In a Landmark Decision, U.S. Supreme Court Clarifies Scope of Patent Exhaustion Doctrine (2/2)

The first part of this post can be viewed here

International exhaustion:

The Court then delved into the question of whether the sale of a patented product abroad would also result in the exhaustion of the rights of a patentee over that product.
In answering that question in the affirmative, the Court principally relied on its landmark judgment in the case of Kirtsaeng versus John Wiley and Sons which was covered on this blog here.

In Kirtsaeng, the Court had held that the copyright exhaustion doctrine is geographically agnostic, so it applies on all fours to international sales. Noting that the Kirtsaeng decision was not based on the text of the statutory provision containing the copyright exhaustion doctrine but the common law’s antipathy toward restraints on alienation, the Court held that there is no reason why that conclusion would not apply with equal force in the realm of patent law. This conclusion, the Court opined, is further buttressed by the fact that copyright law and patent law share a historic kinship and similarity of purpose.

Finally, the Court rejected the middle-ground suggested by the American Government as per which foreign sales would result in exhaustion unless a patentee decides to expressly reserve its rights over the product in question.
Noting that exhaustion of rights is contingent only upon the completion of a valid sale, the Court opined that the intention of the patentee to expressly reserve any rights to itself has no bearing upon this conclusion.

Some thoughts:

In light of the fact that this decision is likely to have a profound impact on the manner in which transactions involving the sale of patented inventions are structured – as evidenced by the fact that 16 amici briefs were filed in Lexmark’s favour – it definitely repays close study. I would, in particular, like to flag three important talking points that clearly emerge from this judgment.

First, while the Court’s conclusion on the domestic exhaustion question appears to rest on a firm legal foundation, one immediate practical consequence of it is that it renders nugatory all post-sale restrictions and the concomitant benefits attached with them in contracts entailing the sale of patented products. Put differently, the decision robs parties of the freedom to enter into the kind of bargain that was at issue in this case: Where x is able to purchase a product at a discounted price from y in lieu of y imposing restrictions on x’s ability to use or commercialize the product in whatever manner x deems fit.

Second, as Greggory Dolin notes in this podcast, the decision is likely to result in the escalation of prices of a large array of patented inventions, most significantly pharmaceutical drugs, in developing and underdeveloped countries. More specifically, by virtue of the fact that the Court granted its imprimatur to the importation of patented products that are lawfully purchased in foreign countries in its verdict, patentees are unlikely to engage in geographical price discrimination which operated to the benefit of consumers in developing countries thus far. In order to ensure that a third party is not able to purchase a drug that is priced at a lower rate in a developing country as compared to its price in the US market and import and sell it in the US as a substitute for the drug available in the American market, pharma companies are likely to sell their drugs at a uniform price across borders.

To be sure, scholars such as Sarah Rajec have opined that this need not necessarily be the case, in light of some sui generis safeguards that different countries have put in place to ensure affordable access to essential medicines. In any case, it can be safely stated that the decision marks the death knell for geographical price discrimination in patented products.

Finally, I think the Court wrongly treats the international exhaustion question as an open-and-shut application of its holding in Kirtsaeng. As Justice Ginsburg notes in her short but powerful dissent, while copyright law and patent law may have a historical kinship, they are not identical twins.

Given that one of the foundational principles undergirding the patent law system is that its application is confined to the territorial boundaries of a nation, it is surprising that the court does not meaningfully answer the question as to how extraterritorial conduct can result in the exhaustion of a patentee’s rights.

In sum, it would be no exaggeration to state that this decision marks a watershed moment in the development of the patent exhaustion doctrine and, given that we only have one Indian decision that tangentially deals with this subject (covered here and analyzed by Prof. Basheer in greater detail here), it is likely to significantly influence the way in which Indian courts are likely to confront such a question, given our shared common law heritage.

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1 thought on “In a Landmark Decision, U.S. Supreme Court Clarifies Scope of Patent Exhaustion Doctrine (2/2)”

  1. How any manufacturer of patented products will price its products domestically and abroad is not as simple as portrayed.

    First the existing differential price testifies to the manufacturer’s belief that a higher domestic price coupled with a lower export price gives him the highest possible profit. Raising the price abroad will lower his profit.

    In the new situation he will need to additionally figure out what volume sold abroad will leak back to the domestic market, depressing the prices there and how much the prices in foreign markets will rise to reflect the effective lower volume supply.

    This is a complex dynamic situation .

    Additionally TRIPS has provisions, largely neglected today, that deal with no working of patents. Will more countries bring them into their laws if vital drugs are not supplied to them?

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