of

5

“post-sale” restrictions in a purchase agreement and

whether such restrictions could avoid patent exhaustion.

The Federal Circuit interpreted this Court’s precedent

as having addressed only post-sale restrictions that ran

afoul of antitrust law. See Pet. App. at 53a-56a. Under

that reasoning, the Federal Circuit held that other post-

sale restrictions that are not per se illegal under antitrust

law could avoid patent exhaustion. Jd. For example, the

Federal Circuit found that a sale subject to a post-sale

restriction limiting a patented product to a “single-use”

did not trigger patent exhaustion. /d. at 8a.

The Federal Circuit’s holding, however, is directly

contrary to this Court’s repeated articulation of the

patent exhaustion doctrine. As recently as Quanta

Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,

638 (2008), this Court addressed the effect of post-sale

restrictioi.s on patent exhaustion. The Court in Quanta

applied prior precedent without regard to antitrust law

and stated a broad, bright-line test for patent exhaustion.

Under Quanta, any sale authorized by the patent holder

triggers patent exhaustion, eliminating the patent

holder’s ability to control post-sale activity. Jd. at 638.

The Court did not limit patent exhaustion to sales without

contract restrictions or ones with restrictions that would

be unlawful under antitrust law. Moreover, the Court’s

analysis in Quanta also reveals that the Federal Circuit

misapprehended this Court’s earlier precedent.

Similarly, in reaffirming its earlier decision in Jazz

Photo Corp. v. Int'l Trade Commission, 264 F.3d 1094,

1102-07 (Fed. Cir. 2001), the Federal Circuit addressed

the application of patent exhaustion to foreign sales of

a product patented in the United States. The Federal

6

Circuit held that an authorized sale of a patented product

outside of the United States does not exhaust U.S. patent

rights, notwithstanding the opposite holding of this

Court in Kirtsaeng v. John Wiley & Sons, Inc., 133 8.

Ct. 1351, 1363-64 (2013) (addressing first sale doctrine

under copyright law). This result also misapprehends

this Court’s earlier precedent, ignores the common law

rule against restraints on disposition of goods making

“no geographical distinctions” (133 S. Ct. at 1363), and

illogically and incorrectly distinguishes the holding of

Kirtsaeng. If allowed to stand, the Federal Circuit’s

decision would cripple the international market for

reprocessed or resold goods.

ARGUMENT

I. THE FEDERAL CIRCUIT’S DECISION WILL

SEVERELY IMPACT THE MARKET FOR FDA

CLEARED REPROCESSED MEDICAL DEVICES

A. Patent Exclusion Power is Not Needed as

a Policy Matter to Protect the Safety of

Reprocessed Medical Devices

A holding that “single-use” or “use-and-return”

restrictions cannot circumvent patent exhaustion is

best for commerce. Reprocessed medical devices in

particular are a significant industry. About 3,000 of the

nation’s 5,500 or so acute care hospitals have implemented

reprocessing programs. AMDR’s members reprocess

medical devices for 14 of the 17 hospitals recognized on the

US News & World Report “Honor Roll,” including Mayo

Clinic, Cleveland Clinic, Johns Hopkins, Massachusetts

General, Stanford Healthcare and many others. Analysts,

7

such as Transparency Market Research, estimate that

the total savings to all hospitals from reprocessing

is upwards of $500 million per year. The Healthier

Hospitals Initiative, an alliance of hospitals and health

systems that seeks to boost sustainability in healthcare,

released a report in April 2013 finding that 185 hospitals

saved $32 million in 2012 by reprocessing single-use

medical devices. And Tenet Healthcare Corp. reported

saving $9.4 million and diverting more than 1.5 million

pounds of medical waste from landfills in 2012. For that

reason, customers of AMDR’s members have described

medical device reprocessing as “the right thing to do,

both environmentally and economically.” See http://www.

beckershospitalreview.com/supply-chain/the-ins-and-

outs-of-third-party-reprocessing.html (last visited April

15, 2016). The American Nurses Association, Association

of Peri-Operative Nurses, Healthcare Without Harm, and

Practice Greenhealth have also all written in support of the

environmental benefits of single-use device reprocessing.

