Fed. Cir. Upholds Default of No International Patent Exhaustion in Lexmark

The Federal Circuit released its en banc decision in Lexmark v. Impression Products this morning, upholding the Mallinckrodt rule that patentees may place resale restrictions on their products and upholding the Jazz Photo rule that authorized foreign sales of U.S.-patented products do not exhaust the U.S. patent rights on those products. As regular Written Description readers know, I wrote an essay with Daniel Hemel before the Lexmark argument arguing that the briefing was ignoring the ways in which overturning Jazz Photo would harm foreign interests, and we thought these distributive tradeoffs were reflected in the Federal Circuit argument.

The Lexmark result is 10–2 and spans 129 pages, with Judge Taranto writing for the majority and Judge Dyk writing for himself and Judge Hughes in dissent (arguing for the government's presumptive exhaustion rule). None of the judges supported the argument of Impression and its amici that an authorized foreign sale should always exhaust U.S. patent rights.

Both opinions do discuss economic policy issues, and the majority cites Daniel's and my essay at p. 95 of the slip opinion as support for the statement that there is "no dispute that U.S.-patented medicines are often sold outside the United States at substantially lower prices than those charged here and, also, that the practice could be disrupted by the increased arbitrage opportunities that would come from deeming U.S. rights eliminated by a foreign sale made or authorized by the U.S. patentee." In addition to describing these problems with changing the rule, the opinion also notes that no one has presented evidence "that substantial problems have arisen with the clear rule of Jazz Photo."

For those who don't want to wade through the opinion, here are the key legal moves made in the majority to distinguish the Supreme Court's Kirtsaeng case (finding international exhaustion in the copyright context) and to support the Jazz Photo status quo. (Note that I'm only focusing on the Jazz Photo issue, which doesn't mean Mallinckrodt isn't interesting.)

• Exhaustion depends on receipt of U.S. market reward, which is not provided by foreign sale: "Jazz Photo's no-exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee's sale presumptively exhausts its rights in the article sold." "The reward is inherently a market reward." (As Daniel and I have emphasized in an earlier article.) "And the market reward, under the statute, is explicitly the reward available from American markets subject to American laws. . . . Patents involve costly government-approval processes [unlike copyright], and the standards vary. . . . [Thus,] a foreign sale, standing alone is not reasonably viewed as providing the U.S. patentee the reward guaranteed by U.S. patent law."
• Statutory context is different from copyright: "Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts 'without the authority' of the copyright holder. There is no counterpart to that provision in the Patent Act." "Nothing in the [Patent] Act supersedes the § 271 requirement of authority from the patentee before a person in Impression's position may engage in the itemized acts without infringing."
• Policy context is different from copyright: "[T]he 'copyright-related consequences' emphasized by the Court in Kirtsaeng were to a large extent, though not entirely, tied to the distinctive problems of museums, libraries, and booksellers. . . . Kirtsaeng also concluded that circuit-court precedent on § 109(a) was too fractured to give meaningful comfort that the practical problems . . . were unlikely to materialize. In contrast, our exclusive jurisdiction and clear rule since 2001 . . . provide considerably more reason to discount predictions that adhering to a territorial line to make exhaustion unavailable based on a foreign sale will result in serious practical problems."
• Implied license defense can prevent bad outcomes: "Impression did not press any implied-license defense, despite the fact that Quanta made clear that the doctrines are distinct." "[T]he possibility . . . of unintended infringement by buyers of goods in foreign countries who bring them into the United States . . . . is limited by the availability of an implied-license defense from the circumstances of a sale."
• Jazz Photo is supported by the "rationale" of the Supreme Court in Boesch (1890): Even though the foreign sale in Boesch was not authorized by the patentee, the Court broadly stated: "A prior foreign patent operates under our law to limit the duration of the subsequent patent here, but that is all. The sale of articles in the United States under a United States patent cannot be controlled by foreign laws." The Lexmark opinion states: "That rationale by its terms does not make relevant whether the foreign sale was made under a foreign patent." Later, the opinion reviews other pre-Jazz Photo precedent and concludes the no-exhaustion rule "is broadly consistent with the decisions of courts other than the Supreme Court, with the apparent exception of a trial-court decision that predates Boesch."
• The no-international-exhaustion rule is related to the presumption against extraterritoriality: "The principle of Boesch, precluding foreign control of U.S. rights, has a mirror-image counterpart in the territoriality principle of U.S. patent law that broadly denies projection of U.S. patent rights to cover foreign conduct." The opinion quotes the Supreme Court in Microsoft v. AT&T: "Foreign conduct is [generally] the domain of foreign law, and in the area here involved, in particular, foreign law may embody different policy judgments about the relative rights of inventors, competitors, and the public in patented inventions."
• Separate legislation guaranteeing no-exhaustion favors this interpretation: "Congress did act in three specific instances formally to guarantee a U.S. patentee the right to retain its U.S. rights despite selling abroad [in Morocco, Australia, and Singapore free-trade agreements]. . . . [which] would be negated if Impression's view of the Patent Act were adopted . . . . An interpretation of a statute that produces such a contradiction with other enactments is to be avoided."

In dissent, Judge Dyk states: "Like the majority I would retain Jazz Photo insofar as it holds that a mere foreign sale does not in all circumstances lead to exhaustion of United States patent rights. But the government argues, and I agree, that the foreign sale should result in exhaustion if the authorized seller does not explicitly reserve its United States patent rights." He notes that Boesch "did not even involve an authorized sale by the holder of U.S. patent rights" and that "every one of the lower court decisions before Jazz Photo applied exactly the rule for which the government argues." And he thinks "[t]he policies that animated Kirtsaeng are in large part applicable to patent exhaustion."

Judge Dyk does not adopt Impression's position, however, because he recognizes that "there are significant differences between copyright and patent that cut the other way," including huge patent law variation between countries such that "[m]any countries offer no realistic protection or very little protection for items patented under U.S. law." And he thinks the government's position adopts the right balance:

In my view, the necessary accommodation between the interests of the rights holder and the unsuspecting buyer can only be achieved by the government’s proposal to put the burden on the U.S. rights holder to provide notice of a reservation of U.S. rights to the purchaser, an approach supported by the earlier lower court decisions and legislative action.

I may have more to say on the difference between this position and the majority's in the future, but for now I'll just note that this difference is relatively small compared with the mandatory exhaustion rule advocated by Impression. Importantly, both the majority and dissent positions allow the kind of price discrimination and experimentation with non-market allocation mechanisms that Daniel and I highlight in our essay.

So does this mean international patent exhaustion is now settled? Perhaps not. Over at Comparative Patent Remedies, Tom Cotter opines: "Next stop, I feel reasonably certain, will be the Supreme Court, and I'm not at all sure what to expect when the case lands there."