Exhaustion doctrine

This article is about the first-sale doctrine as applied to patents. For the analogous first-sale doctrine applicable to copyright, see First-sale doctrine.

Under the exhaustion doctrine, doctrine of exhaustion, or first sale doctrine, the first unrestricted sale of a patented item exhausts the patentee's control over that particular item. It generally is asserted as an affirmative defense to charges of patent infringement, but less commonly is asserted affirmatively in a declaratory judgment action.

In other words, it is a concept in intellectual property law whereby an intellectual property owner will lose or "exhaust" certain rights after the first use of the subject matter which is the subject of intellectual property rights. For example, the ability of a trademark owner to control further sales of a product bearing its mark are generally "exhausted" following the sale of that product.

The doctrine also may be referred to as the doctrine of "patent exhaustion." It is closely related to (and sometimes conflated with) the doctrine of implied license, and is often asserted in conjunction with claims of equitable estoppel or legal estoppel.

The concept typically arises in the context of parallel imports, and may therefore be relevant nationally, regionally or internationally, such that if a right becomes "exhausted" in one area or jurisdiction, an intellectual property owner may not be able to enforce its rights in another area or jurisdiction.

Different countries regulate the applicability of the doctrine of exhaustion in relation to different products in different ways.

United States: cases involving the first-sale doctrine

In Jazz Photo Corp. v. United States International Trade Commission, 59 USPQ 2d 1907 (Fed Cir August 21 2001), Fuji Photo Film asserted that the user of a single-use camera was not allowed to remove the film, process it, replace the battery, or package it in a new cardboard container, based on labelling on the camera warning the purchaser that the camera should not be opened. The ITC held that these steps amounted to reconstructing the camera and infringement of the patents. The decision was reversed by the Federal Circuit on the grounds that the labelling was not an enforceable restriction on the use of the camera, that "no licence limitations may be implied from the circumstances of sale" (59 USPQ 2d at 1917), and that the challenged activities merely repaired the camera and extended its useful life. However, in the same decision, the Federal Circuit confirmed that the U.S. follows what is called the "territorial exhaustion doctrine," which provides that a U.S. patent is only exhausted by a sale made in the United States. As the disposable cameras in question were sold and repackaged abroad, there was no exhaustion of the U.S. patent, and resale of the refurbished device in the United States amounted to infringement. The defendant was only allowed to obtain cameras originally sold in the U.S. to refurbish and resell in the U.S., because those original sales (having been made in the U.S.) effectively exhausted the patentee's rights under the U.S. patent.

In Bauer & Cie. v. O'Donnell, 229 U.S. 1 (1913), the Supreme Court of the United States ruled that patents could not be used to control resale prices. That remained settled law in in the U.S. Supreme Court for the next 90 or more years. In 2007, however, the Supreme Court ruled that minimum resale price maintenance requirements are not a per se violation of the U.S. antitrust law. Leegin Creative Leather Prods. v. PSKS, Inc. (June 28, 2007). Further, in 2006 the U.S. Supreme Court held that ownership of a patent does not necessarily confer "market power" on a patent owner, for purposes of an antitrust analysis. Illinois Tool Works Inc. v Independent Ink, Inc. (March 1, 2006) (addressing permissibility of tying restrictions). It may be argued, therefore, that the continued viability of Bauer is no longer clear. As yet, however, the Supreme Court has not spoken specifically to the question.

In Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), the Federal Circuit found that the doctrine of exhaustion was only a unilaterally disclaimable "implied license," despite more than a century of precedent to the contrary. The rule announced in Mallinckrodt, however, which spoke approvingly of what were called "conditional sales," was overruled by the U.S. Supreme Court (albeit without mentioning the Mallinckrodt decision directly) through its 2008 decision in Quanta Computer vs. LG Electronics (discussed below). Post-Quanta, it is unclear how, or even if, a patentee may avoid patent exhaustion through disclaimers or restrictions on use imposed on its licensees or downstream customers. See, e.g., TransCore, LP et al. vs. Electronic Transaction Consultants Corp., No. 2008-1430 (Fed. Cir. April 8, 2009) (holding that manufacturing under an unconditional covenant not to sue results in patent exhaustion, irrespective of whether the parties purposefully sought to limit the benefits to downstream customers).

In Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc., 421 F.3d 981 (9th Cir. 2005), the Ninth Circuit Court of Appeals upheld a District Court decision that found that the contract terms on the packaging of a printer cartridge are sufficiently clear to act as a "box-wrap" license, such that when the user opens the box he or she is accepting the terms and forming a contract. Because the printer cartridge is patented, Lexmark can impose post-sale conditions on purchasers such as prohibitions preventing refilling of the cartridge. On March 31, 2009, however, the Eastern District of Kentucky issued a decision in Static Control Components, Inc. vs. Lexmark International, Inc., holding that Lexmark's attempts to limit a customer's use of inkjet cartridges through use of a limited license (purporting to restrict the customer's ability to reuse or refurbish the cartridge) was barred by the U.S. Supreme Court's June 2008 decision in Quanta vs. LG Electronics (discussed below), which significantly limited a patentee's ability to avoid patent exhaustion through the use of "conditional sales" and limited licenses.

Oral arguments in Quanta v. LG Electronics were heard by the Supreme Court on January 16, 2008. LG Electronics licensed patents to Intel for use in microprocessors, with the condition that Intel notify buyers of those microprocessors that such buyers did not receive a patent license for the use of the Intel microprocessors together with non-Intel components. Intel notified Quanta of this limitation, but Quanta nonetheless proceeded to make and sell computer systems using Intel’s chips and other components obtained elsewhere. LG Electronics sued Quanta for violation of the patents, while Quanta argued that the first sale doctrine applies. The Electronic Frontier Foundation filed an amicus brief in the case, arguing that Mallinckrodt and later cases based on it have inappropriately expanded the scope of patents by judicial fiat, and that sellers should use contract law if they want to impose conditions on a sale: "EFF Supports Consumer Right To Repair, Resell Patented Goods". 2007-11-13. http://www.eff.org/press/archives/2007/11/13.  At the same time, a number of amici briefs were also filed by law professors, research organizations, and technology companies, explaining that a multi-level royalty program can actually reduce the costs of a patent license on individual companies, by apportioning the value of the patent amongst industry members based on the nature and value of their use. See, e.g., http://www.amberwave.com/pdf/Quanta.pdf. On June 9, 2008, the Supreme Court unanimously ruled in favor of Quanta.^[1]

See also

• Competition policy
• Copyright
• Exhausted combination doctrine
• First-sale doctrine - a concept in U.S. copyright law
• Patent infringement
• Patent misuse
• Quanta Computer, Inc. v. LG Electronics, Inc.

References

1. ^ "Supreme Court Victory for Patent First Sale Doctrine". http://www.eff.org/deeplinks/2008/06/supreme-court-victory-patent-first-sale-doctrine. 

External links

• Box-wrap patent infringement
• Quanta v. LG at scotuswiki.com.