Guest Post: Copyrights, Patents, and International Exhaustion

By Professor Ryan Vacca

Last week, the Supreme Court heard oral arguments in Costco Wholesale Corporation v. Omega, S.A., to determine whether copyrighted works first sold in Switzerland and then imported into the U.S. infringed the copyright owner's right of distribution or whether the first sale doctrine (aka the exhaustion doctrine) applied to make the importation non-infringing.

The facts are fairly straightforward.  Omega is a watch company that manufactures watches in Switzerland.  Omega owns a copyright in a small visual image that is laser-engraved onto each Swiss-manufactured watch.  Costco, a U.S. warehouse retailer, acquired genuine Omega watches from a third party, who had purchased them from an authorized Omega distributor abroad.  Costco subsequently sold these watches in the United States.  Omega alleged that Costco's sale of these watches infringed its exclusive right to distribute copies of its copyrighted work under § 106(3) of the Copyright Act because § 602(a)(1) provides that:

Importation into the United States, without the authority of the owner of the copyright under this title, of copies … of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies … under section 106.

Costco argued that its sales in the U.S. were non-infringing under the exhaustion doctrine codified in § 109, which provides:

Notwithstanding the provisions of section 106(3), the owner of a particular copy … lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.

As I blogged earlier and others have discussed here and here, the Court is wrestling with what the phrase "lawfully made under this title" means in § 109 of the Copyright Act.

Costco argues that goods manufactured abroad can still fall within this phrase whereas Omega argues that goods manufactured abroad are not "made under this title" unless the goods are made or sold with permission from the copyright owner to import the goods into the United States. At oral argument, the Justices quickly pointed out the difficulties in these two interpretations on both a textual and policy level.

In contrast to the formidable task before the Court in the copyright context, patent law takes a relatively easier approach to the international exhaustion issue. The seminal Supreme Court case on international exhaustion under patent law is Boesch v. Graff, 133 U.S. 697 (1890). In Boesch, the plaintiffs held a U.S. patent and German patent for an improvement to lamp burners. The defendants purchased burners in Germany from Mr. Hecht, who was authorized to make these burners in Germany because of Germany's prior user defense (Hecht was not authorized by the patentees). When the defendants imported these burners into the U.S., the patentees sued for infringement. The defendants argued that their legal purchase in Germany from Mr. Hecht permitted them to import and sell them in the United States. The Court disagreed and held that although Mr. Hecht had a right to make and sell the burners in Germany under German patent law, this had no effect on the U.S. patentee's ability to enforce its U.S. patent in the United States.

Over a century later, the issue of international patent exhaustion arose again in Jazz Photo v. ITC, 264 F.3d 1094 (Fed. Cir. 2001) and Fuji Photo Film v. Jazz Photo, 394 F.3d 1368 (2005), where the Federal Circuit reaffirmed the Supreme Court's holding in Boesch and clarified that the exhaustion doctrine would not apply even if the U.S. patentee or its licensees authorized the first sale abroad. In other words, even if the U.S. patentee permitted the first sale in a foreign country, a subsequent attempt to import such an item into the U.S. would still constitute infringement. In support of its holding, the Federal Circuit noted that the U.S. patentee's "foreign sales can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect."

Based on the dialogue between the Justices and the attorneys in Costco, it appears that the Court may be uncomfortable limiting the exhaustion doctrine in the copyright context solely to situations where the first sale took place within the United States. They seem to be struggling to articulate a standard that allows some foreign sales to take advantage of the exhaustion doctrine while giving the phrase "lawfully made under this title" some meaning.

If, in the end, the rule announced by the Court in Costco differs from the holdings in Boesch and Jazz Photo, then what effect may this have on the future of patent law's exhaustion doctrine? Of course, the Court could maintain a dual approach, where copyright exhaustion and patent exhaustion are treated differently. However, if presented with an international patent exhaustion case, the Court could rely on its Costco holding and try to align the copyright and patent rules. We have seen the Court take this approach recently in MGM Studios v. Grokster, 545 U.S. 913 (2005), when it created a new theory of secondary liability in copyright law (the inducement theory) by relying, in large part, on patent law's recognition of this theory via statute in § 271(a) of the Patent Act.

