Application of the Eu “Exhaustion of Rights Doctrine” To the Exercise of Intellectual Property Rights; A Critical Examination
|APPLICATION OF THE EU EXHAUSTION OF RIGHTS DOCTRINE TO THE EXERCISE OF INTELLECTUAL PROPERTY RIGHTS; A CRITICAL EXAMINATION|
|Muhammad Istkhar Advocate, Lahore|
|Published in:||Corporate Law Decisions|
|Year of Publication:||2011|
|Suggested Citation:||2011 CLD Journal Section p.21|
The exhaustion of rights is known as the first sale doctrine**** which means once the goods has been put into the market by the owner with free consent then owner cannot prevent others to be a subject to trade again. For example a trade mark owner sells his goods in the market with his consent and without any reservation; he cannot object and give any kind of instructions about the further sale of that goods because he has exhausted his right. Now the issue is how the conflict between the exercise of intellectual property rights ("IPRs") and application of European Union ("EU") competition law will be resolved while both laws purposes are totally against each other. For example intellectual property rights which create the monopoly over the intellectual products and it entitles the owner to prevent the others to exploit it. In contrast competition law demands the free movement of goods and it wants to remove the barrier among the European Economic Area ("EEA") States, which is clearly against the monopoly rights**** . In this article I will discuss critically the application in the EU exhaustion of rights doctrine to the exercise of intellectual property rights with the examples of the decisions of European Court of Justice ("ECJ").
Conflict between the exercise of intellectual property rights and EU competition law
Intellectual property means the creations of the mind: inventions, literary, artistic works, symbols, names, images, (Cit. p.22) and designs used in commerce  . It creates the monopoly over the intellectual products. For example the function of trade mark is to protect and guarantee the origin of the trade mark bearing goods**** and similarly Lord Walker said that trade mark use is a convenient shorthand expression for use of a registered trade mark for its proper purpose (that is, identifying and guaranteeing the trade origin of the goods to which it is applied)" . Intellectual property rights entitle the owner to prevent others from using it without his or her consent but others can exploit it with the consent of the owners or by giving licence**** .
In contrast, competition law demands the free movement of goods, to promote competitive market, pluralism, welfare of the consumer**** and cheap goods should be available in the market of the EEA which is clearly against the monopoly rights. Similarly Jeremy Phillips expressed it elegantly, "in their absolute forms, competition law demands competition while intellectual property prevents it. The two are bound together in conflict, whether in the courtroom or on the supermarket shelf  . This conflict has been resolved by the exhaustion of rights doctrine.
Exhaustion of right doctrine
The concept of exhaustion of rights doctrine is a right of first sale after using it the owner will exhaust his right to control subsequent dealings. For example, once the owner of a copyright, patent or trademark has first sold a copy of his protected product, he loses his control over the further vicissitudes of this copy on the market. The principle prevents the proprietor from using intellectual property rights to interfere with any subsequent commercialisation of the goods in question. The exhaustion of rights doctrine was originated from decisions of the German Reichsgericht**** . This concept is applicable at national level, regional level for example EEA and international level. Hereinafter I will discuss the application of exhaustion of right doctrine in EEA.
There are conflict between the intellectual property purpose and European Community law: one issue is community law affects existence of right or exercise of right of the intellectual property rights, this matter has been solved by the ECJ in Deutsche Grammophon case**** the court divided intellectual property rights into two categories: one existence of right and other is exercise of right, first is (Cit. p.23) subject of the national law and later is a matter for community law which is not affecting the intellectual property rights existence. Further community law is providing the balance between the intellectual property rights monopoly and competition law under the Articles 28 and 30**** which allow that IPRs holders to protect the specific subject-matter of the IPRs**** . There are conflicts between the exercise of intellectual property rights and the purpose of the EU Community Law, therefore the exhaustion of right doctrine is resolving the issues. The examples are given below:
1- Trade Mark and Exhaustion of right doctrine
Trademarks protect the goodwill of trade mark bearing goods, to inform the customers about the origin and the specific kind of goods which they want, its owner has also right to oppose the infringer who is getting the benefits illegally, he has not only the right to exploit but also the right to protect the status and reputation of the goods**** . A writer says that the trade mark owner has right "to use includes affixing the sign to the goods, their packing, importing them under the sign, offering or putting the goods under the registered sign" and he has a right to prevent others from the infringement.
