Guest post by Professor Sarah R. Wasserman Rajec*
In Impression Products, Inc. v. Lexmark Inc., decided Tuesday, the Supreme Court held that the authorized sale of a patented product, anywhere in the world, exhausts the patent-holder’s rights in that product. The Court overturned Federal Circuit case law holding that post-sale restrictions and foreign sales preserve a U.S. patent-holder’s right to sue for infringement. As a result, Impression Products was not liable for patent infringement when it bought used Lexmark toner cartridges abroad from lawful purchasers, refilled them, and then imported and sold them in the United States, nor did the post-sale restrictions Lexmark placed on its goods give rise to patent infringement liability. Jason Rantanen has written about the decision’s impact on post-sale use restrictions. I will focus on the ruling as regards international patent exhaustion.
The decision that an authorized sale anywhere in the world exhausts a patentee’s rights brings patent law doctrine in line with copyright law and the Court’s 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc.. In that case, the Court held that textbooks lawfully made and sold in Thailand could be imported and sold in the United States without infringing U.S. copyright. Kirtsaeng was not controlling because it involved statutory interpretation as opposed to the purely doctrinal nature of exhaustion in patent law, but many of the policy arguments for copyright apply in the patent context, and many goods are covered by both types of protection. The greater impact of an international patent exhaustion rule, as I have previously argued, is that it makes U.S. patent law more consistent with free trade principles and is likely to increase competition by lowering barriers to trade in patented goods. Companies will no longer be able to use patent rights (without further strategizing, see below) to engage in geographic price discrimination between U.S. and foreign markets, and supply-chain-participants, resellers, and consumers will not be subject to the information costs associated with determining the provenance and travels of all articles of commerce they purchase. These Court makes clear that the third party benefits that ease the flow of commerce were important in coming to its decision, colorfully explaining that:
More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation.
Even after looking up “remora,” the opinion leaves open some questions about international trade in patented goods. Some are legal and will likely spur further litigation (e.g., whose authorization is required for an “authorized sale abroad” to occur?) while others are empirical and still speculative (e.g., with geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales? And, what will the effect of this ruling be on access to medicine?).
First, the legal question: What is an authorized sale abroad?
Who needs to authorize the sale? Will companies be able to get around exhaustion by structuring businesses so that foreign sales are not authorized by the U.S. patent holder?
In its opinion, the Court stated that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose on the location of the sale.” And, more to the point, “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” However, an authorized sale is not the same as a lawful sale—it requires an entity capable of authorization in the United States, and requires that this entity grants authorization in the foreign market. The Court addressed the issue of what will count as an authorized sale in its discussion of Boesch v. Graff, an 1890 case in which the Court ruled that U.S. patent rights were not exhausted by lawful manufacture and sale in Germany. However, in that case, the manufacturer was entitled to make and sell the products under a prior user right in the German patent law which allowed those who were preparing to produce a patented article at the time the patent was filed to do so without authorization. Thus, the Court in Impression Products explained that Boesch merely illustrates “that a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction.”
However, there is a lot of room between Boesch, where the patentee had “nothing to do with” the manufacture and sales and Impression Products, where Lexmark had patent rights in multiple countries and authorized sales abroad. The question remains whether a company structured such that subsidiaries in different countries own the various patent rights will be subject to exhaustion of its U.S. patents for foreign sales made by a foreign subsidiary. The Court seems to imply not, explaining that “only the patentee can decide whether to make a sale that exhausts its patent rights in an item,” and later, “what matters is the patentee’s decision to make a sale.” Yet if it is really the case that only authorization by the U.S. patent-holder will result in exhaustion through foreign sales, the Court has left open a way for patent holders to opt out of international exhaustion. And while courts may interpret “authorized sale” more broadly, to include sales by related entities, the contours of any rule will take some time to be settled.
With geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales?
I have previously discussed the economic argument for price discrimination, explaining that
The standard economic argument against international exhaustion draws on the potential gains to patent holders and to consumers in low-income countries from geographic price discrimination. This argument describes the current rule as allowing patent holders to market goods worldwide, adjusting prices for countries with lower purchasing power while continuing to reap rewards in high-income countries. An international exhaustion regime, according to this view, will push patent holders either to restrict sales to high-income markets or to offer goods at a globally uniform price, to the detriment of consumers in low-income countries. However, geographical price discrimination is but one of many options for identifying and marketing to populations with differing abilities to pay; many goods, regardless of patent protection, are available in different versions at different prices worldwide. Geographic price discrimination is desirable to firms because of its effectiveness at preventing arbitrage and because enforcement costs are shared by states through customs enforcement. It may not be the most desirable form of price discrimination for consumers, however, because it is imprecise in identifying differing demand curves. This is particularly true for countries with large or growing income disparities. A shift to international exhaustion would likely result in changes in how firms market goods, but would not necessarily entail the wholesale welfare losses that the standard argument suggests, because that argument compares geographic price discrimination with no price discrimination at all.
