PARALLEL IMPORTS OF PATENTED GOODS
The Supreme Court Talks about Its Legality
Jinzo Fujino*
INTRODUCTION
On July 1, 1997, the Supreme Court of Japan handed down a long-awaited decision concerning parallel imports of patented goods (BBS case”). Upholding the Tokyo High Court decision, the Supreme Court clarified a situation where parallel imports of goods manufactured under a foreign patent do not infringe a corresponding Japanese patent.
In its opinion, the Supreme Court made clear that the issue of parallel imports is a matter of interpretation of domestic patent law. Accordingly, principles of patent independence and territoriality were not relevant to the Court's analysis. Interestingly, however, the Supreme Court introduced the theory of implied license with tests of contract” and notice” for determining the availability of international exhaustion.
In the BBS case, the Supreme Court found that there was no explicit agreement between the buyer and the patentee with respect to which markets, if any, the buyer would be excluded from for the purposes of resale. Similarly, there was no notice of such exclusion from the Japanese market on the goods. Based on these findings, the Supreme Court concluded that the patentee is not entitled to injunctive or monetary relief under the Japanese patent.
The introduction of these tests, however, raises numerous related issues. A first, fundamental question is whether the parties, by contract, can prevent a patent right from being exhausted. In addition, the decision is likely to give rise to new disputes concerning contract and notice requirements in the context of parallel imports. One can expect that these disputes will eventually be brought to the court for judicial clarification.
The following is an English translation of the recent Supreme Court decision. The translation is followed by a detailed analysis of the Supreme Court decision.
SUPREME COURT DECISION
DECISION on Case No. Heisei 7(wo)1988 delivered on July 1, 1997
Petitioner: BBS Kraftfahrzeug Technik AG, Federal Republic of Germany
Intervenor: Nippon BBS Kabushiki Kaisha, Tokyo
Intervenor: Washimeir Kabushiki Kaisha, Fukui-shi, Japan
Attorney to Petitioner and Intervenors: Sumio Takeuchi, Attorney-at-law
Respondent: Kabushiki Kaisha Racimex Japan Tokyo
Respondent: Kabushiki Kaisha Jap-Auto Products, Tokyo
Attorney to Respondents: Giichi Ohara, Attorney-at-law
With respect to the case of injunction, etc. of patent infringement filed before the Tokyo High Court (Case No: Heisei 6 (ne)3272) involving the above parties, the Tokyo High Court delivered its decision on March 23, 1995. Petitioner filed before this Court, a petition to dismiss the High Court's decision in its entirety. This Court holds as follows.
Petition to this Court is dismissed; and
Fees for the Petition should be borne by Petitioner.
GROUNDS
On Reasons for Petition” by Sumio Takeuchi, Attorney to Petitioner and Intervenors:
I.This case was brought by Petitioner against Respondents who engaged in a so-called parallel importation by way of importing and reselling in Japan products manufactured and sold in the Federal Republic of Germany by Petitioner. In this case, Petitioner sought an injunction on importation and sale of products, and damages based on a patent right which Petitioner owns in Japan. The following facts were duly found final by the High Court.
(1) Petitioner owns, in Japan, a patent right entitled Wheel for Automobile” (filed on October 29, 1983 claiming a priority based on a patent application filed before the European Patent Office on May 27, 1983), published for opposition on January 12, 1990, and granted Patent 1629869 on December 20, 1991. (The patent is hereinafter referred to as the subject patent” and the invention as the subject patented invention.”)
(2) Petitioner owns a patent right in Germany to cover an invention similar to the subject patented invention. (It was filed on May 27, 1983 before the European Patent Office with Germany and other countries as designated countries. It was given an application number of 83105259.2 and was granted a patent on April 22, 1987.) (This patent is hereinafter referred to as the corresponding German patent.”)
(3) Up until August 1992, Respondent, Jap-Auto Products imported aluminum wheels for automobiles, BBS/RS,” as described in Appendix 1 which was attached to the Decision of the District Court, and aluminum wheels for automobiles, ROLINZER RSK,” as described in Appendix II and sold them to another Respondent, Racimex Japan. Racimex Japan engaged in the sale of these aluminum wheels at least up until August 1992. It is likely that Respondents would continue their importation and sale. (Hereinafter, the aluminum wheels mentioned here are collectively referred to as the Subject goods” including both products already sold and those to be sold in the future.)
(4) The subject goods fall within the technical scope of the subject patented invention.
(5) The subject goods were manufactured as the product under the corresponding German patent, and sold by Petitioner in Germany after the German patent became effective.
II.In the petition to this Court, Respondents argue for what is called international exhaustion. Namely, the effect of the subject patent applicable to subject goods has exhausted because of legitimate distribution by Petitioner of the subject goods in Germany. Therefore, Respondents’ importation and sale of the subject goods in Japan does not constitute infringement of the subject patent.
