Despite Supreme Court Ruling, Foreign Sales Don’t Affect US Patent Rights29/03/2016 by Steven Seidenberg for Intellectual Property Watch Leave a CommentShare this Story:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Google+ (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window)IP-Watch is a non-profit independent news service and depends on subscriptions. To access all of our content, please subscribe now. You may also offer additional support with your subscription, or donate.Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 20 years. He is based in the greater New York City area and may be reached at firstname.lastname@example.org.The controversial ruling was perhaps to be expected. The Federal Circuit Court of Appeals doggedly hewed to its existing interpretation of patent law. Unfortunately, the court’s decision in Lexmark International v Impression Products conflicts with recent Supreme Court jurisprudence, according to many experts – thus leaving unresolved some important questions about how much control patentees can maintain over their patented products. The usual rule in the US is that if a patentee authorizes the sale of a patented item, the sale exhausts the patentee’s rights in that particular item. The purchaser can use the item any way it likes, including reselling the item, without having to seek permission from or pay royalties to the patentee.But in 2001, the Federal Circuit Court of Appeals (often called the nation’s “patent court”) declared that not all sales create patent exhaustion. The court held in Jazz Photo Corp. v. International Trade Comm’n that sales made outside in the US do not exhaust the rights of US patentees. When such foreign goods are imported into the US without the patentees’ authorization, the importers are guilty of infringement, the court found.A recent Supreme Court ruling cast doubt on the validity of Jazz Photo. So the full Federal Circuit decided to address this issue head on in Lexmark [pdf]. The en banc court distinguished the Supreme Court case and reaffirmed its own limits on patent exhaustion.A Different Kind of ExhaustionThe US Supreme Court found in 2013 that foreign sales exhaust an IP owner’s rights in a product. But that case, Kirtsaeng v. John Wiley & Sons, Inc. [pdf], dealt with copyrights. The Federal Circuit declared in Lexmark that, for purposes of exhaustion, patents must be treated differently than copyrights.The Federal Circuit noted that, in finding foreign copyright exhaustion, Kirtsaeng relied on a specific provision of the Copyright Act (which covered copyright exhaustion). That statutory provision has no counterpart in the Patent Act, so there is no basis for foreign exhaustion of patent rights, the court declared.This analysis has failed to persuade many IP experts, who note that the doctrine of exhaustion was created by the common law, and this common law doctrine did not treat copyrights differently than patents.“Exhaustion was always a common law doctrine. It was codified into the Copyright Act, but the fact that it wasn’t codified in Patent Act doesn’t mean the doctrine is different,” said Prof. Rochelle C. Dreyfuss, of New York University School of Law. She added that the Federal Circuit’s statutory argument “seems very odd to me.”The Federal Circuit also claimed that because copyright law is far more harmonized around the world than is patent law, public policy requires that patents and copyrights be treated differently when it comes to foreign exhaustion.“Copyright protection is more stable around the world, so if you publish a book in Thailand, it is more reasonable to say you’ve exhausted your US copyright in the book. Patent regimes are very different around the world, so it doesn’t make as much sense to say you are exhausting your US patent rights when you are selling your patented item in a country where patent rights are very different,” explained Prof. Lisa L. Ouellette of Stanford Law School.Not all IP experts are convinced by this policy argument. “Standards of copyright protection vary around the world, just like they do for patents. So that didn’t strike me as a strong argument,” said Dreyfuss.The Best PolicyNevertheless, Dreyfuss stated, on public policy grounds, “Lexmark is correct and Kirtsaeng is wrong.” Many patent experts agree with her. They note that the lack of foreign exhaustion allows patentees to geographically segment their markets – e.g., pharmaceutical companies can sell their patented drugs at high prices in rich countries and low prices in poor countries. Without this segmentation, patentees would sell only at high prices around the world, in order to prevent low priced items from being resold in rich countries and thus undercutting their profits in the developed world.“The price discrimination argument has a lot of merit. We want to allow that, so poor people [in less developed countries] can pay less. It is a very compelling policy reason,” said Prof. Arti Rai of Duke Law School.It is debatable, however, whether US courts can favor a policy because it helps poor foreigners. “This raises the really interesting policy question of the extent to which US courts should consider the interests of foreign consumers when making decisions on US law, or whether the courts should focus on just the interests of US citizens,” said Ouellette.If US courts must serve only the interest of US citizens, it is unclear what the courts should do about foreign patent exhaustion. “US patent owners benefit from the status quo, while US consumers would generally benefit by international exhaustion. So it is hard to say whether changing the rule would benefit or harm overall US economic interests,” said Ouellette.Going UpThe Federal Circuit is unlikely to have the last word on Lexmark. The case will probably go next to the US Supreme Court, according to patent experts.“This is the sort of case the Supreme Court would like to take, because the law [on foreign patent exhaustion] is not exactly clear, and the only Supreme Court case on the issue is from the 19th century and has very different facts,” said Rai.Moreover, the high court would probably like to address the tension between Lexmark and the Supreme Court’s decision in Kirtsaeng. “It is fairly likely that Supreme Court will grant certiorari, because many of the considerations behind Kirtsaeng also apply here [in Lexmark],” said Ouellette.Once Lexmark gets to the Supreme Court, however, it is unclear how the court will rule. “It is a really close case,” said Ouellette.According to experts, the court appears unlikely to fully apply Kirtsaeng to patents; it will probably not adopt a rule that all foreign sales exhaust US patent rights. Such worldwide exhaustion also has been rejected by other large, developed nations. “I don’t think any other high income country has global exhaustion. The highest income country that does is South Africa,” said Ouellette.Worldwide patent exhaustion makes sense for small or poor countries, whose markets are unlikely to interest makers of many patented items. To obtain these patented items, therefore, such nations often import products that were initially sold abroad. For these nations, “parallel importation is really important to the well-being of their citizens,” said Dreyfuss.EU nations have regional exhaustion. Patent rights in the EU are exhausted only by sales in the EU, according to Dreyfuss.The US Supreme Court might adopt a modified version of foreign patent exhaustion, which is being championed by the US Justice Department: foreign sales exhaust US patent rights unless patentees explicitly notify buyers that the patentees reserve their US rights.Such a rule would appeal to Rai and many other patent experts. It would enable US consumers to benefit from some global exhaustion, while still allowing patentees to maintain geographical segmentation, if they so choose.Should the Supreme Court decide to hear the Lexmark case, it will be argued next term, which begins in October. 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