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he patent exhaustion doctrine1 generally holds that the authorized first sale2 of a patented good terminates the patent holder’s right to restrict the buyer’s subsequent use and sale of that good.3 Patent exhaustion is an affirmative defense to a claim for patent infringement.4 It is grounded under U.S. patent law in the public policy rationale referred to in this Article as the single reward principle. The premise of the single reward principle is simple and fair. A patent holder is entitled only to a single reward for the sale of a patented good, because a patent holder receives the reward intended as the utilitarian incentive to invent when selling the patented good.5
But despite this simple policy rationale and its more than 150-year history, U.S. courts so far have not articulated a complete framework for applying the patent exhaustion doctrine to foreign sales. The application of the doctrine to foreign sales is complicated, because patent law is territorial, existing generally under the national laws of each country. Since 2001, the Federal Circuit has ruled several times on patent exhaustion from foreign sales.6 The decisions are consistent with the territorial boundaries of patent law and hold that the patent exhaustion doctrine is territorially limited.7 The Federal Circuit’s decisions, however, rely on a limited rationale and as a result lack certainty when applied to new fact patterns. Most importantly, the Federal Circuit decisions do not address the effect of patent exhaustion in a foreign sale when the sale contractually authorizes the buyer to engage in conduct with respect to the invention within U.S. territory.8
This Article employs the legal principles underlying the Federal Circuit decisions to propose a simple but complete framework that the courts may use to apply patent exhaustion to foreign sales in future decisions. The proposed framework holds that the patent exhaustion doctrine does not apply to a foreign sale unless the U.S. patent holder has also contractually authorized importation into, use, or sale of the patented good in the U.S. Contractual authorization under the proposed framework means that the patent holder receives some form of consideration in exchange for the termination of the statutory right to exclude9 under a U.S. patent. The proposed framework thereby leaves the exhaustion doctrine free of fact-dependent inquiries regarding parallel foreign patent rights.
The proposed framework is based on two foundational principles of U.S. patent law: the nature of the patent grant solely as a right to exclude10 and the territorial scope of the patent grant as limited to U.S. territory.11 By closely adhering to these foundational principles, the framework produces predictable and consistent outcomes across a full spectrum of possible fact patterns involving the foreign sale of goods also patented in the U.S. As a result, the framework’s territorial limitation of the patent exhaustion doctrine ensures that the doctrine can be applied uniformly to all foreign sales with foreseeable results, thereby providing certainty to U.S. patent holders, licensees, and their foreign purchasers when structuring foreign sales potentially involving U.S. patent rights.
Part I of this Article reasserts the basic nature of the U.S. patent grant solely as a statutory right to exclude.12 It next reviews the territorial scope of the U.S. patent grant, finding that Congress must show clear intent for a provision of U.S. patent law to apply to conduct outside U.S. territory, and that international agreements have reinforced the limited territorial scope of U.S. patent law.13 Part II lays out the foundation for the proposed framework by first analyzing the theoretical underpinnings of the single reward principle.14 It then applies the limited territorial scope of the U.S. patent grant to the single reward principle to demonstrate why patent exhaustion must be limited territorially.15 Lastly, to present a complete framework, Part II examines the boundaries of the territorial limitation of patent exhaustion, concluding that patent exhaustion must also result from a foreign sale contractually authorizing conduct with regard to the invention within U.S. territory.16 Part III applies the proposed framework for patent exhaustion from foreign sales to common fact patterns to illustrate how the framework provides certainty to U.S. patent holders, licensees, and their foreign purchasers.17
* Jay A. Erstling is a Professor of Law at William Mitchell College of Law, St. Paul, MN, and Of Counsel at Patterson Thuente IP, Minneapolis, MN. He was the Director of the Office of the Patent Cooperation Treaty (PCT) and Director-Advisor on PCT Matters at the World Intellectual Property Organization (WIPO) from 2002 to 2007.
** Frederik W. Struve is an associate attorney with Hellmuth & Johnson, PLLC, Edina, MN, in the Information Technology & e-Commerce and Intellectual Property practice groups.
This Article uses the term “patent exhaustion” instead of “first sale” because, as this Article demonstrates, a first sale can occur in a foreign jurisdiction without termination of the statutory right to exclude held by the U.S. patent owner as to the good sold.↩
“Authorized” first sale as used in this Article means the transfer of all right and title to a patented good by a patentee, or a person or entity authorized by the patentee.↩
See Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008); United States v. Univis Lens Co., 316 U.S. 241, 250 (1942); see also 5 Donald S. Chisum, Chisum on Patents § 16.03[a] (Matthew Bender ed., 2014); 6 R. Carl Moy, Moy’s Walker On Patents § 19:1 (4th ed. 2012).↩
5 Chisum, supra note 3, § 16.03[a].↩
Univis, 316 U.S. at 251 (“Our decisions have uniformly recognized that the purpose of the patent law [to promote progress in the useful arts] is fulfilled with respect to any particular article when the patentee has received his reward for the use of his invention by the sale of the article, and that once that purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold.”).↩
See, e.g., Ninestar Tech. Co. v. Int’l Trade Comm’n, 667 F.3d 1373, 1378 (Fed. Cir. 2012); Fujifilm Corp. v. Benun, 605 F.3d 1366, 1371 (Fed. Cir. 2010); Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005); Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094, 1105 (Fed. Cir. 2001).↩
See Fuji Photo Film Co., 394 F.3d at 1376 (“The patentee’s authorization of an international first sale does not affect exhaustion of that patentee’s rights in the United States.”); Jazz Photo Corp., 264 F.3d at 1105 (“United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.”). The territoriality doctrine thus holds, in general, that transactions occurring outside U.S. jurisdictional territory are not subject to U.S. patent law. See Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454–55 (2007); Dowagiac Mfg. Co. v. Minnesota Moline Plow Co., 235 U.S. 641, 650–51 (1915) (holding that U.S. patent law does not apply to a foreign sale where “no part of the transaction occur[ed] within the United States”); 3 Moy, supra note 3, § 12:11 (“[A]ctivities outside the United States are outside the scope of the patent.”).↩
For example, where a U.S. patentee sells a good covered by a U.S. patent in Denmark but also contractually authorizes importation into and resale in the U.S.↩
35 U.S.C. § 154(a)(1) (2012).↩
See infra Part I.A.↩
See infra Part I.B.↩
See infra Part I.A.↩
See infra Part I.B.↩
See infra Part II.A.↩
See infra Part II.B.↩
See infra Part II.C.↩
See infra Part III.↩