Not Like Two Peas in a Pod - Parallel Importation is Okay if TMs Assigned Abroad, says CJEU

The global marketplace for goods is a very tough one, especially when products are sold in various countries under different entities, even if controlled by a central entity. This gets even more complicated if rights are cherry picked and sold to other companies. Advocate General Mengozzi looked at this conundrum this past summer (more on which here), with a focus on the exhaustion of rights when those rights are sold to another company. The matter finally landed on the CJEU's desk, which rendered their decision in late December.

As a short recap, the case of Schweppes SA v Red Paralela SL dealt with the sale of Schweppes' tonic water, for which the company owned several trademarks in many jurisdictions. In the UK the company assigned their rights to the name Schweppes to Coca-Cola in 1999, but remained the owner of the rights in other EU jurisdictions, including Spain. Red Paralela imported the beverage from the UK to Spain, which were put on the market by Coca-Cola. Schweppes subsequently took Red Paralela to court for trademark infringement.

The CJEU was asked four questions, which it dealt with together, asking in essence "…whether Article 7(1) of Directive 2008/95, read in the light of Article 36 TFEU, must be interpreted as precluding the proprietor of a national trade mark from opposing the import of identical goods bearing the same mark originating in another Member State in which that mark, which initially belonged to that proprietor, is now owned by a third party which has acquired the rights thereto by assignment".

What is important is whether Schweppes rights have been exhausted as a result of their assignment of rights in the UK for the importation of goods into another country where those rights remain.

The Court considered that the rights awarded by trademarks cannot be circumvented through the affixing of the relevant mark on the goods and selling in another territory, even if done legally through assignment. This is still, however, reliant on "…that each of those marks has, from the date of expropriation or assignment, independently fulfilled its function, within its own territorial field of application, of guaranteeing that the trade marked goods originate from one single source". The Court further set out that this condition would not be satisfied when the proprietor (without or without the third-party that was assigned the rights) promoted a global brand with no clear single origin. Through this the proprietor's trademark, as determined by the Court "…no longer independently fulfill[s] its essential function within its own territorial field of application, [and] the proprietor has himself compromised or distorted that function". The proprietor therefore loses their right to oppose the importation of those goods through this distortion.

However, should the parties be one and the same, or maintain an economic link, the prohibition of the importation of the goods might be possible.

Some parallel imports miss the mark

The Court set out that an economic link exists where "…the goods in question have been put into circulation by a licensee, by a parent company, by a subsidiary of the same group, or by an exclusive distributor". Through these relationships the proprietor can directly control the quality of the goods themselves. This is very important, as the actual exercise of control isn't needed, but merely the possibility of exerting control. The proprietor therefore takes responsibility over the goods' quality.

Following the Advocate General's opinion, the CJEU set out that an economic link also exists where "…[after] the division of national parallel trade marks resulting from a territorially limited assignment, the proprietors of those marks coordinate their commercial policies or reach an agreement in order to exercise joint control over the use of those marks, so that it is possible for them to determine, directly or indirectly, the goods to which the trade mark is affixed and to control the quality of those goods". There the prohibition of importation would not be justified to preserve the essential function of the trademark.

An economic link isn't dependant on the companies being formally dependant on each other for the joint exploitation of the mark, nor whether they take control of the quality of the goods or not. Assignment by itself will not create an economic link necessarily.

In summarising their decision, the CJEU set out that "… Article 7(1)... must be interpreted as precluding the proprietor of a national trade mark from opposing the import of identical goods bearing the same mark originating in another Member State in which that mark, which initially belonged to that proprietor, is now owned by a third party which has acquired the rights thereto by assignment, when, following that assignment; the proprietor, either acting alone or maintaining its coordinated trade mark strategy with that third party, has actively and deliberately continued to promote the appearance or image of a single global trade mark, thereby generating or increasing confusion on the part of the public concerned as to the commercial origin of goods bearing that mark; or there exist economic links between the proprietor and that third party, inasmuch as they coordinate their commercial policies or reach an agreement in order to exercise joint control over the use of the trade mark, so that it is possible for them to determine, directly or indirectly, the goods to which the trade mark is affixed and to control the quality of those goods".