However the European Court of Justice has declared many rules in its decision that where the owner can invoke his IPRs to prevent others, where his right is exhausted and he cannot prevent others. As in Centrafarm v. Winthrop, 1974 the court decided the case under Article 7(1) of Trade Mark Directive 1989 that once the goods has been put into market within one Member State of the Community by the trade mark owner or with his consent, he cannot oppose its further commercialisation in other States of the Community**** . Similarly the Court of Justice gave the opinion in the case of Levi Strauss  that if trade mark proprietor remains silent or he does not communicate any warning to the market in EEA or he transfers the ownership of the goods without imposing any contractual reservations then that will be considered his implied consent and he cannot oppose**** . Further in Consten and Grunding case**, in this case, Grunding was a German manufacturer who appointed the Consten as its sole distributor in France. He encouraged it to develop a market for Grunding products and they were also agree that Grunding will restrain the other exporter and distributors to export the goods of it to (Cit. p.24) France and Consten was allowed to register the trade mark "Gint" in France. This trade mark was appeared on some products alongside the "Grunding" mark. According to the French law Consten tried to prevent the import of goods bearing the "Gint" trade mark; even those goods had been put into the market in other Member States by Grunding or with its consent. The ECJ held that Consten has right to register the "Gint" mark which is protected under the French law but it cannot prevent the parallel imports because the Grunding itself goods has been put on market in other Member States** . When trade mark owner sells his goods in the market or permits to somebody to use his trade mark, he has exploited his right or he has exhausted his right, other person can sell that product anywhere without the fear of IPRs violation**** . Once the owner has lawfully marketed his goods in another Member States with his free consent at that time he has exhausted his right then he cannot stop any person to sell those goods**** .
There are a few grounds under that the trade mark owner can oppose the further marketing of the trademarked goods and his IPRs will not be exhausted, for example: Where**** :
The condition of the goods has been changed or impaired by the parallel importers**** .
The trade mark has been changed by the parallel importer to wrongful gain a commercial advantage and wrongful loss of the trademark owner.
The goods have been advertised in this way that seriously damages the reputation of the trade mark.
The goods have been repackaged in this ways which create confusion for the consumers.
The court held that the proprietor has right under first sentence of the Article 30 of TM Directive 89/104, that he has right to protect the subject-matter of the trade mark, to prevent illegally interference of the third parties and any use of trade mark which is likely to impair the guarantee of origin**** .
Trade mark owner can prevent others under the Article 7(2) when he has legitimate reasons otherwise he has no right to stop others when he has exploited his right with free consent.
(Cit. p.25) 2- Patent and Exhaustion of right doctrine
A patent is an exclusive right granted for an invention, it is not just reward but encouragement for the invention and to ensure that inventors disclose information about their inventions**** . Patent is also demanding the exclusivity as the other intellectual property rights demand for the specific time and community law is not affecting its existence but it will intervene when the patent is exercised at the international level**** . Similarly in Centrafarm v. Sterling Drug**** the court defined that a patent is a guarantee that the patentee has the exclusive right to use an invention with a view to manufacture industrial products and putting them in the market and to oppose the infringements. Further the court says that "once the product is marketed in another Member State, either by the patentee itself or with its consent, the patentee's rights are exhausted" . As in above said case**** Sterling Drug has patent for the drug Negram in Member States, including the UK and the Netherlands. Centrafarm a well-known parallel importer, bought large quantities of Negram from UK and imported them into the Netherlands and sold them with profit. Sterling Drug filed suit in court alleging an infringement of its patent against the Centrafarm. It is held that Sterling Drug has exhausted its rights by putting Negram onto the market in the UK therefore could not invoke its patent in Netherland to keep Centrafarm's imports out of the country. The court has declared a few exceptions where the patentee can prevent others where:
The original proprietors of the patent were legally and economically independent, where the product came from the Member State where it was not patentable and it had been manufactured by the third parties without the consent of the patentee**** .
The compulsory licence has been issued**** .