In other words, the useful comparison is not between geographic price discrimination and no price discrimination, but between geographic price discrimination and the other methods that companies will increasingly turn to following this ruling. If instead of choosing not to sell abroad under the new rule, a company chooses to sell a costly and a cheaper version of a good, the availability of that cheaper version may be a boon to consumers inside the United States that otherwise could not afford the costly version.
Many have suggested that this ruling will lead to more licensing and fewer sales and I generally agree, where that is technologically possible and privity can be maintained. However, one thought I’ve had is that this move towards licensing goods when possible is not isolated to the patent context in any way. That is, licensing of goods may allow companies to price discriminate and control (or stop) downstream sales, and it generally runs counter to the law’s abhorrence for restraints on alienation, but it was on the rise before this case and would be just as desirable (to companies and some consumers) or undesirable (to other consumers and resellers) for goods not covered by patents as for those that are. So while I agree that we’ll see more action in this area as a result of the case, and that the dividing line between licenses and sales is incredibly important to our understanding of ownership and use of modern and emerging technologies, it is not an issue of patent law qua patent law.
What will the effect of this ruling be on access to medicine?
International patent exhaustion presents particular concerns for the advocates of global access to medicines and for the pharmaceutical industry. Because versioning or licensing do not easily apply to the sale of drugs, there is a concern that pharmaceutical companies will refuse to sell medicines at low prices in lower-income markets because of a fear of arbitrage. As a result, patients in lower-income countries would suffer without access to medicine and pharmaceutical companies may reap lower profits to invest back into research and development of new drugs. There are reasons, however, to think that the immediate effect on the pharmaceutical industry and patients worldwide will not and need not be so dire. There are also solid policy reasons to expand the regulatory means of curbing parallel imports in this industry.
Currently, the Food & Drug Administration must approve drugs before they are sold in the United States—both the chemical composition of the drug and its manufacture. The registration of drugs and approval of production processes mean that the FDA serves as a gatekeeper for all who wish to sell drugs in the U.S. market, and an expansion in this role to exclude drugs first sold in least developed countries would not exceed the scope of the agency’s current expertise. And while generally there are good reasons to apply patent law equally to different technology areas, the drug industry may be appropriate for special treatment because it is subject to price controls in so many countries. Thus, while a patent-holding pharmaceutical company may have a choice whether to sell its drug in foreign markets, they have less control over the price than in the United States, which does not have a single-payer system allowing for the strong bargaining power that many countries have. In addition, because the WTO agreement on Intellectual Property, the TRIPS Agreement, allows for countries to issue a compulsory license for patented goods in certain circumstances, drug companies may face foreign sales that they have not authorized. Under these circumstances, the free trade concerns that drive some of the arguments for international exhaustion simply do not apply in that industry. Combined with the highly-regulated nature of drug sales in the United States, this provides a strong argument for treating drugs differently in order to maintain access for foreign patient populations.
Concluding thoughts
Despite the Court’s suggestion that a rule of international exhaustion is consistent with prior doctrine, it is a change in the law as announced by the Federal Circuit and as understood by practitioners and academics. (The historical claim has been challenged for both copyrights and patents.) On the domestic side, we can expect to see even more attempts to structure transactions as licenses rather than sales, while on the international side, I expect that the question of patent-holder authorization will dominate in the near future.
= = = = =
* Assistant Professor of Law, William & Mary Marshall-Wythe School of Law.
Impression v. Lexmark: Patent Rights Exhausted by Sale, Domestic or Abroad
One thing that seems to often get overlooked in discussions of cases like this is that nearly half of all U.S. patent applications are filed by foreign entities.
Thanks Paul.
How do you think that such folds into the dialogue?
Does this not all the more focus the spotlight on the rather plain fact that exhaustion (far from being some type of ‘bumper sticker’ treatment) does NOT include a “where sold” aspect, and that it is an arbitrary attempt to insert an inconsistent “where sold” plank into the meaning of exhaustion that needs to be showcased?
How do you think that such folds into the dialogue?
Looks to me like Paul was starting a dialogue and not attempting to “fold into” any particular dialogue.
Does this not all the more focus the spotlight on the rather plain fact that exhaustion (far from being some type of ‘bumper sticker’ treatment) does NOT include a “where sold” aspect
The “plain fact” is actually just a Supreme Court holding. Ginsberg didn’t find anything “plain” about it.
Do you really want to talk about “plain facts”, “anon”? LOL
Of course you don’t.
In case you did not notice (and of course you did not), I added to Paul’s start with the cogent observation that the word “exhaustion” in the everyday or in the legal sense simply does not carry with it the notion of “where sold.”
But of course, you are in way too much of a hurry to try to say something smarmy in return.
Is that too a part of your “grown up”-ness?
And as far as your innuendo about “Do you really want to talk about “plain facts”, “anon”? LOL Of course you don’t.” – why would I not want to? Clearly, in our exchanges, it is you rather than I that have failed to talk plainly – that is, in an inte11ectually honest manner.
