Exhaustion of IP: A Tool for Competition

Arathi Ashok

Innovation, growth and development are the objectives sought to be achieved by all nations. To
achieve these objectives various mechanisms are resorted to. Two major mechanisms resorted to
by most nations are the intellectual property (IP) regime and the competition law regime. Though
the aspiration of both the regimes is the same, the methodology adopted in realization of its
fundamental aspiration is conflicting and contradictory. While Competition law tries to bring out
the triple objective of innovation, growth and development through creation of an environment
conducive for competition, the same is achieved by Intellectual property by conferring
monopolies. This divergence in the approach, to attain the same basic goal, has often given a feel
that IP and Competition is incompatible with each other, which is only a delusion.

With the establishment of the World Trade Organisation and the coming into force of the TRIPS,
the IP regimes in all its signatory countries were unified to an extent. The Preamble to the TRIPS
itself says that it is an attempt to reduce distortions and impediments to international trade which
shall be achieved by promoting effective and adequate protection of IP rights. At the same time,
the most crucial point to be noted is that, it says that States should ensure that enforcement of IP
rights do not themselves become barriers to legitimate trade. This reflects the realisation that IP
can be a barrier to trade and its consequential anxiety. The reason behind this anxiety is the well
established fact that monopolies are bad for economic and societal development. It is this very
same realisation that has led to the inclusion of certain provisions, within TRIPS itself, to ensure
that IP does not become an abusive instrument. Some of such important mechanisms are
limitations of IP rights, compulsory licensing and exhaustion of IP rights.

Limitations of IP rights are those situations where in the law disregard the IP holders monopoly
to the advantage of another person’s rights the protection of which is more important in that
particular specific circumstance. For example, using if copyrighted works for the purpose of
education. On the other hand compulsory license is a mechanism where the law recognises and
protects the IP holder’s rights but at the same time permits some other specific person also to
exercise the right due to the existence of any particular situations. For example, in situations of


Assistant Professor, School of Legal Studies, Kochi – 22.

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outbreak of an epidemic and if its medicine is under patent mechanism then the State can issue
compulsory mechanism to any one for meeting the immediate requirement of the public.
Contrary to these two situations, exhaustions of IP rights is a situation where the law presumes
that IP rights in relation to a particular article ceases and it becomes like any other tangible
property that is capable of movement and transfer without any added fetters.

In this article the author deals exclusively with this third inbuilt mechanism of the IP regime for
the purpose of restricting abuse of the IP monopoly by fostering competition. For the purpose of
analysing this, the article shall be divided into three parts. Part I shall explain the concept of
exhaustion of IP rights and its evolutions, part II shall look into how exhaustion acts as a tool to
ensure competition and part III will look into how the Indian IP regime deals with exhaustions
the changes that are required to ensure successful working of this mechanism and consequential
fostering of competition.

Exhaustion & Its Evolution

Exhaustion literarily means wearing out completely or depleting away. The doctrine of
exhaustion in IP is not much different. Exhaustion means the consumption of rights in
intellectual property subject matter as a consequence of the legitimate transfer of the title in the
tangible article that incorporates or bears the intellectual property asset in question. It takes place
when the IP owner or any person authorised on his behalf sells the product, upon the very first
authorised sale, the right to control resale or the distribution of the sold piece of product gets
exhausted. 1 Thus the IP rights over that particular piece of the product get exhausted.
Exhaustion, therefore, is a natural consequence of the intangible nature of the assets covered by
intellectual property, such as expressions, knowledge, reputation, quality, origin. This is also
known as the ‘First Sale Doctrine’, especially in America, as the doctrine kicks in on the first
authorised sale. The doctrine was created, nurtured and nourished by the judiciary and the
earliest case which dealt with the concept was Bloomer v. McQuewan2where the court found that
property sold by the patentee becomes the private individual property of the purchaser and that
the patent holder loses his right over that property. As United States Appellate Federal Judge

1
Enrico Bonadio, “Parallel imports in a global market: should a generalised international exhaustion be the next
step?”, European Intellectual Property Review, 2011.
2
55 U.S. 539 (1852)

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Posner said, in the absence of exhaustion, if every time a car owner wished to resell his/her used
car needed to request a license from the car maker, that would lead to an absurd situation of
implying automatic compulsory licenses.3 The solution to this problem is to presume that when
the car was purchased the right to use the trademark on that car exhausted and the car along with
the mark became the property of the car owner. The theory behind the doctrine is that it enables
the IP owner to receive one fair reward for surrendering its right to withhold a product from the
market 4 but thereafter permits free disposition and movement of chattels; in this way, it is
thought, IP rights will not unduly disrupt a modern and efficient system of distribution, and
goods will not be encumbered with a maze of contractual restrictions and restraints on alienation.

