7.1 Preamble to the gatt 1994

Fundamentally, iprs are not just an enforcement tool in isolation, it should be carefully treated in comprehensive terms of multilateral trade so that it does not become a barrier to trade.⁴³³ The question arises as to whether implied restrictions to nt against the spirit of the preamble can result in a violation. It is also a legitimate argument that conceptually, from the perspective of the gatt and trips, protection of iprs come along with the goal of enhancing trade.⁴³⁴ On analysing it from the perspective of the exhaustion issue, it would obviously seem that in a setting where trips was established to facilitate multilateral trade, the mode of exhaustion should be in line removing trade barriers.⁴³⁵ As such, considering the trade-enhancing nature of international exhaustion, it would be the most appropriate mode of exhaustion in line with the Preamble to the gatt 1994. We now move to the next part of the chapter to find a more detailed analysis of Article i of gatt 1994 to understand the relationship between gatt and patent exhaustion.

7.2 Article i – Most Favoured Nation

The mfn treatment covered in Article i of gatt is one of the foundations of the wto regulations. Under Article i, a wto Member is required to accord the mfn given by it for ‘like products’ to one country, unconditionally to all other wto Members at any given time, in terms of trade tariffs and other regulatory treatment including internal taxes, charges and regulations.⁴³⁶ The mfn treatment would thus require a wto Member to provide same trade concession that it provides any other nation.⁴³⁷ Thus, in case of any discriminatory treatment to imports of like products from a wto Member country vis-à-vis imports from another country, it will be a clear violation. Here it is important to note that ‘like product’ does not necessarily mean same product, hence it might be identical or of different variety, but still could qualify as like product. In absence of a clear definition of like product, it is to be considered products that show identical or similar characteristics as was held by the ab in European Communities – Measures affecting asbestos and asbestos-containing products (ec Asbestos).⁴³⁸

In gatt 1947, Article i was interpreted in a broad manner to cover not just tariffs, but any measure that may affect trade between gatt members and include both positive and negative discrimination. A reference may be drawn to the US – Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil (US – mfn Footwear) case.⁴³⁹ mfn is based on equal treatment of all wto members. Principally to promote non-discrimination in international trade between sovereign equals drawing from Article 2(1) of the United Nations Charter.⁴⁴⁰ But, the fundamental reason behind mfn treatment in trade agreements is comparative advantage. So that the most efficient producer can produce and engage in trade to supply the product while the other members benefit from welfare-enhancing trade.

mfn enforced through the multilateral agreement enables ex-ante removal of trade distortions since it restricts giving trade concessions to one over another trade partner.⁴⁴¹ As such any measure that might be trade-distorting would be considered a violation of Article i, including non-fiscal border measures. Here it will be relevant to refer to the European Communities – Regime for the Importation, Sale and Distribution of Bananas (ec Bananas iii) case.⁴⁴² In ec Bananas iii the ab held that if any party has less onerous import requirements, it is an advantageous administrative treatment over the others. In this case, it was found that discrimination was in licensing procedure, where some operators from particular origin were enjoying less complicated licensing procedures along with other in-quota discrimination in tariffs for bananas originating from certain other countries, thus violating Article i.⁴⁴³

The importance of mfn as one of the foundational pillars of the wto trading regime is well established and remains largely unchallenged especially in its treatment of like products. In European Communities – Measures Prohibiting the Importation and Marketing of Seal Products (ec – Seals) case, Canada and Norway challenged EU regulations that used tbt to ban importation and marketing of seal products from their countries while EU raised the issue of morality in killing of seals. It is interesting to note that there were certain seal products that were exempted from the ban. The ab confirmed the panel finding that there was violation of Article i and stressed on equal opportunity among all wto Members for all like products imported.⁴⁴⁴ In ec – Seals earlier the panel had found that while certain seal products originating from Greenland would qualify for the EU market under the allowed exceptions, a large majority from Canada and Norway would not have met such exceptions. Hence although the issue of likeness seemed apparently origin-neutral, it was discriminatory, establishing de-facto discrimination which was held as a violation of Article i.⁴⁴⁵ The decisive question that identified the discrimination as highlighted by the panel and confirmed by the ab was, if it was immoral to allow products from seal hunt, how can such immorality be exempted for like products from certain geographical region.⁴⁴⁶

Let us now apply the above ab findings on ‘like products’ to determine whether a patent exhaustion mode can be held in compliance or violative of Article i. Hypothetically, let us consider certain patented product that has been manufactured under the same technology, exhibiting same features in two different countries. One, manufactured in the country and another imported from another, thus two originating in two wto Member countries. Following national or regional exhaustion while treating the import of the patented product and restricting it through enforcement of patent would mean that like products would be discriminated against and thus a violation of Article i of gatt.

In such scenario, if international exhaustion is applied on the imported patented products irrespective of where it is originating, there would not be any discrimination. One might argue that the discrimination is not against another member country, but the patented product licensed to be manufactured in another country. Here the author would draw reference to ec – Seals case and argue that irrespective of the restraint being imposed on the licensed product, given that manufacturing under license had been opted due to comparative advantage, exports from the wto member where the licensed product originated, in effect has been discriminated. Following international exhaustion and enabling parallel imports on the other hand would be in true essence, adhering to mfn where iprs are not used as regulatory measures to discriminate like products.

