Patent Exhaustion: Outcomes are hard to predict.

The Supreme Court emphasizes the importance of preserving the sanctity of stare decisis to guide judicial decisions. See Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401 (2015). Yet, cases in the area of patent exhaustion appear to lose sight of this responsibility. It appears that the Supreme Court and the Federal Circuit have particular outcomes in mind and will modify, ignore, manufacture, or access unexpected precedent as needed to support the desired outcomes. While this leaves patentees without clear guidance as to when patent rights work and when they do not, perhaps a silver lining can be drawn from such judicial creativity as will be proposed at the end of this section 3. More specifically, are the judicial manipulations of precedent evidence not of mischief but rather of justice and fairness?

 ​1. Supreme Court uses unexpected precedent.

The U.S. Supreme Court most recently expanded the exhaustion doctrine where one of the two major issues addressed included evaluating the international scope of the exhaustion doctrine. In Impression Products, Inc. v. Lexmark Intl., Inc., 137 S. Ct. 1523 (2017), the Supreme Court addressed whether patentee sales outside the United States exhaust U.S. patent rights. If international sales trigger exhaustion, then a third party could purchase used products abroad, refurbish them abroad, and then import them into the United States at deeply discounted pricing without risk of infringing the applicable U.S. patent rights.

At the time the Federal Circuit had two cases directly on point. Jazz Photo Corp. v. International Trade Commission, 264 F. 3d 1094 (2001) was cited in the Impression decision. Ninestar Technology Co. v. ITC, 667 F.3d 1373, 101 USPQ2d (Fed. Cir. 2012) was not. Both Federal Circuit cases hold that international sales of products by or under the authority of the patentee do not exhaust U.S. patent rights.

Before the Impression dispute reached the Supreme Court, the Federal Circuit in the decision below relied on its precedent to hold that the international sales by patentee did not trigger exhaustion. Hence, the Federal Circuit ruled that the accused infringer committed U.S. patent infringement by importing the refurbished articles into the U.S.

On appeal to the Supreme Court, patentee appeared to be on rock solid ground. Both Jazz and Ninestar Patentee supported patentee’s position on exhaustion (international sales do not exhaust U.S. patent rights). In contrast, as will be discussed below, the accused infringer mischievously relied on an ancient writing from the Renaissance era in England that literally was centuries removed from patent law in the year 2017. The accused infringer also relied on silence as being evidence that something was expressly spoken. Slam dunk win for patentee, right?

Wrong. Patentee did not have a slam dunk at all. Surprisingly, the Supreme Court reversed the Federal Circuit and held that international sales trigger exhaustion of U.S. patents. Hence, there was no patent infringement when the accused infringer imported the refurbished items in the U.S. The Supreme Court in effect overruled both Jazz and Ninestar.

The Supreme Court supported its ruling in a first aspect by mismatching its holding with a key policy underlying the exhaustion doctrine. One of the key principles underlying the exhaustion doctrine is that the patentee is entitled to one reward under the patent, not too. A corollary of this principle is that patentee is entitled to its one reward. With this corollary in mind, Patentee tried without success to negate the exhaustion doctrine from applying to its foreign sales on grounds that patentee did not get even a single patent reward from its sales abroad.

Patentee showed that 1) there were no applicable patent rights to guard those sales; and 2) its international prices were lower than its U.S. prices as evidence that in fact there was no patent reward.

In short, patentee argued that exhaustion should not be triggered because its international sales had no nexus to and received no benefit from its U.S. patent rights. Unless you have the foresight to know that this argument failed, patentee’s argument appears to be potent.

With hindsight, we know now that patentee lost. The Supreme Court was not bothered by the lack of nexus between international sales and the U.S. patent rights. Quite simply, the patentee had a U.S. patent, a sale occurred, and thus exhaustion was triggered. According to the court, the fact that patentee did not get as much reward as desired from a first sale abroad did not justify allowing patentee to get a second reward in the form of patent infringement damages.

The Supreme Court never explained satisfactorily, however, why revenues from those discounted, international sales were a patent reward under a U.S. patent.

Apart from trivializing an important policy underlying the exhaustion doctrine, the Supreme Court also supported its ruling with unexpected precedent penned by Sir Edward Coke, an English lord, in a long-past century. Although the English lord served as a barrister and judge during his career, the cited document (1 E. Coke, Institutes of the Laws of England §360, p. 223 (1628)), written a few years before Lord Coke passed, was not even a judicial decision. It may be true that the document addressed restraints on trade as being repugnant, but the writing had nothing to do with U.S. patents or the U.S. patent laws (both of which would not come into being in original form until almost two centuries later or in their current form until nearly 400 years later), or any patents or patent systems for that matter.

Somehow this ancient writing nonetheless bubbled to the top of the precedent pile to serve as key support for the international expansion of the exhaustion doctrine and to be potent enough to control and support overruling two, on point Federal Circuit cases from the current century. It is quite unexpected that rumination on trade put to paper in England nearly 400 years ago should control the international scope of the exhaustion doctrine of the U.S. patent laws in the year 2017. What other writings from centuries ago need to be consulted to ensure your legal research is complete and to understand how the modern patent system operates?

Also surprising in the Impression case, the Supreme Court relied on Congressional silence as a second ground to support its ruling. The Supreme Court viewed Congressional silence as Congressional intent to endorse and maintain a proffered status quo in which long-standing principles of trade practice cause international sales to trigger patent exhaustion.