See http://www.amdr.org/environmental/ (last visited

April 15, 2016).

Even the F'DA has recognized the significant benefits

of reprocessed medical devices. The F'DA appreciates that

“{rleprocessing and reusing single-use devices (SU Ds) can

save costs and reduce medical waste.” FDA Device Advice:

Comprehensive Regulatory Assistance, Reprocessing of

Single-Use Devices, http://www.fda.gov/MedicalDevices/

DeviceRegulationandGuidance/ReprocessingofSingle-

Use Devices/ (last visited April 15, 2016). Through March

2016 the FDA has cleared approximately 252 single use

medical devices for reprocessing.

8

The FDA ensures that “before medical devices can

be reprocessed and reused, a third-party or hospital

reprocessor must comply with the same requirements

that apply to original equipment manufacturers.” Jd.

The FDA’s former Director of the Center for Devices

and Radiological Health has therefore recognized that

the “FDA believes that reprocessed SUDs [single-use

— tat most FDAS he af requirements are as

nd 3 a new device.” See Testimony of Dr.

Daniel Schultz, at http:/www. fda.gov/Medical Devices

Device Regulation and Guidance/ReprocessingofSingle-

UseDevices/ucm121067.htm (last visited April 15, 2016)

(emphasis added).

In fact, the “pre-market submission of data to the

Agency [for clearance of a reprocessed device] . . . exceeded

the requirements for OEMs.” Jd. (emphasis added).

That is because in 2002, Congress enacted the Medical

Device User Fee and Modernization Act (“MDUFMA”),

which provided in § 302 additional specific regulatory

requirements for reprocessed single-use devices, including

that a reprocessor must:

* “prominently and conspicuously” label the device

as reprocessed;

* allow the FDA to review devices previously

exempted from FDA 510(k) clearance; and

* submit a new, additional category of premarket

submission—the premarket report—for any

reprocessed Class II device.

9

Moreover, there is nothing inherently unsafe in

reprocessing a device that an original manufacturer chose

to designate as single-use-only. The decision to put a

“single use” label on a device’s packaging is made by the

original manufacturer—not the FDA. A manufacturer

typically makes that label designation just to avoid having

to submit evidence supporting re-use to the FDA. See

U.S. Government Accountability Office, GAO-08-147,

Reprocessed Single-Use Medical Devices: FDA Oversight

Has Increased, and Available Information Does Not

Indicate that Use Presents an Elevated Health Risk (Jan.

2008), available at http://www.gao.gov/products/GAO-08-

147 (last visited April 15, 2016).

The Federal Circuit majority nevertheless found as

a policy matter that a patentee should—even after an

authorized sale that relinquishes title to a product—be

able to use patent law to control the conditions under which

that product is later reprocessed, recycled, or reused. Pet.

App. at 61a. Without citing to any factual evidence, the

majority concluded that post-sale restrictions allegedly

make sense because, for example, a medical device

supplier may have “reason to believe that reuse, when

not under its own control, carries a significant risk of

poor or even medically harmful performance, to the

detriment of its customers and its own reputation.” /d. at

60a-61la. According to the Federal Circuit’s unsupported

speculation “[s]uch interests are hardly unrelated to the

interests protected by the patent law—the interests both

of those who benefit from inventions and of those who

make risky investments to arrive at and commercialize

inventions.” Jd. at 61a.

10

The Federal Circuit’s argument, however, overlooks

all of the foregoing discussed consumer, economic, and

environmental benefits of reprocessed devices. And it

overlooks the heavily Tee oat FDA wpe ta in place a

ernie Leprocesse: hots

pepe 8- 9.

