CASRIP Newsletter - Fall 1997, Volume 4, Issue 3
Japanese Supreme Court Affirms Legalization of Parallel Importation
The Japanese Supreme Court adopted the implied license theory and ruled that parallel importation of patented products does not constitute patent infringement in BBS Krafifahrzeugtechnic AG v. Racimex Japan Corp., and Jap Auto Products Co.1 The facts in this case is quite simple. The defendant legally bought patented products from the patent owner in Germany and sold the products in Japan. The exclusive licensee of the Japanese patent which covers the products tried to enjoin the defendant from importing and selling the products and requested damages for patent infringement. Thus, there was no issue as to whether the patent covered the product sold by the defendant. Thus, the only issue in this case was whether the patentee retained an exclusive right on particular products which were first sold outside Japan.
The Tokyo District Court adopted a conservative view in denying the international exhaustion theory.2 By literally applying the language of direct infringement, it denied the defendant's argument to ban double recovery for the patentee's contribution. The Tokyo High Court reversed the district court's decision and denied relief against the defendant.3 The Tokyo High Court's discussion gives more focus on the trade law policy of guaranteeing the flow of goods in the market and the interests of third parties who receive patented goods after the patent owner's first sales. The court paid very little attention to the interests of the patent owner and the licensees who need to create a distribution system for the patented goods in each country. The Tokyo High Court noted that patentees are guaranteed only one opportunity to secure a reward for the disclosure of their invention. It reasoned that the exhaustion theory must apply to prevent patentees from controlling patented goods after their use of that opportunity. This rule applies regardless of the place where the patentee uses the opportunity unless regulation or law of the country prevents patentees from receiving the full reward.
The Japanese Supreme Court agreed with the result of the Tokyo High Court but relied on a different justification; the implied license theory.4 First, denying the patentee's argument relying on Paris Convention, Article bis and the territoriality of industrial property, the Court made clear that domestic courts of Paris Union members are not bound by the provision in determining the legality of parallel imports because the issue solely relates to the interpretation of domestic patent statute. The Court then explained the policy underlying the first sale doctrine which exhausts an exclusive right when patented products are legally obtained from a patentee or licenses of Japanese patent: Patentees cannot receive a reward for their invention regarding a particular item once their investment was reimbursed by selling the item. Otherwise, requirements to obtain an approval from the patentee or licensee upon every transaction would interrupt free flow of products on the market. Such protection would be inconsistent with public interests. The Court then admitted that the first sale doctrine would not apply automatically to patented products legally sold in another country because Japanese patentees do not receive double rewards if they do not own a patents in that country is identical in scope and effect to the Japanese patent covering the products. After noting the importance to secure free flow of goods in international transaction, the Court stated that Japanese patentees who sold their products in another country can readily foresee a possibility that their products will be imported into the Japanese market. Considering the reality of market, it is reasonable to presumes an implied license on the products when the Japanese patentee sold them in another country without any explicit restriction on the rights related to the products. Regarding to the scope of the implied license, the Court made clear that (1) patentees can restrict their licensees from exporting into Japan and (2) such restriction can be enforceable against third parties as long as the restriction is placed on the products. The Court also noted that the implied license occurs if the patented products are not sold by a Japanese patentee but sold by a subsidiary or related entity of the Japanese patentee in another country, regardless of the fact that the patentee owns a patent corresponding to the Japanese patent. Applying the rule in the facts of this case, the Court denied relief requested by the patentee, because the patentee could not show any restriction on the products when it sold the products in Germany, which would harm balance be applicable to products which are legally The implied license theory was developed by U.S. courts to limit the patentee's right from extending to products legally put on the market by the patentee.5 The rule to apply the implied license to free legally sold products from the exclusive right is also known as "the first sale doctrine."
The Supreme Court analysis focusing on the first seller's authority to license and the restriction on the license parallels the U.S. courts' analysis in deciding whether to endorse a patentee's attempt to restrict the right of owners for the patented products after the first sales. Such analysis consists of two steps: (1) identification of a restriction to decide the authority of the owner and (2) enforceability of such a restriction.
