Patent Exhaustion in Japan: How Does It Affect U.S. Companies Importing Patented Goods?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

The principle of patent exhaustion, often known as the "first sale doctrine," dictates that the initial authorized sale of a patented item by the patentee, or with their consent, generally extinguishes certain patent rights in that specific item. This means that subsequent acts such as resale or use of that particular item by downstream purchasers typically do not constitute patent infringement. This doctrine is fundamental to balancing a patentee's exclusive rights with the free movement of goods in commerce. For U.S. companies and others involved in international trade, understanding how Japan applies patent exhaustion, particularly in the context of parallel importation, is critical.

Domestic Patent Exhaustion in Japan: The Foundation

In Japan, the principle of domestic patent exhaustion is well-established, primarily through judicial recognition rather than explicit statutory provision within the Patent Act. If a patented product is lawfully sold within Japan by the patentee or a licensee, the patent rights concerning that specific physical article are considered exhausted. This means the buyer, and subsequent purchasers, are generally free to use or resell that particular article without needing further permission from the patentee.

The Supreme Court of Japan alluded to this in its landmark decision on parallel imports, the BBS Wheels case (Judgment of July 1, 1997), and later directly affirmed the principle of domestic exhaustion in the context of repaired or refilled products in the Printer Ink Tank case (Judgment of November 8, 2007). The rationale underpinning domestic exhaustion includes the idea that the patentee has already received their economic reward from the first sale, and that subsequent control over the sold articles would unduly hinder their free circulation in the marketplace.

Limits of Domestic Exhaustion: The Repair vs. Reconstruction Doctrine

While domestic exhaustion permits the use and resale of a lawfully sold patented item, it does not grant a license to make new infringing products. This distinction becomes crucial when considering post-sale modifications, such as repair or refurbishment.

  • Permissible Repair: Generally, repairing a patented product that has been legitimately sold is not considered patent infringement. Repair is seen as an act to preserve the utility of the specific item that was already placed on the market and for which patent rights have been exhausted.
  • Impermissible Reconstruction: However, if the modification goes beyond mere repair and amounts to "reconstruction" – effectively creating a new version of the patented product – this can constitute a new act of production and thus infringe the patent.

The line between permissible repair and infringing reconstruction has been a subject of judicial scrutiny. The Supreme Court in the Printer Ink Tank case (November 8, 2007) provided a comprehensive framework for making this determination. The Court stated that whether a modification constitutes a new infringing "production" should be judged by comprehensively considering:

  1. The attributes of the specific product in question.
  2. The content of the patented invention (i.e., what constitutes its essential technical features).
  3. The manner and extent of the processing or replacement of parts.
  4. Established trade practices in the relevant sector.

Essentially, if a product has reached the end of its useful life and is then substantially remade, or if an essential part of the patented invention within the product is replaced (particularly with parts not sourced from the patentee or licensee), the activity is more likely to be deemed an infringing reconstruction rather than a permissible repair. For example, if a patented machine's core inventive component wears out and is replaced, effectively creating a new instance of the inventive feature, this could be infringement. Conversely, replacing non-patented, consumable, or routinely worn-out parts to maintain functionality would likely be considered permissible repair. The earlier Tokyo High Court decision in the Acyclovir case (November 29, 2001), where crushing patented tablets and re-encapsulating them was found not to be a new infringing "production" of the chemical compound itself, illustrates the factual complexities that can arise.

International Exhaustion and Parallel Importation: The Core Issue for Global Trade

The most significant aspect of patent exhaustion for international businesses concerns "international exhaustion" and its application to parallel imports. Parallel importation refers to the practice of importing into a country genuine patented goods that were first lawfully sold in another country by the patentee or with their consent. The central question is whether the sale of a patented product abroad by the patentee (or under their authority) exhausts the patentee's rights under the corresponding patent in the importing country (e.g., Japan).

