As usual, Professor John Duffy is able to cast new insight on a well-worn problem. In the context of exhaustion, he enlists noted commercial law scholar Richard Hynes and together they walk through the underlying sources of the doctrine. Their work will likely have an important impact on the Federal Circuit’s upcoming Lexmark decision. – Dennis
Guest Post by John F. Duffy and Richard M. Hynes
In Lexmark International v. Impression Products, the Federal Circuit has now ordered en banc arguments to consider overturning not just one, but two of the court’s most important precedents on patent exhaustion. See en banc notice on Patently-O (linking to the court’s en banc order). Before discussing those two issues, we want to pose a question:
Q: What is the legal basis for the patent exhaustion doctrine?
(A) The doctrine is based on the U.S. Constitution.
(B) The doctrine is based solely on an interpretation of the Patent Act.
(C) The doctrine is pure judge-made law, and much like any other common-law doctrine, it is based on judicial views about good policy.
(D) The doctrine is a hybrid of statutory law and judge-made law—a judicial gloss on the Patent Act created in an era when courts felt comfortable engaging in surgery on statutes to advance judicial views about good policy.
(E) None of the above.
If the answer to this question is crystal clear to you, then you need not read any further. But we are willing to bet that most sophisticated lawyers would answer this question incorrectly, so you really should read on.
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Let’s start with a tried and true strategy for answering multiple choice questions—eliminating implausible answers. First, let’s get rid of answer (E) “None of the above.” That’s got to be wrong, because the answers essentially cover all plausible bases for any legal doctrine in domestic law. We can also eliminate answer (A). No court or commentator has ever argued that the doctrine is constitutionally required.
That leaves three possible options—that the doctrine is (B) statutory interpretation, (C) judge-made law, or (D) some combination of those two. Most modern lawyers and commentators would choose (C) or (D). They would think that the exhaustion doctrine is—wholly or partially—judge-made “common law” that reflects judicial views about good policy. Indeed, just last month, this blog published commentary asserting that the exhaustion doctrine is based on “two policies,” including a supposed policy against allowing patentees a “double recovery” on the sale of their inventions and a supposed policy against “restraints on the alienation of chattels.” Samuel F. Ernst, Of Printer Cartridges and Patent Exhaustion: The En Banc Federal Circuit is Poised to Clarify Quanta.
Professor Ernst’s blog posting is, it is fair to say, the received wisdom among modern commentators, but we think that received wisdom to be quite clearly wrong. Our view is based on three reasons, which are summarized here but set forth in greater detail in our forthcoming article Statutory Domain and the Commercial Law of Intellectual Property (http://ssrn.com/abstract=2599074) (hereinafter Statutory Domain Article). First, in its foundational cases on both copyright and patent exhaustion, the Supreme Court repeatedly and clearly stated that it was engaged solely in statutory interpretation. For example, the Court in Bobbs-Merrill v. Straus—the foundational copyright exhaustion case—stated explicitly that the case presented “purely a question of statutory construction.” 210 U.S. 339, 350 (1908). Similarly, in Motion Picture Patents Company v. Universal Film—an important case on patent exhaustion from the same era—the Court quoted the language of the patent statute granting exclusive rights; stated that it was “interpreting this language of the statute”; and emphasized that it was trying to “determine the meaning of Congress” in writing that language. 243 U.S. 502, 509-10 (1917). Modern commentators have tended either to ignore these portions of the Supreme Court’s opinions or to assert that the Supreme Court was dissembling in those passages. (For examples, see Statutory Domain Article, at 6 n.16.) We think the Court was telling the truth and that the exhaustion doctrine is based purely on statutory interpretation.
A second reason for doubting the received wisdom about exhaustion is that the foundational cases consistently state their holding in terms of the relevant issue being “outside,” “beyond” or “not within” patent law. See, e.g., Motion Picture Patents, 243 U.S. at 509; Bloomer v. McQuewan, 55 U.S. 539, 549 (1852); Boston Store of Chicago v. American Graphophone Co., 246 US 8, 24 (1918). Such statements are inexplicable if patent law itself were concerned with limiting patentees’ ability to impose post-sale encumbrances on personal property. Those statements are, however, completely consistent with the exhaustion doctrine being based on statutory interpretation, for they fit perfectly with the view that exhaustion represents an inferred limit on the “scope” or “domain” of the Patent Act. (For a much more complete discussion of such domain limitations, see Statutory Domain Article at 24-31.) In other words, the underlying basis for the exhaustion doctrine is not substantive policies such as hostility toward restraints on alienation, but rather an absence of substantive policy on the issue within the Patent Act. Such issues are instead governed by a vast body of commercial law—including the law of contracts, security interests, personal property servitudes, antitrust, etc.—that permits all sorts of restraints on alienation, use restriction and encumbrances in some, but not all, circumstances. The exhaustion doctrine insures that IP law does not displace that vast and complex body of law in circumstances where Congress had no intent to do so.
