Supreme Court to Review Federal Circuit’s Decisions in Heartland and Lexmark

January 3, 2017

This past month the Supreme Court decided to review two cases that could change the patent litigation landscape in important ways, and that may have broad implications for the licensing and distribution of patented goods, domestically and internationally.  They have the potential to narrow the range of venues available to patent plaintiffs, and to broaden the geographic scope of the exhaustion defense for patent defendants.  Below, we review the issues presented in each case, and how the Court’s decisions may affect business interests in the United States and abroad.  Our intellectual property, appellate, and technology transactions attorneys are available to discuss further and to advise on these issues at your convenience.

I.     Executive Summary

On December 14, 2016, the Supreme Court announced that it had granted certiorari in TC Heartland LLC v. Kraft Food Brands Group LLC, No. 16-341 (Fed. Cir., 821 F.3d 1338).  The Heartland case concerns the range of venues available to patent plaintiffs.  Specifically, the issue is whether a plaintiff may sue a corporation for patent infringement in any district where the defendant is subject to personal jurisdiction (as the United States Court of Appeals for the Federal Circuit has long held), or only in the districts where the defendant is incorporated, or has committed acts of infringement and has a regular and established place of business (as the petitioner and several amici have argued).  Under the current approach to venue, patent plaintiffs have enjoyed relatively broad latitude in choosing a forum, and many have gravitated to certain districts such as the Eastern District of Texas and the District of Delaware.  The Supreme Court is being asked to interpret a jurisdictional statute to restrict the available venues in patent cases, an invitation which, if accepted, could lead to a dramatic change in where such suits are filed.

The Supreme Court’s decision to review Heartland comes just shortly after the Court granted certiorari in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189 (Fed. Cir., 816 F.3d 721; cert. granted Dec. 2, 2016).  The Lexmark case concerns patent exhaustion, a doctrine that limits a patentee’s rights regarding activities that occur after the initial authorized sale of a patented item.  The exhaustion doctrine is analogous to the first-sale doctrine in copyright law, which allows buyers of books and other copyrighted materials to resell them without risk of copyright liability (provided that the initial purchase was authorized by the copyright owner).  In a recent decision, the Supreme Court held that the first-sale doctrine applies to copyrighted items made or sold abroad, not only to items made or sold in the United States.  Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013).  One issue now before the Court in Lexmark is whether the patent exhaustion doctrine likewise applies to foreign sales, such that an authorized sale of a patented article outside of the United States exhausts the U.S. patent rights in that article.  The Federal Circuit held below that patent exhaustion does not apply to foreign sales–notwithstanding Kirstsaeng–and the Supreme Court will review that holding.  The second issue before the Court in Lexmark is whether a patentee can avoid the patent exhaustion doctrine by employing a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale.

Below, we provide more information about Heartland and Lexmark, and the implications that different outcomes could have for the business community.

II.     Heartland – Venue in Patent Infringement Cases

In Heartland, the Supreme Court has decided to consider where venue is proper in a patent infringement case against a corporate defendant.  Before addressing the facts and possible outcomes in Heartland, it is useful to review the statutory venue framework at issue and how it has been interpreted to date.

            A.     Venue Before Heartland

The United States Code contains a special venue statute for patent cases (28 U.S.C. § 1400(b)), and a general venue statute for federal cases (28 U.S.C. § 1391).  The patent-specific venue statute provides that “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”  28 U.S.C. § 1400(b).

In 1957, the Supreme Court held in the Fourco case that the patent-specific venue statute is controlling, and that the general venue statute does not apply to patent cases.  Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 229 (1957) (“We hold that 28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).”).  The Court also clarified in Fourco that for corporate defendants, the language “where the defendant resides” (in the patent-specific statute) refers to the corporation’s place of incorporation.  Thus, under Fourco, venue in a patent case against a corporate defendant is limited to (1) the defendant’s state of incorporation, or (2) where the defendant has committed acts of infringement and has a regular and established place of business.

Fourco remained settled law for over three decades.  Then, in 1988, Congress amended the general venue statute to provide that “[f]or purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced.”  28 U.S.C. § 1391(c) (1988).  Two years later, the Federal Circuit held in the VE Holding case that this 1988 amendment superseded the Fourco decision, and supplied a definition of where a corporate defendant “resides” for purposes of not only the general venue statute, but also the patent-specific venue statute in section 1400(b).  VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1579 (Fed. Cir. 1990) (“Section 1391(c) as it was in Fourco is no longer.”); id. at 1580 (“[As amended,] Section 1391(c) applies to all of chapter 87 of title 28, and thus to § 1400(b), as expressed by the words ‘For purposes of venue under this chapter.'”).  Thus, under VE Holding, venue in a patent case against a corporate defendant is proper not only in the districts identified by Fourco, but also in any other district where the defendant is subject to personal jurisdiction at the time the action is commenced.