Another possibility for harmonization of copyright and patent law is that the Court takes its cue from patent law and hold that exhaustion in the copyright context only applies when the copyrighted works were first sold or otherwise distributed in the United States. If this disrupts the policy concerns underlying the exhaustion doctrine, then Congress can always step in to resolve this issue.

Dennis Crouch

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

44 thoughts on “Guest Post: Copyrights, Patents, and International Exhaustion

  1. I’m more interested in the economics of this than the legal argument.

    What exact justification is there for copyright law as a barrier to trade from a human welfare point of view? All the law is doing here is giving Omega the opportunity to engage in price discrimination by preventing international arbitrage. Controlling arbitrage is desirable in some situations (for instance, in pharmaceutical patents: if there was one world price for on-patent drugs, almost none would be sold in poor nations)

    But I’m concerned that all we are giving Omega is the ability to extract more surplus from high-valued users.

  2. I don’t see much of a problem with treating copyright and patent law differently. They each carry different types, terms, and “thicknesses” of ownership rights. Although I understand that, in some instances, it is helpful to align the two, I think that in this case such a course of action might be unnecessary or even unhelpful.

  3. I don’t see much of a problem with treating copyright and patent law differently. They each carry different types, terms, and “thicknesses,” where ownership rights are concerned. Although I understand that, in some instances, it is helpful to align the two, I think that in this case such a course of action might be unnecessary or even unhelpful.

  4. Get your sentiments straight.

    ??? What the F does that mean?

    Ya gonna havta point out these supposed conversations ta me Ned-o-gram. Conversations only in your head may count in IMHO-Ned Lawland, but irl, such voices earn ya a nice white coat with extra long sleeves.

  5. The foreign patent exhaustion issue is currently before the Supreme Court in Fujifilm v. Benun, No. 10-486. It will be interesting to see if the court takes up the issue.

  6. Well, ping, you cited the German conquest of Europe as a good thing in one breath (400AD), and decry it in the next(1940AD). Get your sentiments straight.

    So what do we have? English is a German dialect with a lot of Latin words.

  7. Punches you are of course quite right about Latin, it was never any more “pan-European” than English is today, probably nowhere near as “pan-European” as English is today. I was musing on how scientists and medical doctors in Europe communicate with each other, to promote the progress of useful arts. There’s a profesor of English at Cambridge University. At week-ends he goes back to his Welsh island and speaks Welsh. It is his thesis that, in future, every educated fellow will have two languages, the one of his local community (that gives him his identity) and, in the office, English. You can see it already, all over Europe (including in Ireland, Scotland and Wales). Being functional in two (or more) languages enriches creativity.

    Can’t comment much on Roma. If I am not mistaken, in England they are called “travellers” and, in the courts, people of “no fixed abode”. They like it that way, don’t they? Or is that a popular misconception?

    Remind me, what started this conversation? Must it continue?

  8. Max–

    I’m no linguist, but…

    hmmm…don’t know if latin was truly pan-european…it seems to me that there have been islands of Uralic sprinkled about Europe at various times. Granted, it depends on how you define european boundaries, but I would certainly include Hungary, for instance.

    I’ll grant you that latin was the pan-european administrative language during the empire.

    Although it is the position of Roma that they are stateless, that is not in fact the case; many are citizens of Romania or Bulgaria. Also, Roma, like others, must either work or have residency papers if they want to remain in France for longer than 3 months at a time.

    Max is actually correct–if you don’t like a jurisdiction you can “try your luck” in another–but if your luck turns out to be insufficient, you are effectively S.O.L..

  9. Просматриваю статьи на данном сайте уже небольшое время. И говорю сразу что буду продолжать смотреть ваши статьи =)

  10. all saw the value

    Cepts those that didn’t. They be the ones that eventually crashed the Roman party. Side the Romans themselves, that is.

  11. IANAE, the Romans conquered most of Europe, and that process to the conquered was not pleasant. But, in the end, all saw the value of the Roman Empire over being free and uncivilized.

    Karl de Grosse united Europe sans England and Spain for a short time, but that ended with the Treaty of Verdun, again dividing Europe and leading it to war upon itself.

    I don’t see how it is possible to unit Europe without war. I think the presence of the US in Europe keeping the peace has a lot to do with the current European Union. But, looking back at US history, even we really didn’t become one Union until the civil war. Even we had to go through that pain.

    So good luck there, Max, on the new United States of Europe. If you can pull it off, it really will be a first.

