The following paper examines the problem, from the European point of view, of the national, regional and world-wide exhaustion of each of the main categories of intellectual property rights 

Intellectual Property (IP) law has historically been based on the principle of territoriality. An IP right generally gives protection only within the territory of the state granting that right. However, under certain circumstances, the exercise of IP rights is narrowed and, sometimes, precluded. This is called the exhaustion doctrine.

The present essay is aimed at defining what exactly is meant by the exhaustion of IP rights and what in practice the difference is between exhaustion at the national and international levels, as well as at the European Union (EU) level.

Once a product protected by such a right has been put on the market by the IP right owner or with her consent, the IP right owner cannot prohibit the further commercialization (like the resale) of that product. The IP right is said to be "exhausted."

The exhaustion doctrine is unanimously recognized at a national level: a national IP right is exhausted within the territory of the state granting that right. This is called "national exhaustion" of rights. As an example, Article L. 613-6 of the Intellectual Property Code (the French IP statutes) provides exhaustion of the rights attached to a French patent, in a case where products covered by the patent have been put on the market within France.

In some countries, the doctrine of exhaustion of IP rights has been applied at the international level. Thus, once the owner of IP rights has marketed her goods on the market anywhere in the world, the IP rights are exhausted. This doctrine is called the "international exhaustion" of rights.

For instance, in Japan, further to BBS Kraftverzeug Technik AG v. Racimax Japan KK & Jap Auto Products KK (July 1, 1997), it is considered that international exhaustion applies in the field of patents and trademarks, unless it is otherwise agreed (that is, through licenses). Similarly, the international exhaustion doctrine used to be applied in several European countries, including Austria, Germany and the United Kingdom. For instance, in the United Kingdom, the Copyright Designs and Patents Act of 1988 provided that the copyright owner's right to issue works to the public was exhausted once a copy of the protected work was put into circulation anywhere in the world.

International exhaustion is a controversial issue among countries. This was reflected during the Uruguay Round of the Agreement on Trade Related aspects of Intellectual Property (TRIPs), where the international exhaustion issue was addressed. However, this issue was considered to be so delicate that it was expressly excluded. Thus, Article 6 of TRIPs states: "nothing in this Agreement shall be used to address the exhaustion of intellectual property rights."

Therefore, the international exhaustion remains a matter of each individual jurisdiction. However, this situation has been altered where the exhaustion issue was addressed in certain supranational forums, like in the European context.

At the European level, the doctrine of international exhaustion has been replaced with the doctrine of "Community exhaustion," in order to harmonize the laws of the Member States.

Several reasons have motivated the position not to introduce the "international exhaustion" in each Member State’s legislation. Firstly, the European trademark owners’ interests had suffered large profit losses due to a growing flow of the parallel imports that originate from outside of the European Economic Area (EEA). Secondly, the Contracting Parties had adopted different approaches as to the application of the international exhaustion doctrine. These different approaches were reflected during the discussions related to the adoptions of a directive to approximate the laws of the Member States relating to trade marks and of a Council Regulation on the Community trademark. Thus, while the Commission originally proposed international exhaustion in its basic proposals both for these directive and regulation, it was finally decided to adopt the Community exhaustion regime.

In addition, strong incentives have led to adopt the Community exhaustion regime of IP rights within the Common Market. Indeed, such rights have been considered as conflicting with the overriding goal of the Treaty establishing the European Community (the EC Treaty), the creation of a single market where all barriers to the free movement of goods are removed. In Centrafarm v. Sterling Drug [1974] ECR 1147, the court observed that: "the exercise by the owner of a trademark of the right which he enjoys under the legislation of a Member State to prohibit the sale, in that State, of a product which has been marketed under the trademark in another Member State by the trademark owner or with his consent is incompatible with the rules of the EC Treaty concerning the free movement of goods within the Common Market."

