INTERNATIONAL LABORATORY
FOR LAW AND DEVELOPMENT
http://lld.hse.ru
RESEARCH PAPER SERIES
T HE WTO C OMPATIBILITY
OF A D IFFERENTIATED
I NTERNATIONAL E XHAUSTION
REGIME
JEROME H. REICHMAN
RUTH L. OKEDIJI
IOANNIS LIANOS
ROBIN JACOB
CHRISTOPHER STOTHERS
ABOUT THE AUTHORS
JEROME H. REICHMAN
Jerome H. Reichman is Bunyan S. Womble Professor of Law at Duke Law School. He has
written and lectured widely on diverse aspects of intellectual property law, including
comparative and international intellectual property law and the connections between
intellectual property and international trade law. His articles in this area have particularly
addressed the problems that developing countries face in implementing the World Trade
Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS
Agreement).
Professor Reichman serves as special advisor to the United States National Academies and
the International Council for Science (ICSU) on the subject of legal protection for databases.
He is a consultant to numerous intergovernmental and nongovernmental organizations; a
member of the Board of Editors, Journal of International Economic Law; and on the
Scientific Advisory Board of il Diritto di Autore (Rome).
RUTH L. OKEDIJI
Ruth L. Okediji, the University of Minnesota Law School's William L. Prosser Professor of
Law since 2003, teaches contracts, international intellectual property (IP), copyright,
trademarks, and IP and development. She is recognized worldwide as one of the foremost
experts on international IP law and international economic regulation.
Her scholarship focuses on issues of innovation policy, economic development, and global
knowledge governance in the context of international institutions and public international
law.
Professor Okediji has been acknowledged nationally and internationally for her research and
professional service and is regularly cited for her work on IP-related issues in developing and
least-developed countries. She has served as a policy advisor on the impact of IP protection
on development goals for many governments and inter-governmental organizations. She also
has been a consultant for the U.N. Conference on Trade and Development, the U.N.
Development Program, and the World Intellectual Property Organization and has directed
research and technical assistance projects in Europe, Sub-Saharan Africa, and the Caribbean.
IOANNIS LIANOS
•
Ioannis Lianos is Global Competition Law and Public Policy Professor at the University
College London Faculty of Laws and the Chief researcher at the Skolkovo-HSE International
Laboratory for Law and Development.
•
He contributes widely to the global discussion in the area of competition law and policy. He
is a Non-Governmental Advisor (NGA) at the International Competition Network (ICN), a
Research partner with UNCTAD in Geneva. He contributed to European Commission's
consultations on damages, being one of the very few lawyers to be invited by the European
Commission to contribute to the preparation of the recent draft guidelines of the Commission
on the evaluation of damages.
Prof. Lianos has organized and conducted training for judges in competition law and
economics in London, Toulouse, Lisbon, Hong Kong and Athens and has organized more
than 30 international conferences on various aspects of competition law and policy at UCL
and beyond, in the context of the UCL Centre for Law, Economics and Society, which he
founded in 2007. He has advised a number of governments and private parties in the areas of
competition law and good governance (e.g. Impact Assessments).
ROBIN JACOB
The Rt. Hon. Professor Sir Robin Jacob holds the Sir Hugh Laddie Chair of Intellectual
Property Law at University College London. He is also the President of the Intellectual
Property Institute; Governor of the LSE; Hon. President of the Association of Law Teachers;
President of the UK Branch of the Licensing Executives Society; and a Governor of the
Expert Witness Institute.
Sir Robin Jacob joined the UCL Faculty of Laws in May 2011 leaving the Court of Appeal
of England and Wales to do so. Having read Natural Sciences at Cambridge, Sir Robin then
read for the Bar (Grays Inn). He started practice at the Intellectual Property Bar in 1967.
From 1976 to 1981 he was the Junior Counsel for the Comptroller of Patents and for all
Government departments in intellectual property. He was made a Queen’s Counsel in 1981.
His practice took him abroad often (Hong Kong, Singapore, Europe, USA, and Australia).
He was appointed a High Court Judge (Chancery Division) in 1993. From 1997 to 2001 he
was Supervising Chancery Judge for Birmingham, Bristol and Cardiff. He was appointed a
Lord Justice of Appeal in October 2003. He continues to sit from time to time in the Court of
Appeal and will sometimes act as an arbitrator or mediator.
He has written extensively on all forms of intellectual property. He often lectures, mainly but
not only on IP topics, both in the UK and abroad.
CHRISTOPHER STOTHERS
Christopher Stothers is a Partner in Arnold & Porter (UK) LLP's Intellectual Property
Litigation group in London and a Solicitor-Advocate in England and Wales. His practice
concentrates on high value cross-border patent litigation (including opposition work before
the European Patent Office) and antitrust litigation. He covers all fields of technology-from
pharmaceutical and medical devices to software and telecommunications. His practice also
covers other types of intellectual property litigation (trade mark, copyright, and designs),
commercial litigation and arbitration, pharmaceutical regulation, and European Union law.
From 2006 to 2010 he was an arbitrator for .eu domain name disputes.
Dr. Stothers is also a Visiting Lecturer in Intellectual Property and Competition Law at
University College London and author of a comprehensive treatise on ‘Parallel Trade in
Europe: Intellectual Property, Competition and Regulatory Law' (Hart Publishing, 2007).
THE WTO COMPATIBILITY OF A DIFFERENTIATED INTERNATIONAL
EXHAUSTION REGIME PROPOSED BY THE EURASIAN ECONOMIC
COMMUNITY
A CONSULTANCY REPORT
JEROME H. REICHMAN, RUTH L. OKEDIJI, IOANNIS LIANOS, ROBIN JACOB & CHRISTOPHER
STOTHERS
Table of Contents
I. INTRODUCTION ......................................................................................................................................... 1
A. Definition and Logic of the Exhaustion Principle ................................................................................ 2
B. An Overview of the Different Types of Exhaustion ............................................................................... 3
II. SPECIFIC ISSUES CONCERNING THE PROPOSAL FOR DIFFERENTIATED APPLICATIONS OF THE
EXHAUSTION DOCTRINE ............................................................................................................................. 5
A. The Unresolved Controversy Surrounding International Exhaustion .................................................. 5
B. Legal Sustainability of the Eurasian Proposal ..................................................................................... 7
1. Problems Sounding in National Treatment and Most Favored Nation Under TRIPS ...................... 8
2. Other Relevant Issues under TRIPS ................................................................................................ 11
3. Justifying the Reasonableness of Sectoral Differentiation ............................................................. 13
III. THE APPLICABILITY OF THE GATT ................................................................................................. 17
A. Parallel Application of the GATT and the TRIPS Agreement ............................................................ 18
B. The Obligations Imposed by GATT .................................................................................................... 20
1. Article XI (1) GATT: Quantitative Restrictions and Measures Having Equivalent Effect ............ 21
2. Article III: 4 GATT: National Treatment ....................................................................................... 23
3. Article I(1) GATT: Most Favoured Nation Clause (MFN) ........................................................... 28
C. Justifications for Avoiding the Restrictions Under the GATT ............................................................ 30
1. Article XX (d) GATT ..................................................................................................................... 30
2. Article XXIV GATT ....................................................................................................................... 39
D. Enforcement........................................................................................................................................ 42
IV. THE UNCERTAIN STATUS AND UNRELIABILITY OF STATE PRACTICE ............................................ 43
A. The U.S. Approach to Exhaustion ...................................................................................................... 43
1. Patents and Exhaustion ................................................................................................................... 43
2. Trademarks and Exhaustion ............................................................................................................ 46
B. The EU Approach to Exhaustion ........................................................................................................ 51
1. A Free Circulation Right and/or “Exhaustion” as Regards Sales within the EU ............................ 51
2. Specific EU Legislation in the Case of IP Rights Which Are Either Pan-EU Rights or Parallel
National Rights Granted Pursuant to National Laws Which Have Been Harmonised ....................... 57
3. Importations into the EU and Exhaustion – Trade Marks .............................................................. 58
4. The Essence of the EU Regime – The Choice of the Trade-mark Proprietor ................................. 59
C. Approaches to Exhaustion in Other Jurisdictions .............................................................................. 65
V. CONCLUSIONS ....................................................................................................................................... 67
THE WTO COMPATIBILITY OF A DIFFERENTIATED INTERNATIONAL
EXHAUSTION REGIME PROPOSED BY THE EURASIAN ECONOMIC
COMMUNITY
A CONSULTANCY REPORT
Jerome H. Reichman (Duke University), Ruth L. Okediji (University of Minnesota), Ioannis
Lianos (UCL), Robin Jacob (UCL) & Christopher Stothers (UCL)
I. INTRODUCTION
Countries in the Eurasian region, like others, have historically established their own
exhaustion regimes pursuant to national priorities and interests. Consequently, there has existed a
diversity of exhaustion rules and practices in the region – ranging from ‘international’ exhaustion
in Kazakhstan to ‘national’ exhaustion in Russia. Under its founding Treaty signed on May 29,
2014, the Eurasian Economic Union established a regional exhaustion regime for trademarks, but
did not address other forms of intellectual property (IP). Recently, however, the Eurasian
Economic Commission (EEC) has considered adoption of an international exhaustion regime
applicable to all forms of knowledge goods protected by IP rights. Under this proposal, the
transition to an all-encompassing international exhaustion regime will be marked by a
differentiated approach that insulates qualifying foreign direct investors from the short-term
economic loss arising from the increased competition that such a transition to international
exhaustion is likely to occasion. As conceived, this proposed “differentiated” exhaustion regime
will rely on international exhaustion as a baseline for all categories of intellectual property, with
an exception for trademarks belonging to investors who localized their production in the Union
before introduction of the international exhaustion principle. For these trademark owners a
regional exhaustion regime will remain in place for a transitional period of time yet to be
determined.
The concept of exhaustion generally in relation to IP law is well-established in the laws of
many Member States of the World Trade organization (WTO).1 Whether supplied explicitly by
legislative provisions or established through judicial precedent in all countries that recognize it,
exhaustion is a tool to advance certain public policy goals by limiting the scope of the exclusive
1
As of June 26, 2014 there are 160 Member States of the WTO. With respect to patents, at least 76 members of the
World Intellectual Property Organization (WIPO), who also are WTO Members, confirmed the existence of
exhaustion in their national patent laws. See Exceptions and Limitations to Patent Rights: Exhaustion of Patent
Rights, Standing Committee on the Law of Patents, Twenty-First Session, November 3-7, 2014, SP/21/7, at 2.
[Hereinafter, WIPO SCP Report 2014].
1
rights granted to IP owners. 2 For some countries, exhaustion serves explicitly to regulate
competitive conditions in the interest of consumer welfare.3 For other countries and regions, the
public policy rationale is to facilitate trade and the free movement of goods.4 Practically
speaking, most countries seem likely to reflect some combination of these two objectives in the
national legal framework within which the goals of the IP system are administered.5
As will be seen in the body of this report, there are a wide variety of views about how
exhaustion can be legally applied and an even wider variety of relevant state practices. The
legality of virtually any set of these existing state practices is open to question and unreliable;
while the range of legal options that would clearly withstand scrutiny under both intellectual
property law and international trade law is relatively circumscribed. As a result, care must be
exercised in implementing any proposed regime of differentiated exhaustion if the object is to
avoid a WTO dispute settlement action for nullification or impairment of benefits under the
Agreement Establishing the World Trade Organization of 1994.6
A. Definition and Logic of the Exhaustion Principle
The doctrine of exhaustion is potentially applicable to all categories of intellectual property
rights (IPRs), although its operation can and does differ across IP subject matter. Exhaustion
determines the point at which an intellectual property right holder’s control over protected goods
or services expires. The typical point of exhaustion for present purposes is the first sale, that is,
the placing on the market of the IPR-protected good or service.7 The doctrine then enables the
purchaser or transferee to use and dispose of that good or service without further restriction. 8
2
See, e.g., Ioannis Argoustis, Parallel Imports and Exhaustion of Trade Mark Rights: Should Steps Be Taken
Towards an International Exhaustion Regime?, 34 E.I.P.R. 108-121 (2012) (reporting an estimated $7 to $10 billion
dollars of parallel trade in the U.S. as of 2009, and substantial shares of varying market segments in the E.U.).
3
WIPO SCP Report 2014, above n. 1, (describing various policy objectives for exhaustion as reported by Member
States
4
Id. See also, VALENTINE KORAH, INTELLECTUAL PROPERTY RIGHTS AND THE EC COMPETITION RULES, 6 (2006)
(stating that Article 30 of the EC Treaty “confirms that the authors of the Treaty thought that industrial and
commercial property rights could have an equivalent effect to quantitative restrictions” on trade between Member
States).
5
Like other limitations and exceptions, the doctrine of exhaustion is a tool to advance the public welfare by seeking
an appropriate balance of interests between owners and consumers.
6
Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, THE LEGAL TEXTS: THE
RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 4 (1999), 1867
U.N.T.S. 154, 33 I.L.M. 1144 (1994).
7
See generally Irene Calboli, Trademark Exhaustion in the European Union: Community-Wide or International?
The Saga Continues, 6 MARQUETTE INTELL. PROP. REV. 48 (2002) (citing authorities).
8
The circumstances under which an IPR is considered “exhausted” in a country may also differ widely, with
considerations of whether the product was advertised or sold, whether the “first sale” occurred directly by the owner
or indirectly by a licensee, whether it occurred with or without the owner’s consent, and with or without
remuneration. With regard to international exhaustion, an additional consideration is whether putting the product
into circulation, directly or indirectly, was subject to a contractual restriction at the point of sale. See DANIEL
GERVAIS, THE TRIPS AGREEMENT: DRAFTING HISTORY AND ANALYSIS (3RD ED.) 2008, at 198 (stating that “[t]he
question which goods are “legitimate” is not answered in TRIPS.”).
2
Absent an exhaustion doctrine, the original intellectual property right holder could “perpetually
exercise control over the sale, transfer or use of a good or service embodying an IPR,” and thus
prolong economic control indefinitely at the expense of the free transfer of goods and services.9
Put simply, the termination of an IP owner’s control is a critical aspect of a well-functioning
market economy.
It is important to emphasize that exhaustion concerns rights in the physical product that is
purchased or transferred, not the intangible intellectual property rights embodied in that product.
Some authorities conceptualize exhaustion as an “implied license” to use the purchased product,
with the seller’s ability to limit that implied license contractually subject to competition law.10
The implied license justification for exhaustion, however, appears to be in tension with the idea
that there are inherent limits on the exclusive rights of IP owners and that exhaustion constitutes
just one of those limits. 11 For countries or regions in which the freedom of competition and
freer trade are principal policy objectives animating efforts to craft an appropriately balanced IP
system, the common-law implied license approach is arguably a less relevant juridical and policy
premise for an exhaustion regime.12
B. An Overview of the Different Types of Exhaustion
The “Great Conventions” - the Paris Convention for the Protection of industrial Property13
and the Berne Convention for the Protection of Literary and Artistic Works - 14 do not address
the exhaustion of IP rights, nor do they impose any obligation or constraint on Members to do
so.15 Just as states have historically maintained different policies and practices with respect to
limitations and exception to IPRs,16 state practice with regard to exhaustion has largely been an
9
UNCTAD-ICTSD RESOURCE BOOK ON TRIPS AND DEVELOPMENT (2005) at 93 (hereinafter, UNCTAD-ICTSD
RESOURCE BOOK)
10
NINO PIRES DE CARVALHO, THE TRIPS REGIME OF PATENTS AND TEST DATA (4th ed. 2014), at 140-41 (citing
authorities).
11
Christopher Heath, Exhaustion and Patent Rights, in PATENT LAW IN GLOBAL PERSPECTIVE (RUTH L. OKEDIJI
AND MARGO A. BAGLEY, EDS, OUP 2014) 419, at 421 - 422.
12
Id. at 423 (identifying the US first sale doctrine as “closer to the doctrine of implied license” and thus narrower
than exhaustion, at least in its historical formulation in Germany). See also Irene Calboli, Market Integration and
(the Limits of) the First Sale Rule in North American and European Trademark Law, 51 SANTA CLARA L. REV.
1241, 1242-46 (2011).
13
Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 21 U.S.T. 1583, 828 U.N.T.S. 305
[hereinafter Paris Convention].
14
Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 1161 U.N.T.S. 3 [hereinafter
Berne Convention].
15
There are arguments that an “implied national exhaustion” rule exists in the Berne Convention. These are based
on the fact that the rights in the Berne Convention are territorial in nature, and that certain provisions (e.g., Articles
13(3) and 16) make clear that acts deemed lawful in one country do not make them lawful per se in another, thus
allowing countries to seize goods that may have been lawfully made in other Berne member countries.
16
Subject, of course, to some outer boundaries contained in the treaties, especially the national treatment rules.
3
exercise of sovereign discretion. 17 Commentators have identified three types of exhaustion
regimes: national exhaustion, regional exhaustion and international exhaustion. 18 As noted
earlier, there is no uniform policy justification for the exhaustion doctrine adopted by countries
nor are there uniform rules on how the various types of exhaustion operate even within the same
IP subject matter category.19 Nonetheless, a baseline exists for each type of exhaustion regime
sufficient to distinguish between them at a very general level of abstraction.
Under a national exhaustion regime, an IP owner’s exclusive rights are exhausted once the IP
owner or licensee places the product in the ordinary stream of commerce (marketed or first sold)
in the country in which the IP right is protected. Under this regime, the exhaustion of an owner’s
IP rights in one nation does not exhaust those rights in another nation. From a trade perspective,
therefore, national exhaustion impedes the movement of goods and services more significantly
than its counterparts;20 it facilitates the IP owner’s ability to segment geographic markets and to
price differentiate within them, thus allowing “consumers in different countries to be played off
against each other.”21 The economic benefits from such a regime are contested.22
In a regime of regional exhaustion, the IP right in the product is exhausted once the product
is lawfully placed in the ordinary stream of commerce (marketed or first sold) anywhere in the
region. The EU offers the best example of a regional exhaustion regime.23 Finally, in a regime of
international exhaustion, the IP right in the product is exhausted once the product is lawfully
placed in the ordinary stream of commerce (marketed or first sold) anywhere in the world.24
Under any of these regimes, the IP right, once exhausted, means that anyone may use, re-sell,
rent, and, certainly in the case of international exhaustion, import the goods in question without
the permission of the IP owner. International exhaustion thus facilitates parallel imports of
17
See, e.g., Calboli (2011), above n. 12; I. Argoustis, above n. 2. Even within the EC, countries maintained different
exhaustion regimes with respect to Trademarks until adoption of the 1988 Trademarks Directive as they did also
copyrights until the beginning of the TRIPS negotiations, and still do in relation to patents.
18
See, e.g., ICTSD-UNCTAD, above n. 9.
19
Thus, for example, the application of a national exhaustion regime to patent rights differs even among countries
adopting a common law implied license approach. See Heath, supra n. 11, at 424-434 (comparing the UK implied
license approach to the US first sale approach).
20
See Heath, supra note 11 at 482 (observing that “a consistently applied rule of domestic exhaustion would make a
mockery of international trade”); Calboli (2002) above n. 7. 48-49.
21
Hanns Ullrich, Technology Protection According to TRIPS: Principles and Problems, in FROM GATT TO TRIPS,
357, 385 (FRIEDRICH-KARL BEIER & GERHARD SCHRICKER EDS., 1996)
22
UNCTAD-ICTSD RESOURCE BOOK, above n. 9, at 116 (citing sources); GERVAIS, above note 18 at 200-201
(noting the debate); Heath, supra note 11 at 474 (summarizing the legal reasons against international exhaustion);
J.D. Sarnoff, The Patent System and Climate Change, (2001) 16 VA. J. OF LAW AND TECHNOLOGY 301, 359 (noting
costs of international exhaustion); CHRISTOPHER STOTHERS, PARALLEL TRADE IN EUROPE, (OUP 2007) at 17-24
(summarizing the policy debate).
23
See, infra Part IV.B discussing the EU regional exhaustion regime.
24
Calboli (2011), above n. 12, at 1245-46.
4
genuine goods, limiting the possibility of segmenting geographic markets with price
discrimination.
In practice, however, the lines between these various types of exhaustion are neither rigid nor
unequivocal. Some countries employ so-called "mixed" regimes, employing national exhaustion
for some types of IP and international exhaustion for others.25 In the case of copyright law, some
jurisdictions even apply the chosen exhaustion regime differently among the various exclusive
rights that the copyright owner holds in any given product.26 In the case of trademarks, both the
regimes of the U.S. and the E.U. are replete with compromises and contradictions.27
The empirical evidence on the effect of such mixed exhaustion regimes remains
indeterminate, and in some cases, including in the U.S., a complex mix of legislative provisions,
judicial opinion and enforcement practice undermines the stability of any given exhaustion
regime. This may be true for many other WTO members, but only a careful study can adequately
establish the reality on the ground. There is nonetheless growing recognition in some quarters
that, in light of the public interest goals that inform IP law and analogous welfare considerations
in favor of free trade, exhaustion rules that admit a more liberal flow of goods and services
across borders and that foster competitive markets should be the norm for the international trade
framework and not the exception.28
II. SPECIFIC ISSUES CONCERNING
THE EXHAUSTION DOCTRINE
THE
PROPOSAL
FOR
DIFFERENTIATED APPLICATIONS
OF
A. The Unresolved Controversy Surrounding International Exhaustion
From the perspective of international trade law, states may choose to recognize that
exhaustion of an intellectual property right occurs when a good or service is first sold or
marketed outside its own territorial borders. This trade law perspective, which emphasizes the
importance of free competition, encourages states to adopt a regime of international exhaustion,
which makes market segmentation and price discrimination become more difficult, because
parallel imports may flow from any country where an IPR-protected product is first put on the
market.29 This approach is arguably more consistent with the free-trade paradigm underlying the
25
WIPO SCP Report 2014 above n. 1 at 3, noting four countries that reported having a “mixed” exhaustion regime
with respect to patents, and another four countries that could not state precisely what kind of regime, among the
three, was practiced.
26
KORAH, supra at 10 (noting that the ECJ has extended the doctrine of exhaustion to a variety of IPRs but not to
performing or rental rights) (citations omitted).
27
See generally Calboli (2011), above n. 12.
28
See, e.g., Thomas Cottier, The Exhaustion of Intellectual Property Rights—A Fresh Look, 39 I.I.C. 755-757
(2008); see also Enrico Bonadio, Parallel Imports in a Global Market: Should a Generalized International
Exhaustion Be the Next Step?, 33 E.I.P.R. 153-61 (2011).
29
UNCTAD-ICTSD RESOURCE BOOK, above n. 9, at 93.
