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In November, the Supreme Court will hear arguments in Costco Wholesale Corp. v. Omega S.A., the next intellectual property case on the high court’s docket. On the surface, Costco seems to be all about copyright, specifically whether luxury watchmaker Omega can use copyright law to control the importation and resale of its products, even if it has already sold them abroad at a (relatively) low price. But the outcome of this copyright case is going to reverberate among patent lawyers as well. Here’s why: In issuing its ruling in the case, the U.S. Court of Appeals for the Ninth Circuit ruled that the “first sale” doctrine—which bars copyright owners from using infringement lawsuits to stifle secondary markets, such as used book stores or other re-sellers—doesn’t apply if that “first sale” occurred abroad. Now, Costco and other big retailers—together with Internet retailers, libraries, and public interest groups are complaining that if the Supreme Court allows the Ninth Circuit ruling to stand, secondary markets of all types—retailers who buy internationally, libraries, video-game stores—might be held hostage by copyright holders. As an amicus brief filed last month by Intel Corp. points out, a similar battle is taking place at the U.S. Court of Appeals for the Federal Circuit. That court has refused to apply patent exhaustion (essentially the “first sale” doctrine in a patent context) to sales abroad. Intel, the world’s largest chipmaker, objects to that position, asking the Supreme Court in its amicus brief to clarify that copyright and patent rights both end after a legitimate sale—whether that sale occurs abroad or within the U.S. Intel—which the company’s brief notes owns a “vast array” of patents—is eager to see those patent rights limited by exhaustion. To understand why, one need look no further than the case of Quanta Computer v. LG Electronics. In that case, LG sued Quanta for patent infringement because it was putting Intel chipsets inside computers that Quanta assembled—even though Intel had already purchased a worldwide license to the relevant LG patents. That case went to the Supreme Court, which showed no sympathy for LG’s attempt to wring a second royalty payment out of its patents. The high court ruled 9-0 in favor of Quanta in 2008. For Intel, it was an important win. The company frequently negotiates rights with patent-holders like LG on a worldwide basis—and it doesn’t want those patent-holders to be able to sue the computer manufacturers who are Intel’s customers. But even after Quanta, the Federal Circuit has refused to apply the patent exhaustion principle to sales abroad, says Matthew McGill, one of the Gibson Dunn & Crutcher lawyers who wrote the amicus brief for Intel in Costco v. Omega. In Fujifilm v. Benun, decided in June, a Federal Circuit panel found that Quanta shouldn’t influence the court’s own precedent. “What makes the Benun case newsworthy is that the court there adheres to its view that the exhaustion doctrine does not apply to sales made abroad,” said McGill. The reasoning adopted in Benun by the Federal Circuit has its origins in a long-running dispute between Fujifilm and a company called Jazz Photo. Jazz Photo acquired disposable cameras made by Fujifilm that had been used and disposed of, then refurbished them and imported them into the United States. The Federal Circuit ruled in 2001, and again in 2005, that Jazz wasn’t protected from infringement allegiations; the court wouldn’t apply “patent exhaustion” to a sale abroad because, it said, that would violate extraterritoriality rules. With its Benun decision in June, the Federal Circuit upheld that line of reasoning despite Quanta, saying Quanta’s patent exhaustion rules simply didn’t apply to international sales because of territoriality concerns—the same reason the Ninth Circuit cited when it refused to apply first sale abroad in Costco. In its brief, Intel argues that allowing those rules to stand would amount to an “end-run” around patent exhaustion—a legal doctrine that is essential for the company to protect its customers, because so many sales of its chipsets do occur abroad. “If the rightsholder can hold that the patent rights can spring back to life, with each new international boundary that the technology crosses,” McGill said, “that changes the dynamic significantly.” Omega filed its brief responding to the Supreme Court challenge last week, and this week, in the final round of briefs, was joined by several amicii, including the American Bar Association and the software industry. While Intel is concerned with large sales, the rules at issue also apply to individual consumers, notes McGill. A consumer who buys a computer in Canada—a sale that would pay off all the relevant IP rightsholders—could fly back to the U.S. and still be liable for patent infringement for importing the computer. In its brief, Omega argues that Congress deliberately authorized copyright owners to engage in “market segmentation” that allows it to control pricing in various markets. But McGill argues that Omega’s interest in price control is a policy argument not addressed in the copyright law. “In the copyright laws, nothing indicates that Congress had ‘international market segmentation’ in mind,” he said. In arguing that the Federal Circuit has misapplied Supreme Court rules, McGill may find the justices to be a receptive audience. In its recent patent decisions—including the landmark eBay v. MercExchange case from 2006 and the 2007 Microsoft v. AT&T—for which McGill was a member of Microsoft’s legal team—the Court has not hesitated to reverse the Federal Circuit, even when it comes to that court’s longstanding practices. Documents and links for this story:

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