Understanding How The Principle Of Community Exhaustion Affects Your IP

Tuesday, February 1, 2005 - 01:00

What Exactly Is "The PrincipleOf Exhaustion?"

The Principle of Exhaustion is a fundamental limitation on intellectual property rights (IPRs), the legally created rights of the intellectual property holder that attach with a particular form of intellectual property (IP), such as patents, trademarks, and copyrights. This limitation has historically been territorial, primarily national. Each nation creates and enforces its own IPRs solely within its jurisdiction. The exhaustion of rights principle is followed by many nations for their internal markets. This principle holds that a "first sale" of an item incorporating the protected intellectual property in the national territory will exhaust the rights of the holder of the intellectual property, thereby preventing him from further domestic enforcement of the related IPRs against others regarding that item. This is known as "national exhaustion." Thus, a balance is struck between awarding a holder of intellectual property with IPRs and ensuring that his IPRs are not used to restrict the movement of goods within the territory's internal market. Essentially, once an IPR holder has exhausted his right to exclude in the national territory by selling in some way the product embodying his IP, he loses the right to exclude others from selling that product in some way in the same market. The practice of exhaustion has a longstanding history, and for good reason. IPRs can't be globally granted on a forever basis, because it would restrict the growth of markets and thus, trade and economies.

How Does This Affect A U.S. Company's InternationalBusiness Model?

National exhaustion is only one form of this checks and balance system. There is also international exhaustion, in which the IPR holder exhausts his rights in the country recognizing this rule once he has marketed his goods anywhere in the world. Relatively recently, the European Union (EU) has subscribed to community exhaustion, whereby a "first sale" within the EU Community may extinguish the rights of an IPR holder throughout the EU. This is a big change, since traditionally, each of the European countries practiced national exhaustion, protecting IP from border to border. With these changes in mind, a U.S. company that is international in scope will have to carefully monitor the principle of community exhaustion. There is a real risk relating to sales by a parallel importer for goods ranging from clothing to pharmaceuticals. "Parallel imports" is the preferred term of the EU where the US prefers "gray goods." Parallel imports are goods that are legitimately marketed and unofficially acquired abroad, which then are imported into another country against the wishes of the owner. A multinational business will have to carefully plan sales in and outside the EU, for example: (1) if they should go to market there; (2) how to put their product on their chosen markets and (3) how to successfully monitor the markets once they've made the move.

What Is The Role Of Corporate Counsel When It ComesTo Exhaustion?

Generally, corporate counsel needs to have a clear understanding of what exhaustion is and how it works in order to protect the company's IPRs and interests in all global markets. It is also important to understand that your IPRs can be exhausted by the efforts of a third party such as a licensee or distributor. Even if the original patent or trademark holder objects to having his branded goods sold by unauthorized agents, exhaustion can still occur. As consent to sell is tantamount to extinguishing one's IPRs, it is critical that corporate counsel understands what constitutes consent. Corporate counsel will want to work with outside counsel that is well versed, not just with IP, but also in areas of anti-trust and competition law. They must be conversant in areas relating to exhaustion and rely both on internal and external partners to be watchful of developments relating to the company's product and markets.

It is also wise to expressly say in contracts, distribution and licensing deals that you don't want your product imported or exported under certain circumstances. EU law does not require this, but spelling it out can only help you if a third party challenges your intellectual property rights. Corporate counsel may also use contractual provisions to prevent parallel importations of its products from third countries into the EU. Counsel must consider the compatibility of its agreements with competition law and the potential side effects of export bans on trade among member states.

Do You See Any Changes Relating To Exhaustion In The Future?

The parameters of exhaustion are still under development in many countries, including those in the EU, and those applying for EU membership. While the category of IP law relating to trademark is well developed in the EU, there are still developments underway in patent and copyright, amongst other areas. The expectation is for changes to be analogous to trademark in other areas of IP law in the EU.

Also, as the EU continues its enlargement, it will be interesting to see what happens when a country like Poland or the Czech Republic, where the IP law has traditionally been poor, especially for pharmaceuticals, becomes a member of the EU. With Poland and the Czech Republic becoming new members in May 2004, along with eight other countries, transitional provisions have been provided under which the new member country must adopt EU IP law. These provisions vary from new member country to new member country. The effect of these provisions has yet to be seen.

Is It Going To Become More Difficult To Deal With Exhaustion In The Future?

There are particular challenges, for example in the pharmaceutical field. Parallel importing of pharmaceutical drugs is supported by the EU Commission as a way to augment the Community's national healthcare. Counsel must be vigilant. It is a necessity for all businesses to monitor the parallel import trade, which in some cases is eroding IP rights in national member states. The EU is trying to become transparent between countries, like America is between states. The issue of parallel importers is not going away. A multinational company with an international presence should have a plan in place to monitor how its products are being sold. Such a program should involve at least marketing, sales, business intelligence and legal colleagues.

It is a good idea to form an in-house committee, as well as educate employees to be on the alert for product sales by a third party. Policing action is necessary. Corporate leaders will also want to be on good communication terms with their distributors. With such a program in place, a company can proactively ensure that its products and related intellectual property are safeguarded. An effective monitoring program may alert a company to expect the requisite notice from a parallel importer of his intention to market the imported product. Possession of such knowledge before the fact can provide more strategic room for effective response.

Margaret Buck is an associate in Cozen O'Connor's intellectual property department, concentrating her practice in patent preparation and prosecution. Prior to law school, Ms. Buck worked for more than 10 years in the food, personal care, cosmetics and pharmaceutical industries and holds several patents herself. To contact Ms. Buck, call 215-665-4183.