5
General Agreement on Tariffs and Trade (GATT) (1994)30 and the General Agreement on Trade
in Services (GATS) (1994)31 than a regime of national or regional exhaustion.32
However, the classic intellectual property paradigm, as embodied in the Paris Convention of
1883 and the Berne Convention of 1886, may be viewed as favoring the intellectual property
owners’ right to segment markets and to practice price discrimination under the territoriality and
“independence” of rights doctrines embodied in these conventions.33 No internationally agreed
approach to the doctrine of exhaustion could be found to resolve this conflict during the Uruguay
Round of Multilateral Trade Negotiations in the 1990s.34 As a result, Article 6 of the TRIPS
Agreement provided that, for purposes of dispute settlement under “this Agreement,” and subject
to the provisions of Articles 3 (national treatment) and 4 (Most Favored Nation), “nothing in this
Agreement shall be used to address the issue of the exhaustion of intellectual property rights.”35
This provision was further elaborated by the Doha Ministerial Declaration on TRIPS and
Public Health of 2001, in Paragraph 5(d), which provides as follows:
The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion
of intellectual property rights is to leave each Member free to establish its own regime for
such exhaustion without challenge, subject to the MFN and national treatment provisions
of Articles 3 and 4. 36
Although most commentators read this provision broadly, at least one considers that Article 5(d)
is confined only to “the protection of public health.”37
30
General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World
Trade Organization, Annex 1A, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF
MULTILATERAL TRADE NEGOTIATIONS 17 (1999), 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994) [hereinafter
GATT 1994].
31
General Agreement on Trade in Services, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade
Organization, Annex 1B, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF
MULTILATERAL TRADE NEGOTIATIONS 284 (1999), 1869 U.N.T.S. 183, 33 I.L.M. 1167 (1994) [hereinafter
GATS].
32
See above n. 28. In practice, however, the European Court of Justice has moved the treatment of trademarks in the
opposite direction. See, e.g., Irene Calboli, Review the (Shrinking) Principle of Trademark Exhaustion in the
European Union (Ten Years Later), 16 MARQUETTE INTELL. PROP. L. REV. 257 (2012).
33
See especially DE CARVALHO, above n. 10, at 138-164. But see, Heath, supra n. 11, at 478-479 (disputing de
Carvalho’s thesis as a misinterpretation of the intention and wording of Art.4bis of the Paris Convention.)
34
DANIEL GERVAIS, THE TRIPS AGREEMENT: DRAFTING HISTORY AND ANALYSIS, (4TH ED., 2012) at 222.
35
Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement
Establishing the World Trade Organization, Annex 1C, THE LEGAL TEXTS: THE RESULTS OF THE
URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 320 (1999), 1869 U.N.T.S. 299, 33 I.L.M.
1197 (1994) [hereinafter TRIPS Agreement]., Article 6.
36
WT/MIN(01)/DEC/2, 20 November 2011.
37
DE CARVALHO, above n. 10, at 149. But see GERVAIS, above n. 34 at 227 (describing the Doha Declaration as
providing a “broad interpretation” of TRIPS Article 6.)
6
It is undisputed that these provisions did nothing to resolve pre-existing controversies
concerning the legality of international exhaustion as such in the period before the Agreement
Establishing the WTO of 1994. Since then, the academic literature and most of the commentators
generally assume that states may, with impunity, freely choose among national, regional, and
international regimes of exhaustion, subject to certain limitations. 38 However, at least one
authority on international intellectual property law contends that a regime of international
exhaustion continues to violate the obligations of international patent law as embodied in the
Paris Convention and the TRIPS Agreement, notwithstanding the moratorium on dispute
resolution that Article 6 of TRIPS otherwise imposed on this issue.39
To fully elaborate this argument, which rests largely on the independence of patents doctrine
in Art. 4bis of the Paris Convention, as well as on a close reading of Articles 2.1 and 2.2 of the
TRIPS Agreement, would require more space and time than we can devote to it in this Report.
For reasons that are puzzling, this author also distinguishes between applications of the
international exhaustion doctrine to patents, which he deems noncompliant with TRIPS, and
applications to trademarks, which he claims allowable, thereby apparently ignoring the
independence of trademarks doctrine in Paris Convention Article 6(3). Nevertheless, for present
purposes, it is well to remember that, in the absence of any authoritative resolution of this issue,
the legitimacy of a regime of international exhaustion, despite widespread recognition by most of
the respected scholars we have consulted, remains open to question by at least one authority.
B. Legal Sustainability of the Eurasian Proposal
Assuming, as we do, that international exhaustion remains a viable option that states can
legitimately invoke under both international trade law and international intellectual property law,
we must consider whether the Eurasian proposals for differentiated application of that doctrine
are legally sustainable, and if so under what conditions. Here it is useful to approach the question
from the angle recently suggested by a leading authority and negotiator during the Uruguay
Round, Prof. Thomas Cottier.40
Cottier enthusiastically advocates the use of international exhaustion as a form of trade
regulation that would mitigate the tensions between global competition policy and the tendency
of intellectual property rights to promote market segmentation under regimes of both national
and regional exhaustion. Indeed, from his point of view, both national and regional doctrines of
exhaustion are inherently forms of quantitative restrictions that are contrary to GATT Art. XI
and in need of “particular justification.” 41 He says WTO Members should “start with the
38
See, e.g., GERVAIS, above n. 34; UNCTAD-ICTSD, above n. 9.
See DE CARVALHO, above n. 10, at 148-159.
40
See above n. 28
41
Cottier, above n. 28at 757. See also Bonadio, above n. 28.
39
7
equivalent of international exhaustion in patent law and operate specific limitations, including
safeguard clauses or trade restrictions introduced under the Doha Waiver on essential drugs.”42
Like all the other leading commentators, Cottier assumes that states may freely distinguish
between the forms of intellectual property rights for purposes of devising their exhaustion
regime.43 Current state practice comports with this view. Indeed, according to Professor Daniel
Gervais, “it is not infrequent to apply national exhaustion to patents but international exhaustion
in the field of trademarks and copyright.”44 The United States Supreme Court has recently found
international exhaustion applicable to copyright law, but not to either patent or trademark laws.45
The literature and our own analysis thus makes the Eurasian switch to international
exhaustion look justifiable from the perspective of competition policy and casts the proposed
exceptions within an analytical framework worth pursuing. In this vein, let us first consider
potential boundaries sounding in the TRIPS Agreement itself and then in other related laws,
especially GATT (1994) and GATS, although—as we will see—there is no satisfactory way to
separate these regimes from one another in practice.
1.
Problems Sounding in National Treatment and Most Favored Nation Under TRIPS
The longstanding rule of national treatment enshrined in the Great IP Conventions46 was
codified in Article 3 of the TRIPS Agreement. It provides in relevant part “Each Member shall
accord to the nationals of other Members treatment no less favourable than that it accords to its
own nationals with regard to the protection of intellectual property, subject to the exceptions
already provided in, respectively, the Paris Convention (1967), the Berne Convention (1971) . . .
.”47 According to the WTO Appellate Body,
. . . in drafting the TRIPS Agreement, the framers of the WTO Agreement saw fit to
include an additional provision on national treatment. Clearly, this emphasizes the
fundamental significance of the obligation of national treatment to their purposes in the
TRIPS Agreement. Indeed, the significance of the national treatment obligation can hardly
be overstated. Not only has the national treatment obligation long been a cornerstone of the
Paris Convention and other international intellectual property conventions. . . . So, too, has
the national treatment obligation long been a cornerstone of the world trading system that is
served by the WTO. As we see it, the national treatment obligation is a fundamental
42
Cottier, above n. 14 at 757
See also GERVAIS above n. 32; ICTSD-UNCTAD, above n.15.
44
GERVAIS, above n.8 at 201.
45
See Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013); see, e.g., Irene Calboli, The United States
Supreme Court’s Decision in Kirtsaeng v. Wiley & Sons: An “Inevitable” Step in Which Direction?, 45 I.I.C. 75-90
(2014).
46
See Paris Convention, above n. 13, Arts. 2(1), 6; Berne Convention, above n. 14, Art. 5(1)
47
TRIPS Agreement, above n.35, Art. 3.
43
8
principle underlying the TRIPS Agreement, just as it has been in what is now the GATT
1994.48
The Appellate Body, like the Panel, thus established that GATT jurisprudence on national
treatment could be invoked when interpreting the same obligation under the TRIPS Agreement,
especially in light of the similarity in wording between the provisions.49 As is more fully
elaborated in Part III below, GATT jurisprudence on Article XX dealing with exceptions, and
on “the fundamental thrust and effect” of a measure would specifically apply to help analyse the
existence of less favourable treatment of foreign nationals.
Unlike national treatment, the Most-Favoured-Nation (MFN) obligation is entirely new to
international intellectual property relations. Borrowed from trade law, the rule is clearly stated in
TRIPS Article 4: “any advantage, favour, privilege or immunity granted by a Member to the
nationals of any other country shall be accorded immediately and unconditionally to the
nationals of all other Members.”50 It is critical to note that the TRIPS MFN provision lacks any
exceptions allowing discriminatory privileges to free trade agreements, custom unions or
otherwise in the context of regional integration, unlike GATT XXIV.51
However, Article 4 of TRIPS does recognize exceptions for any privileges or advantages
derived from international agreements in force prior to the TRIPS Agreement, so long as such
agreements are notified to the TRIPS Council and “do not constitute an arbitrary or unjustifiable
discrimination against nationals of other Members.”52
Accordingly, in evaluating possible exceptions to a general regime of international
exhaustion, under both TRIPS Article 6 and GATT Article XX, WTO members can choose from
diverse options “provided that the regime is non-discriminatory and applied outside customs
unions in the same manner to all” WTO Members.53 Moreover, such options, if discriminatory at
all, must at least be justifiable.54
The WTO Appellate Body has taken a particularly expansive view of “discrimination” in the
United States – Section 211 Omnibus Appropriations Act of 1998 dispute (also known as the
Havana Club case).55 In analyzing the particular measure in dispute between the U.S and the EU,
the Appellate Body held that the contested U.S. legislative provision and accompanying
48
United States- Section 211 Omnibus Appropriations Act of 1998, WT/DS176/AB/R, 2 January 2002, paras. 240242, at p. 69.
49
Id. at para. 242.
50
TRIPS Agreement, above n. 35, Art. 4.
51
GATT, above n. 30, Art. XXIV. See below, Part III.
52
TRIPS Agreement, Art 4 (d).
53
Cottier, above n. 28, at 577.
54
Id.
55
United States- Section 211 Omnibus Appropriations Act of 1998, WT/DS176/AB/R, 2 January 2002.
9
regulations dealing with trademarks owned by Cuban nationals was a violation of the national
treatment and most-favored-nation obligations of the TRIPS Agreement.56 Like the exhaustion
principle, “neither the TRIPS Agreement nor the Paris Convention (1967) required WTO
Members to adopt any particular "ownership regime.”57 Nevertheless, according to the Appellate
Body,
To fulfill the national treatment obligation, less favourable treatment must be offset, and
thereby eliminated, in every individual situation that exists under a measure. Therefore,
for this argument by the United States to succeed, it must hold true for all Cuban original
owners of United States trademarks, and not merely for some of them.58
Even the possibility that “an extra hurdle” existed for non-nationals and not for nationals placed
the former in a less favorable position and thereby constituted a violation of the national
treatment obligation59 under both the Paris Convention and the TRIPS Agreement.60
With regard to the MFN principle, the Appellate Body used the same arguments in its
analysis of the national treatment rule to conclude that the MFN rule was also violated by the
U.S. measure,61 despite the fact that the measure as written could apply to non-Cubans.62 This
reasoning in Havana Club is consistent with the later Panel decision in European Communities—
Protection of Trademarks and Geographical Indications for Agricultural Products and
Foodstuffs, which held that certain regulatory requirements needed to obtain protection for GI’s
located in third countries imposed an “extra hurdle” on foreigners that violated the national
treatment provision.63
We believe the WTO’s jurisprudence in the Havana Club case and other relevant TRIPS
jurisprudence, limits the adoption of an international exhaustion regime to one that is facially
56
Id. See also, European Communities—Protection of Trademark and Geographical Indications for Agricultural
Products and Foodstuffs, Panel Report WT/DS/74/R, March 15, 2005, adopted April 20, 2005.
57
WT/DS176/AB/R, para, 243. See also, id., para. 169.
58
WT/DS176/AB/R, para. 286.
59
Id., paras. 265-269 (“The United States may be right that the likelihood of having to overcome the hurdles of both
Section 515.201 of Title 31 CFR and Section 211(a)(2) may, echoing the panel in US – Section 337, be small. But,
again echoing that panel, even the possibility that non-United States successors-in-interest face two hurdles is
inherently less favourable than the undisputed fact that United States successors-in-interest face only one.” Id. at
para. 265.
60
Id. at para. 269 (“[W]e conclude that, by applying the "extra hurdle" imposed by Section 211(a)(2) only to nonUnited States successors-in-interest, the United States violates the national treatment obligation in Article 2(1) of the
Paris Convention (1967) and Article 3.1 of the TRIPS Agreement .”).
61
Id. at paras. 306-319.
62
Id. at para. 317 (“The fact that Section 515.201 of Title 31 CFR could also apply to a non-Cuban foreign national
does not mean, however, that it would offset in each and every case the discriminatory treatment imposed by
Sections 211(a)(2) and (b) on Cuban original owners.”)
63
European Communities—Protection of Trademarks and Geographical Indications for Agricultural Products and
Foodstuffs, above n. 54, paras 7.139-140 (finding the two conditions for recognition of foreign GI’s in the EU a
“significant extra hurdle”).
10
neutral, and that there can be no de jure or de facto geographical distinctions. As provided in
TRIPS itself, “For the purposes of Articles 3 and 4, “protection” shall include matters affecting
the availability, acquisition, scope, maintenance and enforcement of intellectual property rights
as well as those matters affecting the use of intellectual property rights specifically addressed in
this Agreement.”64 Moreover, in Canada—Patent Protection for Pharmaceutical Products,65 the
Panel stated unequivocally that both direct and indirect discrimination may become the subject
of a TRIPS complaint:
Discrimination may arise from explicitly different treatment, sometimes called ‘de jure
discrimination’, but it may also arise from ostensibly identical treatment which, due to
differences in circumstances, produces differentially disadvantageous effects, sometimes
called ‘de facto discrimination.’66
In other words, the Eurasian proposal as designed and implemented must pass scrutiny as to
both its facial terms and its practical, on the ground effects or consequences. If national
exhaustion in the same IP category or sector allows patent or trademark owners a demonstrably
advantageous shelter from free competition not available to those exposed to international
exhaustion, it is hard to see why a geographical criterion for invoking these advantages would
not constitute a per se violation of TRIPS Article 4. In other words, if the Eurasian Community
extends the advantages of one regime to imports from some countries and the disadvantages of
the other regime to another group of countries the end result is discriminatory on its face. As
some authorities have noted, under TRIPS Articles 3 and 4, “Members must not apply different
exhaustion rules to nationals of different Members.”67
2.
Other Relevant Issues under TRIPS
Whether a differentiated exception to the international exhaustion doctrine could legally be
made with regard to products or industrial sectors raises a somewhat more complicated problem,
disregarding for the moment any question of “investment” as a corollary justification. A
distinction cast in terms of product sectors alone would initially raise questions about violating
TRIPS Article 27.1, which forbids discrimination for patented products and processes on the
basis of “the field of technology.”68 One WTO panel has extended this constraint to scope of
64
TRIPS Agreement, above n. 33, Art. 3, Note 3.
WT/DS114/R, adopted on April 7, 2000.
66
Id. at para. 7.94.
67
UNCTAD-ICTSD, above n. 9, at 108. GERVAIS, above n.32 at 201. In the Canada—Patent Protection for
Pharmaceutical Products case, above n. 62, the Panel identified two elements of de facto discrimination: 1) a
discriminatory effect based on different treatment and 2) a discriminatory purpose based on the objective
characteristics of the disputed measure. (para. 7.94). Whether, under GATT jurisprudence, both components are
required and must be analyzed in a dispute remains unclear.
68
TRIPS Agreement, above n.35, Art. 27.1.
65
11
protection issues under Article 30, and not merely eligibility issues, on the grounds that it
constitutes a structural limitation that allows only “reasonable differentiation.”69
Obviously, one may object that Article 27.1 has been suspended by TRIPS Article 6 with
regard to exhaustion.70 However, there is some evidence in the legislative history that TRIPS
Art. 27.1 was intended to incorporate the principles of GATT Art. XI, which forbids quantitative
restrictions, directly into the TRIPS Agreement.71 Even if that proposition were not demonstrably
established, the law of GATT Articles XI and XX could be applied by analogy to the issue at
hand, notwithstanding the suspension of TRIPS Article 6,72 unless TRIPS were regarded as a lex
specialis that was separate and immune to applications of the GATT. 73 Apart from the
questionable validity of this lex specialis argument (although it has its adherents),74 in this case it
would not necessarily be dispositive if Article 27.1 were interpreted either as a kind of mirror
image of GATT Art. XI or if the same principles had legislatively been transplanted from GATT
into TRIPS Article 27.1.
Given these premises, one might ask whether a naked sectoral or product distinction—
without further justification—would survive a quantitative restriction test under GATT, as well
as an MFN test under TRIPS Article 6? As previously indicated, the MFN test might depend on
whether the distinction ended up benefitting the nationals of one geographical set of countries as
distinct from other countries under a de facto test of discrimination, as occurred in the European
Communities—Protection of Trademarks and Geographical Indications for Agricultural
Products and Foodstuffs, case referenced earlier.75
If the MFN clause is not triggered, leading authorities seem little concerned about
differentiated exhaustion based on product sectors alone. On the contrary, international
intellectual property scholars mostly claim that governments can freely choose among the
products they subject to this regime. 76 The latest to join this chorus is the Max Planck’s
Declaration on Regulatory Space under TRIPS.77 As will be seen, however, these assertions
often ignore the implications of trade law and policy.78
69
WTO Canada –Patent Protection of Pharmaceutical Products, above n. 65.
See above n. and accompanying text.
71
See especially DE CARVALHO, above n. 6, at 149, 294. For further elaboration of GATT Article XI, see Part III
below.
72
See, e.g., Cottier, above n. 28.
73
See, e.g., UNCTAD-ICTSD, above n. 9 (recognizing but not supporting a lex specialis thesis).
74
See, e.g., Honda Giken Kogyo; ECJ 17-Jul-2014.
75
See above n.63 and accompanying text.
76
See, e.g., GERVAIS, above note 34; UNCTAD-ICTSD, above n.9.
77
Max Planck Declaration on Regulatory Space under the TRIPS Agreement, April 15, 2014, para. 5.1, available at .
78
As a member of the Steering Committee that drafted the Max Planck’s Declaration, Prof. Reichman contested the
breadth of these assertions to no avail, but he remains skeptical for the reasons set out below.
70
12
A tenable interpretation of TRIPS Article 27.1 would suggest that some reasonable or
justifiable differentiation between fields of technology is acceptable, as distinct from
impermissible discrimination.79 While this distinction flows from one reading of the WTO
Canada Pharmaceutical Products case, that decision does not support the view that a naked
sectoral distinction without more would be “reasonable.” If, moreover, there are grounds for
contending that Article 27.1 of TRIPS was deliberately intended to transplant the principles of
GATT Article XI into the TRIPS Agreement,80 or that it reflects analogous GATT principles,81
the non-justiciability of TRIPS Article 27.1 with respect to exhaustion under Article 6 would not
necessarily suspend the application of GATT Article XI, not to mention GATT Art. XX. As for
the “lex specialis” view of TRIPS, clearly the panel in the WTO Trademark and Geographical
Indications case did not subscribe to that thesis when it relied primarily on the GATT’s own
national treatment jurisprudence in interpreting TRIPS Article 3, rather than on Article 2(1) of
the Paris Convention as incorporated into TRIPS by Article 2.1 of that same Agreement.82
3.
Justifying the Reasonableness of Sectoral Differentiation
On its face, Article 6 of the TRIPS Agreement identifies the beneficiaries of protection as
nationals who own IP rights, and does not directly address rules bearing on countries of origin.
Nevertheless, it is worth emphasizing that, in the view of a leading trade law expert, TRIPS Art.
6 does not render the criteria of GATT Arts. XI and XX “nonoperational” with respect to a
regime of international exhaustion.83 On the contrary, rules of GATT (1994) and GATS “may
inform future policies on the subject.” 84 In this context, the tests of “necessity” and
“proportionality,” with particular regard to “less intrusive means to bring about legitimate policy
goals,”85 are particularly relevant as further elaborated in Part III, below.
Applying these criteria to the Eurasian proposal summarized above, there is a need to justify
a product or sectoral differentiation in terms that might be deemed acceptable under GATT and
GATS. Here we should stress the importance of inducing foreign direct investment (FDI) in the
local production of manufactured goods as a defensible justification for shielding certain firms
from the full competitive rigor of a shift from national to regional exhaustion, at least during a
pre-determined transitional period of time. Moreover, United States law does recognize that
investment in local industry can sometimes give the state more leeway in designing its customs
79
WTO Canada –Patent Protection of Pharmaceutical Products, above n. 18; see, e.g., Jerome H. Reichman &
Rochelle Cooper-Dreyfuss, Harmonization Without Consensus: Critical Reflections on Drafting a Substantive
Patent Law Treaty, 57 DUKE L.J. 85, 111-113 (2007).
80
See DE CARVALHO, above n. 2, at XX.
81
Cottier, above n. 28.
82
European Communities, above n. 54.
83
Cottier, above n. 28, at 577.
84
Id.
85
Id.
13
procedures;86 however, the procedures adopted in application of such a standard cannot create
extra hurdles for foreigners or otherwise violate the MFN or national treatment rules.
The benefits of attracting FDI to both developing countries and countries in transition are
widely acknowledged in the literature. 87 Increasingly, this concern has been factored into
components of numerous Free Trade Agreements—both bilateral and regional—which seek to
protect foreign investors in local enterprises from the risks of confiscation or expropriation under
the normal rules governing the protection of aliens under public international law.88 Lately,
these investment protection treaties (or components thereof) have been invoked to buttress
investment in products protected by international intellectual property rights against adverse
interpretations of domestic international intellectual property standards that might otherwise
weaken or indirectly “expropriate” the foreign producers’ expected returns. For example, Eli
Lilly has sued Canada under the investment provisions of NAFTA for nullifying the value of
certain pharmaceutical patents on the grounds of Canada’s “promise of the patent” doctrine of
utility.89
While commentators have expressed skepticism about this claim to freeze extant national IP
laws on grounds of ‘investment protection,’ the legal arguments advanced by Eli Lilly may
presage the kind of arguments investors not subject to the proposed shelter from international
exhaustion could collectively mount against the Eurasian proposal. By the same token, invoking
the need to stimulate foreign investment protection as a defense to sectoral differentiation of
exhaustion is not certain to suffice, as there is no explicit carve-out for distinguishing between
categories or levels of investment in either the TRIPS Agreement’s national treatment and MFN
rules or the Great Conventions.