Many corporations sell products that reach most, and often all, districts of the United States, and such corporations can expect to be held subject to personal jurisdiction in patent cases in a wide range of districts.  See, e.g., Beverly Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558, 1566 (Fed. Cir. 1994).  Under VE Holding, venue is proper in any such district – i.e., once personal jurisdiction is established, venue is automatically proper.

Twenty-one years after VE Holding, in 2011, Congress again amended the general venue statute.  The provision “[f]or purposes of venue under this chapter,” was replaced with “[f]or all venue purposes” in section 1391(c), and a new provision “Applicability of Section. – Except as otherwise provided by law” was added in section 1391(a).  28 U.S.C. § 1391.  These latest amendments are at issue in the Heartland case, explained below.

            B.     Heartland and the Issue Under Review

The defendant in the Heartland case, TC Heartland LLC, is incorporated and headquartered in the state of Indiana.  The plaintiff, Kraft Foods Group Brands LLC, sued Heartland for infringement of three Kraft patents in the United States District Court for the District of Delaware.  Kraft Foods Grp. Brands LLC v. TC Heartland, LLC, No. 14-28-LPS (D. Del. Aug. 13, 2005).

Heartland moved to dismiss the case for lack of personal jurisdiction, and to dismiss for improper venue or alternatively to transfer venue to the Southern District of Indiana.  In relevant part, Heartland argued that Congress’ 2011 amendments to the general venue statute nullified VE Holding and re-confirmed the narrower venue rule of Fourco, under which venue for this suit would not be proper in the District of Delaware.

The district court denied Heartland’s motions, and Heartland then petitioned the Federal Circuit for a writ of mandamus.  In re TC Heartland LLC, 821 F.3d 1338 (Fed. Cir. 2016).  The Federal Circuit denied Heartland’s petition, holding in relevant part that the VE Holding decision from 1990 is still controlling and was not displaced by the 2011 amendments.  Id. at 1341-43.  Specifically, the Federal Circuit held that the definition of corporate residency in section 1391(c) continues to apply in patent infringement actions despite the 2011 amendments, and therefore venue in a patent suit against a corporate defendant is proper anywhere the defendant is subject to personal jurisdiction.  Id.

After the Federal Circuit denied its mandamus petition, Heartland petitioned the Supreme Court for a writ of certiorari.  Heartland argued that the Federal Circuit’s venue decision in VE Holding conflicts with Fourco and should be overruled.  Heartland also argued that Congress’ 2011 amendments eliminated any basis for the Federal Circuit to continue relying on VE Holding, in two ways:  First, Congress removed the general venue introductory language “[f]or purposes of venue under this chapter” (which the Federal Circuit had relied on in VE Holding) and replaced it with “[f]or all venue purposes” (which is closer to the statutory language “for venue purposes” that existed at the time of Fourco).  Second, Congress added a new provision that the general venue statute applies “[e]xcept as otherwise provided by law.”  Heartland argued that the patent-specific venue statute, as interpreted by the Supreme Court in Fourco, satisfies this exception and thus controls over the general venue statute.

Gibson Dunn filed a brief for amici Dell Inc. and the Software & Information Industry Association in support of Heartland’s petition.  Several other amici also filed briefs urging review, and on December 14, 2016, the Supreme granted certiorari.  TC Heartland LLC, No. 16-341.

            C.     Possible Effects of Supreme Court Review in Heartland

Looking ahead, depending on how the Supreme Court rules on the merits of the venue question in Heartland, the patent landscape could change in important ways for patentees and corporate defendants.  Under the Federal Circuit’s existing interpretation of venue in VE Holding, patent plaintiffs have many options for where to file infringement suits, and often gravitate to certain districts perceived to be plaintiff-friendly, such as the Eastern District of Texas.  Corporate defendants often move for transfer out of such districts and into districts that are more convenient for their employees and witnesses.  But the transfer analysis is complex, and district courts retain discretion to deny transfer motions in many cases, such that defendants are often required to litigate in districts that they contend have little or no connection to the facts and witnesses at issue.  If the Supreme Court affirms in Heartland, this regime will continue.