7.3 Article iii – National Treatment

‘National Treatment’ is the other fundamental requirement existing since gatt 1947 that forms the foundational pillar of the wto trading system. In essence, under nt, all imported good, service, a service provider, an investor, an ip, a person (both juridical and natural) owning ip or any other property rights should be treated same as their national or domestic equivalent.⁴⁴⁷ In other words, it prohibits all types of discrimination between imports and domestic products and thus triggered lex lata i.e. by the jurisdiction of the importing wto Member.⁴⁴⁸

While different Agreements under the wto regulatory system addresses different aspects, gatt addresses imports of goods and like mfn this too is based on the principle of non-discrimination and takes effect when the import enters the market of the importing country. The history of nt dates to the foundation of Bretton Woods system where in the proposed International Trade Organisation, Article 18 of the Havana Charter covered, ‘National Treatment on Internal Taxation and Regulation’ which laid the way to a more revised version in the form of Article iii of gatt 1947.⁴⁴⁹

nt in case of iprs under the trips Agreement has been elaborated in previous chapter, the intention here is to analyse nt under gatt 1994 to draw a possible interpretation of how that might affect patent exhaustion. As such, nt in the other Agreements covered by the wto regulatory system is not addressed in this book. Considering the regulatory span of Article iii, we consider exclusively imports of legitimate products and not illicit imports. Hence in terms of patent protected products, imports of counterfeits or unauthorised copies of the patented products are not considered. Only those which have been manufactured legally outside a wto member country are considered. Hence, this would apply to the border measures that impact the products on crossing the importing country’s border in a discriminatory manner based on its origin.

Historically, it is important to consider how decisions of national adjudicatory bodies would be considered under gatt, given that wto dispute settlement mechanism does not consider orders of domestic courts passed in national jurisdictions of wto members. A reference may be made to the gatt 1947 regulations where certain elements of Section 337 of the US Patent Act at that time were held inconsistent with gatt nt mandate by a dispute settlement panel in 1989. In this case certain provisions of Section 337 of the US Patent Act operative at that time, did not allow imported products the benefit of patent invalidity defence in an infringement while the same was available for domestically manufactured products. The gatt panel found Section 337 to be clearly violating US commitment to nt and subsequently the decision Section 337 was appropriately amended.⁴⁵⁰ nt requirements under the gatt has not changed, hence it must be assessed how it is applicable now while drawing an inference as to its applicability and treatment of patent exhaustion.

Assessment of whether the imported product is a like product is crucial hence in absence of clear definition, wto jurisprudence laid down by different panels and the ab becomes important.⁴⁵²

nt under Article iii of gatt mandates wto Members to treat goods imported from other Members as domestically produced goods the same way by providing equal conditions for imported products vis-à-vis domestic products.⁴⁵³ This issue of non-discrimination has been lucidly elaborated by ab in one of its initial decisions, Japan – Alcoholic Beverages.⁴⁵⁴ In Japan – Alcoholic Beverages case ab confirmed the findings of the panel that physical characteristics, consumer uses and tariff classification would determine ‘likeness’ of the imported products with that produced domestically, dumping the ‘Aim and effects test’ propounded in the gatt 1947 era, United States – Measures affecting Alcoholic and Malt Beverages (US – Beverages),⁴⁵⁵ as baseless and erroneous. However, the rejection of the aims and effect approach without even the slightest consideration in any condition, perhaps to avoid any ‘intrusive inquiries into the inner workings of the decision-making procedures in the heterogenous membership’, has raised concerns too.⁴⁵⁶

The crucial issue of like products was dealt with by the ab in ec – Asbestos.⁴⁵⁷ The assessment of whether the imported products and the domestic products are like products in the true sense of Article iii:4 has been considered from their competitiveness. In other words, whether they directly competed in the market and whether regulatory measures were taken to restrain such competition. If it was established that in direct competition and the measures adopted by the importing member state resulted in the imported like product facing less favourable treatment than that of the domestic product, there was violation of Article iii. Hence, Article iii applies to the measures and not just inherently limited to imports. In ec – Asbestos, the ab interpreted Article iii to determine likeness and treatment accorded to the imports by the determination of the nature and extent of the competitive relationship of the two like products.⁴⁵⁸ The ab held that if the regulations in the importing wto Member are typically adopted to distinguish the imports by according it less favourable treatment because the market would not make such distinction, violation is established.⁴⁵⁹

Similarly in India – Measures affecting the Automotive Sector (India – Autos) case, which was initiated during a period when India had severe balance of payment (bop) problems, Article iii applied to the measures although they were not inherent to imports.⁴⁶⁰ To address its bop problems, India adopted broad import licensing regime for ‘completely knocked down’ (ckd) and ‘semi-knocked down’ (skd) automobiles and components through indirect measures. Passenger car manufacturers in India could obtain an import license for importing ckd and skd units conditional to them joining in a Memorandum of Understanding that had mandatory local manufacturing requirement as well as local content sourcing and time-bound minimum investment requirements, etc. This was challenged by ec and the US and the measures were held to be discriminatory and protectionist although imports as such were not discriminated.⁴⁶¹

Even in more recent decisions like, India – Certain Measures Relating to Solar Cells and Solar Modules (India Solar Cells),⁴⁶² the ab persistently held that the nt obligation applied to discriminatory measures, although the product discriminated against was not directly competing with the products purchased. In this case under National Solar Mission of the Government of India, guaranteed price contracts were offered to government agencies conditional to local content mandate, i.e. used Indian made solar cells and modules.⁴⁶³ Hence Article iii applied to the measures although they were not inherent to imports if the relationship between the two could be established.

From the series of gatt jurisprudence right from pre-wto to recent times, analysed above, it has been clearly established that Article iii mandates non-discrimination between imports of like products that are competitive with their domestic alternates. Further it is not just the imports but also applied to the measures that intend to discriminate between the two. There cannot be any doubt as to the likeness of products manufactured under the same patented technology whether it is manufactured in one country or two or more. In such scenario if a wto Member follows national or regional exhaustion of patents it will violate its nt obligation. This is because it uses domestic patent enforcement measures on parallel imports of products manufactured under the same patent to restrain direct competition with the products manufactured domestically, clearly violating Article iii. Whereas in case the importing country adopts international exhaustion, patent infringement measures cannot be used either as border measure at the time of imports nor after the imports reach the market hence would be in right spirit of Article iii.