Your innuendo falls short of anything but (yet another) Malcolm #1 meme of Accuse Others Of That Which Malcolm Is/Does…
11 years of the same old same old….
“Do you really want to talk about “plain facts”, “anon”? LOL Of course you don’t.” – why would I not want to?
LOL
Remember, folks: this is the guy who denies that software is logic and who spent many consecutive years pretending not to understand how limiting a “new” ineligible method to a prior art context effectively takes that ineligible method out of the public domain.
But he’s a very serious person! Totally not just a simpering tr0ll with his own self interests mind. Nope. Not him.
LOL
“who denies that software is logic”
How is you project to copyright logic coming along?
“Remember folk”… indeed.
What a putz.
How is you project to copyright logic coming along?
There is no such project and nobody has any idea what your mewling about. See above re: “plain facts” and your inability to come to terms with them.
Of course there is no such project, because any such project would quickly show your dissembling.
See above re: that is, in an inte11ectually honest manner.
It is your inability to “come to terms with them” and your inability to recognize the simple fact that software is not logic.
Here is a recent post with plain facts that YOU need to come to terms with:
link to patentlyo.com
it is you rather than I that have failed to talk plainly
Keep digging, bro’.
…says the guy clutching the shovel….
Oh, so very Accuse Others Of That Which Malcolm Does of you….
I don’t overlook that Paul. I am trying to get others to think about the bigger picture and that we allow foreign inventors to file in the US only because we want to have them to let us obtain patents in their territories.
This regime certainly benefits the US to the extent that the US has strong R&D. But allowing foreign entities to patent in the US is a burden on the US economy, a price we pay for access to their markets protected by US generated IP.
I do not agree that allowing foreign entities to patent in the US is a burden. For the economy, there is little difference between a foreign entity that gets patents and commercializes patented products in the US and a US entity that does the same. So maybe there could be an issue with giving lost profits to a patentee that imports its product, but that’s about it.
….taxe$…
I guess I do not quite understand this response. If Congress were to decide that we are not collecting enough taxes from ex-U.S. patentees, why would they respond by preventing ex-U.S. entities from acquiring U.S. patents? Why would they not simply raise taxes on ex-U.S. patentees?
But, US companies cannot make the patented invention in the US costing us jobs.
Some benefit. Some do not. The US as a whole is poorer.
Ned,
I am not sure that I can agree with you that the negative right that is a patent should be so strongly correlated to the “jobs” angle.
Related?
Yes, perhaps.
As you seem to want to drive?
No.
I see the fingerprints of Efficient Infringement when I see the “jobs” angle, in part because I see the “must make” tied to the “jobs” and “must make” so often accompanies the Efficient Infringer obscurement of what a patent is and what the actual Quid Pro Quo is about.
Definitely not if the foreign entity makes the patented products in the US.
we allow foreign inventors to file in the US only because we want to have them to let us obtain patents in their territories
Is the ability to file patents in other countries the only benefit the US obtains from the granting of that permission? I don’t think so.
OK, MM, the why did our founding fathers limit patents to US citizens if they did not believe, on balance, that granting patents to inventors from abroad was not in the interests of the US?
Definitely not, but there are folks out there (and not just a few) who would sooner swallow hot coals than concede as much.
Not sure which folks you are referring to…
Ned perhaps?
As far as I can tell, he seems to be the only one bent out of shape on the issue.
ah – I see that perhaps Distant Perspective might be who you might be thinking of (as well)….
How much of that foreign jnk is logic “on a computer” grbage, I wonder.
MM, Whither manufacturing, R&D follows.
MM, did you know of Leonard Cohen? link to nytimes.com
link to youtube.com
You’d have to be pretty young, from the other side of the world, or amazingly culturally ignorant to not know who Leonard Cohen is.
I thought you know who he was. One of the greats.
Some potential brain interface invention companies are coming online fyi guys:
link to livescience.com
Let me know if my memory is wrong, but did not the Tokyo High Court more than ten years ago make this same decision re Japanese patents?
Correct.
Given the comparative stagnation of the Japanese economy relative to the U.S. economy, I am not sure that we really want to be copying their public policy choices too slavishly.
Or even making an unsubstantiated statement that implies that the stagnant Japanese economy is due to the decision under discussion?
Talk about slavish….
😉
I would also note that given the differences between: (1) the size of our economy and the size of the Japanese economy; and (2) the age-demographics of our two populations, it is unlikely that many of the benefits that accrue to Japan from their international exhaustion rule would accrue to us.
Greg,
Your logic suffers yet again.
First, at 15.2, you want to make up some direct causal relation where no such relation is in evidence, then at 15.2.2, you want to lock in other factors as if those other factors are determinative of any benefit that might slide through your first logic error.
It seems that there is no rock you will not overturn to hide under in your defense of a business model predicated on controlling a natural secondary market that employs an inconsistent view of exhaustion through the actions of double-dipping.
To clarify: the phrase “that employs an inconsistent view of exhaustion through the actions of double-dipping” is meant to describe “business model” – not “natural secondary market.”
