Under What Circumstances Is a Japanese Patent Right Considered "Exhausted," Limiting Enforcement?

Japanese Attorney at Law - Bengoshi L.L.

• 12 min read

The grant of a patent in Japan provides the patentee with the exclusive right to work the patented invention in the course of trade. However, this right is not absolute and is subject to certain limitations. One of the most significant of these is the doctrine of patent exhaustion (権利消尽 - kenri shōjin). This judicially developed doctrine dictates that once a patented product has been lawfully placed on the market in Japan by the patentee or with their consent, the patentee's rights with respect to that specific item are generally considered "exhausted." Consequently, subsequent purchasers are typically free to use, resell, or repair that particular item without infringing the patent.

The rationale behind this doctrine is twofold: first, to prevent the patent system from unduly hindering the smooth circulation of goods once they have entered the stream of commerce; and second, the recognition that the patentee has had an opportunity to receive their due reward for the invention through its first authorized sale. While not comprehensively codified in a single statutory provision for every scenario, the principle of exhaustion is a deeply entrenched and consistently applied concept in Japanese patent law, as affirmed by landmark Supreme Court decisions.

Understanding when and how patent rights are exhausted is crucial for businesses involved in the manufacture, sale, or secondary market activities of patented goods in Japan. The analysis often involves a structured approach, considering the type of invention, the entity responsible for the first sale, and the nature of the subsequent acts performed with the product.

The Core Principle: Domestic Exhaustion

The fundamental application of the exhaustion doctrine pertains to products first lawfully sold within Japan. When a patentee, or a licensee acting within the scope of their license, sells a patented product in the Japanese market, the patent rights concerning that specific physical item are generally extinguished. This means that the buyer, and any subsequent transferees, can typically use that item, sell it to others, or perform ordinary repairs without needing further permission from the patentee or facing infringement claims related to that specific item.

Analytical Framework for Exhaustion Issues

To determine whether patent rights have been exhausted in a particular situation, Japanese courts and practitioners often consider a three-step analytical framework:

  1. Step 1: The Type of Patented Invention (客体問題 - kyakutai mondai - Object Issue): What is the nature of the invention for which patent rights are being asserted?
  2. Step 2: The Manufacturing and Selling Entity (主体問題 - shutai mondai - Subject Issue): Who was responsible for placing the product on the market, and under what authority?
  3. Step 3: The Nature of the Alleged Infringer's Act (行為問題 - kōi mondai - Act Issue): What is the specific act being performed with the product by the alleged infringer?

A. Step 1: The Nature of the Patented Invention

The applicability and nuances of exhaustion can vary depending on whether the patent covers a product, a process, or a process for manufacturing a product.

i. Product Inventions (物の発明 - mono no hatsumei)

For tangible product inventions, the exhaustion doctrine generally applies in a relatively straightforward manner to the specific product sold. However, complexities arise when the item initially sold is not the complete patented product but rather a component that could be used in the patented product (i.e., an item that might otherwise give rise to an indirect infringement claim).

  • Sale of a Component Itself: If a patentee sells a component that is, for example, exclusively for use in their patented product (an indirect infringement item under Article 101, item 1), exhaustion principles generally apply to that component. This means the patentee cannot subsequently assert indirect infringement against downstream users or resellers of that specific component. This was a point discussed in the IP High Court Grand Panel decision of May 16, 2014 (Hanrei Jihō No. 2224, p. 146, the Packet Data Transmission Method and Apparatus case, often referred to as Apple v. Samsung).
  • Component Used to Make the Final Patented Product: If the purchased component is then used by the buyer or a third party to manufacture the complete patented product, the situation is more nuanced. The sale of a mere component generally does not exhaust the patentee's rights in the entire patented product that is subsequently assembled using that component. The rationale is that the patentee, by selling only a part, may not have had the opportunity to obtain full remuneration for the entire patented invention. However, exhaustion for the final product might be found if there was an express or implied license to complete the invention, or if the sold component(s) essentially constituted a "kit" representing the substantial entirety of the invention, such that the sale of the kit was tantamount to the sale of the patented product itself.