The doctrine of Community exhaustion of IP rights has been developed to balance the conflicting interests between the IP rights’ owners and the free movement of goods within the Common Market. To strike this balance, the existence of IP rights was distinguished from the exercise of these rights.

As to the existence of IP rights, the grant and enforcement of such rights have not been harmonized throughout the EU and are governed by the IP law of each Member State. Owners of IP rights may, in certain circumstances, prevent the import of products lawfully marketed elsewhere by suing for the infringement of national rights. Article 222 of the EC Treaty declares that the Treaty "shall in no way prejudice the rules in Member States governing the system of property ownership".

Articles 28 and 30 of the EC Treaty define the relationships between the principle of free movement of goods and the exercise of IP rights arisen under Member State’s legislations. Article 28 provides that "[q]uantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States." And, under Article 30, "[t]he provisions of Article 28 … shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of … the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade among Member States."

These articles have been interpreted to mean that it is the existence but not the exercise of IP rights which are protected under Member State’s legislations: the exercise of IP rights may be curtailed on the ground that it interferes with the principle of free movement of goods. More precisely, Article 28 of the EC Treaty prohibits all quantitative restrictions and measures having an equivalent effect on imports between Member States. The entitlement of the owner of an intellectual property right to bring an action for infringement in a national Court against an importer is, on its face, a measure which may restrict imports. The national measure on which that right is based should therefore be prohibited by Article 28. However, Article 30 of the Treaty provides that the prohibition contained in Article 28 will not apply if a national measure is "justified on grounds of... the protection of industrial and commercial property...." However, Article 30 as derogation from the basic principle of free movement must be construed narrowly.

Initially, the Community exhaustion was adopted in the trademark field. Article 7 of Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks and Article 13 of Council Regulation 40/94 of 20 December 1993 on the Community trademark, provide that:

1. The trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent.

 

2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.

 

The Community exhaustion regime was further applied to the other IP fields: Article 5(5) of Council Directive 87/54/EEC of 16 December 1986 on the legal protection of topographies of semiconductor products; Article 28 of the Convention for the European Patent for the Common Market (also called "the amended Community Patent Convention) included in the Agreement related to Community Patents (89/695/EEC); Article 10 of Directive 98/44/EC of the European Parliament and the Council of 6 July 1998 on the legal protection of biological inventions; Article 15 of Directive 98/71/EC of the European Parliament and the Council of 13 October 1998 on the legal protection of designs.

The language of Article 7 of Directive 89/104/EEC is also found in Commission Regulation 240/96 on the application of Article 85(3) of the Treaty to certain categories of technology transfer agreements. Thus, when listing the circumstances prohibited under this regulation (the so-called "black list"), Article 3 covered the circumstance in which one or both of the parties are required without any objectively justified reason to make it difficult for users or resellers from obtaining outside, or from putting on the market in the licensed territory products which have been lawfully put on the market within the Common Market by the licensor or with her consent.

In parallel, Article 2(1) of the Agreement on the European Economic Area of 2 May 1992 has unitarily addressed the issue of the Community exhaustion regime to all the IP rights.

To the extent that exhaustion is dealt with in Community measures or jurisprudence, the Contracting Parties shall provide for exhaustion of intellectual property rights as laid down in Community law. Without prejudice to future developments of case law, this provision shall be interpreted in accordance with the meaning established in the relevant rulings of the Court of Justice of the European Communities given prior to the signature of the Agreement.

 

The adoption of Article 2(1) has broadened the scope of Article 7 of Directive 89/104/EEC and Article 13 of Council Regulation 40/94, in terms of territory and range of IP rights. Firstly, since the Agreement on the European Economic Area entered into force, the rights conferred by the trademark are exhausted if the products have been put on the market in the EEA, that is, not only among the Member States ("the Community" under the meaning of Article 7 of Directive 89/104/EEC as originally adopted), but also among Norway, Iceland and Liechtenstein. Secondly, Articles 1 and 13 define the term "intellectual property" as including the protection of industrial and commercial property that does not "constitute a means of arbitrary discrimination or a disguised restriction on trade between the Contracting Parties."

