Chapter 12 Conclusion and Recommendation: Adoption of International Exhaustion of Patents, Globally

In: Patent Exhaustion and International Trade Regulation
Santanu Mukherjee
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12.1 Purpose of Patent Protection, Ubiquity and Need for Balance

A patent is set of rights granted by the State to the inventor of a novel (new) product or process of making a product, involving an inventive step (which is non-obvious for a person ordinarily skilled in the art) and has industrial applicability (or practically useable). The rights enable the inventor to exclude others from direct competition for a limited period of 20 years from the date of filing of the patent (as per the trips Agreement) against the most important requirement of ‘enabling disclosure’. This requirement of mandatory enabling disclosure is important since it elaborates the invention to the general public and provides the best mode to practice it. As a result, innovation is incentivised by rewarding the inventor with legal protection to exclude any third party from unauthorised use while disclosure helps in dissemination of knowledge. Further, the limited duration of the patent also serves the purpose of balancing private rights and public interest in the invention.

Whether patents incentivise to invent or it just helps in raising investments as has been argued by Fritz Machlup (discussed earlier in this book) is debatable. But there is no doubt that the legal exclusivity enhances costs and in areas of technology where public and social interests are critical, patents can impose significant costs for developing countries.760 One would also argue that in certain fields of technology where possibility to imitate an invention is equally difficult and expensive as inventing it, the legal exclusivity through patents would only lead to market distortion.761 In any such scenario, because of the ubiquitous nature of patents (which enables existence of the same patent rights over multiple number of units of a product situated at different places at the same time), the patent rights become a very powerful tool in controlling different markets at any single time.

Considering the above facts, the patent holder can charge the consumer higher than the competitive price for the product. This power to charge higher price than the marginal cost of the product introduces static inefficiencies where some consumers pay more while others cannot even access the product due to high price. If the patented product does not have any alternative, then there might be a monopolistic situation raising the possibility of abuse of the monopoly. On the other hand even if there are alternatives, they might not be as efficient as the patented technology, hence the exclusivity would further distort the market.762 In such scenario among other tools to balance the private rights and enhance access to patented technology products or the processes, exhaustion of patents steps in as an appropriate balance.

As it has been discussed in the analysis and arguments put forward in this book, the patent system is not solely transactional but an amalgamation of two goals, private incentives and public good. Given these two contradictory goals of the patent system, we have noticed that along with conferring benefits to the society, it also imposes costs. This makes it essential to put in place different mechanisms to balance the goals so that the patent system can contribute to societal welfare. Exhaustion of patents is one of the most important factors in the ip system as it balances the private nature of iprs and its consumer benefits aspect.

12.2 Patent Exhaustion in Different Countries: Need for Uniform International Exhaustion

Exhaustion of patents have been one of the ways that countries have tried to address the ubiquitous nature of patents and balance market exclusivity on one hand and access on the other. As has been presented in this book, the UK approach has been more of contractual nature following the doctrine of implied license. As per the doctrine of implied license, the sale of a physical product would also include not only the rights to use the ip but also to part with it (unconditional sale) unless expressly restrained to do so. Hence if there is a sale of a patented product, in absence of any express notice curtailing further distribution of the product, it is implied that the patent right is also licensed to the purchaser along with the product.763

The argument in favour of implied license is based on the laws of contract that provides the patent holder (as seller or licensor) to determine what conditions of sale might be negotiated, i.e. whether markets would be defined, etc. Hence in absence of any such conditions either by intention or by oversight, the patent holder should be able distribute (re-sell and/or import and/or export) the patented product further without infringing the patent. However, the patent holder would still be able to enforce the patent in case of unauthorised manufacture of the patented product or further distribution if the product has been altered or repaired or modified in a manner that the patent has been infringed. It is important to note that although in effect implied license through unconditional sale would enable parallel importation, it is not a case of exhaustion of rights. In this case there is no exhaustion of rights as such but completely based on the contractual terms or their absence.