At the multilateral level, exhaustion is explicitly covered by provisions found in four treaties,
two of which are administered by WIPO: the United Nations Set of Principles and Rules on
Competition, 1980;5 the Agreement on Trade-Related Aspects of Intellectual Property Rights
(the TRIPS Agreement), 1994;6 the WIPO Copyright Treaty, 1996;7 and the WIPO Performances
and Phonograms Treaty, 1996.8

3
Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 704 (7th Cir. 1984).
4
Christopher J. Clugston, International Exhaustion, Parallel Imports, and the Conflict between the Patent and
Copyright Laws of the United States, Beijing Law Review, 2013. Vol.4, No.3, 95-99.
5
Section D(4)(e) of the UN Set reads:
“Enterprises should refrain from the following acts or behavior in a relevant market when, through an abuse or
acquisition and abuse of a dominant position of market power, they limit access to markets or otherwise unduly
restrain competition, having or being likely to have adverse effects on international trade, particularly that of
developing countries, and on the economic development of these countries: […]
(e) Restrictions on the importation of goods which have been legitimately marked abroad with a trademark identical
with or similar to the trademark protected as to identical or similar goods in the importing country where the
trademarks in question are of the same origin, i. e. belong to the same owner or are used by enterprises between
which there is economic, organizational, managerial or legal interdependence and where the purpose of such
restrictions is to maintain artificially high prices; […].”
6
Article 6 of the TRIPS Agreement reads:
“For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing
in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.”
Paragraph 4(d) of the Declaration on the TRIPS Agreement and Public Health (WT/MIN(01)/DEC/2, of November
20, 2001), reads:
“The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of intellectual property
rights is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the
MFN and national treatment provisions of Articles 3 and 4.”
7
Article 6 of the WCT, on the Right of Distribution, reads:
“(1) Authors of literary and artistic works shall enjoy the exclusive right of authorizing the making available to the
public of the original and copies of their works through sale or other transfer of ownership.
(2) Nothing in this Treaty shall affect the freedom of Contracting Parties to determine the conditions, if any, under
which the exhaustion of the right in paragraph (1) applies after the first sale or other transfer of ownership of the
original or a copy of the work with the authorization of the author.”
Of the above stated the most important is the mandate of TRIPS, owing to its obligatory nature.
Moreover the provision which provides for the rights of the patentee under TRIPS has an agreed
statement which specifically lays down that exhaustion shall be available in respect to the use,
sale, importation or other distribution of the good.9 Thus it has to be noted that exhaustion is not
absolute and that not all rights will get exhausted. Only those rights on resale and distribution
which are available on that particular piece of good will get exhausted and other rights including
the right to make the product will remain with the owner of the IP right itself. Thus for the
principle of exhaustion for operate it is mandatory to have a first authorised sale by the patent
holder himself or his licensee and is a defence in IP infringement cases.

Exhaustion is a market-driven legal consequence and in that context it has been categorized in
accordance with the geographical dimension of its impact. Based on the territorial extend of
which the right gets exhausted, exhaustion is divided into 3 categories. They are:
1. National Exhaustion – It is a situation where the author loses control the re-sale the
product in the nation where the initial authorised sale took place. Under a strict territorial
application of the doctrine, a sale in country A under a country A patent (or copyright or
trademark) would exhaust the IP Owner’s rights only in Country A, and the IP Owner
could rely on its separate patents in other countries to enjoin sales, seek damages or
possibly even require customs officials to halt infringing imports at the border. This
principle would hold even though the IP rights in all the countries are essentially the
same. A strict territorial exhaustion doctrine is arguably consistent with the nature of IP
rights, which are granted by each individual nation as an act of sovereignty and are
strictly territorial in effect; while its impact will vary with other trade conditions (relative
exchange rates, for example) and across different categories of goods, a strict territorial
approach can serve as a barrier to free movement of goods and cause IP rights to act as
private trade barriers.10
This system gives the IP right holder absolute control over the product even after its sale
in the international market. Though such a level of vertical constraint is considered anti-

