Impression Products, Inc. v. Lexmark International, Inc. , 137 S. Ct Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017) and its implications for Patent Exhaustion Jeremy McKown January 26, 2018

Disclaimer This presentation reflects my personal view and does not purport to reflect the views of Johnson & Johnson or its affiliates.

Review of Impression Products, Inc. v. Lexmark International, Inc. Agenda Background Review of Impression Products, Inc. v. Lexmark International, Inc. Parallel Trade in the EU Practical considerations Q&A

Mallinckrodt Inc. v. Medipart Inc. 976 F.2d 700 (Fed. Cir. 1992) Device used for delivery of radioactive or therapeutic material in aerosol mist form to the lungs of a patient Mallinckrodt sold patented devices to hospitals; marked with the appropriate patent numbers, and the inscription "Single Use Only“ Package insert stated "For Single Patient Use Only" and instructed the entire contaminated device be disposed of in accordance with procedures for the disposal of biohazardous waste After initial use of the devices, many hospitals sent them to Medipart for servicing – the "reconditioned" units were then shipped back to the hospitals for reuse Mallinckrodt sued Medipart asserting patent infringement and inducement to infringe District court held (i) "Single Use Only" restriction was unenforceable, and (ii) Medipart's activities were permissible repair, not impermissible reconstruction Fed. Cir. reversed and remanded The appropriate criterion is whether Mallinckrodt's restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason If the sale of the device was validly conditioned under the applicable law such as the law governing sales and licenses, 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

Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008) LG Electronics granted Intel a license to method patents practiced in Intel's chipsets, permitting Intel to manufacture, use, sell, and import its own products that practice the patents Under a separate agreement, Intel further agreed to notify customers that while none of the products they purchased infringed patents, the license did not extend to combining Intel products with non-Intel products Intel sold chips to Quanta, who then combined them with other computer components LG sued Quanta for patent infringement and Quanta raised the affirmative defense of patent exhaustion Court focused on the license agreement between LG and Intel and found the patent license between the parties did not restrict what Intel could sell, and therefore Intel had sold the chipsets to Quanta with no restrictions and thus exhausted LG's patent rights

Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1356 (2013) Kirtsaeng, a student in the United States, recognized significant price difference for text books between certain foreign and American markets and sought to capitalize on such by acting as a third-party vendor for the books Kirtsaeng asked friends and family in Thailand to purchase the books at a lower price than that demanded in the U.S., imported the books, and sold them at a significant profit (some estimates suggest Kirtsaeng's profits were $900,000) Wiley sued, asserting that Kirtsaeng's activity violated the first-sale doctrine of copyright law Supreme Court's decision in Kirtsaeng turned on a statutory interpretation (e.g., 17 U.S.C. 109 (a)): whether the copies of Wiley’s textbooks manufactured and sold abroad were “lawfully made under this title,” which would have exhausted the U.S. copyright The Supreme Court ultimately decided that the phrase “lawfully made under this title” contains no geographic limitation of the statutory first-sale provision to products made in the United States

Lexmark Int'l, Inc. v. Ink Techs. Printer Supplies, LLC, 9 F. Supp Lexmark Int'l, Inc. v. Ink Techs. Printer Supplies, LLC, 9 F. Supp. 3d 830 (S.D. Ohio 2014) Lexmark sold cartridges under two different plans: (i) at full price which permits buyers to use them as they wish, and (ii) at a discounted price discount, subject to an express single-use/no-resale restriction Some of the foreign sold cartridges and all of the domestically sold cartridges at issue were sold subject to the single-use/no-resale restriction Impression later acquired the cartridges in order to resell them in the United States—the restricted ones after a third party physically modified them to enable re-use in violation of the single-use/no-resale restriction District Court held: (1) Kirtsaeng does not apply to patents because "copyright cases are not 'controlling' regarding patent issues”, but (2) Quanta overruled approval for single-use restrictions and therefore Lexmark's “Return program” exhausted its own patents The Federal Circuit sua sponte granted en banc review