However, if the Supreme Court reverses the Federal Circuit in Heartland, then patent plaintiffs may not be able to file as often in their preferred districts.  Instead, plaintiffs will have to file either where the defendants are incorporated, or where the defendants have both committed acts of infringement and have regular and established places of business.  That may mean that new patent cases will be spread more evenly across a broader range of districts than they are at present.  But it may also encourage the concentration of cases in certain districts.  For example, the District of Delaware is already a popular venue for patent cases, but it may become even more so if the Supreme Court reinstates Fourco, as many potential defendants are incorporated in Delaware even if they do not maintain regular places of business there.

Alternatively, or in addition, some patent plaintiffs may decide to continue filing in their preferred districts regardless of Heartland, by invoking the “regular and established place of business” prong of the patent-specific venue statute.  This approach risks dismissal for improper venue, however, depending on how this prong of the statute is applied on a case-by-case basis.  See, e.g., In re Cordis Corp., 769 F.2d 733, 737 (Fed. Cir. 1985) (denying petition for mandamus seeking dismissal for improper venue) (“[I]n determining whether a corporate defendant has a regular and established place of business in a district, the appropriate inquiry is whether the corporate defendant does its business in that district through a permanent and continuous presence there and not as Cordis argues, whether it has a fixed physical presence in the sense of a formal office or store.”).

Finally, regardless of how the Court resolves the venue question on the existing statutes, Congress may adjust venue in patent cases by legislation; affirmance in Heartland could give further impetus to legislative change.  Bills are currently pending in both the House and the Senate which could result in modifications to the patent venue statute.  See H.R. 9, 114th Cong. § 3(g) (2015); S. 2733, 114th Cong. § 2 (2016).  Previous bills addressing the issue have failed to pass both houses, however.  See H.R. 1908, 110th Cong. § 10(c) (2007) (proposing corporate residence be defined under section 1400 as the “judicial district in which the corporation has its principal place of business or in the State in which the corporation is incorporated”); S. 3818, 109th Cong. § 8 (2006) (same).

III.     Lexmark – Patent Exhaustion

In Lexmark, the Supreme Court will consider (1) whether patent exhaustion applies to foreign authorized sales, and (2) whether a patentee may contract around exhaustion via a “conditional sale.”  As with Heartland, the Court’s decision on the merits of Lexmark could change the patent landscape in the United States.  But it could also affect business interests abroad.  These cases also present the Court an opportunity to provide guidance on critical patent licensing issues in light of Quanta and Kirtsaeng. Below, we review the exhaustion doctrine, the key facts and issues in Lexmark, and possible outcomes.

            A.     Exhaustion Before Lexmark

Under the common law patent exhaustion doctrine, the initial authorized sale of a patented article generally extinguishes the patentee’s right to bring an infringement action as to post-sale use of that article.  Nonetheless, judicial decisions have articulated limits on the scope of the doctrine in particular contexts.

As relevant to the Lexmark case, certain conditional sales have been held not to trigger exhaustion.  In 1938, the U.S. Supreme Court held in General Talking Pictures Corp. v. Western Electric Co. that a patentee’s rights are not exhausted by a licensee’s unauthorized sale when the licensee knows the sale is outside the scope of its license.  See 304 U.S. 175, 181-83 (1938).  In 1992, the Federal Circuit held in Mallinckrodt, Inc. v. Medipart, Inc. that a patentee may also preserve its rights to bring an infringement action after the first sale by imposing, and clearly communicating, a single-use or resale restriction on the patented article.  976 F.2d 700, 709 (Fed. Cir. 1992).  However, in 2008 the U.S. Supreme Court held in Quanta Computer, Inc. v. LG Electronics, Inc. that a patentee’s right to bring an infringement action was exhausted upon a licensee’s sale of a product substantially embodying the patentee’s method patent when the patentee had granted the licensee unrestricted authorization to make, use, or sell products embodying the patent, notwithstanding separate obligations upon the licensee to notify  downstream customers of purported post-sale restrictions on combinations of the licensed products.  553 U.S. 617, 636-37 (2008) (distinguishing General Talking Pictures, 304 U.S. 175).

Further, the exhaustion doctrine has historically been focused on domestic sales.  As early as 1890, the U.S. Supreme Court observed in Boesch v. Graff that “[t]he sale of articles in the United States under a United States patent cannot be controlled by foreign laws.”  133 U.S. 697, 703 (1890).  Relatedly, in 2001, the Federal Circuit held in Jazz Photo Corp. v. International Trade Commission that the foreign sale of a U.S. patented article does not exhaust U.S. patent rights.  264 F.3d 1094, 1105 (Fed. Cir. 2001) (citing Boesch, 133 U.S. at 703).  However, without reference to Jazz Photo or the patent exhaustion doctrine, in 2013 the Supreme Court held in Kirtsaeng v. John Wiley & Sons, Inc. that a copyright owner’s rights over a copy of its copyrighted work are exhausted under the first-sale doctrine in section 109(a) of the Copyright Act even when the copy is manufactured abroad.  133 S. Ct. at 1355-56.