Moreover, this Court long ago resolved the proper

policy balance between a patent holder’s interest in using

patent law to control the use of its invention versus the

public’s interest in using their purchased property as they

see fit. That is the very origin of the patent exhaustion

doctrine. See, e.g., Bloomer v. McQuewan, 55 U.S. 539, 14

How. 539, 549, 14 L. Ed. 532 (1853) (“[W Jhen the machine

passes to the hands of the purchaser, it is no longer within

the limits of the monopoly.”); Motion Picture Patents

Co. v. Universal Film Mfg. Co., 243 U.S. 502, 518 (1917)

(observing that “the primary purpose of our patent laws

is not the creation of private fortunes for the owners of

patents but is ‘to promote the progress of science and

useful arts”). This Court has explained the basis for the

doctrine as follows: “[TJhe purpose of the patent law is

fulfilled with respect to any particular article when the

patentee has received his reward . . . by the sale of the

article”; once that “purpose is realized the patent law

affords no basis for restraining the use and enjoyment of

the thing sold.” United States v. Univis Lens Co., 316 U.S.

241, 249-50 (1942). Patent law is not a tool for exacting a

“toll” for every use of a patented product or for regulating

the use of the patented product.

11

B. The Federal Circuit’s “Conditional Sale”

Exception to Patent Exhaustion Could

Potentially Eliminate Secondary Markets in

Patented Goods

The Federal Circuit’s decision below effectively

guts the patent exhaustion doctrine. A patentee could

potentially exclude from exhaustion any sales of a patented

product simply by including a “clearly communicated”

post-sale restriction in the purchase agreement (or

potentially even just in a shrink-wrap agreement on the

packaging). The patentee would be able to threaten patent

infringement liability against all subsequent purchasers

down the chain to either prohibit reuse/resale entirely or

to extract a second, third, or fourth “license” fee. These

very concerns led to the Court’s holding in Quanta. See

Quanta, 553 U.S. 617 at 630 (“This case illustrates the

danger of allowing such an end-run around exhaustion.”)

(emphasis added).

The Federal Circuit brushed off any concerns in

this regard, arguing that this result has purportedly

not come to pass since the decision in Mallinckrodt. See

Pet. App. at 60a. Most observers, however, had believed

that Quanta overruled Mallinckrodt. See infra at p. 17

(discussing articles and district court decisions concluding

that Mallinckrodt was not good law). Moreover, even

before Quanta, it was believed that the three-person

panel decision in Mallinckrodt was wrongly decided, as

it was contrary to earlier precedent of this Court. See,

e.g., Richard H. Stern, The Unobserved Demise of the

Exhaustion Doctrine in US Patent Law, 15 Eur. Intel.

Prop. Rev. 460-65 (1993) (“The flaws in Mallinckrodt’s

legal analysis appear overwhelming. . . . Because

12

Mallinckrodt’s precedential support is negligible, its

viability as a precedent may be limited. Subsequent panel

decisions may distinguish it or limit it to its facts to the

point of irrelevance.”) (emphasis added). Should this Court

decline to reverse the Federal Circuit’s sweeping en banc

decision, however, post-sale restrictions will undoubtedly

become far more common. Secondary market goods for

products such as medical devices, cell phones, home

electronics, automotive parts, and others may largely

disappear.

C. The Federal Circuit’s Ruling That Foreign

Sales Do Not Result in Patent Exhaustion

Could Disrupt International Secondary

Markets

The medical device reprocessing industry—as with

many other secondary markets—is also a world-wide

industry. The Federal Circuit’s ruling that foreign sales

do not result in patent exhaustion would significantly

disrupt that market and harm consumers. At the same

time, it would only benefit patent holders by allowing

them to demand multiple payments on a single tangible

good after it is sold or to enforce country-by-country price

discrimination.