The High Court dismissed the claim filed by Petitioner against Respondents for injunction and damages under the subject patent. The High Court reasoned that Petitioner manufactured and sold the subject goods as products under the corresponding patent in Germany. It was clear that Petitioner was provided an opportunity to secure remuneration for disclosing its invention. There were no admissible facts showing that such opportunity to secure remuneration was legally restricted when the subject goods were distributed. Legitimate distribution in Germany should be deemed to have caused the subject patent to be exhausted with respect to the subject goods.
III. The High Court decided that Petitioner's claims against Respondents for injunction and damages under the subject patent have no grounds. This Court is agreeable to the conclusion of the High Court decision. Reasons for this Court's agreement are as follows.
1. The Paris Convention for the Protection of Industrial Property of March 20, 1883, as revised at Brussels on December 14, 1900, at Washington on June 2, 1911, at The Hague on November 6, 1925, at London on June 2, 1934, at Lisbon on October 31, 1958, and at Stockholm on July 14, 1967, and as amended on September 28, 1979” (hereinafter referred to as the Paris Convention”) provides in Article 4bis that:
(1) Patents applied for in the various countries of the Union by nationals of countries of the Union shall be independent of patents obtained for the same invention in other countries, whether members of the Union or not.
(2) The foregoing provision is to be understood in an unrestricted sense, in particular, in the sense that patents applied for during the period of priority are independent, both as regards the grounds for nullity and forfeiture, and as regards their normal duration.
This provision denies the interdependence of patent rights and stipulates that a patent right of each country is independent from others with respect to its grant, changes and surrender. In other words, the existence of a patent right is not affected by the invalidation, forfeiture, expiration, etc. of a patent right in a different country. The question of whether a patentee is allowed to enforce its patent right under certain circumstances is not a matter stipulated in that provision.
Also, the principle of territoriality denotes, in the context of a patent right, that the grant, assignment, validity or the like of a patent right in each country is governed by the law of that country and that the patent right is effective only in the territory of that country.
When a patentee enforces its patent right in Japan, would such fact that a product subject to that patent right was already sold outside Japan by the patentee or the like, affect enforceability of the Japanese patent right? This question is a matter of interpretation of the Japanese Patent Law and is irrelevant to the Paris Convention and the principle of territoriality. It is clear from the foregoing that any interpretation in this respect, whatever interpretation it might be, is not in the breach of the provision of Article 4bis and the principle of territoriality.
2. A patentee has an exclusive right to commercially exploit its patented invention (see, Patent Law, Section 68). In the case of an invention of a product, acts of using, assigning or leasing constitute the exploitation of the invention (see, Patent Law, Section 2(3)(iii)). If so, acts of a commercial use or resale to a third party by the buyer who obtained products covered by the patent (hereinafter referred to as Patented Product”) from the patentee or its licensee, or acts of a commercial use or further sale or lease to others by the third party who obtained the patented products from the buyer would appear, on the surface, to constitute the exploitation of a patented invention to cause infringement of the relevant patent. However, in the case of the sale of patented products in Japan by the patentee or its licensee, a relevant patent in Japan should be deemed to have its right exhausted with respect to the product. In that case, the effect of the patent should no longer extend to the acts of use, assignment or lease of the patented product.
This Court bases this interpretation on the following.
(i) The protection of an invention under the patent law has to be achieved in harmony with public interest;
(ii) In general, through the act of a sale, all rights adherent to the goods are transferred to the buyer. The buyer receives all rights which the seller has owned. When a patented product is placed on the market, the buyer enters into a deal with a prerequisite that he would obtain rights to freely use and resell the product as a business. If the sale of a patented product requires approval from the patentee for each transaction, the free flow of products on the market would be interrupted and the smooth distribution of patented products would be disturbed. This would result in adverse affects on the patentee's interests and would be contrary to the purpose of the patent law which aims at encouraging inventions by promoting their protection and utilization so as to contribute to the development of industry.” (see, Patent Law, Section 1);
(iii) On the other hand, a patentee receives proceeds including reward for disclosing its patented invention when the patentee sells its patented product. When it licenses the patent, it receives royalty payments. It can be said that an opportunity to secure a reward for disclosing its patented invention is guaranteed. Thus, once the patentee or its licensee sells Patented Products, there is no need to allow the patentee to obtain double profits through the process of distribution.
3. However, this rationale cannot be automatically applicable to the case where a patentee of a Japanese patent has sold its patented products outside Japan, because, in that case, the patentee may not have a patent for the same invention as covered by the Japanese patent (hereinafter referred to as the counterpart patent”). Even if the patentee owns the counterpart patent, it should be noted that its patent in Japan is separate from its counterpart patent in the country where the sale took place. In light of this fact, the patentee shall be free from any claim about double profits even if the patentee enforces its Japanese patent against the product which is a subject matter of the counterpart patent.
