Patent Exhaustion in Japan: How Does It Apply to Repaired Goods and International Sales?

The patent exhaustion doctrine, often known as the "first sale doctrine," is a fundamental principle in patent law that limits the extent to which a patentee can control a patented article after an authorized sale. Once a patented product is sold by the patentee or with their consent, the patent rights with respect to that specific item are generally "exhausted," and the purchaser (and subsequent owners) are free to use, resell, or repair the item without infringing the patent. This doctrine strikes a balance between rewarding the patentee for their invention and ensuring the free circulation of goods in commerce.

Japan, like other major jurisdictions, recognizes the patent exhaustion doctrine, primarily through judicial precedent rather than explicit, comprehensive statutory provisions. Understanding its application, particularly concerning repaired or modified goods and the complexities of international sales (parallel imports), is crucial for businesses operating in or trading with Japan.

The Legal Basis and Rationale for Patent Exhaustion in Japan

While the Japanese Patent Act does not contain a single, overarching article defining patent exhaustion for all scenarios, the doctrine is firmly established through a series of court decisions. The core rationale mirrors that found in other legal systems:

1. Reward for the Patentee: The primary justification is that the patentee has had the opportunity to receive their economic reward for the invention at the point of the first authorized sale of the patented article. Allowing them to assert control and demand further royalties for subsequent dealings with the same article would lead to an unjust double recovery.
2. Free Circulation of Goods: Restricting the use or resale of legitimately sold patented goods would unduly hinder commerce and the public's ability to utilize items they have lawfully acquired.
3. "Purpose Attainment Theory" (目的到達説 - mokuteki tōtatsu-setsu): Rather than relying heavily on an "implied license" theory (which can be problematic if the patentee expressly negates such a license), Japanese courts often consider that the patent right has achieved its purpose with respect to the specific item once it's placed on the market through an authorized sale. The Supreme Court of Japan's decision on July 1, 1997 (often referred to as the BBS Wheels case, Heisei 7 (o) No. 1988), is a landmark ruling in this area, confirming the doctrine and notably addressing its international dimension. This decision, and a subsequent Supreme Court ruling on November 8, 2007 (Heisei 18 (ju) No. 826, concerning ink cartridges), emphasize a balancing of interests between the patentee and the public.

The general approach to determining if exhaustion applies can often be broken down by considering:

• The nature of the patented invention (e.g., product, method).
• The entity that made the first sale (e.g., patentee, licensee).
• The nature of the alleged infringer's act (e.g., use, resale, repair, modification).

Application of Exhaustion to Different Types of Inventions and Sales Scenarios

The application of the patent exhaustion doctrine in Japan varies depending on the type of patented invention and the specific circumstances of the sale and subsequent acts.

A. Product Patents (物の発明 - mono no hatsumei)

For tangible product patents, the rule is relatively straightforward: patent rights are generally exhausted for a specific unit of a patented product once that unit has been lawfully sold in Japan by the patentee or with their authorization. The new owner of that unit can then use it, resell it, or otherwise dispose of it without infringing the patent related to that specific unit.

The identity of the seller is important:

• Sale by the Patentee: Exhaustion clearly applies.
• Sale by a Licensee: If a product is sold by an authorized licensee (whether exclusive or non-exclusive), exhaustion generally applies, provided the sale was within the terms of the license agreement. If a licensee acts outside the scope of their license (e.g., exceeding quantity or territorial restrictions in a manner that constitutes patent infringement rather than mere contractual breach), the sold products might be considered infringing, and exhaustion would not apply to them.
• Sale by a Statutory Licensee: Sales by those holding statutory licenses (e.g., under prior use rights or for employee inventions) also typically lead to exhaustion, as these are lawful exercises of a right to work the invention.
• Sale of Indirectly Infringing Products: If a patentee sells a product that, while not the complete patented invention itself, is a key component whose sale would otherwise constitute indirect infringement (e.g., a part designed exclusively for use in the patented invention), exhaustion principles may extend to the subsequent assembly and use of the direct product made using that component. The reasoning is that the patentee has profited from the invention through the sale of the essential component.

B. Method Patents (方法の発明 - hōhō no hatsumei)

The application of exhaustion to method patents has historically been more complex because a method is "used" rather than "sold" as a tangible item. However, Japanese case law has evolved to recognize exhaustion for method patents in certain circumstances where the patentee has had a fair opportunity to reap the rewards of their patented method.