Whether the sale of a patented article, made under an otherwise lawful restriction, gives rise to patent exhaustion? Reaffirmed its earlier decisions finding that the Supreme Court did not overrule Mallinckrodt in Quanta; Quanta did not address a patentee sale (rather it was directed to a manufacturing licensee sale), let alone a sale subject to a restriction A patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized and therefore remains infringing conduct under the terms of § 271 Under Supreme Court precedent, patentee may preserve its patent rights by otherwise-proper restrictions when it makes and sells patented articles itself and not only when it contracts out manufacturing and sales, provided that downstream users have adequate notice

Whether a sale of a patented item outside the United States gives rise to U.S. patent exhaustion? Jazz Photo’s no exhaustion principle remains sound after the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise infringing domestic acts Kirtsaeng focused on the statutory first sale doctrine embodied in 17 U.S.C. 109(a), which entitled owners of copyrighted articles to engage in certain activities without the authority of the copyright holder Recognized the Patent Act and Copyright Act grant different rights and are not similar in scope or application (e.g., Patent Act grants a right to “exclude,” unlike the Copyright Act) Copyright Act 17 U.S.C. 109 has no counterpart in Patent Act Copyright Act focuses on a copyrighted work’s location of manufacture, which is not a factor in patent exhaustion analysis

Policy considerations Patent statute gives patentees the reward available from American markets, so foreign sales cannot be a basis for patent exhaustion since a patentee cannot reasonably be treated as receiving that reward from sales in foreign markets Noted the various differences in obtaining patent rights as compared to copyrights, such as the fact that patents are awarded on a region-by-region basis after an examination process while copyright protection is granted globally upon creation Extensive review of statutory provisions (e.g., Section 271(a)) and case law

Dissent Dissenting Opinion filed by Judge Dyk, joined by Judge Hughes Mallinckrodt Inc. v. Medipart Inc. was wrong when decided and cannot be reconciled with the Supreme Court’s recent decision in Quanta Jazz Photo should be retained insofar as it holds that a foreign sale does not in all circumstances lead to exhaustion of United States patent rights (i.e., seller must explicitly reserve the United States patent rights) Domestic Exhaustion Cited numerous Supreme Court cases where the Court held that the authorized sale of a patented article exhausted all of the patentee’s patent rights in that article, and freed the article from any restrictions on use or sale based on the patent laws (See Motion Picture Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 518 (1917)) Relied heavily on the ruling in Quanta, which reiterated the rule that “the right to vend is exhausted by a single, unconditional sale, the article 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” Consistent with the “first sale doctrine is a common law doctrine” articulated in Kirtsaeng Must follow Supreme Court’s authority establishing the exhaustion rule, to do otherwise misconceives their role as a subordinate court

Dissent Continued Foreign Exhaustion Attempt to distinguish Boesch v. Graff, 133 U.S. 697 (1890); here foreign sales were made by Lexmark (the US Patent holder) as opposed to an unauthorized sale in Germany Proper inquiry is whether the seller had authorization to make a sale Cited several trade agreements (US-Australia, US-Singapore and US- Morocco) where the patent holder must place a restriction of importation in contract or otherwise Domestic only patent exhaustion would seriously impair international trade Put the burden on the patent holder to provide notice of reservation of rights

AIPLA Amicus Brief – Domestic Exhaustion U.S. Constitution Art. 1, §8, cl. 8 To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries Copyright Act (i.e., first sale doctrine) very different than Patent Act Patent Rights are a Bundle of rights If a patentee can temporally divide rights to make and sell its invention by express restrictions in a licensing agreement, it should also be able to sell limited use rights by express provisions in a sales contract Owners of intellectual property in different industries rely on the ability to condition sales of patented goods without exhausting their patent rights Patented biotech inventions, such as genetically modified crop seeds or biological medicines, encourages investment in these areas while providing access to, for example, small scale farmers or individual patients who could not afford to pay large fees for unlimited use rights

