August 03, 2009

International Exhaustion for Patents?

6 min

I. Introduction

The “exhaustion” principle, also known as the “First Sale Doctrine,” is prompted by a first authorized and unrestricted sale of a patented product, and operates to terminate all patent rights to a protected product.  In other words, the patent holder may control the first sale or license of a patented product, however they may not restrict the use of the product in subsequent sales or licenses.  Thus, the patent holder may not sue a downstream customer who infringes the patent.  For example, a patent holder who sells a patented product to a wholesaler, who resells to a retailer, may not sue the retailer or its customers for patent infringement.  The theory behind the exhaustion doctrine is that the patent holder has bargained for, and received, an amount equal to the full value of the goods. 

"International exhaustion” is a relatively recent extension of the exhaustion principle as applied to U.S. sales of patented products, and is based on the idea that a patent owner who places a patented product on sale outside the United States “exhausts” their patent rights.  Consequently, a purchaser of a patented product that the patent owner first sold abroad is free to import, use and sell the protected product within the United States.  Whether exhaustion applies to international sales has been considered in several federal court cases since 2001.  However, conflicting case law leaves the legitimacy of international patent exhaustion unresolved. Accordingly, there is uncertainty for both patent holders and those importing products into the United States.

II. Current State of the Law

In 2001, the U.S. Court of Appeals for the Federal Circuit held in Jazz Photo Corp. v. International Trade Commission that “foreign sales of products covered by a United States patent do not serve to exhaust the patent holder’s rights with respect to those products.”  The Federal Circuit stated that “to invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.”  Thus, the court held that the exhaustion defense only applied to patented products that were first sold in the United States. 
The Federal Circuit further elaborated on its holding in Jazz Photo in Fuji Photo Film Co., LTD v. Jazz Photo Corp., a related case in 2005.  The court stated that Jazz Photo does not “dictate a narrow application of the exhaustion principle” and does not “limit the exhaustion principle to unauthorized sales. … The patentee’s authorization of an international first sale does not affect exhaustion of that patentee’s rights in the United States.”  The Federal Circuit stated that foreign sales could “never occur under a United States patent because the United States patent system does not provide for extraterritorial effect.”  Thus, in Jazz Photo, the court “expressly limited first sales under the exhaustion doctrine to those occurring within the United States.” 
In 2008, the Supreme Court in Computer, Inc. v. LG Electronics, Inc., or “Quanta I,” weighed in on the exhaustion doctrine.  The Court stated that the “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 post sale use of the article.”  Under the facts of this case, the Court was concerned that downstream purchasers of a patent could be liable for infringement even though the product had been “once lawfully made and sold” pursuant to a license agreement between a patentee and an original purchaser.  Although, the Court was aware of foreign sales, it declined to address the foreign sales in this case with respect to the “authorized sale” issue under the exhaustion doctrine. 
This year, in LG Electronics, Inc. v. Hitachi, Ltd., or “Quanta II,” a Northern District of California court held that “exhaustion, triggered by the authorized sale of an article that substantially embodies a patent, also applies to authorized foreign sales as well as sales in the United States.”   The court reasoned that because the Supreme Court in Quanta I “was aware of foreign sales …, yet declined to limit its holding to sales in the United States, [it] suggests that interpreting Quanta so as to impose such a limitation would be incorrect.”  The court further opined that, despite the holdings of Jazz Photo and Fuji Photo Film, to draw a distinction between products that were first sold in the United States and those that were first sold abroad would “negate the Supreme Court’s stated intent in Quanta [I] to eliminate the possibility of a patent holder doing an ‘end-run’ around the exhaustion doctrine by authorizing a sale, thereby reaping the benefit of its patent, then suing a downstream purchaser for patent infringement.”  This case currently remains before the district court, although an appeal is expected to the Federal Circuit.
In contrast to Quanta II, in LaserDynamics v. Quanta Storage America, Inc. in the Eastern District of Texas on June 29, 2009 the court stated that “the exhaustion doctrine does not apply to sales made overseas by the plaintiff’s licensees.”  The court cited those references, including Jazz Photo and Fuji Photo Film, which had been distinguished in the Quanta II case.
The issue of international exhaustion in the context of copyright law was recently addressed in Costco Wholesale Corp. v. Omega, S.A. in the 9th Circuit.  The case focused on the Copyright Act’s first sale doctrine which states that the owner of a copyrighted good may resell that good without the authority of the copyright holder.  The first-sale doctrine is not applicable to imported goods manufactured abroad.  This case has been appealed to the Supreme Court and the Court’s decision whether to grant certiorari is expected in October 2009.

III. Conclusion

Although the law of international patent exhaustion remains at issue, it is expected that the Supreme Court may grant certiorari to Costco as early as October of 2009.  Further, it is expected that Quanta II may soon be appealed to the Federal Circuit.  The Petitioner in Costco has cited the Quanta II opinion in its petition to the Supreme Court, noting that “[i]n the analogous area of patent exhaustion,” the district court in Quanta II recently held that “[d]rawing such a distinction between authorized domestic sales and authorized foreign sales would negate the Supreme Court’s state intent in Quanta [I]…”  The Costco petition asserts that analogous concerns are also present in Costco.  It is anticipated that the Supreme Court will soon resolve the conflicting case law and decide whether exhaustion should apply to foreign sales of products patented in the U.S.  Certainty on this issue will be welcomed by those with both United States and international sales.