Nevertheless, the need for, and benefits of, foreign investment in the local production of
manufactured goods in the Eurasian market could arguably justify strengthening the investors’
expected returns from its intellectual property rights against a sudden increase of parallel imports
86
See § 337 of the Tariff Act of 1930, 19 U.S.C. § 1337. In making a § 337 case, a complainant must show proof of
a domestic industry, requiring a "economic" prong and a "technical" prong. “The economic prong can be satisfied
by demonstrating that there exists in the United States with respect to the products protected by the intellectual
property right being asserted: significant investment in plant and equipment; significant employment of labor or
capital; or substantial investment in its exploitation, including engineering, research and development, or
licensing.”) See http://www.itctla.org/resources/faqs#domestic-industry.
87
See e.g., KEITH E. MASKUS, INTELLECTUAL PROPERTY RIGHTS IN THE GLOBAL ECONOMY (2000); KEITH E.
MASKUS, PRIVATE RIGHTS AND PUBLIC PROBLEMS: THE GLOBAL ECONOMICS OF INTELLECTUAL PROPERTY RIGHTS
IN THE 21ST CENTURY (2012).
88
RESTATEMENT OF THE LAW (THIRD) – THE FOREIGN RELATIONS LAW OF THE UNITED STATES §712 (State
Responsibility for Economic Injury to Nationals of Other States) (1987).
89
See Jerome H. Reichman, Compliance of Canada’s Utility Doctrine with International Minimum Standards of
Patent Protection, PROCEEDINGS OF THE ANNUAL MEETING OF THE AMERICAN SOCIETY OF INTERNATIONAL LAW
(forthcoming 2014); Ruth L. Okediji, Is Intellectual Property Investment? Eli Lilly v. Canada and the International
Intellectual Property System, 35 (4) U. PENN. J. INT’L L., 1121 (2014).
14
under a regime of international exhaustion. That level of increased competition was not foreseen
at the time when the existing investments were initially made, and it could discourage future
investment in local production by foreign firms of particular interest to the participating
countries.
Such a tailor-made exception to a regime of international exhaustion arguably finds some
support in Article 5(A) of the Paris Convention itself, which allows Member states to
characterize the failure of patentees to invest in local production as a form of actionable abuse.90
The government of India has recently invoked this concept of abuse to justify the grant of a
compulsory license for a patentee’s failure to locally produce a cancer drug imported from
abroad and sold at prices most patients could not afford.91
Such a concession to existing foreign investors in local production of goods might also be
roughly compared to prior user rights available under many, if not most, domestic patent laws.
Innovators who failed to become the first to file for patents under those laws may qualify for
prior user rights, which allow them to continue using an innovation patented by another who
filed first, subject to certain conditions, including in some cases the payment of royalties. But the
prior user may not be driven out of the market by the patentee’s injunction.92 By the same token,
those who invested in local production for the European market under a regime of national
exhaustion may arguably deserve a similar immunity from a later, more rigorous regime of free
competition under a doctrine of international exhaustion that was not contemplated at the time
the initial investments were made.
Analogies to prior user rights are, however, weaker if the investment in local production
were to be made after a regime of international exhaustion had been put in place and with
knowledge of it.93 Moreover, and for what it is worth, the same commentator who questions the
legality of international exhaustion under the WTO TRIPS Agreement has also questioned the
legality of prior user rights,94 which are otherwise well-established in the domestic patent laws
and have recently been introduced into the patent reforms of U.S. law.95
90
Paris Convention, Art. 5(A), imported into TRIPS by Art. 2.1. of that Agreement.
Natco Pharmaceutical vs. Bayer Corporation, 2012 (50) PTC 244 (PO, Mum). However, cases involving
pharmaceuticals benefit from a layer of immunities from scrutiny added by Art. 5(d) of the Doha Ministerial
Declaration on TRIPS and Public Health of 2001, above n. 34.
92
See generally, UNITED STATES PATENT AND TRADEMARK OFFICE REPORT TO CONGRESS ON THE PRIOR USER
RIGHTS DEFENSE (2012).
93
Cf. the WTO §110(5)(B) case, where a questionable amendment to an earlier exception to the exclusive public
performance rights of U.S. copyright law had been made with knowledge of the limits potentially imposed by the
three-step test codified in Article 13 of the TRIPS Agreement.
94
See DE CARVALHO, above n. 6, at 383-386.
95
See Leahy- Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011), § 273.
91
15
That said, the potential economic importance of FDI in local production for the Eurasian
market may transcend these technical legal arguments and conceivably constitute both a
“necessary” and “proportional” exception to a newly instituted regime of international
exhaustion in that market. This tailor-made justification could, in turn, be strengthened if it were
expressly limited in time and characterized as a transitional measure necessitated by the very
competition policy underlying the shift to international exhaustion in the first place.
Here it is well to remember that states may exceed the minimum standards of the TRIPS
Agreement, and they may also apply the standards differently within their own state practice.96 In
so doing, they may increase or decrease the value of any given set of IP rights, provided that the
end result constitutes a good faith implementation of the TRIPS Agreement and does not unduly
discriminate against the nationals of other Member States.
Moreover, Articles 8.2 and 40 of the TRIPS Agreement continue to reserve competition law
and policy to domestic regulation, while Article 8.2 allows members, when formulating their
laws and regulations, to adopt measures “necessary…to promote the public interest in sectors of
vital importance to their socio-economic and technological development.”97 Similarly, Article 7
mandates that the protection and enforcement of intellectual property rights should operate “to
promote the transfer and dissemination of technology, to the mutual advantage of producers and
users of technological knowledge and in a manner conducive to social economic welfare and to a
balance of rights and obligations.”98
These safeguard provisions cannot be ignored under the authority of recent Appellate Body
decisions,99 as they were in the WTO-Canada Pharmaceutical Products Report;100 and they
could greatly strengthen the case for the proposed Eurasian concessions, especially if limited in
time and characterized as transitional measures. Nevertheless, these and other arguments set out
above (and more fully developed in Part III) are directed at a set of issues that, as Cottier
recognizes, are novel, unsettled, and therefore of uncertain legal outcomes.101
What does seem certain is that, notwithstanding these justifications, if the application of the
proposed concessions leads in practice to de facto discrimination favoring one group of
96
See TRIPS Article 1.1 (Members shall give effect to the provisions of this Agreement. Members may, but shall
not be obliged to, implement in their law more extensive protection than is required by this Agreement, provided
that such protection does not contravene the provisions of this Agreement. Members shall be free to determine the
appropriate method of implementing the provisions of this Agreement within their own legal system and practice.)
97
TRIPS Agreement, above n. 33, Arts. 8 and 40.
98
Id., Art. 7. See generally Peter K. Yu, The Objectives and Principles of the TRIPS Agreement, 46 HOUSTON L.
REV. 979 (2009) (Symposium Issue).
99
See generally, Bryan Mercurio, Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of
the Legality of Local Working Requirements (with Mitali Tyagi), 19 MINN. J. OF INT’L LAW, 275 (2010).
100
Above n. 63.
101
See Collier, above n.28.
16
geographically distinct nationals over others, the WTO’s Appellate Body may likely reject them,
in keeping with its sweeping defense of national treatment and MFN principles in the Havana
Club case.102 Moreover, even if these arguments were to successfully avoid an adverse dispute
resolution at the WTO, they are unlikely to avoid protests and pressures from non-exempted
interests and their governments, with some risks of retaliatory actions. Questions and concerns
are also likely to be raised in public forums, especially at the WTO Council for TRIPS.
Nevertheless, barring an adverse judgment for damages in a WTO dispute, the Eurasian
authorities may judge the benefits of such concessions to outweigh the corresponding costs.
One should also remain aware that WTO complaints sounding in non-violatory acts of
nullification and impairment of benefits under Article 64 of the TRIPS Agreement are currently
subject to a moratorium agreed by the Council of Ministers.103 However, there is talk at the
Council for TRIPS about the possibility of lifting this moratorium in the future. Meanwhile, such
complaints are actionable under GATT (1994)104 and should be factored into any assessment of
potential liability for a differentiated exhaustion regime.
III. THE APPLICABILITY OF THE GATT
Part III will more thoroughly examine the compatibility of a system of differentiated
international exhaustion with the GATT agreement, while exploring the varying options of
differentiated international exhaustion detailed above.
The following issues are addressed:
1. Can GATT rules apply cumulatively to the TRIPs agreement, and what would be the role
in that regard of Article 6 of TRIPS? In other words, is it possible for exhaustion rules
and their enforcement to fall within the scope of the GATT prohibitions?
2. In case a positive answer is given to the above question, we will examine the
compatibility of the differentiated international exhaustion approach with the principle of
the general elimination of quantitative restrictions and equivalent measures under Article
XI of the GATT 1994, as well as with the principle of Most-Favoured-Nation treatment
102
See above notes 55 - 60 and accompanying text.
See TRIPS Agreement, above n. 33, Art. 64. See WTO Ministerial Decision of 7 December 2013, TRIPS Nonviolation and Situation Complaints , WT/MIN(13)/31 or WT/L/906 (“We take note of the work done by the Council
for Trade-Related Aspects of Intellectual Property Rights pursuant to our Decision of 17 December 2011 on ‘TRIPS
Non-Violation and Situation Complaints’ (WT/L/842), and direct it to continue its examination of the scope and
modalities for complaints of the types provided under subparagraphs 1(b) and 1(c) of Article XXIII of GATT
1994 and make recommendations to our next Session, which we have decided to hold in 2015. It is agreed that, in
the meantime, Members will not initiate such complaints under the TRIPS Agreement.”)
104
See GATT (1994), above n.30, Art. XXIII. See also GATS, above n. 31, Art. XXIII.
103
17
(MFN) (under Article I of the GATT 1994) and the principle of National Treatment on
Internal Taxation and Regulation (under Article III of the GATT 1994).
3. Should we find that a differentiated international exhaustion regime is prohibited by any
of the above articles, we will explore if it is possible to justify these prohibitions by
reference to other provisions of the GATT, in particular Articles XX (d) and XXIV of the
GATT 1994.
A. Parallel Application of the GATT and the TRIPS Agreement
As explained above, Article 6 of the TRIPs agreement leaves the issue of the legality of
parallel imports open and allows Member States to opt for any exhaustion system and for any
type of intellectual property right, provided that the application of the exhaustion doctrine chosen
does not conflict with Articles 3 and 4 of the TRIPS agreement. The non-regulation of the
exhaustion regime by the TRIPS agreement nevertheless leaves open the possibility of applying
the provisions of GATT to these issues, as Article 6 of TRIPS may be interpreted as implicitly
invoking the application of the GATT and an assessment of the regime governing parallel
imports under the principles of that agreement. Indeed, as has been convincingly argued by
some authors, “Article 6 of the TRIPS Agreement precludes a mandatory regulation of the issue
in question only under the provisions of the TRIPs Agreement but not under the provisions of
other multilateral agreements, such as the GATT 1994”105.
Such an interpretation of the relations between Article 6 of TRIPS and the GATT relies on
the following reasoning:
105
•
Articles 3 and 4 of the TRIPs agreement focus on prohibitions of discrimination based on
the criterion of the nationality of the IP holder. However, discriminatory treatment that is
based on the criterion of the origin of the products is not dealt with by the TRIPs
Agreement provisions. Hence, it would make sense for the latter type of discrimination to
fall under the scope of the GATT, as it should apply to all discriminatory measures that
are based on the criterion of the origin of the products, in as much as the TRIPs
Agreement does not exclude explicitly the operation of GATT 1994. In other words, it
makes no sense to claim that Article 6 TRIPS preempts the application of GATT.
•
It is true that, at first sight, the objectives of the TRIPs may seem to conflict with those of
the GATT 1994. While the GATT promotes trade liberalization and the erosion of any
barriers to trade, the TRIPS agreement aims to enhance the international protection of
intellectual property rights by defining minimum standards of protection that all the
L.G. GRIGORIADIS, TRADEMARKS AND FREE TRADE: A GLOBAL ANALYSIS (SPRINGER, 2014), at 105.
18
Member of the TRIPs Agreement should ensure. Yet, as has been recognized by some
authors, “there is much in common between the approaches of the (two) agreements to
trade regulation” and “some of the most basic GATT principles, such as transparency,
non-discrimination, national treatment, fair trade are found in the TRIPs agreement”.106
Furthermore, the Preamble to the TRIPs Agreement refers to GATT 1994.107 In addition,
Article XVI (3) of the WTO Agreement provides that “in the event of a conflict and a
provision of any of the Multilateral Trade Agreements, the provision of this Agreement
shall prevail to the extent of the conflict”,108 thus indicating that it is compatible with the
WTO Agreement for the individual agreements annexed to that Agreement to apply in
parallel. Otherwise there would be no reason to have such a provision regulating
conflicts.109
•
This reading of the WTO Agreement is also compatible with the approach followed so far
with regard to the cumulative application of GATT and GATS, or the agreement on
Safeguards and GATT.110 The fact that the WTO Agreement is recognized as a “Single
Undertaking” requires that “all WTO obligations are generally cumulative and Members
must comply with all of them simultaneously”.111 As is explained by Marceau and
Trachtman, “(t)he principle of effective interpretation within the WTO Single
Undertaking calls for the harmonious interpretation and application of all WTO
provisions.”112
•
Conflicts between the different obligations imposed by the several Agreements that are
part of the WTO may occur. Situations of “conflict” have been defined as following:
“technically speaking, there is a conflict when two (or more) treaty instruments contain
obligations which cannot be complied with simultaneously […] Not every such
divergence constitutes a conflict, however […] Incompatibility of contents is an essential
condition of conflict.”113 This narrow definition of conflict makes even more sense if one
considers the interaction between separate agreements that are concluded between the
106
W. J. Davey & W. Zdouc, The Triangle of TRIPs, GATT and GATS, in T. Cottier & P.C. Mavroidis (eds.),
INTELLECTUAL PROPERTY: TRADE, COMPETITION, AND SUSTAINABLE DEVELOPMENT (Michigan U press:, 2003), 53,
54.
107
S.K. Verma (1998) Exhaustion of Intellectual Property Rights and Free Trade – Article 6 of the TRIPS
Agreement, INTERNATIONAL REVIEW INTELLECTUAL PROPERTY AND COMPETITION LAW 534, 553-558.
108
Above n.
109
GRIGORIADIS above n. 105, 106.
110
Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July
1997, DSR 1997:I, 449; Appellate Body Report, Korea – Definitive Safeguard Measures on Imports of Some Dairy
products, WT/DS98/AB/R, adopted 12 January 2000.
111
Appellate Body Report, Korea – Definitive Safeguard Measures on Imports of Some Dairy products,
WT/DS98/AB/R, adopted 12 January 2000, para. 74.
112
G. Marceau & J.P. Trachtman, A Map of the World Trade Organization Law of Domestic Regulation of Goods:
The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the General
Agreement on Tariffs and Trade, JOURNAL OF WORLD TRADE 48(2):351-432, 419.
113
ENCYCLOPEDIA OF PUBLIC INTERNATIONAL LAW (Amsterdam: Elsevier Science 1984), p. 468.
19
same parties, which one should presume were not meant to be inconsistent with each
other, in the absence of any evidence to the contrary.114
•
One could argue that there is no conflict between Article 6 TRIPS and the provisions of
the GATT 1994. So long as Article 6 TRIPS is interpreted as recognizing full policy
discretion in the Member States to adopt an exhaustion regime that may not render the
simultaneous fulfillment of the obligations imposed by all other WTO Agreements
impossible. Neither a literal, nor a contextual, nor a teleological interpretation of Article 6
supports such broad understanding of the regulatory discretion provided in the Member
States. On the contrary, Article 6 of the TRIPS Agreement subjects the regulatory
discretion of the Member States to the respect of the National Treatment and MFN
obligations imposed by that Agreement.
•
The WTO Agreement contains some limited conflict rules, such as the one included in
the General Interpretative Note to Annex 1A of the WTO Charter, stipulating that “in the
event of conflict between a provision of the General Agreement on Tariffs and Trade
1994 and a provision of another agreement in Annex 1A to the Agreement establishing
the World Trade Organization […] the provision of the other agreement shall prevail to
the extent of the conflict”. Yet, this provision does not regulate the conflicts that may
exist between GATT and TRIPs, as TRIPs is not covered by Annex 1A.
•
In the unlikely event that Article 6 of TRIPS would be interpreted as being in conflict
with a provision of the GATT, one may not refer to this General Interpretative Note,
although it may be possible to rely on the principle of lex specialis derogat generali. Yet,
the determination of which of the two agreements, TRIPs or GATT constitutes lex
specialis remains unclear, in view of the fact that the TRIPs Agreement imposes
obligations on the Members that seem to be different from, and additional to, the
obligations on members under the GATT. This follows from the fact that the TRIPs
Agreement does not regulate discrimination based on the criterion of the origin of the
goods 115 and from the fact that GATT may apply in parallel with the TRIPs,
notwithstanding Article 6 of TRIPs as demonstrated above.116
B. The Obligations Imposed by GATT
114
W. JENKS, The Conflict of Law-Making Treaties, in 30 BRITISH YEARBOOK OF INTERNATIONAL LAW, 401-453.
For a similar interpretation with regard to GATT 1994 and the TBT Agreement, that led the Appellate Body to
find that the TBT was not an exclusive lex specialis to GATT, see Appellate Body Report, EC-Asbestos,
WT/DS135/AB/R, para. 80.
116
For a similar view, see GRIGORIADIS (2014), above n. 105, at 105; C. Freytag (2001) Parallelimporte nach EGund WTO-Recht (Patente und Marken versus. Handelsfreiheit). Duncker & Humblot, Berlin, 241. But see MCEJ
Bronckers, The Exhaustion of Patent Rights under World Trade Organization Law. JOURNAL OF WORLD TRADE
137–159 (1998).
115
20
GATT contains a number of restrictions on national regulation, some of which may conflict
with a regime of differentiated international exhaustion.
1.
Article XI (1) GATT: Quantitative Restrictions and Measures Having Equivalent Effect
Of particular relevance for our analysis is Article XI (1) GATT, which prohibits quantitative
restrictions and measures having equivalent effect that impede the free movement of goods
between Member States of the GATT Agreement. According to this provision,
“(n)o prohibitions or restrictions other than duties, taxes or other charges, whether made
effective through quotas, import or export licenses or other measures, shall be instituted
or maintained by any contracting party on the importation of any product of the territory
of any other contracting party or on the exportation or sale for export of any product
destined for the territory of any other contracting party”.
The exercise of the exclusive right provided by trademark law to oppose parallel imports
coming from another jurisdiction (in case of domestic exhaustion regime) or from a jurisdiction
which is not part of the union of nations to which the importing country belongs (in case of
regional exhaustion) could be said to constitute a measure equivalent to a quantitative restriction,
as it reduces the volume of parallel imports (the construction reached by the EU under the
corresponding wording of the EEC Treaty)117.
A similar conclusion may be reached with regard to a regime of differentiated international
exhaustion to the extent that it enables trademark holders to oppose parallel imports, originating
from jurisdictions for which the regime of international exhaustion does not apply (i.e.
differentiated geographic international exhaustion) or in case the trademark is owned by
undertakings that have made significant investments in the territory of the Eurasian Economic
Union (i.e., differentiated international exhaustion for the purpose of protecting investors).
117
Indeed, the WTO jurisprudence adopts a broad definition of what constitutes “other measures”, according to
Article XI(1) GATT. See Panel Report, Japan - Trade in Semi-Conductors, adopted on 4 May 1988, L/6309 35S/116, para. 104 (“this wording was comprehensive: it applied to all measures instituted or maintained by a
contracting party prohibiting or restricting the importation, exportation or sale for export of products other than
measures that take the form of duties, taxes or other charges”). The term “restriction” is also very broad and covers
“all measures instituted or maintained by a [Member] prohibiting or restricting the importation, exportation, or sale
for export of products other than measures that take the form of duties, taxes or other charges” [ Panel Report, India
– Quantitative Restrictions on Imports of Agricultural, Textile and Industrial products, adopted on April 6, 1999,
WT/DS90/R, para. 5.128] or “any form of limitation imposed on, or in relation to importation" [Panel Report, India
– Measures Affecting the Automotive Sector, adopted on December 21, 2001, WT/DS146/R, WT/DS175/R, para.
7.265]. In India – Measures Affecting the Automotive Sector, the panel highlighted “the need to identify not merely a
condition placed on importation, but a condition that is limiting, i.e. that has a limiting effect” [para. 7.270]. In the
context of Article XI, that limiting effect must be on importation itself. Consequently, Article XI(1) GATT can
apply to any measure restricting trade, such as any type of exhaustion regime, but pure international exhaustion.
21
Although Article XI (2) of the GATT provides certain exceptions concerning the trade of certain
product categories, no such exception refers to parallel trade.
One may also refer to the recent WTO case involving Argentina – Measures Affecting the
Importation of Goods, in which the WTO panel assessed certain trade restrictive requirements
(TRR) imposed by Argentina in order to limit imports with the purpose to help control its trade
balance and implement a “managed trade” policy, basically implementing an import substitution
programme118. These restrictive trade requirements included requirements imposed to economic
operators to undertake investments in the form of irrevocable capital contributions, when their
level of imports exceeds that of their exports, requirements to reach a higher level of local
content in their products by substituting imports with products that are produced or could be
produced in Argentina, requirements to undertake investments in order to commence
manufacturing processes in Argentina or to increase or improve manufacturing capacity. The
European Union, among other Contracting parties to the WTO, complained arguing that each of
the TRRs is inconsistent with Article XI:1 of the GATT 1994, since each one prohibits or
restricts the importation of goods into Argentina. In particular, the EU alleged that the
investment requirement is to be inconsistent with Article XI:1 because it is imposed as a
condition to import. The Panel noted the following:
“(t)he required increase of local content, either by purchasing from domestic producers or
by developing local manufacture, has a direct limiting effect on imports, because the
measure is designed to force the substitution of imports in line with policies set by
Argentina” and that
“[…] (t)he investment […] requirements have a limiting effect on imports because the
right to import is linked to making capital investments […]”119.
The Panel further noted that
“[…] the TRRs may result in costs unrelated to the business activity of the particular
operator. Extra costs as a general matter will discourage importation and, thus, will have
an additional limiting effect on imports. While the circumstances in the present case are
different, the fact that a measure may constitute a restriction on importation within the
meaning of Article XI:1 of the GATT 1994 when it acts to discourage importation by
penalizing it and making it prohibitively expensive, was analysed by the panel in Brazil –
Retreaded Tyres. We agree with the panel's analytic approach in that case”120.
118
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R.
119
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, paras 6.258 & 6.259.
120
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, para. 6.261.
22
The Panel observed that the well-established GATT case law concluded that “the very potential
to
limit trade is sufficient to constitute a 'restriction […]'121" and that “Article XI:1, like Articles I,
II and III of the GATT 1994, protects competitive opportunities of imported products, not trade
flows122”, thus concluding that the measure in question infringed Article XI(1) GATT123.
