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AMERICAN BAR ASSOCIATION
SECTION OF INTELLECTUAL PROPERTY LAW
REPORT TO THE HOUSE OF DELEGATES
RESOLUTION
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RESOLVED, That the American Bar Association supports the traditional rule that the first
sale of patented goods (as opposed to a mere license) by United States patent owners or their
licensees (“Sellers”) triggers the defense of patent exhaustion with respect to an allegation of
patent infringement related to those goods;
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FURTHER RESOLVED, That the American Bar Association supports the traditional rule
that, to impose contractual post-sale restrictions during the first sale of patented goods, the
restrictions imposed by a Seller must: (1) relate to products reasonably within the scope of
the patent grant (i.e., be related to subject matter within the scope of patent claims) and;
(2) not have anticompetitive effects except those justifiable under the rule of reason;
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FURTHER RESOLVED, That the American Bar Association urges the courts to clarify that
authorized sales of patented goods by the Sellers in the United States exhaust United States
patent rights, and that a violation of contractual post-sale restrictions may not be remedied by
an action for patent infringement but instead may be remedied by an action for breach of
contract; and
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FURTHER RESOLVED, That the American Bar Association urges the courts to clarify that
authorized sales of patented goods by the Sellers outside of the United States do not exhaust
United States patent rights if, at the time of sale, the Sellers expressly reserve or exclude
United States patent rights by contract from such foreign sales, in which event remedies lie in
both an action for patent infringement and an action for breach of contract.
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REPORT
The Federal Circuit is currently considering en banc two questions relating to the “patent
exhaustion” doctrine in Lexmark International, Inc. v. Impression Products, Inc., Appeal No. 141617. This common-law doctrine1 permits a purchaser of patented goods the unrestricted right to
sell or use those goods, notwithstanding the original seller’s patent rights. The first sale
extinguishes the patent rights in those goods.
One question relates to whether a patent rights holder can impose restrictions or conditions at the
time of the first sale to limit patent exhaustion. The other question relates to whether patent
exhaustion applies to sales of patented goods abroad.2
This report asks the ABA House of Delegates to approve a policy supporting the traditional
principles of patent exhaustion. After an authorized sale of goods embodying the invention
covered by a United States patent, the patent holder’s ability to impose restrictions on the further
sale and use of those patented goods is limited. Such an authorized first sale under a United
States patent prevents later enforcement of the patent against resellers or users of those goods.
Contractual restrictions on resale or use (if the seller imposes any) may be enforced under
contract; but not patent law.
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Patent exhaustion, sometimes called the affirmative defense of first sale, refers to the
termination of a seller’s rights to control through U.S. patent law particular patented goods that
have been sold. After a seller’s first authorized sale, that seller has no further patent rights in
those goods themselves. Use, sale, or other disposal of those goods by the purchaser or anyone
else cannot infringe the seller’s U.S. patent rights. However, the seller retains the patent right to
exclude others from making new patented goods. Patent exhaustion only applies to the goods
actually sold.
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The Federal Circuit’s en banc order presents the following two questions:
(a) The case involves certain sales, made abroad, of articles patented in the United States. In light
of Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012), should this court overrule Jazz
Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), to the extent it
ruled that a sale of a patented item outside the United States never gives rise to United States
patent exhaustion.
(b) The case involves (i) sales of patented articles to end users under a restriction that they use
the articles once and then return them and (ii) sales of the same patented articles to resellers
under a restriction that resales take place under the single-use-and-return restriction. Do any of
those sales give rise to patent exhaustion? In light of Quanta Computer, Inc. v. LG Electronics,
Inc., 553 U.S. 617 (2008), should this court overrule Mallinckrodt, Inc. v. Medi-part, Inc., 976
F.2d 700 (Fed. Cir. 1992), to the extent it ruled that a sale of a patented article, when the sale is
made under a restriction that is otherwise lawful and within the scope of the patent grant, does
not give rise to patent exhaustion?
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However, exhaustion of United States patent rights may not be appropriate where the sale of
patented goods outside of the United States has little or no connection with the United States.
