The Role of Territoriality in Patent Exhaustion

Patent exhaustion is one of the most fundamental restrictions on patent rights.[i]  Under this doctrine, an authorized sale of a patented article moves it outside the scope of the U.S. patent monopoly.[ii]  With respect to the vended article, the patent right is extinguished and the patentee can no longer sue for infringement.

One question that remains unsettled, however, is the role of territoriality.  That is, where must the authorized sale take place?  For well over a century courts have struggled to answer whether extraterritorial sales qualify for purposes of patent exhaustion.[iii]

While the question was briefly settled in 2001 when the Federal Circuit adopted a national exhaustion standard—requiring that the authorized sale occur in the United States—little support exists for this territoriality requirement.[iv]  The lack of Supreme Court precedent has bred uncertainty and challenges.[v]

But guidance should soon be forthcoming.  The Supreme Court recently heard oral arguments in Kirtsaeng v. John Wiley & Sons concerning the related doctrine of international copyright exhaustion.  The decision in that case likely will have a significant influence on patent exhaustion.[vi]  Moreover, the issue of international patent exhaustion is squarely raised in a petition for certiorari in Ninestar Technology Co. Ltd. v. International Trade Commission.[vii]  Thus, with the Supreme Court poised to address the territoriality requirement, this article examines various Supreme Court patent exhaustion opinions and attempts to discern a possible Supreme Court standard.

Imperfect Precedent: Territorial Limitation Cases

While precedent is scarce, in the nineteenth century the Supreme Court decided a number of domestic exhaustion cases involving sales by assignees or licensees with limited geographic rights.  These territorial limitation cases provide useful, albeit imperfect, precedent for analyzing the role of territoriality.  One of the most influential exhaustion cases, Adams v. Burke, decided in 1873, illustrates the applicability of these cases to the current question.[viii]

In Adams, a patentee had assigned its rights for patented coffin lids to a first assignee in a limited geographic area around Boston and a second assignee outside that limited area. An undertaker purchased the patented lids from the first assignee in the assigned territory, but then transported the lids to the territory of the second assignee and used them in his business. The second assignee sued the undertaker arguing that the undertaker’s use in its territory constituted infringement.

The Supreme Court disagreed.  In siding with the undertaker, the Court held that once a party sells the patented article, it is no longer within the patent’s monopoly regardless of the territorial limitation placed on an assignee or licensee.[ix]  The Court gave primacy to a purchaser’s right to possess the article unencumbered from the patent monopoly.

The Supreme Court continued to apply this holding in subsequent territorial limitation cases in the 1890s.  For instance, in Hobbie v. Jennison, the patentee sued a territorial licensee for selling goods to a purchaser where the licensee knew the purchaser would use the goods outside of its territory.[x]  The patentee’s theory was that the licensee infringed the patent by knowingly selling goods to parties for use outside of its territorial license.  The patentee attempted to distinguish Adams by noting that Adams dealt not with the right to sell, but with a purchaser’s right to use the vended article.

The Supreme Court rejected this argument.  The Court agreed with the lower court that Adams held that “the sale of a patented article by an assignee within his territory carries the right to use it everywhere, notwithstanding the knowledge of both parties that a use outside of the territory is intended.”[xi]  Relying on Adams, the Supreme Court noted that the sale occurred within the licensee’s territory, and thus did not constitute infringement even if the licensee knew the article would be used outside its authorized territory.[xii]

The Supreme Court further extended the exhaustion doctrine in Keeler v. Standard Folding Bed in 1895.[xiii]  In Keeler, a party purchased patented articles from an authorized dealer in Michigan, and then resold those articles in Massachusetts, where a rival dealer had the exclusive right to sell under the patent.  Until this point, the law was unclear as to whether only the right to restrict the use of the vended article was exhausted by a sale.  Keeler clarified this point.  In Keeler, the Court concluded that “one who buys a patented article of manufacture from one authorized to sell them becomes possessed of an absolute property in such articles, unrestricted in time or place.”[xiv]  Thus, Keeler made clear that the authorized sale exhausts all rights with respect to the vended article, including the rights to use and sell the article.[xv]

