In its 2017 ruling in Impression Products v. Lexmark that “restrictions and location are irrelevant” and “what matters is the patentee’s decision to make a sale,” the US Supreme Court endorsed an international view of patent exhaustion in line with China, the United Arab Emirates and others. The EU is on the other side of that line, and a recent decision by the Unified Patent Court suggests it intends to stay there. Whether a post-Brexit UK will join them remains to be seen.
The doctrine of patent exhaustion holds that the right to exclude others from practicing a patent is extinguished once the owner places the patent on the market.Where that market begins — and where it ends — is where the US diverges from some of its closest allies.
In the seven years since the US Supreme Court rendered its landmark decision in Impression Products v. Lexmark that “patent exhaustion is uniform and automatic” and applies with equal force to foreign sales, multinational corporations have had to rethink their pricing strategies here and abroad.
The decision authored by Chief Justice John G. Roberts, in effect, eliminated the ability of patent owners to police the resale in the US of parallel imports lawfully sold for less overseas. In a partial dissent, Justice Ruth Bader Ginsburg rejected the majority’s reliance on copyright’s first sale doctrine in reaching their conclusion.
Countries that are signatories to the Berne Convention have already agreed to harmonize on various copyright protection-related issues but no such harmonization exists for patents, she reasoned — to no avail.
“Differentiating between the patent exhaustion and copyright first sale doctrines would ... make little theoretical or practical sense,” the majority held.
— Clear advantage —
Article 69(1) of the Patent Law of the People’s Republic of China exempts from infringement liability the use, sale, offer to sell or importation of a product “after the sale of a patented product or a product obtained directly by a patented process by the patentee or any entity or individual authorized by the patentee.”
Canada, India, the United Arab Emirates and Australia also adhere to international patent exhaustion principles, while Singapore endorses international exhaustion with a carveout for pharmaceuticals.
For more than a quarter century, the prevailing view in the EU has remained one of regional exhaustion.
In Silhouette v Hartlauer, the European Court of Justice in 1998 confirmed that patentees in EU member states exhaust their rights only for sales in the European Economic Area, or EEA. That leaves patentees free to sue for downstream infringement outside the EEA — a clear advantage for EU patent owners, especially in the pharmaceutical and publishing sectors.
The introduction of the Unified Patent Court and unitary patent system in 2023 provided the EU with a chance to rethink that protectionist stance but in the end, they opted to maintain the regional exhaustion status quo.
Article 29 of the Agreement on a Unified Patent Court states: “the rights conferred by a European patent shall not extend to acts concerning a product covered by that patent after that product has been placed on the market in the European Union by, or with the consent of, the patent proprietor, unless there are legitimate grounds for the patent proprietor to oppose further commercialization of the product.”
— Movement, competition —
The UPC Agreement does make allowances for exhaustion when the rights holder makes sales in EU countries who have not ratified the UPC Agreement, but outside the EEA the message is clear: the right to exclude is not exhausted once products are placed on the market outside Europe.
“At the heart of the EU's regional exhaustion is the aim of balancing the interests of IP owners by giving them control over how and when their products come into the EU, while ensuring free movement and competition of products once they do,” Annsley Merelle Ward, partner at WilmerHale in London, told MLex.
Brexit presented the UK with its best chance to flex its newfound independence in the intellectual property arena, and leaders appeared to recognize as much at the time.
In 2021, the UK Intellectual Property Office called for stakeholder views on “the UK’s future regime for the exhaustion of intellectual property rights which will underpin the UK’s system of parallel trade.”
In a January 2022 update, however, it said so little data was received in response “it has not been possible to make a decision based on the criteria originally intended.” According to Ward, several years earlier, the UKIPO was warned by leaders in IP-intensive industries that “international exhaustion would lead to the inability to properly control safety and consumer standards, increase border checks and increase pricing pressure which would chill investment in domestic industry.”
The 2022 statement by the UKIPO maintains the government “remains committed to exploring the opportunities which might come from a change to the regime” and that “further development of the policy framework needs to happen before reconsidering the evidence and making a decision on the future exhaustion of IP rights regime.”
“Whatever happens next will be an interesting lesson in whether, when given the chance afresh, a country will choose protectionism over free or at least free-er trade,” Ward observes.
“So far, in the UK, it seems to be trending to that of its closest trading partner,” she adds.
— Unnecessary to resolve —
The UPC recently had occasion to revisit Article 29 in a patent infringement action by Hewlett Packard Development Corp. LAMA France, in addition to asserting invalidity of HP’s patents, mounted a competition law defense “to obtain a reversal of the burden of proof in its favor relating to the existence of exhaustion of the patentee's rights,” the UPC’s Paris Division explained.
Specifically, LAMA France said that because HP makes it impossible for third parties to identify the geographical origin, or first sale, of its ink cartridges HP abuses its dominant position in the market.
The UPC did not bite, holding instead (see here) that although it had jurisdiction to consider a competition defense, “the question is not necessary to the resolution of the present dispute.”
Fatal to LAMA’s case was a failure to offer a “serious delimitation of the relevant market,” and scant evidentiary support for its claim of HP’s market dominance.
LAMA submitted news articles which suggest 38.8% of the global market for printers is locked up by HP and that HP is involved in consumer law disputes, but that was not enough.
Thus, the court said it need not weigh in on the question of whether HP exhausted its rights in European Patent Nos. 2,089,230 and 1,737,669.
The UPC’s next opportunity to address the issue may rest with a decision expected tomorrow, in Huawei v. Netgear.
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