THE END OF PATENT EXTRATERRITORIALITY? THE RECONCILIATION OF THE PATENT AND COPYRIGHT FIRST SALE DOCTRINE

Transcription

1 2015] 229 THE END OF PATENT EXTRATERRITORIALITY? THE RECONCILIATION OF THE PATENT AND COPYRIGHT FIRST SALE DOCTRINE Caitlin O Connell INTRODUCTION As an undergraduate, you are given the opportunity to study abroad for a semester in Singapore. You want to document your experience as you travel around Singapore, Thailand, and the Philippines, but you realize that you forgot to bring your camera with you. Luckily, you are able to find a camera at a local shop, which you buy and use throughout your trip. Upon your return to the United States, you decide to buy a more sophisticated camera and to sell the one you bought in Singapore. After advertising on Craigslist, you are able to sell the camera at market price and even make a profit! Imagine your surprise when you receive notice that you are being sued by the manufacturer of the camera (which happens to be a U.S.- patented product) for infringement of their patent. As the patent first sale doctrine stands today, any individual who brings a U.S.-patented product into the United States and sells it is subject to potential suit for infringement. The reason that you might find yourself in this predicament is because the patent first sale doctrine which exhausts certain patent rights after an initial authorized sale of a U.S.-patented product is currently limited to authorized first sales of products within the United States. 1 As a result, a U.S. patent holder is able to continue to exert his or her exclusive right to sell the product even after someone has validly purchased the product simply because the sale occurred outside the United States. In 2009, the United States District Court for the Northern District of California rendered a decision, which had the potential to dramatically change the way that U.S. patent owners market and sell their inventions abroad. The United States District Court for the Northern District of California heard an infringement action brought by LG Electronics against Hi- George Mason University School of Law, J.D. Candidate, May 2016; Notes Editor, GEORGE MASON LAW REVIEW, ; Virginia Tech, B.S. Biochemistry, summa cum laude, May I would like to thank my family, friends, and my fellow editors for their help and support throughout the process of writing this Comment. A special thanks to my mother for moonlighting as my editor. 1 See Fujifilm Corp. v. Benun, No. 05-cv-1863 (KSH), 2009 WL , at *3 (D.N.J. July 24, 2009), aff d, 605 F.3d 1366 (Fed. Cir. 2010).

2 230 GEO. MASON L. REV. [VOL. 23:1 tachi. 2 Relying on the Supreme Court s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 3 the court extended the first sale doctrine to foreign sales of patented goods. 4 In doing so, the court went against the precedent set by the Court of Appeals for the Federal Circuit in Fuji Photo Film Co. v. Jazz Photo Corp. 5 (Fuji Photo) and Jazz Photo Corp. v. International Trade Commission 6 (Jazz Photo), in which the first sale doctrine was held to be applicable only to initial domestic sales. 7 However, in Fujifilm Corp. v. Benun 8 the United States District Court for the District of New Jersey declined to interpret Quanta in this manner, instead holding that the territoriality requirement was not removed from the first sale doctrine and that only a domestic sale could exhaust patent rights. 9 The Court of Appeals for the Federal Circuit affirmed the Benun district court s interpretation of Quanta; however, the appellate court failed to consider the arguments advanced by the California district court in LG Electronics, Inc. v. Hitachi, Ltd., 10 which supported overturning the precedent set in Fuji Photo and Jazz Photo both established prior to the Quanta decision. 11 It has always been the position of the United States that intellectual property rights granted to authors and inventors do not extend beyond our country s borders. 12 Case law applying the first sale doctrine to copyrighted works further supports this policy. 13 However, the application of the first sale doctrine to patents does not support this stance. Instead, the case law has extended the reach of U.S. patents to regulate extraterritorial activity, which undermines foreign patent law. 14 The Supreme Court and the Court of Appeals for the Federal Circuit have consistently held that a foreign sale would not exhaust a patent owner s rights. 15 Now, the decision by the Unit- 2 LG Elecs., Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, 1038 (N.D. Cal. 2009) U.S. 617 (2008). 4 Hitachi, 655 F. Supp. 2d at F.3d 1368 (Fed. Cir. 2005) F.3d 1094 (Fed. Cir. 2001). 7 See Fuji Photo, 394 F.3d at 1376; Jazz Photo, 264 F.3d at No. 05-cv-1863 (KSH), 2009 WL (D.N.J. July 24, 2009), aff d, 605 F.3d 1366 (Fed. Cir. 2010). 9 See id. at * F. Supp. 2d 1036 (N.D. Cal. 2009). 11 See Fujifilm Corp. v. Benun, 605 F.3d 1366, 1371 (Fed. Cir. 2010). 12 Int l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355, 1360 (Fed. Cir. 2004) ( Further, it is well known that United States patent laws do not, and were not intended to, operate beyond the limits of the United States. (quoting Brown v. Duchesne, 60 U.S. (19 How.) 183, 195 (1856))). 13 See United Dictionary Co. v. G. & C. Merriam Co., 208 U.S. 260, 264 (1908). 14 See, e.g., Timothy R. Holbrook, Extraterritoriality in U.S. Patent Law, 49 WM. & MARY L. REV. 2119, (2008). 15 See 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) (citing Boesch v. Graff, 133 U.S. 697, 701, 703 (1890)).