7.4 Article xx – General Exceptions

There are number of exceptions that might apply to mfn and nt obligations of which, Article xx of gatt specifically provides for exceptions for measures that would otherwise be inconsistent with gatt obligations of a wto Member. ip rights while would likely be interpreted as justified trade barriers, it would only be so if they are consistent and qualifies in the necessity test under Article xx (d) and the non-discrimination requirement under the chapeau to Article xx gatt. Further, while interpreting exhaustion under this exceptions clause, one would need to assess the complexity involved assessing different factors.⁴⁶⁴ Different cases decided by different panels and ab decisions interpret whether an exception would apply to mfn and nt obligations. gatt Article xx the ‘General Exception’ and Article xxiv the exception for ftas layout the circumstances where such exceptions would or would not apply.

As always, the analysis of whether a state acts in a wto-incompatible manner only starts with the question whether it was incompatible with the pertinent obligations under a wto agreement. As a second step, justifications for the prima facie illegal act have to be explored.⁴⁶⁵

The intention in this chapter is to analyse how the general exceptions have been applied by parties and interpreted by different panels and the ab to draw an inference as to how that might apply hypothetically in case of patent exhaustion driven restriction on parallel importation came before the wto dsb.

One would observe that Article xx exemption is allowed as a defence to adopting measures inconsistent with gatt on assessment of three factors; i) the objective or value of the challenged measure, ii) how the measure is expected to meet the objective and iii) the impact of such measure on trade between the wto Members. Based on this, assessment is to be made whether such measure was necessary and if so, whether possible alternatives that are less trade restrictive could have been adopted.⁴⁶⁷ As we elaborate further in this section of the chapter it will be discussed how the Article xx defence has been allowed or denied through interpretation of different panels and the ab in different cases.

Article xx (a) exempts measures taken by a wto Member that would otherwise be considered trade restrictive and discriminatory, if it was established to be taken to protect public morals. For a member to argue in favour of some trade restrictive measure to protect public morals, the member must establish that it is designed to protect public morals and such measure is necessary to accord such protection.⁴⁶⁸ Now the question arises as to what should be considered as ‘public moral’, given that neither gatt or the other wto Agreements define it. The issue of public morals came up both under gatt and gats in the United States – Measures Affection the Cross-Border Supply of Gambling and Betting Services (US – Gambling) case decided by the ab.⁴⁶⁹ Public morals was ‘standards of right and wrong conduct maintained by or on behalf of a community or nation.’ It was also accepted that wto Members should be able to define and apply it considering their cultural, religious, ethical values.

In US – Gambling case, Antigua and Barbuda complained before the wto dsb against the US that certain US federal laws banned cross-border internet gambling while US evoked gatt Article xx (a) exception along with the same provisions in Article xiv gats. US – Gambling raised two significant questions; first, as to how should the wto dsb assess legitimacy of a member country’s claim of public morals given that it may be subjective to factors that are local and would differ from one member country to another. Secondly, even if such measure was considered legitimate on grounds of public morality, why should another member’s otherwise legitimate right to trade with that country, be restrained. In other words, how would the wto dsb balance between public morals and liberalised multilateral trade.⁴⁷⁰

Both the Panel and ab had found that the measures were genuinely designed to protect public morals but then the ab considered whether the measure was ‘necessary’ to protect public morals and whether reasonable alternative was provided. It was stated that the necessity can be established if the alternative is not ‘reasonably available’ in technical and economic terms. In other words, if such alternate measure incurs excessive costs or imposes technical inabilities, such alternative could not be considered as reasonably available. Finally on appeal, the US measure did not meet the chapeau requirement on Article xx since it was applied in a discriminatory manner only to foreign service suppliers and not to domestic service suppliers. Here it must be noted that the chapeau triggers only after the necessity test is complied.⁴⁷¹

In another case on the same subject matter, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (China – Audiovisual Services),⁴⁷² China had invoked Article xx(a) to defend a series of measures regulating importation and distribution of reading materials, audio-visual home entertainment products and sound recordings and films for theatrical release which were challenged by US as non-compliant with China’s gatt commitments. The ab found that China could invoke Article xx (a) based on its Accession Protocol however on assessing whether such measure was necessary, the ab confirmed the finding of the Panel that China had not demonstrated that the series of measures were necessary to protect public morals. After that the ab however did not go ahead further to assess whether the chapeau to Article xx was met. Similarly in ec – Seals⁴⁷³ too, the ab concluded that the EU Seal trade was within the scope of Article xx (a) and the measures are relevant and then moved to the ‘necessity’ test and found that the alternative measure available was not less trade restrictive. Finally moving on to the chapeau to Article xx, the ab found that although the same conditions prevailed in the Seal hunting Inuit communities in Greenland and Canada, there was unjustifiable discriminatory treatment between them.⁴⁷⁴

Article xx(b) exempts from gatt obligations if the measures are to protect human, animal or plant life or health. Similar provision is found in some other wto Agreements including trips where Article 27.2 which states, ‘Members may exclude from patentability inventions, the prevention within their territory of their exploitation of which is necessary to protect human, animal or plant life or health or to avoid serious prejudice to the environment.’ From the wording of the article the policy objective of the measure is clear. Especially environment vs international trade has been a matter of discussion and debate in global circles, however it is important to note that blaming international trade for failing to internalise environmental costs is erroneous. Whether it is public health or environment, wto panels and the ab had always assessed that the measure adopted by the wto Member is not intended to trade barriers.⁴⁷⁵

This case of utmost relevance from the perspective of Article xx (b) defence is, ec – Asbestos.⁴⁷⁶ In ec Asbestos Canada alleged that certain ban imposed by France on asbestos and asbestos products including their importation was violation of Articles 2, 3 and 5 of sps Agreement, Article 2 of tbt Agreement and Articles iii, xi and xiii of gatt 1994 resulting in nullification and impairment of benefits accruing under these agreements. ec invoked Article xx(b) as defence and alleged that such ban was necessary to protect human life or health. The ab for the first time not only elaborated the ‘necessity’ aspect of Article xx(b) and applying the test, but also refined it in broad perspective of Article xx. Logically without the ban asbestos elimination would not be possible hence there was no way protection could be accorded. However, at the same time the ab assessed through different levels of scrutiny.⁴⁷⁷