Article XX (d) does provide for a general exception from the prohibition of measures
equivalent to quantitative restrictions when these are necessary to secure compliance with laws
or regulations that are not inconsistent with the provisions of this Agreement including those
relating to the protection of patents, trademarks and copyrights. However, this provision cannot
override the prohibition of parallel imports by virtue of the exercise of a trademark right if it
constitutes a measure infringing Article XI(1) GATT, albeit potentially justified, as discussed
further below. Consequently, a prohibition of parallel imports by virtue of a regime of national,
regional or differentiated international exhaustion of rights constitutes, as a non-tariff barrier, a
quantitative restriction to international trade within the meaning of Article XI (1) of the
GATT124.
2.
Article III: 4 GATT: National Treatment
A prohibition of parallel imports by virtue of a regime of national, regional or differentiated
international exhaustion of rights may also be inconsistent with the national treatment obligation
contained in Article III:1 and 4 of GATT. According to this provision,
“1. The contracting parties recognize that internal taxes and other internal charges, and
laws, regulations and requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of products, and internal quantitative regulations
requiring the mixture, processing or use of products in specified amounts or proportions,
should not be applied to imported or domestic products so as to afford protection to
domestic production. […]
4. The products of the territory of any contracting party imported into the territory of any
other contracting party shall be accorded treatment no less favourable than that accorded
to like products of national origin in respect of all laws, regulations and requirements
121
Panel Report, China – Measures Related to the Exportation of Various Raw Materials, July 5th, 2011,
WT/DS394/R, WT/DS395/R, WT/DS398/R, para. 7.1081.
122
Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather,
adopted on December 19, 2000, WT/DS155/R para. 11.20
123
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, para. 6.265.
124
GRIGORIADIS above n.105, 107; C. Freytag (2001) Parallelimporte nach EG-und WTO-Recht (Patente und
Marken versus. Handelsfreiheit). Duncker & Humblot, Berlin, 241-242.
23
affecting their internal sale, offering for sale, purchase, transportation, distribution or
use.”
The prohibition of discrimination covered by this provision has been interpreted in
several GATT and WTO cases. In Japan-Alcoholic Beverages, the Appellate Body declared that
the main purpose of Article III GATT is to prohibit protectionism, which is defined objectively,
by examining the application of the measure in question, and without reference to the subjective
intent of the Member State adopting the allegedly discriminatory measure.125 As the Appellate
Body explained in EC-Asbestos, “in endeavouring to ensure ‘equality of competitive conditions’,
the ‘general principle’ in Article III seeks to prevent Members from applying internal taxes and
regulations in a manner which affects the competitive relationship, in the marketplace, between
the domestic and imported products involved, so as to afford protection to domestic
production.”126 The protectionist purpose of the measure may be discerned “from the design,
architecture and the revealing structure of a measure.”127 In order to prove a violation of Article
III: 4, the complaining Member must prove that the measure at issue is a “law, regulation, or
requirement affecting their internal sale, offering for sale, purchase, transportation, distribution,
or use”; that the imported and domestic products for which the measure afford protection are
“like products,” and that the imported products are accorded “less favourable” treatment than
that accorded to like domestic products.
Although there is little doubt that trademark rules constitute regulation affecting the sale,
offering of sale, purchase and use of the products, in view of its exclusionary effect against
parallel imports, should a regime of domestic, regional or differentiated international exhaustion
be chosen, the two other conditions for the implementation of Article III: 4 need to be examined
in depth. A regime of domestic exhaustion will inevitably afford less favourable treatment to
imported products, as opposed to “like” products produced in the territory of the importing
Member State. According to the Appellate Body in EC- Asbestos, “a determination of ‘likeness’
under Article III: 4 is, fundamentally, a determination about the nature and extent of a
competitive relationship between and among products.”128
It is important here to note that “when origin is the only factor distinguishing between
imported and domestic products, there is no need to conduct a likeness analysis on the basis of
the traditional likeness criteria established in the GATT [jurisprudence] …. In these cases,
125
Appellate Body Report, Japan – Alcoholic Beverages, II, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R,
adopted 1 November 1996, para. 16.
126
Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing
Products, WT/DS135/AB/R, adopted 5 April 2001, paragraph 98.
127
R.E. Hudec GATT/WTO Constraints on National Regulation: Requiem for an Aims and Effects Test,
INTERNATIONAL LAWYER (1998) 619-649.
128
Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 99.
24
imported and domestic products may be considered to be alike under Article III:4”129. For
instance, in a regime of domestic exhaustion, and to a certain extent for a regime of regional or
differentiated international exhaustion based on a geographic criterion, the application of the
exhaustion principle will focus on the origin of the product. The only distinguishing feature
between an imported product and a domestic one, in terms of the application of the exhaustion
principle, would be its origin. If this is the case, then the imported and domestic products will be
considered as "like" for the purposes of Article III:4 of the GATT 1994. The determination of
likeness will nevertheless be necessary, should a differentiated international exhaustion regime
based on an investment protection clause be chosen. For this reason, it becomes important to
examine the jurisprudence of the WTO on “likeness”
One may refer to the well-known concept of cross-elasticity of demand in order to
describe the existence of a competitive relationship between two products: that is, if the price of
one product increases (in a small but significant non transitory way), consumers shift
consumption to the other product. Although the concept of “likeness” under Article III: 4 does
not extend to “all products which are in some competitive relationship130”, “there is a spectrum
of degrees of ‘competitiveness’ or ‘substitutability’ of products in the marketplace”, and “it is
difficult, if not impossible, in the abstract, to indicate precisely where on this spectrum the word
‘like’ in Article III: 4 of the GATT 1994 falls.”131
The Appellate Body referred to the criteria mentioned by the Working Party Border Tax
Adjustment report in order to analyze “likeness”: “(i) the properties, nature and quality of the
products; (ii) the end-uses of the products; (iii) consumers' tastes and habits – more
comprehensively termed consumers' perceptions and behaviour – in respect of the products; and
(iv) the tariff classification of the products”132. According to the Appellate Body, “these four
criteria comprise four categories of "characteristics" that the products involved might share: (i)
the physical properties of the products; (ii) the extent to which the products are capable of
serving the same or similar end-uses; (iii) the extent to which consumers perceive and treat the
products as alternative means of performing particular functions in order to satisfy a particular
want or demand; and (iv) the international classification of the products for tariff purposes”133.
129
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted
WT/DS438/R, WT/DS444/R, WT/DS445/R, para. 6.274.
130
Appellate Body Report, European Communities – Measures Affecting Asbestos and
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 100.
131
Appellate Body Report, European Communities – Measures Affecting Asbestos and
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 99.
132
Appellate Body Report, European Communities – Measures Affecting Asbestos and
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 101.
133
Appellate Body Report, European Communities – Measures Affecting Asbestos and
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 101.
on August 22, 2014,
Asbestos-Containing
Asbestos-Containing
Asbestos-Containing
Asbestos-Containing
25
However, even if two products are "like", that does not mean that a measure is
inconsistent with Article III: 4 without more. This is because the Appellate body performs (since
Korea – Various Measures on Beef a two-step test): first, examining whether the like domestic
and imported product are treated differently, and, second, determining whether this differential
treatment amounts to “less favourable treatment”.134 A complaining Member must therefore
establish that the measure accords to the group of “like” imported products “less favourable
treatment” than it accords to the group of “like” domestic products. Discriminating between the
like domestic and the like imported products would not be considered as falling within the scope
of the Article III: 4 prohibition unless this differential treatment is no “less favourable” for like
imported products.
Hence, a regulation that would favour imported like products, in comparison with
domestic like products, would be considered as perfectly compatible with Article III: 4 GATT.
Reverse discrimination is not subject to the prohibition of Article III: 4. As the Appellate Body
noted in EC- Asbestos,
“(t)he term ‘less favourable treatment’ expresses the general principle, in Article III:1,
that internal regulations ‘should not be applied … so as to afford protection to domestic
production’. If there is ‘less favourable treatment’ of the group of ‘like’ imported
products, there is, conversely, ‘protection’ of the group of ‘like’ domestic products.
However, a Member may draw distinctions between products which have been found to
be ‘like’, without, for this reason alone, according to the group of ‘like’ imported
products ‘less favourable treatment’ than that accorded to the group of ‘like’ domestic
products.”135
Indeed, “whether or not like imported products are treated less favourably than like
domestic products should be assessed instead by examining whether a measure modifies the
conditions of competition in the relevant market to the detriment of imported products”, different
treatment not being sufficient nor necessary to prove less favourable treatment. In other words,
the differential regulatory treatment should be “predicated, either intentionally or unintentionally,
on the foreign character of the class of products affected by the regulation.”136 WTO panels have
acknowledged that “the words ‘treatment no less favourable’ called for effective equality of
134
Appellate Body report, Korea – Various Measures on Beef, WT/DS161/AB/R and WT/DS169/AB/R, paras 133149.
135
Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing
Products, WT/DS135/AB/R, adopted 5 April 2001, para. 100.
136
G. Marceau & J.P. Trachtman (2014), A Map of the World Trade Organization Law of Domestic Regulation of
Goods: The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the
General Agreement on Tariffs and Trade, JOURNAL OF WORLD TRADE 48(2):351-432, 363.
26
opportunities for imported products in respect of laws, regulations and requirements affecting the
internal sale, offering for sale, purchase, transportation, distribution or use of products”137.
Turning to the regime of domestic exhaustion, this doctrine enables the trademark owner
in the importing jurisdiction to block imports of goods that have been put already on the market
of another State by him or with his consent. Hence, the trademark owner may exploit fully his
trademark twice, in the exporting State and in the importing State. However, if he has already put
the product on the market of the importing State, he is precluded, because of the principle of
domestic exhaustion, from exercising again his right to exclude parallel imports. It is clear in this
configuration that the product imported through parallel trade, and thus put on the market in a
foreign State, will be put at a disadvantage, as its import and commercialisation would not be
possible, because of the exercise of the trademark, in comparison with a competing product
produced and commercialized in the importing State (like domestic product), which will be
commercialized without any problem, as the trademark owner has already put this product on the
market and thus exhausted its IP right in the importing State market. This is the case even if the
product is sold by a distributor without the consent of the trademark owner.
A similar finding may be made with regard to regional exhaustion, which also offers an
unequal de facto treatment between domestic products produced in the importing State (or a
union of States to which participates the importing state) and products produced in a third
country. Although, in this case there might be the further issue of the differential treatment
between foreign products, depending on whether these are produced in a State member of the
Union, or a third State, which may raise concerns as to the application of the MFN principle,
from the point of view of Article III: 4, the situation is comparable to that identified with regard
to domestic exhaustion. Some foreign products, imported through the grey market, would be
offered a less favourable treatment than like domestic products, in view of their total exclusion
from the market.
A differentiated international exhaustion regime will face similar challenges. If it is based
on a geographic criterion, that is, a regime of international exhaustion applied to products
originating from some jurisdictions, while a domestic or regional exhaustion regime applies to
products originating from other jurisdictions, the regime will favour domestic products for the
same reasons as those stated above. First, it will exclude parallel imports (products originating in
jurisdictions that do not benefit from an international exhaustion regime) from the market of the
importing state. Second, it will offer an unequal treatment favouring the commercialization of
domestic products as well as products originating from the States participating in the Union.
137
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, para. 6.288 (emphasis added).
27
A differentiated international exhaustion regime based on the investor principle will be
confronted with the same problem. The criterion for the application of the more preferential
regime to the trademark owner, leading to the exclusion of parallel imports, would be that of
investing significantly in the territory of the importing State, in case of domestic exhaustion or
that of the Union of importing States, in the case of regional exhaustion. In essence, that criterion
favours domestic products, as it is clear that the category of domestic producers satisfies this
criterion more easily than foreign producers. Indeed, all domestic producers satisfy this criterion,
because they are established in the territory of the importing member State or Union of States,
while only some of the foreign producers may satisfy this criterion, as it is highly likely that
there might be foreign producers that have not made any investments in the territory of the
importing state or Union of states and they do not dispose of any productive facilities in this
territory. Such a criterion will also be considered essentially protectionist, as it favours industry
established in the importing state’s territory or that of the Union of states to which it participates
at the expense of industry established abroad. Indeed, in Argentina – Measures Affecting the
Importation of Goods, the panel noted, with regard to requirements of a higher degree of local
content for imported products that “(g)overnment measures providing incentives for the use of
domestic over imported input products have been found to be inconsistent with Article III:4 by
several panels”138. One might expect that a similar conclusion may be reached with regard to an
investment protection related criterion, applying an exception to the principle of international
exhaustion for the products of trademark proprietors that have significant investments in the
EEU, and thus modifying the conditions of competition between domestic and imported
products, in view of the reasons mentioned above.
In contrast, an undifferentiated international exhaustion regime will be compatible with
Article III: 4 as it does not establish any differential treatment between parallel imports and like
domestic products. In both cases, the trademark owner would not be able to oppose the
commercialization of the product, if it has been put into commerce by him or with his consent in
another jurisdiction and the trademark owner has thus exercised his IP right only once.
3.
Article I(1) GATT: Most Favoured Nation Clause (MFN)
As indicated above, a regional exhaustion and a differentiated international exhaustion
regime (either one based on an investment protection clause or one based on a purely
geographical criterion of differentiation) may infringe Article I of the GATT (the so called MFN
clause). According to this provision,
“(w)ith respect to customs duties and charges of any kind imposed on or in connection
with importation or exportation or imposed on the international transfer of payments for
138
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, para.
28
imports or exports, and with respect to the method of levying such duties and charges,
and with respect to all rules and formalities in connection with importation and
exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III,
any advantage, favour, privilege or immunity granted by any contracting party to any
product originating in or destined for any other country shall be accorded immediately
and unconditionally to the like product originating in or destined for the territories of all
other contracting parties”.
Although stated explicitly in Article I(1) the MFN principle can also be found in a
number of other provisions of the GATT [Articles II, III(7), IV, V(2), (5) & (6), IX (1), XIII(1),
XVII (1), and XX(j)]. The principle relies on the equality of competitive opportunities that needs
to be recognized for all traders, irrespective of the jurisdiction in which they are established.
Hence, if trade liberalization was conceded to a specific State, the same benefit must be extended
to all other States members of the WTO.
The MFN clause forms an inherent part of the non-discrimination principle by
completing the national treatment clause of Article III. As some authors have noted, “(w)hile
MFN prevented discrimination as between foreign products, the national treatment principle
prevented discrimination as between domestic and imported products.”139 While it is not clear if
the concept of “like product” should be interpreted the same way in Article I(1) as for Article III,
it is expected that both definition would rely on the concept of substitutability or the competitive
relation between the products to compare.
The interpretation of the MFN clause by the Appellate Body has been broad in order to
include de facto as well as de jure discrimination:
“[T]he words of Article I:1 do not restrict its scope only to cases in which the failure to
accord an "advantage" to like products of all other Members appears on the face of the
measure, or can be demonstrated on the basis of the words of the measure. Neither the
words "de jure" nor "de facto" appear in Article I:1. Nevertheless, we observe that Article
I:1 does not cover only "in law", or de jure, discrimination. As several GATT panel
reports confirmed, Article I:1 covers also "in fact," or de facto, discrimination”.
[…] Article 1:1 requires that "any advantage, favour, privilege or immunity granted by
any Member to any product originating in or destined for any other country shall be
accorded immediately and unconditionally to the like product originating in or destined
for the territories of all other Members." (emphasis added) The words of Article I:1 refer
not to some advantages granted "with respect to" the subjects that fall within the defined
scope of the Article, but to "any advantage"; not to some products, but to "any product ";
139
D. McRae (2012), MFN in the GATT and the WTO, ASIAN JOURNAL OF WTO & INTERNATIONAL HEALTH LAW
7(1): 1-24, 6.
AND POLICY,
29
and not to like products from some other Members, but to like products originating in or
destined for "all other " Members.” 140
By reserving a differential treatment to the products originating from some States (as
opposed to others), regional exhaustion as well as a differentiated international exhaustion based
on geographic criteria seem to be incompatible with the MFN principle. Regional exhaustion
discriminates de jure and de facto between parallel imports originating from a State member of
the Union of states in which the importing state participates and parallel imports originating from
all other states. Differentiated international exhaustion based on geographic criteria also infringes
the MFN principle, as it differentiates between parallel imports originating in jurisdictions that
are offered an exemption from the principle of domestic (or regional) exhaustion and parallel
imports originating from all other jurisdictions.
The breadth of the obligation imposed by Article I(1) of the GATT, which refers to “any
advantage” and “any product,” reinforces the belief of the authors that regional and differentiated
international exhaustion based on geographical criteria should be excluded. The same conclusion
may be reached with regard to a system of differentiated international exhaustion based on an
investment protection principle to the extent that such regime provides a differential treatment to
parallel imports (foreign products) from companies that invested in the importing jurisdiction in
comparison with parallel imports (foreign products) from companies that have not invested in the
importing jurisdiction. Although the differential treatment is not offered to each category of
parallel imports because they originate in different Member States, the text of Article I (1) seems
broad enough to also cover differential treatment provided to any product originating in any
other country. Such treatment should in principle be accorded immediately and unconditionally
to a like product originating in all other Members. As will be discussed below, GATT Article
XXIV offers an exception to MFN which benefits regional exhaustion regimes.
C. Justifications for Avoiding the Restrictions Under the GATT
Prohibitions on parallel imports by virtue of the abovementioned doctrines may be
justified on the basis of Article XX (d) GATT and Article XXIV GATT. We will explore each of
the possibilities separately.
1.
Article XX (d) GATT
Article XX (d) introduces an exception from every obligation resulting from the GATT,
enabling States to take import-restrictive measures when these are necessary to secure
compliance with laws or regulations which are not inconsistent with the provisions of the
140
Appellate Body report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R,
WT/DS142/AB/R adopted on May 31, 2000, paras 78-79.
30
Agreement, including those relating to the protection of patents, trademarks and copyrights, and
the prevention of deceptive practices. Furthermore, such measures should not be applied “in a
manner which would constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prevail, or a disguised restriction on international trade”.
The application of this provision entails that a measure applying differentially to
domestic and imported goods, and even if it may afford protection to domestic production, may
be exempted from the prohibition under the GATT, if it satisfies the conditions of Article XX(d),
that is, when it is “necessary” to secure compliance with the protection of trademarks, provided
this is compatible with the provisions of the WTO Agreement and does not constitute an
arbitrary or unjustifiable discrimination or a disguised restriction on international trade. With
regard to the necessity of the measure, this concept was first addressed in Korea – Various
Measures on Beef, where the Appellate Body held the following:
“[…] Clearly, Article XX (d) is susceptible of application in respect of a wide variety of
‘laws and regulations’ to be enforced. It seems to us that a treaty interpreter assessing a
measure claimed to be necessary to secure compliance of a WTO consistent law or
regulation may, in appropriate cases, take into account the relative importance of the
common interests or values that the law or regulation to be enforced is intended to
protect. The more vital or important those common interests or values are, the easier it
would be to accept as ‘necessary’ a measure designed as an enforcement instrument […]
There are other aspects of the enforcement measure to be considered in evaluating that
measure as ‘necessary’. One is the extent to which the measure contributes to the
realization of the end pursued, the securing of compliance with the law or regulation at
issue. The greater the contribution, the more easily a measure might be considered to be
‘necessary’. Another aspect is the extent to which the compliance measure produces
restrictive effects on international commerce,
[…] that is, in respect of a measure inconsistent with Article III: 4, restrictive effects on
imported goods. A measure with a relatively slight impact upon imported products might
more easily be considered as ‘necessary’ than a measure with intense or broader
restrictive effects.
In sum, determination of whether a measure, which is not ‘indispensable’, may
nevertheless be ‘necessary’ within the contemplation of Article XX(d), involves in every
case a process of weighing and balancing a series of factors which prominently include
the contribution made by the compliance measure to the enforcement of the law or
regulation at issue, the importance of the common interests or values protected by that
law or regulation, and the accompanying impact of the law or regulation on imports or
exports.”141
141
Appellate Body Report, Korea – Various Measures on Beef, WT/DS161/AB/R and WT/DS169/AB/R, adopted
on December 11, 2000, paras 162-164.
31
In United States – Section 337 the Panel also added in the assessment of the necessity of the
measure the consideration of the extent to which a less WTO-inconsistent measure is
“reasonably available”.
“[a] contracting party cannot justify a measure inconsistent with another GATT provision
as "necessary" in terms of Article XX(d) if an alternative measure which it could
reasonably be expected to employ and which is not inconsistent with other GATT
provisions is available to it. By the same token, in cases where a measure consistent with
other GATT provisions is not reasonably available, a contracting party is bound to use,
among the measures reasonably available to it, that which entails the least degree of
inconsistency with other GATT provisions”142.
In principle, the WTO members have the right to determine for themselves the level of
enforcement of their domestic laws. Yet one should keep in mind that the TRIPS agreement
imposes a degree of harmonization of intellectual property that member states must attain,
including in the area of trademark law (Art. 16-21 TRIPs). Yet, it is also true that Article 6
TRIPs leaves discretion to the States to choose the legal regime that regulates the exhaustion of
IP rights, including trademarks, which means that with regard to measures relating to the
application of the exhaustion regime, Member States may benefit from a wide degree of
regulatory discretion. Consequently Article XX (d) may be invoked in order to protect the
effectiveness of any regime of exhaustion of IP rights they chose. As the Appellate Body noted
in EC–Asbestos, when examining the application of the necessity test and the existence of a less
WTO-inconsistent reasonable alternative, one may need to examine “whether there is an
alternative measure that would achieve the same end and that is less restrictive of trade than a
prohibition” (emphasis added).143 The complaining Member has the burden of showing that
there are less WTO-inconsistent reasonable alternatives that would achieve the same goal
pursued by the State that has allegedly violated WTO law.144
Furthermore, an alternative measure cannot be considered reasonably available “where it
is merely theoretical in nature, for instance, where the responding Member is not capable of
taking it, or where the measure imposes an undue burden on that Member, such as prohibitive
costs or substantial technical difficulties”.145 According to the Appellate Body in Brazil –Tyres,
142
Report by the Panel, United States - Section 337 of the Tariff Act of 1930 (L/6439 - 36S/345) adopted on 7
November 1989, para. 5.26.
143
Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing
Products, WT/DS135/AB/R, adopted on April 5, 2001, para. 172.
144
Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and
Betting Services (DS 285), adopted on April 7, 2005, paras 306-311.
145
Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and
Betting Services (DS 285), adopted on April 7, 2005, para. 308..
32
“the capacity of a country to implement remedial measures that would be particularly costly, or
would require advanced technologies, may be relevant to the assessment of whether such
measures or practices are reasonably available alternatives to a preventive measure, such as the
Import Ban, which does not involve ‘prohibitive costs or substantial technical difficulties”.146
The Appellate Body has developed the “material contribution” test in order to assess the
necessity of the measure, requiring that “the measure is apt to make a material contribution to the
achievement of its objective.”147 That is,
“[t]o be characterized as necessary, a measure does not have to be indispensable.