The case is an important landmark in the partial assignment of rights for global trademarks. Should a proprietor want to maintain full control, they would have to assign the rights to an entity that they control, or have an economic link with, lest risk the loss of their capability to prevent parallel importation to a maintained jurisdiction. This makes sense, since the assignment of rights would lose their value if the original proprietor still maintained the capability to prevent importation when and where ever they wished.

Printing on the Wall - US Supreme Court Rules on Patent Exhaustion

Discussed on this blog only a few weeks ago, the US Supreme Court decision in Lexmark can have huge ramifications for both patent holders and sellers of those products all over the world. When and if at all patent rights exhaust after the sale of a product, be it in the US or abroad, is an important question and will set clear boundaries for both buyers and sellers, potentially impacting the price and availability of products and services all over the world. Many IP practitioners have been waiting for the decision by the Supreme Court, who released it only some weeks ago.

By way of a brief primer, the case of Impression Products Inc. v Lexmark International Inc. concerned the resale of printer ink cartridges, for which Lexmark owned several patents, which they also designed and manufactured. Impression Products bought used cartridges both abroad and in the US, refilled them and resold them; however, Lexmark set conditions on the cartridges during their sale, preventing their reuse and resale by other companies. Lexmark took Impression to court, and the matter ended up with the Supreme Court, who were set to decide a major point of patent law, as to when patent rights have been exhausted (if at all) after the sale of the product containing the patent rights.

The first question the Court tackled was whether the sale of the cartridges in the US did indeed exhaust their rights in the patented aspects of the goods. 35 USC section 154(a) confers the right to make and sell patented products, but the provision does not set any express limitations on the right. However, case law has established that "[w]hen a patentee chooses to sell an item, that product “is no longer within the limits of the monopoly” and instead becomes the “private, individual property” of the purchaser, with the rights and benefits that come along with ownership". The law therefore has limits on the control that a patent holder can exert on products within their monopoly. After discussing the historical context of patent exhaustion, the Court swiftly determined that "…Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law".

This rationalisation makes sense to this writer, since a near perpetual, inexhaustible patent right in products, even post-sale, could have huge ramifications on the resale market, and potentially even anti-competitive uses (which the prevention of the resale of cartridges by a competitor could be construed as). The Court summarised its position on this: "…patent exhaustion is uniform and automatic. Once a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license".

The Court then moved onto the issue of the importation and sale of cartridges bought abroad. This question has not been addressed much under patent legislation, but has been discussed in the Supreme Court decision in Kirtsaeng, which established that the first sale of a copyright protected work would exhaust the rights in that work, even if imported from abroad and sold in the US (having been initially made and sold lawfully).

The Supreme Court faced the wrath of
patent holders after the decision

Under the common law concept of exhaustion, as discussed in Kirtsaeng, there is no territorial restriction on the fact. A sale abroad would be, arguably, exhaustion of rights within the US, and would therefore allow the importation of those goods into the US without infringement. According to the court, the copyright concept of exhaustion would not be distinguishable from patent exhaustion, as this would "…differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense [as] …the two “share a strong similarity and identity of purpose". The person buying the goods abroad is not buying the patented rights, according to the court, and that "…exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate". The court therefore concluded that Lexmark's rights were exhausted when the cartridges were sold abroad, and Impression would not be infringing their rights by importing the goods to the US.

Justice Ginsburg was the only judge to dissent. In her view, patent rights were purely territorial, and that "…[b]ecause a sale abroad operates independently of the US patent system, it makes little sense to say that such a sale exhausts an inventor’s US patent rights". This would open the door for competitors to potentially sell those patented products in the US with no legal recourse by the patent holder. Arguably, Justice Ginsburg's perspective is wholly justifiable, and this writer would raise concerns over this fact as well. If patent rights are fully exhausted in the event of a foreign sale, there would be very few restrictions on doing exactly the above by competitors. Finally, she disagreed with the majority's application of Kirtsaeng with patent rights, as "…[a]lthough there may be a “historical kinship” between patent law and copyright law… the two “are not identical twins". The legislative framework for copyright and patents does differ, and a straightforward application of copyright concepts to patents might not be possible as the law stands today.

The decision is a very important one, and will have clear and strong implications to patent holders who rely on the retention of rights in the US, irrespective of where the products were sold. Time will only tell whether this opens the Pandora's Box of reselling "infringing" products in the US; however, this writer is certain that other avenues will be used for the sale of patented products, such as contractual vehicles, rather than relying on pure rights retention.

