Module 31: Exhaustion of Intellectual Property Rights

1. Introduction:
Exhaustion of intellectual property rights presents some of the important conceptual,
legal and economic challenges in the study and practice of intellectual property rights.
This area of IPR law is practiced differently in various jurisdictions and there is
seemingly no consensus on what should the contours of the law on exhaustion be.
With no standard definition and no harmonized provisions at the international level,
exhaustion presents an important area for scholars to interpret and explore more
keeping in mind certain first principles.
Exhaustion primarily deals with the ability of IP owners to pursue their product for
every subsequent use after the first sale of the product embedding IPRs. Exhaustion is
with respect to the legal requirements pertaining to consequences of first sale of the
original physical copy purchased by the consumer and does not extend to making
copies. This follows with general principles of sale of goods and property where
absolute restrictions or conditions on sale are unacceptable since it interferes with the
freedom of parties to contract further and imposes inalienability rules that are devoid
of fundamentals of freedom to enjoy property.

2. Property and Sale

Sale is one of the important incidents of owning property. Without sale no property
can be monetized. Hence absolute conditions prohibiting sale of land or chattels is
antithesis to the idea of the consequences of owning property. Alienability is one of
the important attributes and a legal entitlement that flows from owning property.
While the right to exclude others is at the core of the property- which is primarily an
exclusion thesis, the ability of an owner of land or chattel to convey his property
through (sale, lease, license, assignment, rent etc…) forms the secondary bundle of
rights.

Section 14, Section 19(1) and (2) of the Sale of Goods Act, 1930, No. 3 of 1930 deals
with consequences on conditions of sale.
Section 14 states:
 14. Implied undertaking as to title, etc.—In a contract of sale, unless the
circumstances of the contract are such as to show a different intention there is—
(a) an implied condition on the part of the seller that, in the case of a sale, he has a
right to sell the goods and that, in the case of an agreement to sell, he will have a
right to sell the goods at the time when the property is to pass;
(b) an implied warranty that the buyer shall have and enjoy quiet possession of the
goods;
(c) an implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the buyer
before or at the time when the contract is made.

Similarly Section 19 (1) and (2) states:

Property passes when intended to pass.—
(1) Where there is a contract for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the parties to the contract intend it
to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to
the terms of the contract, the conduct of the parties and the circumstances of the case.

Hence no good that is bound by the Sale of Goods Act, 1930 can escape the above
clause. Hence every good involving intellectual property has to primarily comply with
the above mandate in the Act. i.e. the consequences of Sale of Goods Act also extend
to intellectual property. In many ways, first sale has basis in common law and the
statutory basis is only in addition to the rich jurisprudence that courts have developed
in this area of law.

3. What’s first sale in IP?

An important question involving first sale of physical goods is the challenge posed by
existence of various types of IPRs in that good. IP based goods also pose challenges
because of the ability of such goods to be both non-rivalrous and non-excludable. The
consequence of First sale involving IP is hence a matter of concern for IP laws to
provide. Conceptually, IP owner loses distribution control on any product embedding

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IP by virtue of first sale. It is meant to restrict IP owners from benefiting perpetually
from reselling of IP based products.
It no doubt benefits consumers who can avail cheaper versions of already sold
products in the market (popularly called as second hand markets). However
consumers have the benefit of first sale doctrine only with respect to the purchased
product in question and not with making additional copies. In other words, first sale
acts as an important limitation on the distribution rights of the IP owner and no
further. No copies can be made as a defence under the first sale doctrine.

4. Exceptions to first sale

While conceptually first sale is applicable to all further sales downstream, however,
depending on the nature of the product and the aftermarkets involving IP goods, first
sale may be limited. This occurs generally with copyright protected goods like, music,
sound records, computer programs which have strong rental markets. Hence a sale of
DVD would not entail a purchaser of the DVD to use it for the purposes of rental.
Similarly, Droit de suite (right to follow) with respect to the original copy of the
copyrighted work poses an important limitation on the ability of owners to impose
limitations on first sale by statutorily requiring that a portion of sale be allocated to
the producer for his/her original master copy. This happens primarily with arts and
artefacts or original manuscripts. Certain type of enjoyment of IP protected goods
does not come with the sale tag. They are licensed. Hence conditions that prohibit
downstream use of a particular product may be restricted through the license. The
legality of such restrictive licences may be contested on grounds of public policy.
Increasingly, technology is also used to contain the enjoyment of first sale by
downstream consumers.