Paul, I have the same recollection. As well, WIPO link to wipo.int links this article by Christopher Heath that discusses the case. link to wipo.int
Suppose that sales authorized by the patent holder outside the US did not exhaust patent rights.
Let Zootcomm be a telecommunications business in Zootland that also has a facility for manufacturing semiconductor chips there. Zootcomm is granted a U.S. patent on a technology embodied in its chips that is essential for mobile networks operating the 8G standard. Maybe the subject matter of the patent does not even satisfy patent eligibility requirements outside the U.S. Because sales outside the U.S. do not exhaust Zootcomm’s patent rights in the U.S., Zootcomm can can use its exclusive rights to prevent arbitrage, thereby ensuring that U.S. residents pay a much higher price for 8G-enabled mobile devices than consumers in the rest of the world. And it can seek to ensure that Zootcomm’s chips, manufactured in Zootland, displace chips produced by other manufacturers. Throughout the rest of the world, where Zootcomm does not have patents, the price of mobile devices is significantly lower.
Would the U.S. economy benefit? If so, how?
Zootcomm can can use its exclusive rights to prevent arbitrage, thereby ensuring that U.S. residents pay a much higher price for 8G-enabled mobile devices than consumers in the rest of the world.
Correct. It is in the nature of patents that a patentee may use the patent to charge higher prices that would be possible without the patent. That is the whole point. If you find this problematic, you really have a problem with patents, not with domestic exhaustion.
Would the U.S. economy benefit? If so, how?
Yes, U.S. the economy benefits from a domestic exhaustion rule. The reason why it benefits is because the ability to charge rents on the patented good incentivizes innovation, disclosure, and commercialization. The U.S. economy benefits from that increased innovation/disclosure/commercialization more than it loses by paying those rents.
“higher prices that would be possible…”
Er, sorry for the typo. “higher prices than would be possible…”
“It is in the nature of patents that a patentee may use the patent to charge higher prices than would be possible without the patent.”
Just to be more clear, please allow me to rephrase this statement:
“It is in the nature of U.S. patents that a U.S. patentee may use the patent to charge U.S. consumers higher prices than would be possible without the patent.”
That part is the part that you got right.
That’s the first dip.
But no one is arguing against that first dip.
It’s the second dip that people are arguing against.
that’s some nice half truths there (and an avoidance of the gist of the question).
You forgot to address the double-dipping aspect, though.
If Zootcomm’s “invention” is not a truly useful dislosure, then hardly anybody in the US other than those employed in Zootland’s distribution chain in the US benefits from Zootland’s patent grant.
So let us stipulate that Zootland’s invention is meritorious, deserving the protection typically afforded by patent laws worldwide.
So Zootcomm’s exploitation of its patents ensure a healthy, prosperous and technologically creative ecosystem in Silikifjord, Zootland, where Zootcomm manufacturing facility is based. U.S. consumers can buy expensive goods exported from Zootland by Zootcomm priced so as to extract from the U.S. market the maximum that the U.S. market will bear.
In practice, U.S. semiconductor businesses may have their own patents that they can assert against Zootcomm in Zootland and elsewhere in the world. This of course depends on the configuration of patent rights worldwide, that the U.S. can only influence through international treaty obligations and assertion of national interests. But Zootcomm is in the position to say that it can get enough return from sales outside the U.S. that the U.S. market, though valuable, is not critical to its business. Therefore it has no need to offer licenses on FRAND terms, or participate in any U.S. patent pool. It would argue that if Zootcomm cannot sell G8 mobile technology in the U.S. then nobody can do so.
Thus the stupendous innovation that hugely benefits the Zootland economy is not likely to raise boats in the U.S. to nearly the same extent.
The commercialization seems to me in this scenario to benefit Zootland far more than it benefits the U.S.
Coming to disclosure, the incentives of patent system’s have surely done their work if sufficient to induce disclosure that would otherwise occur. For this to happen, the is no logical necessity for understanding the bargain as giving the patentee, in return for the disclosure of useful ideas, the assistance of the courts and the executive in exploiting all consumers in all markets worldwide to obtain the maximum return that economies can bear. An alternative perspective: if one wants to establish a plantation of oak trees by planting acorns or young saplings, it may be necessary in the early years to clear away weeds to enable the young plants to establish themselves. But one only needs to weed to a sufficient extent to allow the saplings to survive to the point where they can flourish without labour on the part of the forester. Thus if an inventor has a useful idea (which we characterize as a principle, not in itself an invention), the inventor can obtain a patent monopoly on those modes of applying that principle to obtain results of the sort that the patent laws are designed to protect. The invention is then the genus consisting of those modes of applying the principle in a practical fashion that have been described and enabled. If the consequences of the patent monopoly provide sufficient incentives that the patentee is significantly better off by disclosing and either commercializing herself or licensing others to commercialize, then the patent system has achieved its objective with respect to the invention in question. It may be that the patentee can receive larger returns than are necessary to induce disclosure, but in such circumstances it may be considered as practicable or desirable to seek to regulate to limit rents extracted by the patentee.
