Exhaustion of Intellectual Property Rights and International Trade

The exhaustion doctrine in intellectual property law generally limits the rights of a patent, copyright or trademark owner (“IP Owner”) to control the disposition of an article after the article has been sold by or under the authority of the IP Owner. In theory the doctrine enables the IP Owner to receive fair reward for surrendering its right to withhold a product from the market but thereafter permits free disposition and movement of chattels, preventing IP rights from unduly disrupting distribution systems.Under a strict territorial application of the doctrine, a sale in country A under a country A patent (or copyright or trademark) would exhaust the IP Owner’s rights only in Country A, and the IP Owner could rely on its separate patents in other countries to enjoin sales, seek damages or possibly even require customs officials to halt infringing imports at the border. This principle would hold even though the IP rights in all the countries are essentially the same. A strict territorial exhaustion doctrine is arguably consistent with the nature of IP rights, which are granted by each individual nation as an act of sovereignty and are strictly territorial in effect; while its impact will vary with other trade conditions (relative exchange rates, for example) and across different categories of goods, a strict territorial approach can serve as a barrier to free movement of goods and cause IP rights to act as private trade barriers.Opposed to the territorial principle is the historically more widely applied principle of international exhaustion. Under this version of the doctrine a sale by or under the authority of an IP Owner anywhere exhausts its right under all counterpart IP anywhere in the world. This doctrine has always seemed difficult to reconcile with the underlying systems of national IP rights but avoids the practical problems and trade barriers of a territorial principle.Court decisions in the last few years in three major trading areas -- the EU, Japan and the US – have rejected a strict international application of the exhaustion doctrine for some forms of IP, with the result that sales of some products by an IP Owner outside Country or trading region A do not necessarily prevent the owner from using Country A IP rights to prevent imports or sales there. This is an issue which the major international trade treaties leave to individual signatories’ local law. Subject to possible limits imposed by competition laws in what will probably be relatively rare cases, IP Owners in these three major trading areas may, with greater or lesser effort, now restrict parallel trade and discriminate in sale of some goods between markets with different levels of pricing.These recent decisions, while suggesting some degree of convergence among the three trading areas, do not necessarily correlate closely with the notion suggested by Guzman* (in connection with competition laws) that such legal regimes should be supported by net exporting nations, not net importers. It is possible that as the implications of these decisions become clearer and their possible effects more evident, they will eventually lead to further consideration and possibly further international trade negotiations on the subject of parallel imports.