It is true that Congressional silence is a valid basis to support the status quo. But, in view of both Jazz and Ninestar, the Supreme Court proposal did not accurately characterize the status quo. More correctly, would not Congressional silence support the actual status quo based on the Jazz and Ninestar decisions rather than a fictional status quo creatively crafted in part from Renaissance writings of Lord Coke from the year 1628? How can Congressional silence support a status quo that did not exist?

Regardless of its inauspicious origin, the holding in Impression strengthens the exhaustion defense by granting re-sellers more freedom from patent infringement risk and correspondingly weakens patent rights. If patentee has a U.S. patent, then any sale anywhere in the world will trigger exhaustion regardless of the pricing or other consideration received by patentee for those sales. While this suggests that patentee can simply raise its international pricing to accommodate this strange rule, the reality may be that competitive pressure in other territories may not allow compensating price adjustments in the absence of supporting patent rights.

​2. Federal Circuit uses unexpected precedent.

Like the Supreme Court, the Federal Circuit also relies on surprising precedent sources in order to bolster desired outcomes. In Auto. Body Parts Ass'n v. Ford Glob. Techs., LLC , 2018-1613 (Fed. Cir. Jul. 23, 2019)(“Ford”)(sale of passenger vehicle did not exhaust design patent rights in replacement hoods), the exhaustion issue should have been at the very least evaluated in view of the very recent and apparently pertinent Keurig, Inc. v. Sturm Foods, Inc., 108 USPQ 1648 (Fed. Cir. 2013) and Lifescan Scotland, Ltd. v. Shasta Technologies, LLC, 108 USPQ2d 1757 (Fed. Cir. 2013). Both these precedential cases were decided only a few years earlier and appear to be very relevant. At the very least, if the two cases were not to be followed, the court could have explained why they could be distinguished.

But it was crickets as far as the Keurig and Lifescan cases were concerned. The Ford decision never mentioned or discussed these two cases, not even in a footnote. What is most odd is not the fact that these two recent cases were ignored. Rather, the most prominent oddity is the precedent that proved to be controlling. The controlling precedent was a state law case penned in New Hampshire in 1865. See Ford, supra, (citing Aiken v. Manchester Print Works, 1 F. Cas.

245 (C.C.D.N.H. 1865) (evaluated if sales of knitting machines exhausted patents in patented replacement needles); also citing, Morgan Envelope Co. v. Albany Perforated Wrapping Paper Co., 152 U.S. 425 (1894) (purchaser of patented cutting machine could buy unpatented replacement cutters and knives from third party).

How could the Federal Circuit in Ford reach a holding that pretends Keurig and Lifescan do not exist while leapfrogging back in time over 150 years to rely on a much older, state law case from just after the Civil War era to control the outcome? It is not as if the Keurig and Lifescan decisions were unknown to the Ford court, leaving it no choice but to turn to obscure state law precedent from the middle of the 1800’s to have some basis for its decision. Patentee prominently cited and discussed both the Keurig and Lifescan decisions in its appellate brief.

The two cases were right there in the record. It is unexpected, therefore, that recent Federal Circuit precedent on exhaustion should be leapfrogged in order to access a New Hampshire case from 1865 in order to understand how patent exhaustion works in the year 2017. What other state law cases from the Civil War or other historical eras should be accessed to understand how the modern patent system operates?

​3. Does unreliable precedent undermine the judicial system?

Bottomline, when exhaustion is raised as a defense, the potential success of the defense is hard to predict due to “creative” use of precedent by the courts and patent challengers. The unpredictability exists not only for issues of first impression, but also for issues with precedent directly on point. In most reported cases, the defense succeeds. These creative judicial endeavors relentlessly expand the exhaustion doctrine to favor the accused infringer to the detriment of the patentee.

Patent owners secure occasional victories, though. Even as the exhaustion tide surges in most cases, there have been some unexpected instances in which patent owners avoided exhaustion. See, e.g., Ford , supra, and Helferich Patent Licensing, LLC v. The New York Times Co., 778 F.3d 1293 (Fed. Cir. 2015). These two recent Federal Circuit cases rejected exhaustion defenses even though the defenses in both cases appeared to be bona fide winners under the Keurig and Lifescan cases decided just a few years earlier.

Hence, the tendency of the courts to leapfrog or modify relevant precedent is used both to negate and support the exhaustion defense depending on the outcome desired by the court. There are serious problems when judicial precedent is unreliable and cannot be trusted. Two key pillars of a judicial system are stare decisis and trust of the system. Stare decisis requires not only that precedent be reliable, but also that it be recognizable. Otherwise, the fairness so important to the trusted operation of a judicial system is compromised.

It is true that some of the cases take fantastic and unexpected liberties with precedent. These cases are so outcome directed that you have to wonder how the results can do anything but undermine confidence and trust in the judicial system. This seems like the obvious conclusion to draw.

The real conclusion is precisely the opposite. There is another way to look at such outcome-driven cases in order to draw out a silver lining. These outcome-driven are not merely whimsical excursions by the courts. Rather, they show that the winning party, even in the face of unfavorable precedent from the normal sources, was still able to convince the court to rule in its favor. So persuaded, the court then drove to the desired outcome to achieve justice, practice fairness, and maintain the integrity of the patent system. In other words, cases driven to particular outcomes are the result of stellar advocacy by the winning party and the desire of the courts to implement justice. The existing precedent does not handle the new balancing needed to achieve justice, so precedent is handled creatively. For the courts to do this when the closest precedent goes the other way, winning counsel had to do an amazing job to convince the court to re-group. And the court had to listen.

In other words, these outcome-driven cases are proof that excellent advocacy makes a difference. They are proof that stellar advocacy is not merely logos, but ethos and pathos as well.