3 2015] THE END OF PATENT EXTRATERRITORIALITY? 231 ed States District Court for the Northern District of California in Hitachi attempts to re-align the first sale doctrine for patents with the copyright law as well as the theory against regulation of extraterritorial activities under the U.S. patent laws. 16 This Comment examines the first sale doctrine and its relationship to the U.S. patent law system. It argues that the first sale doctrine should be codified and extended to cover foreign sales of patent goods in order to prevent the regulation of extraterritorial activity, reconcile the patent and copyright applications, and avoid the inconsistent results in the application of the current common law approach. Part I of this Comment briefly discusses the first sale doctrine and the theory against extraterritoriality of intellectual property rights. Part II discusses the evolution of the copyright first sale doctrine, which provides a useful point of comparison between the codified doctrine and the common law doctrine. Part III delves into the case law prior to the Supreme Court s decision in Quanta. Part III also examines the Quanta decision with particular emphasis on the Supreme Court s first sale doctrine analysis. Part IV examines two district court cases interpreting the first sale doctrine as it applies to foreign sales post-quanta, as well as the Fujifilm Corp. v. Benun decision where the Federal Circuit held that the first sale doctrine does not apply to foreign sales. Finally, Part V argues that Congress should codify the patent first sale doctrine and in doing so, should extend its application to foreign sales as the copyright first sale doctrine has been extended. I. BACKGROUND THE FIRST SALE DOCTRINE, AND EXTRATERRITORIALITY Article I, Section 8, Clause 8 of the Constitution authorizes Congress to establish the U.S. patent law system. 17 The patent system exists to promote the progress of science and technology by granting inventors the exclusive right to their claimed invention. 18 Title 35 of the U.S. Code codifies the laws governing the patent system. 19 The policy underlying the patent system is to reward inventors who choose to disclose their invention to the public by granting them exclusive rights to their invention for the duration of the patent term. 20 The patent system does not, however, give the owner the exclusive right to practice or use their invention, but rather it grants them a negative right. 21 The inventor has the right to exclude oth- 16 See LG Elecs., Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, (N.D. Cal. 2009). 17 U.S. CONST. art. I, 8, cl Id. 19 Patent Act of 1952, 35 U.S.C (2012). 20 See Van Products Co. v. Gen. Welding & Fabricating Co., 213 A.2d 769, 773 (Pa. 1965). 21 See id.

4 232 GEO. MASON L. REV. [VOL. 23:1 ers from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States. 22 A. The First Sale Doctrine The first sale doctrine, also known as the principle of exhaustion, is a limitation on the statutory rights granted to copyright and patent owners. The first sale doctrine sets forth the principle that a copyright or patent owner does not have the ability to exert their statutory rights beyond the first authorized sale. 23 As a result, the owner is unable to control the downstream sales of their product, which allows subsequent sellers to freely use or sell the product without fear of infringing the original copyright or patent. 24 The inability of copyright or patent owners to control the downstream distribution of their work qualifies the statutory-based, exclusive rights that the government has granted them The Copyright First Sale Doctrine Section 41 of the Copyright Act of 1909 first incorporated the copyright first sale doctrine. 26 After several amendments, the copyright first sale doctrine is now codified at title 17, section 109 of the U.S. Code. 27 Section 109 was intended to codify the common law approach to the copyright principle of exhaustion, which was first articulated in Bobbs-Merrill Co. v U.S.C. 154(a)(1). 23 Dennis Crouch, First-Sale Doctrine: Authorized Foreign Sales Exhaust US Copyrights [and US Patents], PATENTLYO (Mar. 19, 2013), 24 See id. 25 See Bobbs-Merrill Co. v. Strauss, 210 U.S. 339, (1908); Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1852). 26 Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1387 (2013) (citing Copyright Act of 1909, ch. 320, 41, 35 Stat. 1075, 1084). 27 The relevant text of the current statute is as follows: (a) Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. Notwithstanding the preceding sentence, copies or phonorecords of works subject to restored copyright under section 104A that are manufactured before the date of restoration of copyright or, with respect to reliance parties, before publication or service of notice under section 104A(e), may be sold or otherwise disposed of without the authorization of the owner of the restored copyright for purposes of direct or indirect commercial advantage only during the 12-month period beginning on-- (1) the date of the publication in the Federal Register of the notice of intent filed with the Copyright Office under section 104A(d)(2)(A), or (2) the date of the receipt of actual notice served under section 104A(d)(2)(B), whichever occurs first. 17 U.S.C. 109(a) (2012).