In the field of trademarks, the principle applies specifically to goods, consistently with Article 7(1) of Directive 104/89. However, under Article 1, it does not apply to services, even though services may also be the subject of trademark protection. Similarly, in the field of copyrights, the court in Joined Cases 55/80 and 57/80 Musik-Vertrieb Membran GmbH and KKK-Tel International v. GEMA ruled that the principle applies to copyright goods, while it ruled in Coditel SA v. Cine Vog Films SA, Case 62/79, that the principle did not apply to services consisting of performances. Finally, in the field of patents, the court in Centrafarm v. Sterling Drugs, Case 15/74, ruled that the principle also applied to patented goods.

A critical element in determining that the owner of an IP right has exhausted her rights under Article 7 of Directive 89/104/EEC is her consent to the placing of the product on the market.

The issue whether such "consent" exists relates to the balance between the IP rights’ owners’ interests and the free movement of goods. In Van Zuylen Freres v. Hag AG (HAG I), Case 192/73, the court ruled that "Article 30 in fact admits exceptions to the free movement of goods only to the extent to which such exceptions [were] justified for the purpose of safeguarding rights which constitute[d] the specific subject of [commercial and industrial] property" (although HAG I was overruled by CNL-Sucal v. HAG AG (HAG II), case 10/89, the quoted statement still stands).

In a series of cases, the court identified the "specific subject" of IP rights.

In Merck v. Stephar [1981] ECR 2063, the court identified the specific subject of patents.

[I]t must be stated that in accordance with the definition of the specific purpose of the patent... the substance of a patent right lies essentially in according the inventor an exclusive right of first placing the product on the market. That right of first placing a product on the market enables the inventor, by allowing him a monopoly in exploiting his product, to obtain a reward for his creative effort without, however, guaranteeing that he would obtain such a reward in all circumstances.

 

In Centrafarm BV v. Winthrop BV, Case 16/74, the court identified the specific subject of trademarks.

[T]he specific subject of the industrial property is to guarantee that the owner of the trade mark has the exclusive right to use that trade mark, for the purpose of putting products protected by the mark into circulation for the first time, and is therefore intended to protect him against competitors wishing to take advantage of the status and reputation of the trademark by selling products illegally bearing that trademark.

 

In Joined Cases C-241/91P and C-242/91P, Radio Telefis Eireann and Independent Television Publications Ltd v. Commission of the European Communities, the court identified the specific subject of copyrights.

[T]he protection of the specific subject of a copyright entitled the copyright holder to reserve the exclusive right to reproduce the protected work. … [T]he copyright was … being exercised in a manner which corresponded to its essential function, which was to protect the moral rights in the work and ensure a reward for the creative effort.

 

This concept of "specific subject’ was further applied to determine whether consent existed at the time products were put on the market. In Pharmon v. Hoechst [1985] ECR 228, the court determined the issue whether there had been consent where patented products were produced under a compulsory license. To resolve this issue, the court determined whether the patentee exercised the "specific subject" of patent rights. It ruled that:

where … the competent authorities of a Member State grant a third party a compulsory license which allows him to carry out manufacturing and marketing operations which the patentee would normally have the right to prevent, the patentee cannot be deemed to have consented to the operations of that third party. Such a measure deprives the patent proprietor of his right to determine freely the conditions under which he markets products.

 

... the substance of a patent right lies essentially in according the inventor an exclusive right of first placing the product on the market so as to allow him to obtain the reward for his creative effort. It is therefore necessary to allow the patent proprietor to prevent the importation and marketing of products manufactured under a compulsory license in order to protect the substance of his exclusive rights under his patent.