An agreed statement clarifies that this provision refers “exclusively to fixed copies that can be put into circulation as
tangible objects.”
8
Paragraphs (2) of Articles 8 and 12 of the WPPT have the same language as Article 6.2 of the WCT, even if
applied to different rights, as already noted above.
9
Note to Article 28(1), TRIPS
10
James B. Kobak, Jr., Exhaustion Of Intellectual Property Rights And International Trade,
 competitive to some extent, there are nonetheless advocates who see pro-competitive
benefits for this kind of market restraint. First, it prevents “free riding on investments
made by official licensees and distributors”.11 Many manufactures require distributors
and retailers to invest in advertisements in order to promote their products to the public.12
Secondly, if a system of international exhaustion were followed, licenses may not be
issued in a different market unless the right holder can be assured that they will not with
parallel imports of that product in whichever market the right holder operates in. 13
Consequently the global market could see slowed technology and information
dissemination which is “harmful to follow-on innovation and productivity growth.” 14
Thirdly, it allows producers of IP products to charge different prices for the same product
in different markets. Price discrimination such as these is considered exploitative conduct
on behalf of the producer and parallel imports are thought to refrain it.15 The author is
also in favour of this conclusion. Fourthly and the most compelling argument in favour of
national exhaustion is the narrow case of minimum price caps placed on pharmaceutical
drugs by governments.16 The general assumption is that free competition in the market
creates low prices. However, low prices are not always the result of free competitive
market forces. For example, some governments limit the rate of return on certain
products. Attaching such a restriction is an unacceptable restriction of public policy.
However, even if such extension of public policy were acceptable to certain countries, IP
holders are not expected to continue their continuing services to the exporting country. 17
Consequently, price controlled markets may suffer from reduced access to IP products
altogether.

11
Frederick M. Abbott, “First Report (Final) to the Committee of International Trade Law of the International Law
Association on the Subject of Parallel Importation”, 1 J. Int’l Econ. L., 2008, p. 607, 608.
12
Nancy T. Gallini and Aidan Hollis, “A Contractual approach to Grey Market”, p.1, available at
http://econ.ucalgary.ca/fac-files/ah/irle99.pdf
13
Carsten Fink, “Entering the Jungle of Intellectual Property Rights Exhaustion and Parallel Import”, in Carsten
Fink & Keith E. Maskus, Intellectual Property and Development Lessons from Recent Economic Research, 2005, p.
180
14
Id
15
Ibid at p. 176
16
Christopher B. Conley, “Parallel Imports: The Tired Debate of Exhaustion of Intellectual Property and Why the
WTO should Harmonize the Haphazard Laws of International Community”
17
Carsten Fink, “Entering the Jungle of Intellectual Property Rights Exhaustion and Parallel Import”, in Carsten
Fink & Keith E. Maskus, Intellectual Property and Development Lessons from Recent Economic Research, 2005, p.
179
 2. Regional Exhaustion – It is that principle of exhaustion where the author loses control the
re-sale the product in a particular region where the initial authorised sale took place
within that particular region. It must be noted that the right gets exhausted only within the
region and the owner of IP rights can exercise all rights in regard to even that particular
product outside that region. The most common example of the operation of this
mechanism is within the European Community. For example if countries A, B and C
form a region which has accepted regional exhaustion then if a IP associated product is
sold in country A by the IP right holder or his licensee then its resale in countries B or C
cannot be object by the IP right holder. But if the person who bought that particular
product tries to sell that product outside the region, for example in country Z, then it can
be objected by the IP right holder as the right to do the same falls back on the IP right
holder for the reason that outside the region the right of the IP holder remains intact and
has not got exhausted. For all purposes, regional exhaustion operates in the same way as
national exhaustion – it is generated by the first sale within the same trade region and it
has consequences in the territories of the several countries that form the trade region in
question.

