Intellectual Property (Exhaustion of Rights)

From Max-EuP 2012

by Thomas Dreier

1. Purpose

Amongst other exclusive rights, intellectual property (IP) rights (intellectual property) grant to rightholders a right of distribution. The distribution right can be defined as the right to control the distribution of material copies of protected objects (the patented invention, the trade mark and the copyrighted work) to the public by way of sale or otherwise. In view of the territorial nature of intellectual property rights, a person holding exclusive rights with regard to one and the same protected object in more than one country enjoys a bundle of national distribution rights. On the basis of these distribution rights, such a rightholder is in a legal position to grant licences only with regard to some of the national distribution rights, but not with regard to others (or to license distribution in different territories to different licensees) and thus to partition the market existing for his product. Of course, such a partitioning appears to be unacceptable within one and the same economic territory, since it hinders the free movement of goods within this territory. The legal tool designed to prevent such unwanted partitioning of a unified market is the exhaustion of the distribution right. Once IP goods which are protected by an IP right have been put into circulation either by the rightholder himself, or with his consent by a third party, the distribution is said to be exhausted. In other words, once the distribution right has been exhausted, the rightholder can no longer stop distribution of the objects in question on the basis of his distribution right.

However, if the purpose of exhaustion of the distribution right is always to prevent the partitioning of markets, its justification depends on whether exhaustion takes place in the national, European or international context. In the national context, where only one national distribution right is in question, the issue is to make sure that the rightholder does not subdivide the national territory into different distribution areas. Moreover, the buyers of goods protected by IP rights have to be protected against unforeseeable limitations of the national distribution right. Exhaustion is mainly justified by the fact that the rightholder has the chance of bargaining for and obtaining adequate remuneration at the occasion of the first sale of his IP-protected goods. At the Union level, however, the main problem is solving the tension between the territorial nature of IP rights on the one hand and the principle of free movement of goods (Art 34 TFEU/28 EC) within the European Union. The Treaty on the Functioning of the European Union (TFEU) recognizes this tension and gives preference to the free movement of goods unless restrictions to this principle are justified on the grounds of the protection of IP rights (Art 36 TFEU/30 EC). In other words, the TFEU accepts that the territorial nature of IP rights may result in a limitation of the principle of free movement of goods. On the basis of these treaty provisions, the European Court of Justice (ECJ) has, on the one hand, developed the concept of Union-wide exhaustion and, on the other hand, defined the circumstances under which a partitioning of the internal market remains permitted. At the international level, the emphasis is on the issue to what extent IP rightholders shall be in a position to legally partition the global market. Whereas the logic of free trade speaks against such a possibility and in favour of international exhaustion, it has to be kept in mind that there is no world-wide economic area. Rather, the global market is characterized by different levels of consumers’ buying power and it may indeed make sense to partition territories and charge different prices in different countries for identical goods. If national distribution rights were exhausted under a principle of international exhaustion, such a partitioning of the global market would no longer be possible because IP rightholders could no longer invoke their national distribution rights in order to prevent re-importation of their goods by third parties from a country with a low price level into countries with high price levels.

2. Characteristics

Traditionally, in the EU Member States, national exhaustion follows different traditions. Whereas most countries either did not extend the distribution right to acts of resale, or provided for a limitation to this effect, in France the so-called droit de destination theoretically enabled the rightholder to control any re-sale subsequent to the first sale of IP-protected goods. In practice, however, it seems that this right has not been exercised, or it has been assumed that the rightholder contractually consented to acts of re-distribution in the initial sales contract.

Within the EU, in establishing and defining the principle of Union-wide exhaustion, the ECJ has given preference to the free movement of goods over the principle of territoriality of IP laws in a number of early decisions (for copyright law see ECJ Case 78/70 – Deutsche Grammophon [1971] ECR 487; ECJ Joined Cases 55/80 and 57/80 – Musik-Vertrieb Membran GmbH v GEMA [1981] ECR 147; for trade mark law see ECJ Case 16/74 – Centrafarm BV et al v Winthorp BV [1974] ECR 118; for patent law see ECJ Case 187/80 – Merck v Stephar and Exler [1981] ECR 206; and for design law see ECJ Case 144/81 – Keurkoop v Nancy Kean Gifts [1982] ECR 2853). In copyright, Union-wide exhaustion only affects the distribution of tangible copies of the copyrighted work. However, the intangible communication of a copyrighted work to the public does not exhaust the exclusive right with regard to subsequent acts of public communication (ECJ Case 62/79 – Coditel I [1980] ECR 881: trans-border cable retransmission of a foreign broadcast of a protected work). Consequently, any subsequent public communication still needs the consent of the rightholder of the work initially broadcast. In subsequent cases, the ECJ has further defined several details concerning the prerequisites for exhaustion. Another limitation results from the narrow definition of the distribution right contained in Art 4(1) Information Society Directive (Dir 2001/29), which only applies, according to the ECJ, if a transfer of ownership has taken place with regard to the particular copy in question (ECJ Case C-456/06 – Peek & Cloppenburg [2008] ECR I-2731). The reason is that the issue of exhaustion may only arise if the case to be decided is about the distribution right.