A Lack of Patent Exhaustion - Discussing the Lexmark Case Ahead of US Supreme Court Hearing

Many IP rights give their owners a great deal or rights and capabilities to restrict the use of their rights by other parties, and arguably, rightfully so, as the creation is indeed theirs. Even though this might be the case at face value, the use and exploitation of those rights should still have certain limitations, for example, from preventing an author from allowing certain people from reading their book after they have purchased a copy. This doctrine is called the exhaustion of rights, which means that after a certain point, the rights held by the author or owner of a technology cease to apply, allowing for the party to use their products as they please. Exhaustion of rights is still a developing area of law, and an up-coming case in the US Supreme Court has been primed to tackle this in relation to patents, with the case having ramifications both ways irrespective of the decision. Looking ahead to the decision, it is important to discuss the Court of Appeal case decided over a year ago.

The case of Lexmark International Inc. v Impression Products Inc. dealt with the sale of refilled ink cartridges for computer printers by Impression, who purchased used cartridges from abroad to refill and resell in the US (having a third-party circumvent the protection mechanism preventing reuse in the cartridges). Lexmark holds patents in relation to these cartridges, and most of the cartridges had strict single-use/resale restrictions set by Lexmark both in the US and abroad. Impression had not sought permission to resell the cartridges in the US, and Lexmark subsequently took the company to court for patent infringement.

Under 35 USC section 271, only the patent holder is authorized to sell and import patented inventions in the US. Impression argued that the rights (undisputed to be valid and enforceable) had been exhausted after the first sale of the cartridges to the original consumer, and therefore their resale and importation would not be an infringement of the rights.  The Court disagreed, and saw that "...a patentee may preserve its § 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale". This would therefore allow Lexmark to assert its rights post-sale as per the stickers on the cartridges.

The Court focussed on the aspect of the provision that restricts the sale of the patented 'without authorization', as the lack authorization of resale through the sticker clearly leaves the buyer without rights. Conversely, the sale of an article without the reservation of rights would, arguably, have the right to resale the item. It all comes down to the language used during the sale process. The Court summarized their position, where "...[a] sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the "authority" to engage in the use or resale that the restriction precludes", following the decision in Mallinckrodt Inc. v Medipart, Inc.. This means that the patent owning party would retain the rights in the item if expressly and clearly communicated at the time of purchase, provided that no law or policy is violated through the retention of rights.



Patent exhaustion is a real plight! (Source: Good Little Robot)

The legislative position is not any different, according to the Court, from the common law position as set out in Kirtsaeng v John Wiley & Sons (discussed more here), which restricted the rights in items that have been sold (albeit in relation to copyright and not patent rights). The ultimate seller of patent rights can retain some rights in the sold items, which differs from copyright that does not offer the same varying set of rights.

The second question the Court had to grapple with was whether the sale of the items abroad conferred any authority to Impression to import the cartridges to the US and sell them there. Ultimately, following the Jazz Photo Corp. v International Trade Commission case, the Court determined that no legal rule to this effect existed. For there to be an ability to do so, Impression would have to have a licence, implied or direct, to do so, which in the case they did not have. Similarly to the above, the decision in Kirtsaeng does not apply in this instance either (where copyright protected works were bought abroad and imported for sale in the US), as the law in copyright affords an equivocal right to resell the items, which patent legislation does not give.

Ultimately, Impression's case failed and the Court found that they had indeed infringed Lexmark's rights.

Both Judge Dyk and Hughes dissented from the judgment, raising opposing views on both the applicability of Mallinckrodt and Jazz Photo.

In their view, in relation to the first argument of patent exhaustion, the decision in Quanta Computer Inc. v LG Electronics Inc. applies, which sets out that "...the initial authorized sale of a patented item terminates all patent rights to that item". The moment the item involving the patent has been sold with authorization, all rights in the patented aspect cease to apply, even in relation to resale. Additionally, in relation to the second argument, once the item was sold abroad (with no restrictions as to US patent rights), the rights in the patent works are exhausted. This is even more poignant, according to the judges, due to the sale by the patent rightsholder, and not a mere licensee.