3. International Exhaustion – It is a situation where the author loses control the re-sale the
particular product irrespective of where the initial authorised sale took place. Under this
version of the doctrine a sale by or under the authority of an IP Owner anywhere exhausts
its right under all counterpart IP protection anywhere in the world. This doctrine has
always seemed difficult to reconcile with the underlying systems of national IP rights but
avoids the practical problems and trade barriers of a territorial principle.

International exhaustion gives rise to the consequence of parallel import. Parallel imports, or
grey market goods as they are sometimes referred, are not fake or counterfeit goods. Instead,
parallel imports are goods that are sold internationally by a patent owner or a licensee and then
subsequently imported without permission.18 The products that are imported as a consequence of
parallel import are genuine products, quiet contrary belief that there are pirated or counterfeit or
low quality products. There is absolutely no quality difference between that is made and

18
Christopher J. Clugston, “International Exhaustion, Parallel Imports, and the Conflict between the Patent and
Copyright Laws of the United States”, Beijing Law Review, 2013. Vol.4, No.3, 95-99.
imported by the IP right holder and that is imported through the mechanism of parallel import for
the reason that the products imported through parallel import are also made by the IP right holder
himself or under the authorization of the right holder. For this reason parallel imports are quiet
controversial. The term “grey market” used in relation with parallel imports must be understood
and properly appreciated in it right sense. It signifies the distribution channel in which products
which has IP protection makes its way into the protected importing country.19 These goods are
legally produced, sold and exported. Thus the IP holder has either exploited the IP right himself
or authorized another party to exploit the same through a licensing agreement. The product is
then sold and exported to another territory that has issued the same IP right on that product to the
same person on whom the right was conferred on by the first territory. The most common
method is passive parallel import where goods are purchased in a foreign market and resold in
domestic market.20 Active parallel import occurs when a foreign licensee exploits the patent and
then enters the domestic market in direct competition with the patent holder and other official
domestic licensee.21

The theory of comparative advantage is the most fundamental concept in international trade. A
system preventing parallel imports does not comport with the theory of comparative advantage
because nations are unable to specialize in what they do best. Therefore, because a system of
national exhaustion conflict with the principle of free trade, it is therefore no surprise that
economist argues in favour of a system based on international exhaustion.22

The foundation of the theory of comparative advantage lies upon two critical assumptions. The
market operates only under two conditions of (1) free entry and (2) perfect competition.23 Only
with those assumptions will competition force price down to marginal costs in free trading
markets.24 Accordingly, a free market with competition erodes the purpose of parallel import.25

19
Mitsuo Matsushita, The World Trading Organisation Law: Practice and Policy, 2006, p. 734.
20
Carsten Fink, “Entering the Jungle of Intellectual Property Rights Exhaustion and Parallel Import”, in Carsten
Fink & Keith E. Maskus, Intellectual Property and Development Lessons from Recent Economic Research, 2005,
p.171,172
21
Id
22
Ibid, at p. 175
23
Ibid, at p. 176
24
Id
25
Id
However, parallel imports occur only in markets with improper competition. 26 Imperfect
competition is a result of firms maintaining pricing power and price discrimination schemes.27

The biggest critique of a system of national exhaustion has been it’s per se approach of banning
all parallel imports. The bright line rule therefore fails to balance and separate the pro
competitive benefits of grey market trading with the anti-competitive effects of market
segregation. Therefore parallel imports may be better served if “scrutinized from an antitrust
perspective.”28 If so, national competition laws would invalidate contractual provisions contrary
to public policy.29 Second, contractual restrictions provide producers with the ability to directly
address products relative to their given industry and its environment. 30 Third, contractual
restrictions are not bound to national territories.31 From the above it can be safely concluded that
from an economic point of view, specifically from developing country perspective, it is better to
opt for international exhaustion when compared with national exhaustion. From a larger public
angle perspective also this conclusion holds correct, i.e. international exhaustion delivers more
public benefit goods when compared to national exhaustion.

Exhaustion as a Tool for Competition

From the above discussion it is clear that exhaustion, irrespective f it being national, regional or
international, it facilitates competition as it allows for free movement of good after the first
authorized sale by the right holder. Even if this be the situation it must be kept in mind that from
the competition point of view the best form of exhaustion is international exhaustion as this
facilitates the movement of goods across borders and provides the perfect impetus to
international trade. When we look into the statues and case laws of different countries we can see
as to the extent to which exhaustion has been used a mechanism to foster trade and competition.