5. Types of Exhaustion
Exhaustion of IP Rights can assume three forms.
A. National Exhaustion
B. Regional Exhaustion
C. International Exhaustion

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All first sale is essentially territorial in character. Hence by virtue of extension of the
common law doctrine on first sale, national exhaustion is permissible across
jurisdictions. Hence national exhaustion is territorial first sale where the rights of the
IP owner are exhausted territorially. When national exhaustion is extrapolated in the
context of a region (for e.g. European Union), there is regional exhaustion. However,
the policy question in the context of first sale involving IP products has to do with
whether or not first sale must be by virtue of international exhaustion of rights. In
other words, whether or not countries must provide for importation of legitimate
copies of any IP protected good placed in a different country/ region by virtue of first
sale internationally- where rights are exhausted internationally. The debate around
international exhaustion is critical to the advantages and disadvantages of such a
regime for consumers and producers.

6. Arguments for and against international exhaustion

Arguments for and against international exhaustion are within a continuum (as seen
below)
Key arguments that favour international exhaustion are:

⮚ Cheaper access to IP protected goods, critically in the area of medicines and

hence access to a product is ensured.

⮚ Promotes consumer access to high quality goods available in a different

jurisdiction.

⮚ Allows importing country distributors to benefit from price arbitrage and

competition among such distributors.

⮚ Increases trade flows across the borders and does not inhibit free trade and

allied services.

Key arguments against international exhaustion are:

⮚ Discourages price global discrimination by firms by encouraging movement of

goods from low-income markets to high-income markets.

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 ⮚ Discourages post-sale services by local vendors and hinders efficiency in

distribution.

⮚ No incentive to price arbitragers to maintain supply chain quality

management.

⮚ Has impact on dynamic competition in the long run at the cost of achieving

static goals of access to cheaper versions.

7. TRIPS and Exhaustion

Exhaustion is one of the most contentious issues discussed during the Uruguay Round
negotiations involving the TRIPS Agreement. Since there was no consensus on the
nature of exhaustion regime, it was primarily left for WTO members to decide. One of
the primary arguments against the rule of national exhaustion was that it would reduce
trade flows and compartmentalize free-trade, which is the foundational pillar of the
WTO. Article 6 of TRIPS does not define exhaustion- contentious during negotiations
due to its impact on free-trade. WTO members can adopt any regime of exhaustion,
including the power to define what exhaustion should mean, in some limited way. As
per Article 6 WTO members’ decision to adopt a particular regime of exhaustion
cannot be challenged under the Dispute Settlement Mechanism. However, WTO
members must provide National Treatment and Most-Favoured Nation treatment to
nationals of all WTO members. It is important to note that WTO members in
implementing any regime of exhaustion cannot violate other provisions of the
agreement. There is no WTO dispute settlement jurisprudence on Article 6.

8. Exhaustion of patent rights in India

Section 107A(b) reads, “importation of patented products by any person from a
person who is duly authorized [sic] by the patentee to sell or distribute the product,
shall not be considered as an infringement of patent rights.” 1 As per the Statement of
Objects and Reasons of the 2002 Amendment, this provision was introduced to
“ensure availability of the patented product in the Indian market at minimum
international market price.”2 It is evident that unless there is authorization by the

1 The Patents (Amendment.) Act, 2002, No. 38, Acts of Parliament, 2002 (India).
2Id.
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patentee to sell or distribute the product, a subsequent act by the purchaser to import
the patented good into India can be infringing. This is assuming that the patent holder
may refuse to sell or impose post-sale restraints on their licensee and, hence, such a
licensee may not be authorized to sell the product to anyone importing such patented
products into India. Since this restricted the concept of exhaustion, Section 107A(b)
was amended in 2005.
It now reads:
“importation of patented products by any person from a person who is duly authorised
under the law to produce and sell or distribute the product, shall not be considered as
an infringement of patent rights.”3

