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Live from the IP Symposium: Implications of Costco on Exhaustion Doctrine

03/21/2011

Panel Discussion: Implications of Costco on Exhaustion Doctrine

Moderator: Professor A. Samuel Oddi, Akron Law

Panelists:
Kenneth J. Burchfiel, Sughrue Mion, PLLC
Patrick J. Coyne, Finnegan, Henderson, Farabow, Garrett & Dunner
Wayne M. Serra, Ulmer & Berne, LLP
Professor Ryan Vacca, Akron Law

Mr. Patrick J. Coyne

Mr. Patrick Coyne opened the discussion with the exhaustion doctrine in the context of copyright law. He discussed several historical cases and their impact on the exhaustion doctrine.

The First-Sale principle was first established in Bobbs-Merril v. Straus. Straus purchased copies of the book and refused to sell them at the price Bobbs demanded. Straus prevailed.

In K-Mart v. Cartier, the Supreme upheld Custom’s interpretation of the statute that Customs is not required to bar parallel imports of gray market goods.

The Costco case included a very small global design. The design was registered, not aesthetic, and used to control the importation of the good. The court did not even address the issue of whether was it even a copyright. The Supreme Court did not clarify substantial issues that still need resolved.

The take away from these cases was that if the good is made in the US, or the first sale occurs in the US, then the First Sale Doctrine applies.

Mr. Coyne also discussed the legislative history. The history shows that the focus was on piracy and that where work was transferred was important, not where the work was made or sold.

Who does Mr. Coyne think should have won? Costco should have one hands down.

First, what does it mean to be “made under this title?” Where the work was made does not matter because the Berne Convention made where the work was created insignificant. In addition, exhaustion occurs by a sale, it does not matter where the actual sale occurs. Costco has created a “parade of horribles” because the Supreme Court interpretation includes those that have purchased a good overseas and later transfer the good to someone in the States as infringers.

Professor Ryan Vacca

Professor Vacca discussed Trademarks and the shift in the exhaustion doctrine from an emphasis on relationships to a rule of universality. For the last century, the rule of universality applied, a good legally made in one country can be imported into another country without violating a trademark. So how does this relate to copyrights? Gray goods.

1st scenario – US Co purchased and registers TM from independent Foreign Co

Infringing and barred under Tariff and Lanham Act

2nd – US CO registers TM; US Co and Foreign Co are affiliated

Not infringing

3rd – US Co authorizes independent Foreign Co to use TM abroad

Infringing

Lanham and Tariff Acts created exceptions to exporting TM goods

The key is the relationship between the US Co and foreign entity. If there was an affiliation, there is no infringement and the importation is not barred. Another important key is goods analysis. If the good is materially different, then it is infringing and the importation is barred. If the good is NOT materially different, then it is not infringing. For example, Cabbage Patch Dolls. Spanish manufacturer licensed to make and sell only in Spain. A third party purchased dolls and important them into the US. The birth certificates were in Spanish, not English, therefore the product was materially different and infringing.

The goods analysis is really is a superimposition onto the relationship analysis. The goods are evaluated first, and then analysis goes to the relationship analysis. However, this is not a good approach under copyright law because importing an identical product undermines the author’s interests.

Mr. Kenneth J. Burchfiel

Mr. Burchfiel does not believe Costco has application to patent law. There is very little precedent on the question of whether a foreign sale of a US good that is authorized by the patent owner is later re-imported without the owner’s permission infringes. The issue surrounding the territorial restriction in Costco is to what extend to 271(g) limitations apply to section 154?

Patent exhaustion is a judge-made doctrine loosely tied to a statute. There is an express importation right under the Patent Act. In addition there is judicial antipathy to price fixing. Can the patentee sell a product and limit the rights of subsequent users?

The Patent Exhaustion Doctrine provides that the initial authorized sale of a patented item terminates all patent rights to that item. (LGE v. Quanta) Therefore most patent exhaustion cases revolve around contracts to determine what is an authorized sale, when did the sale take place, etc.

Fuji v. Jazz had many conclusory statements without supporting reasoning. In that case, Jazz would buy the old Fuji disposable cameras, with Fuji’s permission, in other countries, recondition them, and import them into the US. The court in that case said, “US patent rights are not exhausted by products of foreign provenance….. A different rule applies in the copyright context.” The Second Circuit is in contradiction with this opinion and there’s hope that the SC will take-up the issue for clarification at some point in the future.

Mr. Wayne M. Serra

Mr. Serra discussed the implications of Costco in the software industry. He stressed that we are in a digital age, causing an innovative disruption, decimating some traditional industries like the newspaper industry. Music industry has also dealt with disruptive innovations beginning with 8-track tapes and later compact discs. The MP3 file format now allows music files to be compressed enough to making internet transfer practical.

Many software cases just avoid the Exhaustion Doctrine. In Vernor v. Autodesk, the first sale doctrine did not apply to licensing arrangements for software. Licenses had a transfer restriction as part of the agreement. In UMG Recordings, Inc. v. Augusto (9th Cir. 2010), however, the exhaustion doctrine applied because UMG did nothing to ensure users accepted the license, therefore UMG’s license failed.

He concluded with stating that companies are taking advantage of the importance of court decisions. Restive licensing agreements are being enforced by courts.

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