However, its contribution to the achievement of the objective must be material, not
merely marginal or insignificant, especially if the measure at issue is as trade restrictive
as an import ban. Thus, the contribution of the measure has to be weighed against its
trade restrictiveness, taking into account the importance of the interests or the values
underlying the objective pursued by it.”148
The chapeau of Article XX (d) further requires that there must be no “arbitrary”
discrimination between countries where the same conditions prevail; second, there must be no
“unjustifiable” discrimination between countries where the same conditions prevail; and, third,
there must be no “disguised” restriction on international trade. These concepts have been defined
as following by the jurisprudence of the Appellate Body:
“ ‘[a]rbitrary discrimination’, ‘unjustifiable discrimination’ and ‘disguised restriction’ on
international trade may, accordingly, be read side-by-side; they impart meaning to one
another. It is clear to us that ‘disguised restriction’ includes disguised discrimination in
international trade. It is equally clear that concealed or unannounced restriction or
discrimination in international trade does not exhaust the meaning of ‘disguised
restriction’. We consider that ‘disguised restriction’, whatever else it covers, may
properly be read as embracing restrictions amounting to arbitrary or unjustifiable
discrimination in international trade taken under the guise of a measure formally within
the terms of an exception listed in Article XX. Put in a somewhat different manner, the
kinds of considerations pertinent in deciding whether the application of a particular
measure amounts to ‘arbitrary or unjustifiable discrimination’, may also be taken into
account in determining the presence of a ‘disguised restriction’ on international trade.
146
Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted on
December 3, 2007, para. 171.
147
Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted on
December 3, 2007, para. 150.
148
Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted on
December 3, 2007, para. 210.
33
The fundamental theme is to be found in the purpose and object of avoiding abuse or
illegitimate use of the exceptions to substantive rules available in Article XX.”149
In principle, if any of these three conditions is not satisfied, it will not be possible to
justify the measure under Article XX (d) GATT. Hence, if the measure at issue is a means of
unjustifiable and arbitrary discrimination, it is not necessary to examine also whether the
measure was applied in a manner that constitutes a disguised restriction on international trade150.
Turning to the analysis of exhaustion rules and their possible justification under Article
XX(d), it seems that the necessity requirement will be satisfied by any exhaustion regime chosen,
domestic, regional, differentiated international exhaustion based on geographic criteria,
differentiated international exhaustion based on investment protection criteria, international
exhaustion, in view of the broad regulatory space Article 6 TRIPS provides to the Contracting
parties as to the choice of exhaustion regime. Furthermore, according to Article 1 (1) of the
TRIPs Agreement, “Member [the Contracting Parties] may, but shall not be obliged to,
implement in their law more extensive protection than is required by this Agreement, provided
that such protection does not contravene the provisions of this Agreement”. Hence, the parties
are free to decide on the degree of protection of the economic value of trademarks by allowing
the trademark owner to oppose parallel imports under certain conditions.
One may argue that a domestic or a regional exhaustion regime or an international
exhaustion regime that is based on geographic criteria may be a particularly optimal choice in
case of excluding parallel imports at the border, because of facilitated enforcement of the ban by
the customs authorities, a particularly effective enforcement system, given the weakness of the
judicial system of a specific Contracting party. Indeed, according to the interpretation given to
the necessity test under Article XX (d) GATT, summarized above, the capacity of a country to
implement remedial measures that would be particularly costly or would face substantial
technical difficulties should be considered as a relevant factor in order to justify the existence of
reasonable available alternatives. Banning parallel imports at the border makes a material
contribution to the achievement of the objective, which is the protection of the exclusionary
rights of the IP holder, should the States make the choice of granting this extra degree of
protection from parallel imports, as is their right in view of Article 6 TRIPs.
Yet, a different view may be taken as to the necessity of protecting the right of the IP
holder to benefit from the exercise of her IP right in a second market, once she has put the
products on the market in the State from which the product has been imported. Grigoriadis notes
the following:
149
150
Appellate Body Report, US – Gasoline, WT/DS2/AB/R, adopted on April 29, 1996, page 25.
Appellate Body Report, US – Shrimp, WT/DS58/AB/R, adopted on October 12, 1998, para. 184.
34
“This is the case only where the recognition of the principle of national exhaustion of
rights or of the principle of regional exhaustion of rights has been dictated by the extent
of protection granted by the Contracting Party for the economic value of trademarks, an
issue on which the Contracting Parties are free to decide. [in view of Article 1(1) TRIPs]
Otherwise, prohibitions on parallel imports cannot be considered to be necessary for the
effective implementation of the Contracting Party’s trademark law. Parallel imported
goods are goods that are genuine and that have been legally put on the market for the first
time. Any inadequacies in the administrative or jurisdictional mechanisms of the
Contracting Parties to combat the phenomenon of counterfeiting and piracy do not suffice
to justify a situation in which the owner of a trademark is entitled to oppose any
importation of goods bearing the trademark carried out by a third party. Besides, Article 6
of the TRIPs Agreement does not contain a provision that establishes a minimum
standard, so that an ability of trademark owners to oppose parallel imports could be
considered to be covered by the provision of Article 1 (1) of the TRIPs Agreement. In the
light of the foregoing considerations, the adoption of the regimes of national exhaustion
of trademark rights and of regional exhaustion of trademark rights is contrary to Article
XX (d) of the GATT 1994, so long as it is motivated by protectionist considerations in
favour of domestic undertakings/industry.”151
It may be argued that a similar conclusion applies to a regime of differentiated international
exhaustion based on a geographic criterion, and even more strongly, to a regime of differentiated
international exhaustion based on an investment protection criterion. In the latter case, it is clear
that the measure aims to protect domestic industry, as it effectively protects trademark owners
that are established or have an important presence, in the sense of productive facilities, in the
territory of the importing state. The Argentina – Measures Affecting the Importation of Goods
case could have provided the opportunity to examine more thoroughly the possibility to justify a
trade restriction requirement that would have created incentives for suppliers investing in the
jurisdiction adopting the measures 152 . However, although the panel considered that such
requirements were infringing Article XI(1) GATT, it did not address the possibility to justify
such measures under Article XX(d).
With regard to the application of the other conditions— the absence of a unjustifiable and
arbitrary discrimination or a disguised restriction to international trade—it is necessary to
examine, at least for the first two conditions, if the same conditions prevail in the specific
contracting parties, the exporting and the importing state, as discrimination is otherwise possible
should the legal framework or the economic conditions prevailing in the two jurisdictions be
different. There cannot be discrimination unless a differential treatment is provided to similar
situations. Providing differential treatment to different situations does not constitute
discrimination, and certainly not “arbitrary” or “unjustifiable” discrimination. The fact that each
151
GRIGORIADIS, above n. 105, 113-114.
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R.
152
35
of the two jurisdictions has chosen a different type of exhaustion regime may be relevant as to
the non-existence of a different legal framework in each jurisdiction. Similarly, differing
economic conditions, for instance the fact that the exporting jurisdiction is a developing country,
while the importing jurisdiction a developed country, may also justify the restriction of parallel
trade, should the sentence “countries where the same conditions prevail” be understood as
meaning countries with similar or comparable economic performances.
The assessment of these different criteria and their application to the measure in question
depends on a variety of factors and it is not possible at this stage to predict with certainty the
outcome of the balancing test. It appears, however, that international exhaustion would seem to
be the less WTO-inconsistent measure, followed by a regime of differentiated international
exhaustion based on geographic criteria or a regional exhaustion. The situation is more open for
a regime of differentiated international exhaustion based on investment protection criteria and
domestic exhaustion.
An argument in favour of a broad application of Article XX (d) even to situations of
domestic or regional exhaustion may be made in view of the interpretation of Article XX (d)
prior to the entry into force of the WTO agreement. Under the GATT 1947, it was generally
accepted that article XX (d) could apply and save prohibitions on imports. In United States –
Imports of certain Automotive Spring Assemblies, the United States attempted to justify a breach
of Article XI (1), in this case an order by the International Trade Court (ITC) excluding the
import of automotive spring assemblies that were found to infringe two US patents, in
application of Section 337 of the United States Tariff Act of 1930, on the basis of Article XX
(d)153. The Panel considered whether or not the exclusion order was “applied in a manner which
would constitute ... a disguised restriction on international trade”, noting that that “the Preamble
of Article XX made it clear that it was the application of the measure and not the measure itself
that needed to be examined”.154
The Panel then considered whether the ITC action, in making the exclusion order, was
“necessary” in the sense of paragraph (d) of Article XX to secure compliance with United States
patent law and examined in this connection “whether a satisfactory and effective alternative
existed under civil court procedures which would have provided the patent holder […] with a
sufficiently effective remedy against the violation of its patent by foreign producers”.155 The
Panel found that such private enforcement action and the remedy it could lead to “would not
have been sufficient” to protect the specific patent rights because, in practice, it would have been
153
Report of the Panel, United States – Imports of certain Automotive Spring Assemblies, adopted on May 26, 1983,
L/5333 - 30S/107.
154
Report of the Panel, United States – Imports of certain Automotive Spring Assemblies, adopted on May 26, 1983,
L/5333 - 30S/107, para. 56.
155
Report of the Panel, United States – Imports of certain Automotive Spring Assemblies, adopted on May 26, 1983,
L/5333 - 30S/107, para. 59.
36
effective only in relation to the automotive spring assemblies produced by the infringing
undertaking and supplied to parties joined in the court action. That remedy “would not have been
effective against other possible foreign infringers of the United States patent and potential users
of the infringing product in the United States”, which in view of the relatively simple
manufacturing process used to produce automotive spring assemblies, and the possibility that
foreign producers infringing the patent would be able to produce, without major difficulties,
would have increased the likelihood that such automotive parts could be imported for use in the
United States. Hence, the panel considered that the United States civil court action would not
have provided a satisfactory and effective means of protecting the patent rights of the IP holder
against importation of the infringing product and that the exclusion order procedure could be
considered as “necessary” for the protection of the IP right156. The panel nevertheless noted the
following:
“[…] the substance of patent infringement cases could vary considerably, for example as
regards the characteristics of the product which was the subject of the infringement and
the simplicity or complexity involved in its manufacture. There might also be variations
in the degree of difficulty which might be encountered in joining in a court action all
possible users of the product which had been manufactured in violation of the patent, in
the serving of process and enforcement of court judgments depending, among other
things, on the legal and judicial court system in the country of the manufacturer
infringing the patent.
The Panel did not, therefore, exclude the strong possibility that there might be cases, for
example, involving high-cost products of an advanced technical nature and with a very
limited number of potential users in the United States, where a procedure before a United
States court might provide the patent holder with an equally satisfactory and effective
remedy against infringement of his patent rights. In such cases the use of an exclusion
order under Section 337 might not be necessary in terms of Article XX(d) to secure
compliance with laws and regulations (i.e. United States patent law) which were not
inconsistent with the General Agreement”.157
Finally, some of the criteria for the application of Section 337 actions were found
irrelevant by the panel and thus not necessary for the effective protection of the infringed IP
right, in particular the requirement in subsection (a) of Section 337 that the plaintiff proves a
substantial injury to a United States industry which was efficiently and economically operated.
156
Report of the Panel, United States – Imports of certain Automotive Spring Assemblies, adopted on May 26, 1983,
L/5333 - 30S/107, para. 60.
157
Report of the Panel, United States – Imports of certain Automotive Spring Assemblies, adopted on May 26, 1983,
L/5333 - 30S/107, paras 65-66.
37
One may doubt as to the relevance of this case law, which concerns a case of
infringement of IP rights, and the broad interpretation it offers of the necessity test under Article
XX(d) to the situation of an exclusion of parallel imports, that is imports that are perfectly legal,
do not infringe the substance of the IP right involved but just concern the question of the
appropriability of revenue streams from additional sales of the product covered by the IP right in
the market of the importing state.
In United States – Section 337 of the tariff Act 1930, the panel noted that the Panel that “a
contracting party cannot justify a measure inconsistent with another GATT provision as
‘necessary’ in terms of Article XX(d) if an alternative measure which it could reasonably be
expected to employ and which is not inconsistent with other GATT provisions is available to it”
and “in cases where a measure consistent with other GATT provisions is not reasonably
available, a contracting party is bound to use, among the measures reasonably available to it, that
which entails the least degree of inconsistency with other GATT provisions”158 Although the
panel examined the criterion of necessity, the report does not provide any discussion of the three
conditions included in the chapeau of Article XX(d) and in any case does not provide any clear
guidance on the application of Article XX(d) to a prohibition of parallel imports following the
institution of a regime of domestic, regional or differentiated international exhaustion.
Yet, what this case law may indicate is that had the contracting states wished to render
the choice of regional or domestic exhaustion incompatible with Article XX (d), they could have
revised the text of that provision, or drafted that of Article 6 TRIPs accordingly, in view of the
interpretation of Article XX (d) by the panel prior to the implementation of the GATT 1994. By
having not done so, and by having maintained as such the text of Article XX (d), as well as by
recognizing in Article 6 TRIPs that Member States are free to choose the exhaustion regime that
fits better to their objectives, the Contracting States seem to have recognized that Article XX (d)
may enter into play and justify restrictions to parallel trade and that it cannot be true that the only
regime compatible with the GATT Agreement is that of pure international exhaustion.159
Nonetheless, the Court of Justice of the EU has interpreted Articles 28 and 30 of the
TFEU (formerly Articles 30 and 36) in a way that does accommodate a regime of regional
exhaustion, precisely because the main objective of the free movement of goods provisions of
the TFEU is to achieve the integration of the EU Internal Market, which is a different objective
158
Report by the Panel, United States – Section 337 of the tariff Act 1930, adopted on November 7, 1989, L/6439 36S/345, para. 5.26
159
For a similar interpretation on the basis of the principle “in dubio mitius,” according to which: “the limitation of
sovereign competence of a country in a matter regulated by an International Agreement cannot be presumed but,
such a limitation requires the consent of the country”, see GRIGORIADIS, above n. 105, 115-116. The author notes
that in order for XX (d) of the GATT to be interpreted as allowing the Contracting Parties to accept only
international exhaustion of trademark rights, “a consent of the Contracting Parties must have been given for the
limitation of their sovereign competence in the issue of the legal treatment of parallel imports of trademarked
goods,” yet “[s]uch consent, however, does not exist, as confirmed by Article 6 of the TRIPs Agreement.”
38
that the trade liberalization aimed by the WTO. That said, it should however be recognized that
the regime of international exhaustion seems more WTO-consistent than any other regime, and
accordingly the choice of another regime, such as domestic, regional differentiated international
exhaustion carries a certain risk of this not being justified under Article XX(d) GATT.
2.
Article XXIV GATT
Even if regional exhaustion may be considered as compatible with Article XX (d), it
remains possible for the exclusion of parallel imports following the imposition of a system of
regional exhaustion or of differentiated international exhaustion on the basis of a geographic
criterion to infringe Article I (1) GATT (MFN clause), in view of the discrimination introduced
between foreign products that do not benefit from exhaustion and foreign products that benefit
from the exhaustion regime. In this case, a further possibility for justification is provided for by
Article XXIV GATT. This provision introduces an exemption to the most-favoured-nation
principle by establishing the legality of the so-called regional economic unions (customs unions
or free trade area 160), when the duties and other regulations of commerce imposed at the
institution of any such union in respect of trade with contracting parties not parties to such union
or agreement shall not on the whole be higher or more restrictive than the general incidence of
the duties and regulations of commerce applicable in the constituent territories prior to the
formation of such union [Article XXIV(5) GATT]. The Eurasian Economic Union may benefit
from this provision as it aims to constitute a free trade area and to a certain extent a customs
union. It should be noted, however, that even though regional exhaustion may benefit from the
exception to MFN provided for in GATT Article XXIV, no possibility of exception seems
possible with regard to the application of the MFN principle to differentiated international
exhaustion rules based on geographic discrimination or on an investment protection principle.
The application of the conditions for the benefit of the GATT Article XXIV exception
seems quite straightforward with regard to regional exhaustion. As it is explained by Grigoriadis,
“a transition from a regime of national exhaustion of trademark rights to a regime of
regional exhaustion of those rights entails, indeed, preferential treatment for parallel
imported goods originating in other Member States of the customs union or the free trade
area, but it does not entail raising new obstacles to market access for parallel imported
goods originating in third countries. In other words, such a transition does not make
market access for goods imported in parallel more difficult but entails the legality of
parallel imports that could previously be prohibited on the grounds that they concerned
goods that had not been put on the domestic market by the holders of the trademarks
borne by the goods or with their consent. Trademark proprietors retain the right to
160
The concepts are defined in Article XXIV (8) GATT.
39
prevent parallel imports concerning goods originating in a third Contracting Party, as it is
true by virtue of a regime of national exhaustion of trademark rights”161.
The opposite conclusion would be reached if on the contrary there was transition from a
regime of international exhaustion to that of regional exhaustion, in which case Article XXIV
would not apply and the restriction of parallel imports originating from non-members of the
regional economic union would be found incompatible with the GATT. This would presumably
be the case should the Eurasian Economic Commission choose a regime of regional exhaustion,
in view of the fact that prior to signing the Eurasian Economic Union Agreement, Kazakhstan
had an international exhaustion for all types of IP rights.
A more contentious issue would be the application of Article XXIV to justify a
differentiated international exhaustion regime based on a geographic criterion. As long as such
regime is not integrated in a regional economic union agreement, as this is defined in Article
XXIV (8), it may not benefit from the exception of Article XXIV. Yet, if such regime forms part
of a free trade area or a customs union, then it may benefit from the exception of Article XXIV.
Of particular significance would be here the consideration of the necessity of the system
of differentiated international exhaustion for the constitution of the regional economic union. As
the Appellate Body clarified in Turkey – Textiles “Article XXIV may, under certain conditions,
justify the adoption of a measure which is inconsistent with certain other GATT provisions, and
may be invoked as a possible ‘defence’ to a finding of inconsistency” but also noted that the
chapeau of this provision “states that the provisions of the GATT 1994 ‘shall not prevent’ the
formation of a customs Union”, which it read to mean “that the provisions of the GATT 1994
shall not make impossible the formation of a customs union”.162 Accordingly, the Appellate body
held that “this wording indicates that Article XXIV can justify the adoption of a measure which
is inconsistent with certain other GATT provisions only if the measure is introduced upon the
formation of a customs union, and only to the extent that the formation of the customs union
would be prevented if the introduction of the measure were not allowed”.163 The Appellate Body
thus acknowledged the link between the measure for which the exception of Article XXIV is
required and the concept of customs union. This is linked to the need to ensure internal trade
between the members of the union and vis-à-vis third parties the application of a common
external trade regime and of substantially the same duties and other regulations of commerce.164
161
GRIGORIADIS, n. 105, 119.
Appellate Body report, Turkey – Restrictions on Imports of Textile and Clothing products, WT/DS34/AB/R,
adopted on October 22, 1999, para. 45.
163
Appellate Body report, Turkey – Restrictions on Imports of Textile and Clothing products, WT/DS34/AB/R,
adopted on October 22, 1999, para. 46.
164
Appellate Body report, Turkey – Restrictions on Imports of Textile and Clothing products, WT/DS34/AB/R,
adopted on October 22, 1999, para. 49.
162
40
The Appellate Body also held that text of the chapeau of Article XXIV: 5, states that the
provisions of the GATT 1994 shall not prevent the formation of a customs union
“Provided that”, which indicates that Article XXIV can “only be invoked as a defence to a
finding that a measure is inconsistent with certain GATT provisions to the extent that the
measure is introduced upon the formation of a customs union which meets the requirement in
sub-paragraph 5(a) of Article XXIV relating to the ‘duties and other regulations of commerce’
applied by the constituent members of the customs union to trade with third countries”.165 In
conclusion, the Appellate Body subjects the benefit of exception of Article XXIV to two
cumulative conditions:
“First, the party claiming the benefit of this defence must demonstrate that the measure at
issue is introduced upon the formation of a customs union that fully meets the
requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV. And, second, that party
must demonstrate that the formation of that customs union would be prevented if it were
not allowed to introduce the measure at issue”.166
The assessment of these two conditions with regard to the Eurasian Economic Union
goes beyond the task of this report. Yet, it is clear that the burden of proof here would be on the
party alleging the benefit of the exception, the Eurasian Economic Union. It is also to be noted
that although Article XXIV does not seem to require that the measure be introduced immediately
when the customs union agreement is implemented, the Appellate Body requires that the
measure at issue “is introduced upon the formation of a customs union” (emphasis added). The
second condition will also require some separate analysis.
Looking more specifically to the requirement that the general incidence of quantitative
restrictions should be on the whole less restrictive than the general incidence of regulations of
commerce applicable in the constituent territories prior to the formation of the customs union, it
is important to note that if there was a transition from a regime of domestic or regional
exhaustion to that of differentiated international exhaustion based on geographic criteria, Article
XXIV may apply, as such change may extend the number of jurisdictions benefiting from a
regime of free market access, without restrictions on parallel imports. Transition from a regime
of regional exhaustion to one of pure international exhaustion would not constitute a violation of
the MFN clause and consequently it will not be necessary to justify it under Article XXIV.
165
Appellate Body report, Turkey – Restrictions on Imports of Textile and Clothing products, WT/DS34/AB/R,
adopted on October 22, 1999, para. 52.
166
Appellate Body report, Turkey – Restrictions on Imports of Textile and Clothing products, WT/DS34/AB/R,
adopted on October 22, 1999, para. 58.
41
However, transition from a regime of international exhaustion to a regime of
differentiated international exhaustion would not benefit from the exception of Article XXIV
GATT, as in this case the level of regulatory obligations imposed would be higher post
constitution of the regional economic union than prior constitution of the union. For instance,
although Kazakhstan benefitted from a regime of international exhaustion prior to the conclusion
of the EEU treaty, a decision to turn towards a system of differentiated international exhaustion
will mean that certain parallel imports that were able to enter without challenge the Kazakhstan
market prior to the EEU agreement would not be able to do so after the decision to move to a
differentiated international exhaustion regime.
The transition from a regime of regional exhaustion to one of differentiated international
exhaustion based on an investment protection clause might also raise concerns, in view of the
fact that after the Treaty on EEU (and its Annex 26) was signed by Kazakhstan, the regional
exhaustion principle for trademarks became a law in Kazakhstan. In this case, the application of
the exception to the principle of international exhaustion will depend on the characteristics of the
specific trademark owner and in particular the fact that the trademark owner has made
investments in the territory of the Eurasian Economic Union. It is possible in this case to make
an argument based on the MFN principle that such regime leads to a de facto discrimination
against the States whose companies do not satisfy in general the investment criterion. This may
be indeed be the case of states that have not concluded bilateral investment protection treaties
with the importing state or bilateral agreements promoting foreign direct investments in the
importing state. Yet again, the possibility to justify such violation of the MFN principle will
depend on the necessity of such measure to the regional economic union agreement and the level
of regulatory obligations imposed now, in comparison to that prior the constitution of the
regional economic union
D. Enforcement
It is not evident that WTO countries would themselves be motivated to initiate steps for
WTO dispute resolution, particularly given that many other exhaustion regimes short of
international exhaustion (and possibly even that) could be the subject of difficult scrutiny. Only
states can bring a WTO action challenging the Eurasian proposal unless there are free trade
agreements that could apply to the rights of IP owners in the EEC. Under most free trade
agreements, injured private parties can sue the state directly and this could expedite direct
challenges to any of the proposed solutions to exhaustion. They could also pursue investor-state
arbitration in those cases where investment treaties are applicable. In addition, there is some risk
of retaliation by aggrieved states which, in extreme cases, could lead to seizures of goods in
transit for purposes of reparation. Far more likely, however, at least in the short term, is the
possibility that aggrieved states would raise their complaints before the WTO’s Council for
TRIPS or equivalent bodies under the GATT. The effectiveness of such complaints is hard to
42
evaluate but they can certainly disrupt comity on which other relations may depend. Finally, as
mentioned earlier, there is some risk that the moratorium on non-violatory acts of nullification
under TRIPS may be lifted sooner than expected, and in any case remains viable under GATT.