ii. Process Inventions (方法の発明 - hōhō no hatsumei)

Historically, the application of exhaustion to pure process inventions was considered problematic, as a process is an intangible series of steps and is not "sold" in the same way a physical product is. However, judicial thinking has evolved. The IP High Court Grand Panel decision of January 31, 2006 (Hanrei Jihō No. 1922, p. 30, another aspect of the Liquid Container or 「液体収納容器」事件, though this specific point on process exhaustion was not addressed by the Supreme Court in its later ruling in the same case line focusing on repair/reconstruction) and subsequent legal scholarship suggest that exhaustion principles can apply to process patents in certain limited scenarios:

  • Sale of an Apparatus Exclusively for Performing the Patented Process: If the patentee or their licensee sells a machine, device, or material whose only substantial and intended use is to perform the patented process (i.e., an item that would typically fall under the indirect infringement provisions of Article 101, items 4 or 5 for process patents), the patentee's right to control the use of the patented process with that specific apparatus may be considered exhausted. The reasoning is that the economic value of the process invention is substantially embodied in the dedicated apparatus, and its sale provides the patentee an opportunity for remuneration.
  • Co-pending Product and Process Claims for the Same Technical Idea: If a single patent includes both product claims and process claims that essentially cover the same core inventive concept (e.g., a new compound and a method of using that compound for a specific purpose), an authorized sale of the product claimed might also be seen as exhausting the rights under the associated process claims, particularly to prevent the patentee from negating the effect of product exhaustion by subsequently asserting the process claims against the use of the legitimately purchased product.

iii. Inventions of a Process for Manufacturing a Product (物を生産する方法の発明 - mono o seisan suru hōhō no hatsumei)

This category has elements of both product and process inventions:

  • Products Manufactured by the Patented Process: If the product that is directly obtained by the patented manufacturing process is lawfully sold by the patentee or a licensee, the exhaustion doctrine applies to that specific product in the same way it applies to product inventions.
  • Apparatus for Performing the Manufacturing Process: If what is sold is an apparatus or machine specifically designed for carrying out the patented manufacturing process, the situation is analogous to the sale of an apparatus for a simple process invention discussed above; rights to use the process with that apparatus may be exhausted.

B. Step 2: The Entity Selling the Product (Subject Issue)

The identity and authority of the seller are critical to determining if the first sale was "lawful" and thus capable of triggering exhaustion.

  • Sale by the Patentee: This is the most straightforward scenario where exhaustion applies.
  • Sale by a Licensee:
    • Within the Scope of the License: If a licensee, whether holding a non-exclusive license (通常実施権 - tsūjō jisshikensha) or an exclusive license (専用実施権 - sen'yō jisshikensha), sells the patented product within the terms and conditions of their license agreement, exhaustion occurs.
    • Sales in Breach of License Terms: This is a more complex area. The prevailing view in Japan is that not every breach of a license agreement by the licensee will negate exhaustion for downstream purchasers. A distinction is often drawn:
      • Breaches Affecting the Scope of the Patent Grant: If the licensee exceeds the fundamental scope of the license (e.g., selling a different type of product than licensed, exceeding a maximum production quantity), the sale may be considered unauthorized from a patent law perspective, and exhaustion may not apply.
      • Purely Contractual Breaches: Violations of other terms, such as restrictions on the territory of sale (within Japan), failure to meet minimum sales quotas, non-payment of royalties, or using unapproved material suppliers, are often treated as mere breaches of contract. Sales made under such breaches may still trigger patent exhaustion, leaving the patentee with contractual remedies against the licensee. This approach prioritizes the security of transactions and protects bona fide downstream purchasers who may be unaware of such internal contractual restrictions.
    • Sales After License Termination: If a license is validly terminated, any subsequent sales of the patented product by the former licensee are unauthorized, and thus, no exhaustion occurs for those items.
  • Sales under Statutory Licenses: If a party is working the invention under a statutory license (e.g., a prior user right under Article 79, or an employer's right for an employee invention under Article 35), sales made pursuant to such a license also lead to exhaustion. This is necessary to give practical effect to these statutory rights.
  • Reservation of Ownership (所有権留保 - shoyūken ryūho): If a transaction is genuinely a lease where the patentee retains ownership, rather than a sale, exhaustion typically does not occur because there has been no transfer of title that would trigger it. However, courts will look at the economic substance of the transaction; a purported lease that is, in reality, a disguised sale will likely be treated as a sale for exhaustion purposes.