  12. Why didn’t you see the wisdom of a common European government?

    Everyone sees the wisdom of a common European government. The problem is that only one country sees the wisdom of, for example, Germany being that common government.

    That’s why Europe can unite (with mild discomfort) with England as an external enemy, but not with England as an internal one.

  13. Max, twice, for brief moments two centuries ago and again 70 years ago, most of Europe was united and had but one external enemy, England.

    What happened?

    Why did you Brits continue the fight against France and then Germany? Why didn’t you see the wisdom of a common European government?

    What makes things different today?

  14. When was Latin lingua franca in Europe? I wonder if I have read too much Patrick O’Brian. 1790, when Dr Maturin conversed in Latin with his medical colleagues all over Europe while Captain Aubrey was fighting them in his frigate. And then there were the Wandergesellen (journeymen) who travelled around Europe training to be a Meister craftsman. Ken Follett? The Pillars of the Earth? Cathedral building in the 1100’s?

    Roma? Gypsies? Zinti? Kurds? Stateless persons do indeed have special difficulties. But does the exception disprove the rule? Turks in Germany have a free choice which nationality they prefer.

  15. I look forward to the day when we are discussing importing into the U.S. from another country, patented isolated DNA having U.S. copyright logos on them that were legitimately acquired inside a person by that person in another country.

    No, what you really want is isolated DNA claimed in Beauregard style, with a copyright registered in the sequence itself. Purchased from the patentee in a country that’s weird about life science patents, and inserted into a mouse genome during a layover in Canada. Let’s see Customs try to decide which DNA to seize and which DNA to let through.

  16. Max: “if you don’t like one, you can escape one and try your luck in another”

    Tell that to the Roma who were rounded up in France.

    At precisely what point in history was Latin the “single pan-european language”?

  17. can you imagine the ‘invasive’ body search‎

    If ya think the search be invasive – just wait for the confiscations

  18. I look forward to the day when we are discussing importing into the U.S. from another country, patented isolated DNA having U.S. copyright logos on them that were legitimately acquired inside a person by that person in another country.

    If you think there is heat going on now, can you imagine the ‘invasive’ body search‎ that will be done by U.S. customs should the above come to pass?

  19. Thanks for the explanation Punches. Long ago, in the good(!) old days, Europe had a single pan-European language, Latin. Ask any doctor from those times. Today, many European countries cherish more than one official language. Six it is, in Spain, no? Even the UK Patent Office operates in Welsh. But, one fine day, transaction cost light, the Euro-Asian mainland continuum will be back to one or two official languages. Will it be English, Mandarin, or both?

    Me, I’m grateful for the multiplicity of jurisdictions in the EU. Just as in the Middle Ages, if you don’t like one, you can escape one and try your luck in another. That goes not only for patent attorneys but also for inventors and entrepreneurs (for which there is keen competition, these days). Ask Ireland.

  20. “Because of the fact of no patent in China, the price of the patented item is 1/5th the price of that item first sold in the United States. The item can be purchased from the patent owner, or from many other manufacturers or retailers. Should it make a difference to the exhaustion doctrine under these circumstances whether the importer into the United States purchased the item in China from the patent owner or from one of the other manufacturers?”

    If he chooses not to get a patent there then that’s up to him. If he also chooses to sell a bulk amount of watches at 1/5 the price that are then resold, then that is also up to him. I’m guessing that the patentee here is making profit off the first sale.

    I somehow don’t think this suit is over 10 watches that were resold. Surely it is a bulk amount.

    Besides, to do otherwise would reward this guy for making them in china. We wouldn’t want that.

  21. does that mean I have to leave my…

    Appearantly so.

    Lesson here: Don’t travel, or perhaps, don’t travel and spend money (spend that there money here in the States, dammit Gumby).

  22. Max is correct.

    Apparently Europe has entered the Neo-Byzantine era.

    By the way Max, all those transactional costs are what is dragging down the EU.

