The patent right allows the right holder to restrict manufacture, use, sell or distribute it by any other way without the permission of the owner. The ubiquitous nature of the right enables it to exist independent of the physical product itself in each of the product at any given time. Hence a single patent right can effectively restrict the use or commercialisation of the product at any given time even if the patent is limited to a particular component of the product. This is because the patent can control the entire supply chain of the product at any given time since they exist in different markets at the same time, thus providing significant market power in the hands of the patent holder.
Given the enormous power in the hands of the patent owner to control the use, sell or any form of distribution of the product, the profit motive can entail possibility of misuse or abuse of such power. For example, a patent holder ‘A’, licenses the patent to ‘B’ to manufacture it in country ‘Yellow’ and to ‘C’ in country ‘Blue’ against payment of negotiated royalties. B and C respectively manufactures the products in a legitimate manner under the patent licenses and tries to sell it in the international market. But as soon as B and C tries to sell it in a different market e.g. in countries ‘Green’, ‘Red’, and others, A can stop B and C by exercising his patent rights at any given time simultaneously, unless controlled through checks and balance measures. Thus, the ubiquitous nature of the patent enables A to restrict competition at multiple places simultaneously and in this case, even after B and C pays royalty in lieu of the innovator’s lead time. One needs to note that the royalty received is for the innovation introduced and not for profiteering through different market allocation.
For this reason, it is important to address ubiquity in patents in an appropriate manner so that it does not restrict free movement of goods in the market. To this effect, the doctrine of exhaustion (Erschöpfung) was developed and introduced by the German professor Kohler in the 19th Century and eventually adopted by courts and legislation, inherently limiting such powers. However at the time of propounding the concept, he did not spell out the geographical scope of exhaustion leading to some contradicting interpretations.52
Patent exhaustion or non-exhaustion developed in different jurisdictions and got established with certain variations. In the United Kingdom (UK), the practice was not based on general exhaustion of the iprs but on contractual agreement between the holder of the iprs and the buyer as to the after-sale treatment of the ip in the product. In absence of any contractual restriction, an ‘Implied License’ to the buyer over the ip in the product would result. In Germany, the country of origin of the doctrine of exhaustion, and in other European countries, it developed as ‘Exhaustion’ of the iprs. It was eventually adopted also by the European Union. In the United States, the concept emerged as the ‘First Sale’ doctrine.
2.1 Doctrine of Implied License
The doctrine of implied license as practised in the UK was later exported to different commonwealth countries through the colonization route. It was also adopted by other countries, however, with the passage of time some of these countries changed their exhaustion or non-exhaustion regime through legislative amendments or judicial interpretation. As per the doctrine, once an iprs product is sold or distributed legally in any manner, it is implied that the iprs embedded in the product is licensed for life of the patent to the buyer along with the transfer of the right to the physical property. As such, if the holder wants to retain control over the iprs in that product, the holder needs to put specific notice on the product informing the buyer that iprs has not been licensed or have a contractual agreement specifically restricting the license of the patented product. The doctrine flows from the decision of the English High Court in Betts v. Willimott57 and further elaborated in National Phonograph Co. of Australia v. Menck58 where it allowed the patent holder to control further distribution only if expressly notified to the purchaser.59
In any situation where there is no contractual restriction by the patent holder determining further sale of the patented product, the sale of the physical product would imply that the ip in the product is automatically licensed to the purchaser. This means, if the patent holder does not put a written notice, restraining further sale of the patented product or determining the market, it would be implied that the patent holder does not intend to restrict further distribution of the patented product. It is interesting to note that in jurisdictions where the doctrine of implied license is practiced, contractual law supersedes iprs laws. In some jurisdictions, if there is a statutory provision for specific exhaustion of rights, any restriction imposed via contracts based on
2.2 Doctrine of First Sale
As per the first sale doctrine, once the patent owner sells the patented product, s/he cannot exercise the patent rights to restrict others from using, selling or distributing the patented product further down the chain. In other words, with the first unrestricted sale of the patented product, the patent owner exhausts the market control over distribution of the original product through patent rights. This means that the patent holder can enjoy from the patented product including selling it, restrain unauthorised manufacturing of it, or even destroy it, but cannot enforce the patent to restrain others from further selling or distributing it.60
An important criterion of the patent system is the enabling disclosure that helps the technological innovation to be available to the public for further innovation. In order to obtain a patent grant, the applicant needs to disclose details of the patent sufficiently enough so that a person skilled in the art can perform the patented technology. The idea is to allow a person to build on the invention from the description of the patent and it’s working, as provided in the patent without application of further inventive step.61 It is important to note that the enabling disclosure enables a person to understand the patented technology and how it works. However, it does not allow any third party to work the patent without the patentee’s authorisation. As such, disclosure does not in any way exhaust the rights held by the patentee or in case of an implied license it does not nullify the rights to restrain others from manufacturing. In exhaustion of patents or in case of implied license only the rights of distribution exhaust or is licensed.
