The Sale of a Patented Product Now Exhausts All U.S. Patent Rights

By Lawrence Green. A member of our Patent Practice Group

The Supreme Court has further limited the rights of patent owners, determining that, once a patentee sells a product either in the U.S. or abroad, it exhausts all of its U.S. patent rights in that product, regardless of any restrictions the patentee purports to impose.

The products at issue in Impression Products, Inc. v. Lexmark International, Inc. are toner cartridges used with laser printers.  Lexmark designs, manufactures and sells toner cartridges to consumers in the United States and around the globe.  It owns a number of patents that cover components of these cartridges and the manner in which they are used.

Lexmark structures its sales so as to encourage customers to return spent cartridges.  One way it does this is by selling cartridges at roughly a 20% discount through Lexmark’s return program.  A customer who buys cartridges through the return program owns the cartridges but, in exchange for the lower price, signs a contract agreeing to use the cartridges only once and to refrain from transferring the empty cartridges to anyone but Lexmark.

The purpose of this restriction is to prevent other companies, known as remanufacturers, from acquiring empty Lexmark cartridges, refilling them with toner and reselling them at a much lower price than the price for the new ones sold by Lexmark.

As we reported in 2016, the Federal Circuit, in an earlier stage of this litigation, held that Lexmark could lawfully reserve rights with respect to the patented cartridges as long as the reservation did not run afoul of other laws, such as the antitrust laws. This holding applied to cartridges sold both in the U.S. and abroad.

According to the Federal Circuit, reserving patent rights did not conflict with the common law’s antagonism to restrictions on a purchaser’s right to transfer his ownership rights because patent rights are part of the statutory regime that trumps common law.  The Federal Circuit defiantly reaffirmed its holding in Mallinckrodt Inc. v. Medipart, Inc. (1992), even though that decision had been effectively overridden by the Supreme Court’s 2002 decision in Quanta Computer, Inc. v. LG Electronics, Inc.

The Supreme Court was blunt in rejecting the Federal Circuit’s analysis. The lower court “got off on the wrong foot” with its view that the exhaustion doctrine does not require a patent owner to hand over its full “bundle of rights” whenever it sells a patented article:

The misstep in this logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on “the scope of the patentee’s rights.” 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. Exhaustion, however, extinguishes that exclusionary power.

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States Are Cracking Down on Cybersecurity Laggards

By Thomas Carey. Chair of our Business Practice Group

On May 23, the attorneys general of 47 states and the District of Columbia reached a settlement with Target Corporation of enforcement actions brought after a 2013 breach of the retail chain’s computer system.  That breach famously compromised credit and debit card information of 40 million customers.

The headline that most commonly came out of this settlement is that Target agreed to pay $18.5 million to the states.  This article is not about that penalty, because the more far-reaching aspect is the detailed obligations to ensure security that the state AGs have imposed upon Target.

To a degree, these measures resemble the requirements recently imposed on banks, insurance companies and brokerage houses by the New York Department of Financial Services.  Taken together, the Target settlement and the New York regulations reflect a growing expectation among the states that companies take strong measures to safeguard their data and that of their customers.

Both the settlement and the regulations require the adoption of a formal information-security program that details administrative, technical and physical safeguards.  While the Target settlement is directed to data regarding consumers and their credit cards, the New York regulations require financial institutions to protect all non-public information.  This would include, for example, customer lists, vendor lists, computer source code and unpublished patent applications.

Both the settlement and the regulations require the appointment of an executive experienced in information security.  That officer must advise both the CEO and the board of directors about the company’s security posture and risks.  The regulations, more specifically, require this information security officer to report at least annually to the board of directors, including details of successful or unsuccessful efforts to gain unauthorized access to the company’s systems.

The settlement goes further than the New York regulations in requiring Target to scan and map the connections between its cardholder data environment (CDE) and the rest of its computer network and to segregate the CDE from the other parts of the network. To do so, Target must restrict or disable all unnecessary network programs that provide access to the CDE.

In addition, the settlement requires Target to deploy a file-integrity monitoring system that notifies personnel of unauthorized modifications to critical applications or to operating system files within the CDE.

Both the settlement and the New York regulations require an evaluation of the cybersecurity measures of vendors to ensure they comply with the company’s cybersecurity policy.  The regulations limit this scrutiny to those vendors that maintain, process, or otherwise are permitted access to the company’s nonpublic information. Presumably, the settlement is meant to be limited in the same fashion, but its language is not clear on this point.  The New York regulations pertaining to vendors do not go into effect until March 1, 2019. More...

The On-Sale Bar Remains A Mighty Obstacle to Patentability, Even If The Sale Involves No Public Disclosure of the Invention

By Dorothy Wu Chiang. A member of our Patent Practice Group

In passing the America Invents Act (the “AIA”) in 2011, Congress changed the statutory language concerning the “on-sale bar.”  The bar prevents a party from patenting an invention that has been sold or offered for sale more than one year before the application date. The AIA added the phrase “or otherwise available to the public” to the statute. On its face, the phrase could be seen to impose a new requirement – public disclosure of the technology – in order for the on-sale bar to make a patent unavailable, but the Federal Circuit Court of Appeals recently ruled in Helsinn v. Teva Pharmaceuticals that despite the new language, the on-sale bar continues to apply to sales that do not involve a disclosure of the invention.

Helsinn owned four patents covering intravenous formulations of palonosetron that reduce the impact or likelihood of chemotherapy-induced nausea and vomiting. Because palonosetron was already known in the art, the novel feature of the patents was the unexpectedly low dosage, 0.25mg, of this substance. Because all four patents claimed priority to the same provisional application, they had the same effective filing date of January 30, 2003. However, three patents were subject to pre-AIA patent law, whereas the fourth was subject to the AIA.

In April 2001, Helsinn signed two agreements with MGI Pharma, Inc., which markets and distributes pharmaceuticals. The license required an initial $11M payment and set a future royalty on distributed products. Because Helsinn was still conducting its Phase III trials, the agreements could be terminated if the product failed to gain FDA approval. The companies issued a joint press release regarding the deals, and MGI submitted redacted copies of the agreements, which kept the dosage and agreed prices secret, in its Form 8-K filing with the Securities and Exchange Commission.

Helsinn received FDA approval for its product in July 2003 and filed its patent applications thereafter. In 2011, Teva filed an Abbreviated New Drug Application with the FDA to pursue a generic version of Helsinn’s drug, whereupon Helsinn sued for infringement.

The trial court ruled that the supply and purchase agreement was a contract for future sales under pre-AIA law, which rendered three of the four patents invalid due to the on-sale bar. However, the court interpreted the phrase “or otherwise available to the public” to imply that, in order for the on-sale bar to apply under the AIA, the offeror must have publicly disclosed the claimed features of the patented subject matter. Because MGI had redacted the dosage from agreements submitted with its Form 8-K filing, the sale was not “public” and could not invalidate Helsinn’s last patent. More...