The ab formulated four conditions to implement such scrutiny. The first condition to determine whether the measure was necessary, the societal value of the measure at issue and how the measure contributes to the protection or promotion of this value needs to be identified. In this case it was by removing or reducing asbestos fibres that have the life-threatening health risks. The ab then moved to the second condition to assess whether a less trade-restrictive alternative measure was ‘reasonably available’. Canada had alleged that ‘controlled use’ of asbestos and asbestos products could not be considered as a reasonable alternative since its implementation was impossible. The ab considered different factors, a pertinent being whether the alternative measure could meet the objective of the original measure and in this case, it held that it was not possible for France to allow ‘controlled use’ to meet its health objective i.e. to restrain health risks imposed by use of asbestos and its products. The third condition provided the wto members policy space to determine health or environment standards that they consider necessary and that was not open for challenge by other wto members. However, the members could challenge the necessity of such measure for meeting the aimed level of protection. Finally, the fourth condition was that a wto member may in good faith consider a measure based on qualified scientific and respected sources as appropriate and this may be different from majority scientific opinion. Hence the panel may not consider legitimacy of a measure based on majority scientific evidence available.⁴⁷⁸

Another case in point is European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries (ec – Tariff Preferences). In this case the measure was an ec generalised tariff preferences (gsp) scheme for combating drug production and trafficking in 12 developing countries and transition economies. India complained that the treatment received by the 12 countries were preferential and argued that the nature of the measure was such that there was no relationship between the stated objectives of the measures and the drug arrangements.⁴⁷⁹ The panel assessed the ‘design, structure and architecture’ of the measure and agreed with India that there was no relationship between the objectives stated and the drug arrangements. Further the ec failed to show how such measure was necessary to protect human life or health also it did not pass the test of chapeau to Article xx establishing that there was preferential treatment.⁴⁸⁰

In another prominent case, Brazil – Measures affecting imports of retreaded tyres (Brazil – Tyres), the tests of whether the exception is applicable was clearly laid down by the panel and the ab.⁴⁸¹ In this case, Brazil banned imports of retreaded tyres for environmental and health reasons. One can argue that Brazil’s ban was to meet its obligation upholding human rights. However, any such human rights measure cannot circumvent the need to comply with a wto member’s commitment under relevant wto agreements.⁴⁸² ec had complained of gatt Article xi violation while Brazil invoked exemption under Article xx(b) as defence.

In the Brazil – Tyres case the panel and the ab first applied a two-tier test to assess whether the measure was provisionally justified in its objective to protect human, animal or plant life or health: (i) the design threshold of the measure to meet the objective; (ii) the ‘necessity’ test as to whether such measure was necessary. To assess the second test, the panel and ab assessed to what extent the measure met its legitimate policy objective both general and specific i.e. in this case human health and human life. On being satisfied that the measure was necessary the panel then moved on to assess less trade-restrictive possible alternatives wherein the panel found that Brazil did not meet this requirement. Here the panel observed that the capacity of a country to implement the remedial measure should also consider its cost and use of technologies. Further, moving on to the chapeau of Article xx, the ab found that Brazil did not meet the ‘Laws and regulations consistency’ test, although the discriminatory measure met its objective, the exemption of Mercosur Members was not justified. Hence not only the measure itself is to be non-discriminatory but also the way it was applied.⁴⁸³

In the above reference to cases based on Article xx(a) one would not expect a party to invoke public morals in defending national or regional exhaustion although the legal requirement of any measure being ‘necessary’, reasonably available alternates, as decided by ab decisions in US – Gambling and China – Audiovisuals are broadly to be considered. However, there has been tendencies of treating parallel imports as counterfeits and invoking border enforcement measures based on national and regional exhaustion of patents. Given that there has never been a wto dispute decided by any panel or the ab on parallel imports, hypothetically if the products are pharmaceutical drugs and a member applies national or regional exhaustion and restricts entry of parallel imports on the ground that such measure is needed to protect human life and health, it needed to be tested on applicability of Article xx(b) exemption.

From a reading of this Article, it may be argued that from the perspective of iprs, the exemptions have been introduced to address iprs, although independently, but in consonance with the trips Agreement. The aim was to enable certain flexibilities that can help a wto member address its domestic policy obligations without compromising on the interests of liberalised multilateral trade.⁴⁸⁴ The precise nature of the exceptions provided under this Article, if considered in relation to iprs, would show that the main intention was to address the issue of iprs from the perspective of multilateral trade. Further, under Article xx (d), it is important to establish that the gatt-inconsistent measure was necessary individually for each element of such breaches, to protect the patent and there was no other alternative that would have been less trade restrictive.⁴⁸⁵ It is important to analyse how the provisions of Article xx(d) have evolved through the interpretations by different panels and the ab, also how the chapeau to Article xx have been applied.

