The exclusive right, conferred by Article 28, to import the patented product or process merits special attention on account of a footnote attached to it. This footnote states that the exclusive right to import is subject to Article 6 of the Agreement. Under that Article, the issue of exhaustion of rights cannot be addressed by the Dispute Settlement Understanding, unless it is the basis for a discrimination claim. For practical purposes, this means that countries can have the exhaustion regime they have chosen. Therefore, the Agreement does not impose any obligation on Member States on this point, which remains purely a national issue. A Member State is completely free to decide whether or not to apply the principle of the exhaustion of the patent owner’s rights.
What is the exhaustion of intellectual property rights?
The issue of national exhaustion is relevant not only to importation rights but also to distribution rights. In principle, if the theory of the exhaustion of rights is not applied, the importation of a patented product (or parallel* importation) without the authorization of its patent owner is illegal. The monopoly conferred by the patent includes not only the exclusive right to manufacture and work the patented product, but also the exclusive right to import it, if the patent owner manufactures it, or has granted a licence to manufacture it, in another country.
The exception to this general rule of prohibition is to be found in the principle of the exhaustion of rights. According to this principle, an intellectual property right is exhausted when a patented product is first put on the market with the consent of the patent holder. From the perspective of trade liberalization, it is considered that from the moment the product is marketed, the patent holder can no longer control its subsequent circulation. By virtue of this principle, the patent thus confers a monopoly on the invention (that is, the know-how) and not on the products legitimately resulting from this invention. The patent holder retains the exclusive right to manufacture the patented product and to put it on the market, but, from that moment on, has no further right over the actual product. The patent holder thus loses his monopoly of importation and sale.
How is the principle of the exhaustion of rights to be applied?
The TRIPS Agreement leaves Member States free to decide whether or not to apply this principle on their territory. There is, however, one further point that must be made.
One of the fundamental rules of the TRIPS Agreement is non-discrimination between Member States. There are, by virtue of the TRIPS Agreement, three main options open to a Member State wishing to apply the principle of the exhaustion of rights:
• either an international exhaustion of the rights of the patent holder, in other words, the possibility granted to a third party to import into the territory of the relevant Member State the same patented product from any other WTO Member State in which it has been put on the market with the consent of the right holder. The Member State opting for this principle would have the widest range of supply of products with the obligation (through the MFN clause) to accept products from all Member States.
• or a regional exhaustion of the rights of the patent holder (cf. the European Union), or the possibility of importing onto the territory of that State the same patented product originating from any other Member State of the same regional union;
• or national exhaustion, which amounts to limiting the circulation of products covered by the IPR in one country to only those put on the market by, or with the consent of the patent owner, in the same country.
This provision of the Agreement is very important in so far as it allows the supply of the product to be increased and prices to be moderated through competition, in other words, improving accessibility through importation. Member States could improve the accessibility of products, including drugs, by establishing that the exclusive rights of the patent holder may not be claimed in cases where products marketed with that patent holder’s consent in any other country are imported. No State may complain of a breach of the Agreement on this ground.
Nevertheless, although parallel importation is legal in terms of the TRIPS Agreement, questions of economic strategy arise concerning the scope of the application of the theory of the international exhaustion of intellectual property rights. In practice, while authorizing parallel importation may help to bring down prices through competition, it may also discourage patent holders from granting licences for local working, and thus run counter to some countries’ technological development. Some authors therefore advocate a conditional authorization of exhaustion of intellectual property rights (Remiche, 1996). Why not anticipate the possibility of parallel importation only if, after a certain time has elapsed, the patent holder is not working the invention locally or is not meeting local demand at reasonable prices? In that case, the authorization of parallel imports would be motivated by the country’s desire to industrialize and to supply the local market with sufficient drugs at affordable prices.
According to other authors, the effect of international exhaustion of rights would be for right holders to move towards a single worldwide price for their products, which they would be likely to seek to set at the price that the market can bear in the wealthier countries.