The decision of the Japanese Supreme Court in the BBS Aluminum Wheels casein 1997 has served to ignite an intense debate within Japan as to the appropriate scope of protection that is to be afforded to inventions that are patented in Japan and other countries and are imported from those other countries into Japan. In its opinion, the Court acknowledged that the issue is one of domestic law and expressly declined to embrace a theory of international exhaustion in reaching its decision that there was no infringement of the Japanese patent by the act of importation and sale in Japan.

The BBS case also has fueled a continuing debate worldwide with regard to the desirability of an international principle of law that favors parallel imports. This debate has raged within several international intellectual property law forums, including the AIPPI, but to no resolution. However, this debate has provided an opportunity for the underlying legal and economic policies to be articulated and critiqued. The debate also has arisen within the context of the negotiations of the General Agreement on Tariffs and Trade (GATT) over the past decade and is expected to continue into the future. This paper examines the recent debate over parallel imports from a U.S. perspective, and in the light of significant conflicts between economic policy and legal principle, within the arena of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.

Even prior to its inception in 1993, the TRIPS Agreement was the focus of extensive debate concerning the issue of parallel imports. During negotiations, no acceptable basis for compromise was offered – and the final text of the TRIPS Agreement left that issue unresolved, permitting the debate to continue. The TRIPS Agreement did not ignore the issue of exhaustion altogether, but implicitly left it for each Member State to decide for themselves whether or not to recognize international exhaustion of IPRs. Article 6 states that

TRIPS Article 6 clearly suggests that the issue of IPR exhaustion was considered, but that neither consensus nor compromise could be reached. Equally clear is the suggestion that each member state is left to define its own laws regarding IPRs exhaustion, by the legislature and/or the courts.

Concern with the impact of Article 6 is revealed in the text of TRIPS Article 28, which specifies the minimum rights that are to be conferred on patent holders in Member states. Included in the traditional rights to prevent unauthorized third parties from acts of making, using, offering for sale or selling a product that is the subject of a patent, is the expressly granted right to prevent unauthorized import a product which is covered by the patent. The footnote to Article 28 of the TRIPS Agreement states that

On the assumption that Article 6 leaves to each Member the ability to make a decision on the principle of both domestic and international exhaustion, each Member state is also left to its own accord to decide whether or not to recognize the exhaustion of the right of importation.

Since the TRIPS Agreement does not resolve the issue of whether there should be international exhaustion of Intellectual Property Rights (IPRs), but merely acknowledges that the issue shall not be considered for dispute settlement, there is a natural movement to reach closure on the issue. Indeed, in 1995, shortly after the TRIPS Agreement was concluded, the International Trade Law Committee (ITLC) of the International Law Association (ILA) met to discuss issues relating to the implementation of the TRIPS Agreement, and a study of the role of parallel imports in the international trading system was commissioned. The ITLC schedule for presenting its recommendations appeared to be set on the basis that a further amendment to the TRIPS Agreement was likely in the year 2000, possibly one that would include a deletion of Article 6.

Apparently concerned by the possibility that a removal of Article 6 could permit the national laws of countries opposing parallel imports to apply trade sanctions against countries having laws permitting parallel imports, a direct examination of the merits of an affirmative policy in favor of international exhaustion, as opposed to the presently passive position of permitting parallel importation as a matter of national policy, was undertaken. In its deliberations, the ITLC appeared to reach a conclusion that an affirmative policy favoring parallel imports should be adopted as a matter of international trade policy. This conclusion was reflected the First Report (Final) to the Committee on International Trade Law of the International Law Association on the Subject of Parallel Importation, authored by an ITLC Rapporteur Professor Frederick M. Abbot, was released in April 1997 for comment (the “Report”). The Report expressly suggested the adoption of a basic rule that:

As the foundation for its analysis the Report offered three precepts, including what were characterized as (1) the basic principles of the WTO, (2) the underlying policies of IPR protections and (3) the economics of parallel importation. The fundamental principle of the WTO was stated simply to be the prohibition of tariff and all other barriers to the movement of goods and services across and within Member boundaries. Thus, a prohibition on parallel imports clearly is a non-tariff barrier to international trade. There may be room for extensive debate as to the appropriateness of these statements, without qualification, as the underlying precept of the WTO. Thus, discussion here of the parallel import question may be better served by focusing on the remaining two principles.