5 2015] THE END OF PATENT EXTRATERRITORIALITY? 233 Straus. 28 In Bobbs-Merrill, the Supreme Court held that the statutory rights granted by Congress entitle the owner to the sole rights of printing, reprinting, publishing... and vending their protected work. 29 However, the Court recognized that the copyright owner s sole right to vend has been exercised at the first sale, and the owner cannot control all future sales by the purchaser. 30 Eight decades later, in Red Baron-Franklin Park, Inc. v. Taito Corp. 31, the Court of Appeals for the Fourth Circuit concluded that section 109 of the Copyright Act of 1976 only exhausts the copyright owner s right to control the downstream distribution of the protected work. 32 By reaching this conclusion, the Court of Appeals recognized that the copyright owner still retained the right to prevent or restrict the reproduction, derivation, performance, and display of the copyrighted work The Patent First Sale Doctrine Unlike the copyright first sale doctrine, the patent first sale doctrine is not codified, but rather it is derived from the federal common law, and thus, case law provides the courts guidance in determining when a patent owner has exhausted their rights. 34 The principle underlying the patent first sale doctrine is the same as that underlying the copyright first sale doctrine. It was first recognized in Bauer & Cie v. O Donnell, 35 shortly after Bobbs- Merrill and the codification of the copyright first sale doctrine. 36 In Bauer & Cie, the Supreme Court concluded that Congress intended for the exclusive right to vend to be exhausted after it has been exercised during the first sale. 37 The Court held that once a patent owner has parted with a patented machine by passing title to a purchaser he has placed the article beyond the limits of the exclusive rights to their invention secured by the patent act. 38 In Motion Picture Patents Co. v. Universal Film Manufacturing. Co., 39 the Supreme Court further limited the patent owner s right to control their product by holding that the first sale doctrine prevents patent U.S. 339 (1908); see Ariel Katz, The First Sale Doctrine and the Economics of Post-Sale Restraints, 2014 BYU L. REV. 55, Bobbs-Merrill, 210 U.S. at 348 (quoting Act of July 8, 1870, ch. 230, 86, 16 Stat. 198, 212) (internal quotation marks omitted). 30 See id. at F.2d 275 (4th Cir. 1989). 32 Id. at Id. 34 See Crouch, supra note U.S. 1 (1913). 36 See id. at See id. at Id U.S. 502 (1917).

6 234 GEO. MASON L. REV. [VOL. 23:1 owners from placing post-sale restrictions on their patented products. 40 However, the Federal Circuit scaled back the limitation in Mallinckrodt, Inc. v. Medipart, Inc., 41 concluding that post-sale limitations were permissible so long as they did not venture beyond the patent grant by engaging in anticompetitive behavior. 42 B. Prohibition on the Extraterritorial Application of Patent and Copyright Protection The Constitution gives Congress the authority to grant authors and inventors an exclusive right to their works, which comes in the form of a copyright or patent. 43 However, from the beginning it was understood that the exclusive rights conferred to the owner were only applicable within the borders of the United States. 44 This meant that the U.S. patent laws did not have the power to regulate extraterritorial activity. 45 This point has been consistently reaffirmed throughout the years, and the understanding has not changed, even as the economic landscape has shifted towards a more globalized market. 46 In fact, Congress codified this understanding in 1952 with the enactment of title 35, section 271 of the U.S. Code, which today defines infringement as the unauthorized use or sale within the United States or importation into the United States of the patented invention. 47 Since the patent and copyright holders rights are applicable only within the United States, they have no recourse for infringement of their U.S. patent or copyright through activity conducted in other countries. 48 Congress constructed section 271 in a manner which denies damages for infringement based upon acts wholly committed in a foreign country. 49 Allowing a U.S. author or inventor to enforce their exclusive rights against a foreign infringer gives extraterritorial effect to the U.S. patent and copyright laws. If the authors or inventors want to retain their exclusive rights to their work outside of the 40 Id. at F.2d 700 (Fed. Cir. 1992). 42 Id. at U.S. CONST. art. I, 8, cl See Brown v. Duchesne, 60 U.S. (19 How.) 183, 195 (1856). 45 See Holbrook, supra note 14, at See Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 531 (1972); Int l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355, 1360 (Fed. Cir. 2004); Rotec Indus., Inc. v. Mitsubishi Corp., 215 F.3d 1246, 1251 (Fed. Cir. 2000). 47 Section 271(a) provides the relevant language: Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent. 35 U.S.C. 271(a) (2012). 48 See Brown, 60 U.S. (19 How.) at See Holbrook, supra note 14, at 2131.

7 2015] THE END OF PATENT EXTRATERRITORIALITY? 235 United States, then they must secure a patent or copyright in each country in which they wish to be protected. 50 II. THE EVOLUTION OF THE COPYRIGHT FIRST SALE DOCTRINE As mentioned earlier, the common law understanding of the first sale doctrine in copyright law was codified at title 17, section 109 of the U.S. Code. 51 The common law understanding is best set forth by the Supreme Court in Bobbs-Merrill Co. v. Straus. 52 Despite the codification of the copyright first sale doctrine, the court has had similar problems in determining its application to foreign sales because of the ambiguity within the statute. 53 The biggest issue the courts have faced is determining how to construe the phrase lawfully made under this title in section 109 and its relationship with section 106(3), which sets forth the exclusive distribution rights granted by the copyright, and section 602(a), which prohibits importation without the consent of the copyright owner. 54 Section 109(a) limits the exclusive distribution right of a copyright by allowing the purchaser of a copyrighted work to sell or dispose their purchased copy without the permission of the copyright holder. 55 Section 106 sets forth the exclusive rights granted to the copyright holder, which include the exclusive right to distribute. 56 Section 602(a) details what kinds of activities constitute infringing importations or exportations of copyrighted works See Deepsouth Packing, 406 U.S. at See supra Part I.A See 210 U.S. 339, 350 (1908); Katz, supra note 28, at See Alexander B. Pope, Note, A Second Look at First Sale: An International Look at U.S. Copyright Exhaustion, 19 J. INTELL. PROP. L. 201, 204 (2011) U.S.C. 109(a), 602 (2012); Pope, Note, supra note 53, at Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. 17 U.S.C. 109(a). 56 This section, entitled Exclusive rights in copyrighted works, lists the following: Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted works publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recording, to perform the copyrighted work publicly by means of a digital audio transmission. Id Section 602 seems to specifically prohibit importation without the copyright owner s consent: Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is