The case, once decided by the Supreme Court, could potentially have huge implications to the sale and resale of goods incorporation patent rights in the US. Should the Supreme Court side with Lexmark, it could cause a huge cooling on the resale of products in the US, and an upswing on the incorporation of stricter sale terms in relation to patent rights in any given goods. This could cause prices to rise and items to be less readily available to consumers. On the opposite side, should the Supreme Court agree with Impression, patent rights could be hugely devalued in the US, especially when it comes to the sale of goods at first instance. This could mean higher up-front costs to protect against the loss on resales, but also release a whole swathe of second-hand markets for patent goods, particularly from abroad should the rights have been exhausted. No matter which way the case goes, it will be very important to both consumers and patentees alike, and shape the future of patent exhaustion for years to come.

Source: Gizmodo

Used Treasures - CJEU Sets Limits on the Resale of Copyright Works

Resale of goods, particularly those protected by copyright, has been a question that the courts have been tackling for a long time. This is further exasperated by the online environment, where the sale and use of sold products or software is ever-more elusive, with the actual exhaustion of any rights (particularly in the sale of the protected goods) is unclear. For rightsholders, exhaustion of rights can often seem like having your cake and eating it, while those seeking to benefit from it perceive it as more of a possibility to create a second-hand market in the online environment. Not often discussed, cases dealing directly with exhaustion seem to be far and few between; however, the Court of Justice of the EU recently took on a case dealing with a question that is important in the context of software exhaustion.

The case of Aleksandrs Ranks and Jurijs Vasiļevičs v Finanšu un ekonomisko noziegumu izmeklēšanas prokoratūra and Microsoft Corp deals with two Latvian individuals who sold Microsoft software products online during 2001 to 2004. The Court estimated that over 3,000 copies had been sold, with the pair making revenues nearing $300,000 during that time. Mr Ranks and Vasiļevičs were subsequently charged with a number of infringement claims, and having gone through the courts in Latvia, the matter ultimately ended up in the CJEU, particularly dealing with questions surrounding the exhaustion of rights in the aforementioned software products.

The Court, dealing with the two referred question together, summarized the matter as asking "…the interpretation of Article 4(2) of Directive 2009/24 [Software Directive], establishing the rule of exhaustion of the copyright holder’s distribution right, and of Article 5(1) and (2) of [the Directive], laying down exceptions to that rightholder’s exclusive right of reproduction, must be interpreted as referring to the equivalent provisions of Directive 91/250 [Computer Programs Directive], namely Article 4(c) thereof, on the one hand, and Article 4(a) and Article 5(1) and (2) thereof, on the other". Effectively the questions seek to establish whether the exhaustion of rights after their first sale under the Software Directive is interpreted as meaning the same equivalent provision as set out in the Computer Programs Directive.

Having discussed the admissibility of the claim overall, allowing for them to be referred to the CJEU, the Court first looked at the actual concept of exhaustion.

For exhaustion to apply to the right to distribute computer programs in the EU it is is subject to two conditions: "...(i) the copy must have been placed on the market and, more specifically, sold by the rightholder or with his consent, and (ii) it must have been placed on the market in the European Union". Sale in itself means the sale of a program for an unlimited period in return for a fee to remunerate the rightsholder for the distribution of that particular program. While the Court has clearly established that, at least in most cases, the sale applies to physical copies of the programs only; the case at hand discussed the resale of electronic copies, and thus would be outside of the prima facie remit of the provisions.

Even Santa has to resell some things

The Court followed this with observations that, although the provisions above discuss 'a copy' of the program, no particular medium is specified, and, following the decision in UsedSoft, the law "...makes no distinction according to the tangible or intangible form of the copy in question". The sale then clearly applies irrespective of the medium of the program, as long as it has been initially sold in the EU lawfully. The reseller can, therefore, resell a copy of a program provided that "…[the] sale does not adversely affect the rightholder’s exclusive reproduction right".

Mr Ranks and Vasiļevičs also argued that the rule would allow for the resale of computer programs stored on a non-original medium (i.e. electronically rather than on a CD or DVD, for example) if the original medium has been damaged. While Article 5 of the Computer Program Directive allows for the making of back-up copies, the exception is limited to instances where "… That copy… (i) [is] made by a person having a right to use that program and (ii) [is] necessary for that use". Clearly, the resale of 'back-up' copies would not fall under Article 5, even if the original copy has been damaged. The CJEU followed this rationale, establishing that a copy cannot be resold even if the original medium has been damaged, and can only be used to meet the sole needs of the person who made that back-up copy.

