Will the Federal Circuit Recognize the U.S.–Foreign Tradeoff in Friday’s Lexmark Argument?

Guest post by Daniel Hemel, Assistant Professor at the University of Chicago Law School, and Lisa Larrimore Ouellette, Assistant Professor at Stanford Law School.

On Friday, the en banc Federal Circuit will hear argument in Lexmark v. Impression Products, the printer cartridge resale case that will determine the fate of two key patent exhaustion precedents, including the current Jazz Photo rule that foreign sales do not exhaust U.S. patent rights. Despite extensive briefing (including over thirty amicus briefs), we argue in a new Essay that the key distributive tradeoffs between U.S. and foreign interests remain ignored (or misunderstood).

Both sides in Lexmark argue that their proposed rule would be more efficient. Those advocating broader exhaustion rules (including Google, Costco, EFF, and a group of IP professors) argue that the current regime is complex and uncertain. Those favoring the status quo (including PhRMA, BIO, and IPO) point to the aggregate welfare gains from geographic price discrimination. While it is possible to construct models to support both views, we argue that the efficiency question cannot be answered without first making a choice about whose welfare is aggregated.

As explained in more detail in our Essay, Trade and Tradeoffs: The Case of International Patent Exhaustion, the U.S. rule on international patent exhaustion implicates at least two tradeoffs between U.S. and foreign interests:

First, there is a tradeoff between U.S. and foreign consumers. A U.S. rule of international exhaustion would cause prices of patented products in low-income countries to increase and prices of those same products in the United States to fall. It is thus surprising to see groups focused on global access to medicines such as Public Citizen advocating for this change; we are not aware of any study suggesting that a U.S. rule of international exhaustion would decrease prices in the developing world. As counterintuitive as it may be for developing countries and global access-to-medicines proponents to take the side of pharmaceutical companies, we think that their interests are in fact aligned on this issue. Developing-world consumers and pharmaceutical companies would both be better off if the Federal Circuit sticks with its Jazz Photo rule.

Second, a U.S. rule of international patent exhaustion would make it more difficult for foreign countries to allocate access to patented goods using non-market mechanisms. Some national governments subsidize their citizens’ consumption of patented products; examples range from the UK National Health Service’s provision of pharmaceuticals to Uruguay’s one-laptop-per-child program. As we explain in our Essay, such subsidies could end up being transferred to U.S. consumers via arbitrage if the Federal Circuit overrules Jazz Photo. At the very least, the decision to overrule Jazz Photo would make it more difficult for foreign governments to subsidize access to patented goods.

We argue that one cannot answer the policy question at the heart of Lexmark without taking a position on these distributive questions. If one assigns zero value to the interests of foreigners, then the United States might well be better off if it adopted a rule of international patent exhaustion. (While international patent exhaustion would also reduce profits for U.S. patent holders, a majority of U.S. patents are issued to foreigners; if one adopts a purely nationalistic approach, the interests of most patent holders wouldn’t count in the welfare analysis.) If one assigns a high value to the interests outside the United States, particularly those in developing countries, then one should almost certainly come down against a U.S. rule of international exhaustion. (If one assigns equal weight to the interests of all individuals regardless of nationality, then the question is somewhat closer.) How much the Federal Circuit should care about foreign consumers is a question that defies easy answer, but we hope that our Essay at least brings these tradeoffs into clearer focus. We also offer some tentative suggestions as to how U.S. courts might approach questions of global distributive justice.

13 thoughts on “Will the Federal Circuit Recognize the U.S.–Foreign Tradeoff in Friday’s Lexmark Argument?

  1. “Developing-world consumers and pharmaceutical companies would both be better off if the Federal Circuit sticks with its Jazz Photo rule.” Not to put too fine a point on it, but duh! That’s not a knock against the authors, but against the people to whom they’re responding – how could anyone miss such an obvious point? Int’l exhaustion of patent rights, viz. the loss price discrimination, would make it more difficult for pharma companies to utilize US consumers to subsidize R&D, which is what they presently do. [Although, as Dennis points out, FDA rules about importation would still present a significant hurdle to the (re-)importation of drugs, patent-protected or not (as last week’s brouhaha about Turing Pharmaceuticals illustrates).] In a universal exhaustion world, one way to help ensure high profits in the USA would be to limit access to patent-protected drugs outside the USA (and not just in third-world countries but in more developed countries where drugs are price-controlled). Conversely, under the current Jazz Photo rule, protection in the USA from foreign sales makes it more likely that medicines will be made available cheaply or for free in third-world countries.

    “As we explain in our Essay, such subsidies could end up being transferred to U.S. consumers via arbitrage if the Federal Circuit overrules Jazz Photo.” Again, duh! How could anyone assert to the contrary, or miss such an obvious point?

    Regardless, as other comments have already stated, it’s doubtful the CAFC will decide based on these policies considerations.

  2. One would think it more likely the Fed. Cir. will decide on legal rather than economic considerations. In particular, that sales of a product in a foreign country under a foreign patent, with different recovery potentials for patent infringement, or in countries no patent coverage at all, to thereby eliminate any U.S. infringement damages recovery under any U.S. patent, creates unwarranted extraterritoriality for patents?

    1. To put it another way, an authorized foreign sale of a product covered by a foreign patent logically exhausts that foreign patent’s further recovery, but why should that foreign sale also exhaust all rights under a U.S. patent,
      which does not cover sales outside the U.S.?

  3. It is less a matter of assigning zero value to the interests of foreigners and more a matter of having me as an American subsidizing someone else (I other words – making our own personal interests EQUAL)

    1. I don’t think that the authors argued that our valuation of the foreign interest should be of equal concern to that of our US national interest, but rather suggested that we should give some credence to the foreign interest – i.e., they argue that the decision’s impact outside of the US is not entirely irrelevant.

    2. Bad economic argument, anon. If I have a domestic monopoly my incentive is to charge the profit maximizing price in the domestic market, regardless of whether I can charge that same price abroad or not. I won’t charge more, because I will lose profits, but I have no particular incentive to charge less either.

      1. Bad economic argument in reply Mr. Cotter, as the ability to charge less in foreign countries (if the ability to recoup at my personal expense here does exist) WILL be taken advantage of.

        My higher price WILL subsidize a lower price elsewhere and the personal interests factor is as I indicated.

        I am expressly looking at the “whose” question from a non-corporate angle, and find the intimation of “regarding zero value” to be misleading.

        Profit maximizing price is NOT so constrained as to a single domestic market, regardless of “monopoly” there or lack of.

        The real world intrudes.

        (You might find the Kirtsaeng case may be worth a read)

  4. Thanks for highlighting this issue.

    A few of points:

    (1) Although the patent system does some amount of work in this area, there are many market conditions that prevent major arbitrage – FDA import restrictions; distribution contracts; etc.
    (2) I don’t believe that the economics of the situation are so straightforward. A change in the law will lead to new business strategies that are not simply raising and lowering prices.
    (3) I don’t know that our Federal Circuit judges are tooled or empowered to make this type of judgment. Of course, as you suggest, the judges have been put in the corner and must make a decision since the other branches of government have not spoken.

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