Most national legislations especially those passed after the coming into force of the TRIPS has
specifically provided for some mechanism of exhaustion. The general trend is that it follows

26
Id
27
Id
28
Nancy T. Gallini and Aidan Hollis, “A Contractual approach to Grey Market”, p.180, available at
http://econ.ucalgary.ca/fac-files/ah/irle99.pdf
29
Carsten Fink, “Entering the Jungle of Intellectual Property Rights Exhaustion and Parallel Import”, in Carsten
Fink & Keith E. Maskus, Intellectual Property and Development Lessons from Recent Economic Research, 2005,
p.181
30
Ibid, p. 180
31
Ibid, p. 180, 181
international exhaustion. The logic behind this trend could be the realization of the importance of
international trade and threat TRIPS was one of the mechanism to foster international trade. The
Preamble of TRIPS itself provides that IP should not be used as a mechanism to prohibit or
abuse international trade. It could be the culmination of these factors that has lead to the trend of
international exhaustion of IP, specifically in the post TRIPS era.

Also generally, statutes that are silent on that issue are construed as providing for national
exhaustion. The reason is that, given the inherent territoriality of IP rights, in the absence of a
provision in a different sense, it may be understood that the inclusion of the right to import (as
well as to exclude others from importing) in the bunch of rights accorded to the different assets
covered by IP means that exhaustion occurs at the national level only – therefore, IP owners keep
the right to prohibit imports even if a legitimate sale has taken place outside the country. This
view has created substantial confusion in relation to the Indian position, which will be dealt in
detail in the latter part of this paper. But most of these Statutes do not provide an explicit relation
between exhaustion of IP rights and competition or anti-trust. An exception to this position can
be seen in the industrial property statute of the Sultanate of Oman. 32 According to this,
exhaustion of industrial property33 rights occurs nationally, but where the IP owner engages in
certain practices that are qualified as abusive or that involve the public interest, including anti-
competitive practices, the Minister shall have the authority, ex officio or at the request of any
interested party, of declaring the rights in question exhausted upon a legitimate first sale made
abroad by the owner or with his consent and where parallel rights are in force. The provision in
general provides for a mechanism of national exhaustion, as a general rule, for the sake of
ensuring effective protection of IP rights and protecting the legitimate interests of foreign direct
investors who, under an international exhaustion regime, may be confronted with products made
by themselves in other countries. However, Oman has not been left defenseless in the case the IP
owner uses the relative territorial insulation granted by national exhaustion in an anti-competitive
(or otherwise abusive) manner: in this event, Oman may resort to international exhaustion.

32
Section 11 of the Law on Industrial Property Rights, promulgated by Royal Decree No. 67/2008
33
Industrial Property under the Act includes utility models, industrial designs, layout designs, trademarks, and
geographical indications
A second example of the interaction between exhaustion and competition law can be found in the
law of Jordan.34 The general rule here is international exhaustion, contrary to the position in
Oman. However, where the parallel imports are deemed not to comply “with the principles of
commercial competition,” the patent owner is entitled to oppose them. The patent owner is also
entitled to prohibit parallel imports by means of clauses in licensing agreements.

When we lo0ok into other major jurisdictions like the US we can see that it has long recognized
international exhaustion in the area of trademark law, the country has traditionally been seen as
one of the more staunch opponents of international exhaustion and parallel importation in the
areas of copyright and patent law.35 During the TRIPS negotiations, the United States took the
lead among developed countries in arguing against recognition in these areas. Like- wise, it has
advanced this position in bilateral treaty agreements and has even gone so far as to put pressure
on trading partners that have considered domestic laws that incorporate international
exhaustion.36 When we look into the evolution of exhaustion in US it can be seen that it owes it
origin to case laws and not statutes. The first time the United States Supreme Court addressed the
issue of exhaustion of patent rights was in Bloomer v. McQuewan 37 which involved a patent
whose term was extended by an Act of Congress. The court held that the inventor might lawfully
sell it to him, whether he had a patent or not, if no other patentee stood in his way. And when the
machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. It
passes outside of it, and is no longer under the protection of the act of Congress. In United States
v. Univis Lens Co.38 the Supreme Court revisited the exhaustion doctrine, but this time in the
context of the interface between patent law and antitrust where the issue at bar was a price resale
maintenance (RPM) clause. The Supreme Court invoked the exhaustion doctrine to conclude that
the setting of prices by the patentee was a violation of antitrust law. The Court concluded that
“[a]greements for maintaining prices of goods in interstate commerce, including restrictions
imposed by the seller upon resale prices, held unreasonable restraints within the meaning of the

