109C
AMERICAN BAR ASSOCIATION
SECTION OF INTELLECTUAL PROPERTY LAW
REPORT TO THE HOUSE OF DELEGATES
RESOLUTION
109C
RESOLVED, That the American Bar Association supports the traditional rule that the first sale of patented goods (as opposed to a mere license) by United States patent owners or their licensees (“Sellers”) triggers the defense of patent exhaustion with respect to an allegation of patent infringement related to those goods;
FURTHER RESOLVED, That the American Bar Association supports the traditional rule that, to impose contractual post-sale restrictions during the first sale of patented goods, the restrictions imposed by a Seller must: (1)relate to products reasonably within the scope of the patent grant (i.e., be related to subject matter within the scope of patent claims) and; (2)not have anticompetitive effects except those justifiable under the rule of reason;
FURTHER RESOLVED, That the American Bar Association urges the courts to clarify that authorized sales of patented goods by the Sellers in the United States exhaust United States patent rights, and that a violation of contractual post-sale restrictions may not be remedied by an action for patent infringement but instead may be remedied by an action for breach of contract; and
FURTHER RESOLVED, That the American Bar Association urges the courts to clarify that authorized sales of patented goods by the Sellers outside of the United States do not exhaust United States patent rights if, at the time of sale, the Sellers expressly reserve or exclude United States patent rights by contract from such foreign sales, in which event remedies lie in both an action for patent infringement and an action for breach of contract.
108C
REPORT
The Federal Circuit is currently considering en banc two questions relating to the “patent exhaustion” doctrine in Lexmark International, Inc. v. Impression Products, Inc., Appeal No. 14-1617. This common-law doctrine[1] permits a purchaser of patented goods the unrestricted right to sell or use those goods, notwithstanding the original seller’s patent rights. The first sale extinguishes the patent rights in those goods.
One question relates to whether a patent rights holder can impose restrictions or conditions at the time of the first sale to limit patent exhaustion. The other question relates to whether patent exhaustion applies to sales of patented goods abroad.[2]
This report asks the ABA House of Delegates to approve a policy supporting the traditional principles of patent exhaustion. After an authorized sale of goods embodying the invention covered by a United States patent, the patent holder’s ability to impose restrictions on the further sale and use of those patented goods is limited. Such an authorized first sale under a United States patent prevents later enforcement of the patent against resellers or users of those goods. Contractual restrictions on resale or use (if the seller imposes any) may be enforced under contract; but not patent law.
However, exhaustion of United States patent rights may not be appropriate where the sale of patented goods outside of the United States has little or no connection with the United States. Consistent with the presumption against extraterritorial application of U.S. patents, sellers should be permitted expressly to reserve or exclude U.S. patent rights from the foreign sale, and prevent application of patent exhaustion where inappropriate.
These principles flow from the common law dating back at least to the nineteenth century and are consistent with U.S. Supreme Court precedent as set forth below.
A. Post-Sale Use Restrictions
Common-law patent exhaustion flows from a deep-seated policy against restraints on alienation of personal property. Dating back to the nineteenth century, courts in this country have recognized the doctrine of patent exhaustion, whereby the initial authorized sale of a patented item terminates all patent rights to that item. See, e.g., Adams v. Burke, 84 U.S. (17 Wall.) 453 (1874); see also Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008). In Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1853), the Court explained a patented good “is no longer within the limits of the [patent] monopoly” after it has been sold. This principle has been affirmed in many later Supreme Court decisions. See, e.g., Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008) (“initial authorized sale of a patented item terminates all patent rights to that item.”); United States v. Univis Lens Co., 316 U.S. 241, 251-52 (1942) (sale of patented lenses exhausted patent rights and rendered post-sale price restrictions unenforceable); and Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 508-18 (1917) (post-sale restrictions that patented machine could only be used with certain motion pictures are ineffective to prevent patent exhaustion).
However, the Federal Circuit’s decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) departs from that long history of patent exhaustion and improperly narrowed the common-law doctrine of patent exhaustion. Mallinckrodt allows patent owners to contract around patent exhaustion through post-sale use restrictions. In Mallinckrodt, the patent owner had sold the patented goods, used in taking lung X-rays, for a single use only. The accused infringer was charging to refurbish those goods after that initial use. The Federal Circuit determined that a patent rights holder could impose contractual post-sale use restrictions if the patented goods were first sold, so long as the restrictions were not in conflict with antitrust laws (i.e., be reasonably within the scope of the patent grant and not have anticompetitive effect that is not justifiable under the rule of reason). Id. at 708.
Rather than limiting relief to contract claims, Mallinckrodt went much further. It held that violations of post-sale use restrictions “may be remedied by action for patent infringement.” Id. at 709. That holding, however, is contrary to the long-standing Supreme Court precedent, which prevents patent holders from enforcing such post-sale use restrictions under the patent laws. This is because patent rights were exhausted by the first sale, and the only redress available to the patent owner should be limited to contract law claims against the original purchaser. See Bloomer, 55 U.S. at 549-50 (post-sale restrictions enforceable in contract law, but not patent law); Quanta, 554 U.S. at 637 n.7 (same).
Mallinckrodt’s rule allows parties to forestall patent exhaustion, and is incompatible with the Supreme Court’s Quanta decision. In Quanta, LGE had licensed Intel to make and sell patented components, but refused to grant a sub-license to Intel’s customers that would have authorized them to combine its patented components with non-Intel parts. Quanta, 553 U.S. at 623. The Supreme Court rejected LGE’s patent infringement claims against an Intel customer, concluding that LGE had unconditionally authorized Intel’s sales to its customers with the effect of exhausting LGE’s patent rights. Id. at 636-37.
