Reselling products in the USA, Part II: “First Sale” doctrine in patent

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Reselling products in the USA, Part II: “First Sale” doctrine in patent

by Kenneth Weatherwax

“Exhaustion,” also known as the “first sale doctrine,” has been the subject of two Supreme Court cases this term:  Kirtsaeng v. John Wiley & Sons (copyright), which was decided on March 19, 2013, and Bowman v. Monsanto (patent), which was argued and submitted on February 19, 2013 and is awaiting decision.  A prior post discussed Kirtsaeng from the copyright perspective; this post includes some preliminary observations on Kirtsaeng from a mostly patent perspective, and also discusses Bowman.

“International” Exhaustion Of Copyrights And Patents

United States law for copyright and patent rights each include a form of the “exhaustion” doctrine, under which a “first sale” of a copyrighted or patented item can exhaust the copyright or patent right in that item.  As described in Part I, the Kirtsaeng case asked whether an authorized first sale of a copyrighted item made outside the United States exhausts the copyright holder’s rights in that item as it will if the item is made in the United States.  In Kirtsaeng the Supreme Court ruled in favor of the accused infringer, and in favor of so-called “international” copyright exhaustion.  By a vote of 6 to 3, the Court held that an authorized first sale of a copy exhausts the copyright in that copy regardless whether or not the copy was made in the United States.

Although the Kirtsaeng decision does not mention patents, many are curious how it will affect patents when similar issues are at stake.  Indeed, a petition is currently pending before the Supreme Court asking it to decide whether a similar “international” exhaustion exists in patent law.  Ninestar Technology v. International Trade Commission, 667 F.3d 1373 (Fed. Cir. 2012).  The United States Court of Appeals for the Federal Circuit (the United States’ patent appeals court) has so far resisted extending patent exhaustion beyond U.S. territory, and whether Kirtsaeng will change that view remains to be seen.

Similar to the first sale doctrine in copyright, “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item,” Quanta Computer v. LG Elecs., 553 U.S. 617, 625 (2008).  Both copyright law and patent law generally observe the extraterritoriality principle, which raises a rebuttable presumption that the law is not intended to apply outside the United States.   Notably, however, the Kirtsaeng majority found that the history of the exhaustion doctrine, at least as to copyright, provided little support for geographical limitations to the doctrine.

There are some potentially interesting differences between the copyright and patent exhaustion doctrines that may or may not be found significant when international patent exhaustion issues are considered in light of Kirtsaeng.  One of these differences is that Kirtsaeng largely involved interpretation of specific language in the copyright statutes.  In contrast to copyright’s codified first sale doctrine, patent exhaustion has never been codified, and remains a creation of the courts rather than Congress.  Kirtsaeng’s discussions of details of language in copyright laws, such as whether the statute’s reference to items “lawfully made under this title” includes items made both inside and outside the United States, may therefore be of only limited relevance to patent exhaustion.

Another potentially interesting distinction between the “international exhaustion” questions at issue in patent and copyright is the difference between the locus of manufacture and the locus of sale.  In Kirtsaeng, the majority addressed the location where the copyrighted copy was manufactured.  Indeed, two of the six justices in the majority emphasized this fact in a separate opinion, arguing that, if Congress desired to modulate the exhaustion doctrine, exempting copies that “happen to have been manufactured abroad” did not seem to be a very “sensible” way to go about it.  Although Kirtsaeng occasionally mentioned the location of the sale as well as the location of manufacture, the Court did not appear to explicitly hold that the location of the sale might matter for exhaustion purposes.

In contrast, in the petition for certiorari in the Ninestar case, the patent exhaustion question is based on the location of sale, not manufacture.  The United States Court of Appeals for the Federal Circuit affirmed remedies against Ninestar based on its prior holdings that a sale of a patented item outside the United States does not exhaust United States patent rights.  Particularly in view of the concurring justices’ views in Kirtsaeng, it is possible that courts might view these two modes of “international” exhaustion differently.