Historically, the principles of "patent independence" (enshrined in Article 4bis of the Paris Convention, stating that patents granted in different countries for the same invention are independent of each other) and "patent territoriality" (the principle that patent rights are limited to the territory of the country granting them) were often cited to argue against international exhaustion. A strict application of these principles would suggest that a sale in country A does not affect the patentee's distinct patent rights in country B, meaning parallel importation into country B would constitute infringement. Indeed, an early influential decision by the Osaka District Court in the Brunswick case (June 9, 1969) denied international exhaustion for patented goods based on these principles.

Comparison with Trademark Parallel Imports

It is worth noting that Japan has long adopted a more permissive stance towards the parallel importation of trademarked goods. Generally, the import of genuine trademarked products (i.e., not counterfeits, and originating from the trademark owner or an affiliated entity) is allowed if it does not impair the essential functions of the trademark, such as source identification and quality guarantee. This was established through a line of cases, including the Parker case (Osaka District Court, February 27, 1970), and later confirmed by the Supreme Court in the Fred Perry case (February 27, 2003). The rationale for trademarks differs because the primary concern is preventing consumer confusion and protecting the goodwill associated with the mark, which may not be compromised if the imported goods are genuine and their quality is consistent with what consumers expect from that brand.

The Landmark BBS Wheels Supreme Court Decision

The landscape for patent parallel imports in Japan was fundamentally shaped by the Supreme Court's decision in L&P K. K. v. BBS Kraftfahrzeugtechnik A.G. (commonly known as the BBS Wheels case), delivered on July 1, 1997. This case involved aluminum car wheels patented in both Germany and Japan by a German manufacturer. The wheels were sold in Germany by the patentee, and a third party subsequently purchased these genuine wheels and imported them into Japan for resale. The Japanese patentee sued for infringement.

The Supreme Court's judgment established a nuanced, conditional approach to international patent exhaustion:

  1. Patent Independence/Territoriality Not Dispositive: The Court first clarified that the principles of patent independence and territoriality do not, by themselves, automatically determine whether parallel importation constitutes infringement. The issue is primarily one of interpreting the scope of rights granted under Japanese patent law.
  2. Rejection of a General International Exhaustion Doctrine for Patents: The Court explicitly rejected a blanket doctrine of international exhaustion for patents. It reasoned that a patentee's right in Japan is distinct from their rights in foreign countries. The reward for a Japanese patent is for the disclosure and use of the invention within Japan. Therefore, allowing the patentee to enforce their Japanese patent against goods first sold abroad is not necessarily an unjust "double-dipping" of rewards, as the foreign sale compensated for the foreign rights, not the Japanese rights. This was a key point of departure from the rationale sometimes used for permitting trademark parallel imports.
  3. The Conditional Allowance of Parallel Imports (The "Implied License" or "Consent" Approach): Despite rejecting a general international exhaustion doctrine, the Court established a crucial rule: the parallel importation of a patented product is generally permissible (i.e., the Japanese patent cannot be enforced to prevent it) UNLESS specific conditions are met. Specifically, enforcement of the Japanese patent is possible if:
    • The patentee and the first purchaser of the product in the foreign country (where it was lawfully sold) entered into an agreement restricting the resale or use of that product in Japan (or other specified territories).
    • This restriction was clearly and legibly indicated on the product itself.
  4. Effect of Restriction: If such a restrictive agreement exists and is clearly marked on the product, then a third party who imports that product into Japan, as well as subsequent purchasers within Japan who knew (or reasonably should have known) of the restriction, would be infringing the Japanese patent.

The Court's rationale was based on balancing the patentee's legitimate rights with the public interest in the free circulation of goods in international trade. It essentially creates a presumption that when a patentee sells a product, they consent to its worldwide resale unless they take explicit and clear steps to restrict its territory of sale and make those restrictions known to subsequent purchasers by marking the product.