For example, in Mallinckrodts, Inc.,6 a Federal Circuit case in 1992, the court applied the two step test. The patent in the suit concerned a medical device with a notice to restrict "a single use only". Hospitals who purchased the devices however sent the used devices to the defendant to recondition by replacing some elements of the medical device. Since the presence of the restriction is clear from the notice attached to the device, the parties' dispute involved whether the restriction was enforceable, in light of the precedents that deal with patent misuse. The Federal Circuit, after denying the per se illegal analysis urged by the defendant, applied the rule of reason to analyze the restriction and upheld its enforceability. Since the enforceability of a territorial restriction was upheld by U.S. courts, it is clear that U.S. patent owners can prevent buyers from exporting goods to another country.7
On the other hand, U.S. case law is not clear about whether this implied license theory applies regardless of the place of the first sales. Under an old Supreme Court case, Boesch,8 the Court banned parallel importation where the imported goods are first sold by a party who holds a prior user's right under German patent law. A recent lower court decision, Griffin, 9interpreted Boesch broadly, requiring U.S. courts to ignore the effect on U.S. patents resulting from operation under a foreign law and ban the parallel importation. Interestingly, the argument advanced by the defendant in Griffin is the double recovery theory which the Tokyo High Court adopted to reject the enforcement of the Japanese patent. The Griffin court obviously shared the same concerns indicated by the Japanese Supreme Court that the same policy underlying the domestic first sale doctrine would not automatically apply to international transactions, because it noted that the adoption of such an argument would require U.S. courts to look into a foreign law and confirm a full recovery.
Sanofi, 10a more recent lower court decision, distinguished Boesch as well as Griffin in that the owner of the goods purchased them from the patentee, rather than from a third party. The Safoni court announced a rule that a first sale gives an implied license to resale and export the products regardless of the place of the first sale unless the patentee clearly imposes a restriction on the transfer of ownership. However, the court still banned the importation, since the plaintiff did not have the authority to give such a license because a sole license had already been granted to a third party to sell the patented products in the United States. Thus, the Safoni court's implied license theory closely parallels the Japanese Supreme Court's analysis.
The Japanese Supreme Court in BBS stated that sales by a patentee's subsidiary or related company may give rise to an implied license. This statement leads to a question whether the Japanese Supreme Courts would resolve facts in Safoni to a different conclustion. Assuming that related entities do not include exclusive licensees which are not owned by the Japanese patentee, would the presence of the exclusive license prevent the application of implied theory? Japanese courts should soon deal with this issue.
-- Toshiko Takenaka
1Judgment of Supreme Court of Japan, July 1, 1997. For reports and comments on this case, see Tessensohn & Yamamoto, The BBS Supreme Court Case - A Cloth too Short for an Obi and too Long for a Tasuki, 79 JPTOS 721 (1997); Fujino, Parallel Imports of Patented Goods, 22 AIPPI Journal, 163 (July, 1997).
2Judgment of Tokyo District Court, July 22, 1994, Jurist No. 1065, 80.
3Judgment of Tokyo High Court, March 23, 1995, 27 Chizaishu (No. 1) 195, 21 AIPPI Japan Group Jounal, January 1996, 26 (1996).
4Judgment of Supreme Court, July 1, 1997, AIPPI Japan Group Journal, July 1997, 163 (1997).
5Chisum, Patents, Section 16.03  (1978, Supp. 1997).
6Mallicrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992).
7Supra note 47, Chisum, at Section 16.03 [a][iv].
8Boesch v. Graff, 133 U.S. 697, 33 L. Ed. 787, 10 S. Ct. 378 (1890)
9Griffin v. Keystone Mushroom Farm, Inc., 453 F. Supp. 1283, 199 U.S.P.Q. 428 (E.D. Pa. 1978)
10Sanofi, S.A. v. Med-Tech Veterinarian Products, Inc., 565 F. Supp. 931, 220 U.S.P.Q. 416 (D.N.J. 1983)