Extending Exhaustion Abroad?

In Quanta Computer, Inc. v LG Electronics, 128 S.Ct. 2109 (2008), the Supreme Court held that the authorized sale of patented computer parts under LG’s license to Intel exhausted LG’s rights under method patents covering the combination of the parts with other standard computer components, finding that the patents on the parts substantially embodied the method patent as well as the product patent.

A pair of subsequent district court cases considered whether the exhaustion doctrine should be extended to apply to foreign sales of products protected by U.S. patents. In LG’s parallel patent infringement case against Hitachi, LG Electronics, Inc. v. Hitachi, Ltd., 2009 WL 667232 (N.D.Cal.), LG argued that its method patents were not exhausted with respect to parts that were sold outside the United States, citing Jazz Photo Corp. v. Int’l Trade Comm'n, 264 F.3d 1094, 1105 (Fed. Cir. 2001). The district court rejected LG’s argument, reasoning that even though the Supreme Court did not address the issue of international exhaustion in Quanta, it was aware of foreign sales and that exempting foreign sales from exhaustion would undermine the Supreme Court’s goal of preventing an “end run around exhaustion” in which a patent holder can first authorize a sale, reaping the benefit of its patent, and then sue a downstream purchaser for patent infringement. On the other hand, in an order filed on June 29, 2009 in the case of LaserDynamics, Inc. v. Quanta Storage America, Inc., et al., Case 2:06-cv-00348-TJW-CE, the district court for the Eastern District of Texas rejected a similar argument, finding no exhaustion on similar facts. The opinion, however, is based solely on the authority of Jazz Photo and its progeny; that Court did not consider the Quanta decision.

Ultimately, it will be up to the Supreme Court to determine whether and to what extent the United States will adopt a doctrine of international patent exhaustion. The Court’s inclinations in this regard may be revealed if it decides to hear an appeal of the decision in Omega S.A. v. Costco Wholesale Corp.; 541, F.3d 982 (9th Cir. 2008), which rejected a defense of international exhaustion of copyright.

Until there is further guidance, the analysis may focus on what constitutes an authorized sale under a U.S. patent. The opinion in Hitachi distinguishes the case of Boesch v. Graff, 133 U.S. 697 (1890), the Supreme Court case cited in the Jazz Photo line of cases, pointing out that the foreign sales in that case occurred outside of any grant of license under the U.S. patent, while foreign sales by Intel were authorized under a worldwide license from LG. Even if the holding in Hitachi is not challenged, it remains to be seen whether it could be extended to apply to sales by a licensee authorized only under foreign patents.