For example, a medical device reprocessor could

face allegations of patent infringement if it were to bring

foreign-sold medical devices into the U.S. to reprocess

those devices in a U.S. reprocessing facility. Even if the

U.S. reprocessor intends to simply take devices from the

original authorized purchaser, import them into the U.S.

to reprocess them as a service for the owner (without a

sale or title changing hands), and send them back to the

13

original purchaser, either the U.S.-based reprocessor or

the foreign purchaser would have to import them into the

U.S. See 35 U.S.C. § 271 (importing a patented good can

be an act of infringement). Therefore, such a U.S.-based

reprocessor—who otherwise performs mere reprocessing-

for-hire services, would now have to trace the patent rights

of every component of that product. Or, the U.S.-based

reprocessor would have to set up duplicative and wasteful

reprocessing facilities around the globe.

The vederal Circuit’s decision may also result in

higher costs for medical devices in the U.S. A U.S.-based

reprocessor who engages in the business of buying lower-

cost medical devices overseas for resale in the U.S. would

be exposed to increased risk of patent infringement

allegations. Meanwhile, the patentee could potentially

charge a lower price outside of the U.S. for a device, but

a much higher price for sales in the U.S. A U.S. hospital

or other consumer would be unable to buy the products at

a lower price outside of the U.S. and import them for use.

D. The Federal Circuit’s Decision Results in

Untenable Uncertainties for Third Party Good

Faith Purchasers of Products

The Federal Circuit majority’s decision also leaves

reprocessing companies guessing as to their rights. The

Federal Circuit’s decisions to affirm Mallinckrodt and

Jazz Photo raises myriad practical barriers.

First, a downstream purchaser that may have no

way of verifying the details of the original sale could

nevertheless be subject to the “conditions” of that sale,

or else be potentially liable as an infringer. The Federal

14

Circuit majority decision partly recognized this danger

and added a requirement of “notice” of any “conditional

sales” to “downstream buyers.” Pet. App. at p. 62a.

The majority decision also requires that the post-sale

restriction be “clearly communicated to the purchaser.”

Pet. App. at 8a. The Federal Circuit, however, provided

no guidance as to what constitutes “notice” or a “clearly

communicated” restriction. Nor did the Federal Circuit

provide any legal reasoning for why the heavy remedy

of patent infringement should be dependent on whether

or not a downstream purchaser knows of a post-sale

restriction in an original sales contract. And the Federal

Circuit did not address what kind of evidence would be

sufficient to prove such knowledge.

For example, the Federal Circuit has previously

held that only post-sale restrictions in a contract can

constitute “conditions” on the sale that would avoid patent

exhaustion. See Jazz Photo Corp. v. ITC, 264 F.3d 1094,

1108 (Fed. Cir. 2001) (“We do not discern an enforceable

restriction on the reuse of these cameras based on the

package statements [stating that the cameras were

for single-use]. These statements are instructions and

warnings of risk, not mutual promises or a condition

placed upon the sale.”) Mere “instructions and warnings”

on packaging cannot themselves constitute a contract and

thus a condition on the sale. See id. If warnings on the

product or product packaging are insufficient, however,

it is unknown how a downstream purchaser would know

of the existence of any “conditions” on the original sale

contract. Moreover, neither Jazz Photo nor the Federal

Circuit decision below addressed the impact of restrictions

in a “shrink-wrap” agreement on the product packaging,

and how a downstream purchaser would have notice of

such an agreement if the original packaging is discarded.

15

Similarly, the Federal Circuit’s ruling that patent

exhaustion does not apply to goods that a U.S. patentee

sells abroad will raise unworkable uncertainties. A

downstream purchaser may often have no way of knowing

whether the first authorized sale of a product occurred in

the U.S. or not. Under the Federal Circuit’s decision, the

fact that a product was first sold abroad does not need to

be “clearly communicated” to a downstream purchaser

in order to avoid patent exhaustion. See Pet. App. at

63a-103a. Further, because a downstream purchaser

of a foreign product would no longer be able to rely on

patent exhaustion, it would now have to engage in costly

examination of whether the goods are patented or not.