Although UsedSoft established that the purchaser of a legal electronic copy of a computer program does have the right to resell their copy (and the rights were exhausted as a result of that initial sale), this can be distinguished from the resale of a back-up copy, since the back-up would not have been the item that was originally sold (which was the tangible copy) and exhaustion would not, arguably, apply. Has the individuals purchased the copies from Microsoft legally from their website, they potentially could have had the right to resell the copies.

In the end the CJEU summarized their decision as "… that Article 4(a) and (c) and Article 5(1) and (2) of Directive 91/250 must be interpreted as meaning that, although the initial acquirer of a copy of a computer program accompanied by an unlimited user licence is entitled to resell that copy and his licence to a new acquirer, he may not, however, in the case where the original material medium of the copy that was initially delivered to him has been damaged, destroyed or lost, provide his back-up copy of that program to that new acquirer without the authorisation of the rightholder".

The resale of computer programs is a very thorny topic, as one can see, and the resolution the CJEU came up with seems to make the most sense. This allows for the resale of genuine copies of programs, yet reserves the rights to only those with a bona fide interest in doing so, rather than a mere opportunistic view for quick monetary gains. The limitation of the resale of back-up copies also makes sense, since, as the original program was bought in a tangible medium, the original seller's view couldn't have been one that allows for the resale of any back-up copies (especially since back-ups, by nature, are for the user and no one else as a means to access their programs in the event of damage or loss to the CD/DVD). It will be interesting to see whether this case spawns more litigation; however, this writer seems to be quite skeptical of this, due to the complexity and lack of benefit to those who'd pursue this avenue more vigorously.

Goliath triumphs over David - US Supreme Court upholds Monsanto's rights on their seeds

In true David vs Goliath fashion, Monsanto, a multinational biotechnology company, took on a farmer over the use of their patented soybean seed some 5 years ago. The legal saga has come further than anyone expected, reaching as far as the steps of the US Supreme Court late last year. The Court released its decision only some days ago, yielding an interesting, albeit not surprising result.

The case of Bowman v Monsanto Co concerned Mr. Bowman, having purchased and used Monsanto's gene manipulated seeds from a certified vendor, much like many of his peers. The seeds themselves were altered to be pesticide resistant, giving farmers the ability to plant their crops and protect them from the bug scourge that wreaks havoc amidst fields all over the world (scenario slightly exaggerated here). One caveat in the purchase of Monsanto's seed is that they can only be used for one planting cycle; that is that any seeds from the harvested crop cannot be used to plant another cycle and the farmer has to buy yet another batch, thus preventing the self-growing of plantable seeds by farmers, retaining Monsanto's monopoly over that particular seed. Mr. Bowman had fully complied with all terms set by the company in his operations, but wished to lower his costs and bought his seed from a grain elevator, ones meant for consumption and not planting. Some of these seeds contained the alteration patented by Monsanto, which Mr. Bowman used to then plant his subsequent crops once he has killed off the plants which weren't resistant to the pesticides. Once Monsanto discovered Mr. Bowman's actions, the company proceeded to sue him for patent infringement.

Terrifying - from a farmer's perspective

In their decision the Court was unanimous, showing a clear stance as to where the law stands today. In his argument Mr. Bowman relied on the doctrine of patent exhaustion. This effectively means that once a patented item has been legally sold, the person who's bought that particular item can sell or dispose of it as they wish, much like with any item they legally purchase. Once the patented item has been legally sold, the patent rights in that particular item end, or are exhausted, preventing the patent holder from controlling it post-purchase. Because the doctrine relates to a "particular article" the person who's bought the item has no right to make copies of that item - in this case creating new plantable seeds. There is no exhaustion if new copies are made, resulting in Mr. Bowman infringing Monsanto's patent. Having bought the seeds from a grain elevator didn't help his cause either, making his claim over exhaustion all the more dubious. As stated the appeal was unanimously dismissed.

You have to accept that the Supreme Court was perfectly right in their decision, and the unanimity further highlights this. As Justice Kagan stated in the Court's decision, should the exception have been accepted "...patents on seeds would retain little value." Clearly this would decimate any patents related to seeds, and once planted and used over and over, possibly even resold to other farmers, the patents would be completely worthless. The decision was one of common sense.

Source: GEN