Exhaustion of Intellectual Property Rights

Priyanka Sardana and Vijay Sardana

WTO members believe that the protection of intellectual property can stimulate international trade and investment, and encourage transfer of technology. They think that the debate on the exhaustion of intellectual property rights, whose outcome will have important implications for international trade and investment, as well the protection of intellectual property.

The concept of exhaustion of intellectual property rights is of great importance for food processing industry because it influences the extent to which the distribution of goods protected by the intellectual property rights can be controlled. For example, sale of cotton produced with the use of Bt Cotton by the farmer can be controlled by the Bt seed company.

According to the exhaustion concept, once an intellectual property right holder has sold a product to which its intellectual property rights are attached, it cannot prohibit the subsequent resale of that product as his intellectual property rights in that product are said to have been “exhausted” by the first sale.

Under a system of national exhaustion, the rightholder (whose rights arise by virtue of that national jurisdiction) loses the right to control resale, in that particular country, of intellectual property protected goods which were sold or transferred with his consent. He will however be able to prevent importation of goods sold abroad under a different jurisdiction, even if they had been sold with his authorization (parallel imports). Under a regime of regional exhaustion such as the one applicable within the European Union, the right to control re-sale of goods sold with the consent of the rightholder is exhausted within that particular region only provided there has been substantive and extensive economic and judicial harmonization in that particular region, parallel imports within that region will in principle be allowed, while rightholders will retain protection against parallel imports from third countries.

The issue of exhaustion of intellectual property rights is controversial and has been discussed for many years in various international and regional fora. One of the most topical discussions is taking place in the European Union where the European Commission is trying to determine whether the EU’s current regime of regional exhaustion with respect to trademarks should be extended to embrace the concept of international exhaustion ie. sale in any jurisdiction with the consent of the trademark proprietor exhausts (or negates) his rights arising under any other jurisdiction.

Exhaustion of intellectual property rights in the context of international trade and investment

WTO, a strong supporter of free and fair international trade, believes that effective intellectual property protection helps encourage trade and investment, as well as economic development. It has however to consider what type of exhaustion regime will be most beneficial to trade, investment, and economic development in the long term.

One view is that international exhaustion of rights will generate competition which in turn will benefit consumers and remove artificial entry barriers from individual markets. According to this perspective, increasing globalization, mass international travel and the advent of electronic commerce will render all distinctions of a national nature obsolete. It is important to note that when the Internet continues to have a significant effect on the trend towards cross border trade in consumer goods it will create a greater consumer awareness of world-wide price discrepancies which must, over a period of time, have an equalising effect on markets and prices.

The other view is that introducing a regime of international exhaustion in the absence of a single global market will be detrimental to trade and investment, and undermine the incentive provided by intellectual property rights to invest in innovation and brand reputation. The reasons given in this article are relevant to all intellectual property rights; however, the various forms of intellectual property rights have their own particularities and should also be considered individually.

Companies who invest in innovation, or the reputation of their branded products, need to recover the costs of their investments. By restricting companies’ ability to control the marketing and distribution of their goods across markets in the current international economic context, international exhaustion reduces the commercial incentive to invest in innovation, brand reputation, and customer service. This cost recovery justifies the risks associated with the development of today’s new technologies and products and is essential for stimulating research and development required for the future. Financial returns from internationally successful products are also used to fund the development of products which may be less profitable but are beneficial to general social welfare or to the local economy or culture (e.g. local or experimental cultural works, drugs for rare diseases, new hi-yielding and disease resistant seeds etc). If the returns from internationally successful products are reduced because of the effect of parallel trading, the potential for investment in commercially riskier products may be jeopardized. In the long term, therefore, international exhaustion could discourage investment in innovation and brand reputation, with negative consequences for social and consumer welfare.

Economic studies have shown that charging different prices to different users is optimal and necessary to achieve an appropriate rate of return that reflects the collective willingness of consumers to pay for the product, and to ensure that products reach markets which would otherwise not be served. However, if these international price differences come under pressure by an international exhaustion regime, the intellectual property owner will be forced to choose other options. First, he may choose to withdraw the product from low priced markets altogether, denying access to beneficial products. Second, the right holder may be compelled to converge prices internationally to stop leakage from the lower priced market to the higher priced market and such convergence will inevitably exclude less developed regions. Example: sale of seed in the name of grain. Intellectual property holders may also reduce the investment in manufacture, supply and customer service in certain countries, further reducing consumer welfare. In the long run, a regime of international exhaustion could limit instead of encourage trade and investment and deprive consumers in certain markets of innovative products that they could have afforded under a differential pricing system.

The level of intellectual property protection still varies from country to country (e.g. the length of the term of copyright protection; the criteria for patentability etc). WTO Agreement on TRIPS is trying to bring uniformity in the IPR laws among member countries. A regime of international exhaustion of rights could lead to a convergence of the substance of intellectual property protection towards the lowest common denominator if right holders are not be able to prevent the importation of goods that do not conform to the standard of intellectual property protection required in the importing country. This could in turn lead to a partial expropriation of the intellectual property owner’s rights.

Core issues for business

The outcome of the debate on the exhaustion of rights will determine the extent to which companies will be able to control the distribution of their goods - an issue of fundamental importance to businesses - and more specifically, the resale of their goods across different markets.

This sensitive debate therefore centres on the following issues:

1. Are businesses justified in treating different territories as different markets?

2. Are there legitimate reasons for businesses to differentiate goods - in terms of pricing, technical and other specifications, and presentation - for different markets or these are just part of  opportunistic behaviour of corporates?

3. Do businesses have a legitimate interest in being able to prevent goods destined for one market from finding their way into another, or they are just tricks of the trade to exploit customers need at high profit points?

Conclusion

The issue of the exhaustion of rights is very complex. It affects businesses in different ways and to different degrees depending on their sector of activity, the market conditions in which they function, and the geographical region in which they operate.

In the absence of a true single global market, a regime of international exhaustion would on balance be more harmful than beneficial to international trade and investment, and to innovation. Businesses have a legitimate interest - for reasons relating to commercial strategy, quality control, brand reputation, safety etc - in controlling the distribution of their goods across different markets, to ensure that products tailored for one market are not sold in another. There are also strong arguments that consumers would not necessarily be better off under a regime of international exhaustion.

If this is the argument, in that case why we are going ahead with globalization of market under WTO regime.

Serious thinking is required.

 

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