2.6 - European exhaustion of IP-rights

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European market. National exclusive rights that allow third parties to prohibit the manufacturing or selling of products on national markets are an excellent means to shield off national markets within the single European market. It therefore should not come as a surprise that from the early years of the European Community, IP-rights have had their fair share of attention of the European Court of Justice since these rights can be easily used to frustrate the free movement of goods.

Free movement of goods. On the basis of (at present) article 34 TFEU quantitative restrictions on imports and all measures having an equivalent effect are be prohibited between Member States. Article 36 TFEU facilitates an exception to that rule by providing that prohibitions or restrictions on imports, exports or goods in transit on grounds of the protection of industrial and commercial property are not precluded. However, such prohibitions or restrictions are not to constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States as the last sentence of article 36 TFEU makes clear.

National IP-rights. In principle, national IP-rights allow their proprietor to restrict the authorization to put a product protected by their IP-right only on the market in the member state in which that IP-right exists. If I put my products on the market in member state X that act implies consent with regard to my IP-rights in that Member State, IP-rightswhich means that I could claim in another Member State that the product concerned still infringes my IP-rights in that foreign Member State. If I then also grant ownership of these foreign IP-rights to different entities of a group of companies, it becomes simple to maintain the historic national borders within the European market and in particular to maintain price differences between these national markets. This is clearly at odds with the objective of the single European market and therefore the Court of Justice has from the sixties of the last century made such manner of using IP-rights impossible in a series of landmark judgments.

EU competition law. In a string of judgments, starting with the judgment in  Grundig v Consten of 1966 (IPPT19660713), the Court of Justice has indicated that claiming an IP-right – in that case trade mark rights – in order to set obstacles for parallel imports, is not in accordance with the community rules on competition. In Grundig this was placed in the key of the community’s law on cartels, but from the judgment in Deutsche Grammophon Gesellschaft v Metro of 1971 (IPPT19710608) the free movement of goods was given the lead role.

First sale by or with the consent of the proprietor of the IP-right. In Deutsche Grammophon Gesellschaft v Metro (IPPT19710608) the Court stated that the proprietor of an IP-right – in that case, a German IP-right of the producer of a sound recording – cannot exercise his exclusive national IP-right with regard to “products placed on the market by him or with his consent in another Member State”. This teaching of the Deutsche Grammophon-judgment was thereafter extended to trade mark law   (Centrafarm v Winthrop; IPPT19741031), patents (Centrafarm v Sterling Drug; IPPT19741031) and copyrights (Membran & K-Tel v GEMA; IPPT19810120). In all these decisions, the same language was used to rule that if products are if products are lawfully marketed in a Member State by or with the consent of  the holder of the IP-right, that same holder or his licensee cannot rely on national IP-rights in another Member State to prevent or restrict the distribution of these products.

Sale in Member State where there is no protection. Exhaustion also plays a role if a product has been marketed with the consent of the holder of the P right in a member State where that holder does not have IP protection. In Merck v Stephar (IPPT19810714) the Court of Justice ruled  that if a patentee of a pharmaceutical product sells the product in a Member State where no patent protection exists, that patentee cannot prevent the marketing of that imported product that Member State into a Member State, where patent protection exists.

Specific mechanism SPCs. With regards to Supplementary Protection Certificates, the Acts of Accession of 2003, 2005 and 2012 for the (then) new Member States prescribe a different regime in the form of a so-called ‘specific mechanism’. On that basis of which the holder of an SPC issued in a Member State other than the new Member States may oppose parallel imports of a medicine from the new Member State if no comparable protection of that medicine was possible in the new Member State at the date of the application of a basic patent, according to the Court of Justice in the Pfizer v Orifarm decision of 21 June 2018 (IPPT20180621).

Compulsory license. However, if the marketing of a product is under a compulsory license, the IP-right is not exhausted and the proprietor of that right is still authorized to invoke his IP-rights in another Member States, as the Court of Justice held in its Pharmon-judgment of 1985 (IPPT19850709, Pharmon).

Sale by economically linked parties. In later judgments the Court of Justice indicated that it is sufficient for the exhaustion of an IP-right if the first sale was done by a third party that is economically linked to the owner of the IP-right, like, for instance, a licensee or a distributor. If such a party, economically linked to the IP proprietor, markets a product consent by the IP proprietor is presumed to be present.

IHT v Ideal Standard. In IHT v Ideal Standard (IPPT19940622) the Court of Justice summarised its case law as follows (under 34): “So, application of a national law which would give the trade-mark owner in the importing State the right to oppose the marketing of products which have been put into circulation in the exporting State by him or with his consent is precluded as contrary to Articles 30 and 36. This principle, known as the exhaustion of rights, applies where the owner of the trade mark in the importing State and the owner of the trade mark in the exporting State are the same or where, even if they are separate persons, they are economically linked. A number of situations are covered: products put into circulation by the same undertaking, by a licensee, by a parent company, by a subsidiary of the same group, or by an exclusive distributor”.