  23. Can’t let this opportunity slip by.

    The European Union has Free Movement of Goods within the Union as one of its basics. But it retains national patent laws. It also has a good deal of harmonisation of IP law within the Union, simplifying matters somewhat. This fortuitous combination of present circumstances has delivered over the years an enormous amount of caselaw on “international exhaustion” on trade between European countries of patented pills, jeans, Oakley sunglasses, Parma ham, French champagne, Colgate toothpaste etc etc. Re-packaging, de-labelling, re-labelling, over-stickering, whether it has to be sliced before the very eyes of the end consumer. Patents, trademarks, copyright. How many bites of the cherry are permitted etc etc. For those with an interest in such stuff, it’s all there, in Europe.

  24. But then what if Fruit of the Loom has copyrighted their logo, too?

    Then you make the exact same argument people have been making for centuries – you won’t remove your undergarments due to exhaustion.

  25. Statute of Anne???

    Bancroft?

    Did Omega deposit that watch with the LoC?

    If Dockers copyrights their logo, does that mean I have to leave my pants at the JFK customs check when I return from London if I can’t show a US receipt?

    But then what if Fruit of the Loom has copyrighted their logo, too?

    Talk about keeping your hands “off my junk.”

    Reductio ad absurdum.

  26. But it does make a difference in whether the patents cover the same invention and whether the patent owner is receiving that compensation.

    If you’re buying from someone other than the patentee in a foreign jurisdiction, I completely agree that the patentee should have recourse under US patent law.

    However, if the patentee decides he doesn’t want patent compensation for some of his sales (e.g. by not having a patent to that invention in the foreign jurisdiction), how is that the importer’s problem? The patentee sold it fair and square, and he shouldn’t be able to go after the buyer for more money afterward.

    Suppose some wacky patentee dedicates his patent to the public but only for infringing acts within the state of Nebraska. If you buy from the patentee in Nebraska and resell in Wyoming, are you infringing?

  27. these aren’t old people making a drug run to Canada for the cheaper drugs (which will have copyright images on them of the Omega understanding is upheld by the Supremes).

    That probably won’t be necessary. Those old people aren’t re-selling the drugs, and it’s probably already illegal for random private citizens to trade in prescription drugs anyway.

    Then again, those drugs are probably patented, because there’s no shortage of cheap off-patent drugs in the US. And I don’t recall anyone who bought drugs in Canada getting a license to use a drug in infringement of a US patent.

    My problem, of course, is that I have reservations about claiming and asserting copyright using what seems to be little more than a trademark/certification mark.

    More to the point, the problem is applying a copyrighted work to a mass-produced article of manufacture. It’s one thing if you’re selling paintings or posters, but if you’re putting ornamentation on a watch you should be getting a trademark or a design “patent”.

    Of course, perhaps the easiest answer for the future is that exporters to the US first remove the logo.

    Wouldn’t you run into trademark issues if you altered an Omega watch and then sold it under the Omega brand?

  28. IANAE, I would argue that the patentee should be fully compensated for the use of the invention. Once he has received that compensation, he should not be able to receive a second. Under this theory, therefore, it makes no difference whether the first sale is made under a US or foreign patent. But it does make a difference in whether the patents cover the same invention and whether the patent owner is receiving that compensation.

    Under this analysis, the Boesch case may have been decided differently had the patentee sold the patented invention to the inventor under the patent in Germany. But, in that case, the sale was not from the patentee, but someone was operating under a prior user right. In this respect, it is as if there was no patent Germany. The German prior user was in the same situation as my prior example about China where the patented invention was purchased in China from someone else than the patentee, and then imported into the United States.

    Simply put, exhaustion was not at issue in Boesch. Had it been, the result could have been different.

  29. ping,

    I guess the answer is that the “logo” was “made under this title” when it was presented to, and registered by, the Copyright Office.

    Thus, Title 17 would come into play relative to the importation of the “original work of authorship”.

    My problem, of course, is that I have reservations about claiming and asserting copyright using what seems to be little more than a trademark/certification mark.

    Of course, perhaps the easiest answer for the future is that exporters to the US first remove the logo. Would I buy a genuine Omega not bearing the logo. In the immortal words of Sarah Palin and everyone I know who originates from Minnesota, “Ya Betcha!”

  30. it seems ta be a catch 22 of sorts

    If not “made under this title”, how can ya seek protection o the title?

    If then, “made under this title” in order to get the protection of the title, where goes their argument?

  31. RE: “Omega argues that goods manufactured abroad are not “made under this title” unless the goods are made or sold with permission from the copyright owner to import the goods into the United States.”

    No way.