8 236 GEO. MASON L. REV. [VOL. 23:1 The lawfully made under this title issue was first addressed by the United States District Court for the Eastern District of Pennsylvania in Columbia Broadcasting System, Inc. v. Scorpio Music Distributors, Inc. 58 CBS had filed an infringement complaint alleging that Scorpio had unlawfully imported their copyrighted materials. 59 Scorpio relied upon a first sale defense, arguing that they had purchased the copyrighted works from International Traders only after a valid first sale by Vicor a CBS licensee to Rainbow Music. 60 Scorpio based their argument on section 109 of the Copyright Act, alleging that CBS s rights had been extinguished upon the copyrighted works initial sale, and that as a result they did not need to receive permission to import the materials. 61 The district court concluded that Congress did not intend to allow a third party purchaser to circumvent the [importation] statute... by simply buying the recordings indirectly. 62 The court held that the inclusion of the phrase lawfully made under this title was intended to grant[] first sale protection only to buyer[s] of copies which have been legally manufactured and sold within the United States. 63 As a result, Scorpio was not protected by the first sale doctrine and was held liable for infringing CBS s copyrighted works. 64 The appellate courts first addressed this statutory-interpretation issue in Sebastian International, Inc. v. Consumer Contacts (PTY) Ltd. 65 Sebastian brought suit against Consumer Contacts after Consumer Contacts shipped Sebastian s copyrighted products into the United States without Sebastian s permission. 66 The district court entered judgment in favor of Sebastian, concluding that the first sale doctrine does not prevent the copyright holder from controlling subsequent importations, only subsequent sales. 67 On appeal, the Court of Appeals for the Third Circuit determined that in order to harmonize the first sale doctrine with the importation clause of the Copyright Act, the first sale must extinguish[] any right later an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section Importation into the United States or exportation from the United States, without the authority of the owner of copyright under this title, of copies or phonorecords, the making of which either constituted an infringement of copyright, or which would have constituted an infringement of copyright if this title had been applicable, is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under sections 501 and 506. Id. 602(a)(1)-(2) F. Supp. 47 (E.D. Pa. 1983). 59 Id. at Id. 61 See id. at Id. at Id. 64 Scorpio, 569 F. Supp. at F.2d 1093 (3d Cir. 1988). 66 Id. at Id. at 1095.

9 2015] THE END OF PATENT EXTRATERRITORIALITY? 237 to control importation of those copies. 68 In adopting this understanding, the court concluded that section 602 cannot be read to create additional rights beyond the exclusive rights created by section The Supreme Court addressed the issue in Quality King Distributors, Inc. v. L anza Research International, Inc. 70 in order to address the split between the Third Circuit (Sebastian) and the Ninth Circuit (Quality King) in the interpretation of the first sale doctrine (section 109) and the importation clause (section 602). 71 L Anza brought suit against Quality King for importing their copyrighted products and selling them at discounted prices. 72 Quality King raised a first sale doctrine defense under section 109 of the Copyright Act; however, both the district court and the Ninth Circuit rejected their defense concluding that if the first sale doctrine provided a defense against importation, then the importation clause would be meaningless. 73 While the Court recognized the potential negative effects of parallel importation and sales on the gray market, it did not find that these concerns warranted altering its interpretation of the text of sections 109 and The Supreme Court reversed the decision of the lower courts, stating that section 602 recognizes importation as an infringement of the exclusive right granted in section 106, which is expressly limited by the first sale doctrine of section As a result, the Court concluded that section 602 is inapplicable to both domestic and foreign owners who choose to import and sell copyrighted products into the United States. 76 Several years later, the Court of Appeals for the Ninth Circuit addressed the issue once again in Omega S.A. v. Costco Wholesale Corp. 77 This time, the issue was the application of the first sale doctrine to copies of a U.S.-copyrighted product that had been manufactured abroad and subsequently imported and sold in the United States. 78 Costco asserted a first sale doctrine defense under section 109 to Omega s infringement claim under sections 106 and The court determined that in order to reconcile the three provisions, it must be true that infringement does not occur under 106(3) or 602(a) where the owner of a particular copy... lawfully made under this title imports and sells that copy without the authority of the cop- 68 Id. at 1097, Id. at U.S. 135 (1998). 71 See id. at 138, Id. at Id. at Id. at Id. at Quality King, 523 U.S. at F.3d 982 (9th Cir. 2008). 78 Id. at Id.

