14 February 2016

US Federal Circuit Maintains the Status Quo on International Patent Exhaustion (and Mentions Australia)

ExhaustedBack in November 2015 I wrote on the topic of ‘international patent exhaustion’ in anticipation of a decision by the US Court of Appeals for the Federal Circuit (CAFC) in the case of Lexmark v Impression Products.  In doing so, I expressed my hope that the court would uphold the existing position, established by 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. 

The CAFC has now issued its decision in the case [PDF, 612kB] and has, by a 10-2 majority, affirmed Jazz Photo, maintaining the established position that US patent rights are not exhausted by a foreign sale.  In the absence of a valid defence (more on which later) it is therefore an infringement to import a patented product into the US even if it is a genuine product manufactured and sold by, or with the authority of, the patentee in a foreign country.  The minority would not have categorically overturned Jazz Photo, insofar as it holds that a foreign sale does not in all circumstances exhaust US patent rights.  In their view, a foreign sale should result in exhaustion unless an authorised seller explicitly reserves the US patent rights.

My primary reason for supporting the status quo is that I believe it is, on balance, beneficial for innovative companies to be able to use patent rights to maintain price disparities in different markets.  The fact is that those of us fortunate enough to live in developed nations have, on average, higher incomes, higher living standards, and a greater ability to fund innovation via the prices we pay for goods and services than people in developing nations. 

If patent rights in a country such as the US are exhausted by the sale of a product in, say, India or Kenya, the only effective option left open to patentees will be to charge similar prices globally.  Clearly, the more that new technologies (including innovations in food production and health care) can be made available at affordable prices to developing nations, the more rapidly they will be able to advance.  (Obviously, development is much more complex than this, but intellectual property laws are one piece in the overall puzzle, and it is desirable that they make a positive, rather than negative, contribution.)

International Exhaustion – US and Australia

When I wrote my earlier article on the topic of international exhaustion I simplified, and focussed mainly on the US position.  As one person pointed out in the comments, there is no uniform international ‘law’ regarding patent exhaustion, and there is some authority for the proposition that foreign sales do exhaust Australian patent rights.  I accept that this was probably the default position at some time in the past, but may no longer be the case under Australia’s current patent laws, which have significantly expanded the range of distinct actions – including importing goods – that may constitute discrete acts of infringement.

In this context, I noted with interest that the CAFC majority had cause to reference Australia in its opinion.  More particularly, the court noted (pages 82-84 of the slip opinion, for those following along at home) that:

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. Congress so provided through legislation, adopted by both houses and signed by the President, that approved three international agreements. United States-Morocco Free Trade Agreement Implementation Act, Pub. L. No. 108-302, 118 Stat. 1103 (2004); United States-Australia Free Trade Agreement Implementation Act, Pub. L. No. 108-286, 118 Stat. 919 (2004); United States-Singapore Free Trade Agreement Implementation Act, Pub. L. No. 108-78, 117 Stat. 948 (2003). In doing so, Congress did not provide the promised rights other than through the existing Patent Act provisions of §§ 154, 271.

This was an aspect of the AUSFTA that had not previously caught my attention.  In particular, Chapter 17, Article 17.9.4 states:

Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from a patented process, without the consent of the patent owner shall not be limited by the sale or distribution of that product outside its territory, at least where the patentee has placed restrictions on importation by contract or other means.

As in the US, the Australian government did not feel the need to enact any changes to the existing patent laws in order to give effect to this provision of the Agreement.

Of course, this does not mean that the ‘rule’ in Australia is now that a foreign sale never exhausts Australian patent rights.  The requirements of the AUSFTA can be satisfied by the possibility that exhaustion may be avoided by the terms of a contract of sale or supply, or by a presumption of exhaustion that may be negated by an express reservation of Australian patent rights (as supported by the minority in Lexmark).

The Australian patent laws have been wholly replaced twice (first by the Patents Act 1952, and again by the Patents Act 1990) since the decisions generally cited as authority for a rule of international exhaustion were issued.  The only more recent support for the proposition that such a rule might still have existed (at least under the 1952 Act) is a 1977 High Court decision relating to copyright (Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV [1977] HCA 52). 

My personal view is that the position under the current Australian law is totally up-for-grabs and, as the CAFC majority decision shows, there is a solid case in an era of globalisation for national patent rights to remain under sovereign control.  The court recognised the potential economic policy issues, and noted (at page 95 of the slip opinion, for those still following):

There seems to be 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. One official recognition of both the fact of low prices abroad and the linkage of such prices to territorial resale protection appears in a 2003 World Trade Organization decision made with the agreement of the United States. The WTO there waived certain TRIPS patent-recognition provisions in order to allow certain countries to import generic versions of needed medicines. The WTO took care, however, to condition the waiver on agreement by the importing countries “to control re-exportation of drugs they import in this fashion.”

None of which, of course, proves anything in the Australian context, until and unless a case involving possible international exhaustion comes before the courts here.

Can Travellers Become Unintentional Infringers?

In my earlier article I highlighted the difference between an individual consumer brining home an item purchased overseas, and commercial-scale parallel importation of goods sold elsewhere at a lower price.  While the latter obviously has the potential to cause significant commercial harm to a patent-holder, the former seems like something that most people might consider to be generally legitimate.

In practice, of course, pursuing individual travellers for patent infringement is unlikely to be a commercially justifiable exercise.  Nonetheless, this scenario was considered by the CAFC majority, which concluded that in many circumstances an implied-licence defence may apply and that, in any case, no evidence was provided that this kind of thing is even an issue (at page 93 of the slip opinion):

There is, of course, the possibility … of unintended infringement by buyers of goods in foreign countries who bring them into the United States, whether to use them as components in new goods they make, to sell them, or to use them as consumers. But that possibility is limited by the availability of an implied-license defense from the circumstances of a sale ….  The only scenario relevant to exhaustion is one involving patentee-made or -authorized foreign sales, and we simply have no reliable evidence that the possibility of unintended infringement in that scenario is actually a significant issue in practice.

Conclusion – International Exhaustion Still Not Settled?

I believe that the majority of the CAFC reached the correct conclusions in Lexmark.  I would like to think that the law in Australia is similar, although at this point it is very difficult to know whether or not that is the case.  Certainly there is authority for foreign sales precluding the enforcement of Australian patent rights over 100 years ago, when the exclusive rights of the patentee were enumerated as ‘to make, use, exercise, and vend the invention within the Commonwealth’ (Patents Act 1903 , section 62). 

Under the current Act, however, the patentee has an exclusive right to ‘exploit’ the patented invention, with that term being defined as including (but not being limited to) ‘where the invention is a product – make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things’ (Schedule 1, Dictionary).  So even if some of these rights are exhausted by a foreign sale and/or subject of an implied licence to the purchaser (the obvious example being the right to ‘use’), it might not be the case, for example, that a purchaser has an unfettered right to import the patented product into Australia.

But whatever the case may be in Australia, I doubt we can regard the law in the US as being settled just yet.  An application to have the Lexmark decision reviewed by the Supreme Court seems almost certain, and I think that the odds are better than even that the United States’ top court will want to take this one on.


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