Exhaustion occurs at the moment when the intellectual property rights (IPR) holder’s control over the use and disposition of goods and services embodying IPR ceases in order to permit the free transfer of goods and services within and across national borders. This generally occurs when goods and services are first sold or placed on the market. According to the Resource Book on TRIPS and Development, “once the rights holder has been able to obtain an economic return from the first sale or placing on the market, the purchaser or transferee of the good or service is entitled to use and dispose of it without further restriction.” The doctrine of exhaustion has a direct effect on the control over the disposition of goods and services embodying the IPR rights and not the IPR themselves. It seems that the doctrine of exhaustion is treated more as a trade matter (disposition or transfer of good and services within and across national boarders) rather than an IPR matter (although the trade and IP aspects of IPR are often difficult to finely distinguish and are more often than not overlapping).

The different forms of exhaustion with respect to their scope are: international, regional and national. International exhaustion is the one with the largest scope. If a good or service is first sold or placed on the market of any country, then the IPRs as embodied in the good or service is deemed exhausted with regard to all the other countries in the world. The good or service first sold or placed can thereafter be more or less freely transferred and traded within and across the national borders of all countries worldwide. With regard to regional and national exhaustion, the principle is the same although the effect of the exhaustion of IPR as embodied in the good or service only applies, respectively, within a particular region or a particular country. Based on the Resource Book on TRIPS and Development, Japan, Switzerland, South Africa, countries in Latin America, Australia, United States, in general adhere to international exhaustion (subject to certain qualifications) and the European Union follows the rule of regional exhaustion.

Even if the rule of exhaustion deals primarily with the control and disposition of good and services themselves that embody IPR, it has an important role in trade. Without this rule, trade and different types of uses, transfers, dispositions and activities (whether political, social or economic) of goods and services will be severely impaired because too much control will be granted to the IPR holder. For example, commonplace acts like lending a book to another person to read, selling a used CD or recycling used juice containers and turning them into useful bags and accessories, can be prohibited by the IPR holder. This would result in too much a restriction on the free exchange of good and services in the national, regional and global markets. The a priori assumption here of course is that free exchange of good and services within and across national borders is beneficial for commerce, economic development, increased innovation and the sharing of cultures and knowledge. In a way, exhaustion regulates how the physical embodiments of IPR are controlled and transferred in order to ensure that there is a balance between the rights of IPR holders and those of the general public and, on a macro level, the larger international community. The doctrine of exhaustion is a counterbalance to the quasi-monopolistic rights of IPR holders to exclude others from the use and control over their IPR as embodied in such goods and services.

Under Article 6 of the TRIPS Agreement, it seems that, except when it involves the principles of national treatment and most favored nation, for purposes of dispute settlement, in general, the Agreement does not create, modify, extinguish or change any rule, right or principle in connection with the issue of exhaustion of IPR. This hands-off policy was a result of the failure of the members to agree on any exhaustion rules during the negotiations of the Agreement. In a sense, Article 6 is an agreement not to agree at that time. It is important to note that Article 28 of the Agreement is subject to Article 6, which means that the right of importation under Article 28 cannot be “used to address the subject matter of exhaustion in dispute settlements under TRIPS.” Article 28 then does not directly affect the rule of exhaustion.

The author is a postgraduate law student at the University of Edinburgh. This article was originally written for a class in International Intellectual Property Law.

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