However, the above amendment created further problems in interpretation since it

now allows any person who is duly authorized under the law. As argued by
Gopalakrishnan and Agitha (2012)4, the clause should be interpreted in a way to
capture many instances of exhaustion, including situation where the product in the
other market is not placed by or under the licence of the patent holder. Such a policy
styled and teleological interpretation, the authors argue will serve the objectives of
technology transfer. Basheer and Kochupillai (2009) 5 have argued for amendments to
the Section arguing that it violates Article 28 of the TRIPS Agreement in its current
form. They argue that the provision must be amended to read both first sale
(territorial) and international exhaustion together. Sai Deepak (2011) 6 relies on
internal and external aids of interpretation to conclude that those unquestionably
assuming that Section 107A(b) refers to international exhaustion are basing their
views on “politico-economic arguments” and that “biases dictate the course of law
and logic.”7 He emphasizes that the concept of territoriality strongly suggests that
Section 107A(b) refers to “conditional import of patented products” and not

3The Patents (Amendment) Act, 2005, No. 15, Acts of Parliament, 2005 (India).
4 N.S. Gopalakrishnan& T.G. Agitha, Indian Patent System: The Road Ahead, in THE FUTURE OF THE
PATENT SYSTEM 229(Ryo Shimanami ed., 2012).
5 Shamnad Basheer &MrinaliniKochupillai, TRIPS, Patents and Parallel Imports in India: A Proposal
for Amendment, 2 INDIAN J. OF INTELL. PROP. L. 63 (2009).

6 J. Sai Deepak, Section 107A(b) of the Patents Act: Why it May Not Refer to or Endorse Doctrine of
International Exhaustion?, 4 INDIAN J. OF INTELL. PROP. L. 121 (2011).

7 Id. at 138
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international exhaustion as such. The author argues that “duly authorized under the
law” cannot be a foreign law because established rules of legislative drafting require
such reference to a “foreign law” must be crystal clear from the plain reading of the
provision. The author refutes that even an interpretation that leads one to conclude
that international exhaustion in the most restricted sense is envisaged under Section
107A(b) is plainly beyond the scope of the law.

Pai (2016)8 argues against a teleological and policy styled interpretation to an extent
where it is conceptually barred. In other words, he argues that Section 107A(b) in its
current form can allow parallel imports beyond the traditional notion of exhaustion to
include where products placed in comparative jurisdictions under liability rule (lack
of injunctive relief or continuing infringement rule, goods flowing from remedies for
anticompetitive practices, goods under price controls) are validly imported into India.
By using both internal and external aids of interpretation, Pai (2016) also argues that
Section 107A(b) cannot be interpreted in a restrictive manner to connote national
exhaustion. He provides several examples where distinct provisions exist for
conditional import of patented products by or on behalf of the government. Pai (2016)
also argues that the court can interpret the current law by conceptually examining the
provision- a. by using common law first sale doctrine to ascribe territorial exhaustion
and then extend the concept to international exhaustion by using tools of
interpretation which gels conceptually with international exhaustion. Unfortunately,
there is no clear judicial guidance on this issue. In Strix Limited v. Maharaja
Appliances Limited (2009)9 a single bench of the Delhi High Court refused to accept
the defense under Section 107A(b) pleaded by the defendants. J Sai Deepak v. Central
Board of Excise & Customs & another, (2012) WP(C) No. 3165 of 2012 (India). a
division bench of the Delhi High Court refused to entertain a public interest litigation
to interpret the contours of Section 107A(b) purely on interpretations of the petitioner

9. Exhaustion of Copyrights in India

8 Yogesh Pai, The Hermeneutics of Patent Exhaustion Doctrine in India, in Calboli and Lee and
Research Handbook on IP Exhaustion and Parallel Imports project (Edward Elgar 2016 forthcoming)

9Strix Ltd. V. Maharaja Appliances Ltd., (2008) I.A. No.7441 of 2008 in C.S. (OS) No.1206 of 2008
(India).