Furthermore, just as in copyright exhaustion in Kirtsaeng, there are important economic interests and amici on both sides on the question in Ninestar.  And there again are seemingly plausible arguments that can be raised in favor of each side.  For example, it can be argued that it is not fair to exempt items from patent exhaustion simply because they were sold outside the United States, because in either case the item was sold with the patentholder’s permission and the patentholder received the reward he negotiated for granting that permission.  Why shouldn’t the patentholder’s rights in the item be similarly exhausted regardless where the sale took place?  It can also be argued, however, that it is not fair for authorized sales outside the United States to exhaust the patent because unauthorized sales outside the United States do not infringe the patent, so the patentholder is not in a strong position to negotiate a reward for himself for authorizing such manufacture.  The extraterritoriality principle dictates that “whether the allegedly infringing act happened in the United States is an element of the claim for patent infringement,” Litecubes v. Northern Light Products, 523 F.3d 1353, 1368 (Fed. Cir. 2008).  Why shouldn’t exhaustion work the same way?

The potential differences raised above between the first sale doctrines of copyright and patent are far from exhaustive.  Another interesting aspect of patent exhaustion is that copies of patented inventions, unlike copyrighted creations, may be inherently able to make copies of themselves. This means that it may be possible for ordinary use of a patented item to lead to liability for infringement even if patent rights in the item have been fully exhausted, and even if the user does not physically fashion or build the copies himself but merely allows nature to take its course.  This is the issue that is currently before the Supreme Court for decision in Bowman v. Monsanto.

Exhaustion And Self-Replicating Technology

In Bowman, Monsanto’s patent claims read on soybean plant seeds with certain DNA in them.  (Soybean plant seeds are the part of the soybean plant, Glycine max, which we feed to animals and from which we make soy sauce, soy milk, and tofu.)  If you’re a soybean farmer, you can buy seeds having that DNA from Monsanto.  You have to sign a contract when you buy them.  You’re allowed to plant the seeds and sell the progeny, i.e., the seeds produced by the plants that germinated from the seeds you bought.  You promise in the contract, however, not to replant progeny.  All of this is not disputed in the case.

If you break the promise you made to Monsanto not to replant these progeny, it happens to be not just breach of contract, but also patent infringement.  The reasoning is that planting the progeny = making the invention anew.  That is, the progeny, once planted, will (one presumably hopes) germinate into additional plants, and these plants will produce seeds on which Monsanto’s claims read.  In general, “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” infringes a United States patent.  35 U.S.C. § 271(a) (emphasis added).

Perhaps to some it will seem presumptuous to say that the farmer “makes” the seeds produced by the progeny.  All the farmer does is arrange for some conditions (soil, water, sunlight, pollinating insects, perhaps protection from pests) so that the cells that make up each planted seed can divide and differentiate into a grown plant, which contains a number of seeds that meet Monsanto’s claim limitations.  The argument here would be that the farmer merely “uses” the seeds he bought to grow soybean plants, and does not “make” the seeds they produce.  Exhaustion would then protect the farmer from liability.

Bowman did not replant the progeny of the Monsanto seed he bought, and he is not accused of breaching his contract with Monsanto.  However, for his second crop of the season, he bought someone else’s seeds (a sale which Monsanto did not endeavor to limit contractually), and planted them.  Monsanto DNA-tested the resulting progeny.  Monsanto’s claims were found to read on them, and infringement of Monsanto’s patent was asserted.

Bowman raised an exhaustion defense.  In the United States Court of Appeals for the Federal Circuit, the progeny of the seeds Bowman’s bought were found to be “made” by Bowman, in the sense of the patent law.  Monsanto v. Bowman, 657 F.3d 1341 (Fed. Cir. 2011).  Exhaustion therefore did not protect him:  “[e]ven if Monsanto’s patent rights in the commodity seeds [bought by Bowman we]re exhausted,” the Court held, “such a conclusion would be of no consequence because once a grower, like Bowman, plants the commodity seeds containing Monsanto’s [patented] technology and the next generation of seed develops, the grower has created a newly infringing article. . . . While farmers, like Bowman, may have the right to use commodity seeds as feed, or for any other conceivable use, they cannot ‘replicate’ Monsanto’s patented technology by planting it in the ground to create newly infringing genetic material, seeds, and plants.”  Id. at 1348.  This conclusion follows from the view that planting and harvesting are not just an allowed “use” of the exhausted seeds, but also a forbidden “making” of the new seeds which the plant produces.