            B.     The Lexmark Case

Plaintiff Lexmark International, Inc. owns a variety of patents covering certain printer cartridges and their use.  Lexmark manufactures and sells the patented cartridges both in the United States and abroad.  Some of the cartridges sold by Lexmark are subject to express post-sale restrictions on reuse and resale.  Without affirmative authorization from Lexmark, defendant Impression Products, Inc. acquired restricted Lexmark cartridges, some of which had been modified to enable refilling and reuse, and resold the cartridges in the United States.  A number of the cartridges resold by Impression were acquired abroad and imported into the United States.  Lexmark brought suit against Impression alleging infringement based on the reuse and resale of the restricted cartridges acquired both in the United States and abroad.  Lexmark Int’l, Inc. v. Impression Products, Inc., 816 F.3d 721, 727-28 (Fed. Cir. 2016).

The district court dismissed Lexmark’s infringement claim regarding cartridges Lexmark initially sold in the United States, but denied Impression’s motion to dismiss as to the cartridges Impression acquired abroad.  See generally Lexmark Int’l, Inc. v. Ink Techs. Printer Supplies, LLC, No. 1:10-CV-564, 2014 WL 1276133 (S.D. Ohio Mar. 27, 2014); Lexmark Int’l, Inc. v. Ink Techs. Printer Supplies, LLC, 9 F. Supp. 3d 830 (S.D. Ohio 2014).  The district court first held that, despite imposing post-sale restrictions, Lexmark’s patent rights were exhausted at the initial domestic sale.  Lexmark, 2014 WL 1276133, at *6-7 (citing Quanta, 533 U.S. 617).  However, relying on the Federal Circuit’s 2001 decision in Jazz Photo, the district court held that Lexmark’s foreign sales of the cartridges did not exhaust its patent rights.  Lexmark, 9 F. Supp. 3d at 833; see also Jazz Photo, 264 F.3d 1094.

The parties agreed to a stipulated final judgment and cross-appealed to the Federal Circuit.  After oral argument, the Federal Circuit sua sponte decided to review the Lexmark case en banc.  The en banc court then reversed the district court in part, holding that a patentee can retain patent law rights after the sale of a patented article by expressly specifying restrictions on post-sale use or resale, but affirmed the district court’s analysis of Jazz Photo, holding that, regardless of whether restrictions are attached, foreign sales of a U.S.-patented article do not exhaust United States patent rights.  Lexmark, 816 F.3d at 726-27.

           1.     Post-Sale Restrictions

In reaching its decision that a patentee may preserve certain exclusive rights by imposing post-sale restrictions on its initial sale of a patented article, the Federal Circuit noted that the patent exhaustion doctrine arises under section 271(a) of the Patent Act, which provides that infringement occurs when an individual “without authority” makes, uses, or sells a patented article in the United States.  Lexmark, 816 F.3d at 742.  The court reasoned that by imposing express post-sale restrictions, a patent owner withholds “authority” from the purchaser (or licensee), and therefore preserves its right to bring a subsequent infringement action under section 271(a).  See id. at 742-43 (noting that absent an express restriction, the sale presumptively grants authority to the purchaser to use and resell the patented article).

The Federal Circuit’s holding reaffirmed its prior decision in Mallinckrodt that a clearly communicated restriction imposed on the first sale of a patented article can preserve the patentee’s right to later bring an infringement action.  Id. at 726.  The court rejected the district court’s determination that Mallinckrodt had been implicitly overruled by the Supreme Court’s 2008 decision in Quanta.  The Federal Circuit distinguished Quanta in affirming its Mallinckrodt rule, noting that in Quanta there were no restrictions on the licensee’s sales.  Id. at 737-38.  The Federal Circuit held that the Mallinckrodt rule therefore applied, and that the doctrine of patent exhaustion does not foreclose a patentee’s right to bring an infringement action after the initial sale of a patented article that was subject to a clearly communicated and otherwise lawful post-sale restriction.  Id. at 735.