10 238 GEO. MASON L. REV. [VOL. 23:1 yright owner. 80 The court concluded that the Supreme Court s decision in Quality King did not change the court s previous understanding that lawfully made under this title in section 109 is limited to copies of U.S.- copyrighted works that are made domestically. 81 This decision rested on the principle that the application of section 109 to foreign made copies would impermissibly give the provision extraterritorial effect, since a U.S. statute can only apply to conduct occurring within... the territory of the United States. 82 As a result, infringers may not assert the first sale doctrine as a defense to infringement under sections 106 and The Supreme Court finally addressed the application of the first sale doctrine to copies of a copyrighted work lawfully made abroad in Kirtsaeng v. John Wiley & Sons, Inc. 84 Kirtsaeng had purchased English textbooks manufactured by one of Wiley s foreign subsidiaries for a significantly lower price in Thailand and then sold them in the United States. 85 Wiley brought a copyright infringement suit for Kirtsaeng s violation of sections 106 and 602 to which Kirtsaeng alleged a first sale doctrine defense since the books were lawfully made and acquired. 86 The district court and the Court of Appeals for the Second Circuit both held that Kirtsaeng could not assert this defense since lawfully made under [title 17] is limited to copies made in territories in which the Copyright Act is law, and thus, copies manufactured outside the U.S. are not lawfully made. 87 The Supreme Court reversed finding that the language... context, and the common-law history... favor a non-geographical interpretation of the first sale doctrine in section The Court determined that the lawfully made under this title should be understood to mean in accordance with the Copyright Act and that no geographical limitation should be read into the provision. 89 The result of this holding is the recognition of international exhaustion of copyright rights following a valid first sale, which is consistent with our prohibition against extraterritorial application of U.S. copyright laws Id. at 985 (quoting 17 U.S.C. 109(a) (2006)). 81 Id. at 987, Id. at (quoting RESTATEMENT (SECOND) OF FOREIGN RELATIONS LAW OF THE UNITED STATES 38 (AM. LAW INST. 1965)) (internal quotation marks omitted). 83 Omega, 541 F.3d at S. Ct. 1351, (2013). 85 Id. at Id. at Id. at (quoting John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210, 222 (2d Cir. 2011), rev d, 133 S. Ct (2013)). 88 Id. at Id. at Kirtsaeng, 133 S. Ct. at But see id. at 1376 (Ginsburg, J., dissenting) (implying that the majority s reading of section 109 does apply the Copyright Act extraterritorially).

11 2015] THE END OF PATENT EXTRATERRITORIALITY? 239 III. THE PATENT FIRST SALE DOCTRINE PRIOR TO THE SUPREME COURT S DECISION IN QUANTA COMPUTER, INC. V. LG ELECTRONICS, INC. AND THE QUANTA DECISION ITSELF In 2008, the Supreme Court decided Quanta Computer, Inc. v. LG Electronics, Inc., a patent infringement case that required the Supreme Court to once again address the issue of exhaustion. 91 While this case did not involve an international sale, it has raised the question of whether there is a territorial element to the principle of exhaustion in the patent context. 92 In order to understand how the decision in Quanta might have affected the international application of the first sale doctrine, it would be useful to first outline the state of the first sale doctrine prior to the Supreme Court decision. This Part will outline the understanding of the first sale doctrine prior to Quanta in the patent context. A. The Development of the Patent First Sale Doctrine Prior to Quanta The concept underlying the first sale doctrine was articulated nicely in Boesch v. Graff, 93 where the court stated that [w]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. It passes outside of it, and is no longer under the protection of the act of Congress. 94 While this seems like a relatively straightforward concept, there has been significant debate about its application, particularly in its application to foreign sales. 95 Three major cases laid the foundation for the state of the patent first sale doctrine prior to the Quanta decision: Mallinckrodt in 1992, Jazz Photo in 2001, and Fuji Photo in In Mallinckrodt, a patent owner brought suit against a purchaser for infringement in violation of a single use only notice. 97 The district court held that no restriction could be imposed under the patent law and, therefore, no remedy for violation of the notice could be given in an infringe U.S. 617, 638 (2008). 92 See Fujifilm Corp. v. Benun, No. 05-cv-1863 (KSH), 2009 WL , at *3 (D.N.J. July 24, 2009), aff d, 605 F.3d 1366 (Fed. Cir. 2010); LG Elecs., Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, (N.D. Cal. 2009) U.S. 697 (1890). 94 Id. at See, e.g., Christopher B. Conley, Comment, Parallel Imports: The Tired Debate of the Exhaustion of Intellectual Property Rights and Why the WTO Should Harmonize the Haphazard Laws of the International Community, 16 TUL. J. INT L & COMP. L. 189, 190 (2007). 96 Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368 (Fed. Cir. 2005); Jazz Photo Corp. v. Int l Trade Comm n, 264 F.3d 1094 (Fed. Cir. 2001); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). 97 Mallinckrodt, 976 F.2d at 701.