As we have discussed in this book, Josef Kohler, an eminent German jurist, academic and judge, introduced the doctrine of exhaustion, as a concept in one of his writings. He opined that the common proprietary right of the owner should prevail over the ip right of the product. This opinion was used to interpret the Duotal case by the German Imperial Supreme Court of the time in 1902 where the term ‘Konsumtion’ was used.764 The literal English meaning of konsumtion would be ‘consumption’ referring to being consumed. In other words, exhausted, where ‘exhaustion’ implies that once an ip embedded product is placed in the market by virtue of sale or any other mode of distribution against which the patent holder receives a payment, the patent holder exhausts the right to enforce the patent against further distribution. At the time Kohler introduced the doctrine, the exhaustion referred in terms of the movement of the patented product from one German State to the other. However, there was no indication of whether the exhaustion should be restrained within the boundaries of the State or should it be extended internationally.

From analysis presented in this book it will be noticed that while the foundation of the doctrine of implied license is contracts, in case of exhaustion of patents, it is an interface between patent laws and international trade regulation. Whether the patent owner can restrict movement of the patented product from one territory to another would depend on ‘adopting appropriate legal technique’ to create a State imposed embargo or in other words a non-tariff barrier to trade.765 This practice of restraining exhaustion within national boundaries developed in the practice of the ‘national exhaustion’ mode and when exhaustion triggered by placing the product anywhere in the world, the mode of ‘international exhaustion’ came into existence.

It has been presented in this book how national exhaustion imposes constraints in free movement of patented products from one market to the other. It is for this reason the EU as a regional bloc adopted international exhaustion within the regional bloc. However ironically, they also adopted the more trade restrictive national exhaustion while trading with countries outside EU/efta. Subsequently this was established as a hybrid mode by consecutive rulings of the ecj and came to be referred to as ‘regional exhaustion’ (which was later codified).766 If a country allowed international exhaustion of patents, then third parties in a country would be able to buy the patented products anywhere in the world and import it to the country at parallel to the official distribution channel of the patent holder. This is referred to as ‘parallel imports’, whereas if the patents exhausted only within national boundaries, then the patent holder could enforce the patents and restrict entry of parallel imports.

Different countries adopted different models in dealing with patents and movement of patented products from one country to the other. Many following the colonial ties in UK followed the practice of implied license while few others followed the French practice of destination rights where the destination of the products follow the rights of the country of origin. Some others followed international exhaustion and some the national exhaustion mode. There have also been efforts to model regional blocs in Latin America in line with the European practice of regional exhaustion but as elaborated in this book, they have not been that successful. The mode of exhaustion that a country prefers to adopt, depends on its market and has been found that countries that are net importers of patented products or broadly other ipr products prefer to follow international exhaustion enabling entry of parallel imports in the country. On the other hand, those who are net exporters of ipr products prefer to restrict parallel imports.

Since each country practices different modes of exhaustion, as trade expanded beyond boundaries, this difference often culminated in legally enabled obstructions to trade. This not only leads to confusion, e.g. a country might follow international exhaustion for patents but national exhaustion for copyrights, as in Australia. By enabling wto Members to follow any mode of exhaustion in a decentralised manner, the ultimate goal of removal of illegitimate barriers to trade is far from achieved. Among wto members where the patent owners have strong influence, there is a tendency to opt for national exhaustion. It has been presented through elaborate analysis in the different chapters of the book as to how such practice creates market distortion. To balance such distortions, members may be tempted to use cl provisions or other market regulations. A harmonised practice of international exhaustion while exercising strict patent rights, would balance the two differing interests. Moreover, this would also balance the trading interests of the industrialised countries on one hand and the developing countries and ldcs on the other.