Consistent with the presumption against extraterritorial application of U.S. patents, sellers should
be permitted expressly to reserve or exclude U.S. patent rights from the foreign sale, and prevent
application of patent exhaustion where inappropriate.
These principles flow from the common law dating back at least to the nineteenth century and
are consistent with U.S. Supreme Court precedent as set forth below.
A. Post-Sale Use Restrictions
Common-law patent exhaustion flows from a deep-seated policy against restraints on alienation
of personal property. Dating back to the nineteenth century, courts in this country have
recognized the doctrine of patent exhaustion, whereby the initial authorized sale of a patented
item terminates all patent rights to that item. See, e.g., Adams v. Burke, 84 U.S. (17 Wall.) 453
(1874); see also Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008). In Bloomer
v. McQuewan, 55 U.S. (14 How.) 539, 549 (1853), the Court explained a patented good “is no
longer within the limits of the [patent] monopoly” after it has been sold. This principle has been
affirmed in many later Supreme Court decisions. See, e.g., Quanta Computer, Inc. v. LG
Electronics, Inc., 553 U.S. 617, 625 (2008) (“initial authorized sale of a patented item terminates
all patent rights to that item.”); United States v. Univis Lens Co., 316 U.S. 241, 251-52 (1942)
(sale of patented lenses exhausted patent rights and rendered post-sale price restrictions
unenforceable); and Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 50818 (1917) (post-sale restrictions that patented machine could only be used with certain motion
pictures are ineffective to prevent patent exhaustion).
However, the Federal Circuit’s decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700
(Fed. Cir. 1992) departs from that long history of patent exhaustion and improperly narrowed the
common-law doctrine of patent exhaustion. Mallinckrodt allows patent owners to contract
around patent exhaustion through post-sale use restrictions. In Mallinckrodt, the patent owner
had sold the patented goods, used in taking lung X-rays, for a single use only. The accused
infringer was charging to refurbish those goods after that initial use. The Federal Circuit
determined that a patent rights holder could impose contractual post-sale use restrictions if the
patented goods were first sold, so long as the restrictions were not in conflict with antitrust laws
(i.e., be reasonably within the scope of the patent grant and not have anticompetitive effect that is
not justifiable under the rule of reason). Id. at 708.
Rather than limiting relief to contract claims, Mallinckrodt went much further. It held that
violations of post-sale use restrictions “may be remedied by action for patent infringement.” Id.
at 709. That holding, however, is contrary to the long-standing Supreme Court precedent, which
prevents patent holders from enforcing such post-sale use restrictions under the patent laws. This
is because patent rights were exhausted by the first sale, and the only redress available to the
patent owner should be limited to contract law claims against the original purchaser. See
Bloomer, 55 U.S. at 549-50 (post-sale restrictions enforceable in contract law, but not patent
law); Quanta, 554 U.S. at 637 n.7 (same).
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Mallinckrodt’s rule allows parties to forestall patent exhaustion, and is incompatible with the
Supreme Court’s Quanta decision. In Quanta, LGE had licensed Intel to make and sell patented
components, but refused to grant a sub-license to Intel’s customers that would have authorized
them to combine its patented components with non-Intel parts. Quanta, 553 U.S. at 623. The
Supreme Court rejected LGE’s patent infringement claims against an Intel customer, concluding
that LGE had unconditionally authorized Intel’s sales to its customers with the effect of
exhausting LGE’s patent rights. Id. at 636-37.
Mallinckrodt’s holding that a patent owner can contractually avoid exhaustion of its patent rights
is also inconsistent with other Supreme Court decisions. For example, in Adams v. Burke, 84 US
(17 Wall.) 453 (1873), the patent owner attempted to divide the U.S. patent rights
geographically, by creating one territory within a ten-mile radius of Boston, and a second outside
of that region. After buying the patented goods within the Boston circle, the purchaser took them
outside of that geographical area and used them in the other territory. Id. at 455. When the patent
rights holder for the area outside of the Boston circle sued, the Court refused to find the
purchaser liable for patent infringement, holding that the authorized Boston sale had exhausted
all patent rights. Id. at 456.