One of the initial cases in which a party claimed Article xx(d) defence Korea –Measures Affecting Imports of Fresh, Chilled and Frozen Beef (Korea – Beef). The US alleged that various measures of Korea on beef importation and sale in the Korean market was discriminatory and violation of nt apart from other violations. The measure at issue was Korea’s regulation affecting importation, distribution and sale of beef. Further its ‘dual retail system’ and agricultural domestic support programmes exceeding its aggregate measure of support as per its schedule of commitments.⁴⁸⁶ Korea had defended its measures on the ground that it was necessary to restrict fraudulent misrepresentation of the origin of beef hence violation of Korea’s Unfair Competition Act.⁴⁸⁷

Article xx(d) while stating ‘… secure compliance with laws or regulations which are not inconsistent with provisions of this Agreement. …’, covers laws and regulations which would impact irrespective of whether they are listed. Having considered the measures in a holistic manner, the ab upheld the panel’s finding that the dual retail system was not justified as a measure to comply with Korea’s Unfair Competition Act as it did not pass the necessity test of Article xx(d). In other words, it was not necessary to meet the policy objective. To come to such decision, the ab introduced a two-tier legal standard to test Korea’s justification of its measures: i) the design requirement needed to comply with laws and regulations like customs laws and ip laws which are themselves not inconsistent with gatt and ii) the necessity threshold, i.e. the measure must be necessary.⁴⁸⁸

The ab further elaborated that necessity of such measure also needed to weigh in the contribution of the measure to achieve its policy goal and to societal value while balancing it with the impact of the measure on international trade by possible use of alternative less trade restrictive measures.⁴⁸⁹ The ab agreed with the panel that Korea failed to demonstrate that it could not achieve its desired level of enforcement using alternative measures that was available. One needs to note that the interpretation in Korea – Beef was clear that many types of laws and regulations can be included while assessing the measure if it was necessary to secure compliance under Article xx(d). Hence the assessment of the objective is not only relevant but important.⁴⁹⁰ The wto Secretariat elaborated in its note, different provisions in gatt and cover Agreements that call for necessity tests. ‘the necessity tests confirm the right of Members to regulate and to pursue their policy objectives.’⁴⁹¹

As elaborated earlier, Article xx (d) have been interpreted by different Panels and the ab, through the necessity test, when applied to iprs, functions as checks-and-balance measure to make sure substantive ip protection is not applied in a manner that it becomes a trade barrier. Now let us apply the ab’s interpretation of necessity test as propounded in Korea – Beef case in a situation where a country adopts national or regional exhaustion of patents. As has been discussed earlier, country following national or regional exhaustion restricts entry of parallel imports into the country, treating them as an infringement of the patent.

To elaborate this further, let us study the effect of the three modes of exhaustion from the perspective of multilateral trade under the purview of Article xx(d). In case of national exhaustion, given that the patents exhaust only within the national boundary, patent rights are being enforced by the local right holder to restrict entry of identical products that are also protected by parallel patents, on grounds that they are violating the holder’s patent rights. Similarly, in case of regional exhaustion, the regional bloc in the form of cu is restricting exhaustion within the bloc. While identical products protected by parallel patents are not restricted into the common market of the regional bloc, they are restricted when they are entering from outside the bloc.

It is reiterated that such restriction on imports of identical products with legitimate valid patents and distinguished only by way of different national origin, shall not pass the necessity test under Article xx(d) as these imports are manufactured outside the importing country under valid patents in legitimate manner. In a hypothetical case, if a wto Member complains that such measure wherein legitimate products made under identical patented technology is a violation of the countries nt obligation, the defending country would not be able to pass the necessity test propounded in Korea – Beef and other cases discussed in this section of the chapter. Here it is important to note that a wto Member need not restrict parallel imports to protect ‘… patent, trade marks and copyrights, and the prevention of deceptive practices;’ since parallel imports are not counterfeits but are also protected under legitimate parallel patents. Hence if the wto member practices international exhaustion of patents, given that the patent rights exhaust with the products placed under any market without in the world, authorised dealers of the patented product would not be able to restrain its entry into the importing country using patent enforcement mechanisms thus not violating nt or mfn provisions and would not even attract the necessity test under Article xx (d).

Few years later in Mexico – Tax Measures on Soft Drinks and Other Beverages (Mexico Soft Drinks), where Article iii(d) defence was invoked, the US complained before the dsb that Mexico has violated its nt obligations. The measures involved were certain tax measures imposed by Mexico on soft drinks and other beverages that use any sweetener other than cane sugar.⁴⁹² It is important to understand the backdrop of the case. Mexico claimed that it had the right to impose measures which were not compliant with the gatt nt obligation as a retaliation against US’ non-cooperation in another dispute related to another measure under another agreement. Both were members of the erstwhile nafta but instead of suspending its obligations under nafta to products originating in the US, Mexico adopted measures that was applied to imports from all origins, hence impacting all wto Members. On the other hand, under the nafta dispute settlement mechanisms, US could deny access to third-party adjudication but it preferred to take it to the wto dispute settlement. It is important to note that under wto law, a member aggrieved with discriminatory measures of one other member does not have the right to suspend its obligations of gatt compliance towards all wto members.⁴⁹³

The ab agreed with the panel that Mexico’s measures did not comply with its obligations under nafta hence did not qualify under Article xx(d) requirement of ‘to secure compliance with laws or regulations’. The ab also specified that ‘laws and regulations’ refer to that of the wto Member invoking Article xx(d) defence and not another member. Further, the ab held it was important that the measure is designed ‘to secure compliance’ even if there was no guarantee that it would achieve its intended result. It also observed that the use of coercion is not a necessary component of a measure designed ‘to secure compliance’.⁴⁹⁴

Later in China – Measures Affecting Imports of Automobile Parts (China – Automobiles) case, where the dispute involved certain regulatory measures including imposing a 25% charge on automobile parts imported into the country for the purpose of manufacturing vehicles in China. It was alleged that such border charge was in violation of Article ii and iii of gatt and further, it was beyond China’s tariff concessions that bound it to 10% and hence were. China had argued that there was no violation since the charge was necessary to stop circumvention of avoidance of payment of 25% duties on import of complete vehicles by importers, hence justified under Article xx (d).⁴⁹⁵ After examination of the language of the measure at large, ‘Policy Order 8’, the Panel found that it did not meet the requirements of the necessity test under Article xx(d). China appealed before the Appellate Body which upheld the Panel’s decision, except that there was no inconsistency with China’s accession commitments.⁴⁹⁶

Here it is also important to refer to Brazil – Tyres case, which was discussed earlier under Article xx(b) since it too claimed defence under Article xx(d). The ab not only applied the necessity test both under Article xx(b) and Article xx(d), but also addressed the chapeau on Article iii. The panel decision was confirmed by the ab on appeal and was held that the measures executing the import ban did not fall within the scope of measures that were designed to secure compliance with the ‘laws or regulations that are not themselves inconsistent with’ provision of the gatt.⁴⁹⁷ As was discussed earlier in this chapter, the ab found that Brazil was not compliant with the chapeau to Article xx as its exemptions of Mercosur Members were discriminatory vis-à-vis the complainant.