4. Now, the adjustment between the flow of products in international trade and the patentee's right is discussed below. In light of the fact that international trade is being conducted on a tremendously broad and sophisticated basis, it is necessary that freedom of trade including freedom to import should be paid utmost respect when a dealer in Japan imports a patented product marketed in a foreign country to put it in a distribution channel in Japan. Through economic transactions outside Japan, a seller transfers his rights to the product to a buyer. The buyer enters into a deal with the prerequisite recognition that he receives all rights which the seller has owned with respect to the product. In light of the status-quo of international trade in modern society, it is naturally anticipated that the buyer or a third party who purchased a patented product from the buyer can commercially import it into Japan, and commercially use it or resell it to others in Japan, even if the product is sold by the patentee outside Japan.
Thus, in the case where the owner of a patent in Japan or a person who can be recognized as an entity identical to the patent owner, sells its patented products outside Japan, a reasonable interpretation is that the patentee should not be allowed to enforce its patent in Japan against the buyer unless the buyer explicitly agrees to exclude Japan from the place of sale or use, and against a third party or subsequent buyers who purchased patented products from the buyer unless a notice of such agreement is clearly placed on the patented products. To be more specific:
(i) As was discussed earlier, it can be naturally anticipated that a patented product sold outside Japan might be imported into Japan. If the product was sold outside Japan without a reservation, it should be construed that the right to control the purchased product was implicitly given to the buyer and its subsequent purchasers without any restriction under the patent in Japan;
(ii) With respect to the right of the patentee, it is permissible for the patentee to reserve the right to enforce its patent in Japan when the patentee sells the product outside Japan. In the case where the buyer explicitly agrees with the patentee to an exclusion of Japan from the place of sale and use of the purchased product, and such exclusion is clearly indicated on the product, the subsequent purchasers will be in a position to learn the product is subject to certain restrictions irrespective of the involvement of other persons in the distribution process. They can fully decide whether or not to buy the patented product, taking into account the presence of such restriction; and
(iii) When the product is sold outside Japan by a subsidiary or an affiliated company which can be regarded as an entity identical to the patentee, such transactions should be deemed as the sale of the patented product by the patentee itself; or
(iv) The buyer of the patented product usually trusts in the free flow of the purchased product. That trust should be well protected. It should not matter whether or not the patentee has a counterpart patent in the country of first sale.
5. Now, the above will be applied to this case. According to the facts which the High Court found, both of the subject goods were sold in Germany by Petitioner who has the Japanese patent. Taking into account the fact that Petitioner did not argue and prove the existence of any agreement between Petitioner and Respondent for excluding Japan from the place of sale and use, and that of any clear notice of such exclusion on the subject goods, Petitioner is not allowed to claim for injunction and damages under the subject patent with respect to the subject goods.
The conclusion of the High Court is the same as that of this Court as discussed above. Therefore, this Court agrees to that decision. Petitioner's attorney argued that the High Court was contrary to the law including the constitution on the basis of his own views, or he criticized discussions which do not affect the conclusion of the High Court decision. This Court can not accept such arguments.
NOW, THEREFORE, according to Articles 401, 95 and 89 of the Civil Procedure Law, this Court has unanimously decided what was stated at the beginning of this decision.
The Supreme Court of Japan, 3rd Petty Bench
Chief Judge Masao Ohno
Judge Itsuo Sonobe
Judge Hideo Chigusa
Judge Yukinobu Ozaki
Judge Shigeru Yamaguchi
COMMENTS
1. Overview of the Decision
Since the decision of the Tokyo High Court, there has been a flood of opinions concerning the BBS case.1 Scholars and practitioners have written and argued about the parallel imports of patented goods in Japan. Opponents criticize that the High Court decision is contrary to the principle of territoriality and the independence of patent under the Paris Convention.2 To the contrary, supporters, denying the relevance of the Paris Convention and the principle of territoriality, argue that whether to admit international exhaustion is a matter of domestic law.3 Under these circumstances, the Supreme Court's decision has been awaited with keen interest with a hope that such arguments shall be put to an end.
The Supreme Court clearly stated that international exhaustion has nothing to do with the independence of patent rights and the principle of territoriality. The Court confirmed that international exhaustion is a matter of domestic patent law. In this respect, the opinion of the Supreme Court is clear.
However, the Supreme Court also included a mechanism to prevent the application of international exhaustion, namely, the patentee and the buyer have a right to contract to preclude international exhaustion. Therefore, if there is an agreement that Japan is excluded from the territory for resale and if a clear notice of such exclusion is put on the goods, there shall be no international exhaustion.