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Section 14 did not specify the regime of exhaustion as originally enacted in 1957.
This may be primarily owing to the fact that Sale of Goods Act, 1930 already covers
the common law doctrine against imposition of inalienability rules post-sale. Penguin
Books Ltd. v. India Books Distributors (1985 Delhi High Court) – interpreted section
51 to prohibit importation of copies into India for the purpose of selling
notwithstanding the fact that there is no specific right to import granted under section
14 of the Copyright Act, 1957. Court interpreted the work ‘publish’ in 14(a)(ii) to
include power to exclude importation where rights are exhausted internationally. This
was followed by an amendment with an intent to undo the rule in Penguin.
In respect to the 1994 Amendment to Section 14 (1)(a) (ii)- “to issues copies of the
work to the public not being copies already in circulation,” the problem with the
amendment was that it does not define the territoriality of first sale- whether
international or national. Hence in Eurokids International v. India Book Distributors
Ltd. (2005 Bombay HC), the ratio of Penguin decision was followed. As noted by
Padmanabhan (2012),10 the court did not acknowledge the impact of the 1994
amendment and the question of what constitutes importation of an infringing copy
under Section 51(b)(iv).
Inventing a new concept of ‘parallel exports’, in John Wiley & Sons v. Prabhat
Chander Kumar Jain (2010 Delhi HC), the court prohibited exportation of books
from Indian distributors notwithstanding the fact that rights of copyright holder were
territorially exhausted in India- Section 14(1)(a)(ii) amendment in 1994 rendered
completely redundant. Furthermore there is no right to export granted to the copyright
owner in India, nor are border measures extended to exports in India.
In Warner Bros. Entertainment Inc. v. Santosh V. G. (2009) – exhaustion of rights
does not apply to cinematographic films for the purposes of rental since the rental
right is specifically recognised under section 14 which acts an exception to first sale
doctrine. Prakash (2011)11 argues that “Indian courts have fundamentally
misunderstood the doctrine of first sale, and consequently have wrongly held that
parallel importation is disallowed by Indian law. He further looks at the ingenuity
displayed by a court in prohibiting export of low-priced editions from India, and

10 Ananth Padmanabhan (2012), “Intellectual Property Rights: Infringement and Remedies” Lexis
(2012)
11 Prakash, Pranesh, Exhaustion: Imports, Exports, and the Doctrine of First Sale in Indian Copyright
Law (February 23, 2011). Manupatra Intellectual Property Reports, Vol.1, pp. 149-160, February 2011.
Available at SSRN: http://ssrn.com/abstract=1773723

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comes to the conclusion that this is also wrong in law. The author believes there is a
way out of this quagmire that we find ourselves in due to judicial inventions: that of
accepting a proposed amendment to the Copyright Act.” Copyright Amendment Bill
2010 suggested amendment to the definition of infringing copy (section 2m) to allow
international exhaustion. However, on lobbying by copyright owners this provision
was dropped by the parliament in 2012 Act. A Report by National Council of Applied
Economic Research. (NCAER) commissioned by the Ministry of HRD recommended
international exhaustion by thoroughly reviewing literature in this area and basing it
on empirical evidence rooted in economic theory. However, no action has been taken
since then.

10. Exhaustion of Trademarks in India

The law of exhaustion on trademarks in contained in the Trademarks Act, 1999.
Section 29 and 30 control the nature of exhaustion regime. In Samsung Electronics
Company ... vs Kapil Wadhwa & Ors. (2012 Delhi High Court), a Single Judge of
Delhi High Court interpreted the interface of Section 29 and 30 to connote national
exhaustion. A Single bench decision ruled against international exhaustion stating that
Section 29(1) read with 29(6) prohibits the sale of imported genuine products without
the authorization of the registered proprietor in India and that Section 30(3) embodies
only National Exhaustion principles and does not extend to products acquired from a
foreign market.

This was subsequently challenged in appeal to the division bench. The Bench ruled in
favour of international exhaustion. It noted:
“There is no law which stipulates that goods sold under a trade mark can be lawfully
acquired only in the country where the trade mark is registered. In fact, the legal
position is to the contrary. Lawful acquisition of goods would mean the lawful
acquisition thereof as per the laws of that country pertaining to sale and purchase of
goods. Trade Mark Law is not to regulate the sale and purchase of goods. It is to
control the use of registered trademarks”.
The bench further noted:
“Thus the neutral expression ‘the market’ without the legislature adding words to
indicate whether it was the domestic or the international market which was in the

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mind of the legislature does not justify the conclusion arrived at by the learned Single
Judge as the only logical conclusion.”
Hence the division bench reversed the single judge decision- held that section 30(3)
does not impose any territorial conditions for benefiting from the doctrine of first
sale . As of June 2015, an appeal is pending in the Supreme Court.