34
Article 37, Law on Patents of Invention of the Hashemite Kingdom of Jordan (Law No. 32, of 1999, as amended
by Temporary Law No. 71, of 2001).
35
Calboli, “Corporate strategies, first sale rules, and copyright misuse: Waiting for answers from Kirtsaeng v. Wiley
and Omega v. Costco (II)”, Northwestern Journal of Technology & Intellectual Property, Forthcoming, 2003, p.11
36
Clapperton, D., & Corones, S, “Locking in customers, locking out competitors: Anti-circumvention laws in
Australia and their po- tential effect on competition in high technology markets”, 30 Mel-bourne U. L. Rev. 657
37
Bloomer v. McQuewan, 55 U.S. 539, 549 (1853).
38
United States v. Univis Lens Co., 316 U.S. 241 (1942 )
Sherman Act.”39 The Court stressed the general principle that the exercise of patent rights cannot
go beyond what it may be considered reasonable to protect them. In Quanta Computer, Inc. v. LG
Electronics, Inc., 40 the Supreme Court reaffirmed the exhaustion doctrine in connection with
“method patents.” 41 The Court held that it does apply: “Nothing in this Court’s approach to
patent exhaustion supports LGE’s argument that method claims, as a category, are never
exhaustible. A patented method may not be sold in the same way as an article or device, but
methods nonetheless may be embodied in a product, the sale of which exhausts patent rights. Our
precedents do not differentiate transactions involving embodiments of patented methods or
processes from those involving patented apparatuses or materials. 42 Although the Court in
Quanta did not discuss antitrust-related issues, it seems important to stress that, in its view, the
exhaustion doctrine makes post-sale restrictions unenforceable, at least under patent law. A
recent Supreme Court case43 held that, in the area of copyright law also, international exhaustion
is recognized under United States law. The Supreme Court reversed the lower court decisions,
and made it clear that international exhaustion is recognized, stating as follows:
In our view, §109(a)’s language, its context, and the common law history of the “first
sale” doctrine, taken together, favor a non-geographical interpretation. We also doubt
that Congress would have intended to create the practical copyright related harms with
which a geographical interpretation would threaten ordinary scholarly, artistic,
commercial, and consumer activities.44

Thus it can be concluded that the concept of international exhaustion clearly applies to US at
least in the case of Trade Marks and copyright thought the position as to the type of exhaustion
applicable in the case of patents is not clear. The rationale justifying the Court’s decision on
copy- right exhaustion apply equally, or even more so, to the issue of patent exhaustion. Hence it
can be safely assumed that the concept of international exhaustion applies to all forms of IP
within US and is a fine example of a measure to foster international trade and competition.

39
Obid, at 250
40
Quanta Computer, Inc. v. LG Electronics, Inc., 553. U.S. 617 (2008).
41
The issue was “whether patent exhaustion applies to the sale of components of a patented system that must be
combined with additional components in order to practice the patented methods”
42
Quanta Computer, Inc. v. LG Electronics, Inc., 553. U.S. 617 (2008), at 628, 629.
43
Kirtsaeng v. John Wiley & Sons, Inc., 2013 USLEXIS 2371.
44
Ibid, at 19.
Exhaustion and Indian Law
The IP regime in India is split into multiple statues and a perusal of all these statutes is required
to find out the policy of exhaustion followed in India. We shall first look into how the concept of
exhaustion has been dealt under the copyright regime in India. The copyright regime in India is
dealt under the Copyright Act, 1957 and to look where parallel import is allowed it is essential to
look into whether there is a right to importation under the fabric of the Act. The Copyright Act
expressly provides that no person shall be conferred with any rights under copyright than the
rights specifically guaranteed under Section 16 of the Act and Section 14, which provides the
rights; there is no right as the right of importation.