The court said that companies can invoke their patent to keep out parallel imports from countries where the goods were not patentable during the transitional period**** .
The condition of goods is changed or impaired after that they have been put on the market**** .
(Cit. p.26) 3- Repackaging issue and exhaustion of right doctrine
Generally parallel traders import or export the goods, mostly they repackaging of the goods, use their trade mark and put goods into the market. It has been invoked sometimes by the owners of the trade mark for example Hoffmann-La Roche invoked against the Centrafarm: Sometimes the court permits trade mark owner for the protection of intellectual property rights to prevent illegally interference of the others if he has the reasonable grounds. The court has also refused and decided that the owner has exhausted his right. The court has given many rules in the different cases, about the repackaging goods, are described below:
The parallel importer should give the prior notice to the trade mark owner about the repackaging of goods**** and notice should be given within fifteen days**** .
Both parties, trade mark owner and traders, should carefully and sincerely effort to respect each other's legitimate interests**** .
The trader should state clearly on the goods who is repackaging and who is manufacturer, that printing should be clear so that a normal eyesight and exercising normal degree of the attentiveness, a person will be able to read it**** .
A few points are discussed in the Bristol-Myers Squibb case**** :
The trader should send a specimen of the repackaged goods to the trade mark owner before it goes to sale.
A few examples have been given by the court which would not adversely affect the content of a product and exhaustion of right doctrine will be applicable:
(1) The replacement of one set of external packaging with another.
(2) Attaching self-stick labels to flasks or inhalers.
(3) Adding new user instructions or information in the language of the Member States of importations, or
(Cit. p.27) (4) Inserting into the packaging an extra article, such as a spray, from a source other than the trade mark owner.
It gives a few examples which can affect the original condition of the product and trade mark owner can invoke his right for preventing the illegal interference:
(1) Any additional of new set of user instructions or information which omit certain important information concerning the nature, effect, composition, use, or storage of the product.
(2) The inclusion of an extra article into the packaging which did not comply with the method of use.
4- Copyright and exhaustion of right doctrine
Copyright is a literary and artistic work which is totally different than others intellectual property rights. It has two rights: one is moral and other is commercial, which has commercially right of protection as the other intellectual property rights have as patent and trademark**** . In one case**** the court has declared the copyright specific subject-matter is: 'the exclusive rights of reproduction and of performance'. In the case of GEMA. European Court of Justice decided that author directly or indirectly (through his publisher) can freely choose the place of circulation, after the distribution he cannot prevent the parallel import because he has exhausted his right. Before the distribution author has open right to distribute or not but after the distribution he should face the consequences**** .
The intellectual property rights demand the monopoly over the intellectual products and it entitles the owner to prevent others to exploit it. In contrast the European Union competition law demands the free movement of goods in the European Economic Area. For resolving the conflict the courts have described that the intellectual property has dichotomy: one is existence of right and second is exercise of right, the competition law is only applicable to exercise of right, it is not affecting the existence of right which is governed under the national law. The second solution is to settle the conflict between the intellectual property rights and EU competition law is the exhaustion of rights doctrine which is a right of first sale and after disposal of the right the owner (Cit. p.28) has no right to object or interfere of subsequent commercial dealing. Under the exhaustion of rights doctrine the courts have stopped interferences of the first owner in many cases which are mentioned here in above. But the owner of intellectual property rights can invoke his right where he has legitimate grounds to prevent the infringement.
 R. Trogh, 'The International Exhaustion of Trade Mark Rights after Silhouette: the End of Parallel Imports?' (2002), at:
http://www.jur.lu.se / Internet / English / essay / Masterth.nsf / 0 / 4715186838FACCD2C 1256 BC800 68 C694/ $file / xsmall.pdf/ OpenElement
 T.Hart & L. Fazzani, Intellectual Property Law, 4th edn (Palgave Law Masters, 2006), Pp. 274-275.
 P. J. Yap, 'Case Comment: Essential function of a trade mark: from BMW to 02' (2009) E.1.P.R., 31(2), 81-87.
 R. v Johnstone (Robert Alexander)  UKHL 28;  1 W.L.R. 1736 at  It is taken from: P. J. Yap, 'Case Comment: Essential function of a trade mark: from BMW to 02' (2009) E.1.P.R., 31(2), 81 -87.