Harmonisation of international exhaustion should not just be restricted to patents but across industrial property rights since none can operate in isolation or in other words, they often are embedded in a complete marketable product. In a hypothetical case, where parallel importation of a patented product is allowed, if it needs to be packed with an instruction manual and packaged with writings and diagrams which are copyright protected, following national exhaustion in copyrights would mean that the packaging with leaflets be sourced separately for the parallel imports. Further, in absence of international exhaustion, a country might allow parallel imports but restrict parallel exports contractually, thus hindering open market competitions globally. Moreover, it has been presented in this book that having different exhaustion modes in different countries defeat the purpose of multilateral trade based on comparative advantages of production, calling for harmonising exhaustion into international exhaustion with necessary conditions.

12.3 Patent Exhaustion and Multilateral Trade: Need for Removal of Non-Tariff Barriers

Today’s global trade regime has come a long way since the 1930s when ‘nationalism’ reached an abusive interpretation in Europe leading to the World War ii. After the war when sense prevailed, with US leadership a new liberal economic order was set up in 1947 through the General Agreement on Tariffs and Trade (gatt). The aim was to systematically regulate global trade under a multilateral rule-based trading system focusing on reducing barriers to trade based on reciprocity. By doing so, the intention was to avoid such conflicting positions in trade that could lead to armed conflicts.767

The framers of the multilateral rules were careful not to touch the politically sensitive issues like trade in agriculture, services, investments and technology. ip was not included within the gatt regulatory regime at length, since trade in ip goods were not so significant while there were specialised international treaties for their governance. Interesting to note that the newly minted multilateral rules curved out neat grooves to fit in rules of the regional blocs.768 It is much later in such setting that US introduced The Trade Act 1984 domestically where iprs were introduced. After introducing iprs in subsequent bilateral agreements, it first came up in the Tokyo Round in 1978 to restrain commercial counterfeiting.769 With the initial focus on reducing tariffs and quotas, unfortunately the curve of liberalism gradually turned towards protectionism in the 1970s and the situation was even worse in 1980s with the global recession. Back at the gatt negotiations subjects presented failed to get included in the negotiating agenda.770

Finally, with the launch of the Uruguay Round in 1986, iprs were gradually introduced as a part of the aim to fully integrate the global trading system and bring those issues that were left out earlier, within the realm of gatt. Hence along with the primary negotiations on new sets of rules on trade in agriculture and trade in services, ip was also included.771 The very ambitious and challenging attempt finally was successful with the tariffs being lowered and phased out in time-bound manner. The most distinct and significant introduction of gatt 1994 was the dispute settlement mechanism, which also had retaliatory provisions thus having the strength of enforcement built-in and including iprs within its realm.772

As has been presented in this book, one might question as to why iprs were included in the trade negotiations. Trade liberalisation produces positive efficiency however high standards of iprs harmonised at the minimum level of protection could hinder access to ip products and in such conditions would not necessarily culminate in positive efficiency.773 On the other hand it was noticed that due to rising cost of manufacturing in the industrialised countries, they gradually diverted their r&d to services and ip products. While in other cases they restricted only to creation of ip and the physical production was often outsourced to developing countries. Most of the mncs engaged in such manufacturing catered to the global market, hence if it was possible to harmonise the laws on iprs in countries where they operate, it would reduce the mncs’ transaction cost. Further, with increase of such ip-centric trade, there was also increase in counterfeits and piracy. The industrialised country members of gatt wanted to introduce stricter rules on ipr and its enforcement and introduced it as rules restricting trade in counterfeits and pirated goods. But gradually what started as an agreement to restrain such trade in counterfeits, landed up in the far-reaching, elaborate and comprehensive ip regime under the trips Agreement.

Ironically, although the very basis of the new gatt multilateral trading system is global welfare enhancing through removal and reduction of barriers to trade, the members failed to install international exhaustion of iprs that facilitates reduction of trade barriers. Once patents (and other iprs) were brought within the mainstream of multilateral trade rules for the purpose of protection against counterfeits, it should not have been allowed for market segmentation through modes of exhaustion. This is essential to avoid patents becoming a non-tariff barrier and going against the fundamental purpose of trade liberalisation.