But the question is whether such a right can be inferred from reading other provisions of the Act.
This is exactly what the Delhi High Court did in Penguin Books Limited v India Book
Distributors and others. 45 The Court here held that if any person without the license of the
copyright owner, imports into India for the purpose of trades any literary work, the copyright
over the same is infringed. Any importation of infringing copies is therefore an infringement
unless it is for the importers own use.46 The Court came to this conclusion on the basis of a
combined reading of the then Sections 2(m),47 5148 and 5349. The Court moreover held that ‘the
exclusive right to import into India would extend to the exclusive right to import copies into
India for the purpose of selling or by way of trade offering or exposing sale of the books in
question.’ 50 The ‘publishing’ of works, is also the exclusive right of the plaintiff, by issuing
copies for public distribution. On the bases of this rationale, the Court held that the defendants
were infringing the copyright of the plaintiff and granted an injunction in their favour.

45
1984 (4) PTC 285 (Del.), p.296. Here the plaintiffs had the exclusive right and license for printing, publishing and
marketing of copyrighted works in India. The defendants imported lawful copies of these books from America and
sold it in India. The plaintiffs sought to prevent this. The question was whether the copies imported by the
defendants are infringing copies as per the Copyright Act and whether they are violating any right exclusively
conferred on the plaintiff by virtue of the Act.
46
1984 (4) PTC 285 (Del.), p.296
47
Section 2 (m) defines ‘infringing copy’ means a copy ‘imported in contravention of the provisions of the Act’
48
Section 51 reads:- ‘Copyright in a work shall be deemed to be infringed- (a)…………………….(b) when any
person-(i) makes for sale or hire, or sells or lets for hire or by way of trade or display or offers for sale or hire, or (ii)
distributes either for the purpose of trade or to such an extend as to affect prejudicially the owner of the Copyright,
or (iii) by way of trade exhibits in public, or (iv) imports (except for private and domestic use of the importer) into
India any infringing copies of the work. Explanation – For the purpose of this section, the reproduction of a literary,
dramatic, musical or artistic work in the form of cinematograph film shall be deemed to be an infringing copy.
49
Section 53 empowers the Registrar of Copyright to ‘order that copies made out of India of the work which if made
in India would infringe copyright shall not be imported.’
50
1984 (4) PTC 285 (Del.), p.300
Section 14 of the Copyright Act,1957, was amended in 1994 and rephrased to include right to
issue copies to the public not the copies already in circulation as per Section 14(a) (ii), which
simply means that when a copy of the work is available in the market the author loses the right
over such copy and the decision in Penguin is no more the law. The question was dealt again in
Warner Bros. v. V.G. Santosh51 where it explicitly recognised that, in the context of copyright
law, while the principle of international exhaustion may apply to literary, musical, dramatic or
artistic works; it does not apply to cinematographic film and to sound recordings as well. This
was based on the difference between the wordings of Sec. 14(1)(d) [and (e)] and
14(1)(a)/(b)/(c).this double standard in copyright exhaustion was taken care of by the latest
amendment52 of copyright by deleting “regardless of whether such copy has been sold or given
on hire on earlier occasions” in Sec. 14(1)(d)(ii)53 and 14(1)(e)(ii).54 By the amendment to Sec.
14, the distinction in the wordings of Sec. 14(1)(d)/(e) and 14(1)(a)/(b)/(c) which formed the
basis of Justice Bhat’s reasoning in Warner Bros., will become non-existent. Copyright law will
henceforth recognise the principle of international exhaustion uniformly without making any
distinctions between the various works.

When we look into the frame work of the trademark regime in India too a similar picture
becomes visible. The trademark regime is dealt under the Trade Marks Act,1999. Sec. 30 (3)55 of
the Trade Marks Act, 1999 recognises the principle of exhaustion. The position in relation to this
can be clearly understood from the judgment of Kapil Wadhwa & Ors v. Samsung Electronics
Co. Ltd.56 In the same case the Single Bench57 had earlier held that trade mark exhaustion under
the Act is national and not international. While deciding the case, the Division Bench held that
the Single Judge erroneously concluded that the expression ‘lawfully acquired’ in Section 30(3)