Similarly, in Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940), the Court rejected an
attempt to rely on patents to enforce post-sale pricing restrictions, stating the initial authorized
sales of the patented fuel exhausted the underlying U.S. patent rights. Therefore, the fuel could
be resold without regard to the pricing restrictions. Id. at 457.
The key fact in Bloomer, Quanta, Adams, and Ethyl Gasoline was an authorized sale under the
U.S. patent. If an authorized sale is absent, however, the U.S. patent rights are not exhausted. In
General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, aff’d on reh’g, 305 U.S.
124 (1938), the patent owner restricted the ability of its manufacturing licensee to sell the
patented goods to those who would use them for commercial purposes. The Court held that
unauthorized sales by the manufacturing licensee did not exhaust the U.S. patent rights.
Similarly, the patent owner in Mitchell v. Hawley, 83 U.S. 544 (1872) granted a license to make
the patented invention for a limited term. Unauthorized sales (i.e., those outside that limited
term) did not exhaustion the U.S. patent rights.
Prohibiting patent rights holders from enforcing post-sale use restrictions through patent
infringement litigation against downstream purchasers would not mean post-sale use restrictions
could not be enforced. Patent rights holders can sue the original purchaser for enforcement of the
contract if the original terms of sale have been violated. The patent rights holder is in privity with
the other contracting party. They have negotiated the terms of the sale, and agreed to any postsale use restrictions. By contrast, a downstream purchaser may not be in privity with the patent
rights holder, did not negotiate the terms of the first sale, and may not have been aware of the
restrictions.
B. International Patent Exhaustion
Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), represents
another example of the Federal Circuit limiting the common law doctrine of patent exhaustion.
Jazz Photo has been interpreted as creating a distinction between domestic sales (to which patent
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exhaustion applies) and foreign sales (to which it does not). However, no Supreme Court
precedent requires or even supports such a geographical distinction. No federal statutes address
whether or when an authorized sale by a U.S. patent owner of a patented product outside of the
U.S. exhausts the patent owner’s control over that particular item. Congress has not addressed
whether first sales outside the U.S. should be treated differently than any other sales.
In deciding that the sales abroad did not exhaust the U.S. patent rights, the Jazz Photo panel
misapplied the only Supreme Court case to address a foreign sale’s effect on U.S. patent rights—
Boesch v. Graff, 133 U.S. 697 (1890). In Boesch, the Court held that patent exhaustion did not
apply to an overseas sale, because the seller of the products sold outside of the U.S. did not hold
the U.S. patent rights. The Court explained the seller could not convey U.S. patent rights he did
not have: “The right which Hecht (the seller) had to make and sell the burners in Germany was
allowed him under the laws of that country, and purchasers from him could not be thereby
authorized to sell the articles in the United States in defiance of the rights of patentees under a
United States patent.” Id. at 703. Boesch stands only for the proposition that a sale not authorized
by the U.S. patent holder does not exhaust U.S. patent rights. Boesch does not address the effect
of a U.S. patent holder’s authorized foreign sales.
The common law, prior to 1952 and prior to Jazz Photo, established that overseas sales
authorized by the patent holder could exhaust U.S. patent rights. For example, in Curtiss
Aeroplane & Motor Corp. v. United Aircraft Engineering Corp., 266 F. 71, 78-79 (2d Cir. 1920),
the Second Circuit held the sale of patented airplanes in Canada by the U.S. patent owner
exhausted U.S. patent rights. See also Dickerson v. Matheson, 57 F. 524, 527-28 (2d Cir. 1893)
(if U.S. and foreign patent owners were the same entity, a foreign sale would exhaust the patent,
but if they were different, importer required permission from the domestic rights holder);
Holiday v. Mattheson, 24 F. 185, 185-86 (C.C.S.D.N.Y. 1885) (after selling article without
restriction in England, patentee could not prevent purchaser from re-selling patented good in the
United States). That was the settled state of the law prior to the Federal Circuit’s 2001 Jazz
Photo decision.