The bright-line patent exhaustion doctrine of Quanta

and the bright-line rule of Kirtsaeng against geographical

distinctions on restraints against alienation remove all of

this uncertainty. They strike the proper balance between

patentee and purchaser rights and relegate contract

disputes to their proper place.”

2. This Court in Quanta recognized that post-sale

restrictions are something to be enforced, if at all, through

contract law, rather than patent law. See Quanta, 553 U.S. at 636,

fn. 7 (“We note that the authorized nature of the sale to Quanta

does not necessarily limit LGE’s other contract rights.”)

16

Il. THE FEDERAL CIRCUIT’S “CONDITIONAL

SALE” DOCTRINE IS CONTRARY TO THIS

COURT’S 150-Y EAR-OLD PATENT EXHAUSTION

DOCTRINE

A. This Court Has Uniformly Held that Any

“Authorized” Sale, Regardless of Tangential

Post-Sale Restrictions, Triggers Patent

Exhaustion

This Court’s patent exhaustion standard is both

broad and simple: “[TJhe authorized sale of an article

that substantially embodies a patent exhausts the patent

holder’s rights and prevents the patent holder from

invoking patent law to control postsale use of the article.”

Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617,

638 (U.S. 2008). Once the patentee parts with title to the

product through an authorized sale, it relinquishes all

ability to control post-sale use or resale.

The test in Quanta does not depend on the relationship

of the parties or whether there were any tangential

covenants, warranties, or ongoing duties in a contract.

Nor does it depend on antitrust law or the legality of any

post-sale restrictions. Rather, the Court recognized that

a patentee (LGE) had authorized a manufacturer (Intel)

to manufacture and sell patented products. Jd. at 636. The

Court found what the patentee argued were “conditions”

on the use of the product (i.e., the manufacturer was

required to notify any purchasers that they could not

combine the patented products with non-Intel components)

amounted to mere collateral agreements that did not

render the sales by Intel “unauthorized.” Jd. When the

manufacturer sold the products to a third party (Quanta),

“Tntel’s authorized sale to Quanta thus took its products

17

outside the scope of the patent monopoly” and as a result,

the patentee could “no longer assert its patent rights

against Quanta.” Jd. at 638 (emphasis added).

Accordingly, most commentators agreed that Quanta

put to rest any “conditional sale” exception to patent

exhaustion. See Alfred C. Server and William J. Casey,

Contract-Based Post-Sale Restrictions on Patented

Products Following Quanta, 64 Hastings L.J. 561, 596

(Apr. 2013) (stating that “a majority of commentators” have

adopted the view that Quanta overturned the conditional

sales doctrine); Herbert Hovenkamp, Innovation and the

Domain of Competition Policy, 60 Ala. L. Rev. 103, 111

& n.35 (2008) (claiming Quanta overruled Mallinckrodt);

Thomas G. Hungar, Observations Regarding the Supreme

Court’s Decision in Quanta Computer, Inc. v. LG

Electronics, Inc., IDEA—The Intellectual Property Law

Review, Vol. 49, No. 4 (June 7, 2009) at 529-30 (same); see

also Ergowerz Int’l, LLC v. Mazell Corp. of Am., 18 F.

Supp. 3d 430 (S.D.N-Y. 2014) (same); Intergraph Hardware

Techs. Co. v. Dell, Inc., 2009 U.S. WL 166559, *3 (E.D.

Tex. Jan. 16, 2009) (same); Static Control Components,

Inc. v. Lexmark Int'l, Inc., 615 F. Supp. 2d 575, 585 (E.D.

Ky. 2009) (same).

Ill. THE FEDERAL CIRCUIT’S RATIONALE FOR

ITS “CONDITIONAL SALE” EXCEPTION TO

PATENT EXHAUSTION IS FLAWED

Notwithstanding the broad, clear patent exhaustion

rule articulated by this Court, the Federal Circuit majority

nevertheless found that its “conditional sale” exception to

patent exhaustion was warranted. Its reasoning, however,

misapprehends this Court’s precedent, the patent statute,

and the purpose of patent exhaustion.

