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!

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