It must be noted that while assessing general exceptions defence, it is not considered in isolation but in conjunction with the proviso to Article xx, usually referred to as the chapeau to Article xx, that forms an additional test. The application of the chapeau to Article xx had been established in the early years of gatt 1994 dispute resolution through two landmark cases – United States – Standards for Reformulated and Conventional Gasoline (US – Gasoline) in 1996 and later in the United States – Import Prohibition of Certain Shrimp and Shrimp Products decided in 1998.⁴⁹⁸ In the former case it was held by the ab that in applying the exceptions provided under Article xx, first it needs to be ascertained if such exception falls under those that are provided in paragraphs (a) to (j) of the Article and if it does, then it is required to ascertain if such exception complies with the terms of the chapeau.

In the Shrimp/Turtle case the ab corrected the Panel’s decision and held that the applicability of the chapeau is important.⁴⁹⁹ In the Shrimps/Turtle case the ab mentioned that in one category of measures, an action of a member might be considered as ‘arbitrary discrimination’ or ‘unjustifiable discrimination’ or ‘disguised restriction on international trade’, but at the same time it might not be considered so, in another type of measure. In fact, in this case the ab made it very clear that although a member could avail the exceptions in Article xx, the chapeau restricts abuse of the Article and thus balances the rights of the other members.⁵⁰⁰

In India – Solar Cells case, the US had challenged India’s domestic content measures in the initial phases of its Jawaharlal Nehru National Solar Mission on solar power developers selling electricity to the government.⁵⁰¹ India argued that under different articles including exemption under Article xx(d) arguing it was necessary to ensure ecologically sustainable growth. On appeal, the ab agreed with the Panel that India’s dcr measures were not justified under Article xx(d) and that for any specific national ‘laws or regulations’ to qualify for Article xx(d) exception, it is important to examine how the domestic legislation was operating and its effect.⁵⁰² The ab held that India neither demonstrated that the domestic instruments being challenged set out a rule to ensure ecologically sustainable growth, nor did it prove that the international instruments identified fell within the scope of Art. xx(d).

Now on applying it to the interface between ip protection, its enforcement and multilateral trade under the gatt regime is concerned, Article xx (d) acts as a balance between possible conflicts of laws. Further, the law and regulations need to be considered as a whole and not in isolation, hence ip laws are to be applied within the broader gamut of economic law and the exhaustion doctrine fits in balancing diverse interests of different stakeholders.⁵⁰⁴ One might lead to believe that trips already covers the same subject matter, however on deeper scrutiny it will be noticed that there are differences. Often it is argued that trips Article 6 allows a member country to adopt any mode of patent exhaustion but on analysis of a mode of patent exhaustion of a country in terms of its treatment of nt and mfn, a clear violation of national and regional exhaustion can be noticed. Further, trips Agreement does not have anything similar like the chapeau on Article xx.

The analysis of how nt and mfn in relation to what exceptions would apply and which would not and the conditions that would apply, determines the trade in patented products. Hence as we have noticed with regards to different cases that have been interpreted by different panels and the ab, if a wto member adopts national or regional exhaustion instead of international exhaustion, it applies border measures to restrict entry of like products into the market. In the first instance such measure would not pass the necessity test since measures restricting the import is not necessary as the imports legitimate patented products. Further, on the test of how the measure meets the policy objective of restraining parallel imports, it cannot be argued that the restraint is on counterfeit since the patent is owned by the same entity, just that the origin of the patented product is in a different wto member. Now let us apply the chapeau on parallel imports, those members allowing import based on regional exhaustion would clearly discriminate between members of the regional bloc / cu and those which are not thus failing to pass the chapeau on Article xx.

Now let us consider a hypothetical case of a wto member which did not stop parallel imports through border measures but once it reaches the market, the authorised distributor initiates infringement proceedings against it and obtains an interim prohibitory injunction from selling the products in the market subject to confirmation of permanent injunction through trial. While obviously the municipal adjudicatory body would consider domestic laws based on the country’s patent law and determine the exhaustion mode but if injunction is granted, it will be in violation of Article iii, nt obligation of the wto member. It will be an outright discrimination between the patented products which are produced and marketed in the country and the parallel imports that are like products which are treated differently. It has been elaborated earlier that during gatt 1947 period there has been such an instant where certain elements of Section 337 of the US Patent Act at that time were held inconsistent with gatt nt mandate by a dispute settlement panel in 1989.⁵⁰⁵ Also based on the analysis of different decisions of the panel earlier in the chapter, it can be confirmed that a preferential treatment over imported products would be inconsistent with gatt 1994.

7.5 Article xi: 1 – General Elimination of Quantitative Restrictions

This makes it clear that there should be no quantitative restrictions or prohibitions of any ‘form’ that can hinder the free movement of goods between wto members.

