A Common Law Doctrine of Exhaustion Based on an Implied Licence: a Canadian Perspective

• Shuji Sumi, LLM, is formerly a registered Japanese Patent Attorney and a registered Canadian and US Patent Agent.

• This article redefines the Canadian implied renunciation theory for justifying the purchaser’s dealing with a patented product. The implied renunciation of the exclusive right under the patent is interpreted in light of an implied licence.

• To the extent of an implied licence to deal with a purchased patented product, the exclusive right under the patent is unenforceable, that is, the exclusive right is effectively exhausted. The implied renunciation theory is differently expressed, that is, a ‘common law doctrine of exhaustion’ is a redefined theory for rationalizing the purchaser’s dealing with the patented product.

• While the common law doctrine of exhaustion is a blended form of an implied licence and patent exhaustion, at the foundation thereof, there is an implied licence that may be limited by the patentee’s intention. The implied licence and the effective exhaustion of the patent rights operate between the patentee and the purchaser. The implications of the common law doctrine of exhaustion are distinct from the exhaustion theory.

To reconcile the ‘implied renunciation of the exclusive right under the patent’ and an ‘implied licence’, the former is purposely interpreted in light of the latter. Renunciation of the exclusive right is evaluated as though the patentee ‘waived’ his exclusive right with respect to the sold patented product. By virtue of the purchaser’s acquired right, the purchaser is given immunity from infringing the exclusive right under the patent by dealing with the purchased patented product, and the exclusive right under the patent is unenforceable against her dealing with it. Taking into account the concept of exhaustion, the ‘implied renunciation of the exclusive right’ is interpreted as though the protection conferred by the patent is consumed and effectively exhausted to the extent of the purchaser’s right. The right acquired by the purchaser depends on an implied or explicit licence conferred on her, as does the ‘effective exhaustion’ of patent rights. Thus, the implied renunciation theory is redefined by blending the concepts of an implied licence and patent exhaustion. In this article, the redefined theory is referred to as a ‘common law doctrine of exhaustion’.⁸

The basic rule of the common law doctrine of exhaustion is that the extent of the effective exhaustion depends on the scope of the right acquired by the purchaser. An unconditional sale confers on the purchaser an implied licence, and the patentee’s exclusive right is effectively exhausted with respect to the sold patented product to the extent of the implied licence that is an unlimited right. Thus, the exhaustion is unlimited—‘full exhaustion’. If the imposed restrictive conditions are not brought to the purchaser’s attention at the time of the purchase, the sale will be unconditional,⁹ resulting in an implied licence and the full exhaustion of patent rights. If, however, the purchaser is aware of the restrictive conditions at the time of the purchase, the sale will be conditional and the purchaser will acquire an explicit licence—a limited right—defined by the conditions.¹⁰ To the extent of the limited right, the exclusive right under the patent is unenforceable, effectively exhausted. Outside the scope of the limited right, the exclusive right under the patent is enforceable—not exhausted—and the purchaser’s dealing with the patented product infringes the patent.¹¹ Hence, the effective exhaustion of patent rights, in this case, is limited, a ‘partial exhaustion’.

As such, under the common law doctrine of exhaustion, the effective exhaustion occurs on a conditional basis, and in a varied form, by reflecting the patentee’s intention, and operates between the patentee and the purchaser—an inter partes exhaustion. On the face of the common law doctrine of exhaustion, the sale of a patented product exhausts the patent rights; however, it does not denote that the exclusive right under the patent is ‘used up’. Accordingly, the common law doctrine of exhaustion differs from the exhaustion theory, under which the exhaustion of patent rights occurs on an unconditional basis and in a uniform manner.¹² While the exhaustion theory has not been introduced into Canadian patent law, an implied licence has similar effects to exhaustion. The common law doctrine of exhaustion has similarities with the US pre-Impression theory that is characterized by conditional exhaustion, wherein an unconditional sale of a patented product exhausts the patentee’s right.¹³ However, the common law doctrine of exhaustion differs from the US post-Impression theory.¹⁴