Returning to Zootcomm. Presumably Zootcomm would aim to establish its business in the local market. It could accordingly take at a Zootland patent for its invention. This would require disclosure, and U.S. industries could take advantage of this disclosure, irrespective of whether Zootcomm is entitled to a U.S. patent.
Given the affluence of the U.S., Zootcomm also has an incentive to take out a U.S. patent to obtain a patent monopoly in the U.S. market, and accordingly would disclose within the U.S. patent system.
So, presuming international non-exhaustion, if Zootcomm can use U.S. patent laws to extract higher rents from U.S. consumers by preventing the establishment of a grey market in Zootcomm phones sold by Zootcomm, or with Zootcomm’s authorization, in Zootland, India, China or Brazil.
It seems to me that any indirect benefits to the U.S. in building the Zootland economy would not be sufficient to offset the higher rents that Zootcomm can extract from U.S. consumers through differential pricing.
This seems to suggest to me that international non-exhaustion might be a two-edged sword, and that, rather than relying on Article III courts in the U.S. to establish rulings that cannot credibly be tailored and adjusted, it would be more appropriate to Congress to legislate, if necessary and appropriate, probably empowering some agency to determine the detailed application of the regulations – with disputes perhaps referred to an Article I court.
It comes down to double dipping and the ability to control secondary markets.
The consistent application of exhaustion – in what the term itself means – simply has no room for any arbitrary domestic/foreign insertion of inconsistent application.
The only explanation that I have for a situation like that, is that the U.S. government grants patent rights and provides protection from the courts to Zootcomm in exchange for Zootland granting the equivalent patent rights and providing similar protection from the Zootland courts to U.S. entities. That was the calculation behind the TRIPS agreements. But I agree with you that the TRIPS agreements, which ensure equal treatment of domestic and foreign entities (where the good is produced is a more critical question), may in general disadvantage people living in countries having a trade deficit in parented products (high tech).
Treaties that require less developed countries to develop patent systems exist for the benefit of high tech countries, obviously.
Ned,
Countries are not high tech.
Entirely domestic companies within a country may be high tech.
Somewhat similar (but in important aspects, different), trans-national companies may be high tech.
But rest assured, trans-nationals owe NO allegiance to ANY single country.
There is a reason why juristic persons should be treated with a shorter leash than true citizens.
You assume, but do not prove, Distant, that the ability to patent Zoolander inventions in the US promotes invention in Zooland.
Thus the stupendous innovation that hugely benefits the Zootland economy is not likely to raise boats in the U.S. to nearly the same extent.
Whoa there. You are moving the goalposts now. First you ask about benefits to the U.S. Then, you shift to benefiting “to… the same extent.”
I have no idea whether the benefits of the Zoolander invention benefit the U.S. to the same extent that it benefits Zoolander. It is typically difficult bordering on impossible to gauge relative benefits from innovation.
In any event, the gains from trade need not be symmetrical to be gains on both sides. To insist that we do not want Zoolanders to partake of the incentives provided by our patent system would be to cut our noses to spite our faces.
Well, the longwinded Zootland narrative was prompted by the expectation that those in the U.S. patent community controlling or employed by U.S. firms would instinctively look at exhaustion from the perspective of where the interests and legitimate expectations of their firms would lie. Therefore make the point, at length, that U.S. patent holders might well be businesses based and manufacturing in China, India, Korea, Nigeria, Argentina, Finland etc. (Also bouncing off a position to the effect that, in return for disclosure of an invention, the inventor or her assignee is entitled to expect that the laws will be interpreted by the courts so as to maximize returns in all markets.)
So of course reciprocity makes sense: allow U.S.-based firms to patent in Europe and Australia, whilst allowing European firms and Australian firms to patent in the U.S. There is a symmetry.
But there is asymmetry when international non-exhaustion is brought into the picture. If the patented product commands a price of $160 euro in the U.S. and $100 euro in Zootland, then there is an incentive to import lawfully-sold patent-exhausted goods from Zootland to the U.S., but no corresponding incentive in the other direction.
==
So ultimately I arrive at the following propositions.
If patents were unavailable outside the U.S. then there might be a clear argument for the U.S. to apply a consistent policy of international non-exhaustion.
If patent rights were equivalent internationally, and market prices comparable, then international non-exhaustion, like domestic non-exhaustion, would be “double dipping”. It should be remembered that the patent exhaustion arose at a time when it was common for patent rights to be assigned to assignees for particular geographic regions of the U.S.
This would suggest to me that, were some degree of international non-exhaustion desirable on policy grounds, then it should be targeted towards particular products and countries, and a target remedy for incompatibility of patent rights.
But suppose that the competitive market price for the product would be $120 in the U.S. and $60 in Zootland, whereas, with exclusive patent rights, the product could sell for $160 in the U.S. and $100 in Zootland, then the patentee (or assignee) receives a premium of $40 from the authorized first sale, whether that first sale takes place in the U.S. or in Zootland, and thus the patentee has received the “liberal reward” that the patent laws are intended to provide. If tariff walls do not protect the producers of commodities or staples of commerce from legal grey markets, then I see no reason why patent rights derived from small incremental innovation should automatically provide the patentee with rights to shut down grey markets arising from disparities in living costs, social customs and expectations etc.
