The ‘Exhausting’ Topic of International Patent Rights

Imagine that you are travelling overseas, and you see a product on sale for a much lower price than in your home country.  It is a genuine article – not a cheap knock-off – but the market in the country you are visiting simply will not bear the same cost as in your affluent home nation.  The manufacturer can maintain this price disparity because the product is patented in every country in which it is sold.

So, if you buy the lower-priced product, should you be allowed legally to take it home, or should the manufacturer be able to use its patent rights in your home country to block you from bringing it in, or to require you to pay an additional royalty for the privilege of doing so?  Probably you would feel that, having bought the product legally, you should be entitled to do whatever you wish with it, and that the manufacturer should have no further say in the matter.

Now imagine that you are not just a consumer, but that you own a retail store.  You realise that you could buy 1000 of the product at the lower price, import it back into your home country, and then sell it at a profit of $100 per unit while still undercutting the recommended retail price of the same product being sold into your local market by the manufacturer.  Should the manufacturer be able to use its patent rights to prevent you from engaging in this sharp business practice, or are you merely using your initiative to legitimately enhance competition back home?

Finally, suppose that the product in question is a drug used in the treatment of HIV/AIDS, which is a significant public health issue in poorer regions of the country in which you are travelling.  Do you think that makes any difference?

The above scenarios all address the issue of international patent exhaustion, i.e. whether or not the sale of a product patented in one country automatically nullifies (i.e. ‘exhausts’) the patentee’s rights in all other countries in which it holds equivalent patents.  Unless you are already familiar with this area of the law, you might be surprised to learn that the answer is generally ‘no’.  A patent-owner can, in principle, enforce its rights – via an injunction, or requirement to pay a royalty – every time one of its products is transferred to a new jurisdiction in which it holds a relevant patent.  This is different from the ‘rule’ that applies within a single jurisdiction, where the first sale of a product generally relieves the patentee of further rights.

Should there be a similar ‘rule’ of international exhaustion?  I think not – or, at least, not yet.  But it is a question that is currently up for consideration by a US appeals court.

The Principle of First Sale

The theory behind the ‘first sale’ rule within a single jurisdiction is simple.  Once a patented product has been sold, either by the patentee, or by a licensee duly authorised to do so, the benefit of the patent (e.g. a premium on the product price, or a licence fee) has been obtained.  Claiming any subsequent control over the product not only encroaches upon the purchaser’s rights to do as they wish with their goods, but enables the patentee to ‘double dip’, for example by claiming a royalty upon each resale of the product.

It is, of course, possible for a patent-holder and purchaser to modify this default position via contract, such as an agreement making it a condition of sale that the product may not be resold.  It is, however, entirely up to the purchaser whether to accept the condition, or to make do without the product.  But this is an exception to the rule, and requires that the parties clearly agree to the terms of the contract of sale.

There are, in fact, two different views that are commonly held with regard to  the legal effect of the first sale.  According to one view, the patent rights are exhausted by the sale such that the product is, in effect, no longer the subject of the patent.  On an alternative view, this is a little unsatisfactory, in that neither the product nor the scope of the patent has changed, and the only thing distinguishing a ‘patented’ product from an ‘unpatented’ one is its history.  Thus, some people prefer to believe that a sale carries with it an implied licence enabling the purchaser to do all the things with the product that the patentee is entitled to do, at least within the jurisdiction in which the sale took place.

Either way, the patentee has no further legal right to any control over the product following the initial sale.

Why Should the Same Rule Not Apply Internationally?

As a consumer you might be thinking that once you have purchased a product outright, it is yours to do with as you please.  Why should it make any difference where you bought it, or how much you paid for it?

The short answer to this question is that patents are national rights.  In the absence of express international agreements to the contrary, each sovereign state that issues and enforces patent rights does so independently of all other jurisdictions.  Although there has been significant international harmonisation of patent systems, governments are understandably reluctant to cede ultimate control over the enforcement of monopoly rights to foreign interests.

Still, any country that wished to could choose to recognise a rule of international patent exhaustion.  But would this necessarily be a good thing to do?

Consider my third scenario from the opening paragraphs of this article.  You are the lucky beneficiary of citizenship of a developed nation, and you are travelling in a developing nation in which HIV/AIDS in poor communities is a significant problem.  Fortunately, the developer of a drug treatment provides the product at a price that is affordable to the country’s government.  It is able to do so, despite the enormous cost of drug development, on account of the premium it charges in developed nations while the drug remains under patent.

So, what happens if the developed nations decide to recognise international exhaustion?  One obvious possibility is that opportunistic businesses start buying up stocks of cheaper drugs from developing nations for resale at higher prices in developed nations.  This reduces availability in places where the drug may be most needed, as well as eroding the higher-priced sales of the originating manufacturer in developed nations, and undermining its business model.  The ultimate outcome is likely to be a new equilibrium, in which prices are higher than before in developing nations, while being reduced in developed nations.

If you favour free markets and free trade above all else, you might think that this is, in fact, the ‘right’ outcome (but, then, you might well also be opposed to patents in general, so this is really a secondary issue).  Personally, I think there are more important things in the world than delivering cheap prices to consumers in advanced economies.  One day, perhaps, there will no longer be a distinction between least developed, developing and most developed nations.  In the meantime, however, the main beneficiaries of a rule of international patent exhaustion would be those who least need the benefit.

Conclusion – Will the US Upset the Applecart?

Currently, the issue of international exhaustion is not purely academic.  On 2 October 2015 an en banc panel of the US Court of Appeals for the Federal Circuit heard argument in the ‘printer cartridge case’ between Lexmark International and Impression Products. 

One of the questions the court is considering is whether to overturn its own precedent in Jazz Photo Corp. v. International Trade Commission 264 F.3d 1094 (Fed. Cir. 2001) that foreign sales do not exhaust US patent rights.  This has become a live issue, at least in part, because of a 2013 US Supreme Court ruling, in Kirtsaeng v John Wiley & Sons, establishing that US copyright is exhausted by foreign sales.

Now, patent law and copyright law – particularly in the international context – are quite different, so it certainly does not follow that the Federal Circuit will find that the Supreme Court’s decision on copyright is similarly applicable to patents.  However, the court has received amicus curiae briefs from a number of significant supporters of more liberal international patent exhaustion rules, including Google, Costco, the Electronic Frontier Foundation and a group of IP law professors comprising such luminaries as Mark Lemley and Michael Meurer.

I believe that it would be incredibly selfish for the world’s largest developed economy to unilaterally recognise a rule of international patent exhaustion, to the ultimate detriment of every country less well-off than itself.  While I certainly look forward to the day that we achieve the level of global equality that would make sense of such a rule, we are not there yet.  And I am not the only one to believe that there is more at stake here than lower prices for US consumers – a recent essay by Daniel Hemel of the University of Chicago Law School and Lisa Larrimore Ouellette of Stanford Law School, Trade and Tradeoffs: The Case of International Patent Exhaustion, makes a similar case.

I await the Federal Circuit’s decision with interest.

Tags: Exhaustion, Patent law, Patent litigation, US