AIPLA Brief – International Exhaustion Citing Boesch v. Graff, 133 U.S. 697, 702 (1890), “United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent” Court’s interpretation of Section 109(a) of the Copyright Act in Kirtsaeng announced a rule of international exhaustion for copyrights only Court distinguished patents and copyrights on many occasions beginning with Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 345 (1908) see also Bauer & Cie. v. O’Donnell, 229 U.S. 1, 13-14 (1913) (patent statute gives right to exclude others from use, copyright statute does not); Sony Corp. of America v. Universal Studios, Inc., 464 U.S. 417, 439 n.19 (1984); Eldred v. Ashcroft, 537 U.S. 186, 216 (2003) In addition, significant differences in the legal protections offered by the patent and copyright laws; scope of patent varies by jurisdiction, examination process, etc.

AIPLA Brief – International Exhaustion Copyright Act is silent on geographical restrictions Patent statute contains geographical restrictions Patent Act of 1790 included geographical restrictions, Congress removed some restrictions in 1836, but then reinserted the geographic limitation on infringement in 1870 Both the Patent Act of 1952 and the America Invents Act include geographic restrictions on the patentee’s right to exclude Section 271(a) liability if one without authority makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention during the term of the patent therefore, infringes the patent Section 271(f) liability for exporting components of a patented invention for assembly abroad Section 271(g) liability for importing into the United States or selling, offering to sell, or using in the United States, a product “made by” a process covered by a U.S. Patent

AIPLA Brief – International Exhaustion United States advocates against international exhaustion in international agreements Paris convention When a product is imported into a country of the Union where there exists a patent protecting a process of manufacture of the said product, the patentee shall have all the rights, with regard to the imported product, that are accorded to him by the legislation of the country of importation The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) For the purposes of dispute settlement . . . nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights North American Free Trade Agreement (NAFTA) Mexico’s proposal to include regional patent exhaustion was not included

AIPLA Brief – International Exhaustion Multi-national corporations require a consistent policy in order to provide developing nations access to patented pharmaceutical, agricultural, and medical products Companies are able to supply and offer patented products at substantial discounts in developing countries in part because the products cannot be reimported into higher-priced markets where the product is patented Tiered pricing, patient assistance programs, volunteer licensing, patent pools, etc. Patent scope and availability vary country-by-country Patentee’s often subject to pricing set by Health Authorities, not commercial forces

Supreme Court The Court granted certiorari on two questions: (1) Whether a patentee that sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through an infringement lawsuit? (2) Whether a patentee exhausts its patent rights by selling its product outside the United States, where American patent laws do not apply? Holding: A patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose on the location of the sale

Domestic Exhaustion Single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell Citing Bloomer v. McQuewan, 14 How. 539 (1853), United States v. Univis Lens Co., 316 U. S. 241, 250 (1942) and Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617, 625 (2008) the Court explained the doctrine of patent exhaustion has imposed a limit on that right to exclude for over 160 years Exhaustion can be traced back to “common law’s refusal to permit restraints on the alienation of chattels.” citing Lord Coke (see, 1 E. Coke, Institutes of the Laws of England §360, p. 223(1628)) The limit functions automatically: When a patentee chooses to sell an item, that product “is no longer within the limits of the monopoly” and instead becomes the “private, individual property” of the purchaser, with the rights and benefits that come along with ownership. Id. at 549–550. Quanta settled the matter. Without so much as mentioning the lawfulness of the contract, we held that the patentee could not bring an infringement suit because the “authorized sale . . . took its products outside the scope of the patent monopoly.” 553 U. S. at 638.

Domestic Exhaustion Court provided some examples and statistics: Car repair shop that restores and sells cars: If Lexmark stands the smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale. Generic smartphone assembled from various high-tech components “could” practice an estimated 250,000 patents, citing one Amicus brief.