It has been noted that although Article 6 of the trips Agreement allows wto members to choose any mode of exhaustion, it has been presented in this book through elaborate analysis of trips, gatt and gats that any mode other than international exhaustion would not qualify under the wto regulatory system. Practice of national and regional exhaustion distorts trade and would not pass the essential tests of exemption from nt and mfn either under trips or gatt hence be actionable before the wto’s dsb. It is also argued that the caveat in Article 6 which is expected to exempt parties from challenging any exhaustion mode before the dsb would not be the right interpretation since trips cannot be read in isolation, but analysed under different Articles of trips, gatt and gats.774 The argument that as patent rights are territorial and allows only national exhaustion under Article 28 (1), no longer holds ground as this Article does not restrain international exhaustion. It restrains exhaustion to be taken up before the dsb.

The patent rights granted by a wto member under national laws in compliance of the trips need to be compatible with gatt 1994. Hypothetically, if patented products sold legally in a wto member country is restricted from being imported to another wto country on grounds that the patent holder has not permitted importation, it would cause nullification and/or impairment of the trade benefits of the importing country.775 Given that the patent holder is same, being a case of its licensee’s product or the product of parallel patents, such discrimination based on the origin of the patented products causing nullification and/or impairment is actionable by the affecting wto member under Articles xxii and xxiii. The analyses of Article xx as to whether general exceptions would trigger and exempt the practice of national or regional exhaustion of patents and thus restrict parallel trade has shown that such exemptions would only be allowed subject to necessity tests, establishing proportionality, especially under Article xx (d).

The argument that Article xx(d) allows a wto member to take necessary measures to protect iprs, in this case, patents, have also been analysed and not denied. However, through interpretations of different ab and Panel decisions it has been established that restricting parallel imports is neither essential for protecting iprs, nor the measures allowing only products manufactured domestically under same patent is a reasonable alternative. Further, being blatantly discriminatory, the measure would not qualify the chapeau on Article xx too.776 However as argued, there might be certain conditions in which the patented products are imported, e.g. under grant of cl which would not qualify under the gatt or trips rules and appropriately restricted.

Some experts have opined that the ‘trips is a lex specialis or sui generis, which as far as matters related to intellectual property protection are concerned has absolute precedence over the gatt.’777 But such views are also contested since the lex specialis nature of trips is restricted to protection of iprs and not beyond, while the issue of exhaustion enabling parallel imports is completely an issue of trade regulation. It is clear from the trips Agreement that it did not aim to go beyond protection of iprs in the realm of commercial exploitation of iprs and market access issues (like that of parallel importation) that accrue under gatt. Hence the argument that trips as a special law supersedes gatt is not sustainable.778

The issue of exhaustion being one core issue in free movement of patented products from one country to another has also been addressed within different regional agreements. As argued earlier, apart from the fact that whether separate exhaustion regimes under regional trade pacts are in line with the multilateral rules, there has not been homogeneity in practice even among different trade blocs. Further, there has been increasing efforts by asymmetric power among partners of ftas to install national exhaustion even when other partners of the ftas existent practice have been international exhaustion.779

From the above it is evident that in absence of a global harmonised rule on exhaustion, attempts are made to remove trade benefits by restraining international exhaustion. Moreover, the various types of exhaustions practiced by the wto members only add to problems of disharmony in multilateral trade. Automatically, countries facing exigencies like lack of access to patented pharmaceutical drugs would be tempted to opt for more severe options like cl rather than more trade-friendly options like parallel importation. Also, one cannot leave the important issue of allowing parallel imports to contractual decisions of member countries since it would enable restricting exhaustion through express notification.780

As mentioned earlier, apart from addressing patent exhaustion under gatt, the issue of exhaustion has also been analysed under gats in this book. The relationship between liberalisation in trade in services that is related to patented technology and treatment under Articles ii (mfn), xvii (nt) and v and xiv (Exceptions) are of utmost importance too. From the analysis of the provisions of different wto agreements and different regional practices, it is argued that patents cannot be used as non-tariff barriers hence international exhaustion need to be adopted globally. At the same time legitimate concerns of re-imports of patented products, regulatory interventions like cl, price-caps, etc. while adopting international exhaustion, can be restricted through Article xx itself through elaborately laid down procedures. Following international exhaustion would also restrain iprs being used as qrs without compromising their strict enforcement.

