No Change on First Sale for Patented Cartridges

John Shane
Apr 4, 2013

Last month, the U.S. Supreme Court, in Kirtsaeng vs. Wiley, ruled that under US law there is international exhaustion regarding copyright under the first sale doctrine. In terms of copyright, products legally sold outside the US exhaust the copyright in the US. However, the large majority of issues related to the cartridge remanufacturing industry are patent related and not copyright. This decision did not impact patents. However, it is the first step that would need to happen in terms of changes in case law that would impact the cartridge remanufacturing industry based on cases known to be coming down the line. From the point of view of patent exhaustion for cartridges, and whether remanufacturers can legally sell remanufactured cartridges in the US when they are made from cartridges that were  first sold outside the US, or whether they need to track the first sale location at all, Wiley was the first case that remanufacturers needed to answer that question.

However, Wiley is based on copyright, not patent. The second case that was needed to tie the decision in the Wiley case to patents would have been the Ninestar case as Ninestar appealed it’s $11 million fine for violating first sale doctrine on collected cartridges sold in the US to the US Supreme Court. But the US Supreme Court declined to hear the Ninestar appeal so the appeals court ruling stands and there is no change at this time on the question of territorial or international exhaustion of patents under US law. Companies wishing to sell remanufactured cartridges in the US must still be able to demonstrate that the cartridges that they are selling in the US were first sold in the US.

Figure: First Sale Doctrine: This is legal for sale in the US

The US Supreme Court does not provide comment on why it declines to hear a case. So we cannot know their reason for declining to hear the Ninestar case. And while InfoTrends is not an expert on intellectual property law, we do pay attention to people who are experts on the law. The prevailing opinion appears to be that at some point the US Supreme court will have to reconcile what are now two conflicting rules on issues of intellectual property rights and the exhaustion of those rights. Patents and copyrights are both intellectual property.

So for now, the two forms of intellectual property are regulated under divergent rules of exhaustion. It appears that the US Supreme Court will in time need to reconcile the differences or provide sound legal reasoning for why the two types of intellectual property should operate under different rules of exhaustion.

Kirtsaeng vs. Wiley
This recent 6-3 Supreme Court ruling was based on the case of Kirtsaeng vs. Wiley which was related to copyrighted material in textbooks. Kirtsaeng, from Thailand but living as a student in the U.S., imported textbooks lawfully printed overseas and sold them on eBay. In this ruling, the Supreme Court held that the first sale doctrine, which protects the owner of a lawful copy of a copyrighted work, applies to copies manufactured and sold abroad, even if imported later to the U.S. without permission. 

Ninestar vs. International Trade Commission and Epson
Ninestar had petitioned the Supreme Court to hear their argument that authorized foreign sales do exhaust U.S. patents but the high court declined to hear the case. There are high stakes involved as Ninestar is on the hook for over $11 million in fines. Ninestar’s question to the Supreme Court was: “Whether the initial authorized sale outside the United States of a patented item terminates all patent rights to that item.” Ninestar argues that a rule permitting international patent exhaustion would vastly increase the markets for remanufactured goods and that would be good for the U.S. economy. In addition, Ninestar further argues that international patent exhaustion would have the effect of making genuine goods available to U.S. consumers at lower prices. Among other reasons, most think Ninestar believes it is unrealistic and unworkable to expect a manufacturer to keep track of and prove the source of cartridges.

Figure: First Sale Doctrine and the Global Market

Conclusion
Many players in the remanufactured cartridge industry were hoping that the U.S. Supreme Court would hear the Ninestar case and rule that patents are exhausted wherever in the world a product is legally sold. We have heard rumors that some cartridge remanufacturers had actually gone so far as to place orders overseas for empties in anticipation that the US Supreme Court would rule in Ninestar’s favor. But any plans along those lines now need to be placed on hold.

On the other hand, the ability to adhere to the existing requirements on the use of collected cartridges under the first sale doctrine is a distinguishing difference between remanufacturers that are able to adhere to those rules and others not so able. We would not be surprised to learn that some cartridge remanufacturers who currently are able to adhere to the rules currently in place are not so unhappy to see that their competitive advantage has not been dismantled.

For more information in this area, check out our report: OEMs Protect Supplies through Intellectual Property: Update

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