The Supreme Court’s recent decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351
(2012) further supports the Resolution. Kirtsaeng addressed the same issue in the context of
copyrights. Kirtsaeng held that U.S. copyrights are extinguished by an authorized sale, regardless
of location. In reaching that result, the Court construed the Copyright Act’s first sale statute, 17
U.S.C. § 109(a). Because Section 109(a) contains no express geographic limitations, the Court
presumed Congress intended to retain the substance of the common law, which also lacked any
express geographic limitation. Id. at 1358–60, 1363–64. The Court cited writings by Lord Coke
in early 17th century England explaining the general policy embodied in the common law against
restraints on the alienation of personal property. Id. at 1363. In his discussion, Lord Coke was
not addressing copyright law in particular, and this rationale applies as equally to patent rights as
it does for copyrights or any other property rights.
Lexmark has argued that copyright law differs from patent law in ways that make Kirtsaeng
inapplicable. Specifically, in 1994 Congress gave patentees the exclusive right to bar importation
of patented goods brought into the U.S. See 35 U.S.C. §§ 154(a)(1), 271. This freestanding
statutory importation provision creates “geographical distinctions” in patent law that are absent
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from copyright law. But these importation provisions merely describe basic patent rights and the
judicially-created exhaustion doctrine applies to the importation rights, just as it applies to all of
the other statutory patent rights.
The importation provisions do not create a geographic limitation on patent exhaustion. To the
contrary, the legislative history underlying these 1994 amendments indicates that they “do[] not
affect U.S. law or practice relating to parallel importation.” Uruguay Round Agreements Act
Statement of Administrative Action, 1994 U.S.C.C.A.N. 4040, 4280. Therefore, these statutory
provisions are no obstacle to applying Lord Coke’s principles (as recognized in Kirtsaeng) in the
patent law.
However, the fact a foreign sale can exhaust U.S. patent rights does not mean it must do so.
Courts have traditionally permitted U.S. patent rights holders to reserve their U.S. patent rights
even when patented goods are sold abroad. For example, in Dickerson v. Matheson, 57 F. 524
(2d Cir. 1893), the seller held both the U.S. and foreign patent rights, but the overseas purchaser
accepted conditions of sale that specifically prohibited importation into the U.S. Because those
conditions excluded use in the U.S., the sale did not exhaust the U.S. patent rights. Id. at 527
(citing Boesch, 133 U.S. 697); see also Dickerson v. Tinling, 84 F. 192, 194 (8th Cir. 1897)
(purchase of patented item “in a foreign country … subject to the express condition that it should
not be imported into the United States, or sold within their limits” does not abridge “exclusive
right to sell the patented article within the United States”); Curtiss Aeroplane, 266 F. at 77
(distinguishing between foreign sales with and without reservations).
Forcing patent rights holders expressly to reserve their U.S. patent rights (if they choose to do so)
when selling abroad is good public policy. First, it puts the onus on patent holders to make clear
what patent rights are being transferred. These patent holders are in the best position to know
what rights they own and what restriction already exist on those rights. This also would allow
purchasers to bargain for those rights and to adjust the price accordingly. Second, it would
eliminate an implied restraint on the trade of patented articles. The reasons espoused by Lord
Coke for disfavoring such restraints centuries ago continue to apply today. Third, adopting this
rule will help to avoid satellite litigation regarding the sites of patent good sales, which could be
quite complex and costly.
For the above reasons, the Section of Intellectual Property Law believes its recommendation is
consistent with the law and represents sound public policy, and therefore urges its adoption by
the ABA House of Delegates.
Respectfully submitted,
Theodore H. Davis Jr., Chair
Section of Intellectual Property Law
February 2016
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GENERAL INFORMATION FORM
Submitting Entity:
Section of Intellectual Property Law
Submitted by:
Theodore H. Davis Jr., Section Chair
1.
Summary of Resolution
The Resolution expresses Association policy in support of the continued vitality of
traditional patent exhaustion. An authorized sale of patented goods under a United States
patent conveys to the purchaser all of the seller’s authority under that patent. Such a sale
exhausts the seller’s United States patent rights, and prevents later enforcement of the
patents against those goods. Contractual restrictions, if imposed at the time of the first
sale of the patent goods, may not be enforced under patent law.
The reach of patent exhaustion is not unlimited, however. Sales outside the United States
may have little or no connection with the United States. Therefore, an overseas seller of
patented goods should be permitted to expressly reserve or exclude the United States
patent rights from a foreign sale to prevent application of patent exhaustion.
