U.S. Supreme Court Argument in Impression v. Lexmark
The day began with a reading of new opinions, including Justice Alito’s reading of a summary of the SCA
Hygiene decision, reversing the Federal Circuit’s application of laches in patent cases (and agreeing with
the ABA’s position, see the ABA’s brief
at: http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs_2016_
2017/15-927_amicus_pet_american_bar_association.authcheckdam.pdf ). Justice Alito introduced the
Court’s opinion with a statement something to the effect of, “only you patent attorneys in the room will
find this interesting…” Unfortunately, the Justices did not ask many questions of the parties during the
SCA Hygiene argument. Andy Pincus of Mayer Brown argued on behalf of Petitioner Impression
Products. Lexmark was represented by Constantine Trela of Sidley Austin. Malcolm Stewart argued on
behalf of the Government.
Mr. Pincus began by offering the observation that the case involved whether patent exhaustion (also
known as the first sale doctrine) prevented patent owners from asserting rights in their patents once the
product or component covered by the patent was first sold by the patent owner, or its licensee. With
respect to exhaustion involving first sales in the U.S., Mr. Pincus argued that patent owners were
precluded from asserting those rights, but could turn to contract law for relief. Justice Kennedy asked
why after all of these years the doctrine had not been codified, and if that fact means that the Supreme
Court should be cautious in ending or extending the judicially created doctrine. Similarly, Justice Alito
asked if the doctrine was causing any problems. Mr. Pincus argued that the law “is suspect” and has
been causing problems, pointing for support to the briefs of Intel and the Medical Device Reprocessors
that argued that they have not been imposing post sale restrictions and have been doing business under
the assumption that Jazz Photo would someday be reversed. Justice Alito seemed incredulous, stating
that it is counterintuitive that patent holders would disregard this longstanding doctrine to their
detriment.
With respect to first sales that occurred outside of the U.S., Justice Alito expressed amazement that
none of the briefs argued that U.S. patent law did not apply extraterritorially. Mr. Pincus explained that
the issue was not the foreign sale itself, but the impact of the first foreign sale on the resale of the
article within the U.S. Raising other concerns, Mr. Pincus argued that because so many parts were
assembled into products before they were imported, there was no way for a customer to verify that all
of the parts were not infringing. Justice Breyer asked whether Lord Coke’s 300 year-old prohibitions
against contracts that place restraints on trade should trump any patent owner’s claims that they are
entitled to be compensated for infringement of their U.S. patent because they never received any
money when the item was first sold abroad, for example in Germany and maybe even under a German
patent. Mr. Pincus responded that in that hypothetical the U.S. patent owner had authorized the
German sale and therefore controlled whether it was properly compensated. Justice Sotomayor
reiterated Justice Breyer’s question regarding proper compensation, and asked how to address all of the
negative consequences of not allowing downstream restrictions. Mr. Pincus argued that price
discrimination was not something guaranteed under the patent laws, and that federal agencies could
ensure consumer safety. As to the disruption of the settled expectations of patent owners, Mr. Pincus
argued that it is just the normal consequence of reversing bad Federal Circuit decisions, and that the
Alice decision had tremendous implications for patentees and licensees who had license agreements,
but upsetting those expectations was just a consequence of getting the law right.
Malcolm Stewart argued for the government, arguing that there should be patent exhaustion without
restriction based on U.S. sales, but not based on foreign sales where the patent owner expressly
reserves their rights. He made three quick points with respect to first sales occurring in the U.S. First,
the Supreme Court has held in cases including Bauer & Cie. v. O'Donnell that among the exclusive rights
granted a patent owner under 35 U.S.C. 154(a)(1) Congress did not include the right to control resale of
a lawfully sold article. He next argued that the Federal Circuit misread Motion Picture Patent arguing
that the case is distinguishable from this one because it involved the patent owner’s right to control the
first sales of its licensee (as opposed to later downstream sales). Third, he argued that nothing in the
doctrine prevented parties from addressing resale restrictions through mutually agreeable
contracts. With regard to foreign sales, he argued that U.S. patent owners should be able to reserve
U.S. rights, so long as they do so expressly. Once legally imported, then the next sale in the U.S. would
trigger the first sale doctrine under the U.S. patent. He seemed to not answer Justice Kennedy and
Breyer’s questions about how a patent owner goes about reserving their rights, do they put a sticker on
their products to give the buyer notice? When asked by Justice Alito what the policy basis was for the
government’s compromise position (opposing restrictions on U.S. sales, but not restrictions on foreign
sales), he argued that this has been the rule for the last hundred years.