As a second cornerstone of the Report, it is proposed that the underlying principles of IPR concern the return of a reward to the owner, as in the case of patents and copyrights, and an additional protection of the public in the case of trademarks. As to patents, the purpose of the exclusive grant is to promote innovation by granting a monetary reward to the inventor or proprietor. The purpose is similar, but directed to economic and moral support of the arts, for copyright. In the case of trademarks, an identification of origin, coupled with the protection of consumers and the accumulation and preservation of goodwill, serve as the incentive for these rights. On the basis of this understanding, the Report is drawn to the underlying thesis that once a reward is given to the owner of the right, by way of profit or royalty, the bargain with all granting authority has been satisfied and no further obligation remains.

The Report’s treatment of IPR, in the case of patents for example, does not expressly consider certain fundamental and unique attributes of such proprietary right. The Report notes that as a basic principle, the patent rights are inherently territorial. However, there is no closer scrutiny of the nature of those rights as they would exist worldwide for a given product. Even for the same basic development that results in patents worldwide, there may be differences in scope, numbers and types of patents granted from Member to Member. In today’s business environment, these rights may be subject to complex international ownership or licensing arrangements that provide for a distribution of the reward expected by the patentee or proprietor(s). The expectation of a reward that is appropriately distributed among several markets may be reasonable when seeking a return on R&D investment based on international marketing. Needless to say, there are significant differences in the policy and planning that underlie the marketing of IPR protected products and unprotected or “common” products.

While the Report raises some interesting points, more analysis, research and legal development (such as the achievement of a world-wide patent) will be necessary before an affirmative parallel imports policy is even ripe for debate. Further, the adverse impact on both developed and developing Member states cannot be simply brushed aside. Entities within developed countries are certain to have their existing complex production and distribution arrangements extensively damaged, and their flexibility to create such arrangements and ensure that an expected return is obtained severely impaired. Not only will this lead to an erosion of profit, there will be a reduction in the capital available for essential R&D investment. As to developing countries, there is the strong likelihood that prices will be raised domestically due to increased international competition, and that sales of critical products may even be terminated. The possibility that there will be a reduction in capital investment cannot be ignored.

Existing legislation and recent court decisions demonstrate that the United States is not likely to departing from its current position that parallel imports are not allowed and that exhaustion is limited to nationwide boundaries.

The United States, through its courts, has long held that the U.S. will not recognize exhaustion of IPRs outside its boundaries. United States patent law on the issue dates back to 1890, to the case of Boesch v. Graff, 133 S. Ct. 697 (1890). It was in Boesch that the Supreme Court first held that when an invention is patented in the United States as well as in a foreign country, articles containing the invention cannot be imported without the U.S. patent holder’s consent, even if the articles were purchased in the foreign country from an authorized seller. Thus, the Court declined to find exhaustion of patent rights because exhaustion was limited by nationwide boundaries.

However, if a U.S. patent holder sells a patented article in a foreign country under circumstances that indicate that there are to be no resale restrictions, express or implied, the patent holder cannot prevent the purchaser of the article from the vendee of the patentee from importing that article into the United States, either for use or resale. See Holiday v. Matheson, 24 F 185 (S.D.N.Y. 1885). The U.S. patent holder could avoid this situation by including in the sales contract a provision prohibiting importation back into the United States. See Coastland Corp. v. County of Currituck, 734 F.2d 175 (4th Cir. 1984). Whether that decision would still apply today, following the amendment of the U.S. Patent law in 1996 to expressly include the right to exclude imports in Section 271, remains to be decided.