Domestic Exhaustion The right to use, sell, or import an item exists independently of the Patent Act. What a patent adds—and grants exclusively to the patentee—is a limited right to prevent others from engaging in those practices. See Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U. S. 24, 35 (1923). Exhaustion extinguishes that exclusionary power. License vs sale? Focused on licensor – licensee relationship where the licensee can make and sell licensor’s products (i.e., computer manufacturer can make and sell them only for non- commercial use). If sold for commercial use, then patentee can sue for patent infringement A license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. If the licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale The licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself. The result: The sale exhausts the patentee’s rights in that item.

International Patent Exhaustion Considerable focus on the similarities between Patents and Copyright Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1356 (2013); “first sale applies to copies of a copyrighted work lawfully made and sold abroad.” Began with the text of 17 U.S.C. 109 (a), but it was not decisive: The language neither restricts the scope of the first sale doctrine geographically, nor clearly embraces international exhaustion Common law tipped the scales to global exhaustion since the first sale doctrine originated in the common law’s refusal to permit restraints on the alienation of chattels. Common law doctrine makes no geographical distinctions. Nothing in the text or history of the Patent Act shows that Congress intended to confine the borderless common law principle to domestic sales Differentiating the patent exhaustion and copyright first sale doctrine would make little theoretical or practical sense Many everyday products—automobiles, microwaves, calculators, mobile phones, tablets, and personal computers—are subject to both patent and copyright protections

International Patent Exhaustion Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. Exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate “for the article and the invention which it embodies.” Court addressed international patent exhaustion in only one case, Boesch v. Gräff 133 U. S. 697(1890)…..holding a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale ***Post sale restrictions could be enforced through contact law

Ginsburg Dissent A foreign sale should not exhaust a U. S. inventor’s U. S. patent rights; Patent law is territorial A U. S. patentee must apply to each country in which she seeks the exclusive right to sell her invention. Because a sale abroad operates independently of the U. S. patent system, it makes little sense to say that such a sale exhausts an inventor’s U. S. patent rights The Patent Act contains no analogue to the Copyright Act first-sale provision analyzed in Kirtsaeng Copyright protections, unlike patent protections, are harmonized across countries (i.e., 174 countries have jointed the Berne Convention)

Parallel Imports in the EU European Union (EU) is the region where we see the most parallel imports (PI) PI is driven by price differences among different EU member states Prices for pharmaceuticals are typically set by the governments of each member state reflecting national policy considerations and social security systems Importers take advantage of price differences between member states by purchasing pharmaceuticals in low price markets and reselling them in higher price markets

What’s next? Is this the beginning or simply an extension of International Patent Exhaustion? Let’s examine the EU framework….

Exhaustion of IP rights in the EU The first unrestricted sale of a patented item within the EU exhausts the patentee’s control over that item Patents and trademarks cannot be used to restrict circulation of goods put on the market by an IP holder or a beneficiary thereof Parallel trade of pharmaceuticals - parallel import of mutually approved products

Parallel Trade within the Community Favored by the European Commission as a means to harmonize the market through price convergence Pharmaceuticals are priced and reimbursed by national authorities - price differences fuel parallel trade - low-price member states suffer shortages

Practical Considerations Reconsider selling products in low price / margin countries Renegotiate Contracts/Licenses: Can you license/lease your product? Do you have a product that is used once, or needs/can be recycled/sterilized? Draft agreements to include provisions supporting a potential breach of contract claim since a patent infringement claim is no longer available Limited use license? Counsel and review options with your Marketing / Commercial teams Pricing Distribution

Practical Considerations Will decision expand “International Exhaustion?” Will EU expand scope? Manage Distribution of Products in Least Developed and Developing Countries Appropriate contracts with Distributors and Licensees Understand market share / opportunity Importation Rules / Regulations Regulatory hurdles for importing into U.S.? Are U.S. labels different than OUS labels? Legislation

Questions?