Subsequently, the principle of Union-wide exhaustion has found its way into Union legislation as well. Provisions to this effect are to be found with regard to the Union rights, ie the Community Trade Mark (Art 13 Reg 40/94) and the Community Design (Art 21 Reg 6/2002) as well as in the Proposal for the Community Patent (Art 10 of the proposed Regulation for a Community Patent of 2000). The same applies regarding the harmonizing directives on trade marks (Art 7 Dir 89/104), designs (Art 15 Dir 98/71) and copyright (Art 3(3) and 4(2) Dir 2001/29). It should be noted that in trade mark law (and in patent law under the proposed Community Patent), other than in copyright and design law, exhaustion does not take place in cases where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market. In copyright, in line with ECJ case law, Dir 2001/29 prescribes a different treatment of distribution of tangible copies (exhaustion) and intangible public communication (no exhaustion). Moreover, according to Art 4(1) of Dir 2001/29 exhaustion does not apply in each case of putting copies of copyrighted works into circulation, but only in case of a ‘first sale or other transfer of ownership’ (see also ECJ Case C-456/06 – Peek & Cloppenburg [2008] ECR I-2731), not, however, if the copy is only rented (ECJ Case C-61/97 – Laserdisken [1998] ECR I-5171). Moreover, Dir 2001/29 leaves untouched the rental right provided for by Dir 92/100 (subsequently republished in consolidated form as Dir 2006/ 115). This means that the first sale of a copy does not exhaust, with regard to this copy, the rightholder’s exclusive right to rent this copy out (ECJ Case C-200/96 – Metronome Musik [1998] ECR I-1953).

The issue of international exhaustion, however, has purposely been left undecided in Art 6 TRIPS, which provides that ‘nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights’. In other words, no WTO Member State can be brought before the WTO Dispute Settlement Body on account of providing or not providing for international exhaustion in its national legislation. Whereas smaller countries which are copyright net-importers tend to favour international exhaustion, the United States insists in its bilateral trade agreements that its trading partners exclude international exhaustion in their respective national laws. As far as Europe is concerned, the ECJ – contrary to an earlier decision by the EFTA court – has decided against the principle of international exhaustion in a case concerning trade marks (ECJ Case C-355/96 – Silhouette [1998] ECR I-4799 and subsequently ECJ Case C-173/98 – Sebago [1999] ECR I-4103). This has also been repeated for copyright in Art 4(2) of Dir 2001/29 (for the mandatory effect for Member States’ national legislation see ECJ Case C-479/04 – Laserdisken v Kulturministeriet [2006] ECR I-8089). However, the absence of international exhaustion does not exclude the finding of an abuse of a dominant market position within the meaning of Art 102 TFEU/82 EC when the rightholder refuses to grant an import licence (CFI Case T-198/98 – Micro Leader [1999] ECR II-3989). Finally, in view of the AIDS crisis the WTO members have agreed that the importation of anti-AIDS drugs which have been manufactured in their country of origin under a compulsory licensing scheme could not be blocked on the basis of a prohibition of international exhaustion. Also, the territorial limitation of the effects of a compulsory licence cannot be held against such importation.