C. Step 3: The Nature of the Alleged Infringer's Act (Act Issue)

Once a patented product is legitimately sold, what can subsequent owners do with it?

  • Simple Use or Resale: The most basic consequence of exhaustion is that the purchaser and subsequent owners are free to use the specific product sold and to resell it to others without infringing the patent.
  • Modification, Repair, or Reconstruction (修理と再生問題 - shūri to saisei mondai): This is where many disputes lie. While a purchaser has the right to use and maintain the product they bought, this right does not extend to completely reconstructing the patented invention or creating a "new" version of it. The crucial distinction is between permissible repair and impermissible reconstruction.
    • The "Ink Cartridge" Supreme Court Decision (November 8, 2007, Minshu Vol. 61, No. 8, p. 2989): This is the leading authority in Japan on the repair/reconstruction doctrine. The Supreme Court held that exhaustion applies to the specific patented product that was sold. However, if that product is subsequently "processed or its components are replaced, and as a result, a patented product lacking identity with the said patented product is newly manufactured," then the patent rights are not exhausted with respect to this "newly manufactured" product. Infringement liability can then arise.
    • Multi-Factor Test for "New Manufacture": To determine if an act constitutes impermissible "new manufacture" rather than permissible repair, the Court outlined several factors to be considered comprehensively:
      1. Attributes of the patented product: (e.g., is it a product with consumable parts? What is its expected lifespan? Is it intended for single use?).
      2. Content of the patented invention: (i.e., which specific components or features of the product embody the core inventive concept protected by the claims?).
      3. Mode of processing and replacement of parts: (What is the nature and extent of the work done? How significant are the replaced parts relative to the whole product?).
      4. Commercial realities and transaction practices: (e.g., is such repair or refurbishment common in the industry? Does the patentee or market expect such activities?).
    • Applying the Factors:
      • Replacement of Consumable or Economically Minor Parts: Generally, replacing parts that are intended to be consumed or wear out during normal use (e.g., refilling an ink cartridge, replacing a worn-out blade in a tool) or repairing economically insignificant components is considered permissible repair and falls within the scope of exhaustion.
      • Replacement of Parts Embodying the Invention's Core: If the replaced part is itself a key component embodying the "essential part" or the technical core of the patented invention, the act is more likely to be deemed a "new manufacture," thus taking it outside the scope of exhaustion. For example, if the patented invention resides in a specific memory chip within a device, replacing that chip with a new one might be seen as creating a new instance of the patented invention.
      • Transaction Practices and Patentee's Conduct: If the patentee's own practices (e.g., selling replacement parts) or common industry practices suggest that certain types of refurbishment are expected, this would weigh in favor of finding the activity to be permissible repair. Conversely, if a product is designed and marketed as a single-use item (e.g., for safety or efficacy reasons in medical devices), and modifications are made to enable its reuse, this could be viewed as impermissible reconstruction.
    • Modifications to Non-Claimed Parts: If the modifications or repairs are made only to parts of the product that are not covered by the patent claims, the analysis is generally simpler. The prevailing "production approach" suggests that as long as the claimed inventive features are not being "re-produced," exhaustion should continue to protect the user's activities. The Supreme Court in the Ink Cartridge case focused its test on whether a patented product lacking identity with the original was newly manufactured, implying the focus is on the recreation of what is actually claimed.

Exhaustion and Indirect Infringement

The doctrine of exhaustion also interacts with principles of indirect infringement. If a user is lawfully entitled to repair their purchased patented product under the exhaustion doctrine (e.g., by replacing a consumable component that is part of the patented combination), a third party who supplies that specific replacement part to that user for the purpose of that permissible repair will generally not be liable for indirect infringement.