Yet the Supreme Court noted “[t]he conclusion reached does not deprive a patentee of his just rights, because no article can be unfettered from the claim of his monopoly without paying its tribute.”[xvi]  Thus the Court treated the payment of the monopoly royalty as the prerequisite for exhaustion, while finding unqualified ownership is merely incidental to the sale.[xvii]  The Court stated that “[t]he inconvenience and annoyance to the public that an opposite conclusion would occasion are too obvious to require illustration.”[xviii]

The Reach of Boesch

While the above-cases are informative, Boesch v. Graff, decided in 1890, is often cited as the most relevant case regarding international exhaustion.[xix] But that is misleading.  In Boesch, the Supreme Court did not address international patent exhaustion.[xx]  Rather, it dealt with the question of whether a foreign sale by a party with prior user rights in that foreign country, and no patent rights, exhausted the U.S. patent right.[xxi]  Unremarkably, the answer is no.[xxii]

In Boesch, a single patentee owned patents in Germany and the United States covering lamp burners.  A party in the United States purchased lamp burners from a seller in Germany.  The seller in Germany, however, did not own or even have a license under either patent.  Instead, it possessed prior user rights, enabling it to sell the lamps in Germany without authorization from the patentee.  The Supreme Court held that the seller, because its rights were limited to Germany, could not authorize sales in the United States in defiance of the U.S. patent.[xxiii]

While Boesch is not strictly an exhaustion case, a tension still exists between that opinion and the domestic territorial limitation cases.  Adams and its progeny hold that a territorial assignee’s authorized sale exhausted rights beyond the boundaries of the authorized territory.  But Boesch arguably provides an exception to that rule.[xxiv]  At least on the international stage, Boesch holds that a sale, which is authorized in a specific territory, may not result in extraterritorial exhaustion.[xxv]

Nevertheless, one can harmonize the Supreme Court’s precedent.  While the domestic territorial limitation cases state that an authorized sale exhausts the patent rights even beyond the territory of the assignee, Boesch merely adds a qualifier.[xxvi]  That is, Boesch requires, by negative implication, that the authorization for the sale derive from the U.S. patentee, and not from an unrelated, foreign source.[xxvii]

The Supreme Court’s framing of the issue in Boesch supports this interpretation: “whether a dealer residing in the United States can purchase in another country articles patented there, from a person authorized to sell them, and import them to and sell them in the United States, without the license or consent of the owners of the United States patent.”[xxviii]  As framed, the dispositive issue is the lack of any license or consent of the U.S. patent owner.

This interpretation is further bolstered by the way in which Boesch was distinguished in Keeler.  There, the Supreme Court noted that, in Boesch, “neither the patentee or any assignee had ever received any royalty or given any license to use the patented article in any part of the United States.”[xxix]  Thus, Boesch can be seen to modify the holding of Adams to read: An authorized sale of an article by a party deriving authority from the U.S. patent owner exhausts all rights to the vended article under the U.S. patent.[xxx]

Conclusion: Qualified International Exhaustion

Therefore, despite the lack of clarity, a potential standard can be discerned. While Boesch and the Adams line of cases do not support unqualified international exhaustion, where any sale at any place would free the vended article from all U.S. patent rights, under a reasonable interpretation these cases suggest a qualified international exhaustion standard.  Under this standard, an authorized sale of an article that substantially embodies a U.S. patent by the U.S. patent holder or a party deriving authority from the U.S. patent holder exhausts the rights under that patent regardless of the locus of the sale.

Admittedly, the Supreme Court has never articulated this qualified international exhaustion standard, much less adopted it in any holding.  Instead, this doctrine relies on a global extension of domestic territorial limitation cases and dicta.  Thus, while this article proposes a possible standard, unfortunately, we will need to wait and see.  But it should not be long.