On March 25, 2013, the U.S. Supreme Court denied the petition for certiorari filed by Ninestar Technology Co. in a case decided by the Federal Circuit Court of Appeals last year captioned Ninestar Tech. Co. v. ITC (Supreme Court No. 12-552), in the Court of Appeals, 667 F.3d 1373 (Fed. Cir.2012). In declining to review the Federal Circuit’s decision, the Court deferred a ruling that could potentially shed light on the Court’s willingness to extend the principles underlying its interpretation of the Copyright Act’s first sale doctrine on an international basis in Kirtsaeng (see Wilson Elser Client Alert of March 21, 2013) to the similar but far from analogous patent exhaustion context.
In Ninestar, the Federal Circuit considered appellant Ninestar’s appeal from exclusion and cease and desist orders issued by the U.S. International Trade Commission that prohibited the company’s importation and sale of ink printer cartridges it remanufactured in China and subsequently sold through its wholly owned subsidiaries in the United States. The prohibition on Ninestar’s importation and sale of the foreign-remanufactured product was grounded by the ITC’s finding that the ink cartridges infringed U.S. patents owned or exclusively licensed by Epson America, Inc.; Epson Portland, Inc.; and Seiko Epson Corporation. Section 337 of the Tariff Act of 1930, codified at 19 U.S.C. § 1337, governs the importation of goods into the United States and defines certain trade practices as unlawful and subject to ITC regulation. Notwithstanding these orders, Ninestar continued to import and sell the ink cartridges, and was eventually assessed a civil penalty under § 1337 for its noncompliance.
The Federal Circuit’s Decision
On appeal, Ninestar challenged the civil penalty and defended its noncompliance with ITC orders on several grounds, including that the underlying basis for the agency’s orders and subsequent assessment of the penalty – that Ninestar’s products constituted infringement – was based on incorrect law. Arguing that its knowing violation of ITC orders by its continued importation of the cartridges was justified, Ninestar advanced the position that “the manufacture and sale of a product in any country extinguishes all patent rights, regardless of the physical location where the sales occur.”
To demonstrate a knowing violation by Ninestar, which is required to affirm the ITC orders and penalty at issue, the Federal Circuit engaged in a brief discussion of governing patent exhaustion principles. The Federal Circuit had created a binding precedent in Jazz Photo Corp. v. U.S. Int’l Trade Comm’n, 264 F.3d 1094 (Fed Cir. 2001), denying the existence of international patent exhaustion, but providing little reasoning to support its conclusion. The Federal Circuit in Ninestar endorsed the position that “the first sale rule’s territoriality requirement” still operates to protect U.S. patent owners from the importation of foreign-manufactured goods covered by U.S. patents on the grounds that such goods are infringing and therefore subject to exclusion under the Tariff Act. The court ultimately affirmed the ITC’s ruling that Ninestar had knowingly violated its orders in bad faith.
Supreme Court Denies Certiorari
The petition for a writ of certiorari filed by Ninestar requested that the Supreme Court consider whether a U.S. patent holder’s rights terminate upon the authorized first sale of a patented item abroad. Perhaps agreeing with respondent ITC’s position that Ninestar was the improper procedural vehicle for deciding the issue, the Court denied certiorari. While similar, in a macro sense, to the issue decided in Kirtsaeng, the rationale underlying that decision, coupled with factors unique to patent law, mitigate against Kirtsaeng’s ready application in this context, and perhaps weighed in favor of the Court’s denial.
As a preliminary matter, the Court’s decision in Kirtsaeng was exclusively grounded in statutory interpretation of the scope of the Copyright Act’s “first sale” doctrine, codified at 17 U.S.C. § 109(a). The Court held that § 109(a)’s language and context, including congressional intent and practical consequences, together with the history of the first sale doctrine compelled the conclusion that the statute’s “lawfully made under this title” language encompasses copies of copyrighted works manufactured outside the United States, thereby exempting such copies from the Act’s prohibition on unauthorized importation of copyrighted works.
The Patent Act has no codified first sale doctrine, rendering the question of whether an authorized first sale of a patented item manufactured abroad operates to trigger the exhaustion of a U.S. patent holder’s rights a matter of common law, not mere statutory interpretation. Additionally, contrary to § 109 at issue in Kirtsaeng, Congress’s intent in relation to the statute at issue in Ninestar is clear. Congress amended § 1337 in 1988 for the express purpose of strengthening the protection provided to owners of U.S. intellectual property rights and the accompanying remedies for violation of such rights due to the perceived threat of “foreign companies violating such rights.” See P.L. 100-418. Thus, rather than “not hav[ing] geography in mind” when authoring § 1337 as was acknowledged in Kirtsaeng, Congress clearly considered prohibitions related to certain foreign imports critical to furthering the statute’s objectives related to protection of U.S. patent rights.
Moreover, a geographic reading of the first sale doctrine in the patent context arguably fails to summon the same parade of “horribles” concerning the transaction costs to cultural institutions, such as requiring libraries and museums to bear substantial investigative expenses prior to distributing and displaying copyrighted works. Those “horribles” counseled against a geographic reading of the first sale doctrine in Kirtsaeng. Lastly, as a practical matter, the heightened conditions associated with obtaining patent protection, and the temporal limitations imposed thereafter, further distance the patent context from copyright. For these reasons, a geographic interpretation of the first sale doctrine with respect to patents is arguably not as strained as in the copyright context.
While the denial of certiorari in Ninestar is not determinative of the Supreme Court’s view of patent exhaustion in the context of an international “first sale doctrine,” it may signal how the Court might rule on future cases that come before it. For now, it appears that Jazz Photo remains the authoritative case in the Federal Circuit. Under that decision the existence of international patent exhaustion would be denied.
The next material case on patent exhaustion has already been fully submitted. The Supreme Court has heard oral arguments regarding patent exhaustion in Bowman v. Monsanto Co. (Supreme Court No. 11-796), on an appeal from the Federal Circuit, 657 F.3d 1341 (Fed. Cir.2011). In Bowman, the petitioner challenges the denial of patent exhaustion as to harvested seeds produced through the use of patented plant technology. The question presented is “Whether the Federal Circuit erred (1) by refusing to find patent exhaustion in patented seeds even after an authorized sale and (2) by creating an exception to the doctrine of patent exhaustion for self-replicating technologies.” It is expected that a decision will be rendered by June 2013. We will provide more detailed discussion of the Bowman case once the Supreme Court announces its decision.