NAIP Patent Blog

by Charl Goussard, NAIP Legal Research

Parallel importation has long been both an opportunity and threat for companies. Today, due to the massive size and increasing complexity of markets, as well as growing competition globally, parallel importation has become an even greater issue of concern for not just businesses, but also patent holders. It is for this reason that we have decided to have a closer look at the impact of Parallel Importation on Intellectual Property Right (IPR) owners.


Firstly, What is Parallel Importation?

The World Health Organization describes parallel imports (also referred to as "grey market" imports) as “…imports of a patented or trademarked product from a country where it is already marketed….”

Parallel imports mainly occur when there are price discrepancies of the same product in different markets. These price discrepancies are most prevalent in the markets for medicine and high technology goods.

For instance: Taitiger Ltd. (Taiwanese) manufactures a notebook and exports it to Europe where its designated, exclusive agent sells the notebook for 500 EURO per unit. The same notebook however is sold by Taitiger's agent in Australia for 350 EURO per unit. Consequently, Kangaroo Exports, an opportunistic Australian trader, seizes the opportunity and buys Taitiger notebooks in Australia which he then exports to France and re-sells for 450 EURO per unit, 50 EURO cheaper than what Taitiger’s European agent sells the notebooks for, but still makes a profit.

From this example, we see parallel importation benefits some and adversely affects others. In general, however, companies prefer to maintain control over products, distributors and prices. As a result, companies go to many lengths to deal with and prevent parallel importation.


Do Patents Provide any Protection Against Parallel Importation?

In a word: Yes!

The purpose of obtaining a patent or an exclusive right to practice a patent is to legally fix a monopoly over the utilization of the whole or a part of the patent for an area in which the patent is registered.

For the sake of clarity, let us briefly review what a patent is and what kinds of rights it gives to its owners:

A patent is a collection of exclusive rights granted by a state to an inventor or his assignee for a fixed period of time in exchange for a disclosure of an invention. The exclusive right granted to a patentee in most countries is the right to prevent or exclude others from: making, using, selling, offering to sell or importing the invention.

So, is it possible for a patent owner to use his/her rights to prevent parallel imports?

From the definition above, one can deduct that a patent owner may nip parallel imports in the bud by monopolizing the 1. selling; 2. offering to sell; and 3. the importation of the invention. In addition, the patent owner may extend his rights to others by way of a license. Usually these licenses take the form of a patent license agreement, an agent or distribution agreement, or a manufacturing agreement. Some of these agreements may even grant the licensee the Exclusive or Sole right to practice the specific right pertaining to the patent.

In the example above, we assume that Taitiger's notebook is covered by patents in some European Countries – UK, France, Germany and The Netherlands. The right to import, offer to sell and resell has been exclusively licensed to Taitiger's European Agent. If Taitiger's Agent becomes aware of Kangaroo's parallel imported Taitiger notebooks in one of the mentioned countries, the Agent or Taitiger can prohibit Kangaroo from further importation and sales in the European Union (such a prohibition can be enforced on a national level by way of patent infringement litigation – or by way of Border Detention measures) .

However, the monopoly an IPR holder has over the sale and importation of patented goods is not absolute… One of its limitations can be found in Doctrine of Exhaustion.


What is the Doctrine of Exhaustion?

The Doctrine of Exhaustion is a limitation of intellectual property rights (IPRs). Once a product which is protected by IPRs has been sold by either the IPR owner or by others with his/her consent, the IPRs over this given product, as far as commercial exploitation is concerned, are exhausted. Sometimes this limitation is also called the First Sale Doctrine, since the rights of commercial exploitation (sale or offer for sale) for a given product end with the product's first sale. Subsequent acts of resale, rental, lending or other forms of commercial use by third parties can thus no longer be controlled by the IPR holder.

The Doctrine of Exhaustion can be applied on a national, community or international level. Each level affects sales and importation rights over patented goods differently.

Under national exhaustion, exclusive rights for commercial exploitation terminate upon the first sale of a product within the national boundaries, but IPR holders maintain the right to exclude parallel importers. The United States is an example of a country that follows the Doctrine of Exhaustion on a national basis (applied to patents, copyrights and trademarks). In our example above, Taitiger would be able to prohibit Kangaroo from importing notebooks into the US if Taitiger were the holder of US patents contained in the notebook. However, once Taitiger’s notebooks have been sold in the US by their agent, their IP rights are exhausted and Taitiger has cannot exercise any of its IPRs over subsequent commercial exploitation.

In the European Union, things work a bit differently. For parallel imports, the EU applies a system of community exhaustion. IPR holders may exclude parallel imports from outside the European Union, but the rights for commercial exploitation for patented goods, imported or not, are exhausted upon their first sale in any country within the Union.

