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.