Mr. Trela argued for the patent owner, Lexmark, that there cannot be patent exhaustion because
patentees do not have to sell all of their rights at one time. On the issue of domestic sales, pointing to
General Talking Pictures, he argued that parties can divide up their rights geographically, by field of use,
or in time. He argued that the FTC and DOJ’s new licensing guidelines say that field of use, territorial,
and other limitations on intellectual property licenses may be procompetitive. When asked by Justice
Roberts why contract law is inadequate, Mr. Trela argued that you cannot enforce these types of
contract terms because the patentee is not in privity with the downstream buyer. Justice Breyer chimed
in that contracts doing that likely would be in violation of antitrust laws. Mr. Trela argued that when
Lord Coke wrote against restraints on trade, he was talking about someone who sold their whole
interest, but that here we are not talking about selling the whole patent interest. Justice Breyer
appeared to concede the point. To pound it home, Mr. Trela pointed to General Talking Pictures in
which the patentee reserved rights in the commercial theatre market while granting the licensee rights
in the home market, and it’s holding that such division of rights is permissible. He asserted that
arguments about the effect on consumers are irrelevant because consumers have nothing to do with
these cases, asserting that patent litigation is too expensive to bring cases against individual consumers,
and pointing out that there is no criminal case to bring against a patent infringer, as there is in copyright
law.
As to foreign sales, Mr. Trela argued that the first sale doctrine is intended to lift restraints imposed by
U.S. patents, but when the first sale occurs overseas there is no U.S. patent involved, so the doctrine
cannot apply to those sales. Faced with similar questions about the impact on consumers, he argued
that phone users are not going to worry about being sued under any patents, much less several, and
that under the UCC merchants warranty that the articles they sell to consumers are not
infringing. When Justice Sotomayor asked why there should be a different rule for copyright cases than
for patents, he answered that copyright laws around the world are uniform, while patent laws are not,
and that patent rights are more limited and that patents are examined not registered. He pointed to
IBM’s brief as demonstrating that reversing this long standing doctrine would upset settled expectations
of many industries, affecting hundreds of thousands of contracts. He also argued that the briefs of
biomedical and pharmaceutical companies show that they rely heavily on such restrictions to enable
them to sell the same compound to different markets, such as veterinary and human markets.
Yay Cheerleaders!
In an opinion written by Justice Thomas, the United States Supreme Court issued its decision in Star
Athletica, L.L.C. v. Varsity Brands, Inc., deciding that the designs found in cheerleader uniforms are
entitled to copyright protection. Justice Ginsburg wrote a separate concurrence and, of course, IP
hating Justice Breyer dissented, joined by Justice Kennedy. Specifically, the Court held that: “a feature
incorporated into the design of a useful article is eligible for Copyright protection only if the
feature (1) can be perceived as a two- or three-dimensional work of art separate from the useful
article and (2) would qualify as a protectable pictorial, graphic, or sculptural work-either on its own
or fixed in some other tangible medium of expression-if it were imagined separately from the
useful article into which it is incorporated.” The Court held that the test was satisfied in this case.
What is so interesting about this case is that it is not just the logo placed on the uniform that is
copyrightable, but the Supreme Court upheld the Sixth Circuit’s ruling that each “chevron” design
(stripes meeting at an angle) is copyrightable. It held that those graphic designs are separately
identifiable from a comparable blank cheerleading uniform—presumably, you could hang each design
on the wall as art. The Court noted that its holding was entirely consistent with the rule established in
one of its 1950s cases in which it held that a statuette used as a lamp base could be copyrighted and
that the copying and sale of lamps using the statuette as a base constitutes infringement of a valid
copyright.
Justice Ginsburg wrote separately to state that the designs themselves are copyrightable pictorial or
graphic works, which just happen to be reproduced on useful articles. Justice Breyer wrote that he
“agree[s] with much in the Court’s opinion” but dissented arguing that these designs are not “works of
art separate from the useful article” because the chevron designs cannot exist as work of art separate
from the useful article, like a statuette used in a lamp can. Justice Breyer clearly had fun writing his
dissent, and I encourage you to read it.