11. Specific issues in exhaustion

Exhaustion of self-replicating technologies
It will be interesting to examine how the Indian patent law will play out in the context
of self-replicating technologies. In Bowman v. Monsanto (2013), the question was
whether Bowman could claim a defence under patent exhaustion for self-replicated
seeds produced out of validly purchased seeds from Monsanto. The United States
Supreme Court held that:
“Under the patent exhaustion doctrine, “the initial authorized sale of a patented article
terminates all patent rights to that item,” Quanta Computer, Inc. v. LG Electronics,
Inc., 553 U. S. 617, 625, and confers on the purchaser, or any subsequent owner, “the
right to use [or] sell” the thing as he sees fit, United States v. Univis Lens Co., 316 U.
S. 241, 249–250. However, the doctrine restricts the patentee’s rights only as to the
“particular article” sold, id., at 251; it leaves untouched the patentee’s ability to
prevent a buyer from making new copies of the patented item. By planting and
harvesting Monsanto’s patented seeds, Bowman made additional copies of
Monsanto’s patented invention, and his conduct thus falls outside the protections of
patent exhaustion. Were this otherwise, Monsanto’s patent would provide scant
benefit. After Monsanto sold its first seed, other seed companies could produce the
patented seed to compete with Monsanto, and farmers would need to buy seed only
once. If Bowman was granted that exception, patents on seeds would retain little
value. Further, applying the normal rule will allow farmers to make effective use of
patented seeds. Bowman, who purchased seeds intended for consumption, stands in a
peculiarly poor position to argue that he cannot make effective use of his soybeans.
Bowman conceded that he knew of no other farmer who planted soybeans bought
from a grain elevator. In the more ordinary case, when a farmer purchases Roundup
Ready seed from Monsanto or an affiliate, he will be able to plant it in accordance
with Monsanto’s license to make one crop.”

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Exhaustion of copyright infringing products incidental to valid imports
Situations where international exhaustion otherwise allowed in different legislation
may be effectively made redundant by a provision in another IP legislation which
allows only territorial exhaustion. Where a good is otherwise imported, but is being
incidentally infringed by virtue of territorial exhaustion rule in copyright law, Section
52(1)(zc) of the Indian Copyright Act, 1957 allows for importing infringing copies of
copyrighted work which is incidental to any otherwise valid importation. Clause (zc)
reads: “the importation of copies of any literary or artistic work, such as labels,
company logos or promotional or explanatory material, that is purely incidental to
other goods or products being imported lawfully."

Quanta Ruling
The US Supreme Court in Quanta Computers v. LG (2008) reversed the Federal
Circuit decision about the limits on patent exhaustion doctrine. The Supreme Court
held that the patent exhaustion defense applies to patented method claims, as well as
when an authorized/licensed sale of a product substantially embodies a patented
invention. This decision is important since the Court found the sales at issue triggered
exhaustion despite the patentee's attempt to limit downstream use of the products
through contract. This case is contrary to the several precedents developed by the US
Federal circuit courts and has created new controversies of the exact scope of
exhaustion doctrine. US courts have usually allowed a rule of reason analysis on
contractual limits involving patent exhaustion.

12. Summary:
In summary, one may notice how the common law doctrine of first sale has gradually
developed to encompass first sale of products involving intellectual property rights. It
discusses TRIPS provision on exhaustion and the scope of its application. The module
provided an overview of exhaustion doctrine in India and developments across several
IP laws in India. The module covers patents, trademarks and copyright exhaustion
regimes in India and adequately discusses all literature and questions surrounding the
topic. It also discusses some specific issues pertaining to exhaustion.

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 Points to Remember

Exhaustion has basis in common law doctrine of first

sale.
TRIPS does not define the regime of exhaustion
Exhaustion is limited to physical copy of the good; does
not extend to reproduction
There are limits to exhaustion doctrine prescribed in
the law
Section 107A(b) of Patents Act, 1970 deals with patent
exhaustion doctrine in India
Section 14 (1)(a) (ii) of Copyright Act, 1957 deals with
copyright exhaustion doctrine in India
Section 29 and 30 of Trademarks Act, 1999 deals with
trademark exhaustion doctrine in India
A wide body of judicial decisions and scholarly writing
discussed above has provided differing interpretations on
the nature of exhaustion doctrine in India.

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