Apart from the details regarding the required conditions for exhaustion already mentioned above (in particular, what has to be understood by the ‘legitimate reasons’ which may justify the proprietor’s opposing further commercialization of trade mark goods put into circulation by the rightholder or with his consent; see, eg, ECJ Case C-59/08 – Copad [2009] ECR I-3421; ECJ Case C-558/08 – Portakabin [2010] ECR I-0000), room for diverging national interpretation of the principle of exhaustion exists in two respects. First, in a number of Member States it is subject to discussion to what extent exhaustion applies to the trade in ‘used’ software or to mere software licences in cases in which the rightholder does not deliver physical copies of the copyrighted computer program. Secondly, national laws might differ in their answers to the question whether the distribution right with regard to one and the same copyrighted work can be split with regard to different distribution channels. Where—and to the extent to which—this is accepted, marketing goods in one channel of commerce would not exhaust the right to distribute the very same goods in a different channel of commerce, although they were initially put on the market by the rightholder or with his consent (eg in Germany, the Federal Supreme Court (BGH) has decided that the sale of a copyrighted book in a book club does not exhaust the right to distribute the very same book in general book stores, see BGH 21 November 1958, GRUR 1959, 200, 202; however, the BGH reached a different conclusion regarding the sale of books via coffee shops, see BGH 8 November 1989, GRUR 1990, 669; likewise, the BGH refused to recognize a special channel of commerce for so-called Original Equipment Manufacturer (OEM) software, ie software which is distributed by the original manufacturer only in connection with the sale of a personal computer, which has as its consequence that the acquirers of these cheaper OEM versions are free to resell them—without any accompanying computer—on the market for the more expensive general software version, see BGH 6 July 2000, GRUR 2001, 153).

3. Details

Additional issues regarding the exhaustion of the distribution right concern questions such as the one when goods have been ‘put into circulation’. According to the ECJ, goods are not put into circulation if they are merely passed on from one undertaking of the same concern to another, eg from a parent company to its subsidiary (see ECJ Case 16/74 – Centrafarm BV et al v Winthorp BV [1974] ECR 118; ECJ Case 119/75 – Terrapin v Terranova [1976] ECR 1039; ECJ Case 144/81 – Keurkoop v Nancy Kean Gifts [1982] ECR 2853), and also not if the goods protected by an IP right have been put onto the market abroad under a compulsory licence (ECJ Case 19/84 – Pharmon v Hoechst [1985] ECR 2281). The same is true for specimens labelled ‘not for sale’ (ECJ Case C-127/09 – Coty Prestige Lancaster Group [2010] ECR I-0000). Moreover, it has to be clarified when there has been a first ‘sale’ of the respective goods when licences are granted (see ECJ Case C-61/97 – Laserdisken [1998] ECR I-5171: rental not first sale; see also ECJ Case C-456/06 – Peek & Cloppenburg [2008] ECR I-2731: letting others use the object or merely displaying it for commercial purposes not first sale). For the use of someone else’s trademark as a keyword for internet referencing services see ECJ Case C-558/08 – Portakabin.

Also, the question of putting goods into circulation ‘within the Union’ is in need of clarification in view of existing differences in national laws regarding the issue how to treat mere export and mere transit of infringing goods (for goods of original merchandise having the customs status of non-Union goods when the offering is done and/or the sale is effected while the goods are placed under the external transit procedure or the customs warehousing procedure see ECJ Case C-405/03 – Class International [2005] ECR I-8735). Moreover, exhaustion also applies with regard to acts undertaken in the European Economic Area (EEA) and the effect of exhaustion also extends to the EEA (see Art 65(2) in connection with Annex XVII Point 4 of the Agreement on the European Economic Area; for trade mark law see ECJ Case C-16/03 – Peak Holding [2004] ECR I-11313).

In several instances the ECJ has had the opportunity to specify the conditions under which the owner of a trade mark may legitimately oppose further commercialization of a pharmaceutical product imported from another Member State in its original internal and external packaging with an additional external label applied by the importer (for details see ECJ Case C-276/05 – The Wellcome Foundation [2008] ECR I-10479; ECJ Case C-348/04 – Boehringer Ingelheim et al [2007] ECR I-3391; ECJ Case C-143/00 – Boehringer Ingelheim et al [2002] ECR I-3759; ECJ Case C-379/97 – Upjohn [1999] ECR I-6927; ECJ Joined Cases C-427/93, C-429/93 and C-436/93 – Bristol-Myers Squibb et al [1996] ECR I-3457; for exhaustion of patent rights in this respect see ECJ Joined Cases C-267/95 and C-268/95 – Merck v Primecrown and Beecham v Europharm [1996] ECR I-6285). Also issues of burden of proof have been addressed (see also ECJ Case C-244/00 – van Doren [2003] ECR I-3051).