12.4 International Exhaustion of Patents – Balancing ipr Protection and Consumer Welfare through Competition Policy

It has been highlighted that price differentiation by patent holders in different markets based on demand and supply or due to other comparative advantages results in arbitrage. Such arbitrage would encourage legitimate trade outside the channel of the authorised distribution encouraging gain from the arbitrage enabled through parallel importation.781 Allowing the patent holder to restrain such parallel trade would restrain market competition of legitimate alternates. Further, if there was market fixing through cartelization by the patent holder and its authorised distributors, parallel importation would remedy such cartels.782

In essence, a rule of international exhaustion is a tool for promoting competition and the efficient allocation of resources.783 As has been argued earlier, iprs increase the dynamic efficiency through the invention whether as new technology product or process. However, this also increases costs and due to the exclusivity involved in iprs, there can be monopolisation that can further become abusive. In such scenario, competition policy brings static efficiency promoting enhanced access and lower prices through enhanced market competition resulting in higher consumer welfare. Restricting parallel imports would enable vertical restraints to be raised by exceeding the ambit of patents and increasing the price of the patented products.784

The argument that the vertical restraints would benefit the patent holder is true only within the first sale, where the patent holder is able to increase net revenue. After that it exceeds the net revenue from the patent and the revenue collected is only due to market segmentation where additional revenue is collected separately from each market riding on the patent. Restraining such exceeding ambit of a patent through the mode of exhaustion and enabling parallel imports would help increase the distributive efficiency and promote market competition.

It has been elaborated how there has been efforts to introduce exclusive international competition policy at the international level at the gatt/wto as well as at other international forums without much success. However as discussed earlier, the trips have competition law elements as checks and balance measures that can be used by national competition law agencies of wto members to restrain anti-competitive market behaviour. The issue of exhaustion of iprs need not be addressed under these provisions since it has been addressed exclusively in Article 6 of the trips Agreement. Instead, Article 6 can be suitably amended to allow international exhaustion of patents across wto membership as an ex-ante measure from the competition policy perspective subject to essential exceptions.

12.5 Addressing Parallel Imports under State Control and Restraints on Intellectual Property Rights

The above discussions have summarised why international exhaustion of patents is necessary considering different aspects of international trade governed under the wto regulations. It is now important to elaborate those circumstances where international exhaustion should not apply and hence while recommending adoption of international exhaustion as a global rule, these circumstances should be considered as exceptions. The foremost being that international exhaustion can only trigger-in when the patent exists under market conditions without any market intervention or alteration of the rights, including by the State.785 Broadly these interventions are categorised in two distinct sections as elaborated below.

12.5.1 Restraint on Parallel Imports Due to Non-existence of Patents in Country of Export or Patents being Subject to Compulsory Licenses and Other Controls

Patents are granted as unencumbered market exclusivity to provide lead-time over competitors and incentivise innovation. The aim is to enable the inventor to earn ip revenue as reward for introducing the invention and disclosing it. The inventor is allowed to charge an additional patent value when the patented product is sold or can charge royalty if it is licensed under market driven negotiated terms. The doctrine of international exhaustion triggers-in only after the patented product is first sold and revenue collected. The aim is to restrain repeat collection of patent revenue from different markets. However international exhaustion should not impact those products which are outside the purview of patents or do not enjoy unencumbered market access.