 T.Hart & L. Fazzani, Intellectual Property Law, 4th edn (Palgave Law Masters, 2006), P. 275.
 G. Monti, 'EC Competition Law' (Cambridge University Press, 2007) P 21.
 J. Phillips, Analysis: Pariah, Piranha or Panther, 'The New View of Intellectual Property in Europe' (1998) I.P.Q. 107.
 R.G. 'For trademarks compare', February 28, 1902, RGZ 50, 229 (Kolnisch Wasser) and R.G.,
May 2, 1902, 51, RGZ 263 (Mariani). It is taken from: R. Trogh, 'The International Exhaustion of Trade Mark Rights after Silhouette: the End of Parallel Imports?' (2002), at: http://www,jur.lu.se/Internet/english/essav/Masterth.nsf/0/ 4715186838FACCD2C1256BC80068C694 / $file / xsmall .pdf / Open Element
 Case-78/70, 'Deutsche Grammophon v. Metro'  ECR 487.
 European Union Consolidated Versions of the Treaty on European Union and of the Treaty Establishing the European Community (2002) (2002/C 325/01), available at: http://www.ecl.nl/.
 C. Barnard, The Substantive Law of the EU 4th edn. (Oxford University Press, 2007), P. 176.
 Ibid, P.183
 N. Gross & L. Harrold, 'Fighting for Pharmaceutical Profits' (2002) E.LP.R. Issue 10. P- 499
(Cit. p.29)  "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."
 G.T.Petursson & P.Dyrberg, 'What is consent? A note on Davidoff and Levi Strauss' (2002) European Law Review. 464.
 Establissements Consten S.A. and Grunding Verkaufs GmbH v. EEC Commission European Court of Justice, 1966, available at: hstp://wwwjstor.org/pas/838380.
 N.J.Wilkof & D.Burkitt, Trade Mark Licensing 2nd edn (Sweet & Maxwell, 2005), P.300.
 J.Phillips, Trade Mark Law a Practical Anatomy (Oxford University Press, 2003), P. 274.
 C-10/89-SA CNL-SUCAL NV v. HAG GF AG (HAG II)  ECR 1-3711.
 C. Barnard, The Substantive Law of the EU 4th edn (Oxford University Press, 2007), pp 192-193.
 Article 7 (2) of Directive 89/104  OJ L40/1
 Case-102/77- Hoffmann-La Roche v.Centrafarm,  ECR 1139
 Directive 89/104  OJ L40/1
 C. Barnard, The Substantive Law of the EU 4th edn (Oxford University Press, 2007), p 179.
 Case -35/87- Thetford Corporation v. Fiamma SpA,  ECR 3585.
 Case -15/74-  ECR 1147
 Case -15/74- Centrafarm v. Sterling Drug,  ECR 1147.
 Case-15/74- Centrafarm v. Sterling Drug,  ECR 1147.
 Case-19/84- Pharmon v. Hoechst,  ECR 2281.
 C 267 & 268/95 -Merck v.Primecrown (Merck II),  ECR 1-6285.
 F. C. Urlesberger, 'Legitimate Reasons' for the proprietor of a Trade Mark
Registered in the EU to oppose Further Dealing in the Goods after they have been put on the Market for the First Time' (1999) 36 CML Rev. 1195.
 Case- 102/77-Hoffmann-la Roche & Co. AG and Hoffmann-la Roche AG v Centrafarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse mbH,  ECR 1139.
(Cit. p.30)  Case C-143/00- Boehringer Ingelheim KG v. Swingward Ltd. and Dowelhurst Ltd.  ECR 1-3759
 Case-102/77-Hoffmann-la Roche & Co. AG and Hoffmann-la Roche AG v Centrefarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse mbH,  ECR 1139.
 Case - 427/93 Bristol-Myers Squibb v Paranova, 11 July 1996 A/S European Court reports 1-03457.
 C. Barnard, The Substantive Law of the EU 4th edn. (Oxford University Press, 2007), p. 204.
 Case-55/80- Musik-Vertrieb v. GEMA,  ECR 147
 Case-187/80-Merck v. Stephar (Merck .I),  ECR 2063.