 

In a trademark case, Phytheron International SA v Jean Bourdon SA, C-352/95 (1997), the court determined the issue whether there had been consent. By resolving this issue, the court focused on the "specific subject" of trademark rights. It then ruled that it is of no importance for the application of Article 7 of Directive 89/104/EEC whether or not the product protected by the mark has been manufactured in a non-member country if it has in any event been lawfully put on the market, in the Member State from which it has been imported, by the owner of the mark or with the owner's consent, including marketing by another company in the same group as the owner.

In a copyright case, EMI Electroler v. Patricia [1989] ECR 79, the court determined the issue whether there had been consent where differences existed between national legislation regarding the period of copyright protection. To resolve this issue, the court determined whether the copyright owner exercised the "specific subject" of copyrights. It ruled that:

the fact that the sound recordings were lawfully marketed in another Member State is due, not to an act or the consent of the copyright owner or his licensee, but to the expiry of the protection period provided for by the legislation of that Member State. The problem arising thus stems from the differences between national legislation regarding the period of protection afforded by copyright and by related rights, those differences concerning either the duration of the protection itself or the details thereof, such as the time when the protection period begins to run.

 

Consequently the copyright owner was entitled to prevent importation of the sound recordings into the Member State where copyright still subsisted.

 

Finally, the situation where protection has been exhausted must be distinguished from a situation where the holder of intellectual property rights in one Member State places his products on the market in another Member State where protection does not exist.

In Joined Cases Merck v. Primecrown C-267/95 and Beecham v. Europharm C-268/95 [1997] 1 CMLR 83, the court reaffirmed that a patentee must accept the consequences of his choice (that is the exercise of his consent) to market a patented product in a Member State where the law does not provide patent protection. In both of those cases, the Plaintiffs argued that they were ethically and/or legally obliged to market their pharmaceutical products in the Member State where patent protection did not exist, and thus had not freely "consented" to their sale. The court responded by slightly refining the definition of consent. Thus, although the court ruled that ethical obligations were irrelevant, it accepted that a true legal obligation to market products was incompatible with free consent. However, the burden of proof will rest on the right holder to show a "genuine, existing legal obligation". The court, while recognizing that price control may distort competition, refused to accept that it could justify a derogation from the fundamental principle that goods must move freely through the EU. Consequently, if a patentee sells in a Member State where he does not have patent protection, he will be unable to prevent cheap parallel imports of his own products, and the home market may effectively become subject to unpatented prices.

In Bristol-Myers Squibb v Paranova A/S, C-427/93 (11 July 1996), the court ruled that Article 7(1) of Directive 89/104 precludes the owner of a trade mark from relying on her rights as owner to prevent an importer from marketing a product which was put on the market in another Member State by the owner or with her consent, even if that importer repackaged the product and reaffixed the trade mark to it without the owner' s authorization. However, the court added that the trademark owner might oppose such a further marketing of a pharmaceutical product under Article 7(2) of Directive 89/104. Such opposition could, however, not be brought where: (1) the trademark owner relied on her trademark rights in order to contribute to the artificial partitioning of the markets between Member States; (2) the repackaging cannot affect the original condition of the product inside the packaging; or (3) the new packaging clearly identifies who repackaged the product and the name of the manufacturer in print such that a person with normal eyesight, exercising a normal degree of attentiveness, would be in a position to understand.

Similarly, in Phytheron International SA v Jean Bourdon SA, C-352/95 (20 March 1997), the court ruled that Article 7 of Directive 89/104/EEC was to be interpreted as precluding application of a national rule in the State of import under which the owner of a trade mark may prevent importation of a product protected by the mark where: (1) the owner of the trade mark in the State of import and the owner of the mark in the State of export are the same; or (2) even if they are different persons, they are economically linked, for example as subsidiaries of the same group.

The international exhaustion principle, which originates in national law, has co-existed with the EC doctrine for many years. That co-existence came to an end, at least in respect of copyrights and trademarks.