The rationale is that the user's act of repair is lawful due to exhaustion; therefore, facilitating that lawful act should also be permissible. To hold the parts supplier liable for indirect infringement in such a scenario would effectively nullify the user's right to repair, as they would be unable to obtain the necessary parts. This aligns with the "Scope of Limiting Provisions Theory," where the defense available to the direct actor (the user performing the repair) extends to shield the alleged indirect infringer (the parts supplier) from liability.

Parallel Importation (International Exhaustion)

A distinct but related set of rules applies when a product covered by a Japanese patent is first sold outside Japan by the patentee or with their consent, and then subsequently imported into Japan by a third party (a "parallel import"). In this scenario, the principles of domestic exhaustion do not automatically apply. Instead, Japanese law, as established by the Supreme Court, employs a concept akin to implied consent.

  • The "BBS Wheels" Supreme Court Decision (July 1, 1997, Minshu Vol. 51, No. 6, p. 2299): This is the seminal case on parallel importation. The Supreme Court rejected a universal doctrine of international exhaustion but established that a Japanese patentee generally cannot enforce their Japanese patent rights against patented products that they (or an economically equivalent entity like a subsidiary) first sold abroad and which are subsequently imported into Japan, unless they took specific steps to restrict such importation.
  • The BBS Wheels Rule (Presumed Consent):
    • If the Japanese patentee (or an entity that can be legally equated with them) sells the patented product abroad, they are presumed to have consented to its subsequent importation into Japan and its circulation within the Japanese market.
    • This presumption can be rebutted, and the patentee can prevent parallel importation if:
      1. Agreement with the first purchaser abroad: The patentee and the first foreign purchaser explicitly agreed that the product would not be sold into or used in Japan, AND
      2. Clear indication on the product: This restriction (i.e., prohibition of import/sale in Japan) was clearly indicated on the product itself.
    • If both these conditions are met, the patentee can enforce their Japanese patent against the parallel imported goods. If either condition is not met, the right to enforce is generally lost for those goods.
  • Key Aspects of the Parallel Importation Rule:
    • Identity of the Foreign Seller: The rule primarily applies when the foreign sale is made by the Japanese patentee or an entity closely affiliated with them (e.g., subsidiary). Sales by unrelated third parties or under foreign compulsory licenses typically do not exhaust Japanese patent rights.
    • Existence of Foreign Patent Rights: The applicability of the BBS Wheels rule does not depend on whether the patentee held a corresponding patent in the country of first sale. The act of placing the goods into international commerce without restriction is the key factor.
    • "Clear Indication" of Restriction: The restriction against importation into Japan must be clearly marked on the product in a way that is reasonably noticeable to subsequent purchasers in the distribution chain. The language and placement of the marking are important. Issues can arise if the marking is removed by intermediaries.
    • Distinction from Domestic Exhaustion: A crucial difference is that for domestic sales, a patentee generally cannot prevent exhaustion by simply putting a notice on the product restricting resale or use. For parallel imports, however, such a notice (coupled with the initial agreement) can be effective in preserving Japanese patent rights.
    • Repair/Modification of Lawfully Parallel-Imported Products: If a product is lawfully imported into Japan under the BBS Wheels principles (i.e., Japanese patent rights are exhausted for it), and it is subsequently repaired or modified in Japan, the same "repair vs. reconstruction" analysis from the Ink Cartridge case would likely apply to determine if a "new manufacture" has occurred, potentially reviving the patentee's ability to assert their rights against that newly manufactured item.

Conclusion

The doctrine of patent exhaustion is a critical limitation on the enforcement of patent rights in Japan, designed to facilitate the free movement of legitimate goods once the patentee has had their initial opportunity to profit from their invention. Its application requires a careful, step-by-step analysis considering the type of patented invention, the authority and actions of the entity that first sold the product, and the specific nature of the subsequent acts performed with that product, particularly in cases of repair or modification. The rules governing domestic exhaustion are distinct from those concerning parallel importation of goods first sold abroad, with the latter hinging on a nuanced framework of presumed consent and the patentee's ability to expressly reserve their Japanese rights through specific agreements and clear product markings. Navigating these principles is essential for any business dealing with patented products in the Japanese market.