A separate question arises concerning contracts between private parties that establish
arrangements (such as restricting re-sale) regarding exhaustion that deviate from the legal rules
imposed by the EEC. The enforceability of such agreements is a matter for the national courts or
any judicial arm created by the EEC, with regard to, in particular, the possible application of
competition law167. These issues are beyond the scope of this report.
IV. THE UNCERTAIN STATUS AND UNRELIABILITY OF STATE PRACTICE
In evaluating the state practices set out below, two considerations must be borne in mind.
First, none of the existing strategies adopted by different WTO Members with regard to
exhaustion have been evaluated by WTO panels with respect to their compliance with either the
TRIPS Agreement or the GATT (1994). Some or many of them could turn out to be
characterized as de facto discriminatory, even if facially neutral. Second, even if some or all of
these measures were to be deemed compliant with TRIPS or GATT, that in itself would tell us
nothing about their continued compliance with either Agreement under a regime of differentiated
exhaustion.
A. The U.S. Approach to Exhaustion168
1.
Patents and Exhaustion
The Patent Act confers upon the U.S. patent owner the rights to exclude others from
making, using, or selling the patented invention in the United States--and, since U.S. accession to
the WTO TRIPS Agreement the additional rights to exclude others from offering to sell the
patented invention in the United States, and from importing the invention into the United
States.169 An exception to these rights is the “first sale” doctrine. Under this doctrine, once the
U.S. patent owner sells (or authorizes another to sell) a product embodying the patented
invention, the subsequent use or resale of that product by the purchaser and any subsequent
167
It is an established policy in the European Union that agreements or unilateral practices limiting the opportunities
of parallel trade constitute an infringement of Articles 101 and 102 TFEU: see, Joined Cases C-501/06P, C515/06P and C-519/06P, GlaxoSmithKline Services Unlimited, formerly Glaxo Wellcome plc v Commission
and Commission, EAEPC and Aseprofar v GlaxoSmithKline Services Unlimited, formerly Glaxo Wellcome
plc [2009] ECR I-9291; Joined Cases C468/06 to C478/06, Sot. Lelos v GlaxoSmithKline [2008] ECR I7139.
168
Courtesy of Professor Thomas F. Cotter, Notes on International Intellectual Property (2014).
169
See 35 U.S.C. §§ 154(a)(1), 271(a).
43
possessors does not infringe.170 In doctrinal terms, the patent owner’s rights to exclude others
from using and reselling that product are exhausted.
A question arises whether the first sale doctrine applies only upon the first lawful sale of
the product in the United States, or upon the first lawful sale anywhere in the world (or whether
some intermediate position is possible). In other words, if the first lawful sale of a product
embodying the patented invention takes place outside the United States, does the subsequent
importation, sale, or use of that product in the United States without the U.S. patent owner’s
permission infringe the U.S. patent owner’s rights, i.e., national exhaustion? Or does the first
sale doctrine prevent the U.S. patent owner from asserting those rights once the product has been
the subject of a lawful first sale anywhere in the world, i.e., international exhaustion? Trying to
determine which, if either, principle the United States follows can be difficult.
A small number of pre-1996 cases addressed the issue of whether a lawful first sale
abroad exhausted the U.S. patent owner’s rights to exclude others from using and selling the
product in the United States. Assuming that these cases are still good law, they may provide
some guidance on this issue, although only one case was decided at the U.S. Supreme Court
level, and opinions may vary as to how broadly or narrowly this case should be interpreted.171
Consider a hypothetical example: A U.S. Patent owner manufactures her product in Italy and
sells it to Buyer in Italy, without imposing any restrictions on Buyer’s subsequent conduct.
Buyer imports the product into the United States, or sells it to someone in Italy who subsequently
imports it into the United States.
Several pre-1996 cases held that, under these circumstances, the U.S. patent owner could not
prevent the subsequent use and resale of the product in the United States.172 A few cases,
however, hold or state that the U.S. patent owner’s exclusive U.S. licensee can enjoin the
subsequent use and resale in the United States.173 And a few cases held that if the U.S. patent
170
See Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008); United States v. Univis Lens Co., 316 U.S.
241, 249 (1942).
171
More recent case law from the United States Court of Appeals for the Federal Circuit, on the other hand, seems to
indicate that the U.S. follows a national exhaustion regime. See, e.g., Fuji Film Corp. v. Benun, 605 F.3d 1366 (Fed.
Cir. 2010); Fuji Photo Film Corp. v. Jazz Photo Corp., 394 F.3d 1368 (Fed. Cir. 2005); Jazz Photo Corp. v. ITC, 264
F.3d 1094 (Fed. Cir. 2001). But it is unclear whether these cases consistent with the Supreme Court’s recent
copyright decision in Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351 (2013), or whether they need to be consistent
in this respect.
172
See Curtiss Aeroplane & Motor Corp., 266 F. 71 (2d Cir. 1920) (distinguishing Boesch on the ground that, in that
case, the U.S. patent owner had not participated “either as a party or as a privy, in the putting out of the article which
is alleged to infringe”); Kabushiki Kaisha Hattori Seiko v. Refac Tech. Dev. Corp., 690 F. Supp. 1339 (S.D.N.Y.
1988); Sanofi, S.A. v. Med-Tech Veterinarian Prods., Inc., 565 F. Supp. 931 (D.N.J. 1983); Holiday v. Mattheson,
24 F. 185 (C.C.S.D.N.Y. 1885).
173
See Sanofi, 565 F. Supp. at 938-39(reasoning that, if the rule were otherwise, the foreign purchaser would acquire
“rights greater than those possessed by the owner of the patent,” in cases in which the latter has promised not to
compete with his exclusive U.S. licensee); accord PCI Parfums et Cosmetiques Int’l v. Perfumania, 35 U.S.P.Q.2d
1159 (S.D.N.Y. 1995); Sanofi, S.A. v. Med-Tech Veterinarian Prods., Inc., 222 U.S.P.Q.2d 143 (D. Kan. 1983).
44
owner sold the product abroad subject to the restriction that the product would not be imported
into the United States, the subsequent use and resale in the United States was unlawful.174 It is
debatable, however, whether these cases remain good law in light of Jazz Photo 175 and
Kirtsaeng.176
Consider another hypothetical example in which the U.S. Patent owner manufactures a
product embodying her patented invention in the United States, and then sells this product to an
exporter in the United States. The latter exports the product to Italy; the importer buys the
product in Italy and imports it back into the United States. Unless the new importation right
adopted as a result of TRIPS was intended to create a radical departure from existing law, this
importation should be lawful under U.S. law.
However, in a situation where the importer, located in Italy, makes and sells the U.S. Patent
owner's product in Italy, without the U.S. Patent owner's permission, this does not violate U.S.
law, because the U.S. patent laws do not have extraterritorial effect. (Whether it violates Italian
law will depend on whether the invention is patented in Italy.) If the importer then imports the
product into the United States, this should be a clear violation of the importation right. Pre-1996
case law held that the subsequent use or sale of the product in the United States under these
circumstances was not protected by the first sale doctrine. For example, in Boesch v. Graff, 133
U.S. 697 (1890), the Supreme Court held that the subsequent use and sale of a patented product
in the United States violated the U.S. patent owner’s rights, even though a third party had
lawfully manufactured the product in Germany and then sold it to the importer. According to the
Court:
The right which Hecht [the German manufacturer] had to make and sell the burners in
Germany was allowed him under the laws of that country, and purchasers from him could not be
thereby authorized to sell the articles in the United States in defiance of the rights of patentees
under a United States patent. . . . The sale of articles in the United States under a United States
patent cannot be controlled by foreign laws.177
Finally, it is worth noting that § 337 of the Customs Act of 1930 (19 U.S.C. § 1337)
authorizes the United States International Trade Commission to remedy “[t]he importation into
the United States, the sale for importation, or the sale within the United States after importation
by the owner, importer, or consignee, of articles that . . . infringe a valid and enforceable patent.”
Id. § 1337(a)(1)(B). This law also applies to articles that infringe registered copyrights and
trademarks. See id. § 1337(a)(1)(B)(i),(C). The rule only applies, however, “if an industry in the
United States relating the articles [in question] exists or is in the process of being established” as
174
See Dickerson v. Tinling, 84 F. 192 (8th Cir. 1897); Dickerson v. Matheson, 57 F. 524 (2d Cir. 1893).
Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001).
176
Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351 (2013).
177
See also Daimler Mfg. Co. v. Conklin, 170 F. 70 (2d Cir. 1909) (similar).
175
45
defined in the statute. Id. § 1337(d)(2). This may supply ample basis in support of the
industry/investor driven justification for the Eurasian proposal.
2.
Trademarks and Exhaustion
With respect to the exhaustion of trademarks, a different analysis is required. The parallel
importation of goods bearing U.S. trademarks presents some difficult legal issues, because two
different statutes--the Tariff Act of 1930 and the Lanham Act--are relevant, as are the Customs
Service regulations promulgated under authority of these acts and the common law of
trademarks. To prevail on a claim for trademark infringement the owner must prove a likelihood
of confusion. In determining whether confusion exists, the trier of fact will consider a number of
different factors, including the similarity of the marks; the similarity of the products or services;
the relative sophistication of the purchasers of these products or services; the channels of trade in
which the marks are used; the mark’s inherent and acquired strength; whether the defendant
adopted the mark in bad faith; and so on. Consistent with these principles is the proposition that,
subject to certain exceptions, “one is not subject to liability [for trademark infringement] for
using another’s trademark . . . . in marketing genuine goods or services the source, sponsorship,
or certification of which is accurately identified by the mark.”178
U.S. trademark law, like patent and copyright law, recognizes a first-sale or exhaustion
principle, which has been summarized as follows:
. . . the trademark owner cannot ordinarily prevent or control the sale of goods bearing the
mark once the owner has permitted those goods to enter commerce. It can be said that the rights
of the trademark owner are exhausted once the owner authorizes the initial sale of the product
under the trademark or that the owner implicitly licenses others to further market the goods
under the mark. Thus, no infringement occurs when the use of a mark properly identifies the
source, sponsorship, or certification of the goods or services, even if the owner of the mark
objects to the use.179
As in patent and copyright law, however, the question arises whether this principle applies
following the first lawful sale in the United States (national exhaustion) or the first lawful sale
anywhere in the world (international exhaustion). The Supreme Court first addressed the issue
of gray-market trademarked goods in A. Bourjois & Co. v. Katzel.180 There, a French company
owned the trademark in France and the United States for a brand of face powder; it then sold its
U.S. business, including the registered U.S. trademark, to a U.S. company. The U.S. company
imported the face powder from the French company and sold it in the U.S. under that mark. The
defendant bought some of the face powder in France and imported it into the U.S. for sale here,
178
Restatement (Third) of Unfair Competition Law; Restatement § 24.
Restatement, id., comment b.
180
260 U.S. 689 (1928).
179
46
in competition with the U.S. company. The U.S. company sued the importer. The Supreme
Court held that the defendant infringed the U.S. trademark owner’s rights, even though the
product was the genuine product of the French company:
After the sale the French manufacturers could not have come to the United States
and have used their old marks in competition with the plaintiff. . . . It is said that
the trademark here is that of the French house and truly indicates the origin of the
goods. But that is not accurate. It is the trademark of the plaintiff only in the
United States and indicates in law . . . that the goods come from the plaintiff
although not made by it.181
As noted in the Restatement, the Court in Katzel rejected the ‘universality’ principle in favor
of a ‘territoriality’ principle that recognizes a separate legal existence for a trademark in each
country whose laws afford protection of the mark. Under this view, the trademark does not
necessarily identify to purchasers in a particular country the original manufacturer of the goods,
but may instead identify the company that owns the exclusive trademark rights within that
country.182
Unfortunately, trademark law is not the only body of law that is relevant in understanding
the US approach to exhaustion; customs law also has a role to play. While the Katzel case was
pending before the Supreme Court, Congress enacted the Tariff Act of 1922--a protectionist
measure designed to shield U.S. firms from the effects of foreign competition. The act was later
amended by the Tariff Act of 1930. Notwithstanding the move towards global free trade
beginning with the establishment of GATT and now embodied in the WTO, some portions of
this Act, including one affecting parallel importation, remain good law in the U.S. A related
provision is found in § 42 of the Lanham Act.
First, under § 526 of the Tariff Act (19 U.S.C. § 1526(a)), it is unlawful:
to import into the United States any merchandise of foreign manufacture if such
merchandise . . . bears a trademark owned by a citizen of, or by a corporation or association
created or organized within, the United States, and registered in the Patent and Trademark Office
by a person domiciled in the United States . . . unless written consent of the owner of such
trademark is produced at the time of making entry.
181
Id. at 691-92. The Restatement, however, goes on to note some ambiguities and suggests that the proper test
remains likelihood of confusion. Under the Restatement approach, a trademark owner has an infringement claim
against the importer of genuine, identical goods only if U.S. consumers are likely to be confused into erroneously
thinking that the source or sponsor of the imported goods is the U.S. trademark owner. As with any likelihood of
confusion claim, the trademark owner may have a cause of action under § 32 of the Lanham Act if the mark is
registered; under § 43 if the mark is not registered; and under state common law.
182
Restatement (Third) of Unfair Competition Law, above n.164, §24, comment f.
47
Second, § 42 of the Lanham Act states that:
Except as provided [elsewhere], no article of imported merchandise which shall copy or
simulate the name of any domestic manufacture, or manufacturer, or trader, or of any
manufacturer or trader located in any foreign country which, by treaty, convention, or law
affords similar privileges to citizens of the United States, or which shall copy or simulate a
trademark registered in accordance with the provisions of this chapter or shall bear a name or
mark calculated to induce the public to believe that the article is manufactured in United States,
or that it is manufactured in any foreign country or locality other than the country or locality in
which it is in fact manufactured, shall be admitted to entry at any customhouse of the United
States.
Note the differences between the two provisions. Under § 526, the importation of an article
of foreign manufacture is unlawful if the article bears a registered U.S. trademark owned by a
U.S. citizen or U.S. corporation. Under § 42, the importation is unlawful if the article (1) copies
or simulates (a) a trade name or (b) a registered U.S. trademark, or (2) bears a name or mark
calculated to deceive the U.S. public about its place of manufacture. Thus, it is possible to
violate § 42 (but not § 526) by copying a trade name, or by copying a registered U.S. trademark
owned by a non-U.S. citizen or non-U.S. corporation.
Although these two statutes may seem, at first blush, to create an absolute bar to the
importation of gray goods, the regulations the Customs Service has promulgated to implement
these rules purport to create some exceptions. 183 For present purposes, the most relevant
provision of the regulations is 19 C.F.R. § 133.23. The principal difference between this
regulation and its predecessors (which were at issue in the K-Mart case discussed below) is the
addition of rules governing the importation of goods that are physically and materially different
from their U.S. counterparts.
First, § 133.23 defines “restricted gray market articles” as “foreign-made articles bearing a
genuine trademark or trade name identical with or substantially indistinguishable from one
owned and recorded by a citizen of the United States or a corporation or association created or
183
As Professor McCarthy notes, the K-Mart decision discussed in the text above addressed the validity of
Customs Service regulations interpreting the Tariff Act, not . . . the Tariff Act itself. However, it is equally true that
when the Supreme Court holds that a federal agency has reasonably interpreted a statute, that view of the statute will
necessarily have a very weighty impact on courts interpreting the statute in suits under the Tariff Act brought by
private companies seeking to bar gray market imports. . . .
While Customs’ regulations do not define the full scope of § 526, some courts have
interpreted Tariff Act § 526 to have the same scope as the Customs’ Service regulations upheld by
the Supreme Court in K-Mart . . . .
5 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 29:49 (4th ed. 2014) (citations
omitted).
48
organized within the United States and imported without the authorization of the U.S. owner.”
19 C.F.R. § 133.23(a).
Second, the regulation provides that, subject to an exception noted below, “[a]ll restricted
entry gray market goods imported into the U.S. shall be denied entry and subject to detention . . .
.” Id. § 133.23(c).
Goods that are subject to these provisions “shall be detained for 30 days from the date on
which the goods are presented for Customs examination, to permit the importer to establish that
any of the following exceptions” apply:
a.
“The trademark or trade name was applied under the authority of a
foreign trademark . . . owner who is the same as the U.S. owner, a
parent or a subsidiary of the U.S. owner, or a party otherwise
subject to common ownership or control with the U.S. owner . . . .”
Id. § 133.23(d)(1) (the “common ownership or control” exception);
and/or
b.
“For goods bearing a genuine mark applied under the authority of
the U.S. owner, a parent or subsidiary of the U.S. owner, or a party
otherwise subject to common ownership or control with the U.S.
owner, that the merchandise as imported is not physically and
materially different . . . from articles authorized by the U.S. owner
for importation or sale in the United States.” Id. § 133.23(d)(2); or
c.
“Where goods are detained . . . as physically and materially
different from the articles authorized by the U.S. trademark owner
for importation or sale in the U.S., a label in compliance with Sec.
133.23(b) Id. § 133.23(d)(3).184
The effect of § 526, § 42, and the regulations is to create a general rule and an
184
“Goods determined by the Customs Service to be physically and materially different under the procedures of this
part, bearing a genuine mark applied under the authority of the U.S. owner, a parent or subsidiary of the U.S. owner,
or a party otherwise subject to common ownership or control with the U.S. owner (see §§ 133.2(d) and 133.12(d) of
this part), shall not be detained under the provisions of paragraph (c) of this section where the merchandise or its
packaging bears a conspicuous and legible label designed to remain on the product until the first point of sale to a
retail consumer in the United States stating that: “This product is not a product authorized by the United States
trademark owner for importation and is physically and materially different from the authorized product.” The label
must be in close proximity to the trademark as it appears in its most prominent location on the article itself or the
retail package or container. Other information designed to dispel consumer confusion may also be added.” Id. §
133.23(b). Where the goods are detained for being physically and materially different, the importer has 30 days to
add such a label. See id. § 133.23(d)(3).
49
exception. The general rule is that the U.S. trademark owner can prevent a foreign
firm from importing goods bearing the U.S. trademark owner’s registered
trademark into the United States, even if the goods lawfully bear that mark abroad
and (arguably) even if there is no likelihood of confusion under general trademark
principles.
The exception to the rule is that the U.S. trademark owner cannot prevent the
importation if:
the US and foreign firms are subject to common control, and either
(1)
the imported goods are physically and materially identical
to the domestic goods, or
the goods are properly labeled as being physically and
materially different from the authorized domestic goods.
(2)
Following the Supreme Court’s discussion in K-Mart Corp. v. Cartier, Inc., 486
U.S. 281 (1988), we can create a taxonomy of the various ways in which gray
market goods may make their way into the United States, and then determine
whether their importation is lawful or unlawful.
Case 1: Domestic firm purchases from an independent foreign firm the
rights to register and use the latter's trademark as a U.S. trademark, and to
sell its foreign-manufactured products here.
•
If foreign manufacturer imports and distributes goods here,
domestic firm is harmed.
•
Similarly, if a third party lawfully purchases the goods
abroad and imports them into the US, the domestic firm is
harmed.
•
Section 526 renders parallel importation under these
circumstances illegal. See K-Mart, 486 U.S. at 287. This is
the same result the Court arrived at in Katzel.
Case 2: Domestic firm registers U.S. trademark for goods manufactured
abroad by an affiliated manufacturer.
•
Case 2a: Foreign firm incorporates subsidiary here; subsidiary
registers here a U.S. trademark identical to parent's foreign trademark;
50
third party lawfully buys goods abroad from the foreign firm and
imports them into U.S.
B.
1.
•
Case 2b: American-based firm establishes abroad a mfg. subsidiary to
produce U.S.-trademarked goods, and then imports them for domestic
distribution; third party lawfully purchases some of the merchandise
abroad and imports it into the U.S. to compete against the Americanbased firm.
•
Case 2c: American-based firm establishes abroad an unincorporated
manufacturing division to produce U.S.-trademarked goods, and then
imports them for domestic distribution; third party lawfully purchases
some of the merchandise abroad and imports it into the U.S. to
compete against the American-based firm.
•
The Customs regulation discussed above, and earlier versions of the
same regulation, permits the importation in all three variations of Case
2 (at least when the goods are not physically and materially different,
or are properly labeled).185
•
Case 3: Domestic holder of U.S. trademark authorizes an independent
foreign manufacturer to use the mark, typically on condition that
foreign manufacturer will not export goods under that mark into U.S.
Third party lawfully purchases goods abroad and then imports them
into U.S. At one time, a customs regulation purported to permit this
importation as well.
•
In K-Mart, however, a majority of the Court held that this regulation
was invalid. Section 526 could not be reasonably construed to permit
the importation under these circumstances. See K-Mart, 486 U.S. at
293-94.
The EU Approach to Exhaustion
A Free Circulation Right and/or “Exhaustion” as Regards Sales within the EU
Following the constitution of the “common market”, and in the absence of EU-wide
intellectual property rights, it was realised that IP rights in different Member States could divide
185
A majority of the Supreme Court upheld this regulation in K-Mart, though for different reasons. See id. at 29293 (opinion of Kennedy and White, J.); id. at 295-312 (opinion of Brennan, Marshall, and Stevens, J.).
51
what should be a common market. Companies tried to use IP rights to keep old national markets
distinct – maintaining higher prices in some countries than others. Traders naturally tried to
parallel import products from low to high price countries.
The European Court of Justice put an end to this by a series of cases involving
trademarks, patents and copyright. There was no express provision about exhaustion of IP
rights in the Treaty on the European Economic Communities (hereinafter EEC Treaty), but the
Court interpreted the Rome Treaty to achieve it for goods or services put on the common market.
Art. 30 EEC Treaty, as it then was numbered (now Article 34 TFEU), prohibited “quantitative
restrictions on importation and all measures with equivalent effect” on trade between Member
States. An exception to this was permitted by Art. 36 EC Treaty (now Article 30 TFEU) in the
case of, inter alia, “the protection of industrial or commercial property”. However, the exception
cannot apply if there is an “arbitrary discrimination or a disguised restriction on trade between
member States.”