To complicate the issue, Patents in Europe are enforced on a national basis. This discrepancy between the nationally imposed patents and the Community imposed Doctrine of Exhaustion creates great opportunities for traders and headaches for patent right holders within the European Union. Importers can easily dodge the net of exclusivity if the IPRs holder has selected only a few countries in Europe for patenting.

For example in the EU, once the parallel imported products are cleared by customs they may be freely traded within the EU. Kangaroo may thus decide to import the parallel goods from Australia to a country within the EU in which Taitiger has not registered their patents (any EU country except for France, Germany, UK or The Netherlands). Thus, if Kangaroo imports the goods through Italy, has Italian customs clear the notebooks, and distributes the notebooks from there, Taitiger would have no legal recourse because Taitiger has not registered their notebook patents in Italy. Taitiger has to assert their patents against Kangaroo's grey imports before these imports are customs cleared. Taitiger cannot, for instance, institute patent infringement litigation against Kangaroo in Paris – since the goods were imported and cleared in Italy.

(Please note that Switzerland is NOT a member of the European Union and that it applies the Doctrine of Exhaustion on a national basis.)

Lastly, some countries, such as Japan, apply the Doctrine of Exhaustion on an international basis. Under this system, exclusive rights are exhausted "internationally" upon first sale. Japanese IPR holders are thus without recourse against a parallel importers – good news for traders!


Conclusion

As seen above – Patenting an invention gives some monopoly over the commercial exploitation of that invention. The exclusive rights to sell and import the patented goods may be retained by the patentee or licensed to third parties.

HOWEVER: These exclusive rights are limited to the territories which the patent covers. The Doctrine of Exhaustion furthermore limits these monopolistic rights in the various territories as determined by the national/community laws applicable for such territory.

It is therefore vital that future patentees familiarize themselves with the commercial risks posed by Parallel Imports in the various markets prior to planning an elaborate marketing strategy!

• What is The Price of Forgoing Basic Research? - An argument that claims basic research conducted by industry has, contrary to popular belief, has been in decline. Additionally, academia has begun a subtle but significant shift toward applied, "industry-relevant" research. So what do these trends portend for innovation? Unless they are corrected soon, nothing very promising.... (from BusinessWeek)

• Trademark attorneys in China will soon be able to celebrate with Taiwan Beer. - Or maybe not. In February 2009, Taiwan Beer will finally be sold in Mainland China, but does that mean the trademark issues surrounding it will be solved? Maybe not. A brief history is available here. (from IP Dragon)

• Traditional Knowledge, IP Law & Biopiracy. - When knowledge from centuries of culture points towards solutions that are eventually patented, do those cultures benefit? Unfortunately, no. For example, "121 patented drugs globally are made from plants, 74 percent of which were 'discovered pursuing claims from native fables.'" Yet drug firms reap and keep all the benefits, and even sue to prevent the innovations from being used in those regions. (from Harvard International Review)

• What's the Cost of Misconduct in a Patent Lawsuit? - This one has an answer: Almost US$17 million. Two pharmaceutical companies looking to produce generic versions of a popular anti-diabetic drug attempted to play the invalidity game and paid for it dearly. Download the brief here. (from Patent Baristas)

• Do Patent Pools Encourage Innovation? (Un)Surprisingly, No. - This paper released by the Economics department at Standford looks at the Sewing Machine patent pool that lasted from 1857 to 1877 and finds that innovation slowed as soon as the pool was form. After the pool dissolved, innovation picked up.

• A rare font copyright case goes to court in China. - Founder Electronics claims that Proctor & Gamble used their "Qian" and "Cartoon" fonts without permission and therefore are asking for 1.478 million RMB. The news article can be found here. (from IPKat)

• A primer on Protection and Enforcement of Well-Known Mark Rights in China. This paper co-authored by Brad Luo of China Business Law blog offers the history, analysis, examples, suggestions for changes and more on China's actions toward trademarks. Read the paper online here. (from IP Dragon)

• Forget about 2008, 2007 was a banner year for patent lawsuits. - Data released by the Stanford Law School shows 78,000 patent, trademark and tradesecret suits in 2007, which may be attributed to holding companies rushing file suit before any patent reform legislation takes effect. (from The Prior Art)

by Charl Goussard, NAIP Legal Research

For even the most practiced professionals, the European Patent System is an extremely complex system. Yet for those who manage to navigate its complexities, a market of almost 500 million people (versus 300 million in the US) and an economy with an estimated GDP of $18.5.trillion for 2008 (versus $14.5 trillion in the US) awaits. As a result we will attempt to detangle this complex system in a series of articles targeted at businesses and companies who are interested in patents in Europe. We will begin with this brief introduction to the system and then follow up with more in-depth discussions on specific areas.