In the field of copyrights, before implementing the three EC Directives on copyright (the Rental Directive 92/100; the Satellite and Cable Directive 93/83; the Duration Directive 93/98), the UK Copyright Designs and Patents Act 1988 provided that the copyright owner's right to issue works to the public was exhausted once a copy of the protected work was put into circulation anywhere in the world. The effect of the UK Copyright and Related Rights Regulations 1996 is to abolish the principle of worldwide exhaustion of copyright. Thus, a copyright holder may now prevent the importation into and issue to the public in the UK of the original or copies of his work if these were sold by him to a purchaser in a third country, such as the United States.

In trademark case, Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH, C-355/96 (16 July 1998), the court addressed the issue whether Community exhaustion applies where goods bearing a trademark that had been first placed on the market in a country outside the EEA and subsequently imported into the EEA, even though the trademark owner had sold them on the express understanding that they would not be imported into the EEA. The court interpreted Article 7(1) of Directive 89/104/EEC in a way ensuring that the purpose of the Directive is achieved, namely to safeguard the functioning of the internal market. A situation in which some Member States could provide for international exhaustion while others provided for Community exhaustion only would inevitably give rise to barriers to the free movement of goods and the freedom to provide services. Therefore, the court concluded that: (1) Directive 89/104/EC does not afford rights as far as trademark law is concerned to control imports between Member States of goods already placed on the Common Market; while (2) Directive 89/104/EC does provide rights for Member States to prevent importation into the EU if these goods have been marketed elsewhere. Moreover, the court fund that Member States do not have freedom in their national laws to introduce or maintain other exhaustion regimes, like international exhaustion.

The effect of the Silhouette decision is that a trademark owner can sue a parallel trader in Europe for trademark infringement so long as the goods in which the defendant is dealing have not been put on the European market with the consent of the brand owners. Defendant may be selling genuine goods having the same quality as the European goods. They are still infringing goods.

The Community exhaustion regime still remains controversial. In particular, following the Silhouette decision, an expected furor has developed – at least in the United Kingdom – on behalf of consumer. Nigel Griffiths, the UK government’s consumer affairs minister, has criticized the decision, as have leader articles in the quality press. In the same vein, supermarket representatives have suggested that the stores will continue to obtain goods from the gray market.

The Commission launched a study on "The economic consequences of the choice of regime of exhaustion in the area of trademarks." The study has been carried out by an institute in London, National Economic Research Associates (NERA), and was presented to the Commission in February 1999. A working document was then issued from the Commission services, and should serve as a basis for a further discussion in a Council expert group in order to prepare the EC position on a possible change to the current trademark exhaustion regime in the EC.

The working document focuses on four keys issues: (a) possible consequences of different regimes for national trademarks compared to Community trademarks; (b) differentiation of exhaustion regimes between different intellectual property rights; (c) differentiation of exhaustion regimes for different sectors of industry; and (d) international exhaustion through international agreements. The working document lists the options available for changing the current regime; the final option would comprise one option from each following list [(I), (II) and III)]. For example, the new exhaustion regime could be for national trademarks only [(I)(ii)], for all sectors [(II)(i)], on a unilateral basis [(III)(i)].

1. Possible changes to the exhaustion regime

 

1. Change the exhaustion regime for national trademarks and Community trademarks, e.g. amend the EC Directive on trademarks and the Community trademark Regulation.
2. Change the exhaustion regime for national trademarks only, e.g. amend the EC Directive on trademarks.
3. Change the exhaustion regime for all IP rights, e.g. change each relevant Directive/Regulation or Convention.

 

2. Sectors affected

 

1. Introduce international exhaustion for all sectors.
2. Introduce international exhaustion for certain sectors only.
3. Introduce the principle of international exhaustion, but exclude certain sectors.