Combating China's Unfair Trade Policies and IP Theft
Many are beginning to fear that China’s aggressive economic tactics, including rampant IP theft which
Congress attempted to address through enactment of the Defend Trade Secrets Act, is helping it to
succeed in replacing the United States as the world economic and diplomatic leader. A recent article in
Forbes argues that as soon as next year China will overtake the U.S. in the contribution countries make
to global GDP. U.S. in China's Economy Will Overtake The U.S. In
2018 https://www.forbes.com/sites/mikepatton/2016/04/29/global-economic-news-china-will-surpassthe-u-s-in-2018/#29fba90e224a Others agree that it will happen, but argue that it will likely occur in ten
years, not one. China and the United States: Tale of Two Giant
Economies https://www.bloomberg.com/graphics/2016-us-vs-china-economy/
This problem includes a significant IP component. On March 16, 2017, the Information Technology &
Innovation Foundation, a think tank founded by Dr. Robert D. Atkinson, one of the top U.S. experts on
technology, trade, and China hosted a meeting introducing its new report titled, “Stopping China’s
Mercantilism: A Doctrine of Constructive, Alliance-Backed Confrontation” found
here: http://www2.itif.org/2017-stopping-chinamercantilism.pdf?_ga=1.13115767.1780763050.1488219459
The meeting focused on how to address China’s aggressive acquisition of market share of advanced
technologies through a host of alleged anticompetitive mechanisms. According to Dr. Atkinson, China’s
“Mercantilism” includes its IP theft (trade secret theft), forced tech transfer policies (forced disclosure of
technology in exchange for doing business there), abuse of its antimonopoly laws (to extract
technologies or licensing payments), creation of China specific standards, subsidies, its closed markets
(for example, in cloud computing), and state supported acquisition of foreign companies to acquire their
technology (including expensive investments in overpriced integrated circuit companies). From 1980
through 2006, China worked hard to attract foreign investment, then moved to openly abusive practices
to acquire technologies and market share, such as its “Indigenous Innovation” policies, which it publicly
undertook from 2006 through 2012, to today’s “China Inc.” or “Made in China 2025 Strategy.” For an
eye-opening story on the Chinese government’s financing of organizations they set up in the United
States to acquire high tech U.S. companies, read: China Seeks to Acquire Yet Another U.S.-based
Semiconductor Manufacturer http://www.rwradvisory.com/china-seeks-to-acquire-yet-another-u-sbased-semiconductor-manufacturer/
During his presentation, Dr. Atkinson noted that the U.S. Chamber of Commerce very recently issued a
similar report titled “Made in China 2025: Global Ambitions Built on Local Protections,” which can be
found
here: https://www.uschamber.com/sites/default/files/final_made_in_china_2025_report_full.pdf The
U.S. The Chamber’s report details the Chinese government’s plan to “leverage the power of the state to
alter competitive dynamics in global markets in industries core to economic competitiveness.” It says
that China hopes to become an advanced manufacturing leader by targeting key strategic industries,
including IT, aviation, rail, electric vehicles, and agricultural machinery, by intensifying preferential
policies for their own companies (market access, licensing, procurement, cyber security reviews,
standards and laws) and financially supporting acquisition of technology from abroad.
Dr. Atkinson noted that China is uniquely positioned to exert control over global trade, given its
aggressiveness, lack of rule of law, and its large size. He noted that the U.S. cannot run to the WTO for
relief from this aggression. According to Dr. Atkinson, the WTO is not a good option because many of
China’s actions are unwritten policies and practices, and U.S. companies tend to agree to China’s
pressures and make unwanted disclosures of technologies and the like, while refusing to disclose such
exertion openly for fear of retribution. Clearly U.S. officials complaining to China about its policies over
the last several years has not worked.
The only example of a successful challenge to China’s overly aggressive practices, he argued, is when an
alliance of countries (U.S., E.U. member countries, and Japan) banded together to confront China’s
Indigenous Innovation practices. (In that case, the Chinese government required government and state
owned enterprises to procure all goods and services only from companies listed in its catalogue, which
of course included only Chinese companies, or foreign companies who agreed to enter into a joint
venture with a Chinese company and to disclose their technologies.) He sees that as a good model for
further action.
