Exhaustion of Intellectual Property Rights and Fair Competition

BlogIntellectual Property RightsPatent    April 7, 2021
Exhaustion of Intellectual Property Rights and Fair Competition Posted On

Where did Exhaustion of Rights Come from?

The idea of enforcing a uniform regime with minimum standards of Intellectual Property Rights (IPRs) was to ensure that such rights do not act as a hurdle in the furtherance of international trade. It is for this reason that when the World Trade Organization (WTO) was formed and the Trade-Related Intellectual Property Rights (TRIPS) Agreement came into force, all the signatory countries were to adhere to the Preamble of the TRIPS Agreement, which states that it is an attempt to decrease distortions and impediments in international trade that shall be achieved by promoting effective and adequate protection of IPRs. To achieve the said objective, it also enumerates that States shall ensure that enforcement of IPRs does not itself become a barrier to international trade. Therefore, the relation between IPRs and competition is very direct and evident.

What is Exhaustion of Intellectual Property?

As the word ‘exhaustion’ makes it clear, it stands for worn-out completely or on the verge of depletion. The same stands true when the term is applied in terms of a doctrine of exhaustion in IPRs. To be specific, it means that the rights in a given Intellectual Property (IP) have worn-out as a result of the legitimate transfer of the title in the tangible article that incorporates or bears the IP asset in question. For instance, there is a publication of a hundred books that have copyrighted content within them and a trademark symbol of the publisher affixed upon each of the said published books. As per the doctrine, if out of these books, one book is legitimately sold to a person, then in that book, the rights are exhausted once the transaction is over.

Exhaustion takes place when the proprietor of an IP asset himself or any other person authorized on his behalf sells the said product. Then, upon the very first authorized sale, the power to control the resale or the distribution of the sold piece gets exhausted. It is also known as the first sale doctrine since the first sale exhausts the rights over the said object incorporating the IPR.

The principle was the result of the decision of the court in the case of Bloomer vs. McQuewan, which ruled that the property sold by the patentee becomes the buyer’s private individual property and that the proprietor of patent loses his right over that individual property while the right in other assets remains intact.

Rationale behind the Doctrine of Exhaustion

Exhaustion of Intellectual Property Rights and Fair Competition

The theory behind the doctrine of exhaustion is that it enables the proprietor of  IP to receive an equitable, fair reward for surrendering his or her right to withhold a product from the market but permits free disposition and movement of the said asset thereafter. Therefore, it prevents disrupting the balance between fair trade practices as well as the enjoyment of exclusive rights over the IP asset. If exhaustion were not applicable under the IPR regime, it would have enabled the rights holders to exploit their monopoly, contrary to the interest of competitors as it deters in extracting the benefits out of competitive practices as well as the consumers to have access to goods. In such an event, the sale of the asset would never mature into an absolute sale, and transfer of ownership would remain conditional.

Kinds of Exhaustion

The different kinds of principles of exhaustion are categorized in reference to the geographical application and territorial extent of the doctrine. There are three different kinds of exhaustion:

  • National Exhaustion: As per this category, exhaustion occurs when the author loses control over the resale of the product in the country where the first authorized sale took place. It is to be noted that under this principle, the purchase of the patented article and its subsequent resale or its re-distribution is to be confined within the territorial limits of the said jurisdiction only; for instance, company ‘A,’ a drug manufacturer, buys a particular API (Active Pharmaceutical Ingredient) inclusive drug from company ‘B’ to re-sell in the same country where the transaction took place. In such an instance, B has already made the sale, and therefore, it cannot further control the resale or distribution in the said jurisdiction. In terms of competition law, where this doctrine is applied, it can serve as a deterrent to free the movement of goods where IP can act as a trade barrier since it would give the proprietor of the IP the right to absolutely control the sale in national as well as international markets. Bangladesh is one such country that follows the principle of national exhaustion.
  • Regional Exhaustion: As per this category, exhaustion occurs when the proprietor of an IPR loses control over the resale of the said asset in a particular region where the first sale took place. It is commonly applied in the European Union. In such an instance, parallel imports of goods within the regional jurisdiction is permitted, and the patented goods that have been subjected to the first-sale anywhere in the region can be imported and sold in any other EU member country without the permission of the patentee with the only requirement that the first sale should be made by or with the prior authorization of the patentee. For example, once a legit sale is made in Germany, the same can be exported to France without the authorization of the proprietor of rights.
  • International Exhaustion: As per this category, exhaustion occurs when the author loses control over the resale of the product irrespective of where the first authorized sale took place. For example, hypothetically, if a person ‘A’ has a patent in Congo and if the patented product is sold in Singapore with his prior authorization, his Patent Rights over the said product (individual article) in Congo will be exhausted. India and Japan, namely, are two commonly cited examples that follow this regime of exhaustion.

Which of the Above Mentioned are Favourable to Fair Trade Practices?

The principle of national exhaustion works best in the interest of the proprietor. The benefits accruing from this principle applied nationally are as follows:

  • It prevents third-parties from free-riding on investments made by official licensees and distributors or even rights holders as some manufacturers require them to invest in promotional events
  • Therefore, it prevents parallel imports, which are beneficial for fair trade but can hamper consumer choices due to lack of availability issues.

However, to be trade-friendly, the theory of comparative advantage has to be fully exploited, which stands against the principles of national exhaustion. Therefore, international exhaustion of rights is the most favorable for all kinds of competitors in the market while also delivering the choice of products to consumers.

Stance of Different Jurisdictions:

  1. The United States of America – The US has recognized international exhaustion from the date of the inception of the principles. The concept of international exhaustion applies to the US, at least in the case of trademarks and copyright; although, the explicit position as to the category of exhaustion applicable in the case of patents is not crystalline. Also, the US has advanced this position in bilateral treaty agreements and has even gone so far as to put pressure on foreign trading partners to incorporate international exhaustion. The court in the US has contributed to the jurisprudence in this aspect. In the case of the United States vs. University Lens Co., the Supreme Court drew the relationship between the antitrust law and the doctrine of exhaustion.
  2. Oman – The principle of exhaustion followed in Oman is slightly different from elsewhere since it provides for national exhaustion of IPRs. However, it also provides that where the proprietor of an IP asset engages in a certain practice that is qualified to be counted as abusive conduct or that involves an act contrary to the public interest, including anti-competitive practices, the responsible authority shall have the power, whether ex-officio or at the request of any interested party, for declaring the rights in question to be exhausted upon a legitimate first sale made abroad by the proprietor or made with his consent and where parallel rights are in force. Therefore, as a general rule, the doctrine of exhaustion applies nationally; however, in adverse circumstances, it may also apply internationally. Therefore, the interplay of fair trade, antitrust, and exhaustion is very evident in Oman’s IP jurisprudence.
  3. India – In the pre-TRIPS era, the stance of India upon the jurisdictional limitation applied through the doctrine of exhaustion was rather ambiguous. It was much later that the courts concurred and made it clear that India adheres to the international principle of exhaustion, which was indeed a welcoming change. The Indian law also tries to achieve maximum competition by ensuring that a majority number of products reach Indian markets, and consequently, the price of those products is regulated. The same, in turn, helps reduce consumer search cost and increases consumer choices concerning a market.

In addition to the measures mentioned above, many states utilize contractual obligations through mutual agreements to help proprietors of IP avoid being governed under international exhaustion and, consequently, parallel imports. ✅ For more visit: https://www.kashishipr.com/

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