Likewise, the ECJ has clarified issues regarding the scope of exhaustion. Thus, exhaustion of the distribution only applies with regard to specific merchandise which has been put into circulation and does not affect the distribution right with regard to other merchandise from the same production (ECJ Case C-173/98 – Sebago [1999] ECR I-4103); first sale does not exhaust the exclusive rental right (ECJ Case C-200/96 – Metronome Musik [1998] ECR I-1953); and the consent given to consult a protected database does not exhaust the right to prevent extraction and/or re-utilization of the contents of that database (ECJ Case C-203/02 – The British Horseracing Board et al [2004] ECR I-10415).

Another question is whether exhaustion may exceptionally also affect the reproduction right in cases in which the rightholder might otherwise make use of the exclusive reproduction right in order to block the free movement of goods for which the distribution right is exhausted. The ECJ answered this question in the affirmative in a case in which the owner of a trade mark for the form and getup of his merchandise wanted to enjoin a reseller from advertising the goods bearing the trade mark on the basis of his reproduction right, although the goods in question had been legitimately put onto the market by the rightholder (ECJ Case C-337/95 – Dior v Evora [1997] ECR I-6013). Similar cases may arise with regard to acts of reproduction which the buyer of a used computer program has to perform where the distribution right with regard to the program has been exhausted (see ECJ, pending case C-128/11 – UsedSoft GmbH). However, so far the ECJ has not formulated a general rule governing so-called annex reproductions.

Finally, it should be noted that the effect of exhaustion vis-à-vis third parties cannot be excluded by way of a contract between the first seller and the first buyer (see ECJ Case C-16/03 – Peak Holding [2004] ECR I-11313). Of course, in the reverse scenario in which the distribution right has not been exhausted, the importation of goods can be allowed by way of contract (even if the contract in question does not explicitly mention this point but can be interpreted as such; see ECJ Joined Cases C-414/99, C-415/99 and C-416/99 – Zino Davidoff and Levi Strauss [2001] ECR I-8691).

4. Harmonization perspectives

The principle of exhaustion of the distribution right which was initially formulated by the ECJ and subsequently found its way into several legislative acts of the Union is by now a well established part of the acquis communautaire in the area of IP law. The issue of international exhaustion has likewise been clarified by the ECJ. It follows that in the future the ECJ will only have to deal with rather detailed questions concerning the conditions and scope of exhaustion.

Literature

Ulrich Joos, Die Erschöpfungslehre im Urheberrecht (1991); Hanns Ullrich, ‘Technology Protection According to TRIPS’ in Friedrich-Karl Beier and Gerhard Schricker (eds), From GATT to TRIPS—The Agreement on Trade-Related Aspects of Intellectual Property Rights (1996) 357; Rolf Sack, ‘Die Erschöpfung von gewerblichen Schutzrechten und Urheberrechten nach europäischem Recht’ [1999] Gewerblicher Rechtsschutz und Urheberrecht (GRUR) 193; Carl Baudenbacher, ‘Erschöpfung der Immaterialgüterrechte in der EFTA und die Rechtslage in der EU’ [2000] GRUR Int 584; Andreas Leßmann, ‘Erschöpfung von Patentrechten bei Konzernvertrieb’ [2000] GRUR 741; Christina Koppe, Die urheberrechtliche Erschöpfung—eine Analyse der Konsumtionsnorm unter besonderer Berücksichtigung der jüngsten Rechtsprechung des BGH sowie des Europäischen Gemeinschaftsrechts (2004); Morton Douglas, Die markenrechtliche Erschöpfung beim Parallelimport von Arzneimitteln (2005); Peter Ganea, ‘Ökonomische Aspekte der urheberrechtlichen Erschöpfung’ [2005] GRUR 102; Silke von Lewinski, ‘International Exhaustion of the Distribution Right under EC Copyright Law?’ (2005) 27 EIPR 233; Christian von Kraack, TRIPS oder Patentschutz weltweit—Zwangslizenzen, Erschöpfung, Parallelimporte (2006); Andreas Wiebe, ‘The Principle of Exhaustion in European Copyright Law and the Distinction Between Digital Goods and Digital Services’ [2009] GRUR Int 114.

Retrieved from Intellectual Property (Exhaustion of Rights) – Max-EuP 2012 on 19 May 2022.

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