  1. 1.In case the patent does not exist because the country does not have a patent law or the invention is outside the realm of patents then such products would not qualify as parallel imports. If the patents do not exist in the first place, there is no possibility of exhaustion of the patent rights. E.g. A pharmaceutical company manufactures a drug under patent in country ‘A’ and apart from selling it in the country at US$ 100/-, exports and sells in country ‘B’ at US$ 70/- where the patent holder enjoys patent protection but the country practices international exhaustion of patents. Another pharmaceutical company legally manufactures a generic version of the same drug in country ‘C’ a ldc, where the law enables such production outside patents due to transitional exemptions under the trips and sells at US$ 20/- in the country.

A trader in country ‘B’ buys the generic version of the drug in country ‘C’ and imports it to country ‘B’ claiming it to be parallel imports since country ‘B’ follows international exhaustion. The imports would not qualify under international exhaustion since although country ‘B’ follows international exhaustion, in the source country even when the generic drug was manufactured legally, there was no patent that would have exhausted on placing for distribution the first time. Hence such imports would have the characteristic of unauthorised production and considered to be an infringed product in country ‘B’ where the drug is protected under patent.

  1. 2.In case the patent is subject to and produced under a cl, or subject to price cap or quantity cap, the patent does not enjoy unencumbered market exclusivity. The revenue generated by sale or collection of royalty is not market driven but through government intervention. Patent exhaustion triggers when the patent holder has been able to obtain the patent value through first sale/distribution. In this case due to encumbrances, the patent holder is unable to raise revenue under competitive market conditions. In such scenario, patents should not be considered exhausted and parallel imports should not be allowed. If such parallel imports of patented products subjected to market regulation either by cl or any other means were allowed, it would distort trade.

One may argue that the cl or other State intervention could be to regulate anti-competitive behaviour by the patent holder. While such cases of market intervention by the State regulator through issuance of cl or any other measure might be justified, its appropriateness would depend on specific factors in the case. Any such decision of the regulator might be later subject to judicial intervention and declared unjustified. Allowing parallel imports of such cases of State intervention even if initiated for valid local reason, would create uncertainty, confusion and risk the possibility of distorting the importing market hence should not be allowed.

12.5.2 Restraint on Parallel Imports due to Inferior Quality of Products

Patents are often licensed for production in different countries to cater to different markets. Sometimes production under patent license differentiates qualities for different markets as a result the patented product manufactured under license may be of inferior quality. The instances of qualitative difference in the patented product and that produced under a license is like trademarks. The possibility of such inferior quality product manufactured under license being cheaper than that of other market where it is of higher quality cannot be ruled out. Once international exhaustion is applied, such patented products would also be subject to international exhaustion, but allowing parallel imports of such products would be unjustified and distorting the market by entry of poor-quality products. Allowing parallel imports of such inferior quality product in the market would create confusion in the minds of buyers. The customers might consider the quality of the cheaper product same as that of the higher quality, costlier product sold through the authorised distributor.

Necessary measures need to be taken to address such anomalies. Although one might argue that the decision to make the inferior quality product was that of the patent holder and even when the licensee produced it, quality control measures could be contractually implemented. Hence the authorised distributor of the patent holder should not be allowed to restrain entry of such parallel imports. Drawing parallels with cases of price differentiation when a patent holder sells the products cheaper at one market creating the source for parallel imports by way of re-importation, one might argue that parallel imports with different quality should be allowed. However, this is not an issue of restraining parallel imports to benefit the patent holder but a case of material difference between the patented product being sold by the authorised distributor of the patent holder and the parallel importer. In case of price differentiation, the consumer is not subject to any deception or confusion and gains from the distributive efficiency enabled through parallel importation. In the case of parallel importation of cheaper patented goods of inferior quality, the consumer suffers confusion and even deception by the patent holder for no error of judgment of the customer.