Third and finally, the principal cases on exhaustion also consistently state that the Court is not deciding on the enforceability of any rights that the patentee may have under non-patent law. One classic statement is found in Keeler v. Standard Folding Bed, 157 US 659, 666 (1895), where the Court concluded its analysis: “Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws.”
The correct answer to the question above is thus (B)—the exhaustion doctrine is pure statutory interpretation and does not reflect judicial hostility toward restraints on alienation or encumbrances generally.
This approach throws a new light on the questions that the Federal Circuit will address in its en banc decision. One of the en banc questions is whether the court should overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), and here the answer is surely “yes.” The Supreme Court case law establishes a pretty clear bright-line rule that the exclusive rights to make and use in the Patent Act are exhausted upon the first authorized sale or other transfer of ownership. (See Statutory Domain Article at 46-49.) Importantly, however, that bright-line rule is based on statutory considerations—Congress had no intention to displace the vast and complex law governing property encumbrances and other aspects of general commercial law. The rule is not based on a view that the Patent Act explicitly or implicitly has any hostility towards post-sale restraints on the alienation or use of chattel property. Patentees are therefore free to impose whatever contractual conditions they and their customers agree upon—subject, of course, to any limitations on lawful contracting imposed by state unconscionability doctrine, by federal antitrust doctrines, or by other law.
If patentees want more than mere contract rights to protect those conditions—if they want property rights that follow or “run with” the chattel—then they can encumber the chattel with a security interest. Indeed, for nearly a century, state commercial law has treated any so-called “conditional sale” as a sale subject to a security interest. The Federal Circuit’s Mallinckrodt decision, which allowed conditional sales to be enforced through patent law without any of the nuanced limitations imposed by modern commercial law, appears to be quaintly oblivious to nearly a century’s worth of change—a throw-back to commercial law generally abandoned in this country shortly after the turn of the last century. For the relevant history, see Statutory Domain Article at 53-54 nn. 226-30.
The other en banc question is whether the Federal Circuit should overrule Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), which held that U.S. patent rights are not exhausted by foreign sales. The Supreme Court’s recent decision in Kirtsaeng v. Wiley, 133 S. Ct. 1351 (2013), ruled that foreign sales do trigger copyright exhaustion, and so the Federal Circuit has quite understandably framed the issue in terms of whether foreign sales trigger patent exhaustion. A statutory approach to the exhaustion question would, however, focus not only on the fact of a foreign sale, but also on the structure of the Patent Act’s distinct right to control importation.
In patent law, the right to control importation is a freestanding right, distinct from the exclusive right to control sales. In copyright law, that’s not so. A copyright owner’s exclusive right to import is defined in the statute to be part of the owner’s exclusive right to distribute under § 106(3) of the Copyright Act. The relevant statutory language states that unauthorized importation is “an infringement of the exclusive right to distribute … under section 106.” The statutory definition of the importation right as being within § 106(3)’s distribution rights is crucial because copyright’s codified exhaustion rule specifically points to the distribution right of §106 as the right that is to be exhausted by transfers of ownership. See 17 U.S.C. § 109(a).
How important is this difference—that the right to import is a freestanding right in patent law but not in copyright? Very. The first case cited in Kirtsaeng is Quality King Distributors v. L’anza Research, 523 U.S. 135 (1998), and as Justice Kagan made clear in her Kirtsaeng concurrence, Quality King was essential to gaining a majority of the Justices. Yet the very first step in the Court’s reasoning in Quality King was to emphasize that the Copyright Act “does not categorically prohibit the unauthorized importation [but instead] provides that such importation is an infringement of the exclusive right to distribute copies ‘under section 106.’” From that starting point—the Copyright Act’s blending together of the right to import as part of the distribution right—Quality King was able to reason that the importation right must also be exhausted whenever the right to distribute is also exhausted, and even the copyright owner in that case could not argue that its sales did not exhaust their distribution right.
Patent law’s distinct and separate right to control importation should be controlled not by Kirtsaeng and Quality King, but by the reasoning in Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191 (1931), which held that the copyright’s separate exclusive right to control public performances is generally not subject to exhaustion. If exhaustion doctrine is a matter of statutory interpretation (as the Supreme Court has repeatedly stated), then a proper analysis of the doctrine requires attention to the specificity of rights in each statute. The pending en banc Federal Circuit case is superficially similar as a policy matter to Kirtsaeng and Quality King (because the cases all involve international aspects of exhaustion), but in terms of statutory structure, the en banc case is more like Buck (because both cases concern a right separate from any right traditionally subject to exhaustion).
There are, of course, additional arguments on this point. We cover many of these in our much longer article on the subject, and perhaps we will cover more in an amicus brief. Our overarching point—and our message to other brief writers in the upcoming en banc Federal Circuit case—is that, before jumping into a policy analysis of the pro’s and con’s of various exhaustion rules, parties and amici first address whether the Federal Circuit should be engaged in pure judicial policymaking or whether, as Supreme Court precedent suggests, the court should be determining the correct interpretation of the Patent Act.
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Read the full article here http://ssrn.com/abstract=2599074.