The principle of IP exhaustion was developed in the nineteenth century to limit IP holders from controlling the distribution, and price, of their products after their first lawful sale. To date, the application of this principle is generally straightforward with respect to physical goods sold nationally so long as their quality has not been altered. Less straightforward is the exhaustion of digital goods and self-replicating products (such as plants and seeds), which rely on products’ duplication instead of their transfer, and the exhaustion of IP-protected parts and ingredients of complex products. However, a large part of the debate on the topic has focused on parallel imports - unauthorized imports of genuine goods from foreign countries. This short contribution focuses on this debate and refers to the EU and U.S. as examples.
Generally, IP holders oppose parallel imports because of the concerns against the arbitrage of their products from low-cost to high-cost jurisdictions. IP holders are interested in free trade and international IP harmonization to reduce costs as well as simplify IP protection across jurisdictions, but they oppose parallel imports because of the competition these imports create with their own domestic distribution networks. Supporters of parallel imports have noted that the international IP system seeks to eliminate barriers to trade, yet the current system essentially allows IP holders to use IP rights anticompetitively and practice price discrimination across national markets.
A specific mention to the lack of agreement in this respect is included in Article 6 of the Agreement on Trade Related Aspects to Intellectual Property Right (TRIPS Agreement), which states “nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.” Accordingly, the choice of domestic exhaustion regimes depends on desirable economic outcomes based on specific economic and trade-related factors, the size of national markets, and the level of national development.
In particular, countries follow one of three systems today: national, regional, or international exhaustion. Under the principle of national exhaustion, IP rights are exhausted after the first sale of the products, but only if this sale occurs in the national territory. This system is the least friendly to international trade and permits IP holders to stop parallel imports at the border or legitimately seize the (genuine) products after importation as infringements. Under the principle of international exhaustion, IP holders’ right to control the further distribution of the products exhaust after the first sale regardless of the country where this first sale has occurred. Under this system, parallel imports are considered lawful in the country of importation, even though the country from which the goods are imported may apply a different system. Finally, the principle of regional exhaustion is a compromise between national and international exhaustion. Under this system, the rights of IP holders are exhausted after the first sale of the products, but only if the sale has occurred in one of the member countries of a regional organizations. Under this system, the import of products originating from countries from outside the region remains unlawful and can be stopped as infringement. Regional exhaustion currently applies in the European Union (EU as extended to the European Economic Area, EEA) and the Organization Africaine pour la Propriete Intellectuelle (OAPI).
Notably, since the signing of the EEC Treaty in 1957, the EU’s primary objective is the creation of an internal market. Initially, the CJEU turned to Article 81 and 82, the Treaty’s competition provisions, and later to Articles 34 and 36, the internal market provisions, to promote the free movement of goods, including IP exhaustion. Today, these provisions apply to the exhaustion of patented goods whereas specific Directives implemented the principle of exhaustion for trademarks and copyrights. In 1989, the Trademark Directive, today Directive 2015/2436, codified the principle of Community-wide exhaustion. In 1994, the Community Trademark Regulation, today replaced by EU Trademark Regulation 2017/1001, repeated this principle. In the 1990s, the CJEU issues several decisions to confirm that Community/EEA-wide exhaustion was the only system applicable and not a minimum standard. Under EU law, IP holders can still invoke selected “legitimate reasons” as exceptions to trademark exhaustion, notably in instances that could lead to consumer confusion or unfair detriment to the reputation of a mark. Similarly, in 2001, the “InfoSociety Directive” included the principle of Community-wide exhaustion. Directive 2006/115/EC on rental rights, lending rights, and certain rights related to copyright, repeated the same provision with respect to the right of distribution of performers, phonogram producers, producers of the first fixations of films, and broadcasting organisations.
On the other hand, one of the most notable examples of international IP exhaustion today is the U.S. Historically, the U.S. allowed parallel imports of trademarked goods when the marks shared a common business origin. The only exception is when the products “differ materially” from the goods sold domestically, even though the U.S. Customs Service Regulations allows the imports of materially different products so long as importers properly label the goods to avoid confusion. Until recently, however, the U.S. practice national exhaustion for copyrighted and patented products. This changed in the past decade due to two landmark decisions of the Supreme Court. In 2013, Kirtsaeng v. John Wiley & Sons, Inc. clarified the language of the 1976 U.S. Copyright Act, which states, on one side, that copyright owners cannot control the transfer of copyrighted works “lawfully made under this title” after their first sale; and on the other side, that “the importation into the United States” of a copyrighted work acquired outside “without the authority of the [copyright] owner” is “an infringement of the exclusive right [of] distribut[ion].” In particular, Kirtsaeng clarified that exhaustion applies equally to products “lawfully made” in the U.S. and in foreign countries. Similarly, the position on patent exhaustion was changed in favor of international exhaustion in 2017 by Impression Products v. Lexmark. Since the U.S. Patent Act does not elaborate on the geographical extent of the first sale of a patented process, or a product embodying patented process, U.S. courts had adopted the position that the sale of an article in a foreign country did not exhaust the U.S. patent. The Supreme Court reversed this position, even though the Court did not exclude that contractual restrictions could still prevent parallel imports.
In conclusion, the application of the principle of exhaustion continues to vary amongst jurisdictions today, and changes from one system to another are not uncommon both through the implementation of domestic legislation and case law. No less relevant, national positions towards contractual restrictions preventing resale (commonly included in distribution agreements) also vary, which adds uncertainty to the admissibility of parallel imports domestically.