Restriction of parallel imports of such products would be logical but on the other hand this might also attract frivolous complaints from the authorised distributor with sole intention of restricting market competition. Even when the quality of the product might be same as that being sold by the authorised distributor, there may be allegations and parallel imports stopped from entering the market. Hence such cases of restricting parallel imports of inferior quality products manufactured under legitimate patent license should be on a case-by-case basis. The most appropriate way to establish a process of restricting trade in such inferior products can be by exercising Article xx (d) wherein such restriction shall need to pass the necessity test, the principle of proportionality and also qualify under the chapeau of Article xx.

For the reasons cited above, based on the international exhaustion of patents through licensing, irrespective of the quality of the parallel imports, they should be allowed. Given that whether a product is a genuine parallel import or a case of counterfeit can still be adjudicated domestically. As such the authorised local distributor or the patent holder’s local representative should be allowed to initiate appropriate legal action in the jurisdiction to enjoin the sale of such parallel imports as unauthorised due to material difference of the products being sold. This would enable both the parties to be subjected to natural justice and if the patent holder or the authorised distributor can establish material difference to the extent of inferiority of the parallel imports, they shall be barred. This would also discourage prospective parallel importers from importing inferior quality products.

12.6 Amendment of the trips Agreement: Proposed Draft Amended Text for Article 6, trips

The blurring of boundaries between disciplines, formalised frameworks for ownership of the developed knowledge and fair benefit sharing between partners to create niche domains are issues that society will have to cope with. The emerging scene in the near future will seek positive linkages between enhancing competition in society on one hand (discourage monopolistic practices) and establishing legal ownership of innovations (with enforcement of acquired rights) on the other. Strongly knitted societal, moral and ethical issues are getting intertwined into technology management, ownership of innovations and business process.786

The following text in Article 6 of the trips titled ‘Exhaustion’, ‘For the purposes of dispute settlement under this Agreement, subject to the provisions of Article 3 and 4, nothing in this Agreement shall be used to address of the exhaustion of intellectual property rights.’ is proposed to be replaced by the text below:

For the purpose of identifying the rights of the ip owner as provided in Article 28 and subject to the provisions of Articles 3 and 4 of this Agreement, the holder shall exhaust the iprs in all forms once the ip protected product has been placed on the market of any wto Member by the ip holder or with express authorisation of the ip holder. Such exhaustion shall take effect subject to the subsistence of un-encumbered ip rights in the country of first sale.

The ip holder shall not be entitled to restrict importation/exportation of any form of the ip products from market of one wto member to another either by contract or in any other manner, once the product has been distributed by the ip holder or with express authorisation of the ip holder in any of the wto member country markets.

Nothing shall restrain the ip holder to restrict importation/exportation of such products that are not ip protected in the country of exportation, either due to absence of necessary ip regulations and/or due to temporary or permanent withdrawal and/or suspension of the ip rights or restrictions on exercise of the ip rights, irrespective of reasons for the same.

As has been analysed in this book, patents increase costs to incentivise innovation but considering the ubiquitous nature of patents the market exclusivity legalised through patents could be extended beyond its ambit creating market distortion. It is argued that there is need to address such ubiquity and balance static and dynamic efficiencies. It has also been presented how different countries tried to address the issue through exhaustion of the patents on first sale of the patented products or products manufactured by the patented process. From the perspective of multilateral trade, restricting international exhaustion enables the patents to act as a non-tariff barrier hence functioning directly opposing to the aims of the multilateral trade regime governed by wto regulations.

In today’s scenario where trading between wto members have immensely increased, it would be practical to allow international exhaustion with certain conditions rather than opt for other exhaustion modes and consider one’s own products as infringed. One might argue as to when wto members have not been able to come to a consensus on international exhaustion earlier during the trips negotiations, how can it be resolved now. To address such arguments, one need to assess number of issues, the circumstances during the trips negotiations and at present are completely different. First, at the time trips was negotiated, the exhaustion issue was not broadly tested in member countries. As has been presented, most of the countries national courts have decided in favour of international exhaustion in some form and some of the national governments have also adopted it. The application of regional exhaustion in EU and eea has shown how international exhaustion has benefited in removal of trade barriers within the region hence it would be a successful model at the wto. Further, the implementation of Doha Declaration confirmed that countries can adopt international exhaustion beyond doubt.