The first issue to be brought in front of the Court was the legality of parallel imports and
the relation between the national IP rights and the material scope of the Treaty of Rome, in
particular its competition law rules. In Consten & Grundig the Court examined the legality of a
European Commission decision that had found that an agreement on the registration and the
exclusive use of a trademark in a Member State concluded between an exclusive distributor and
a supply that prevented trademarked goods from being imported in parallel infringed Article 85
EC (now Article 101 TFEU), prohibiting collusion with the object or effect to restrict
competition in the Common Market. The applicants argued that Articles 36 EEC and 222 EEC186
(now Articles 30 and 345 TFEU) excluded industrial property from the scope of the EU treaty
and thus it was not possible to prevent a trademark right to be used even if this would lead to a
situation of absolute territorial protection, thus reinstating through private means barriers to trade
between Member States. The Court rejected this argument, noting that Article 36 EEC cannot
limit the scope of Article 101 TFEU and that Article 222 EEC (now Article 345 TFEU), “does
not affect the granting of (trademark rights) but only limits their exercise to the extent necessary
to give effect to the prohibition under Article 85(1) of the EEC Treaty [now Article 101(1)
TFEU]”187.
Until the early 1970s, competition rules were the main provisions of the Treaty applied
with regard to restrictions to parallel imports. This case law relating to the interaction between
competition law rules and IP rights, the Court of Justice of the EU examined in subsequent case
law the legality of parallel imports of trademarked goods in the light of the free movement of
186
According to this provision, “This Treaty shall in no way prejudice the rules in Member States governing the
system of property ownership.”
187
Joined cases C-56/64 and 58/64, Consten and Grundig v Commission of the EEC, ECLI:EU:C:1966:41
52
goods rules of the Treaty. The Court of Justice found that the free movement rules of the Treaty
applied to industrial property rights in the following way:
“As a result of the provisions of the Treaty relating to the free movement of goods, and in
particular Article 30 [of the EEC Treaty, now Article 34 of the TFEU], quantitative
restrictions on imports and all measures having equivalent effect are prohibited between
Member States. Under Article 36 [of the EEC Treaty, now Article 36 of the TFEU] those
provisions nevertheless do not preclude prohibitions or restrictions on imports justified
on grounds of the protection of industrial and commercial property. However, it is clear
from that same Article, in particular its second sentence, as well as from the context, that
whilst the Treaty does not affect the existence of rights recognized by the laws of a
Member State in matters of industrial and commercial property the exercise of those
rights may nevertheless, depending on the circumstances, be restricted by the prohibitions
contained in the Treaty. Inasmuch as it creates an exemption to one of the fundamental
principles of the common market, Article in fact admits of exceptions to the rules on the
free movement of goods only to the extent to which such exemptions are justified for the
purpose of safeguarding the rights which constitute the specific subject-matter of that
property”188.
In essence, with this case law the Court found that the strict territorial nature of the
exclusive protection of national industrial property rights constitutes a quantitative restriction to
trade, which although incompatible with Article 30 EEC (now Article 34 TFEU) could be
justified under Article 36 EEC (now Article 30 TFEU). In order to assess how the prohibition of
parallel imports of trademarked products could fall within the scope of the prohibition of Article
34 TFEU, the Court made use of the following operational doctrines in order to balance the
conflicting interests of protecting industrial property rights but also ensuring market integration
and the constitution of a common market: the existence/exercise of the right distinction, the
doctrine of the specific subject matter of the right and that of the essential function of the right,
the doctrine of common origin of the right, and most importantly for our purposes the doctrine of
the Community exhaustion of the rights.
The Court’s bold rulings were to the following effect:
188
Case C-192/73, Van Zuylen fre`res v. Hag AG, [1974] ECR 731, paras 8 and 9; Case C-15/74, Centrafarm BV
and Adriaan de Peijper v. Sterling Drug Inc, [1974] ECR 1147, paras 7 and 8; Case C-16/74, Centrafarm BV and
Adriaan de Peijper v. Winthrop BV, [1974] ECR 1183, paras 6 and 7; Case C-119/75, Terrapin (Overseas) Ltd. v.
Terranova Industrie CA Kapferer & Co, [1976] ECR 1039, para. 5; Case C-102/77, Hoffmann-La Roche & Co. AG
v. Centrafarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse mbH, [1978] ECR 1139, para. 6; Case C-3/78,
Centrafarm BV v. American Home Products Corporation, [1978] ECR 1823, paras 7–10; Case C-1/81, Pfizer Inc. v.
Eurim-Pharm GmbH, [1981] ECR 2913, para. 6. For an extensive analysis, see GRIGORIADIS, above n. 105, Chapter
7; C. Stothers (2007), Parallel trade in Europe: intellectual property, Competition and Regulatory Law, (Hart,
Oxford), Chapter 2.
53
(1) An IP right was a measure with equivalent effect to a quantitative restriction on
importation;
(2) There is a distinction between the existence of an IP right and its exercise189, the exercise
being subject to regulation by EU law.
(3) The distinction between existence and exercise of the right being not clear, as one may
expect for tangible property rights for instance, the Court of Justice was forced to develop
operational criteria by turning to the doctrines of the “specific subject matter of the right”
and that of “the essential function of the right”, the latter doctrine being essentially
indistinguishable to the first one, or at least an important part of the first doctrine. The
CJEU employed the doctrine of the “specific subject matter of the right” for trade-marks
in the 1970s and defined the “specific subject matter” of trade-marks as following: “the
specific subject-matter of the industrial property is the 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 trade 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 trade mark by selling products illegally bearing that trade mark”190. The
specific subject matter was interpreted as including the right to affix the trademark to a
good, to put into circulation the good under the trademark for the first time, to re-affix the
trademark to the good, if this was put on the market without the trade-mark owner’s
consent, which relate to the “origin function” of the trademark, the need to ensure, for the
benefit of the trade-mark owner but also consumers, that the trade-mark provides
information on the origin of the good (and its status or reputation), as well as, to a more
limited extent, of the advertising function of trade-marks, that is the possibility of the
trade-mark owner to be protected against the possibility that the reputation of the
trademark is unfairly exploited by a parallel importer, in particular for luxury products191.
(4) If it is permissible for the owner of an IP right in a Member State to prevent imports of
products embodying his right that had been put on the market in another Third State, this
is not the case for products that had been put on the market in another Member State of
the EEC (now EU) by the owner of the IP right or his consent, as this would be
incompatible with the EEC Treaty. The rationale of this rule may be that it operates as a
limit set in order to avoid the multiple reward of the IP holder and thus restricts the
possibility of the trademark owner to increase the economic value of the trademark by
189
Case C-78/70, Deutsche Grammophon Gesellschaft mbH v. Metro-SBGroßmärkte GmbH & Co. KG, [1971] ECR
487
190
Case C-16/74, Centrafarm BV and Adriaan de Peijper v. Winthrop BV, [1974] ECR 1183, para. 8.
191
Case C-324/09, L’Oreal SA and Others v. eBay International AG and Others, [2011] ECR I-6011.
54
opposing to the price arbitrage of parallel importers. Yet, it may also be related more
prosaically to the need to ensure the free movement of goods between Member States of
the EU and to increase the opportunities of intra-EU trade. As the Court noted in IHT
Internationale Heiztechnik v. Ideal-Standard, “Articles 30 and 36 [EEC, now Articles 34
and 30 TFEU] debar the application of national laws which allow recourse to trade-mark
rights in order to prevent the free movement of a product bearing a trade mark whose use
is under unitary control.192”
The effect of this case law was summarised in Merck v Stephar,193 re-affirmed in Merck v
Primecrown (which although cases concerning patents provide interesting insights on the
rationale of the rule).194 In the latter the Court held:
“Articles 30 and 36 of the EC Treaty preclude application of national legislation which
grants the holder of a patent for a pharmaceutical product the right to oppose importation
by a third party of that product from another Member State in circumstances where the
holder first put the product on the market in that State after its accession to the European
Community but before the product could be protected by a patent in that State, unless the
holder of the patent can prove that he is under a genuine, existing legal obligation to
market the product in that Member State”.
This policy decision (which applies equally to other IP rights, including trademarks) actually
goes beyond IP exhaustion. For in both cases the IP owner had sold his goods in countries (Italy
in the first case, Spain in the second) in which he did not have (and by reason of the laws in force
at the time, could not have had) any patent. He had no “right” to exhaust but nonetheless he
could not prevent the circulation of the products into other member states where he did have
patent rights. So within the EU the rule is one of free circulation, hence broader than just
“Community exhaustion.”
In contrast, for products put on the market in a Third State, the prevention of parallel imports
is not considered as constituting a measure having equivalent effect and prohibited under Article
34 TFEU. In EMI Records v. CBS United Kingdom, the Court held that “the exercise of a trademark right in order to prevent the marketing of products coming from a third country under an
identical mark, even if this constitutes a measure having an effect equivalent to a quantitative
restriction, does not affect the free movement of goods between Member States and thus does not
come under the prohibitions set out in Article 30 et. seq. of the Treaty” as “in such circumstances
192
Case C-9/93, IHT Internationale Heiztechnik GmbH and Uwe Danzinger v. Ideal-Standard GmbH and Wabco
Standard GmbH, [1994] ECR I-2789.
193
Case C-187/80, Merck & Co. Inc. v. Stephar BV and Petrus Stephanus Exler, [1981] ECR 2063
194
Joined Cases C-267/95 and C-268/95, Merck & Co. Inc., Merck Sharp & Dohme Ltd and Merck Sharp & Dohme
International Services BV v. Primecrown Ltd, Ketan Himatlal Mehta, Bharat Himatlal Mehta and Necessity
Supplies Ltd and Beecham Group plc v. Europharm of Worthing Ltd, [1996] ECR I-6285.
55
the exercise of a trade-mark right does not in fact jeopardize the unity of the Common Market
which Article 30 et seq. of the Treaty are intended to ensure”.195 The same principle applies if
the products were put on the market of the Third State without the consent of the trade-mark
owner. The possibility for the trade-mark owner to oppose parallel imports originating in third
(non EU) countries distinguishes the EU exhaustion regime from that of international exhaustion
and was re-affirmed following the implementation of the trademark directive by the CJEU in
Silhouette International Schmied v. Hartlauer Handeslsgesellschaf.t196
One should, however, also keep in mind the possibility for the EU to have concluded
association agreements with some other countries. Most often, these agreements include
provisions equivalent to Articles 34 and 36 TFEU and establish a free trade area. In this case, the
legality of preventing parallel imports originating from the state with which the EU has signed an
association or free trade agreement will depend on the interpretation of the provisions of that
agreement and of its purpose, which might be different from that of the EU treaties.197 It will also
depend on reciprocity. As it was indicated in the Commission’s Explanatory Memorandum to the
Amended Proposal for a Council Regulation on the Community trade mark,
“(o)n the question of international exhaustion of the rights conferred by a Community trade
mark, the Commission has formed the opinion that the Community legislator should refrain
from introducing this principle and make do with the rule of Community-wide exhaustion.
The Community must, however, be empowered to conclude, at some future time with
important trading partners, bilateral or multilateral agreements whereby international
exhaustion is introduced by the contracting parties. The restriction to Community-wide
exhaustion, however, does not prevent national courts from extending this principle in cases
of a special nature, in particular where, even in the absence of a formal agreement,
reciprocity is guaranteed.”198
Hence, there remains at least an argument that the EU may allow international exhaustion
where there is a guarantee of reciprocity on exhaustion.199
195
Case C-51/75, EMI Records Limited v. CBS United Kingdom Limited, [1976] ECR 811, paras 10-11.
Case C-355/96, Silhouette International Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH,
[1998] ECR I-4799.
197
See the position adopted by the CJEU in Case C-270/80, Polydor Limited and RSO Records Inc. v. Harlequin
Records Shops Limited and Simons Records Limited, [1982] ECR 329, with regard to copyright and the refusal to
extend the application of the Community exhaustion principle to products originating in the Third country in view of
the fact that the agreement in question (with Portugal when this was not a Member of the EU) although making
provision for the abolition of restrictions of trade, did not “seek to create a single market reproducing as closely as
possible the conditions of a domestic market”. The implementation of the Trademark Directive and the fact that this
does not provide in its Article 7(1) for parallel imports originating in jurisdictions with which the EU has concluded
association or free trade agreements indicate that trademark owners may prevent parallel imports in this case. For a
similar conclusion, see GRIGORIADIS, above n. 105, 185.
198
Com (84) 470 final, 31 July 1984, vi–vii.
199
C-4/98 Calvin Klein v Cowboyland (case withdrawn and never decided).
196
56
2.
Specific EU Legislation in the Case of IP Rights Which Are Either Pan-EU Rights or
Parallel National Rights Granted Pursuant to National Laws Which Have Been
Harmonised
After the free circulation rule was established by the Court, a number of EU Directives200
and Regulations201 concerned with IP were passed, namely with regard to trademarks the Trade
Marks Directive in 1989202 and the Community Trade Mark Regulation in 1994203. Each of
these contains a provision headed “exhaustion of rights” as follows:
Trade Marks Directive
Article 7 Exhaustion of the rights conferred by a trade mark
1. The trade mark 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.
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.
Trade Marks Regulation
13. Exhaustion of the rights conferred by a Community trade mark
1. A Community trade mark 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.
2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose
further commercialisation of the goods, especially where the condition of the goods is changed
or impaired after they have been put on the market.
As it was earlier noted, although these are described as “exhaustion” rules they are really
rules about first marketing within the European Union. And in essence they are
codifications of the pre-existing case law. Note that in the case of trademarks there is a
200
Requirements upon member states to align their respective national laws.
Measures which take effect as law throughout the EU without further enactment.
202
First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States
relating to trade marks, [1989] OJ L 40/1; Directive 89/104/EC Directive 2008/95/EC repealed and replaced
Directive 89/104/EEC: Directive 2008/95/EC of the European Parliament and of the Council of 22 October
2008 to approximate the laws of the Member States relating to trade marks [1999] OJ L 299/25.
203
Council Regulation (EC) No 40/94 of 20 December 1993 on the Community trade mark, [1994] OJ L 11/1.
Originally 40/94 now replaced by Council Regulation (EC) No 207/2009 on the Community trade mark [2009] L
78/1.
201
57
limited exception – where there are “legitimate reasons” – for instance selling trade-marked
goods as new when they are second-hand or out of date.
Article 7 of the Trade Mark Directive was interpreted by the CJEU as denying any
competence to the Member States to choose the option of international exhaustion. Assessing an
Austrian rule enabling international exhaustion of the trade-mark, the Court held in Silhouette
International Schmied v. Hartlauer Handelsgesellschaft that
“National rules providing for exhaustion of trade-mark rights in respect of products put
on the market outside the EEA under that mark by the proprietor or with its consent are
contrary to Article 7(1) of First Council Directive 89/104/EEC of 21 December 1988 to
approximate the laws of the Member States relating to trade marks, as amended by the
Agreement on the European Economic Area of 2 May 1992”204.
In arriving to this conclusion, the CJEU relied on the wording, overall scheme and
purpose of Article 7 (1) of Directive 89/104/EEC (now Article 7 (1) of Directive 2008/95/EC),
which was found to provide for a complete harmonization of the rules relating to the rights
conferred by a trade mark. Trademark owners can therefore prohibit parallel imports of trademarked goods that have not been put on the market in the EEA by them or with their consent.205
3.
Importations into the EU and Exhaustion – Trade Marks
The position for trade-marks is settled. An owner of a registered trade-mark can
rely upon his EU trade-mark rights (whether registered as a national trade mark or as a
Community Trade Mark) to prevent importation into the EU. Only if he has clearly and
unambiguously consented to the importation under challenge will there be a defence.
The leading case is Davidoff v A & G Imports.206 It is sufficient to quote the Court’s
final ruling:
1.
On a proper construction of Article 7(1) of First Council Directive
89/104/EEC of 21 December 1988 to approximate the laws of the Member
States relating to trade marks, as amended by the Agreement on the European
Economic Area of 2 May 1992, the consent of a trade mark proprietor to the
204
Case C-355/96, Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH, [1998]
ECR I-4799, para. 31.
205
See also Case C-173/98, Sebago Inc. and Ancienne Maison Dubois & Fils SA v G-B Unic SA, [1999] ECR I4103; Joined Cases C-414/99 to 416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. and Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691.confirming this interpretation of Article 7(1) of the Trade-mark
Directive,.
206
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. and Others v
Tesco Stores Ltd and Others [2001] ECR I-8691.
58
marketing within the European Economic Area of products bearing that mark
which have previously been placed on the market outside the European
Economic Area by that proprietor or with his consent may be implied, where it
follows from facts and circumstances prior to, simultaneous with or subsequent
to the placing of the goods on the market outside the European Economic Area
which, in the view of the national court, unequivocally demonstrate that the
proprietor has renounced his right to oppose placing of the goods on the market
within the European Economic Area.
2. Implied consent cannot be inferred:
— from the fact that the proprietor of the trade mark has not communicated to
all subsequent purchasers of the goods placed on the market outside the
European Economic Area his opposition to marketing within the European
Economic Area;
— from the fact that the goods carry no warning of a prohibition of their being
placed on the market within the European Economic Area;
— from the fact that the trade mark proprietor has transferred the ownership of
the products bearing the trade mark without imposing any contractual
reservations and that, according to the law governing the contract, the property
right transferred includes, in the absence of such reservations, an unlimited right
of resale or, at the very least, a right to market the goods subsequently within the
European Economic Area.
3. With regard to exhaustion of the trade mark proprietor's exclusive right, it is not
relevant:
— that the importer of goods bearing the trade mark is not aware that the
proprietor objects to their being placed on the market in the European
Economic Area or sold there by traders other than authorised retailers, or
own purchasers contractual reservations setting out such opposition, even
though they have been informed of it by the trade mark proprietor.
The result is what has been called “fortress Europe” for trade-marks.
4.
The Essence of the EU Regime – The Choice of the Trade-mark Proprietor
The application of Article 7(1) of Directive 2008/95/EC and Article 13(1) of Regulation
9EC) 207/2009 stipulating a regime of Community exhaustion requires that the trade mark
proprietor has put on the market in the EU under that trade mark an item of product or has
consented to putting this product on the market. It remains important therefore to determine what
is meant by “putting on the market” and “consent”.
59
In Peak Holding the CJEU noted that the need for a uniform protection of trade-mark
owners across the EU requires the term “putting on the market” to be determined by EU law, and
not by national law207. This may be of particular importance in the context of an exhaustion
regime integrated in a regional trade agreement, such as that of the Eurasian Economic Union.
The CJEU noted that the Directive is intended in particular to ensure that the proprietor has the
exclusive right to use the trade mark for the purpose of putting the goods bearing it on the market
for the first time and consequently “(a) sale which allows the proprietor to realise the economic
value of his trade mark exhausts the exclusive rights conferred by the Directive, more
particularly the right to prohibit the acquiring third party from reselling the goods.”208 The CJEU
made a distinction between putting the products on the market, defined as allowing the
realization of the economic value of the trade-mark, and the preparatory actions of importing the
products with a view to selling them in the EEA or offering them for sale in the EEA, which are
not considered as equivalent of putting them on the market within the meaning of Article 7(1) of
the Directive. Indeed, “(s)uch acts do not transfer to third parties the right to dispose of the goods
bearing the trade mark” and, in particular, “they do not allow the proprietor to realise the
economic value of the trade mark”, as “(e)ven after such acts, the proprietor retains his interest in
maintaining complete control over the goods bearing his trade mark, in order in particular to
ensure their quality.”209
Some authors interpret this case law as requiring that the economic value of the trademark be realized with respect to the product, for instance, “through the shifting of the profit or
loss, namely the economic risk, of any onward sale of a trademarked good from the trademark
proprietor to a third party […] who, […] may have assumed a contractual obligation to resell the
good”210. This may not only include the sale of the trade-marked products based on the free will
of the trade-marked proprietor, but also a forced sale by court order, or the donation of the trademarked good, as long as this does not aim to promote the sale of other products211. In contrast, in
addition to the preparatory acts referred to above, do not constitute a “putting on the market”
within the meaning of Article 7(1) of Directive 2008/95/EC, “the transfer of ownership of a
trademarked good by way of security, when the assignor remains in possession of the good in
question”, “the sale of a trademarked good to an undertaking that has its own legal personality
but belongs to the same group as the trademark proprietor”, “the internal transit of a trademarked
good”, the offer for sale or the sale of a trademarked good after the good in question has entered
physically but not legally the territory of the EU” (for instance the non-EU good entered in the
EU and was placed under the external transit procedure or a customs warehousing procedure,
“the distribution, free of charge, of trademarked items intended to promote the sale of other
207
Case C-16/03, Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313.
Case C-16/03, Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para. 40.
209
Case C-16/03, Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para.42.
210
GRIGORIADIS, above n. 105, 219.
211
GRIGORIADIS, above n. 105, 221.
208
60
goods because such items are not distributed in any way with the aim of them penetrating the
market”212. In these circumstances the trade-mark proprietor may oppose the offer for sale or sale
of the trademarked products, on the basis of Article 5(3) of Directive 2008/95/EC.
It also follows from this case law that the trade-mark proprietor will be deemed to have
put the product on the market even if she sells the product to an undertaking based in the EU,
which has undertaken a contractual obligation to resell the goods outside the European Economic
Area, thus pushing the trade mark owners to sell directly to the distributors established outside
the EU in order to avoid the Community exhaustion of their rights213. As the Court held in Peak
Holding, “(a)ny stipulation, in the act of sale effecting the first putting on the market in the EEA,
of territorial restrictions on the right to resell the goods concerns only the relations between the
parties to that act” and “cannot preclude the exhaustion provided for by the Directive”214. The
same would apply even in case the trademark owner entrusted a commercial agent to sell the
goods in the EU, given that the commercial agent acts in the name of and for the account of the
principal, in this case the trade-mark owner215.
The concept of “consent” is also considered an EU law concept, and is not interpreted
according to national law, basically for the same reasons than led to an EU law definition of the
concept of “putting on the market”. Otherwise, it would have been possible to easily deviate
from a regime of regional exhaustion to a regime of international exhaustion, simply by adopting
a wide definition of “consent” in the respective national law216. Consent may be established
through an express statement. In its leading case law Zino Davidoff SA and Levi Strauss the
CJEU noted that the consent of the trade-mark owner to the good bearing his trademark to be put
on the market, within the meaning of Article 7(1) of the Trade-mark Directive may also be
inferred implicitly from some facts or circumstances “prior to, simultaneous with or subsequent
to the placing of the goods on the market outside the EEA which, in the view of the national
court, unequivocally demonstrate that the proprietor has renounced his rights”217. However,
consent cannot be inferred from the mere silence of the trade-mark owner. According to the
CJEU, “(a) rule of national law which proceeded upon the mere silence of the trade mark
proprietor would not recognise implied consent but rather deemed consent” and “(t)his would not
meet the need for consent positively expressed required by Community law”218. Furthermore,
212
GRIGORIADIS, above n. 105, 221-224.
