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.
Unfortunately, the question is loaded because (B) – (C) use limiting terms such as “solely” and “Patent Act.” Consequently, the only viable answer is (A) since all patent rights are based on the Constitution and the doctrine of exhaustion predates the Patent Act of 1952. Incidentally, 271(a) codified pre-existing patent law according to Federico.
Lexmark is more like Aro I (repair v. reconstruction), which the S.Ct. decided by following Wilson v. Simpson, 50 U.S. (9 How.) 109 (1850).
This is a great blog article that I hope serves as a teaser to a great longer read. And an additional hat tip to you for having the decency to publish this during the sweet spot for all of us 3Ls – after finals but before the bar prep begins.
Mind == blown. Thanks Profs. Duffy and Hynes!
Well-stated. I hope the authors file an amicus brief.
BTW, one of the sources of confusion re “patent exhaustion,” aka the “first sale doctrine,”aka an “implied license,” is confusing the three separate issues of (1) whether a subsequent owner of a purchased patented product can be sued for patent infringement, or, (2) can a subsequent owner be sued for breach of contract, or, (3) can the original purchaser can be sued for an unauthorized re-sale or use. [Note the Sup. Ct. General Taking Pictures decision]. They are not the sames issues even though they may have limitations, or even antitrust issues. depending on what restraint was being attempted in the contract with the original purchaser, or otherwise. It can be further confused by the doctrines for “repair or replacement parts.”
Interesting – and deserving of a deeper read of the SSRN article.
Is there some part of the post that mentions what statutory text the authors believe the exhaustion doctrine is based on? I got about 9 paragraphs in, with no sign of an answer in sight.
The post insists that the answer is (D), but the substance seems to indicate that the answer may be “(C), but the common law was not displaced by statute and is still assumed to be in the background…”
There are other Sup. Ct. cases that do seem to rely on the ancient and long standing judicial hostility to “restraints on alienation of chattels” and not just statutory interpretation. E.g., in 1917 in Straus v. Victor Talking Machine Co. the Court refused to enforce a post-sale price-fixing restraint imposed on phonograph machines by means of an affixed “License Notice.” The Court held that the case fell within the principle of Adams v. Burke and denied any relief. In so holding, the Court explained:
“Courts would be perversely blind if they failed to look through such an attempt as this “License Notice” thus plainly is to sell property for a full price, and yet to place restraints upon its further alienation, such as have been hateful to the law from Lord Coke’s day to ours, because obnoxious to the public interest.”
[Patents can be considered chattels in this context, since 35 U.S.C. 261 says that: “Subject to the provisions of this title, patents shall have the attributes of personal property.”]
A in Japan sells X to B, who imports X into the US where C holds a patent covering X. Obviously, the sale by A does not protect B against C.
Now add that C has a Japanese counterpart patent and that A is an infringer that C does not know about.
Now add that A is operating under a prior use right vs. C’s Japanese counterpart.
Now consider that C chooses not to sue A.
Now suppose that A owns, by assignment, the Japanese counterpart to the C US patent?
Now add, that C is being paid for the assignment out of royalties on Japanese sales by A.
Now suppose instead that A is C’s exclusive licensee in Japan of the C-counterpart.
Now suppose that A is a non exclusive licensee.
Gets complicated, not so?
What does sale mean? What law do we apply? Is it a matter of federal patent law because “sale” is in the patent statute?
I know that the good professor speaks of development of state law theories of contract in the sale of goods. But how or should state law affect federal patents rights? Does foreign law apply? Should US patent law depend upon the vagaries of foreign contract law? Do we need to consult international law?
In an earlier thread talking about “offers for sale” I raised the issue of the difference between a sale involving a transfer of title and the sale involving transfer of possession. Which kind of sale is it when we are speaking of an offer for sale?
Is it possible for patent law purposes that there be no such thing as conditional sales. I know there are Supreme Court cases on mortgages, but I have a look them up recently to find out how they applied the law mortgage to the law of patents.
My prediction: the Federal Circuit will decide both issues primarily based upon federal patent law, and the some extent considering international law in the case of Jazz Products. Thus, under US patent law there is no such thing as a conditional sale.
Reminds me in a way Ned of our inventor/owner discussions and how you “swore” that state law could not have a part in ownership issues (for example, community property state law). As I recall, I tried to explain to you that you were off, even directing you to read up with a specific chapter reference to Chisum on Patents.
Chisum on patents? He simply compiles footnotes. I expect, if he went on a two year vacation no one would notice as the footnote compilers would continue to slave away.
Your lack of respect for Chisum is noted.
I question everything about Chisum when he begins to favor State Street Bank.
Yes Ned, your tendency to give worth or scorn merely on how well things align with your agenda is well known (hint: it is a bug and not a feature).
anon, there are certain cases that are third rails to me. Someone starts approving of these cases and I begin to sense there is something afoot.
To your credit, you have never directly endorsed State Street Bank.
and anon, I think again think the choice of law issue here may be of issue. The author thinks state or foreign conditional sales law relating to chattels should trump U.S. patent law. I am not so sure it will.