A pivotal decision from the IP High Court on January 31, 2006 (the "Liquid Storage Container" case, Heisei 17 (ne) No. 10045) clarified that exhaustion can apply to method patents if the patentee has effectively put the invention into commerce in a way that allows them to benefit from the method patent. The court identified two main scenarios:

1. Sale of a Product Embodying or Exclusively Used for the Method: If the patentee (or with their consent) sells a product or device that is either specifically designed to carry out the patented method or whose primary or exclusive use is to practice the method (i.e., a product whose sale might otherwise constitute indirect infringement of the method patent), the patent rights for the use of the method with that specific product unit may be exhausted. The sale of such a product is considered the point at which the patentee can extract the economic value of the patented method.
   However, this principle might be limited. If the sold product is only tangentially related to the method (e.g., it could be used for an indirect-of-indirect infringement, or it only relates to a minor, non-essential step of a multi-step method), the patentee might not have had a sufficient opportunity to be compensated for the full value of the method, and exhaustion might not apply.
2. Patents with Corresponding Product and Method Claims: If a single patent includes claims directed to a product and also claims directed to a method of using that product (where both sets of claims relate to the same core technical idea), the authorized sale of the product will typically exhaust the patent rights for the associated method claims with respect to that sold product. This prevents the patentee from circumventing the exhaustion doctrine by asserting method claims against the normal use of a product for which product patent rights have already been exhausted.

C. Product-by-Process Patents (物を生産する方法の発明 - mono o seisan suru hōhō no hatsumei)

For patents claiming a product defined by its method of production:

• If the product itself (made by the patented process) is sold by the patentee or with their consent, exhaustion applies to that specific unit of the product, much like any other product patent.
• If an apparatus or device specifically designed and sold for carrying out the patented production method is sold, the situation is analogous to the first scenario for method patents discussed above; exhaustion may apply to the use of that apparatus for the method.
• If the patent contains claims to both the method of producing a product and the resulting product itself (embodying the same core inventive concept), the principles similar to the second scenario for method patents would apply regarding the interplay of product and method exhaustion.

The Critical Distinction: Repair vs. Reconstruction

One of the most litigated aspects of patent exhaustion worldwide is the distinction between permissible repair of a patented product by its owner and impermissible reconstruction, which amounts to making a new, infringing copy. Japanese law also grapples with this distinction.

The Supreme Court of Japan's decision on November 8, 2007 (Heisei 18 (ju) No. 826), often referred to in the context of refillable ink cartridges, provides the leading framework for this analysis. The Court outlined several factors to consider when determining whether an act constitutes repair (permissible under exhaustion) or reconstruction (infringement):

• The nature of the patented product and its components, including whether parts are intended to be consumable, wearable, or replaceable during the product's normal lifespan.
• The patentee's business model and how the product is typically sold and used in the market.
• The economic significance of the replaced or modified parts in relation to the patented product as a whole. Replacing minor, inexpensive, or routinely wearable parts is more likely to be seen as repair.
• Whether the act of repair or modification essentially recreates the core inventive features of the patent. If the actions substantially replicate the patented invention anew, particularly its novel and non-obvious aspects as claimed, it leans towards reconstruction.
• The specific claims of the patent: Whether the alleged repair/modification touches upon elements specifically recited in the patent claims is a crucial consideration.
  • Modification of Claimed Parts: If the work is done on parts of the product that are integral to the patented claims, the Supreme Court's multi-factor test is directly applied to determine if it's repair or reconstruction.
  • Modification of Unclaimed Parts: If the modification is made to parts of the product that are not themselves covered by the patent claims (though the product as a whole is patented):
    • The "Production Approach" (生産アプローチ - seisan apurōchi): This view, which appears to be the majority stance and aligns with the Supreme Court's focus on whether an act amounts to "manufacturing" the patented invention, suggests that if the modification of unclaimed parts does not constitute a new "making" or "production" of the overall patented invention as defined by the claims, then exhaustion should continue to apply. This prioritizes transactional security for the owner of the lawfully acquired product.
    • The "Exhaustion Approach" (Minority View) (消尽アプローチ - shōjin apurōchi): A minority perspective argues that even modifications to unclaimed parts could potentially negate exhaustion if they significantly alter the product in a way that deprives the patentee of the legitimate scope of their expected remuneration (e.g., by creating a significantly different product or extending its life in a manner not contemplated or compensated for at the first sale). This view might still apply the Supreme Court's repair/reconstruction criteria even in such cases.

