The Intellectual Property Owners Association (IPO) departed from its long-standing opposition to international exhaustion of patent rights in an October 10, 2008 letter to the Chinese government in connection with the proposed Third Amendment to the Chinese Patent Law. As discussed below, the IPO has offered tentative support for international exhaustion when there is an “unrestricted” sale of the patented product. This appears to be the first time that the IPO has offered such support for at least limited international exhaustion of patent rights.

International Exhaustion

The IPO, various intellectual property owners, and other industry groups have strongly opposed the exhaustion of patent rights based on international activity. In general, a patentee's monopoly is exhausted upon an authorized sale of the patented product pursuant to the “first sale doctrine.” At that point, the purchaser is free to use the product without restrictions or conditions imposed by the patent owner. With respect to international exhaustion, the question is whether the sale of a patented product by a licensee in a foreign country exhausts the patentee's rights such that the purchaser may import and resell the product in the patent owner's country free of restrictions and without the patent owner's permission.

The Third Amendment

Currently, Article 63, Section 1 of the Chinese Patent Laws provides as follows:

None of the following shall be deemed an infringement of the patent right: (l) Where, after the sale of a patented product that was made or imported by the patentee or with the authorization of the patentee, or of a product that was directly obtained by using the patented process, any other person uses, offers to sell or sells that product. (Article 63, Section 1)

The above section has been amended in the Third Amendment as follows:

None of the following shall be deemed an infringement of the patent right: (l) Where, after the sale of a patented product that was made or imported by the patentee or with the authorization of the patentee, or of a product that was directly obtained by using the patented process, any other person uses, offers to sell, sells or imports that product. (emphasis supplied). (New Article 69, Section 1)

The practical result of the amended language is to provide for international exhaustion of patent rights.

The IPO's Support for International Exhaustion Based on Unrestricted Sales

According to the IPO, “[i]nternational exhaustion of patent rights presents a serious problem for multinational companies.” In its October 10, 2008 letter, the IPO opposed the amended Article 69(1) for at least three reasons. First, the IPO argued that “[p]atents are territorial in nature and innovators who expend substantial amounts of money on research and development of new inventions depend on the ability to exploit that technology in different ways in different foreign countries or regions.” The IPO cited pharmaceuticals and automotive parts as examples of technology that may be tailored to certain geographic regions. Second, the IPO argued against the draft language because the “innovator may have different arrangements for sale and development of a patented product in different countries.” According to the IPO, the practical result of “[a]llowing importation of a patented product sold in another country into China without the approval of the Chinese patent holder” may be to “harm a local licensee who entered into an agreement with some expectation of exclusivity.” Third, the IPO argued that international exhaustion “could also harm a Chinese purchaser who has unique needs different from those in the country of origin (e.g., patients with differing medical needs than those in the country of origin).”

The IPO concluded that “international patent exhaustion provisions upset the commercial expectations of innovators and consumers, and thus are disfavored outside of special regional situations with common commercial expectations (e.g., within the European Union).” Based on these concerns, the IPO recommended deletion of Article 69(1) or, alternatively, revising the language as follows:

(1) Where, after the unrestricted sale of a patented product that was made by the patentee or the entity or individual with the authorization of the patentee, or …”

The IPO did not explain what would constitute an “unrestricted sale,” or how multinational companies can practically avoid international exhaustion of patent rights.

Avoiding Unrestricted Sales and International Exhaustion

Although the IPO recommended that Article 69(1) be amended to relate solely to unrestricted sales, the Chinese government ultimately approved the Third Amendment without adopting this language.

Based on the above developments, patent owners will likely need to rely more heavily on contract-based remedies to prevent third parties from taking advantage of amended Article 69(1) in China. In particular, patent owners should consider ways to restrict or condition foreign licenses and sales of patented products. For example, patent owners may restrict an agreement with a foreign licensee to a limited geographical area or territory. Foreign license agreements also could require a foreign licensee and/or purchaser of the patented product to expressly agree not to import the patented product into the patent owner's country. Additionally, patent owners may find specific warranty, representation, and indemnification provisions in a license agreement to be useful tools in restricting foreign sales. For some products, “single use only” restrictions also may provide a further mechanism for avoiding unrestricted sales.

Although the IPO's proposed language was not ultimately incorporated into the Third Amendment, the IPO's position may suggest a change in how international exhaustion is viewed by IP owners and other groups. It is possible that support for international exhaustion based on unrestricted sales will make its way into other legislation in other countries. Therefore, patent owners should monitor future developments on the issue to identify the most effective ways to protect and enforce their patent rights in the event that laws permitting international patent exhaustion are adopted in other countries.