2.
Approval by Submitting Entity
The Section Council approved the resolution on November 6, 2015.
3.
Has this or a similar resolution been submitted to the House of Delegates or Board of
Governors previously?
No.
4.
What existing Association policies are relevant to this Resolution and would they be
affected by its adoption?
None.
5.
What urgency exists which requires action at this meeting of the House?
The policy would provide authority for the ABA to express views should it file an amicus
brief in the Lexmark case that is under active consideration by the U.S. Court of Appeals
for the Federal Circuit and may soon come before the U.S. Supreme Court.
6.
Status of Legislation. (If applicable)
Not applicable.
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7.
Brief explanation regarding plans for implementation of the policy, if adopted by the
House of Delegates
The policy would support submission of an Amicus Brief on behalf of the ABA relating
to a petition for writ of certiorari or on the merits before the U.S. Supreme Court in the
currently pending en banc Federal Circuit case of Lexmark International, Inc. v.
Impression Products, Inc., Appeal No. 14-1617, or another judicial proceeding presenting
the same or similar issues regarding the scope of the exhaustion doctrine in patent
infringement cases.
8.
Cost to the Association (both direct and indirect costs)
Adoption of the recommendations would not result in additional direct or indirect costs to
the Association.
9.
Disclosure of Interest
There are no known conflicts of interest with regard to this recommendation.
10.
Referrals
This recommendation is being distributed to each of the Sections and Divisions and
Standing Committees of the Association.
11.
Contact Person (prior to meeting)
Susan Barbieri Montgomery
Section Delegate to the House of Delegates
Foley Hoag LLP
155 Seaport Blvd., Ste. 1600
Boston, MA 02210-2600
Ph: 617-832-1222
Fax: 617-832-7000
s.montgomery@neu.edu
12.
Contact Persons (who will present the report to the House)
Susan Barbieri Montgomery (See item 11 above).
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EXECUTIVE SUMMARY
1.
Summary of the Resolution
The Resolution expresses ABA policy in support of traditional, common-law patent
exhaustion. After an authorized sale under a United States patent, the patent holder’s
ability to impose restrictions on patented goods is limited. Such a sale prevents later
enforcement of the patent against those goods. Contractual restrictions (if imposed at the
time of the first sale) may be enforced under contract; not patent law. However, an
overseas sale of patented goods may have little or no connection with the United States.
Such sellers should be permitted to expressly reserve or exclude United States patent
rights from the foreign sale and to prevent application of patent exhaustion.
2.
Summary of the Issue that the Resolution Addresses
Lexmark International, Inc. v. Impression Products, Inc., Appeal No. 14-1617, is pending
before the U.S. Court of Appeals for the Federal Circuit (en banc). The questions under
consideration are:
1) The case involves certain sales, made abroad, of articles patented in the United States.
In light of Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2012), should this
court overrule Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094
(Fed. Cir. 2001), to the extent it ruled that a sale of a patented item outside the United
States never gives rise to United States patent exhaustion.
2) The case involves (i) sales of patented articles to end users under a restriction that
they use the articles once and then return them and (ii) sales of the same patented
articles to resellers under a restriction that resales take place under the single-use-andreturn restriction. Do any of those sales give rise to patent exhaustion? In light of
Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), should this court
overrule Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), to the
extent it ruled that a sale of a patented article, when the sale is made under a
restriction that is otherwise lawful and within the scope of the patent grant, does not
give rise to patent exhaustion?
3.
Please Explain How the Proposed Policy Position will Address the Issue
The Resolution supports traditional, common-law patent exhaustion. First, the Resolution
supports overturning Jazz Photo to the extent it has been interpreted as holding that an
overseas sale can never exhaust a U.S. patent. Instead, the Resolution urges that an
overseas seller of patented goods may avoid U.S. patent exhaustion by expressly
excluding U.S. patent rights from the foreign sale. Second, the Resolution supports
overturning Mallinckrodt. Patent holders are permitted to impose contractual restrictions
at the time of the first sale, but such restrictions cannot avoid patent exhaustion.
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4.
Summary of Minority Views
None known at this time.
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