51
CS(OS) 1682/2009. This case involved the import from US into India of legally purchased DVDs of films
produced by Warner Bros. which were not yet released for public viewing in India.
52
Copyright (Amendment) Act, 2012.
53
Right of authors of cinematograph film
54
Right of author of Sound Recording
55
Where the goods bearing a registered trade mark are lawfully acquired by a person, the sale of the goods in the
market or otherwise dealing in those goods by that person or by a person claiming under or through him is not
infringement of a trade by reason only of –
(a) the registered trade mark having been assigned by the registered proprietor to some other person, after the
acquisition of those goods; or
(b) the goods having been put on the market under the registered trade mark by the proprietor or with his consent
56
FAO(OS) 93/2012 (Del. HC)
57
Samsung Electronics Co. Ltd. & Anr. v. Kapil Wadhwa & Ors [C.S. (OS) No. 1155/2011]
meant ‘acquisition by consent for the purposes of import’ and opined that conclusion of the
Single Judge that Section 30(3) conferred no additional rights on users led to this incorrect view.
The Division Bench identified a ‘patent fallacy’ in the Single Judge’s view that the scope of the
expression ‘the market’ in Section 30(3) is limited to domestic markets and therefore import of
products requires the consent of the registered proprietor. The Division Bench deciphered the
legislative intent to have recognized the applicability of international exhaustion based on textual
interpretation and use of external aids. Thus it can be concluded that the court unequivocally
concluded that the legislative design under the Trade Marks Act, 1999, also favours international
exhaustion of rights.

The picture that emerges when we look into the statutory frame work of the patent regime in
India comprised in the Patent Act, 1970, is no different. The statutory framework is as
ambiguous as the copyright regime as there is no specific provision providing for international
exhaustion or that permits import. On the other hand, when we look into the rights of the patent
holder we can see an express right of importation.58 In spite of this a complete reading of the Act
gives the impression that the scheme it intends to follow is that of international exhaustion. This
is evident from the provisions which deals with what will not constitute infringement under the
Act.59 The provision specifically permits certain importations. It says that if the product has been
purchased by someone authorised under law to produce and sell or distribute then such
importation will not constitute infringement. The term ‘authorised under law’ should be
interpreted not to mean the law in the land where the patent is being imported, i.e. India, but it is
the law that authorised to produce and sell or distribute i.e. it is the law of the land from where
the product is being exported. The term ‘produce and sell or distribute’ ensures that there has
been a first authorised sale and that the patent has got his due in relation to that product either by
himself or his agent. 60 This satisfies the rationale for granting patent. Thus we can safely
conclude that this statutory framework also mandates an international exhaustion regime.

Thus we can see that all the major forms of Indian IP regime accedes to international exhaustion

58
Section 48, Patent Act, 1970
59
Section 107A: Certain acts not to be considered as infringement: For the purposes of this Act-
(a)……
(b) importation of patented products by any person from a person who is duly authorized under the law to produce
and sell or distribute the product.
60
Shamnad Basheer & Mirnalini Kochupillai, “Exhausting Patent Rights in India: Parallel Import and TRIPS
Compliance”, JIPR, Vol. 13, Sept. 2008, pp 486-497
of IP rights. The recognition of international exhaustion is a welcome change. It brings
uniformity in the intellectual property regime of the country. This uniformity and conformity can
be the consequence of the post TRIPS impact couple with the formation of the World Trade
Organization (WTO). This has given a global feel that there must be free movement of good and
that there must be competition so as to ensure that there is larger public good. The Indian law
also tries to achieve the same by providing maximum competition by ensuring that maximum
number of products reaches Indian market and consequently the price of those products would be
minimal and therefore the customers will be in a much better situation, in relation to making
choices and revenue send on the products.

In a country like India where the substantial number of the population will fall under the
category of lower middle class and below poverty line and where the rate of literacy of only
74%61 it is our need that IP related products like books and medicines are made available at the
cheapest rate possible. It is not possible for the government to subsidize them all or to provide
them freely to those it is necessary. The next best option is to ensure a healthy competitive
market so that these products will be available at the least possible price. It is the inherent duty of
the IP machinery to ensure that this competition subsists in IP related products. The directions in
which the IP laws of our country are structured show this path. It is now up to the judiciary and
the other market regulatory mechanisms including government to ensure that these remain the
same and thereby guarantee that the demands and needs of our population are met with.

61
http://www.census2011.co.in/literacy.php