Intellectual property rights are considered to be the incentive that encourages innovation. It is considered to be a negative right as it is an exclusionary right against third parties from infringing the rights granted by the law.   The intellectual property owners have the choice of choosing their market and can make the decision regarding whether their IP should be sold, licensed, or gifted. The doctrine of exhaustion (first sale doctrine) seeks to limit the right to distribution. This doctrine says that once goods having intellectual property protection is sold within the market, rights to regulate the additional distribution of such goods get exhausted with their first sale. It simply means that whenever an intellectual property holder sells their goods, they no longer are the owners of that particular intellectual property protected product following the sale or distribution of that property, and also the buyer or vendee of such article is free to resell it.

Patent law grants exclusive rights to the patent holder, while competition law ensures that market competition remains fair and effective. The balance of both the competition law and patent law are necessary to protect public interest.

PATENT EXHAUSTION AND COMPETITION

Patent Exhaustion addresses the extent to which IP owners can pursue control over their patent-protected product after the initial authorised sale. This area of law governing the exhaustion of rights (sometimes known as the “first sale” concept) is exceedingly contentious.  

A patent is a bundle of exclusive rights granted to an inventor whose invention satisfies certain prerequisites such as novelty, non-obviousness, and utility. Such exclusive rights include the right to make, use, sell and import patented goods into   such country. These rights allow the patent holder to control the manufacture, use, sale, offering for sale, and importation of patented goods. The term “exhaustion of patent rights” refers to the limitation on a patent holder’s exclusive rights once patented goods are legitimately placed on the market, typically following their initial authorised sale. The doctrinal basis of the exhaustion concept, whether it serves as an implied licence or a strict restriction on the patent right as such- determines the extent of such freedom.  The Patent law limits competition for a limited period and ensures effective competition in the long run by encouraging innovation and allowing market entry after patent expiration. Patent exhaustion doctrine complements competition law by promoting market competition. Competition law facilitates effective competition from the outset through several mechanisms: it ensures market access for new entrants, reduces regulatory barriers to entry, and regulates dominant firms to prevent them from unfairly restricting new market players. Thus, it is evident that both Patent and Competition law regimes aim to enhance consumer and social welfare, which can be achieved by effective competition through innovation.

EXHAUSTION IN THE US

 Article 27.1 of TRIPS, which represents the common minimal standard that WTO members are mandated to implement in their domestic patent regimes, provides that ‘patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application.’  

Article 28(1) of the TRIPS Agreement which states in pertinent part that ‘a patent owner shall have the exclusive right to prevent third parties not having the owner’s consent from the acts of: making, using, offering for sale, selling, or importing for these purposes that product

In United States v. Univis Lens Co. the Supreme Court revisited the exhaustion doctrine, but this time in the context of the interface between patent law and antitrust where the issue on hand was a price resale maintenance (RPM) clause. The Supreme Court invoked the exhaustion doctrine to conclude that the setting of prices by the patentee was a violation of antitrust law. The Court concluded that “agreements for maintaining prices of goods in interstate commerce, including restrictions imposed by the seller upon resale prices, held unreasonable restraints within the meaning of the Sherman Act.” The Court stressed the general principle that the exercise of patent rights cannot go beyond what it may be considered reasonable to protect them. In Quanta Computer, Inc. v. LG Electronics, Inc., the Supreme Court reaffirmed the exhaustion doctrine in connection with “method patents.” The Court held that: “Nothing in this Court’s approach to patent exhaustion supports LGE’s argument that method claims, as a category, are never exhaustible. A patented method may not be sold in the same way as an article or device, but methods nonetheless may be embodied in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials”

EXHAUSTION IN INDIA

Hoffmann-La Roche Ltd v Cipla Ltd., Mumbai Central, the plaintiff pleaded that an interim injunction order should be passed against the defendant’s selling of a generic form of the drug. The court rejected the plaintiff’s plea, saying that the sale of the plaintiff’s patented product was for the public interest.

The Indian scenario regarding exhaustion is less clear and marked by uncertainty. The fact that the Indian statutes do not expressly provide for the exhaustion principle, as seen in statutes of foreign nations, creates ambiguity. This is important because flexibility like exhaustion provided under TRIPS is and should be most beneficial for a developing country like India. Also, it should be highlighted that India is also a nation that took a pro-international exhaustion position in various international negotiations, including TRIPS. The judiciary, too, has contributed to this through an ambiguous interpretation of the provisions of law, concluding that Indian law recognises national exhaustion. The same is due to a lack of clarity in the provisions regarding exhaustion in the patent, copyright, and trademark law of India.  However, even though the language of the legislature lacks clarity, the legislative history and parliamentary debates regarding exhaustion provisions make it clear that it is the intention of the legislature to recognise international exhaustion. 

The current international and national scenario reveals significant confusion regarding which mode of exhaustion should be adopted. In order to clear the issues regarding exhaustion, it is imperative to analyse the history and philosophy behind the doctrine. International exhaustion can benefit consumer welfare, allowing parallel imports and facilitating competitive pricing. The development of international trade has also pushed the issue of parallel imports as the main concern among nations. Therefore, it is high time for international harmonization of the law regarding exhaustion.

 United States v. Univis Lens Co., 316 U.S. 241 (1942)

Obid, at 250

Quanta Computer, Inc. v. LG Electronics, Inc., 553. U.S. 617 (2008).

 The issue was “whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods”

Quanta Computer, Inc. v. LG Electronics, Inc., 553. U.S. 617 (2008), at 628, 629.

 Penguin Books Ltd. vs India Book Distributors And Ors AIR 1985 Delhi 29, Warner Bros. V Santhosh A.G (CS (OS) No. 1682/2006), John Wiley v. Prabhat Chander Kumar, CS (OS) No. 1960/2008, May 17, 2010.

By Adv. Nishmma James | www.linkedin.com/in/nishmma-james-09ba80223 |

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