Parallel imports involve the import and resale in a country, without the consent of the patent holder, of a patented product which was put on the market of the exporting country by the title holder or in another legitimate manner. For example, a company may buy a patented machine sold in Germany and then resell it in Canada - where the same patent is in force - without the patent holder’s permission.
The underlying concept for allowing parallel imports is that since the inventor has been rewarded through the first sale or distribution of the product, he or she has no right to control the use or resale of goods put on the market with his/her consent or in otherwise authorized form. In other words, the inventor’s rights have been “exhausted”129.
129 The doctrine of “exhaustion of rights” may be applied at the national level (rights are deemed exhausted domestically and the commercialization in foreign countries is not deemed to have exhausted the patentee’s rights), at the regional level, as in the case of the European Community (exhaustion is deemed to have occurred if commercialization took place in a country member of a regional agreement), or at the international level. The presentation made in the text refers to this latter case.
Parallel imports, where allowed, cover legitimate products, not counterfeited products130. In some instances, however, parallel imports have been admitted (on a regional scale) even when originating in a country where the product was not protected131.
130 Abundant literature and considerable case-law (particularly in the European Community) exists on the doctrine of exhaustion and parallel imports. See, e.g., Abott, 1998.
131 See the decisions of the European Court of Justice in re Merck v. Stephar, Merck v. Primecrown, and Beecham v. Europharm.
In economic terms, the acceptance of parallel imports may prevent market segmentation and price discrimination by title-holders on a regional or international scale. In other words, parallel imports allow consumers effectively to shop on the world market for the lowest price for a patented good132. Parallel imports may be of particular importance in the health sector, since the pharmaceutical industry generally sets prices differently throughout the world for the same medicines. Importation of a (patented) medicine from a country where it is sold at a lower price will enable more patients in the importing country to gain access to the product, without preventing the patent owner from receiving the remuneration for the patented invention in the country where the product was first sold.
132 In some countries, laws have established regulations providing for exclusive licensing agreements for the importation and distribution of goods. This kind of regulation restricts competition and may practically impede parallel importation.
On the negative side, states must evaluate the argument that there is an economic risk that the doctrine of exhaustion may discourage price discrimination favouring the developing countries. It has been argued that were parallel imports to be admitted generally, companies would tend to charge a single price worldwide, leading to an increase in the (supposedly lower) price that may otherwise be charged in low-income countries133. The pharmaceutical industry is reportedly concerned with the possible leaks across markets that could reduce its profit margins and thereby its ability to recoup R&D investments. There are further questions concerning parallel importing from markets where pharmaceuticals prices are regulated. For these and other reasons, states need carefully to monitor the actual implementation of their exhaustion policy.
133 However, prices levels are generally established in different countries according to the consumers’ ability to pay. Hence, the setting of a single world price may be not be economically viable.
REGULATIONS ON PARALLEL IMPORTS
Parallel imports have been admitted in many developed and developing countries, on a regional or international scale, for all or some areas of IPRs. For instance, in the European Communities (EC) the European Court of Justice has applied the doctrine of regional exhaustion of rights to the entire EC and to different types of IPRs, in order to prevent market segmentationa). Once a patented product has been sold in an EC country, it can be resold in any other member country without infringing on the IPR holder’s rights.
a)In the case of the United Kingdom, however, the principle of international exhaustion has been admitted in some cases. See, e.g., Whybrow, 1997 and Carboni, 1999, on the “Davidoff” case. The European Court of Justice has accepted parallel imports even in cases where the product was not protected by a patent in the exporting country (Merck & Co. vs. Primecrown Ltd., December 1996).
Some countries recognize the international exhaustion of patent rights (and thus permit parallel imports) in case lawb), while others expressly establish exhaustion principles in national patent law. The Andean Group “Common Regime on Industrial Property”, as contained in Decision 344 of 1993, states that the patent owner cannot exercise exclusive rights in the case of “importation of the patented product that has been marketed in any country with the consent of the owner, a licensee or any other authorized person” (article 34. d)c).
b)In Japan, for instance The High Court of Tokyo held in the case Jap Auto Products Kabushiki Kaisha & Anor vs. BBS Kraftfahrzeug Technik A.G (1994) that the parallel imports of auto parts purchased in Germany did not violate patents granted to BBS in Japan. In the Aluminium Wheels case, the Japanese Supreme Court affirmed, in July 1997, that Article 4bis of the Paris Convention (“Independence of patents for the same invention in different countries”) did not apply and that the issue of parallel imports was a matter of national policy of each country. For a review on current State practices in this area, see, e.g., Abbott, 1998; NERA, 1998.
c)Similarly, the Argentine Patent Law No. 24.481 of 1995 provides that the rights conferred by a patent shall have no effect against “any person who...imports or in any way deals in the product patented or obtained by the patented process once the said product has been lawfully placed on the market in any country; placing on the market shall be considered lawful if it conforms to Section 4 of Part III of the TRIPs Agreement” (Article 36.c).