(The Federal Circuit refers to the seeds Bowman bought as “commodity seeds.”  However, Monsanto rejects this characterization, stating that what Bowman bought was “commodity soybeans,” that such soybeans are rarely bought for planting, and that state law even forbids the marketing of such soybeans for planting.  Monsanto Brief at 4 n.3, 6 & n.6.  This does not seem to make a legal difference, but presumably reassures the judges ruling for Monsanto that they are not suddenly banning a common practice.)

The following is an analogy to Bowman’s exhaustion position.  You buy a patented object composed of a metal or moldable polymer, you replicate it through molding using the original object as the model, and say you were just using the object and not making it.  Bowman, of course, might respond that the analogy is imperfect, for the molder does everything himself, whereas all Bowman did was bury the seed and add water and fertilizer and let nature do the rest.

The Federal Circuit’s position—that planting patented seed and taking advantage of its tendency to germinate into new life bearing seeds of the same sort constitutes “making” the patented seed rather than merely “using” it for exhaustion purposes—would appear to make it difficult to exhaust patent rights in any item with the utility of making copies of itself.  This is because exhaustion of patent rights in an item permits it to be freely used, but if the item’s use is to make copies of itself, that use would constitute a “making” of a new item to which patent rights would attach notwithstanding any exhaustion in the first item.  It should be noted, if it matters, that this is not the only utility of Bowman’s commodity seeds: they can be used for food purposes as well as for planting to grow new seed-bearing plants.

Perhaps a more interesting issue is whether Monsanto might be able to effectively render planting of all substantial batches of soybean seeds in America which it didn’t sell infringing, through (inadvertent) contamination of those batches by patented seeds.  Infringement by contamination has come up in a different context in a prior patent case, the crystalline form litigation in SmithKlineBeecham Corp. v. Apotex Corp., 403 F.3d 1331 (Fed. Cir. 2005).  In that case, SmithKlineBeecham claimed that all substantial batches of the drug at issue, including those made by following the instructions of the prior art, would now inevitably contain its patented crystalline forms, for which seeds would enter the batch from the air where they were said to be ubiquitous.  The patented crystalline forms had in effect contaminated the world’s supply of that drug, to SmithKlineBeecham’s benefit.  The district court opinion on this subject is particularly interesting.  But infringement by contamination is notwhat Bowman v. Monsanto is about: although the commodity seeds bought by Bowman included both patented and unpatented seeds, Monsanto, 647 F.3d at 1345,Bowman did not argue that this fact mattered for exhaustion purposes.

Interestingly, the issue of contamination also arises when marketing in countries such as those in Europe which have regulations about labeling genetically-modified organisms (GMOs) and their products.  Whether a food product must be labeled genetically-modified depends on whether it has a sufficient percentage of GMO matter:  it appears that the regulators recognize that zero GMO matter is unachievable.  See Regulation 2003/1830 of 22 September 2003, art. 4(7).

Suppose that Bowman had planted soybeans certified as non-GMO, the kind that are sold in Europe, for his second crop rather than domestic commodity seeds.  If he were unable to get every last progeny seed from his first crop off his field before he planted the non-GMO soybeans, would there be inevitable infringement caused by unavoidable growth of progeny left over from his prior Monsanto planting?  Perhaps once a field is planted with Monsanto seeds, it’s always a Monsanto crop.  Would there be infringement caused by contamination of the non-GMO seeds by Monsanto seeds or progeny introduced to the batch inevitably through wind or animals or farm machinery or material left over from the seeds previously occupying a container?  Would there be infringement caused by cross-pollination of non-GMO seeds by insects bearing Monsanto genetic material?  Cross-pollination has been studied extensively in soybeans and is fairly infrequent but not unknown.  The Monsanto v. Bowman opinion does not appear to address these issues.

The Supreme Court is expected to issue its decision in Bowman by late June.

 

Published April 9, 2013