12 240 GEO. MASON L. REV. [VOL. 23:1 ment suit. 98 The Court of Appeals for the Federal Circuit reversed, holding that the district court erred in their ruling concerning the enforceability of the restriction, stating that so long as the restriction was a valid condition of the sale, then it could be enforced under the patent law. 99 The Federal Circuit based their conclusion on the fact that a patent grants the owner the right to exclude. 100 The right to exclude may be waived in whole or in part and the conditions of such waiver are subject to patent, contract, antitrust, and any other applicable law. 101 The right to exclude may be modified so long as no other law is violated in doing so. 102 Only the sale of a patented good without any conditions exhausts the patentee s interest in the good and permits the purchaser to use or resell the device as they please. 103 The next important Federal Circuit decision regarding the first sale doctrine was Jazz Photo, in which the court addressed the issue of patented products that had been purchased in the United States, but refurbished abroad. 104 In this case, Fuji Photo Film Company brought an infringement suit under section 337 of the Tariff Act for the importation of used lensfitted film packages ( LFFPs ), which had been refurbished overseas. 105 The International Trade Commission ( ITC ) determined that the respondents (which included Jazz Photo Corporation) had infringed Fuji Photo s patents and issued an exclusion order and a cease and desist order. 106 The Federal Circuit stated that when an individual purchases a patented product, the product is no longer within the protection of the patent laws and the purchaser has the right to use it, repair it, modify it, discard it, or resell it, however they wish. 107 The unrestricted sale of a patented article, by or with the authority of the patentee, exhausts the patentee s right to control further sale and use of that article by enforcing the patent under which it was first sold. 108 Thus, the Federal Circuit reversed the ITC s decision, holding that Fuji Photo s initial sale of the LFFPs, which occurred in the United States, exhausted its patent rights. 109 In Jazz Photo, the Federal Circuit declined to extend the principle of exhaustion to prior sales of the LFFPs that occurred outside of the United 98 Id. 99 Id. 100 Id. at Id. 102 Id. 103 Mallinckrodt, 976 F.2d at 707 (quoting Keeler v. Standard Folding Bed Co., 157 U.S. 659, 663 (1895)). 104 Jazz Photo Corp. v. Int l Trade Comm n, 264 F.3d 1094, 1101 (Fed. Cir. 2001). 105 Id. at Id. 107 Id. at Id. at Id. at

13 2015] THE END OF PATENT EXTRATERRITORIALITY? 241 States. 110 However, the court was forced to answer this question in Fuji Photo, a case also involving Jazz Photo Corporation. 111 In this case, the district court found that Jazz Photo infringed Fuji Photo s patents when they imported refurbished disposable cameras. 112 The district court, while interpreting the decision in Jazz Photo, held that only first sales in the United States could be relied upon when asserting a repair defense to an infringement claim. 113 On appeal, the Federal Circuit further clarified its interpretation of the exhaustion principle in Jazz Photo, stating that the exhaustion doctrine is limited to first sales occurring within the United States. 114 They based this conclusion on the principle that foreign sales can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect. 115 The Federal Circuit affirmed the District Court s ruling, concluding that the lower court s application of the exhaustion doctrine was correct. 116 B. The Quanta Decision and Its Relevance to Initial Foreign Sales The Supreme Court in Quanta once again addressed the issue of patent exhaustion, this time to determine its applicability to method patents. 117 Process (or method) patents are one of the four categories of patentable subject matter, with the other categories being machines, manufactures, and compositions of matter. 118 Method patents are directed towards a series of steps within a process, rather than the end product of a process. 119 After determining that the first sale doctrine is applicable to method patents, the Supreme Court went on to discuss the specific product and license agreement in dispute. 120 This discussion is what has reinvigorated the debate over the application of the first sale doctrine to an initial foreign sale of product protected by a U.S. patent. LG had licensed a patent portfolio to Intel with the limitation that the license did not extend to the use of any product in a manner which would allow a third party to combine that product with other components not covered by the patent. 121 Quanta purchased products from Intel that were covered by the LG patent portfolio and com- 110 Jazz Photo, 264 F.3d at Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). 112 Id. at Id. at Id. at Id. 116 Id. at Quanta Comput., Inc. v. LG Elecs., Inc., 553 U.S. 617, 628 (2008) U.S.C. 101 (2012). 119 Quanta, 553 U.S. at Id. at Id. at

14 242 GEO. MASON L. REV. [VOL. 23:1 bined them with non-intel products, despite Intel s written notice that the license did not cover such combinations. 122 LG filed a complaint against Quanta, asserting that the particular combination of Intel and non-intel parts, which Quanta had utilized in its computers, used methods taught by LG s patents and thus infringed those patents. 123 The district court granted summary judgment to Quanta on the basis that LG had forfeited its rights as to any subsequent legitimate purchaser of those products when LG licensed the patents to Intel. 124 The Court of Appeals for the Federal Circuit affirmed in part and reversed in part, concluding that because LG did not license Intel to sell the patented products to Quanta, the exhaustion doctrine did not apply. 125 The Supreme Court reversed the Federal Circuit, holding that the sale was authorized under LG s License Agreement, and that the authorized sale of an article that substantially embodies a patent exhausts the patent holder s rights and prevents the patent holder from invoking patent law to control post-sale use of the article. 126 Once an authorized sale has occurred, the patented product is outside the scope of the patent, and the patent holder cannot assert their exclusive rights against the purchaser. 127 IV. THE PATENT FIRST SALE DOCTRINE FOLLOWING QUANTA COMPUTER INC. V. LG ELECTRONICS, INC. Post-Quanta, there has been renewed debate about the applicability of the first sale doctrine to initial foreign sales. 128 Following the Quanta decision, there has been a split between at least two district courts interpreting the Quanta decision and its effect on the first sale doctrine s application to foreign sales. 129 One district court chose to extend the first sale doctrine to foreign sales, while the other declined to do so, instead choosing to retain the limited applicability to domestic sales. 130 This Part discusses the current state of the patent first sale doctrine in the patent context, focusing on exhaustion of patent rights following initial foreign sales. 122 Id. at Id. 124 Id. 125 Quanta, 553 U.S. at Id. at Id. at See John R. Schroeder, Should Foreign Sales Exhaust U.S. Patent Rights Post Quanta?, 55 ST. LOUIS U. L.J. 713, 724 (2011). 129 See id. 130 Compare Fujifilm Corp. v. Benun, No. 05-cv-1863 (KSH), 2009 WL , at *3 (D.N.J. July 24, 2009) (ruling first-sale doctrine applies only to domestic first sales), aff d, 605 F.3d 1366 (Fed. Cir. 2010), with LG Elecs., Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, 1047 (N.D. Cal. 2009) (ruling first-sale doctrine extends to foreign first sales).