Mallinckrodt’s holding that a patent owner can contractually avoid exhaustion of its patent rights is also inconsistent with other Supreme Court decisions. For example, in Adams v. Burke, 84 US (17 Wall.) 453 (1873), the patent owner attempted to divide the U.S. patent rights geographically, by creating one territory within a ten-mile radius of Boston, and a second outside of that region. After buying the patented goods within the Boston circle, the purchaser took them outside of that geographical area and used them in the other territory. Id. at 455. When the patent rights holder for the area outside of the Boston circle sued, the Court refused to find the purchaser liable for patent infringement, holding that the authorized Boston sale had exhausted all patent rights. Id. at 456.
Similarly, in Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940), the Court rejected an attempt to rely on patents to enforce post-sale pricing restrictions, stating the initial authorized sales of the patented fuel exhausted the underlying U.S. patent rights. Therefore, the fuel could be resold without regard to the pricing restrictions. Id. at 457.
The key fact in Bloomer, Quanta, Adams, and Ethyl Gasoline was an authorized sale under the U.S. patent. If an authorized sale is absent, however, the U.S. patent rights are not exhausted. In General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, aff’d on reh’g, 305 U.S. 124 (1938), the patent owner restricted the ability of its manufacturing licensee to sell the patented goods to those who would use them for commercial purposes. The Court held that unauthorized sales by the manufacturing licensee did not exhaust the U.S. patent rights. Similarly, the patent owner in Mitchell v. Hawley, 83 U.S. 544 (1872) granted a license to make the patented invention for a limited term. Unauthorized sales (i.e., those outside that limited term) did not exhaustion the U.S. patent rights.
Prohibiting patent rights holders from enforcing post-sale use restrictions through patent infringement litigation against downstream purchasers would not mean post-sale use restrictions could not be enforced. Patent rights holders can sue the original purchaser for enforcement of the contract if the original terms of sale have been violated. The patent rights holder is in privity with the other contracting party. They have negotiated the terms of the sale, and agreed to any post-sale use restrictions. By contrast, a downstream purchaser may not be in privity with the patent rights holder, did not negotiate the terms of the first sale, and may not have been aware of the restrictions.
B. International Patent Exhaustion
Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), represents another example of the Federal Circuit limiting the common law doctrine of patent exhaustion. Jazz Photo has been interpreted as creating a distinction between domestic sales (to which patent exhaustion applies) and foreign sales (to which it does not). However, no Supreme Court precedent requires or even supports such a geographical distinction. No federal statutes address whether or when an authorized sale by a U.S. patent owner of a patented product outside of the U.S. exhausts the patent owner’s control over that particular item. Congress has not addressed whether first sales outside the U.S. should be treated differently than any other sales.
In deciding that the sales abroad did not exhaust the U.S. patent rights, the Jazz Photo panel misapplied the only Supreme Court case to address a foreign sale’s effect on U.S. patent rights—Boesch v. Graff, 133 U.S. 697 (1890). In Boesch, the Court held that patent exhaustion did not apply to an overseas sale, because the seller of the products sold outside of the U.S. did not hold the U.S. patent rights. The Court explained the seller could not convey U.S. patent rights he did not have: “The right which Hecht (the seller) had to make and sell the burners in Germany was allowed him under the laws of that country, and purchasers from him could not be thereby authorized to sell the articles in the United States in defiance of the rights of patentees under a United States patent.” Id. at 703. Boesch stands only for the proposition that a sale not authorized by the U.S. patent holder does not exhaust U.S. patent rights. Boesch does not address the effect of a U.S. patent holder’s authorized foreign sales.
The common law, prior to 1952 and prior to Jazz Photo, established that overseas sales authorized by the patent holder could exhaust U.S. patent rights. For example, in Curtiss Aeroplane & Motor Corp. v. United Aircraft Engineering Corp., 266 F. 71, 78-79 (2d Cir. 1920), the Second Circuit held the sale of patented airplanes in Canada by the U.S. patent owner exhausted U.S. patent rights. See also Dickerson v. Matheson, 57 F. 524, 527-28 (2d Cir. 1893) (if U.S. and foreign patent owners were the same entity, a foreign sale would exhaust the patent, but if they were different, importer required permission from the domestic rights holder); Holiday v. Mattheson, 24 F. 185, 185-86 (C.C.S.D.N.Y. 1885) (after selling article without restriction in England, patentee could not prevent purchaser from re-selling patented good in the United States). That was the settled state of the law prior to the Federal Circuit’s 2001 Jazz Photo decision.
The Supreme Court’s recent decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012) further supports the Resolution. Kirtsaeng addressed the same issue in the context of copyrights. Kirtsaeng held that U.S. copyrights are extinguished by an authorized sale, regardless of location. In reaching that result, the Court construed the Copyright Act’s first sale statute, 17 U.S.C. §109(a). Because Section 109(a) contains no express geographic limitations, the Court presumed Congress intended to retain the substance of the common law, which also lacked any express geographic limitation. Id. at 1358–60, 1363–64. The Court cited writings by Lord Coke in early 17th century England explaining the general policy embodied in the common law against restraints on the alienation of personal property. Id. at 1363. In his discussion, Lord Coke was not addressing copyright law in particular, and this rationale applies as equally to patent rights as it does for copyrights or any other property rights.
Lexmark has argued that copyright law differs from patent law in ways that make Kirtsaeng inapplicable. Specifically, in 1994 Congress gave patentees the exclusive right to bar importation of patented goods brought into the U.S. See 35 U.S.C. §§154(a)(1), 271. This freestanding statutory importation provision creates “geographical distinctions” in patent law that are absent from copyright law. But these importation provisions merely describe basic patent rights and the judicially-created exhaustion doctrine applies to the importation rights, just as it applies to all of the other statutory patent rights.