He argued that there is much work we can do here in the U.S. to strengthen our economy. That includes
investing in research and development, infrastructure, education, and much more. And as David Kappos,
the former PTO Commissioner and IBM Chief IP Counsel, writes, we need to fix our IP laws. Because of
an ill-conceived 101 test recently reformulated by the U.S. Supreme Court, he argues, the U.S. has
become a less attractive country to invest in key industries necessary to spur economic growth, like
biotech and software, causing that investment to move to elsewhere including China. US is losing the
innovation war -- to China http://origin-nyi.thehill.com/blogs/pundits-blog/technology/311930-us-islosing-the-innovation-war-to-china?amp=1
Dr. Atkinson encourages the new administration to take a constructive, alliance-based confrontational
approach to China’s economic policies. He wants the U.S. to band together with other countries to
demand that China change its improper disclosure requirements and trade practices, at the risk of
significant negative results. To do that, he wants the U.S. to build an iron clad prosecutor’s case laying
out China’s improper policies and acts in great detail, then send top U.S. officials (the Vice President,
Sec. of State, Sec. of Commerce) around the world enlisting other nations to join the U.S. in challenging
China’s policies. This might include orchestrating a G19 meeting that excludes China to develop a
coordinated plan of action. If the Chinese fail to respond to demands of the alliance, he wants those
countries to take real action to ratchet up the pressure, but where China improves its policies, he wants
those countries to reduce those pressures in kind. Such actions may include:
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Denying use of the banking system for companies benefiting from stolen IP;
Coordinate domestic IP actions with foreign actions by targeting companies or regions in China
that engage in widespread IP theft for criminal enforcement actions and significantly increasing
inspections of Chinese imports by customs;
Do not recognize China as a market-based economy; and
Cut off scientific and other cooperation.
Dr. Atkinson calls on the administration to establish several units within existing offices and agencies to
provide administrative bodies that can monitor China’s anticompetitive behavior and act against it. He
calls for the creation of a National Industrial Intelligence Unit, housed within the National Intelligence
Council, to conduct industrial intelligence gathering and sharing to asses long-term implications on the
U.S. economy of other nations’ announced and implemented economic development strategies. One
responsibility, for example, would be to monitor “Chinese government involvement in and financing of
Chinese companies and the front organizations they set up in the United States, as was the case in the
attempted Canyon Bridge acquisition of Lattice Semiconductor.” Lattice Semiconductor: Would-be buyer
is backed by Chinese government http://www.oregonlive.com/siliconforest/index.ssf/2017/01/lattice_semi_acknowledges_woul.html Dr. Atkinson would have this new unit
be responsible for “a report examining the extent to which Chinese innovation-mercantilist policies—
such as forced joint ventures, forced tech and IP transfer, and completed or attempted Chinese
acquisitions of U.S. advanced-technology enterprises—have contributed to the outsourcing of
manufacturing and other activities to China and is leading to the hollowing out of the U.S. defense
industrial base.”
He would also have the administration create a sub-directorate within the National Security
Council. And he would create an Office of Competitiveness within USTR responsible for creating a global
mercantilist index, ranking nations’ by mercantilist policies, and developing action plans for U.S.
embassy staff to use to persuade poorly ranked governments to show improvement. He would also
increase personnel and resources of the USTR and other trade enforcement agencies, the IP attaché
program, and of the foreign commercial service. Agencies devoted to engaging with foreign nations on
diplomatic, security, and financial concerns (State and Treasury), he says, should be relegated to an
advisory capacity in the interagency trade process, leaving enforcement to the Department of
Commerce, USTR, and the new White House Trade Council.
If we do not act, Dr. Atkinson argues, the U.S. will continue to lose high wage jobs and will continue to
lose market share in key industries involving advanced technologies like semiconductors, computers,
biotechnologies, pharmaceutical drugs, aerospace and more, until we become irrelevant.
Other recommendations include:
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Elevate trade enforcement in the interagency process.
Permit USTR to hire outside counsel for WTO disputes, as many countries (such as China) do,
particularly for more technically complex matters.
Strengthen the rules of engagement in negotiations with Chinese trade negotiators.
Bring more trade disputes before the WTO.
Task USTR with considering development of a non-violation nullification and impairment case,
given that many Chinese policies undercut the benefits and rights the United States thought it
was getting when it allowed China to join the WTO.
Improve monitoring and transparency regarding China’s WTO-contravening industrial policies
(such as subsidies), making up for Chinese failure to provide timely notification to the WTO of
such policies.
Revise and use discretionary powers under the U.S. Trade Act to address unfair trade practices.
Enhance application of Section 337 of the U.S. Tariff Act and develop a strategy to counter
possible Chinese retaliation from increased use of this instrument.
Permit the U.S. International Trade Commission (ITC) to issue Trade Enforcement Advisory
Opinions.