15 2015] THE END OF PATENT EXTRATERRITORIALITY? 243 The United States District Court for the Northern District of California was the first court to interpret the Quanta decision as having overturned the Federal Circuit precedent set in Jazz Photo and Fuji Photo, which had limited the first sale doctrine to sales made in the United States. 131 In Hitachi, LG had filed an infringement suit against Hitachi for combining Intel parts subject to a license agreement with non-intel parts in a way taught by their patents. 132 The patents at issue in this case were the same patents that were at issue in Quanta, and LG was alleging infringement by the defendants in this case in the same way as the defendants in Quanta. 133 LG argued that the Supreme Court s holding in Quanta applies only to authorized first sales, which take place in the United States. 134 The court declined to accept LG s argument and held that the theory underlying the Supreme Court decision in Quanta does not support treating an authorized foreign sale differently than an authorized domestic sale. 135 With this in mind, the court held that any authorized sale of a product that substantially embodies a patent exhausts the patent holder s right to control post-sale use. 136 The court supported its conclusion despite the fact that the Supreme Court did not explicitly extend the exhaustion doctrine to foreign sales based on the fact that the Court was aware of foreign sales of the Intel parts, yet declined to limit its holding to sales in the United States. 137 In Fujifilm Corp. v. Benun, the United States District Court for the District of New Jersey chose to uphold the existing understanding of the first sale doctrine unlike the court in Hitachi. 138 In this case, the defendants asserted a permissible repair defense, under the doctrine of exhaustion, to Fujifilm s allegations of infringement. 139 The district court stated that in order to successfully raise permissible repair as an affirmative defense, [t]he party asserting the defense must show that the items in question have undergone a patent exhausting first sale in the United States. 140 The district court granted partial summary judgment on the issue of infringement in favor of Fujifilm. 141 The defendants later made several motions for judgment as a matter of law, including one based on the theory that there is no 131 See Hitachi, 655 F. Supp. 2d at Id. at Id. 134 Id. at Id. at Id. at Hitachi, 655 F. Supp. 2d at See Fujifilm Corp. v. Benun, No. 05-cv-1863 (KSH), 2009 WL , at *3 (D.N.J. July 24, 2009), aff d, 605 F.3d 1366 (Fed. Cir. 2010). 139 Fujifilm Corp. v. Benun, No. 05-cv-1863 (KSH), 2008 WL , at *7-9 (D.N.J. June 30, 2008). 140 Id. at *9 (citing Jazz Photo Corp. v. Int l Trade Comm n, 264 F.3d 1094, 1105 (Fed. Cir. 2001)). 141 Id. at *11.

16 244 GEO. MASON L. REV. [VOL. 23:1 longer a geographic limitation to the first sale doctrine. 142 The defendants based their renewed exhaustion argument on the interpretation of the Hitachi decision, in which the district court declined to follow the precedent set in Jazz Photo after the Supreme Court s decision in Quanta. 143 The Benun district court declined to follow the position adopted in Hitachi and instead held that [p]atent rights are only exhausted when the patentee (or a licensee) sells the patented article in the United States, deriving a benefit from their U.S. patent rights. 144 The Court reached this conclusion by noting that the Supreme Court did not explicitly address foreign sales in their Quanta decision and, therefore, decided that there was no compelling reason to not follow the Federal Circuit s decision in Jazz Photo. 145 Thus, the district court denied the defendant s motion for judgment as a matter of law for non-infringement, which relied on an intervening change in law of the patent exhaustion doctrine. 146 On appeal, the United States Court of Appeals for the Federal Circuit addressed the issue of whether the Quanta decision overturned their previous decisions regarding the applicability of the first sale doctrine. 147 The defendants argued that the Quanta decision has eliminated the territoriality requirement for patent exhaustion, which had first been announced by the Federal Circuit in Jazz Photo. 148 The Federal Circuit held that Quanta did not eliminate the territoriality requirement for patent exhaustion. 149 The court reached this conclusion relying on a footnote in Quanta which stated that a practicing use may be outside the country, while an infringing use must occur in the country where the patent is enforceable. 150 As it currently stands, the first sale doctrine retains its territoriality requirement and only applies to domestic first sales. V. CODIFYING THE FIRST SALE DOCTRINE FOR PATENTS AND EXTENDING ITS APPLICATION TO FOREIGN SALES Codifying the patent first sale doctrine will help to resolve the inconsistencies in the application of the doctrine that have persisted under the current common law regime. While the application of the first sale doctrine in the Copyright Act has had its own share of difficulties, Congress can use the language in section 109 as a starting point and amend the language to 142 Fujifilm Corp. v. Benun, 2009 WL , at *1, * Id. at * Id. 145 Id. 146 Id. 147 Fujifilm Corp. v. Benun, 605 F.3d 1366, 1370 (Fed. Cir. 2010). 148 Id. 149 Id. at Id. at (quoting Quanta Comput., Inc. v. LG Elecs., Inc., 553 U.S. 617, 632 n.6 (2008)).

