Trade and Tradeoffs: The Case of International Patent Exhaustion

Abstract

Sellers of patented products ranging from printer cartridges to pharmaceuticals frequently charge higher prices in the United States than abroad. To maintain this price differential, such sellers often prohibit the resale of their goods in the United States. The Federal Circuit has maintained that importers may be sued for infringing U.S. patents on these goods. But that may soon change: in Lexmark v. Impression Products, the en banc Federal Circuit has been asked to hold that the sale of a patented product anywhere in the world “exhausts” the seller’s U.S. patent rights. If the Federal Circuit adopts a rule of international patent exhaustion, firms that sell patented products abroad will find it much harder to prevent those products from being resold in the United States.

Advocates and opponents of international patent exhaustion both argue that their preferred rule would be more efficient (i.e., would increase aggregate welfare). In our view, however, whether international patent exhaustion increases aggregate welfare depends on whose welfare is aggregated. Put differently, the desirability of international patent exhaustion depends on a question that economic models alone cannot answer: how much weight (if any) should U.S. courts assign to foreign interests when crafting patent policy?

Here, we explain why the Federal Circuit’s adoption of a rule of international patent exhaustion would likely lower prices of patented goods in the United States and raise prices abroad. Moreover, we explain why such a rule would impose costs on foreign governments that choose to subsidize access to patented goods for their own citizens. These tradeoffs between U.S. and foreign interests are ignored (or misunderstood) in the Lexmark briefing. This short Essay brings these tradeoffs into clearer focus.

NOTE: The PDF available here is the draft that was cited by the Federal Circuit in its en banc Lexmark decision. The final published version of this essay is available at this link: http://columbialawreview.org/wp-content/uploads/2016/04/HO_Trade_and_Tradeoffs.pdf

Keywords: patent, intellectual property, exhaustion, first sale, distributive justice

JEL Classification: F10, H41, I30, K11, K33, O34, O38