European Patent System: Historic Overview

In 1973 Belgium, West-Germany, France, Luxembourg, Netherlands, Switzerland, and the UK agreed to a multilateral treaty called the European Patent Convention (EPC). The purpose of the convention—as indicated by its previous name, "Convention of the Grant of European Patents" (and also sometimes referred to as the Munich Convention)—was to form a unified patent system in Europe.

The EPC lead to the establishment of the European Patent Office, and in 1978, the EPO received its first patent application. Currently, the Convention is in force in 34 countries and as of 1 January 2009, Macedonia will be the 35th member state.

Important to remember is that the EPC is not linked to the European Union (EU). The EPC consists of different member states. Croatia, Iceland, Liechtenstein, Monaco, Norway, Switzerland and Turkey are all EPC member states, but are not members of the EU.


Filing Options & Routes

Let us clear up another common misconception: no single patent provides protection across the whole of Europe. Each country grants and enforces its own patents. Consequently, obtaining patent protection in Europe means registering for patents individually in each desired territory. This method is commonly called the National Route.

Fortunately, if applying for patents in multiple European countries, a simpler option exists: the European Patent Office route. The European Patent Office grants the so-called "European Patent", which is nothing more than a simplified way of prosecuting patents in EPC member states. This "European Patent" may be enforced once it is validated in the individual countries designated during application.

Putting a discussion of the advantages and disadvantages of each route aside, the National Route is advisable if patent protection is needed in only one area. The EPO route is advisable if you wish to have a patent registered in more than one European country. In today's globalizing economies and markets, most businesses and inventors pursue protection in multiple countries. Consequently, this article will focus on the EPO route.


The European Patent: A Simplified Way of Prosecution

A reminder: don't be confused by the term "European Patent".

The term "European Patent" does not carry the same meaning as its equivalents in other countries like the US, Japan or China. European Patents were created to simplify the prosecution of patents for EPC member states. A European Patent is indeed prosecuted and granted. However, they are not enforceable unless they have been further validated by individual member states. Once validated, these "European Patents" become nothing more than National Patents which then must be enforced on a National basis.

Aside from this one major difference in function, the fundamental patent application process at the EPO is similar to the processes at most other patent offices: the application is searched, and then published; thereafter it is examined and then finally granted.

Patent applications may be filed at the EPO office in Munich or at one of its branches in The Hague or Berlin. Some National Offices may also accept EPO applications.


The Language Minefield / La langue des champs de mines/ Die Sprache Minenfeld

EPO applications may be filed in any of the official languages of the EPC member states, but the official languages for prosecution and communication are English, French and German. Thus, if an application is filed in any European language other than English, French, or German, a translation has to be filed at a later stage for prosecution purposes. Furthermore, the claims section of each European Patent has to be translated into all three official EPO languages.

At the national stage, however, patent claims must be translated into the official language of the member state. An applicant who has designated multiple countries would therefore have to translate the claims into the official language of each designated country.

To make things easier and more cost effective for applicants, several countries signed the London Agreement, which entered into force on 1 May 2008. These countries now accept claims in one of either English, French or German, although they retain the right to request a translation if desired. This and other changes has reduced translation costs considerably and made the European Patent application procedure more cost attractive and less time consuming.


Opposition and Revocation

Once a European Patent is granted, the EPC provides for centralized opposition, limitation, and revocation procedures. Within 9 months from grant, any third party may oppose such grant at the EPO. While the EPO hears the opposition, infringement litigation may be instituted on a national level in an EPC member state and national courts may decide to stay the proceedings pending the outcome of the EPO opposition procedure.


Litigation

Currently there is no distinct, centrally enforceable patent or enforcing entity for the whole of Europe. European Patent enforcement of ownership, validity, and infringement is conducted on a country-by-country basis and only in the countries where the patent has been validated.

For a brief period in the 1990s some European Courts issued cross border injunctions—the so-called Pan-European relief—but this practice has been seized by an order from the European Court of Justice. It is thus not possible to get cross border enforcement of patents. Each needs to be individually enforced.

Because of the difficulty and costs of enforcements, most patentees have protection in only a selected number of EPC member states. The choice as where to instigate litigation is predominantly motivated by market factors, applicable judicial procedures, the language of the courts, and legal procedure in various member states.


Conclusion

The European Patent System has come a long way since its initiation in 1973. Much reform however, is planned to make this system even more efficient and cost effective.

On the minds of all concerned with the European Patent System is the possibility of a European Community Patent–a single patent covering all EPC contracting states–with centralized application, opposition, limitation, revocation and infringement procedures. Indeed an EPO work group that aims at a unified Patent Litigation System has drafted the European Patent Litigation Agreement consisting of proposals for a single European Patent Court, a European Patent Court of Appeals and Administrative Committee. Whether the EPC countries sign the agreement is another issue, but regardless of what happens, Europe remains a vital market because of its well developed systems for IP development, enforcement, and commercialization.