2.Problems Created by the Decision
In general, the Supreme Court's decisions have two major functions: addressing a specific issue appealed to the court and establishing a judicial guideline for the lower court which is applicable to related cases. In this instant case, the Supreme Court affirmed the High Court's decision and dismissed the petition. At the same time, the court created new theories for the exemption of international exhaustion. Obviously, these theories need to be observed by the lower courts as a case law for future related cases.
However, it seems that the Supreme Court's decision, with the introduction of the new theories, might raise new questions rather than certainty and clarity.
a) Reduced Competition and Public Interest
In its opinion, the Supreme Court did not elaborate the rationale for the theories of contract” and notice.” Therefore, it is not necessarily clear how much the Supreme Court considered actual business of parallel imports in setting up these theories. In actuality, it would be easier for the patentee to coerce a prohibition of resale of patented goods in Japan, if he so wishes. The patentee's position in negotiations with the buyer may become very influential. To the contrary, the buyer as a parallel importer has an incentive to purchase patented goods only when they are available for resale in other countries, Japan, for instance. Otherwise, risk of patent infringement in Japan would make him reluctant to engage in parallel imports. In view of a significant difference in bargaining powers between the patentee and the buyer, there should be some consideration of equity to protect the weak position of the buyer.
Also, the patentee may not usually want its distributor to be embarrassed with parallel imports. The patentee will strongly demand the buyer to agree not to resell the goods in Japan where its distributor exists. If that is the case, the buyer will have no other ways than giving up Japan as a market for parallel imports. Needless to say, this would not affect the flow of the patented goods because the distributor's channel is secured to assure higher prices than the parallel import goods. Thus, the new theories would eventually close out the market for parallel imports, which is apparently contrary to free competition.
With respect to the aspect of public interest, the Supreme Court briefly referred to the need of paying appropriate attention to the public interest. However, it is questionable whether the court attempted to reserve the public interest under the new theories. In the opinion, there is no discussion in this respect.
b)Conflicts of Law
The new theories might raise questions concerning conflicts between the patent law and contract law. While finding that international exhaustion is a matter of the Japanese patent law, the court also set up a mechanism to prevent the application of international exhaustion. Such exemption can be instituted by the parties, in particular, the patentee. This suggests that contract prevails over the doctrine of patent exhaustion.
A patent right without exhaustion has a broader exclusivity than a patent to which exhaustion is applicable. Given a limited context of parallel imports, the patentee will enjoy the benefit of the Supreme Court’s decision to avoid international exhaustion. It is an established principle that broadening the exclusivity of the patent right is only available through legislation or by the court. It is obvious that private parties should not be given the ability to manipulate the scope of exclusivity.
CONCLUSION
The patent right is an exclusive right secured under the patent law. Such exclusivity is justified based on an assumption that the disclosure of the invention contributes to the enhancement of technology which eventually leads to the public's benefit. The principle of international exhaustion is derived from the need to maintain a balance between the interest of the patentee and that of the public. One way to achieve this balance is to limit the exclusivity of the patent right with regard to parallel imports of patented goods. Limited exclusivity will invite more parallel imports, resulting in lower price.
Nevertheless, there is no explanation in the opinion why the Supreme Court needed the exemption of international exhaustion. One reasonable guess is that the court wanted to address the concern that patentees would lose interest in acquiring patents and licensing them in Japan if international exhaustion is allowed. It is an open question whether international exhaustion would in fact have a chilling effect against the patentees and whether it actually reduces their motivation to acquire patents and to license them in Japan. This question was not fully discussed by the Tokyo High Court. Under the circumstance, one of the approaches which the Supreme Court might have taken was to remand this specific issue to the lower court for its review. At least, such a careful approach seems appropriate as the introduction of new theories would probably raise more fundamental questions as discussed above.
Footnotes
* The author is a director of operation of Morrison & Foerster, Tokyo Office. The views expressed in this article are author's and they should not be regarded as representations of the firm which the author belongs.
1 Full English translation of the Tokyo High Court decision is cited in AIPPI Journal, January 1996, pp.36-45; Also see, James D. Hughes, "Preliminary Analysis of the BBS Aluminum Wheel Case," AIPPI Journal, July 1995, pp. 191-195.
2 For example, see Prof. Dr. Willem A. Hoyng, "A Surprising Decision," AIPPI Journal, January 1996, pp. 26-36.
3 For example, see Nobuhiro Nakayama, "Tokkyo Seihin no Heiko Yunyu Mondai ni okeru Kihonteki Shiza" (Fundamental Aspects on Parallel Imports of Patented Goods), Jurist No.1094, July 15, 1996; see also Saburo Kuwata, "Tokkyo Seihin no Heiko Yunyu Mondai" (Parallel Imports of Patented Goods), AIPPI (1996) Vol. 40, No.6, pp 2-14 (Japanese edition).