Requirements for Preventing Parallel Imports in Japan Post-BBS Wheels

The BBS Wheels decision places the onus on patentees to proactively manage their distribution channels if they wish to prevent parallel importation into Japan:

  1. Contractual Restriction with First Purchaser Abroad: The patentee must have a legally binding agreement with the entity to whom they first sell the patented product in the foreign market (e.g., a foreign distributor). This agreement must specifically restrict the sale or distribution of those products into Japan.
  2. Clear Indication of Restriction on the Product: The restriction on importation into Japan must be clearly, legibly, and indelibly indicated on the patented product itself (or its packaging, if appropriate for the nature of the product). The purpose of this marking requirement is to provide notice to anyone who subsequently comes into possession of the product, including potential parallel importers and downstream customers in Japan. The exact nature of what constitutes a "clear indication" can be fact-dependent but should be unambiguous.

If these conditions are not met, the Japanese patent typically cannot be used to block the importation and sale of genuine patented goods that were lawfully placed on the market abroad by the patentee or with their consent.

Exhaustion and the Sale of Patented Components

A related and complex issue is whether the authorized sale of a patented component exhausts the patentee's rights not only in the component itself but also in a larger system or method that incorporates that component, especially if the component is designed to be used in an infringing manner or is a key part of an indirectly infringing act.

While this area is still evolving, it's worth noting that Japanese courts may take a relatively narrow view of exhaustion through the sale of components, particularly in the context of indirect infringement. For instance, a decision by the IP High Court Grand Panel on May 16, 2014 (in an Apple v. Samsung dispute), reportedly denied that the authorized sale of a component, even if that component fell under the "solely used for" category of objective indirect infringement (Article 101(i) of the Patent Act), automatically exhausted the patent rights in the final assembled product incorporating that component. This suggests that simply because a component is sold under authorization does not necessarily mean that the assembly of that component into a completed patented product by a third party is also authorized by exhaustion. This area contrasts with some interpretations in U.S. law, such as in Quanta Computer, Inc. v. LG Electronics, Inc., where the Supreme Court found broader exhaustion effects from the sale of components that substantially embodied the patent.

Practical Implications for U.S. Companies

The Japanese patent exhaustion framework, particularly the rules from BBS Wheels, has significant practical consequences for U.S. companies:

  • For Patentees Selling Products Internationally: If a U.S. company holds a Japanese patent and sells its patented products in other countries (e.g., the U.S. or Europe), and wishes to prevent those specific goods from being parallel imported into Japan by third parties, it must actively implement the two-pronged strategy from BBS Wheels: secure contractual restrictions with its foreign purchasers and clearly mark the products with the Japanese sales restriction. Without these measures, such parallel imports will generally be permissible.
  • For Importers and Distributors: Companies importing goods into Japan should be diligent in checking for any explicit restrictions marked on the products regarding their sale in Japan. If products are lawfully acquired abroad from the patentee or an authorized seller and bear no such restrictions, their importation and resale in Japan are generally not considered an infringement of the corresponding Japanese patent.
  • For Businesses Dealing with Repaired, Refurbished, or Modified Patented Goods: U.S. companies involved in the after-market for patented goods (e.g., repair services, sale of refurbished items) must carefully navigate the repair versus reconstruction doctrine as interpreted by the Japanese Supreme Court in the Printer Ink Tank case. Substantially remaking a product or replacing its essential inventive components can lead to infringement liability, even if the original product was lawfully purchased.

Conclusion

Japan's approach to patent exhaustion is a carefully calibrated system. Domestically, the principle is well-accepted, allowing free circulation of lawfully sold patented items while policing the boundary between permissible repair and infringing reconstruction. Internationally, the BBS Wheels decision provides a unique framework for parallel imports: it rejects a blanket international exhaustion doctrine but permits parallel importation by default, unless the patentee has taken specific, explicit steps—contractual agreement with the first foreign purchaser and clear marking on the product—to restrict sales into Japan. For U.S. businesses, whether acting as patentees or as traders in patented goods, a thorough understanding of these rules is essential for managing intellectual property rights and conducting cross-border trade involving Japan effectively.