The Federal Circuit: Quanta v. LG Did Not Eliminate Territoriality Requirement for Patent Exhaustion in Jazz Photo

Fujifilm Corp. v. Benun, No. 2009-1487 (Fed. Cir. May 27, 2010)

Holding:

Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), did not eliminate the territoriality requirement for patent exhaustion announced in Jazz Photo Corp. v. United States International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001). Slip op. at 7.

Relevant Facts:

Fuji owns U.S. patents directed to single-use cameras, or lens-fitted film packages (LFFPs). Once a LFFP is used by a consumer it is taken to a film processor who opens the LFFP and processes the film. The film processor does not return the empty LFFP (shell) to the consumer. Jazz bought used LFFPs outside the U.S., refurbished them, and sold them as new in the U.S. The district court ruled in Fuji’s favor on infringement, approved $2 per infringing LFFP running royalty, and held Jazz in contempt of a preliminary order enjoining importation of infringing LFFP. The Federal Circuit affirmed.

Comments:

Footnote 6 in the 2008 Supreme Court case of Quanta Computer, Inc. v. LG Electronics, Inc. has created lingering questions as to whether the Supreme Court intended to eliminate the territoriality requirement for patent exhaustion. Clearly, if a party purchases and refurbishes patented products in the U.S., and then re-sell them in the U.S., patent exhaustion applies to these products and there is no patent infringement. However, if a party purchases and refurbishes patented products outside the U.S., and then imports them to the U.S. for sale, does patent exhaustion apply to these products?

Footnote 6 states:

"LGE suggests that the Intel Products would not infringe its patents if they were sold overseas, used as replacement parts, or engineered so that use with non-Intel products would disable their patented features. But Univis teaches that the question is whether the product is ‘capable of use only in practicing the patent,’ not whether those uses are infringing. Whether outside the country or functioning as replacement parts, the Intel Products would still be practicing the patent, even if not infringing it."

Quanta, 128 S. Ct. at 2119 n.6 (citations omitted).

After the Quanta case, different district courts have issued different opinions on this issue. In this opinion, the Federal Circuit has made its position clear that sale outside the U.S. does not exhaust patents.

Interestingly, the Supreme Court recently granted certiorari in a copyright case involving a similar issue, Omega, S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), cert. granted, Costo Wholesale Corp. v. Omega, S.A., S. Ct. No. 08-1423 (2010). This case concerns the Copyright Act’s first sale rule, in which Costco sold Omega watches in the U.S. that Omega had manufactured and first sold outside the United States. If the Supreme Court rules that the first sale applies in this case, then it is possible that the Supreme Court may apply the same rationale to patent exhaustion. The caveat, of course, is that the Costco v. Omega case arises out of the Copyright Act, which is different from Patent law. The Supreme Court have applied different sets of standards to copyright and patent laws previously, and may do so here even if it would rule that the first sale applies to foreign sales in copyright cases.