    If that is the law, then you would have millions of unsuspecting U.S. tourists subject to lawsuits on returning from their vacations merely for legitmately purchasing one item that falls into the Omega understanding.

    How is U.S. customs supposed to enforce this?

    I mean, these aren’t old people making a drug run to Canada for the cheaper drugs (which will have copyright images on them of the Omega understanding is upheld by the Supremes). You are talking about U.S. tourists returning home after respecting all the laws of the country they visit only to be subject to court action by the act of entering the U.S.

    It is a brilliant idea by the Omega lawyer who thought up this scheme, but no way, no how.

  32. For those unfamiliar with the facts in the case, Omega, in an attempt to thwart importation into the United States, came up with the idea to create a logo, register the logo with the US Copyright Office, engrave the logo on each of its watches, a very small, tiny engraving on the back of the watch case, and then argue that importation of the watches into the US was also the importation of a copyrighted work into the US without the permission of the copyright holder.

    Crudely stated, in this case the Omega watches are nothing more than the “canvas” upon which the copyrighted work is applied.

    I have to wonder, the purported legal issues aside, if this is really what Article 1, Section 8, Clause 8 had in mind in relation to promoting the progress of science? Personally, I believe the answer should be a resounding “No”. The Copyright Act of 1790 led off with “An Act for the Encouragement of Learning”, the very same preface to the UK’s Statute of Anne. How a logo purposely added to shoe horn a utilitarian (and unprotedted” article to fit within the literal language of Title 17 promotes “learning” eludes me entirely.

    Was the “original work of authorship” created under Title 17? The facts suggest the answer must be answered in the negative. Perhaps a better question to ponder is whether or not a logo, per se, which undoubtedly serves as a device to distinguishe an original from one that is not, is even elibigle for protection under our copyright laws.

    Grokster incorporated patent law principles into copyright law. I have to wonder if, perhaos, Costco should be more rightly viewed as an opportunity to incorporate trademark law principles into copyright law, assuming, of course, that the logo should be viewed more in the nature of a trademark versus an original work of authorship.

  33. Should it make a difference to the exhaustion doctrine under these circumstances whether the importer into the United States purchased the item in China from the patent owner or from one of the other manufacturers?

    I would say it should make a difference. If the US patentee chooses not to patent in a country where he sells an identical product, that is his cost to bear. Exhaustion is based on the principle that the patentee has already had one chance to make money on the product and is not entitled to a second. Whether he makes the most of his chance should not be the infringer’s concern.

    If you’re buying abroad from someone other than the patentee, you’re no better than any third party who manufactures infringing product abroad and imports it. The patentee should have every right to prevent that sort of conduct in jurisdictions where he has patent protection.

    On the other hand. If the patent owner has a patent in China and the price in China reflects the market exclusivity provided by the patent, should the result be different?

    I would say it’s the same result. Pricing will still be different, depending on differences in patent law and practice, as well as other market factors like local income levels, exchange rates, and what alternative products are available. If this bothers the patentee, he can always label his goods as being suitable for use or sale only in a particular country. After all, it’s his product. The only thing he shouldn’t be doing is asserting his patent rights against his customers.

  34. “We must assume that the American and Chinese patents originate from the same application and are directed to the same invention.”
    but what if they dont’t Ned?
    Or if they do, what if they’ve been assigned to different companies(through an auction or as a consequence of a war,etc…)?what if before issuance of the patents or 10 years after grant?they should keep it simple:no international exhaustion:period!

  35. There don’t appear to be any commercial / non-commercial distinctions in these rules or possible rules. So I guess that means that there are a ton of infringers who just came back from an international vacation. IPR holders should police at customs.

  36. In the patent context, imagine a US patent owner has a factory in China, but no patent there. Because of the fact of no patent in China, the price of the patented item is 1/5th the price of that item first sold in the United States. The item can be purchased from the patent owner, or from many other manufacturers or retailers. Should it make a difference to the exhaustion doctrine under these circumstances whether the importer into the United States purchased the item in China from the patent owner or from one of the other manufacturers?

    On the other hand. If the patent owner has a patent in China and the price in China reflects the market exclusivity provided by the patent, should the result be different? (We must assume that the American and Chinese patents originate from the same application and are directed to the same invention.)

  37. They bought watches and then are prevented from reselling them. I just don’t know about that man. I just don’t know at all.

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