Ultimately it is a test of the limiting effect of the restrictions or prohibition on imports as to whether it would be held violating Article xi:1. Brazil – Tyres case, established the interpretation of ‘prohibition’ as that restricted importation of any products of any other wto Member into its national market.⁵⁰⁹ Further, Colombia – Indicative Prices and Restrictions on Ports of Entry (Colombia – Ports of Entry) case provided clarity by elaborating that prohibition or restriction in Article xi:1 covers measures that restrict market access or create uncertainty in investments or makes importation very costly.⁵¹⁰

Now when one addresses patent rights in relation to Article xi:1 of gatt, it will be noticed that if the patent holder can exclude imported like products by enforcing the patents or such imports are treated less favourably, then the patent rights would act as quantitative restrictions in breach of nt and mfn rules. If we drew parallel with the interpretation of ‘prohibition’ and/or ‘restrictions’ referred to in Article xi:1 with relation to exhaustion of patents, any mode of exhaustion that restrains parallel importation would be in violation of the Article. This is because the exercise of patent rights over parallel imports from another wto member country would restrict market access constituting a measure equivalent to quantitative restriction.⁵¹¹ Moreover, market access restrictions by invoking national or regional exhaustion is not maintainable. As far as Article xi: 2 is concerned, it provides exceptions for several products like foodstuffs and essential products but does not provide any such specific exception for parallel imports hence this Article is not applicable in any manner.

7.6 Article xxiv – In Light of the Most Favoured Nation Principle

The mfn principle is one of the fundamental requirements of the wto system and is applicable to gatt 1994 as also to trips Agreement. It had already been discussed earlier that all wto members are expected to provide mfn status to every other member. Given that such requirement is obligatory, apparently the practice of regional exhaustion would not be in line with the gatt. For example, in each case if a member follows regional exhaustion, it would allow international exhaustion when trading with members within the region and national exhaustion when dealing with countries outside the region. This means that the regional exhaustion mode will discriminate between members of the wto who are in the regional bloc and those who are outside.

This would obviously result in regional exhaustion violate the mfn principle. However, an in-depth analysis will show that due to certain exemptions under Article xxiv of gatt 1994, regional agreements, free trade areas and cu, would be exempted.⁵¹² It needs to be analysed in depth as to whether patent exhaustion would qualify under the exemptions for regional agreements under Article xxiv. A mutual recognition agreement among members of a regional bloc could allow imports of licensed patent products from the regional bloc while similar licensed patent products from outside the regional bloc could be excluded even when substantive conditions were similar.⁵¹³ It is questionable as to how much it would promote positive integration while undermining multilateral trade within the wto.

This means that under the requirements of this Article, wto members’ entry to regional agreements or cu are conditional.⁵¹⁴ One needs to consider the proviso to the Article which states, ‘Subject to the requirement that such measures are not unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade’ with seriousness. Based on this requirement, regional exhaustion cannot pass the necessity test.

In the Turkey – Restrictions on Imports of Textile and Clothing Products (Turkey – Textiles case),⁵¹⁵ the ab examined whether Article xxiv applies only to the mfn principle or it provides an exception to other requirements of gatt and the relationship between this Article and the other provisions of the gatt. In this case when Turkey finalised its requirements for joining the cu with the ec on 1st January 1996, it harmonised its tariffs and quantitative restrictions on clothing and textiles. By this it introduced new quantitative restrictions instead of what Turkey imposed earlier. At this juncture India claimed that these quantitative restrictions imposed by Turkey on clothing and textiles violated Article xi, xiii of gatt and Article 2.4 of the Agreement on Textiles and Clothing. According to India, these restrictions were not justified exceptions provided under Article xxiv.

Contrary to the Panel’s findings, the ab opined that the chapeau of Article xxiv: 5 was crucial in determining exceptions and held that the exceptions allow certain measures that might be otherwise be held inconsistent with other gatt provisions. But at the same time in its interpretation of the chapeau of Article xxiv: 5, the ab also specified that there must be a balance between the benefits gained from forming the cu and the negative trade effects that are imposed on wto members who are not members of the cu. The ab clearly stated in its decision that the member that uses the exception (under Article xxiv) as a defence, need to establish that requirements under Article xxiv (5) & (8) and the necessity test is met. This means that the party claiming such defence need to prove that without these exceptions the cu would not be formed.⁵¹⁶

Similarly, we have noticed that in the India – Quantitative Restrictions case India had imposed quantitative restrictions (qr) on importation of agricultural textile and industrial products on grounds of balance-of-payment (BoP) problem, a justification in line with Article xviii (B) of gatt 1994. On consultation with the BoP Committee of wto in maintaining the qr and gradually phasing out in 7 years, other members excluding US agreed to it. The US wanted quicker phase out of the qr and on failing to come to an agreement, they requested for a panel and the matter was taken up. The panel concluded that India erred in imposing the qr, this was later upheld by the ab.⁵¹⁷

Going back to Turkey – Textiles, the ab held that the exception in Article xxiv sets an over-riding and pervasive purpose of the exception to facilitate trade between territories.⁵¹⁸ The ab, while interpreting Article xxiv (5) emphasised the necessity of the exception under Article xx. The defence that the exception is necessary can only be accepted if without the exceptions the Preferential Trade Agreement (pta) would not form or come into existence. Ironically the EU which negotiated its exception, did not have any specific mode of patent exhaustion or that of any iprs in general. Each member of the pta had separate modes of exhaustion. The hybrid model of regional exhaustion was only introduced later through judicial pronouncements.

In such scenario it is impossible for the pta to qualify in the necessity test. Later in China – Measures related to the Exportation of various Raw Materials (China – Raw Materials) case that was also decided on appeal by the ab, it was held that ‘prohibition’ and ‘restriction’ under Article xi of gatt 1994 would mean that those prohibition measures that had a limiting effect on the quantity of the imports, both Articles xi:1 and xi:2 of the gatt 1994 refer to prohibitions or restrictions.