Case C-16/03, Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para. 56.
214
Case C-16/03, Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, paras 54-55.
215
GRIGORIADIS, above n. 105, 282.
216
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691.
217
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691, para. 46.
218
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691, para. 58.
213
61
“[…] implied consent cannot be inferred from the fact that a trade mark proprietor has
not communicated his opposition to marketing within the EEA or from the fact that the
goods do not carry any warning that it is prohibited to place them on the market within
the EEA.
Finally, such consent cannot be inferred from the fact that the trade mark proprietor
transferred ownership of the goods bearing the mark without imposing contractual
reservations or from the fact that, according to the law governing the contract, the
property right transferred includes, in the absence of such reservations, an unlimited right
of resale or, at the very least, a right to market the goods subsequently within the
EEA”219.
It is important to note that “the rights conferred by the trade mark are exhausted only in
respect of the individual items of the product which have been put on the market with the
proprietor's consent in the territory there defined. The proprietor may continue to prohibit the use
of the mark in pursuance of the right conferred on him by the Directive in regard to individual
items of that product which have been put on the market in that territory without his consent”220.
Hence, the exhaustion of the right does not extend to the whole of the production line of a
product221.
It seems, therefore, that the EU exhaustion rule leaves a margin of discretion to the trademark owner who may avoid the Community exhaustion of her rights, by avoiding putting the
product in the EU market, in the various ways contemplated by the case law interpreting Article
7(1) of the Trade-mark Directive, or by taking care not to provide her consent to such market
penetration in the EU. The case law provides guidance as to the criteria for identifying consent,
in particular by establishing presumptions of consent in certain circumstances. Although it is not
the purpose of this Section to provide an exhaustive analysis of this jurisprudence, it seems that
the marketing of a trademarked good by an undertaking of the same group than the trade-mark
owner is assumed to have gained the consent of the trade-mark owner. A similar presumptions
applies for the marketing of a trade-marked product by a trade-mark licensee, or by an authorized
(exclusive or selective) distributor or the forced sale of the trade-marked product in the European
Economic Area following a court order 222 . According to Article 8(2) of the Trade-mark
Directive, the proprietor of a trade mark may invoke the rights conferred by that trade mark
against a licensee who contravenes any provision in his licensing contract, among other things,
the quality of the goods manufactured or of the services provided by the licensee. Although this
provision concerns the relations between the trademark proprietor and the licensee, an erga
219
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691, paras 56-57.
220
Case C-173/98, Sebago Inc. and Ancienne Maison Dubois & Fils SA v G-B Unic SA, [1999] ECR I-4103, para.
19.
221
GRIGORIADIS, above n. 105, , 291.
222
GRIGORIADIS, above n.105, 293-296.
62
omnes effect and thus the possibility to object to parallel trade may be possible, on the basis of
that provision of the Directive, if the licensor made the decision to control the licensee by
including provisions in the agreement requiring the licensee to comply with his instructions and
giving the licensor the possibility to verify such compliance. Yet, “(w)here the proprietor of the
mark refrains from controlling distribution or does not avail himself of contractual means of
exercising such control, there is no reason to grant him trade mark rights in respect of third
parties.”223 Similarly, where the licensor “tolerates the manufacture of poor quality products,
even though he has contractual means of preventing it, he must bear responsibility for it”224.
Although the Directive stays silent as to the burden of proof of these different factual allegations,
the issue depending on the evidence law of the Member States, the CJEU recognized in Zino
Davidoff and Levi Strauss that the consent must be proved by the trader alleging it225. The
national evidence rules should not render the task of the parallel importer exceedingly difficult,
as it was also recognized by the CJEU in Van Doren.226
In practice, the typical case will take the following form:
“The trademark proprietor bears the initial burden of proving the general elements of
infringement, i.e. that the parallel importation of goods bearing the trademark infringes his right.
– In reply to the claim of the trademark proprietor on trademark infringement, the independent
trader (parallel importer—independent reseller) will have to either:
a)
prove the existence of a positively expressed consent of the trademark proprietor
for putting the goods on the market in the EEA where the trademark proprietor challenges
only the existence of such consent, or
b)
where the trademark proprietor challenges in general the exhaustion of his right:
(i)
prove that the goods were initially put on the market in the EEA by the
trademark proprietor or with his consent, if so required by the applicable
national procedural rules; or
223
Opinion of AG Kokott in Case C-59/08, Copad SA v Christian Dior couture SA, Vincent Gladel and Société
industrielle lingerie (SIL), [2009] ECR I-3421, para. 51.
224
Opinion of AG Kokott in Case C-59/08, Copad SA v Christian Dior couture SA, Vincent Gladel and Société
industrielle lingerie (SIL), [2009] ECR I-3421, para. 50. Interpretation supported by the judgment of the CJEU in
Case C-59/08, Copad SA v Christian Dior couture SA, Vincent Gladel and Société industrielle lingerie (SIL), [2009]
ECR I-3421, para. 47.
225
Joined Cases C-414/99 to C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others v
Tesco Stores Ltd and Others, [2001] ECR I-8691, paras 53-54.
226
Case c-244/00, Van Doren + Q. GmbH v. Lifestyle sports + sportswear Handelgesellschaft mbH and Michael
Orth, [2003] ECR I-3051.
63
(ii)
allege a risk of market partitioning between Member States as a
consequence of the fact that he bears the burden of proving that the right
flowing from the trademark borne by the goods he sells has been
exhausted. […] a real risk of partitioning of national markets will exist in
the following cases:
aa) where it is impossible or excessively difficult for the
independent trader to prove exhaustion of the trademark right. […]
bb) where the trademark proprietor puts products on the market
within the EEA through an exclusive distribution system, so there is the
possibility of the trademark proprietor acting on the facts revealed by the
independent trader in meeting the burden to eliminate the source of
supply.
In both the above cases, the independent trader must establish all
the following facts and circumstances:
aa) that he purchased the goods he sells within the EEA, so there is
a presumption that Article 7 (1) of Directive 2008/95/EC or Article 13 (1)
of Regulation (EC) 207/2009 applies;
bb) that price differences exist for the goods bearing the trademark
of the trademark proprietor between the EU Member States, regardless of
whether those differences can be justified (e.g., on the basis of a difference
of costs of production between Member States), so there is a presumption
that the trademark proprietor tries, by prohibiting the parallel importation,
to maintain those differences;
cc) that there is no clear difference between the goods bearing the
trademark of the trademark proprietor sold within and outside of the
market of the EEA if the trademark proprietor argues that the independent
trader ought to have known, based on the nature or the particular marking
of the goods he sells, that the goods he sells were not intended to be
marketed in the EEA.”227
One should also not forget the possibility offered by Article 7(2) of the Trade-mark
Directive to the proprietor of the trade-mark to oppose the commercialization of the products
bearing the mark where there exist “legitimate reasons,” “especially where the condition of the
goods is changed or impaired after they have been put on the market.” This provision has also
227
GRIGORIADIS, above n. 105, 322-323.
64
led to an extensive jurisprudence of the EU courts in order to define the terms employed by the
Directive.228
C. Approaches to Exhaustion in Other Jurisdictions
There is a great diversity in the exhaustion regimes chosen by various jurisdictions in the
area of trade-marks. A major distinction concerns between importing and exporting countries,229
the latter usually adopting the international exhaustion regime, as this is more favorable to
parallel trade.230 It is also frequent that the exhaustion regime may change over time, or that the
choice of policy remains undetermined by national legislation, thus leaving it up to national
courts to determine what exhaustion rules to apply in specific cases. For instance, in the absence
of any provision in the Chinese legislation, Chinese courts have generally avoided addressing the
question directly.231
In contrast, Indian law adopts international exhaustion for trade-marks, although it
provides the trade-mark owner with the possibility of opposing parallel imports of trademarked
products under limited circumstances, such that the conditions of the goods have been changed
or impaired after they were put on the market.232 The South African Trademarks Act adopts a
similar position, stating in § 34 (2) (d) of the Trade Marks Act that a trade mark registration is
not infringed by ‘the importation into, or distribution, sale or offering for sale in the Republic, of
goods to which the trade mark has been applied by or with the consent of the proprietor.’233
228
For an extensive analysis, see GRIGORIADIS, above n. 105, Chapter 10, 338 seq.
“Exporting country” is the country out of the market of which a good is exported in parallel and “Importing
country” is that where a good is imported in parallel.
230
GRIGORIADIS, above n. 105, 60.
231
See, for instance, the discussion of Chinese law in D. Chow (2011), Exhaustion of Trademarks and Parallel
Imports in China, SANTA CLARA LAW REVIEW, 51(4): 1283-1309.
232
High Court of Delhi, Kapil Wadhwa & Ors. vs Samsung Electronics Co. Ltd [decided on October 3, 2012],
FAO(OS) 93/2012, where the High Court interpreted Section 30 (3) of the Indian Trade Marks Act 1999 to cover
international exhaustion. Section 30(4) of the Indian Trademarks Act empowers a brand owner to have parallel
imported goods declared infringing on the basis of any ‘legitimate reason”. The High Court recognized the wide
scope of this exception enabling the trade-mark proprietor to oppose parallel imports by noting the following: (para.
68) “[…] it would be relevant to note that further dealing in the goods placed in the market under a trademark can be
opposed where legitimate reasons exist to oppose further dealing and, in particular, where the condition of the goods
has been changed or impaired. With respect to physical condition being changed or impaired, even in the absence of
a statutory provision, the registered proprietor of a trademark would have the right to oppose further dealing in those
goods inasmuch as they would be the same goods improperly so called, or to put it differently, if a physical
condition of goods is changed, it would no longer be the same goods. But, sub-Section 4 of Section 30 is not
restricted to only when the conditions of the goods has been changed or impaired after they have been put on the
market. The section embraces all legitimate reasons to oppose further dealings in the goods. Thus, changing
condition or impairment is only a specie of the genus of legitimate reasons, which genus embraces other species as
well.”
233
However, under the Consumer Protection Act, the parallel importer ‘a person who markets any goods that bear a
trade mark, but have been imported without the approval or licence of the registered owner of that trade mark, must
apply a conspicuous notice to those goods in the prescribed manner and form.’ See South African Consumer
Protection Act, No 68 of 2008 (s. 25 (2)).
229
65
Canada recognizes international exhaustion with respect to trademarks. In Consumers
Distributing Co. v. Seiko Time Canada Ltd.,234 a manufacturer of watches tried to prevent
unauthorized sales of its products in Canada. The plaintiff alleged trade-mark infringement but
the court held for the defendant, stating that “the distribution of a trade-marked product lawfully
acquired is not, by itself, prohibited under the Trade-marks Act of Canada, or indeed at common
law.”235 This approach was subsequently adopted by the Federal Court of Appeal in other
cases.236 Brazil adopts the principle of domestic exhaustion.237 Of particular interest is Australia,
which introduced amendments to its Copyright Act in 1991238 limiting restrictions on Australian
publishers and distributors to import a book which is an overseas work in order to supply
verifiable orders from individuals for a single copy of a book for their own use, or to supply
multiple copies to libraries. Similar exceptions also apply with regard to the importation of a
non-infringing copy of a work (literary dramatic or musical) that may be included in sound
recording. In two reports published in 1999 and 2001 the Australian Competition and Consumer
Commission (ACCC) noted that allowing competition from parallel imports should lead to more
competitive pricing and better choice of product and service for consumers and retailers239. This
led in 2003 to abolish the possibility of IP holders to prevent parallel imports on computer
software, and the electronic form of books, periodicals and sheet music, thus adopting an
international exhaustion regime for these products.240 Similar calls to lift the remaining parallel
importation restrictions in the 1968 Copyright Act have been made for “genuine books” in
2009241 and IT products in 2013242. Australia has an international exhaustion regime for trade234
[1984] 1 S.C.R. 583, 1984CarswellOnt 869.
Above at para. 18.
236
See, e.g., Coca-Cola Ltd. v. Pardhan, [1999] F.C.J. No. 484(F.C.A.) and Smith & Nephew Inc. v. Glen Oak Inc.
(1996), 68 C.P.R. (3d) 153(F.C.A.).
237
Article 132 of the Industrial Property law (No. 9.279 of May 14, 1996) holding that once the trade-mark
proprietor has put products on the Brazilian market he may not “prevent the free circulation of products placed in the
internal market by himself or by another with his consent.” In a recent case the Superior Court of Justice (Diageo)
held that “(u)nder Brazilian law, therefore, exhaustion of the use of the mark occurs through the legitimate
introduction, with the consent of the mark owner, into the national market, because […] it is presumed that the
owner, when placing the product on the domestic market, is automatically remunerated and will not be able to
prevent said product from circulating indiscriminately […] Therefore, the owner of an international mark has, in
principle, the right to demand that its consent be obtained for parallel importation into the national market”. Yet, in
this case the consent of the trade-mark owner was assumed from the absence of complaint or opposition to parallel
imports of her products for at least 15 years. The Court noted: “[…] the parallel importation which has been carried
out by […] GAC cannot be held to be unlawful in view of the […] appellants’ failure to oppose it for such a long
time, thereby conferring consent […] It had the right to purchase the goods, in view of this long acquiescence”. For
a discussion of this case, see http://www.glpi.com.br/fotos/galeria/2014/05/21/2013-04-29-superiorcourtofa.pdf .
238
Copyright Amendment Act 1991 (Cth) ss 5, 8, inserting ss 44A, 112A into the Copyright Act.
239
ACCC, Potential Consumer Benefits of Repealing the Importation Provisions of the Copyright Act 1968 as They
Apply to Books and Computer Software (March 1999); ACCC, Summary of the Commission’s March 1999 Report
on the Potential Consumer Benefits of Repealing the Importation Provisions of the Copyright Act 1968 as They
Apply to Books and Computer Software — Including Price Updates for Books, Computer Software and Sound
Recordings (April 2001).
240
Copyright Amendment (Parallel Importation) Act 2003 (Cth).
241
Productivity Commission, Restrictions on the Parallel Importation of Books (Research Report, June 2009) xxv
(recommendation 1).
235
66
marks and for patents, although for patents this principle may be contractually restricted by the
patent holder243.
V. CONCLUSIONS
In principle, any credible exhaustion regime, however artfully devised, cannot violate the
outer boundaries of TRIPS Article 6 which are the national treatment and MFN rules as well as
National Treatment. Put simply, a differentiated exhaustion regime (domestic exhaustion,
regional exhaustion, differentiated international exhaustion) that distinguishes between countries,
whether de jure or de facto, would likely constitute both a GATT and a TRIPS violation244. The
exceptions recognized in the TRIPS MFN rule stated in Article 4 appear to be inapplicable to the
Eurasian proposal and context. In our view, the foregoing suggests:
1. A regime of pure international exhaustion, without any differentiation, is the most
WTO compatible exhaustion regime. Such regime will not impose state trade barriers
and would thus be in conformity with the trade liberalization objective of the GATT.
In view of Article 6 TRIPs, it will also be compatible with the approach followed by
the TRIPs agreement to protect intellectual property rights, while ensuring the
principle of free trade. Possible private restrictions that may be imposed by the trademark proprietors or by the trade-marked proprietor’s official distributors, such as
prohibitions to export agreements, collective boycotts, collusive pricing practices or
unilateral price or non-price related practices affecting parallel imports may be
subject to the competition law rules, should these apply to practices involving
intellectual property rights. It is particularly important to give reflection on the
possible use of competition law provisions in order to guarantee that the move to a
system of pure international exhaustion will not be jeopardized by commercial
strategies adopted by the trade-mark proprietors. These may take different forms that
may go from an export ban to temporary price reductions or rebates to authorized
agents, thus leading to price discrimination or promotional allowance and support to
242
House of Representatives Standing Committee on Infrastructure and Communications, Parliament of Australia,
At What Cost? IT Pricing and the Australia Tax (2013) (the so called “IT Pricing Report”) xii–xiii (recommendation
4). For a discussion of these initiatives see, Arlen Duke, The Empire will Strike Back: The Overlooked Dimension to
the Parallel Import Debate, 37 MELBOURNE UNIVERSITY L REV 585 (2014).
243
In fact, as it is noted by Arlen Duke, The Empire will Strike Back: The Overlooked Dimension to the Parallel
Import Debate, 37 MELBOURNE UNIVERSITY L REV 585, 586 (2014): “courts have accepted that contracts involving
the sale of patented goods contain an implied licence that gives the purchaser the absolute right to deal with the
goods as she thinks fit, including the right to sell the good in any country”, although it is possible with an explicit
clause in the contract to restrict the purchaser’s right to resupply the goods.
244
We define as “differentiated exhaustion” a regime that distinguishes between countries, one the basis of criteria
of differentiation, such as geographic origin or investment. Hence domestic, regional and forms of differentiated
international exhaustion based on geographic criteria or an investment protection clause, constitute forms of
differentiated exhaustion. These should be opposed to pure international exhaustion, which does not provide for
differentiated treatment on the basis of origin (directly or indirectly, such as with investment protection clauses).
67
the advertising campaigns of authorized distributors, extended warranties and interest
free terms offered only to the authorized distributors etc245. The competition law
dimension of the issue should not be overlooked. Further possibilities offered to
trade-mark owners to oppose parallel imports include the use of legal strategies, such
as bringing suits for the tort of passing off in order to prevent the misappropriation of
a trader’s reputation and goodwill, for violation of prohibitions of misleading or
deceptive conduct, breach of contract, among others, depending on the possibilities
offered by the domestic legal system246. It is also possible to develop practices that
create disincentives for parallel imports that may not fall under the prohibition of the
competition rules, such as uniform pricing throughout the vertical chain, product
differentiation (for instance through specific product packaging) and volume
discounts. Hence, despite the move towards a regime of international exhaustion,
trade-mark proprietors dispose of possibilities to restrict parallel imports.
2. Differentiated exhaustion among sectors and IPRs is well established, and among
industrial sectors may be plausible if backed by justifications that would satisfy
relevant GATT principles. The principal justifications that may be put forward rely
on Articles XX(d) and XXIV GATT and are subject to specific conditions, as
explained above. Yet, the application of Article XXIV may run into problems, as it
was also explained above, in view of the fact that Kazakhstan was obliged to adopt in
order to join the Eurasian Economic Union a regime of regional exhaustion for
trademarks, following the implementation of Annex 26 of the EEU Treaty, while
before the agreement, it had an international exhaustion regime. This transition from
an international exhaustion regime to a regional one may not be justified under
Article XXIV GATT, only if the regional economic union or customs treaty does not
create new obstacles to market access for parallel imported goods originating in third
countries. This does not seem to be the case here, as parallel imports originating from
third countries were subject to international exhaustion, before Kazakhstan joined the
EEU, while they are not subject now to exhaustion, unless the products were put on a
market covered by the EEA agreement by the trade-mark proprietor or with his
consent. A similar argument may be made in case Armenia joins the EEU, as it has
now an international exhaustion regime. Yet, one may remark that a similar problem
may arise with regard to the situation in the EU, as since the Silhouette International
Schmied v. Hartlauer Handeslsgesellschaft judgment of the CJEU, Member States of the
EU that had previously an international exhaustion regime are obliged to adopt a regional
245
For an indicative list of potential business practices to limit parallel imports, even in a regime of international
exhaustion, see S T Cavusgil and Ed Sikora, How Multinationals Can Counter Grey Market Imports 23(4)
COLUMBIA JOURNAL OF WORLD BUSINESS 75 (1988); Rachel Yang, Reza H Ahmadi and Kent B Monroe, Pricing in
Separable Channels: The Case of Parallel Imports 7 JOURNAL OF PRODUCT & BRAND MANAGEMENT 433 (1998).
246
For an interesting discussion with regard to Australia, see Arlen Duke, The Empire will Strike Back: The
Overlooked Dimension to the Parallel Import Debate, 37 MELBOURNE UNIVERSITY L REV 585 (2014).
68
exhaustion one. So far, the compatibility of the EU rule to the WTO has not been
challenged.
3. A differentiated exhaustion regime among IPR categories is arguably permissible and
established in state practice. Nonetheless, there must still be considerable attention
given to how particular IP categories (trademarks versus patent) or specific rights are
selected for national versus international exhaustion under the Eurasian proposal.
Customs arrangements or legal schemes that appear to discriminate in favor of
specific countries (even if there are a few outliers) are likely to run afoul of the
nascent WTO TRIPS jurisprudence on national treatment and MFN or of Articles
XI(1), III(4) and (I1) GATT.
69
4. Differentiated exhaustion between sectors and IPRs requires at least justification in
terms of objective justification and proportionality to make the case sound; Likewise,
for a regime of differentiated international exhaustion based on an investment
protection criterion that follows a protectionist purpose. Although there is a
possibility of justification under Article XX(d) GATT, this article requires that the
measure does not constitute a means of unjustifiable and arbitrary discrimination and
that it is not applied in a manner that constitutes a disguised restriction on
international trade. As it was shown in part III.C.1. it would be riskier for a
Contracting party to the WTO to justify a regime of domestic exhaustion or a regime
of differentiated international exhaustion based on an investment protection clause
that is motivated by protectionist considerations in favour of domestic
undertakings/industry than it would be for regimes based on regional exhaustion or
differentiated international exhaustion based on geographic criteria. As we have
previously explained, the additional possibility of justification provided by Article
XXIV GATT may not be open in this case, in view of the transition in Kazakhstan
from a regime of international exhaustion to a regime of regional exhaustion, or even
a regime of differentiated international exhaustion, both options being less tradefriendly than a system of pure international exhaustion. That said, the practice of
domestic, regional or some forms of differentiated international exhaustion
distinguishing between types of IP rights, or certain type of products (e.g. books) is
well established in a number of jurisdictions.
5. Given that a regime of international differentiated exhaustion is fairly new and raises
new questions of justified exceptions under GATT, a customs procedure that is timelimited and justified in terms of investment might serve to avoid immediate
challenges. Should this option be chosen, instead of pure international exhaustion, we
recommend that this is not based on investment protection criteria that may be
deemed to have a protectionist purpose.
6. In view of the recent Argentina – Measures Affecting the Importation of Goods WTO
panel report, “unwritten measures” may be challenged in WTO dispute settlement247.
Hence, if the EEU adopts a regime of justified regional or international exhaustion
but in practice the customs authorities implement a regime that constitutes a
differentiated exhaustion that may be found incompatible with the WTO rules, it is
possible that this enforcement practice may be challenged in the WTO, even if the
State measure in question is not contained in any law, regulation, administrative act
or official publication. The complainants need “to clearly establish, through
247
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R.
70
arguments and supporting evidence, at least: (a) that the measure is attributable to the
responding Member; and (b) its precise content”. Furthermore, “if a complainant
requests a finding about a measure "as such", it also needs to establish that the
measure has general and prospective application”248.
__________________________________________
248
Report of the Panel, Argentina – Measures Affecting the Importation of Goods, adopted on August 22, 2014,
WT/DS438/R, WT/DS444/R, WT/DS445/R, para. 6.42.
71