U.S. firms would instinctively look at exhaustion from the perspective of where the interests and legitimate expectations of their firms would lie.
Let us bracket the issue of what is a “U.S. firm” (the term is meaningless as far as I can tell). Even if we pretend that there exists a category called “U.S. firms,” none of them has one set of interests for all of time. Every firm has different interests at different times and in different places. It is not possible, therefore, to set U.S. patent policy according to the preferences of the (so-called) category of “U.S. firms.” The best one can do is to ask what policies will work best for U.S. consumers and hope for the best with regard to “U.S. firms.”
But suppose that the competitive market price for the product would be $120 in the U.S. and $60 in Zootland, whereas, with exclusive patent rights, the product could sell for $160 in the U.S. and $100 in Zootland, then the patentee (or assignee) receives a premium of $40 from the authorized first sale, whether that first sale takes place in the U.S. or in Zootland…
Huh? This hypo makes no sense unless we are positing ex hypothesi an domestic exhaustion regime. If we are imagining an international exhaustion regime, then it is not possible for the competitive market price to be $120 in the U.S. and $60 in Zootland. The competitive market price will be arbitraged to ~$60 in both regions.
I see no reason why patent rights derived from small incremental innovation should automatically provide the patentee with rights to shut down grey markets arising from disparities in living costs, social customs and expectations etc.
Where did “small, incremental innovation” come into this hypo? Exhaustion law applies the same to “groundbreaking” and “incremental” innovations alike. There is not one rule for “groundbreaking” innovation and another for “incremental” innovation, for the simple enough reason that
liberal arts majorsjudges are not at all well equipped to determine which is which.This website shows a cost-of-living index for European cities:
link to expatistan.com
Admittedly some of the variation may be due to house prices, rents etc. But I would still presume that teapots, dining chairs, oranges and the like were more expensive in Reykjavik, Iceland than in Timisoara, Romania.
I assume that prices are fixed by competitive pressures within economies such as the Iceland economy.
Maybe tariff walls are historically low, but I a am under the impression that they were significantly higher forty years ago. Maybe protectionism may make a comeback.
But when the wording of statutes changes little, courts in the common law tradition surely need to be subtle about any changes in the manner in which they interpret the statute. It seems to me that, on the domestic exhaustion front, the Roberts court has basically just reaffirmed, hook, line and sinker, the basic principles, doctrine and justification set out by Justices Day and Clarke in particular, the latter in Motion Picture Patents v. Universal Film (1917) in particular. And because the White Court a century ago presented the principles of exhaustion on the common law rejection of servitudes on chattels (“restraints on alienation”), arguing that the mere right to exclude others from vending did not give the vendor or her licensees to convey an encumbered title to a patented item.
But, having settled on a legal theory a century ago, which may well have accorded well with the development of antitrust law at the time, SCOTUS can hardly swap from one theory to another in tune to the rise and fall of tariff walls.
===
Regarding “small, incremental innovation”, what I had in mind was those economic doctrines, widely promoted, that argue that social welfare is promoted by allowing competitive markets to establish prices. Vital ingredients in such theories are the possibilities of competition and arbitrage.
A clean example is the Transportation Problem in linear programming. Given suppliers and consumers, with total supply equal to total demand, and given a matrix of costs for transporting a good from the suppliers to the consumers, one can apply a standard simplex method algorithm to determine how to transport the good from the suppliers to the consumers so as to minimize transport costs. There is a dual problem, which involves setting prices at which the suppliers sell and the consumers pay so as to maximize returns, subject to the constraint that the haulage firms will not transport goods at a loss. The cost-minimizing problem and the dual return-maximizing problem both yield the efficient solution. And then mainstream economists will argue that competitive markets will yield that efficient outcome.
And of course the theory of pricing options and derivatives is built on possibilities of arbitrage.
So economists in the tradition of Hayek, Friedman et al argue that competitive markets, arbitrage etc. is good for the economy.
But of course every manufacturer desires a legal monopoly because monopolies allow them to extract the maximum return. Therefore there will be those that argue that, in return for disclosure of their useful ideas, inventors have an entitlement to a monopoly on practical applications of the disclosure. And such monopolies are designed to eliminate competition and arbitrage.
Trying to cut a long story short, consider the exclusive rights (otherwise known for centuries as a “patent monopoly”) that patentees might regard as their entitlement, enable them to extract the maximum the market can bear. These types of rights, insofar as they eliminate competition and arbitrage, run directly counter to widely accepted economic doctrines regarding free markets.
Trying to cut the story short, where the “innovation” in a patented product makes a very modest, or indeed imperceptible, contribution to technology, “progress” and the “useful arts”, it seems difficult to see how economic welfare results from insulating the exploitation of that product almost completely from the action of market forces that, under widely accepted economic theories, are beneficial to economic development.