The term “prohibition” is defined as “a legal ban on the trade or importation of a specified commodity.” The second component of the phrase, “[e]xport prohibitions or restrictions” is the noun “restriction”, which is defined as “[a] thing which restricts someone or something, a limitation on action, a limiting condition or regulation”, and thus refers generally to something that has a limiting effect.⁵¹⁹

If similar reasoning is applied in a hypothetical case where a country that initially followed international exhaustion, is forced to change to regional or national exhaustion as a condition to join a cu, it might become an issue of complaint by a wto member outside the cu. A third-party wto member which was a supplier (parallel exporter) country benefiting from international exhaustion would now lose the market of this cu member that needs to restrict parallel trade in order to join the cu. Such an action imposes an additional non-tariff barrier to trade vis-à-vis third countries. In such circumstances, the exemption provided under Article xxiv (5) allowing regional exemption would not hold ground. It is well known that pta creates trade diversion in order to accommodate enhanced post-pta competition from a member of the pta. In most cases this occurs by raising barriers against efficient non-members of the pta rather than by reducing high cost of production at home.⁵²⁰ Article XXIV (8) states,

For the purposes of this Agreement:

1. (a)A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that
   1. (i)duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles xi, xii, xiii, xiv, xiv, xv and xx) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories, and
   2. (ii)subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union;
2. (b)A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles xi, xii, xiii, xiv, xv and xx) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

It will be noticed that ‘duties and other regulations of commerce’ under Article xxiv (8) is like that in Article xxiv (5a) and (5b) and reads consistently with it. The provisions allow the pta to eliminate other restrictive regulations of commerce to maintain substantial trade between the members of the pta. However, the caveat to such preferential treatment is in xxiv (8) (a) (ii) itself, where it makes clear that the ‘same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union’ (emphasis added). This means that the pta is not authorised to adopt any such measure higher or more trade restrictive for the wto members outside the pta. The necessity test has been established as a fundamental requirement within the wto through decisions of different panels and the ab and across agreements. No party can claim exemption citing trips would not require to meet the necessity test. On application of the ab decision in Turkey – Textiles, there would be additional burden of proving the necessity to change from international exhaustion to regional exhaustion mode would be on the pta members.⁵²¹

Although the exhaustion issue has not been interpreted by any panel, but given the similarity of the exhaustion issue in the interpretation illustrated in Article xxiv (5a) and (5b), a parallel can be drawn with the Panel’s interpretation of Turkey – Textiles (which was not rejected by the ab). It must be noted that in he ordinary meaning of the terms, ‘other regulations of commerce’ may include any regulation having an impact on trade (such as measures in the fields covered by wto rules, e.g. sanitary and phytosanitary, customs valuation, anti-dumping, technical barriers to trade; as well as other trade related domestic regulation, e.g. environmental standards, export credit schemes). Restriction on international exhaustion to restrain parallel trade by way of enforcement of iprs, including patents can be interpreted as other regulations of commerce.

Hence any discrimination against patented products due to practice of regional exhaustion of patents should not be tenable. Especially with the formation of the pta, changing patent exhaustion from international exhaustion to regional exhaustion would restrict parallel imports and would have an impact on trade between the members of the pta with those non-members within the wto membership. Here it must be mentioned that once the Unitary patent system is fully adopted in the European Union, the situation would change, however as discussed earlier in this book, such adoption is sub-judice in Germany.⁵²²

7.7 Article xxiii: 1 – Non-discrimination of Quantitative Restrictions

It establishes that even if there might not be a violation of gatt per se, if a gatt member opts for a trade distorting measures that causes ‘nullification and impairment’ of the trade benefits to the other members that could be brought in before the dsb as a non-violation complaint. A careful study of the modes of national or regional exhaustion might be deemed fit for a non-violation complaint. It might be argued that an aggrieved member might consider such mode of exhaustion a cause of nullification and impairment of the benefits that the member would otherwise have received if its parallel trade imports were not restricted by way of imposing restrictions on iprs and thus retaliate.⁵²³ However one can also argue that if a country introduced international exhaustion and lost its rights to restrict entry of parallel imports to the country, there could be nullification and impairment caused due to inability to exercise the iprs.

It is important to note that Article 64 (2) and (3) of trips Agreement provides a moratorium on non-violation complaints for five years extendable by consensus.⁵²⁴ The moratorium persists at the time of writing this book.⁵²⁵ Fundamentally a member is bound by its commitments to allow market access and restricting international exhaustion would restrict market access to parallel imports. Hypothetically, if a member followed international exhaustion but was forced to change it to any other mode to cater to the demands of the trading partner, it would be subject to nullification or impairment in trade benefits due to deviation from such commitments.

It must be noted that the ‘nullification and impairment’ clause is foundational in the wto system. It was developed right at the time when the International Trade Organisation (ito) was planned and aimed at dealing with government measures that are not covered by the agreement but affected the benefits of tariff concessions negatively. Astonishingly, it never appeared in the ‘Suggested Charter’ of the ito. It was a separate clause that was part of one (Chapter on Commercial Policy) of the five substantive chapters of the Suggested Charter submitted by the United States and was supposed to be applicable only to this chapter.⁵²⁶

Here, due consideration should be given to the meaning of ‘nullification and impairment’ since it is one of the most important features determining Rules and Procedures governing the dispute settlement system in the wto. According to the Rules and Procedures governing the dispute settlement if a member claims that another member failed to fulfil its gatt obligations, then the complaining country needs to establish (under Article xxiii:1) that such act nullified and impaired the benefit accruing to the Member.⁵²⁷ It should also be noted that the nullification and impairment is not restricted to the gatt Agreement but also covers the other covered agreements of the wto.⁵²⁸

Let us consider a hypothetical case from nullification and impairment angle, a member lodges complaint that patented products manufactured in its country under patent licensee is restricted from entering another member country through enforcement measures hence it nullifies its ability to trade in that market and impairs from making financial gain. It is indeed an exhaustion issue, but the impact is that of nullification and impairment. If there is an ‘impairment’ under trips, although the member might not be able to take unilateral decision to renegotiate the impaired obligation, it might refuse to accept compensation, thus threatening retaliatory actions like those available in the case of a violation of the trips Agreement. However, given the ongoing temporary moratorium on the non-violation complaints, it is not known how any panel would decide this type of complaint if it comes up for adjudication.