Thursday, October 8, 2015

Policy Issues in Lexmark Argument on International Patent Exhaustion

Last Friday, the Federal Circuit heard en banc argument on whether it should adopt a U.S. rule of international patent exhaustion in Lexmark v. Impression Products. This case has important distributive implications for foreign consumers, as Daniel Hemel and I describe in our new essay, Trade and Tradeoffs: The Case of International Patent Exhaustion (forthcoming in the Columbia Law Review Sidebar).

In a Patently-O post last week, we asked whether the Federal Circuit would recognize the U.S.–foreign tradeoff at stake. And the answer appears to be yes. Tony Dutra summed up the argument for Bloomberg (subscription required): Policy Focus in Fed. Cir. Patent Exhaustion Review. Here's an excerpt of his analysis:
Most members of the court appeared prepared to distinguish patent law because there is no Patent Act statutory equivalent to the Copyright Act's provision. However, the discussion turned more to policy questions as the 90-minute argument proceeded. Some judges essentially said that the harm to the copyright holder in Kirtsaeng—books priced more cheaply overseas and imported for less than the U.S. price—was minimal compared to the harm to, for example, AIDS patients in Africa, unless patentees can engage in drug price discrimination.
You can listen to the oral argument yourself here. (Bill Vobach also maintains a helpful key to judge voices.) The most extensive discussion of the issue of AIDS drugs starts at 1:16:02. Barbara Fiacco, arguing for BIO as amicus, discusses the importance of a no-exhaustion rule for allowing regional pricing and preventing arbitrage at 1:05:21.

I also thought it was interesting that the judges were interested in what happens if a U.S. patentee sells in a country where it has no patent. Early in the argument (at 0:17:55), Judge Dyk asked, "Suppose you have a situation in which there is no ... foreign patent protection for the good, and it is nonetheless sold by ... the U.S. patent holder. How does that come out?" Andrew Pincus (who wrote an amicus brief arguing for exhaustion on behalf of LG, Dell, Google, Intel, etc.) responded: "To be honest, Your Honor, I hadn't thought of that hypothetical," before concluding that there should still be exhaustion. It's not an uncommon situation, and Judge Moore questioned Melissa Patterson (arguing for the United States) on the same point at 0:27:28:
Q: What happens if you don’t have foreign patent rights? Because, you know, it’s really really expensive to patent all over the world. Do you know how much it costs to file a patent application?
A: ... I have no idea, Your Honor.
Q: How can you be here and not know how much it costs to file a patent application? How much do you think it costs to file a patent application in every country in the world?
A: I don’t know, Your Honor, but I don’t think it’s relevant to the legal point here.
Q: Wait, how can it not be relevant? I want to know, if you don’t have a patent in Germany because it was too expensive ... So you are a patentee in the U.S., you don’t have a patent in Germany, but you nonetheless sell products in Germany. Why are you now giving a license to bring it back into the United States?
Judge Moore is right that patent acquisition is expensive: one in-house biotech lawyer told me the cost of acquiring patents just in Europe is $200–400k, with the exact amount depending on the costs of local counsel and translators. In contrast, every textbook automatically has copyright protection in all 168 contracting parties of the Berne Convention.

Does this difference matter? To those who think international exhaustion should only depend on whether the U.S. patentee authorized the sale, Judge Moore's follow-up likely seems like a non sequitor. But others have a hard time seeing how the patentee could possibly "exhaust" anything by selling in a country where it doesn't have a patent, and thus doesn't have the ability to extract any patent rents from the first sale. If some Federal Circuit judges decide that there can't be exhaustion when you don't have a patent in the country of first sale, then this would be a good reason to stick with the status quo: As Daniel Hemel and I note in our Essay, a middle ground of an international exhaustion rule that depends on patent status in the country of first sale would greatly increase information costs, and would thus eliminate the primary benefit of moving toward a broader exhaustion rule.

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