 

3. Methods of introducing any change

 

1. On a unilateral basis
2. On a bilateral basis
3. On a multilateral basis

Finally, the working document observes that exhaustion is not only a pure academic issue, but has important economic implications in various industries on prices, product quality, after-sales services, employment, distribution agreements, market segmentation. For instance, the world market for musical recordings amounts to nearly 30 billion EURO, of which the EU accounts for about 30 per cent. The number of people employed in that sector is about 600,000. European companies are the world’s leading producers of pharmaceuticals with a turnover of about 93,500 million EURO. The number of people directly employed in the pharmaceutical industry is about 520,000. The EU is the largest producer of cosmetics and perfumes in the world. The number of people employed in the vehicle sector alone is about 1,000,000 (0,7% of EU total employment).

Under the exhaustion doctrine, the owner of an IP right cannot prohibit the further commercialization of goods protected by this right, once the goods have been put on the market by the owner or with her consent.

Exhaustion is unanimously recognized at a national level, in particular in the countries of the EEA: a national IP right is exhausted within the territory of the state granting that right. In some countries, exhaustion has been applied at the international level; however, it remains a delicate issue among countries. Therefore, international exhaustion is generally a matter of each individual jurisdiction. At the EU level, international exhaustion was a controversial issue among Member States. Therefore, the doctrine of Community exhaustion has been developed mainly on the basis of rules contained in Articles 28 and 30 of the EC Treaty. These Articles aim at striking the balance of conflicting interests between the IP rights’ owners and the free movement of goods within the Common Market.

Initially, Community exhaustion was adopted in the trademark field: Article 7 of Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks provides that "[t]he trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent." The European Court of Justice (ECJ) has interpreted Article 7 of Directive 89/104/EEC and EC legislation was having been drafted on the basis of the earlier case law. Thus, the adoption of Article 2(1) of the Agreement on the European Economic Area has extended the principle underlying Article 7 of Directive 89/104/EEC, in terms of territory and range of IP rights.

A critical element in determining that the owner of an IP right has exhausted her rights under Article 7 of Directive 89/104/EEC is her consent to the placing of the product on the market. To determine the existence of consent, the ECJ has focused on the "specific subject" of each IP right. In a series of cases, the ECJ addressed the issue whether the Community exhaustion doctrine applied under specific circumstances. It ruled that the doctrine still applied where: (1) an importer repackaged products and reaffixed a trademark to it without the owner' s authorization; (2) a trademark owner relied on her trademark rights in order to contribute to the artificial partitioning of the markets between Member States; (3) the repackaging cannot affect the original condition of the product inside the packaging; (4) the new packaging clearly identifies who repackaged the product and the name of the manufacturer in print such that a person with normal eyesight, exercising a normal degree of attentiveness, would be in a position to understand; (5) the owner of a trademark in the State of import and the owner of the trademark in the State of export are the same; or (6), even if they are different persons, the owner of a trademark in the State of import and the owner of the trademark in the State of export are economically linked, for example as subsidiaries of the same group.

Under the doctrine of Community exhaustion, the ECJ also addressed the issue whether international exhaustion applied at the European level. Thus, in the Silhouette decision, the ECJ concluded that: (1) Directive 89/104/EC did not afford rights as far as trademark law was concerned to control imports between Member States of goods already placed on the Common Market; while (2) Directive 89/104/EC did provide rights for Member States to prevent importation into the EU if these goods had been marketed elsewhere. Moreover, the court found that Member States did not have freedom in their national laws to introduce or maintain other exhaustion regimes, like international exhaustion. The effect of the Silhouette decision is that a trademark owner can sue a parallel trader in Europe for trademark infringement so long as the goods in which the defendant is dealing have not been put on the European market with the consent of the brand owners. Thus, even if defendant may be selling genuine goods having the same quality as the European goods, defendant’s goods are still infringing.

Finally, the Commission launched a study on "The economic consequences of the choice of regime of exhaustion in the area of trademarks." A working document was then issued from the Commission services, and should serve as a basis for a further discussion in a Council expert group in order to prepare the EC position on a possible change to the current trademark exhaustion regime in the EC. [60001]