Finally, it has been proven that following international exhaustion reduces costs and is consumer welfare enhancing. In any country if iprs become an access issue due to excessive costs, the government would be forced to intervene, whether by imposing cl or introducing price cap or other such measures. While cl measure is expected to be utilised as last resort but without any other effective means, they would increasingly become the easiest way of intervention. If wto members adopt international exhaustion as standard practice, then the possibility of offsetting the high costs through legitimate cheaper imports would be automatic. The tendency of using cl or other State interventionist measures will be least hence benefitting all. Given that the wto negotiations are now witnessing new issues like ‘E-commerce’, ‘Competition Policy’, and ‘Trade-Facilitation’ at the contemporary Ministerial Rounds, international exhaustion might be introduced too. In such scenario a global regime of international exhaustion introduced through amendment of the trips Agreement is being proposed in this book.


Abbott Frederick, Correa Carlos and Drahos Peter, “Emerging markets and world patent order: The forces of change”, in Abbott Frederick, Correa Carlos and Drahos Peter (eds.), “Emerging Markets and the World Patent Order”, Edward Elgar Publishing Ltd., pg. 9, 2013.


Encaoua David, Guellec Dominique and Martinez Catalina, “Patent systems for encouraging innovation: Lessons from economic analysis”, Journal of Economic Law, pg. 1425, (1423–1440), 2006.


Rothnie A. Warwick, “Parallel Imports”, Sweet & Maxwell, pg. 108, 1993.


Christopher Heath, “Patent Exhaustion rules and self-replacing technologies”, in Irene Calboli and Edward Lee edited, “Research handbook on Intellectual Property Exhaustion and Parallel Imports”, Edward Elgar Publishing Ltd., pg. 291 (289–307), 2016.


Reichgericht in Zivilsachen (rgz) 50, 362 – “Duotal”, cited by Christopher Heath, Also see Ibid at 105, pg. 16.


W.R. Cornish, “Intellectual Property: Patents, Copyrights, Trade Marks And Allied Rights”, Sweet & Maxwell London, pg. 23, 1981.


Ibid at 62, pgs. 425, 426.


Mckenzie Francine, “Free Trade and Freedom to Trade: The Development Challenge to gatt 1947–1968”’ in “International Organizations and Development 1945–1990” by Mckenzie Francine, Springer, pg. 150, 2014.


Exceptions for pta, rta and ftas included at the very beginning of the negotiations.


Ibid at 303, pg. 386, 387.


Ibid at 323.


Ibid at 332.


Ibid 332.


Ibid 314, pg. 43.


Ibid 370, 155, 156, (148–189), 2011.


Elaborated in Chapter 7.1.3 of this book.


Article xx (d) states, “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: … (d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to … the protection of patents, trademarks and copyrights.”


Ibid at 376, pg. 142.


Ibid at 511.


Ibid at 380, pg. 2359.


Ibid at 657.


Ibid at 98, pg. 377.


Hewitt Garry, “Synthesis Report On Parallel Imports”, Com/Daffe/Comp/Td (2002)18/Final, Directorate For Financial, Fiscal And Enterprise Affairs Trade Directorate, Joint Group on Trade and Competition oecd 26th June 2002.


Ibid at 55, pg. 18.


Ibid at 739, pg. 457.


National Economic Research Associates (nera), SJ Berwin & Co and iff Research, “The Economic Consequences of the Choice of a regime of Exhaustion in the area of Trademarks”, Final Report for dgxv of the European Commission, London, 8th February 1999.


Ganguli Prabuddha, “Intellectual Property Rights – Unleashing the Knowledge Economy”, Tata McGraw-Hill Publishing Company Ltd., pg. 12, 2001.

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