It seems to me that the committed free marketeer might argue that the incentives provided by the patent system just need to be strong enough to make it worthwhile on the part of the would-be patentee with a significant invention to disclose that invention in return for the grant of a patent, and that the parameters of the patent system (in terms of subject eligibility, standard of nonobviousness, standard of disclosure, exhaustion policy etc.) should be calibrated accordingly.
OK, long, poorly-worded and probably tedious to wade through. But it doesn’t always seem easy to spell out where one is coming from.
Distant, the degree to which a patented product will have a higher price depends upon demand for that product versus supply. If the improvement is marginal, there will be many alternative, but essentially equivalent, products. The market will take care of itself.
I would still presume that teapots, dining chairs, oranges and the like were more expensive in Reykjavik, Iceland than in Timisoara, Romania.
I am sure that there is local variation, and what that tells us is that there are barriers to entry in various of those markets—i.e., the prices we are seeing are not “competitive market prices” as we are discussing above.
[If] a patented product makes a very… imperceptible, contribution to… “progress”…, it seems difficult to see how economic welfare results from insulating the exploitation of that product almost completely from the action of market forces that, under widely accepted economic theories, are beneficial to economic development.
I think that you are overthinking this. First, as you have already noticed, the instances where the patent is simply improvidently granted (i.e., the claimed invention is not really patentable, and the examiner made a mistake) are kind of uninteresting to this discussion. Of course the country does not benefit from giving a patent on an unpatentable invention. Nobody disagrees on that point, so there is nothing interesting to discuss about that circumstance.
If, then, we confine the discussion to genuinely patentable inventions, there are two things to say about the “genuinely patentable” invention that makes only a “very modest, or indeed imperceptible” to the state of the art.
(1) I think you are trying to have your cake and eat it too, here. If the advancement over the art is truly “imperceptible” (as in, no one can identify an advance), then we are not talking about a patentable invention, we are talking about an unpatentable invention, and as noted above, of course a patent granted on an unpatentable invention is a drag on the economy of the jurisdiction that grants it. In other words, the “imperceptible” advance is a red herring. You are trying to talk about unpatentable inventions as somehow sitting within the category of patentable inventions, and this is just a bald contradiction that amounts to an empty set in terms of discussion fodder.
(2) So, turning to “very modest” advances, I have to wonder what this term means. To the extent that the advance is genuinely useful, novel, and nonobvious, but of only slight degree, there are really only two possibilities here. I believe that these possibilities might be made more clear with a concrete example.
Imagine that prior art shoe polishes fade and flake off as the temperature climbs above 30°C. I invent a shoe polish that can achieve the same degree of shine and waterproofing, but which is temperature stable up to 35°C.
One possibility is that the degree of advance is only so slight (only a 5 C° difference) that people will prefer to continue using the (presumably cheaper) prior art shoe polish until the patent expires. How is this a drain on the economy? Presumably the economy, under this scenario, makes all of the same progress that it would have made had I never invented my improved polish.
The other possibility is that—slight though the improvement might seem—people really prefer it. If so, then—as I said above—the improvement experienced by the economy is that people now have the option to use the improved shoe polish if they want. The good costs more, but the fact that people are willing to buy it proves that they like it more.
In other words, it is really hard to contrive an example of a situation in which granting the patent serves as a drag on the economy, except where you imagine that the patent is improvidently granted by an insufficiently attentive patent office for an invention that is not genuinely patentable under the law.
Distant, Exhaustion does not apply to distribution channels, but only when title passes. This is typically when the end user acquires the product. Until then, the patent owner may retain title.
There is never going to be a large market in grey market goods purchased from end users for resale in a higher price zone. There will be some, for sure, but it will not be enough to truly reduce prices.
The question remains:
Where exactly is this protection by prevention of a grey market coming from?
Can anyone share any patent law anywhere that contains such a protection?
Can anyone share any patent law anywhere that contains such a protection?
Er, I wonder if I am not understanding what you mean.
Until just last week, the U.S. law provided such protection.
To the best of anyone’s knowledge, Canadian & Australian law still do.
E.U. law provides for protection from gray market imports, except that they define gray market differently than we do (for them, a sale anywhere in the E.U. exhausts everywhere in the E.U., but a sale outside the E.U. does not exhaust local patent rights in E.U. member nations).
In other words, very few of our peer nations employ an international exhaustion scheme. Basically Japan and now the U.S. make up a very small club of international exhaustion nations.
“To the best of anyone’s knowledge, Canadian & Australian law still do. E.U. law provides for protection from gray market imports, ”
Ahhhhh – finally a glimmer.
Do you have any specific cites in mind for these sovereigns…?
Goodness, it has been a few years now since I took “international intellectual property law” in law school. It is, of course, perfectly reasonable of you to ask for cites, but I hope you will be patient on this point. It will take me a while to sort through my notes and trace my way back to the actual cases and statutes.
Not a problem Greg – I can be very patient when a substantive point is forthcoming!