18

First, the Federal Circuit incorrectly concluded that

Quanta, as well as the earlier decisions in Motion Picture

Patents Co. v. Universal Film Manufacturing Co., 243

U.S. 502, 518 (1917) and United States v. Univis Lens Co.,

316 U.S. 241, 251 (1942), were distinguishable—that the

broad patent exhaustion rule in those decisions was mere

dicta because there was either no restriction imposed or

the restriction would otherwise have violated the antitrust

laws. See Pet. App. at 54a. But as the dissent by Judges

Dyk and Hughes explained, “the cases impose no such

qualification on the rule announced.” Jd. at 118a.

For example, the Federal Circuit attempted to

distinguish Quanta by arguing that it “did not involve

a patentee’s sale at all” or one “subject to a restriction.”

Id. at 30a. But patent exhaustion applies not just to

patentee sales but also to authorized licensee sales. See

Quanta, 533 at 636-37 (authorized sale from licensee Intel

exhausted the patent). And the sales at issue in Quanta

did come with a “restriction”—-Intel (the licensee/seller)

was required by LGE (the patentee) to notify purchasers

(including Quanta) that they were not allowed to combine

the patented products with non-Intel components. See

Quanta, 533 at 624-25. The Court simply held that this

restriction did not override the undeniable fact that the

sale itself was still “authorized” by LGE. See id.

The Federal Circuit similarly incorrectly interpreted

Motion Picture Patents as only establishing that unlawful

post-sale restrictions (e.g., price fixing) did not circumvent

patent exhaustion. See Pet. App. at 53a-54a. The Court in

Motion Picture Patents, however, put no such limitation on

its holding. The Court simply held that “the right to vend

is exhausted by a single, unconditional sale, the article

19

sold being thereby carried outside the monopoly of the

patent law and rendered free of every restriction which

the vendor may attempt to put upon it.” Motion Picture

Patents, 243 U.S. at 516, 518. In doing so, Motion Picture

Patents overruled the entirety of this Court’s short-lived

decision in A.B. Dick that had broadly allowed post-sale

restrictions—not just as to “unlawful” restrictions. See

id. at 518, overruling Henry v. A.B. Dick Co., 224 U.S. 1,

24-25 (1912).

Univis likewise did not turn on whether a post-sale

restriction is legal under antitrust laws. In Univis, the

Court broadly found that where a patent holder has sold

a patented product he has “thus parted with his right to

assert the patent monopoly with respect to it and is no

longer free to control the price at which it may be sold

....” Id. at 251. In arriving at that conclusion, Univis

started its analysis with patent law, stating that “before

considering whether the defendants’ conduct violated

antitrust law, the Court first asked whether that conduct

was excluded by the patent monopoly from the operation of

the Sherman Act.” Univis, 316 U.S. at 244. To answer that

question, the Court turned to patent exhaustion. Jd. In

other words, Univis found that the post-sale restrictions

were also illegal under antitrust law only after concluding

that patent exhaustion first voided them. That is why

Quanta—which did not turn on or discuss any antitrust

issues—recognized that “Univis governs.” Quanta, 553

U.S. at 617.

Second, the Federal Circuit majority incorrectly

reasoned that without a “conditional sale” exception to

patent exhaustion, there would be two different patent

exhaustion tests for (a) “a practicing-entity patentee

20

that makes and sells its own product” versus (b) a “non-

practicing-entity that licenses others to make and sell

the product.” Pet. App. at 26a. But the Federal Circuit

misunderstood the issue. The distinction that exists under

this Court’s exhaustion test is simply between authorized

and unauthorized sales.

The Quanta test itself reflects this distinction.