Ned,
I see that you want to place the emphasis on (statutory) patent law.
With that in mind, let me ask you again:
Where in the words or scope of the words by Congress that pertain to “offer,” does one find the requirement of what is being offered must be physically extant at the time of (or at any time) of the offer?
The act of infringement based on “offer” is separate and distinct from any other act of infringement.
Let’s keep a clear mind on these distinctions.
anon, “offer to sell” implies that the offer is made and can be accepted. What is offered for sale — “any patented invention” But, really, one can only sell a thing. One practices a method.
154 says that the offer for sale in connection with a process must be of product of the patented process.
Taken together, the statutes seem clear that a thing is being offered for sale. It must exist.
Ned, one can accept an offer without more – with no product available.
You appear (again) only too eager to conflate things – here, actual sale and the separate offer for sale.
Further, this new notion that only things can be sold is downright bizarre. Services are sold. Everyday. To the tune of billions of dollars.
Plainly, you see only a mirage and cannot provide any actual support of your view. Time for you to take a step back and ponder the plain words that Congress chose to use.
Services are sold?
Yeah, anon, in sketchy denizens one can see women or boys hawking services of one kind or another every day.
But, 154 cannot be ignored. It grants the patentee “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States, and, if the invention is a process, of the right to exclude others from using, offering for sale or selling throughout the United States, or importing into the United States, products made by that process, referring to the specification for the particulars thereof.”
Thus the sale in connection with a process is of the products of the process, not the process itself.
And, do not cite me Federal Circuit cases to the contrary. In the words of the Supreme Court, the Federal Circuit does not understand the law of infringement.
As usual Ned, you are guilty of over-reading and mis-understanding statutory law.
The section you wish “not to ignore” (35 USC 154) is in fact, not being ignored. The fact of the matter is that “offer for sale” is in both (d)(1)(A)(i) AND (d)(1)(A)(ii), and that the EXTRA protection that Congress added IN ADDITION TO a mere offer, that of products of processes overseas was added for a separate reason – that it simply is more difficult to catch foreign perps in regards to process patent infringement. You might note link to thomas.loc.gov:./temp/~bdwk5k:@@@D&summ2=m&|/bss/d100query.html| for two separate things.
One germane to this conversation deals with the EXTRA protection (Title IX). That section clearly indicates the “extra” ness that is in addition to the fact that mere “offer” is available for ALL patent types. The EXTRA is not in fact in place of the protection for all types.
The other includes this dandy quote (under Subtitle B):
“Authorizes the Director to enter into contracts with institutions of higher education and qualified private sector business concerns for the conversion of education and training software in order to adapt such software to the requirements of a public interest user.
Requires the Director to advise and consult with any prospective commercial user of an education and training software listed in the clearinghouse. Authorizes the Director to sell or lease such software, including exclusive or nonexclusive rights in PATENTS or copyrights, to a commercial user for a price or fee which reflects a reasonable return to the Government.“
anon, let us agree to disagree once more.
When one speaks of processes in licenses, one speaks of “practicing.”
A sale is of the products produced.
I am not going to agree to disagree when your view is so artificially constrained so as to be effectively flat out wrong.
The plain words of the statute for sale (and we have not even returned yet to a mere offer for sale) plainly include the sale of services (i.e. Methods).
There is simply no two ways around this.
The better path Ned would be for you to recognize your immediate error here in a topic that is less than a “third rail” for you and begin to appreciate my views.
There is a typo in the third to last paragraph: “How important is this difference—that the right to import is a freestanding right in copyright but not in patent law?” Copyright and patent should be swapped.
Thanks. We got that fixed.
–The authors.
>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.
I think based on these statements that the answer is A-D.
The “second reason for doubting” seems counterintuitive… Are the authors stating that the issue of exhaustion arises from courts engaged in statutory interpretation or is the author stating it arises outside of statute interpretation because the statue says nothing about it? From where do the authors claim the exhaustion doctrine and its effect on delimiting patent rights come? The statute or outside of it?
If the Patent Act only confers the right to exclude others, and the exclusion doctrine is basically a doctrine delimiting in what circumstances that right of exclusion is not applicable (use, resale by buyer after original sale), then how can it be said the issue is outside the Patent Act if the issue defines application of the exclusion which is the subject of the Patent Act?
If stator interpretation is the answer, what portions of the act are being interpreted as giving rise to the exclusion doctrine assuming “doctrines” have causal origins ?
OK.
The article is perfectly clear on this issue. Statutory interpretation does not deal only with one statute but with multiple statutes (IP and commercial) and their respective domains, and thus a doctrine (like IP related exhaustion) can arise out of statutory interpretation, not literally from the particular statute at issue (e.g. the IP statute), but instead from “outside” of it.
A most excellent article.
Glad to see it presented on this blog.
nice to see academics showing an increased interest in the rule of law.
How long have been keeping track of their level of interest in “the rule of law”?
I’d love to see your data.
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