Impression Cert Petition Misleads on International Patent Exhaustion Policy

As expected, Impression Products has petitioned for Supreme Court review of the Federal Circuit's en banc decision on post-sale restrictions and international patent exhaustion. I've followed the international exhaustion issue closely: see prior posts summarizing an essay I wrote with Daniel Hemel, the Fed. Cir. argument, and the Fed. Cir. decision. Professor Tom Cotter has said he is "reasonably certain" the Supreme Court will hear the case, and I agree that it is worthy of review.

To briefly recap, Impression wants an authorized foreign sale by a U.S. patentee to always exhaust U.S. patent rights; the Fed. Cir. majority maintained the status quo that U.S. patent rights are exhausted only if explicitly waived by the patentee; and the Fed. Cir. dissent (and the United States) prefer a middle ground in which U.S. patent rights are exhausted unless explicitly reserved by the patentee. (As before, I'm focusing only on the international issue, not post-sale restrictions.)

The cert petition sets forth three arguments for reviewing the international exhaustion holding. First, Impression argues that the Fed. Cir. holding is contrary to Kirtsaeng. This is clearly Impression's strongest argument, and I think it is an interesting and close legal question. Second, Impression argues that the Fed. Cir. majority "rejected the argument advanced by the United States" (which was adopted by Judge Dyk's dissent). Of course, as Impression acknowledges, it too rejects the U.S. position, but this still may be a decent argument for getting the Supreme Court to pay attention.

Third, Impression argues that the "question is important" because the current rule "will produce substantial practical problems." Impression cites two sources indicating that tech products involve many components from many countries (but without indicating whether patent exhaustion rules have posed a practical barrier to assembling these components or selling these products). And the only other source cited in the policy section of Impression's petition is a 2008 article by economists Gene Grossman and Edwin Lai, which is cited as showing that an international exhaustion rule "generates both an increase in consumer surplus in the innovative country and an increase in the world pace of innovation."

But Grossman and Lai's conclusion is not absolute, and it is not based on any real-world data. Rather, they construct a stylized two-country model to question the "prevailing wisdom" that international exhaustion always decreases innovation incentives and global welfare. In short, they show that if the less-innovative country in their two-country world uses strong price controls, then in theory, an international patent exhaustion rule may allow the patentee to credibly threaten to withhold its product from the price-controlled market and thus to demand higher prices. This is a clever and important result, and as Daniel and I explain in our Columbia Law Review Sidebar essay, it means that the net global welfare impact of a U.S. international exhaustion rule is theoretically ambiguous. What is not ambiguous, as we emphasize, is that a U.S. international exhaustion rule creates a net welfare loss for consumers in low-income countries. Even in Grossman and Lai's model, "the legalization of parallel imports by North [the high-income, innovative country] spells a welfare loss for South."

This isn't to say that there aren't genuinely interesting policy questions about which international patent exhaustion rule is optimal, or that the Supreme Court shouldn't hear the case—the issues are undeniably important, and there are enough confusing things about the Fed. Cir. opinion that I think the Court should grant cert. I just hope some of the other cert-stage briefing will do a better job explaining the relevant concerns.