Quanta requires an “guthorized sale” to exhaust the

patent. Quanta, 553 U.S. at 638. Any sales directly made

by the patentee are of course logically “authorized” by

the patentee. Any sales by an infringing, unrelated third

party are logically “unauthcrized” by the patentee. But

a patentee can also grant a license to another company

to make and sell the patented product. If it wishes, the

patentee can give the manufacturer-licensee permission

to sell the product only within a certain geographic area

or field of use. The patentee has not sold the product to the

manufacturer-licensee and thus there is no “authorized

sale” between them to trigger patent exhaustion.

Thereafter, unauthorized sales by the manufacturer-

licensee in violation of the agreement (e.g., sales outside

of the permitted area or field of use), are unlicensed

and therefore infring‘ng. That was the exact scenario

in General Talking Pictures Corp. v. Western Elec. Co.,

305 U.S. 124, 127 (19388). If, however, the manufacturer-

licensee makes an authorized sale to a customer (e.g., the

manufacturer licensee sells within the scope of its license),

patent exhaustion is then triggered. See Quanta, 553 U.S.

at 625. Any subsequent purchaser after that authorized

first sale is free to use and resell the product as it sees

fit (even outside the manufacturer-licensee’s field of use),

just as if it purchased the product from the patentee itself.

In other words, patent exhaustion does not treat sales

21

by a licensee/manufacturer differently from those by a

patentee— it treats authorized and unauthorized sales

differently. See Pet. App. at 121a-123a.

Third, the Federal Circuit majority incorrectly argued

that this Court’s own past use of the term “unconditional

sale” supported a “conditional sale” exception to patent

exhaustion. See Pet. App. at 32a, citing Quanta, 553

U.S. at 626, quoting Motion Picture Patents, 243 U.S.

at 516. But the Federal Circuit misapprehended the way

that this Court has used the term “unconditional sale.”

Traditionally, a “conditional sale” of property was one

in which title did not pass until a condition-precedent

had occurred. See Pet. App. at 115a, Dissenting Opinion

citing Harkness v. Russell, 118 U.S. 663, 665 (1886) (a

“conditional sale” is a security device, i.e., an “agreement

to sell upon a condition to be performed”). In the post-sale

restrictions at issue here, there was no “condition” that

had to occur before title to the patented product passed to

the purchaser. The single-use restrictions here are more

properly characterized as tangential contract provisions

(no different from payment, warranty, or other similar

provisions) rather than a “conditional sale.”

Fourth, the Federal Circuit reasoned that because the

Court in Quanta did not expressly overrule Mallinckrodt’s

“conditional sale” exception to patent exhaustion, it would

be “unwarranted” to believe that the Court disapproved

of it. Pet. App. at 32a. That logic, however, is backwards.

As the Federal Circuit acknowledged, the “evident

explanation is that, at a minimum, no question was

presented for decision” in Quanta regarding overturning

Mallinckrodt. Id. See also Pet. App. at 114a, fn. 3. In

fact, at oral argument, LGE’s counsel was asked: “Q: Am

22

I correct in understanding that you do not defend the

Mallinckrodt decision? A: I do not defend the Mallinckrodt

decision, Justice Stevens, and clearly I don’t believe I have

to.” Thomas G. Hungar, Observations Regarding the

Supreme Court's Decision in Quanta Computer, Inc. v.

LG Electronics, Inc., IDEA—The Intellectual Property

Law Review, Vol. 49, No. 4 (June 7, 2009) at 30.

Fifth, the Federal Circuit’s reliance on 35 U.S.C.

§§ 271(a) and 154(a)(1) as allegedly allowing a patent

holder to exclude any use of a patented invention “without

authority” is misplaced. Such an interpretation is contrary

to the very concept of patent exhaustion. For example, in

Motion Picture Patents and Quanta, the patentee had

not given “authority” for the disputed post-sale use of

the patented products. See Motion Pictures Patents, 243

U.S. at 514-15, Quanta, 553 U.S. at 638. Nevertheless,

exhaustion was trigged because there was an “authorized”

first sale—that sale ended the patentee’s ability to exert

any further “authority” over post-sale use. See id.