Keurkoop v Nancy Kean. This case law goes back to Keurkoop v Nancy Kean (IPPT19820914). There the ECJ already held (under 29) that the proprietor of a national design right may oppose the importation of products from another Member State “provided that the products in question have not been put into circulation in the other Member State by, or with the consent of, the proprietor of the right or a person legally or economically dependent on him, that as between the natural or legal persons in question there is no kind of agreement or concerted practice in restraint of competition [....].”

European exhaustion. Until the entry into force of the Trade mark Directive of 1989 it was a matter of the national laws of the Member States whether exhaustion only applied to products that were first put into the market within the European Union or whether exhaustion also applied in case products were marketed anywhere in the world. The exhaustion rule of article 7(1) of the Trade mark Directive changed this – at least in the eyes of the Court of Justice – by stipulating that a trade mark shall not entitle the proprietor to prohibit its use “in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.” This rule is now laid down in article 15(1) of the Trade mark Directive of 2015.

Silhouette. In the Silhouette-judgment of 1998 (IPPT19980716) the Court ruled that the directive must be construed as embodying a complete harmonisation of the rules relating to the rights conferred by trade mark and that article 7(1) “national rules providing for exhaustion of trade mark rights in respect of products put on the market outside the EEA under that mark by the proprietor or with his consent are contrary to Article 7(1) of the Directive, […].” In short, exhaustion (i) only has a European scope and (ii) is a matter of European law that national laws of Member States have to comply with.

Exhaustion and consent. Given the Silhouette-judgment (IPPT19980716) it is relevant that the proprietor of the IP-rights consents to putting the products on the market within the European Union or the European Economic Area (EEA). In Davidoff  (IPPT20011120) the Court made it clear that the concept of consent is not a matter of Member State  law, but must be interpreted uniformly throughout the European Union. The Court further learned that that consent “must be so expressed that an intention to renounce those rights is unequivocally demonstrated” and that such an intention “will normally be gathered from an express statement of consent”. Nevertheless, the Court held that it is “conceivable that consent may, in some cases, be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market outside the EEA which, in the view of the national court, unequivocally demonstrate that the proprietor has renounced his rights.” Such an implied consent, however, “cannot be inferred from the mere silence of a trade mark proprietor”. Davidoff concerned a situation in which were lawfully put on the market outside the EEA without any express restrictions or reservations being made.

In Makro v Diesel of 2009 (IPPT20091015) the Court made it clear that these Davidoff- requirements for implied consent do not only apply when goods are first put on the market outside the EEA but also in case of a first sale within the EEA. In addition, the Court confirmed that its earlier rulings in IHTv Ideal Standard (IPPT19940622) also still applied after the Trade mark Directive and Davidoff. Makro v Diesel (IPPT20091015) learns that exhaustion of trade mark rights exists in the following situations:

a)   Express consent by the IP owner.

b)  The goods are put on the market “by an operator with economic links” to the proprietor, for example a licensee. In that case consent is presumed to be present (IHT v Ideal Standard).

Copad v Dior. However the judgement of the Court in Copad v Dior of 2009 (IPPT20090423) learns that there is no exhaustion if such a licensee contravenes one of the provisions in a trade mark license contract as provided for in article 8(2) of the Trade mark Directive of 2008 (article 25(2) of the 2015 directive). These are the provisions in licensing contract with regard to (a) its duration, (b) the form covered by the registration in which the trade mark may be used, (c) the scope of the goods or services for which the license is granted, (d) the territory in which the trade mark may be affixed, or (e) the quality of the goods manufactured or of the services provided by the licensee.

c)   Implied consent. However, Davidoff (IPPT20011120) learns that implied consent cannot be inferred from the mere silence of a trade mark proprietor, but requires facts and circumstances prior to, simultaneous with, or subsequent to the placement of the goods on the market outside the EEA which  unequivocally demonstrate that the proprietor has renounced his exclusive rights.

Scope of the European exhaustion concept. The European doctrine of exhaustion of trade mark rights is based on the language of article 15(1) of the 2015 Trade mark Directive (article 7(1) of the previous directive). Similar provisions can be found in article 4(2) of the Copyright Directive, article 5(5) of the Semiconductor Directive and article 15 of the Designs Directive. This regime regarding harmonised European exhaustion therefore applies to trade mark law, copyrights and related rights, database rights, semiconductor rights and design rights. The same European exhaustion rules are also incorporated in the three regulations for EU IP-rights: article 16 of the Community Plant Variety Rights Regulation, article 13 of the EU Trade Mark Regulation and article 21 of the Community Designs Regulation.