           2.     Foreign Sales

The Federal Circuit then affirmed the district court’s holding that a patentee’s foreign sale neither conclusively nor presumptively waives the patentee’s U.S. patent rights under the exhaustion doctrine.  Id. at 753-54.  In reaching this determination, the court reaffirmed its earlier decision in Jazz Photo, and rejected Impression’s argument that Jazz Photo had been overruled by the Supreme Court’s recent decision in KirtsaengId. at 754-56.  The Federal Circuit reasoned that Kirtsaeng’s holding was limited to the copyright context, and therefore did not affect the exhaustion doctrine under the Patent Act.  Id. at 757-58.  Therefore, the court affirmed the Jazz Photo rule, and held that a foreign sale does not foreclose U.S. patent rights under the exhaustion doctrine.  Id. at 754.

            C.     Possible Effects of Supreme Court Review in Lexmark

The Supreme Court’s decision to review Lexmark has the potential to affect a variety of industries and markets, including secondary markets for patented goods generally, and markets for products containing components designed, manufactured, or assembled abroad.

First, the Court’s decision could significantly affect secondary markets for patented goods.  Generally, the patent exhaustion doctrine protects participants in these secondary markets by limiting a patentee’s ability to bring an infringement claim for downstream use or resale after the patentee’s own sale (or an authorized sale) of the patented good.  However, the Federal Circuit’s decisions in Lexmark and Mallinckrodt permit patent holders to retain the right to bring such claims if they impose post-sale restrictions at the time of the initial sale.  If the Supreme Court reverses this Federal Circuit holding, then a patent holder’s right to enforce use or resale restrictions could be curtailed.  Patentees might still be able to assert breach-of-contract claims against parties who fail to abide by contractual restrictions on post-sale activity, but would no longer be able to assert patent infringement claims based on secondary market sales.  As some commentators have noted, if relief is limited to contract claims, then patentees may face challenges establishing standing against downstream buyers, and injunctive relief may be harder to obtain.  The Court’s decision in Lexmark could provide guidance regarding the requirements for purported post-sale restrictions to be effective.

Second, the Court’s decision to review Lexmark could affect the markets for products sold at different prices in different countries, and for products that include components purchased abroad (such as consumer electronics).  The Court may reverse the Federal Circuit’s holding in Lexmark and Jazz Photo regarding foreign sales, and may hold that foreign sales do indeed exhaust domestic patent rights, either conclusively or presumptively.  A brief filed by the Solicitor General on behalf of the United States advocates such a presumption.  See Brief for the U.S. as Amicus Curiae at 16-17, Impression Products, Inc. v. Lexmark Int’l, Inc., No. 15-1189, (filed Oct. 12, 2016).  Either would make it more difficult for patentees to maintain different prices for patented products in foreign versus domestic markets, by allowing others to engage in price arbitrage.  And while a reversal could align patent law with the copyright rule adopted in Kirtsaeng, it might have different effects on the markets for patented goods as compared to copyrighted works.  For example, many components of complex technology products sold in the United States are designed, manufactured, or sold abroad before assembly into the finished products.  A reversal of the Jazz Photo rule could affect the incentives for choosing where to manufacture or sell these components, as patentees consider how best to retain rights under a new exhaustion rule.  Patentees may consider expressly reserving their U.S. patent rights in future foreign sale contracts, to rebut the presumption of exhaustion if the Court adopts the Solicitor General’s proposed approach.

IV.     Conclusion

Between Heartland and Lexmark, the upcoming Supreme Court term has the potential to change the patent landscape significantly in ways that will affect courts, rights-holders, defendants, and indeed all participants in the intellectual property economy.  Our intellectual property, appellate, and technology transactions attorneys are available to advise on these issues at your convenience.

The following Gibson Dunn lawyers assisted in the preparation of this client update:  Stuart Rosenberg and Emma Strong.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.  Please contact the Gibson Dunn lawyer with whom you usually work, author Stuart M. Rosenberg in Palo Alto (650-849-5389, [email protected]), any member of the firm’s Intellectual Property, Appellate and Constitutional Law or Technology Transactions practice groups, or the following practice leaders and members:

Intellectual Property Group:
Josh Krevitt – New York (212-351-4000, [email protected])
Wayne Barsky – Los Angeles (310-552-8500, [email protected])
Mark Reiter – Dallas (214-698-3100, [email protected])

Appellate and Constitutional Law Group:
Mark A. Perry – Washington, D.C. (202-887-3667, [email protected])
James C. Ho – Dallas (214-698-3264, [email protected])
Caitlin J. Halligan – New York (212-351-4000, [email protected])

Technology Transactions Group:
David H. Kennedy – Palo Alto (650-849-5304, [email protected])
Shaalu Mehra – Palo Alto (650-849-5282, [email protected])
John A. Squires – New York (212-351-4089, [email protected])
Daniel Angel – New York (212-351-2329, [email protected])

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