IV. THE FEDERAL CIRCUIT INCORRECTLY HELD

THAT FOREIGN SALES DO NOT TRIGGER

PATENT EXHAUSTION

The Federal Circuit also incorrectly decided whether

non-U.S. sales of a patented product exhaust the U.S.

patent rights. Namely, the Federal Circuit en banc upheld

the earlier panel decision in Jazz Photo, 264 F.3d at 1102-

07 that such sales do not trigger patent exhaustion. This

decision is contrary to Kirtsaeng, 133 S. Ct. at 1363-64

and the common law articulated therein.

23

In Kirtsaeng, the Court concluded that an authorized

sale of a copyrighted book outside the U.S. did give rise

to copyright exhaustion. See id. at 1363-64. Although the

Court there addressed copyright exhaustion based on a

foreign sale, rather than patent exhaustion, it analyzed the

common law regarding restraints on property generally.

See Kirstaeng, 133 S. Ct. at 1363. The Court treated the

copyright first sale doctrine as a “common-law doctrine

with an impeccable historical pedigree” rather than

something unique to the copyright statute. Jd. The Court

broadly recognized that “[a] law that permits a copyright

holder to control the resale or other disposition of a chattel

once sold” is “against Trade and Traffic, and bargaining

and contracting.” Jd. The Court also recognized (1) “the

importance of leaving buyers of goods free to compete

with each other when reselling or otherwise disposing

of those goods” and (2) that a broad first sale doctrine

frees courts from “the administrative burden of trying

to enforce restrictions upon difficult-to-trace, readily

movable goods.” Jd. at 1363-64. The Court then concluded

that “(tlhe common-law doctrine makes no geographical

distinctions” and that a “straightforward application”

of the rule “would not preclude the ‘first sale’ defense

from applying to authorized copies made overseas.” /d.

at 1363-64.

Each of these rationales applies equally to patent

exhaustion. International patent exhaustion—just like

the international copyright first sale doctrine—will

promote the same consumer interests and avoid the same

administrative burdens. The Court has previously noted

parallelisms between the property interests in a copyright

versus a patent. See, e.g., Sony Corp. of Am. v. Universal

City Studios, Ic., 464 U.S. 417, 489 (1984) (recognizing a

“historic kinship between patent law and copyright law”).

24

It was only after the Court in Kirstaeng discussed

general common law property principles that it also

analyzed whether the copyright statute (§109(a)) limited

the common law rule disfavoring restraints on alienation

of goods. See Kirstaeng, 133 8S. Ct. at 1364. It found that

although the copyright statute did address first sale, it did

not mandate against exhaustion based on international

sales. See id. Because the patent statute has no applicable

statutory provision that needs analysis, it also does not

limit the broad common law rule disfavoring restraints

on alienation.

Moreover, Boesch v. Graff, 133 U.S. 697, 701-02 (U.S.

1890) does not support the Federal Circuit majority’s

position that international sales do not exhaust a patent.

Boesch did not broadly hold that foreign sales cannot

exhaust a U.S. patent. See id. at 701-02. Rather, in Boesch,

there was no foreign sale that was “authorized” by the U.S.

patentee (e.g., a sale from the U.S. patentee or from an

entity licensed by the U.S. patentee)—rather, the sale in

Boesch was from a third party who was only able to sell

in Germany, under Germany patent law, because it had

been doing so prior to the German patent application for

the same technology. /d. at 701-02. Boesch recognized that

the party attempting to import the patented product into

the U.S. was doing so “without the license or consent of

the owners of the United States patent.” Jd. at 702.

Vv. CONCLUSION

For the reasons discussed, this Court should grant

certiorari to address the above Questions Presented.

April 21, 2016 Respectfully Submitted,

Rosert A. SURRETTE

Counsel for Amicus Curiae

Association of Medical

Device Reprocessors