An important, and often overlooked, question involving intellectual property rights is, “When are the rights of IP owners exhausted?”  When you buy a book, movie, computer, or software at what point does the IP owner lose the ability to control what you can do with it?  The Supreme Court has taken two important cases this term that may help answer this question.

Whether you are acquiring intellectual property rights, or are a provider of goods and services covered by intellectual property rights, you need to understand exhaustion issues if you want to control and recognize your rights.  In other words, you may not have the rights you think you have, and you may not be able to use your property the way you think you can.

The law of exhaustion is well developed for both patents and copyrights, but the expanding scope of the type of things subject to IP protection and the global nature of our economy challenge existing law.  The law is a mixture of statute and common law, the general goal of which is to limit the ability of intellectual property rights holders from exacting tribute over and over again as goods and services are sold and resold.

The first case before the Court, Bowman v. Monsanto, is a patent case dealing with the question of exhaustion in the context of self replicating plants.  Monsanto owns patents covering its genetically engineered agricultural seeds.  The seeds are modified to include genes that make the plants immune to a Monsanto herbicide (Roundup), allowing broadcast application of the herbicide, which kills everything except plants grown from the patented seeds (although it has been reported that some weeds have now developed natural immunity).  Very clever idea, but the problem is that soybeans are self-fertilizing plants and each generation is genetically identical to the parent and is therefore immune allowing farmers to hold back seed to plant the next year (instead of buying new seed).

Monsanto, like the rest of the industry, solved this problem by providing the seed in accord with very particular restrictions – so called “bag licenses,” which license the seed to farmers to use only to grow plants which can then be harvested and sold as a commodity.  The farmers are forbidden under the license from holding back any harvested seed to grow a second generation of plants.  They must buy new seeds each growing season.  This scheme allows Monsanto to avoid hitting the exhaustion question head on with its direct customers.  Since the seeds are “licensed” not sold, Monsanto maintains control over the use and can enforce the license restriction.  Without the license the right to prevent planting second generation seeds might have been exhausted when the original seeds were purchased.

Bowman, however, did not buy the seeds from Monsanto, but instead bought the seeds on the commodity market from local grain elevators and so had not signed a bag license.  Bowman believed he was free to plant the seed, and then plant the seed from the seed, without restrictions.

Monsanto, of course, took the opposite view.  Monsanto contends it does not matter whether Bowman was under a bag license, because each generation of seed is effectively a new patented invention, and its use without permission is an infringement.  That has been the position the courts have taken as this case made its way up to the Supreme Court.  Presumably, the Court has something interesting to say on the issue because this is the second time they have taken a case like this.  A few years ago the Court took up the same issue but did not reach a decision because one of the justices recused herself.  This case has huge implications for the bio-tech industry as many technologies have the potential to self-replicate, and/or attempt to control use in a manner similar to the techniques used in the agricultural seed field.

The second case, Kirtsaeng v. John Wiley & Sons, deals with copyright exhaustion.  Plaintiff Kirtsaeng is from Thailand but went to school in the US.  His family shipped him textbooks purchased in Thailand, which he then sold on websites such as  Defendant Wiley, a large American publisher, brought suit alleging the importation of copyrighted material into the US is an infringement.  Kirtsaeng’s position is that the books were lawfully obtained in Thailand, and therefore the rights of the copyright holder to control what he does with the books were exhausted when the books where lawfully purchased in Thailand, and he can dispose of the books without interference.  The courts have sided with Wiley so far.

The case hinges on some very interesting issues of statutory construction.  The first issue is whether the US first sale (exhaustion) doctrine applies to works made outside the US.  The first sale statute is applicable to works “lawfully made under this title,”  meaning, works subject to the United States Copyright Act.  Kirtsaeng’s position is that this language does not require that the copyrighted work be made in the US, only that wherever it is made it can be protected under US copyright law.  Wiley counters that it is illogical to apply US copyright protection outside the jurisdiction of US law – a copyrighted work made outside the US cannot be “made under” the US Copyright Act.  Kirtsaeng’s position is bolstered by the fact that US law applies to many acts, even if the acts take place outside the US (such as child prostitution, or the foreign corrupt practices act).

The second issue, presuming that the first sale doctrine applies to works made outside the US, is whether the ban on importation advocated by Wiley would trump the exhaustion of its rights.  In other words, would a ban on importation of works made outside the US operate as an independent copyright protection without regard to any first sale issues such that even if there has been a first sale of the work made outside the US such work can still not be imported into the US.

This is an issue of statutory interpretation where neither statute directly refers to the other.  Kirtsaeng says that the statute banning importation does say that it is subject to 17 USC § 106, which in turn recognizes the limits of §§ 107-122 (the first sale statute is 17 USC §109), and therefore the exhaustion doctrine is a limitation on the applicability of the ban on importation.  Wiley points out that this interpretation would render the ban on importation largely useless, limiting its application to merely preventing importation of counterfeit goods, which is not what Congress intended.

The consequences of this case are also significant, as both sides have raised potentially crippling inconsistencies.  Kirtsaeng argues that if the first sale doctrine only applies in the territory of the first sale (as Wiley contends), this would work as an impossible barrier on foreign trade.  Every extra-territorial trade would be subject to a unique approval of the copyright holder – something that is clearly not happening today.  Wiley argues if the first sale doctrine is universal in nature, copyright holders would have no ability to set prices according to local markets.  People would simply purchase the work in the cheapest market and undercut the copyright holders market throughout the rest of the world.

The bottom line is that exhaustion of rights should be carefully considered whenever you purchase or sell goods or services subject to intellectual property rights.  Unexpected results are highly likely if you don’t.  Look for the Supreme Court’s decisions in these two cases to provide some clarity.