First-sale doctrine (patent)
Encyclopedia
Under the exhaustion doctrine, doctrine of exhaustion, or first sale doctrine, the first unrestricted sale of a patent
ed 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 right
s 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 import
s, 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.
, 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: 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.
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
ed item exhausts the patentee's control over that particular item. It generally is asserted as an affirmative defense
Affirmative defense
A defendant offers an affirmative defense when responding to a plaintiff's claim in common law jurisdictions, or, more familiarly, in criminal law. Essentially, the defendant affirms that the condition is occurring or has occurred but offers a defense that bars, or prevents, the plaintiff's claim. ...
to charges of patent infringement, but less commonly is asserted affirmatively in a declaratory judgment
Declaratory judgment
A declaratory judgment is a judgment of a court in a civil case which declares the rights, duties, or obligations of one or more parties in a dispute. A declaratory judgment is legally binding, but it does not order any action by a party. In this way, the declaratory judgment is like an action to...
action.
In other words, it is a concept in intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
whereby an intellectual property owner will lose or "exhaust" certain right
Right
Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people, according to some legal system, social convention, or ethical theory...
s after the first use of the subject matter which is the subject of intellectual property rights. For example, the ability of a trademark
Trademark
A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or...
owner to control further sales of a product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
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
Estoppel
Estoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...
or legal estoppel.
The concept typically arises in the context of parallel import
Parallel import
A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. Parallel imports are often referred to as grey product, and are implicated in issues of international trade, and intellectual property.The practice of parallel...
s, 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 CommissionJazz Photo Corp. v. United States International Trade Commission
Jazz Photo Corp. v. United States International Trade Commission, 264 F. 3d 1094 , was a case in which the United States Court of Appeals for the Federal Circuit clarified the law of repair and reconstruction , holding that it was...
, 59 USPQ 2d 1907 (Fed Cir August 21 2001), Fuji Photo Film asserted that the user of a single-use camera
Disposable camera
The disposable or single-use camera is a simple box camera sold with a roll of film installed, meant to be used once. Most use fixed-focus lenses. Some are equipped with an integrated flash unit, and there are even waterproof versions for underwater photography...
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
United States Court of Appeals for the Federal Circuit
-Vacancies and pending nominations:-List of former judges:-Chief judges:Notwithstanding the foregoing, when the court was initially created, Congress had to resolve which chief judge of the predecessor courts would become the first chief judge...
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
Bauer & Cie. v. O'Donnell
Bauer & Cie. v. O'Donnell, 229 U.S. 1 was a United States Supreme Court decision involving licensing terms on patented works.Bauer & Cie sold Sanatogen, a patented water soluble albuminoid, with this notice on each bag:...
, 229 U.S. 1 (1913), the Supreme Court of the United States
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
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.
Mallinckrodt, Inc. v. Medipart, Inc.
Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 , is a decision of the United States Court of Appeals for the Federal Circuit, in which the court appeared to overrule or drastically limit many years of U.S. Supreme Court precedent affirming the patent exhaustion doctrine, for example in Bauer &...
, 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.
Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc.
Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc. 421 F.3d 981 was a decision by the United States Court of Appeals for the Ninth Circuit which ruled that an End User License Agreement on a physical box can be binding on consumers who signal their acceptance of the...
, 421 F.3d 981 (9th Cir. 2005), the Ninth Circuit Court of Appeals
United States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit is a U.S. federal court with appellate jurisdiction over the district courts in the following districts:* District of Alaska* District of Arizona...
upheld a District Court
United States District Court for the Northern District of California
The United States District Court for the Northern District of California is the federal United States district court whose jurisdiction comprises following counties of California: Alameda, Contra Costa, Del Norte, Humboldt, Lake, Marin, Mendocino, Monterey, Napa, San Benito, San Francisco, San...
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
United States District Court for the Eastern District of Kentucky
The United States District Court for the Eastern District of Kentucky is the Federal district court whose jurisdiction comprises approximately the Eastern half of the state 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
Electronic Frontier Foundation
The Electronic Frontier Foundation is an international non-profit digital rights advocacy and legal organization based in the United States...
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: 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.
See also
- Competition policy
- CopyrightCopyrightCopyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
- Exhausted combination doctrineExhausted combination doctrineThe exhausted combination doctrine, also referred to as the doctrine of the Lincoln Engineering case, is the doctrine of U.S...
- First-sale doctrineFirst-sale doctrineThe first-sale doctrine is a limitation on copyright that was recognized by the Supreme Court of the United States in 1908 and subsequently codified in the Copyright Act of 1976,...
- a concept in U.S. copyright law - Patent infringementPatent infringementPatent infringement is the commission of a prohibited act with respect to a patented invention without permission from the patent holder. Permission may typically be granted in the form of a license. The definition of patent infringement may vary by jurisdiction, but it typically includes using or...
- Patent misusePatent misuseIn United States patent law, patent misuse is an affirmative defense used in patent litigation when a defendant has been accused to have infringed a patent. It has also been used to mitigate damages following a finding of infringement or justify a failure to pay contracted-for royalties...
- Quanta Computer, Inc. v. LG Electronics, Inc.Quanta Computer, Inc. v. LG Electronics, Inc.Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 is a decision of the U.S. Supreme Court in which the Court reaffirmed the validity of the patent exhaustion doctrine, and in doing so made uncertain the continuing precedential value of a line of decisions in the Federal Circuit that had...
External links
- Box-wrap patent infringement
- Quanta v. LG at scotuswiki.com.