Patent protection has become increasingly desirable for corporations operating both nationally and abroad, because they grant a limited monopoly for patent holders to exclusively use, make, and sell their patented product or process to consumers.[1] Holding patents internationally also incentivizes foreign direct investment, because patents increase a corporation’s value.[2] A large part of this value stems from large royalties that corporations receive when granting third parties licenses to use, make or sell their patented product.[3] While anti-trust issues limit unequal bargaining power in contracts, corporate patent holders generally have large rights to limit and define the scope of its licenses to derive maximum benefits.[4] For example, a licensee may have authority to sell the patented invention, but repairing the product may constitute infringement.[5]
Congress’s codification of the Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) into U.S. domestic law further expanded these patent rights by extending both their scope and extraterritorial application.[6] For instance, recovery for patent infringement expanded to include not only unauthorized “sales” of a patented product, but also “offers for sale,” which constitutes infringement before a sale is consummated.[7] TRIPS also expanded U.S. law to find infringement where component parts of a patented product are exported from the United States to a foreign country, and the patented product is subsequently made and sold abroad.[8] However, this seeming expansion of patent infringement has been severely limited by a recent Supreme Court case, which may ultimately deter foreign direct investment.[9] In Impression Products v. Lexmark,[10] Lexmark – the patent holder – sued a remanufacturer who acquired Lexmark’s used ink cartridges from purchasing consumers in the United States and abroad.[11] The remanufacturer would acquire Lexmark’s empty cartridges, refill them and re-sell them through importation into the U.S.[12] To prevent these acts, Lexmark, in selling its ink cartridges to consumers, “reserved their rights” by requiring that consumers either: (1) buy the cartridge at full price with no restrictions or (2) buy the cartridge at a discount and sign a contract to use the cartridge only once and refrain from transferring the cartridge to anyone else.[13]
In overturning years of Federal Circuit precedent, the Supreme Court found that Lexmark’s acts constituted a restraint on alienation and thus, its “reservation of rights” was invalid.[14] Here, the Court held that when a patentee sells one of its products – whether domestically or abroad – the patentee can no longer control any subsequent resale of its product because its patent rights have exhausted.[15] Accordingly, a patentee’s decision to sell a product exhausts all its patent rights in that item, regardless of any restriction that the patentee purports to impose on purchasers.[16]
This “exhaustion doctrine” now extends to a patent holder’s control over their licensees abroad.[17] Under Impression Products, all patent rights exhaust when a licensee sells a patented product to a third party, depriving patent holders of any cause of action for subsequent infringement.[18] This rule applies regardless of any restrictions that the patent holder imposes on the licensee. The only recourse is contract law.[19] The policy underlying this is that overseas buyers should be able to use the items and then resell the items freely.[20] However, U.S. patent holders’ rights are still protected when a manufacturer abroad independently produces and exports an identical infringing product into the United States. Thus, imports that infringe on a U.S. patent do not exhaust a patentee’s rights when the patentee had nothing to do with the transaction, and the exporting manufacturer will be liable for direct infringement under 25 U.S.C. § 271.[21]
The holding in Impression Products may have a negative impact on TRIPS enforcement and foreign direct investment. The purpose of TRIPS is to encourage foreign direct investment by strengthening intellectual property rights and allowing corporations to reap the monetary rewards of their innovations.[22] Corporations are incentivized to engage in foreign direct investment when their patents retain a substantial value in foreign countries.[23] If a corporation or its subsidiary company loses all its patent rights upon a sale abroad, the value of its patent rights will be severely limited. By itself, foreign direct investment poses grave costs in the forms of taxation, regulation, differing market values and differing market culture.[24] Thus, allowing corporate patent holders to retain a small monopoly for twenty years over the exclusive use of their patents both domestically and internationally increases the value of those patents and the value of the company. This encourages foreign direct investment and promotes the purposes of TRIPS. However, under the current Supreme Court decision, TRIPS will likely be undermined, because third parties who purchase these products from original purchasers can import and resell a corporation’s patented product in the United States and escape infringement liability. This, in turn, may create unfair competition and promote unfair business practices. Accordingly, narrowing the scope of this holding is crucial in order to avoid potential problems both domestically and internationally.
[1] 1-2 Milgrim on Licensing § 2.31 (2017).
[2] Kal Raustiala, Compliance & Effectiveness in International Regulatory Cooperation, 32 Case W. Res. J. Int’l L. 387, 393 (2000).
[3] Id.
[4] See Milgrim on Licensing, supra note 1.
[5] Id.
[6] See Raustiala, supra note 2.
[7] 35 U.S.C. 271 (a) (2012).
[8] 35 U.S.C. 271 (f) (1). TRIPS also redefined the application of extraterritoriality in U.S. patent law. Where previously, there is an interpretive presumption against applying domestic U.S. law internationally, the United States’ increasing involvement in international treaties has left this presumption weaker. Adam Haason, Domestic Implementation of International Obligations: The Quest for World Patent Law Harmonization, 25 B.C. Int’l & Comp. L. Rev. 373, 376 (2002).
[9] Impression Prods. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017).
[10] Before May 23, 2017, the Supreme Court has addressed international patent exhaustion in one case. Boesch v. Graff, 133 U.S. 697 (1890).
[11] Impression Prods., 137 S. Ct. at 1525.
[12] Id. at 1535.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 1536.
[18] Id.
[19] Id.
[20] Id.
[21] Id. at 1537.
[22] See Haason, supra note 5 at 377.
[23] See Rafael Leal-Arcas, The Multilateralization of International Investment Law, 35 N.C.J. Int’l L. & Com. Reg. 33, 43 (2009).
[24] Id. at 45.