17 2015] THE END OF PATENT EXTRATERRITORIALITY? 245 take into account the ambiguities that have been recognized and resolved by the courts. 151 By using the same language, courts can rely upon their section 109 jurisprudence when examining patent exhaustion issues, which should help reduce inconsistencies in the application of the doctrine by the lower courts. Unlike the Copyright Act, Congress should not codify the first sale doctrine as it currently stands. Instead, Congress should adopt the approach advocated by the United States District Court for the Northern District of California in Hitachi and extend the first sale doctrine to cover foreign sales. Doing so will reconcile the first sale doctrine in the copyright and patent contexts and remain faithful to the United States policy against regulation of extraterritorial activity under U.S. intellectual property laws. This change will also spur further innovation. A. Advantages to Expanding the First Sale Doctrine to Foreign Sales Having discussed the Federal Circuit s potential reasons for continuing to limit the application of the patent first sale doctrine to initial domestic sales, this Section argues that the Federal Circuit s current understanding of the first sale doctrine is not the best approach and is inconsistent with the traditional understanding of patent law protection and the Federal Circuit s application of the copyright first sale doctrine. 152 Since the Federal Circuit has been unwilling to overrule its approach initially set forth in Jazz Photo and Fuji Photo, Congress must step in and codify the first sale doctrine to extend the application to initial foreign sales. 153 This Section outlines the advantages to Congress codifying the patent first sale doctrine and expanding its application to initial foreign sales. Perhaps the biggest supporting factor for expanding the application of the patent first sale doctrine to foreign sales is the United States stance against the regulation of extraterritorial activity under our system of intellectual property laws. 154 Courts have consistently been confronted with this problem and have always stood strong in their conviction that the protection of a United States patent does not extend beyond our borders See supra Part II. 152 See Benun, 605 F.3d at See 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). 154 See John A. Rothchild, Exhausting Extraterritoriality, 51 SANTA CLARA L. REV. 1187, (2011). 155 Int l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355, 1360 (Fed. Cir. 2004) ( Further, it is well known that United States patent laws do not, and were not intended to, operate beyond the limits of the United States. (quoting Brown v. Duchesne, 60 U.S. (19 How.) 183, 195 (1856))).

18 246 GEO. MASON L. REV. [VOL. 23:1 While some have argued that applying the first sale doctrine to initial foreign sales would be an extraterritorial application of the patent laws, 156 the Court of Appeals for the Federal Circuit and the Supreme Court have already settled this issue in the copyright context. In Quality King, the Supreme Court recognized that an initial foreign sale of a U.S.-copyrighted work exhausted the copyright owner s exclusive right to vend. 157 In Omega, the Federal Circuit also recognized that an initial foreign sale exhausted the exclusive right to vend, although they limited the first sale doctrine to U.S.- manufactured works. 158 In Kirtsaeng, the Supreme Court went one step further and recognized that any authorized first sale of a work exhausts the rights of the U.S. copyright holder regardless of where the copyrighted work was sold and manufactured. 159 In each of the Supreme Court cases, the Court addressed the issue of the extraterritorial application of U.S. copyright laws, and in each one, it concluded that the only way to avoid extraterritorial application was to exhaust the exclusive rights upon an authorized first sale, regardless of whether the first sale is foreign or domestic. 160 Given that the copyright first sale doctrine and the patent first sale doctrine rest upon the same principle of single reward, it logically follows that the patent first sale doctrine should mirror the copyright first sale doctrine. 161 While the copyright first sale doctrine has been codified and the patent first sale doctrine currently only exists in the common law, the copyright first sale doctrine also has its roots in the common law. 162 As outlined earlier, the Court has had to tackle the issue of foreign manufacture and foreign sales in both contexts since the original common law doctrine did not anticipate these activities. 163 In Kirtsaeng, the Supreme Court held that the first sale doctrine is equally applicable to products that are manufactured abroad and sold abroad and to products that are manufactured domestically and sold abroad. 164 The Court determined that the history and purpose of the first sale doctrine supports a textual reading, which imposes no geographical limitation on the doctrine's application. 165 This same history and purpose underlie the patent first sale doctrine and therefore support 156 See Schroeder, supra note 128, at 725; see also Sarah R. Wasserman Rajec, Free Trade in Patented Goods: International Exhaustion for Patents, 29 BERKLEY TECH. L.J. 317, (2014). 157 See Quality King Distribs., Inc. v. L anza Research Int l, Inc., 523 U.S. 135, (1998). 158 See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 987 (9th Cir. 2008). 159 See Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1371 (2013). 160 See id.; Quality King, 523 U.S. at & n.9; see also id. at 145 n.14 ( [T]he owner of goods lawfully made under the Act is entitled to the protection of the first sale doctrine in an action in a United States court even if the first sale occurred abroad. Such protection does not require the extraterritorial application of the Act.... ). 161 See Rothchild, supra note 154, at See Bobbs-Merrill Co. v. Strauss, 210 U.S. 339, (1908); Katz, supra note 28, at See supra Parts II-III. 164 See Kirtsaeng, 133 S. Ct. at See id.