In K-Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811 (1988), the Supreme Court held that a customs regulation allowing the importation of foreign made goods where the U.S. trademark owner has authorized the use of the mark is in conflict with the plain language of §526 of the Tariff Act of 1930, which prohibits the importation of any merchandise of foreign manufacture which bears a U.S. trademark owned by a U.S. citizen or corporation and who is domiciled in the U.S. The court, however, also concluded that the regulation’s allowance of imports from companies under “common control” is consistent with §526 and thus allowable. Again, the court refused to recognize exhaustion of trademark rights because exhaustion is limited to within the United States. In United States v. Eighty-Three Rolex Watches, the Court held that foreign-owned as well as domestic trademark owners are protected by §526, as long as the foreign-owned trademark holder is not subject to the “common control” exception. 992 F.2d 508 (5th Cir. 1993).

In the area of copyright, recently, the U.S. Supreme Court in Quality King v. L’anza Research International, Inc. found that a copyright proprietor that sold copyrighted goods into Europe at low prices could not prevent those goods from being reimported into the United States under Section 602(a) of the Copyright Law, which forbids import of a work that has been acquired outside of the United States. However, the Court decided that Section 602(a) was applicable to preclude importation only to cases where a licensee or other party who was not the copyright proprietor produced the goods. The Court did not expressly address the issue of international exhaustion, but implicitly affirmed the propriety of laws that treat exhaustion as solely a matter for national determination.

Recent U.S. legislation also demonstrates that the United States has no intention of departing from their current position in the near future. In the North American Free Trade Agreement (NAFTA) Implementation Act of 1993, the legislature amended the act to include a section stating Congress’ intent that “nothing in this provision will change current law or Customs practices regarding parallel imports.” Similar text was also inserted in the Trade Expansion Act of 1992; however, this bill was never enacted into law.

Clearly, a restriction of the principle of IPR exhaustion to domestic boundaries has deep roots in American legal theory, and as such will be difficult to replace. In contrast to the Report, Americans Brian D. Coggio and Adriance M. Antler have proposed that the ability to enjoin resale after purchase and importation should be based on a doctrine that exhaustion is territorially limited in scope by the patent’s jurisdiction. The Utilization of United States Patents to Prevent the Importation and Sale of gray Goods, 83 TMR 481 (1993). They base this theory on the premise that patent rights have an “independent territorial existence” that should not be disregarded by virtue of payment for patent rights in another country, regardless of the patentee’s identity. Coggio and Antler do recognize, however, that non-U.S. patent rights must be substantially equivalent to U.S. patent rights in order for an application of a universal exhaustion doctrine to be equitable.

Although the European Union has enacted regional exhaustion boundaries, the EU policy is not now substantially different from U.S. policy. The EU policy of regional exhaustion is similar to that of the U.S. policy of domestic exhaustion, as the member nations of the EU are analogous to the individual American states. Exhaustion is recognized within the region/states, but not outside the region/states. Each member nation of the EU has their own IPR laws, but the creation of the EU region has brought with it uniformity.

An open issue of international law exists with regard to whether parallel imports should be permitted under a theory of international exhaustion of IPR by a first commercial use or sale of a product utilizing such rights. The general view is that developed countries oppose parallel imports and that developing countries favor parallel imports. Although the issue has been raised in the international arena, the TRIPS agreement for one has left open the question of exhaustion. Although TRIPS addresses the issue, it only does so to state that there is no reconciliation on the matter. As a result, each member country to the agreement is free to decide how they will deal with exhaustion of IPRs and parallel imports by their own national laws and courts. This passive approach to exhaustion is preferred to an affirmative policy of requiring exhaustion as a matter of international law. Consistent with this view, the Japanese Supreme Court confronted the issue of parallel imports in the BBS case and determined it to be a domestic issue, rather than one involving international exhaustion, which favored a rebuttable presumption that a first sale by the patent proprietor outside of Japan extinguishes the patent right within Japan. Other countries like Australia also have considered parallel imports to a domestic issue and have embraced patent rights exhaustion in formal legislation, as a matter of national economic policy. However, there should be an assurance that the adoption of a national law favoring parallel imports will not by itself be considered as an unfair trade practice that is subject to sanction under the laws of individual countries or regional groups.