An important logic to have an exclusivity-based incentive system is that it can provide the inventor, the patent holder, with a legitimate reward based balanced legal regime. The patent system provides with a time-bound exclusivity
2.3 Exhaustion of Patent Rights
The doctrine of ‘Exhaustion’ is based on the principle that once the patent owner uses the patented product or places it in the market by sale or any other means s/he loses the right to restrict the purchaser from further use or sale of the iprs embedded product, thus the patent right exhausts. The main intention of the exhaustion principle is to restrict the control of markets and of collection of multiple rewards by enforcing the patents more than once through market segregation. Fundamentally, once the patented product is used or sold, it already collects the financial reward by way of royalty / license fees and is converted into an economically realisable, marketable commodity. Allowing further exercise of the same patent would be essentially against the principle of free movement of goods. However, it is important to note that exhaustion only applies to original goods. ip rights continue to be effective in relation to counterfeits and items produced under violation of exclusive rights. This is of particular importance in trademark and copyright, but also applies to patented products.
From purely iprs perspective, there can be two different modes of exhaustion, ‘National Exhaustion’ and ‘International Exhaustion’. A third form of exhaustion, namely ‘Regional Exhaustion’, was introduced by the European Court of Justice (ecj) through its interpretations and judgements and later got codified.62 The ecj harmonized exhaustion regime within Europe to facilitate trade between the members resulting in the regional exhaustion, the third form of exhaustion, a hybrid of national and international exhaustion.
National Exhaustion – ip rights cannot be used to restrict the marketing of products that have been placed on the national market by or with the consent of the ip right holder within that national market. However, the ip right holder can prevent parallel imports of his product from a foreign country. Regional Exhaustion – ip rights cannot be used to prevent the marketing of goods anywhere in a certain region (e.g. A free trade zone or a customs union, such as the ec) once the goods have been put on the market somewhere in that region by or with the consent of the ip right holder. The ip right holder can, however, prevent the importation of these goods from outside the region in question.
International Exhaustion – ip rights cannot be used to prevent the marketing of a good by other persons anywhere in the world once his good has been placed on the market by or with the consent of the right holder.63
From the above explanation in all the three cases of exhaustion, a right holder exhausts her/his iprs once s/he puts the ip protected goods in the market. The difference in the three modes of exhaustion is that while in national exhaustion the right exhausts only to the extent when the goods are placed in the national domestic market. In regional exhaustion the geographical boundary extends to not just the national domestic market but within the whole region, a free trade area or a customs union (cu). In case of international exhaustion, the right owner relinquishes his right on putting his good on any market irrespective of whether it is domestic or the international market. The argument that, as patent laws of different countries vary considerably and are held by unconnected owners, uniform exhaustion might distort the market. Such argument stands outdated with the Agreement on Trade Related aspects of Intellectual Property Rights (trips) of the World Trade Organisation (wto) being operational. The trips has brought in a minimum level of protection that does not hinder adoption of a single form of exhaustion for the wto members, in fact such adoption would facilitate multilateral trade.
It has been highlighted that patent holders often sell their products at different prices in different markets. Prices also differ in different markets due to low manufacturing costs and other comparative advantages when produced
Reichgericht in Zivilsachen (rgz) 50, 362 – “Duotal”, cited by Heath Christopher, “Legal Concepts of Exhaustion and Parallel Imports”, in Heath Christopher (ed.), “Parallel Imports in Asia”, Kluwer Law International, 2004. Also see, Cottier Thomas, “Parallel Trade and Exhaustion of Intellectual Property in wto Law Revisited”, in Ruse Khan Grosse Henning & Metzger Axel (eds.), “Intellectual Property Ordering Beyond Borders”, Cambridge University Press, pg. 192 (189–232), 2022.
Cottier Thomas and Stucki Marc, “Conflit entre importations paralléle et propriéte intellectuelle? Actes du colloque de Lausanne, comparativa no. 60” translated by Meitinger Ingo as, “Parallel Imports in Patents, Copyrights and Industrial Design Law – The Scope of European and International Public Law”, and reprinted in The International Intellectual Property System Commentary and Materials –Part 1, Kluwer Law International, pg. 606, 1999.
Ibid at 50. pg. 58.
Ganslandt Mattias, Maskus Keith, “Intellectual Property Rights, Parallel Imports and Strategic Behaviour”, Journal of Economic Law, pg. 1, 2, 2007.
Meitinger Ingo, “Parallel Imports into Switzerland – A Spot of Global Free Trade amidst Fortress Europe?” in Cottier Thomas and Mavroidis Petros (eds.), “Intellectual Property: Trade, Competition, and Sustainable Development”, Michigan University Press, pg. 21, 219, 2003.
Betts v. Willimott, [1871] 6 l.r.Ch. 239, 245.
National Phonograph Co. of Australia v. Menck [1911] 28 r.p.c. 229.
Heath Christopher, “Patent Exhaustion rules and self-replacing technologies”, in Calboli Irene and Edward Lee (eds.), “Research handbook on Intellectual Property Exhaustion and Parallel Imports”, Edward Elgar Publishing Ltd., pg. 291, (289–307), 2016.
Haedicke Maximilian and Timman Henrik, “Patent Law A handbook on European and German Patent law”, c.h. Beck, pg. 22, para 74, 2014.
Ibid at 50, pg. 225, 2003.
Slotboom Marco, “The Exhaustion of Intellectual Property Rights, Different Approaches in ec and wto Law”, 6 The Journal of World Intellectual Property, pg. 425, 426, 2003.
Merwe Van der L. A., “The Exhaustion of Rights in Patent Law with specific emphasis on the issue of parallel importation”, 3 Intellectual Property Quarterly, pg. 288, 2000.