International Exhaustion and Parallel Imports

A highly significant aspect of patent exhaustion is its international dimension: does the authorized sale of a patented product in one country exhaust the patentee's rights in other countries where corresponding patents exist, thereby permitting "parallel importation" into those other countries?

The Supreme Court of Japan addressed this in the BBS Wheels case (July 1, 1997). The Court's stance can be summarized as follows:

• Conditional International Exhaustion: Unlike a blanket rule, the Japanese approach is conditional. The Court indicated that international exhaustion can occur. If a Japanese patentee (or with their consent) sells a product abroad without clearly restricting its subsequent importation and sale in Japan, and they had the opportunity to set terms and receive remuneration reflecting the global market (including Japan), their Japanese patent rights with respect to those specific sold units might be deemed exhausted.
• Patentee's Ability to Reserve Rights: Crucially, the BBS Wheels decision suggested that patentees might be able to prevent exhaustion of their Japanese patent rights by clearly and effectively indicating at the time of the foreign sale that the products are not to be imported into or sold in Japan (e.g., through explicit contractual restrictions or clear labeling).
• Other Considerations:
  • If the foreign sale was made by an unrelated third party without the Japanese patentee's authorization, exhaustion of Japanese rights is unlikely.
  • If the patentee did not hold a corresponding patent in the country of the first sale, the argument for exhaustion of their Japanese patent rights is weakened, as they had no patent rights to exercise (and thus no patent-related reward to obtain) in that foreign jurisdiction at the time of that sale.

The issue of international exhaustion in Japan remains complex and highly fact-specific, often depending on the patentee's actions at the time of the foreign sale and the reasonable expectations of the parties involved.

Comparison with U.S. Patent Exhaustion Law

The U.S. Supreme Court has also issued significant rulings on patent exhaustion, notably in Quanta Computer, Inc. v. LG Electronics, Inc. (2008) and, more recently, Impression Products, Inc. v. Lexmark International, Inc. (2017).

• Core Principle in the U.S.: An authorized sale of a patented item by the patentee or with their authority exhausts all U.S. patent rights in that item.
• International Exhaustion (Post-Lexmark): The Lexmark decision established a strong presumption of international exhaustion in the U.S. It held that an authorized sale of a U.S.-patented item anywhere in the world by the patentee (or with their authority) exhausts the U.S. patent rights in that item, making it very difficult for patentees to prevent parallel importation into the U.S. of goods they legitimately sold abroad. This is a more definitive stance on international exhaustion than Japan's conditional approach.
• Post-Sale Restrictions: U.S. law generally holds that post-sale restrictions on use or resale are unenforceable under patent law once exhaustion has occurred (though contract law might offer separate remedies).
• Repair vs. Reconstruction: The distinction also exists and is crucial in U.S. law, guided by precedents like Aro Mfg. Co. v. Convertible Top Replacement Co. (1961).

Key Differences:

• International Exhaustion: The most striking difference lies here. The U.S. (Lexmark) has adopted a more absolute rule favoring international exhaustion, significantly limiting a patentee's ability to use U.S. patent law to block parallel imports of their own authorized foreign-sold goods. Japan's BBS Wheels doctrine, conversely, provides a potential avenue for patentees to prevent exhaustion of their Japanese rights through explicit territorial restrictions at the point of foreign sale.
• Method Patent Exhaustion: While the U.S. Supreme Court in Quanta affirmed that the sale of an item that substantially embodies a patented method can exhaust the method patent, Japan's judicial approach, although evolving towards recognizing method patent exhaustion (as seen in the IP High Court's "Liquid Storage Container" case), has developed through specific categorical scenarios rather than a single broad principle.

Conclusion

The patent exhaustion doctrine in Japan serves as a vital check on the scope of patent rights after a patented product has been lawfully introduced into the market. It balances the patentee's interest in obtaining a fair reward for their invention against the public's interest in the free circulation and use of purchased goods. Key considerations include the type of patent, the identity of the seller, the nature of the subsequent acts (particularly repair versus reconstruction, guided by the 2007 Supreme Court criteria), and, for internationally sourced goods, the nuanced principles of international exhaustion established in the BBS Wheels case.

For businesses, this means that strategies for selling patented goods in Japan or abroad, licensing practices, and approaches to aftermarket activities like repair services must all take into account these Japanese-specific exhaustion principles. Patentees, in particular, should be mindful of how their sales and licensing terms, especially for international transactions, might impact the enforceability of their Japanese patent rights against subsequently imported or resold goods.