In the case of South Africa, the Medicines’ Act has authorized the Minister to prescribe “conditions for the supply of more affordable medicines in certain circumstances so as to protect the health of the public”. The Minister, “in particular may... determine that the rights with regard to any medicine under a patent granted in the Republic shall not extend to acts in respect of such medicine which has been put onto the market by the owner of the medicine, or with his or her consent” (Article 15C.a)134.
134 As indicated by this text, the parallel import exception in South Africa is not general as in other countries mentioned above, but limited to medicines, and it is subject to the prior decision of the Ministry of Health. Despite these limitations, the South African law was challenged on this point by 42 pharmaceutical firms (which have recently suspended, however, their judicial action against the law) and it was included in the Special 301 “Watch list”. However, the US Trade Representative announced, on December 1, 1999, the removal of South Africa from that list. For more details on this case, see Bond, 1999.
The TRIPs Agreement permits parallel imports. Parallel importing is one of the measures that Member countries may take to protect public health under Article 8.1 of the TRIPs Agreement. More specifically, article 6 of the TRIPs Agreement establishes that each Member country has the freedom to incorporate the principle of international exhaustion of rights - the underlying justification for parallel imports - in its national legislation135. If done, in order to avoid a possible discrimination complaint under article 27.1 and benefit all sectors of the economy, parallel importing should be permitted for patented goods in all fields of technology, and not only for health-related inventions.
135 According to an UNCTAD study, “Member countries also have the option (under Article 6 of the TRIPs Agreement) to adopt a worldwide exhaustion doctrine that could build upon the experience of economic integration schemes of industrialized countries” (UNCTAD, 1996, p. 34). Similarly, a document published by the World Health Organization, after review by the WTO, includes among the possible TRIPs-compatible exceptions “parallel importation of the protected product” (Velasquez and Boulet, 1999, p. 33).
Because Article 6 gives complete freedom on the matter to Member countries, parallel importing rules cannot be challenged at the World Trade Organization as a violation of the TRIPs Agreement, although the authority of a dispute settlement panel to adjudicate the indirect impact of exhaustion on other rights and obligations remains uncertain.
Although Article 6 appears to give Member countries very broad leeway to implement parallel importation policies, the doctrine of international exhaustion as applied to patents remains controversial with respect to both legal and economic aspects. Some influential authorities contend that overuse of the exhaustion doctrine would conflict with the exclusive right of importation conferred by Article 28(a) and with the thrust of Article 27(1), which forbids discrimination “as to ... whether products are imported or locally produced.” It has also been argued that an international exhaustion of rights conflicts with the principle of territoriality and independence of patent rights established by the Paris Convention136.
136 See, e.g., Tsuda and Sakuma, 1996, p. 10.
Other authorities counter that Article 28 is subject to Article 6 and therefore cannot be subject to dispute settlement procedures at the WTO.137 Footnote 6 to TRIPs Article 28.1 (a) states that “this right [of importing], like all other rights conferred under this Agreement in respect to the use, sale, importation or other distribution of goods, is subject to the provisions of Article 6”. The footnote to article 51 (“...there shall be no obligation to apply such procedures to imports of goods put on the market in another country by or with the consent of the right holder...”) also supports this position.
137 See, e.g., Bronckers, 1998; Verma, 1998.
General GATT principles also seem to support the permissibility of parallel imports. Under the GATT 1947, Member countries must treat imported products in a manner not less favourable than the like products of national origin (Article III.4), while Members cannot impose restrictions “other than duties, taxes or other charges” (Article XI(1))138.
138 An interpretation of these provisions is not only that parallel imports are legitimate, but that the GATT requires WTO Members not to forbid such imports. See, e.g, Verma, 1998. The possible application of Article XX.d of GATT (which allows for exceptions when necessary to secure compliance, inter alia, with “the protection of patents, trademarks and copyrights”) needs also to be considered in this context.
Further, widespread resort to the doctrine of international exhaustion by developing countries could acquire some weight as state practice, helping to resolve any legal uncertainty in this area.
The World Health Organization has explicitly supported the use of parallel imports to advance the principle “of preferential pricing in poor countries”. WHO has stated that “in cases where drug prices are higher in poor countries than in richer ones, recourse to parallel imports in low-income countries in order to reduce prices might be appropriate, while preventing parallel exports to industrialized countries”139.
139 WHO, 1999, p. 2. It should be noted that the prevention of parallel trade is an issue that needs to be addressed by the importing and not the exporting country. Thus, the acceptance of parallel importation in a given developing country would not prevent any other country, including industrialized countries, from treating parallel imports differently, to the extent that such treatment is GATT-consistent.
Finally, it is important to emphasize that the issue of parallel imports is completely distinct from the issue of counterfeit pharmaceutical products. Parallel imports, by definition, relate to products which have been legitimately put on the market, not to imitations of original products. Parallel imports would be subject, in principle, to the same import and other regulations applicable to any imported medicine.