Ok, here is what I have been able to track down in my notes:
In the U.K., the lead cases on exhaustion in the international context are Betts v. Willmott (1870–71) LR 6 Ch. App. 239 and Manufactures de Glaces S.A. v. Tilghman’s Patent (1884) LR 25 Ch. D. 1.
In Betts, the patentee owned both a U.K. and a French patent. He manufactured goods in France, and when a purchaser of one of these goods tried to bring it to London, the patentee sued for infringement of his U.K. patent. The Chancery court held that the unrestricted sale in France exhausted the U.K. patent rights. However, a few years later in Tilghman’s Patent, the Chancery court clarified that this applies only in the case of unrestricted sales. If the patentee makes clear that no license is given to import the good into the U.K., then the purchaser acquires no right to bring it into the U.K. Moreover, Badische Anilin und Soda Fabrik v. Isler [1906] 1 Ch. 605 (High Court) later explained that this restriction runs with the goods. That is to say, because the first purchaser acquires a good without a right to bring it into the U.K., the buyer who acquires the good from the first purchaser similarly takes subject to this restriction (even if the second purchaser is not made aware of the restriction).
In practice, this means that U.K. patent owners routinely include mention of the U.K. import restriction when selling outside of the U.K. In other words, international exhaustion is the default rule, but one can (and most do) draft around it.
Neither Canada nor Australia have had occasion to revisit this issue since the repatriation of their respective constitutions, but it is assumed that they each still honor the Betts and Tilghman’s holdings. Nat’l. Phonograph Co. of Australia v. Menck (1911) 12 C.L.R. 15.
However, the European Community Convention (Art. 30) does not permit a member state to use IP rights as a reason to prevent the free movement of goods within the E.U. Merck Sharp & Dohme v. Primecrown Ltd. [1996] E.C.R. I-06285. Therefore, there is no drafting around the exhaustion effect within the E.U. of articles sold in other E.U. member states. This, of course, applies to the U.K. and Ireland (common law countries in the E.U.), but not to other common law nations outside the E.U.
That’s awesome – many many thanks Greg.
Greg, prove that granting patents to Zoolander citizens inventing in Zooland promotes invention in the US.
Ned, you know (and I know you know) that it is impossible to prove that granting patents to anyone spurs any innovation. It makes sense that patents should spur innovation, but “proof” of this assertion is not to be had.
As for whether it spurs innovation here or elsewhere, this is a point on which I am indifferent. Many Americans benefited greatly from penicillin, even though the inventor was Scottish.
Put yourself in the shoes of an inventor. He cannot patent his invention in his homeland but can patent the invention in Afghanistan. Does the right to protect his invention in Afghanistan provide any incentive whatsoever?
Think about venture capitalists. Would they invest in developing an invention in any country without patent protection? I don’t think so. Whether one can protect the invention here or there abroad in almost entirely irrelevant.
On the other hand, global businesses routinely file in the many countries they do business for obvious reasons. But these businesses are not protecting innovation so much as established markets. They innovate not because of patent systems, but because of competition.
Arent’t you asking the wrong question when it comes to patents?
The question is whether the ability to profit from exclusive rights to US inventors promotes progress in the useful arts in America? Recall, from the very beginning of the US, we knew that granting Brits patents for inventions made in Britain would not advance invention in the US, it would retard such. That is why we did not allow any but US citizens to obtain US patents.
Because this is a Zootland company inventing in Zootland, we should give these rascals no quarter, should we?
Exhaustion.
Greg: Until a few days ago, a U.S. patent entitled one to (1) set prices across international markets to maximize revenue and (2) distribute goods at different prices in different channels of U.S. commerce. The SCotUS just plucked both of those sticks from the bundles of existing U.S. patentees, and yet no compensation was paid for the “taking” of these sticks.
To get technical for a second, those were never rights inherent to patents. The right was to exclude importation of foreign goods, even when those goods were authorized by the patent holder in the foreign country. You can leverage the right to effectively enforce price discrimination. But that was never the right itself.
It matters because there are other ways to achieve your goal. Other policies can support price discrimination in a way that is broader than just patents, and doesn’t muck up the chain of title for imported goods with potential patent liability.
If price discrimination is what you really want, there are better ways to go about it. Patent law is a blunt instrument not especially well adapted to that purpose.
To get technical for a second, those were never rights inherent to patents. The right was to exclude importation of foreign goods, even when those goods were authorized by the patent holder in the foreign country. You can leverage the right to effectively enforce price discrimination. But that was never the right itself.
This is a fine and worthy point. Precision in use of language is a good thing. Nothing you say here really detracts from the point I was making in the quoted text, but I thank you for troubling to correct the sloppiness of my writing.
If price discrimination is what you really want, there are better ways to go about it. Patent law is a blunt instrument not especially well adapted to that purpose.
If you care to expand on this, I would be interested to read what you have to say. Off the top of my head, I disagree completely. You have not really made the argument for this thesis, however, so I cannot meaningfully assess whether you are in possession of an insight that I presently lack.