Introduction

The question of international exhaustion of I.P. Rights is, with the exception of an express provision in the Canadian Copyright Act, one which has not been addressed in any of the I.P. legislation in Canada to date and, accordingly, it has been left to the Canadian courts to seek to develop a body of law based in part on the jurisprudence in other common law countries such as the United Kingdom.

We are unaware of any provision in either the Free Trade Agreement (FTA) with the United States or the North American Free Trade Agreement (NAFTA) with the United States and Mexico which has any relevance to the question of international exhaustion of I.P. Rights. This may not be surprising considering that each of the above Agreements is based on increasing the free flow of goods and services between the signatory countries to the Agreements.

Accordingly, there is no fundamental difference, so far as international exhaustion is concerned, between imported products from the United States or Mexico and any other country of the world.

General Observations

The issue of International Exhaustion of I.P. Rights has been the subject of fairly extensive but occasionally contradictory jurisprudence in Canada, particularly having regard to the absence of any International Treaties affecting Canada or domestic legislation [except for Section 27 of the Copyright Act] relating to international exhaustion. There is no Regional Exhaustion involving Canada that the authors are aware of in view of the absence of any provisions in the FTA, NAFTA treaties earlier identified.

In general, international exhaustion is applicable in Canada to all forms of I.P. rights including patents, trade marks, copyright, industrial designs and plant breeders' rights.

The Exception Provided by Section 27.1 of the Copyright Act

The Canadian Copyright Act contains provisions relating to the importation of copyrighted works into Canada and, specifically, Section 27.1(1) expressly prohibits the importation into Canada of books without the consent of the copyright owner even where the books were produced in another country with the consent of the copyright owner, where the importer knew or should have known would infringe copyright if made in Canada.

Section 27.1(2) covers secondary copyright infringement including the sale or renting out of a book or exposing or offering for sale or rental or exhibit in public, a book or possession of a book for the above purposes.

Section 27.1(3) limits the application of subsections (1) and (2) to those cases where there is an exclusive distribution of the book and the infringing acts take place in the part of Canada where there is the exclusive distributor.

Section 27.1(4) deems an exclusive distributor to derive an interest in the copyright by license for the purpose of entitlement to remedies for copyright infringement. As explained by one commentator, "...Canadian book distributors were party to exclusive rights agreements which allowed them to import and distribute foreign books in Canada. However, it was often impossible for them to obtain a 'Canadian interest' in the copyright from the foreign distributor or editor. Without any 'interest' in the copyright allowing them to appear before the courts, it was practically impossible for them to bar the import in Canada of works for which they had signed an exclusive rights agreement. At least with respect to books, it is now possible for an exclusive Canadian distributor to justify his legal standing before the courts when seeking an order barring the distribution in Canada of books for which they enjoy exclusive rights under an agreement."

In all other areas of I.P. Rights, including patents and trade marks, generally international exhaustion has been accepted by the Canadian courts subject to exceptions involving a claim to "passing off" arising from alteration of the product or packaging so as to mislead the purchasers of the goods as to the identity, quality and/or source of the same.

Questions To Be Answered

The National Group Guidelines have requested that the following questions on international exhaustion be answered in the order of (i) patents; (ii) trade marks and (iii) other I.P. Rights.

In view of the absence of any significant distinction between the different I.P. rights, the responses to the following questions will, in general, address the I.P. rights as one.

1

Is there international exhaustion of (i) patents; (ii) trade marks; and (iii) other industrial property rights? That is, can an industrial property right owner use industrial property rights against parallel imports from another country, when the imported products have been put on the market in that country by the industrial property right owner or with his consent?

In respect of patents of invention, trade marks and other I.P. rights generally (subject to the copyright exception), the short answer is that international exhaustion applies. The I.P. rights owner cannot restrict the free flow of products into Canada under the above conditions where the products originated with the owner of the I.P. rights in another country or indeed by any third party that produced the products with the consent of the owner, absent express notice of restriction on resale or export out of the country of origin.

The Canadian Federal Court of Appeal in Smith & Nephew Inc. v. Glen Oak Inc., (1996) 68 C.P.R. (3d) 153, addressed the question of international exhaustion in respect of trade marks. It is suggested that the same principle applies to the other I.P. rights with the exception of copyright rights.

As stated by the Federal Court of Appeal in Smith & Nephew at page 158:

Goods which originate in the stream of commerce with the owner of a trade mark are not counterfeit or infringing goods simply because they may have arrived in a particular geographical market where the trade mark owner does not wish them to be distributed.

and at page 160:

Smith & Nephew as Canadian licensee and importer of goods bearing BDF's trade marks cannot complain of the sale in Canada of other goods which are also manufactured by or under license from BDF and bear the same trade marks. there can be no deception as to the origin of the goods, which are exactly what they purport to be, Nivea facial cream and soap whose quality and character is controlled by BDF. If the respondent is distressed that the goods imported by appellants are different in quality or character from those which it imports and obtains from BDF, or that they are in the Canadian marketplace at lower prices in direct competition with it, its complaint must surely be with BDF itself. There is no evidence that the appellants have obtained the goods illegally and they have no obligation either in contract or under the provisions of the Trade-marks Act not to compete with the respondent in the Canadian market.

In reaching this decision, the Court of Appeal rejected earlier decisions of the Federal Court, Trial Division, in which the principle of international exhaustion was applied where products of the rights owner were imported into Canada without the consent of the said owner.

The Canadian Federal Court of Appeal, in a judgment in Coca-Cola Bottling Ltd. v. Musaadiq Phardhan & al. rendered in 1999 by the Federal Court of Appeal (F.C.A. Court file no. A-869-97; judgement of April 12, 1999; Judges Strayer, Linden and Robertson), once again addressed the question of exhaustion of trade mark rights. The Court stated:

The foundation of the law of trade marks is that when a person, knowing that goods are not made by a particular trader, sells them as and for the goods of that trader, he does that which injures that trader.

In other words, the essence of the law of trade marks is to prevent deception as to the provenance of goods or services where the originator of those goods or services has adopted a distinguishing mark for them. (¼)

Thus the resale of goods manufactured by a trade mark owner, bearing the trade mark of the manufacturer, cannot realistically be said to be a use by the vendor to deceive the purchaser as to the provenance of the goods. As such, it cannot be the basis for an infringement action based on section 19 of the Act which confers on the trade-mark owner the exclusive right to use the trade-mark to identify his goods. In the present case there is no allegation of "use" in that sense by the respondent.

2(a)

Can contractual restrictions imposed by an industrial property right owner be used to limit the effect of international exhaustion? (b) What is the effect of breach of contractual restriction by a purchaser - does exhaustion occur?

Yes, contractual restrictions can limit the effect of international exhaustion, however, generally the restrictions must be brought to the attention of the party importing the product into Canada.

At one time, it would appear that restrictions placed on the sale of products in one country by the I.P. rights owner would follow the product through the hands of subsequent purchasers and vendors including restrictions against exporting. The more recent jurisprudence would now appear to make it clear that, in the case of products originating with the I.P. rights owner, such restrictions may only be applicable where they have been brought to the attention of the importer at the time of acquisition, otherwise the I.P. rights owner's recourse is against the entity that was a party to the restrictions or had express notice of them.

No distinction appears to be made by the Canadian courts between the various species of I.P. rights in respect of the above issue on international exhaustion.

There is a statement by the Supreme Court of Canada in Rhone-Poulenc v. Micro Chemicals (1968), 53 C.P.R. 140, that suggests that notice of a limited license must be proved to have been given to a purchaser of a patented product from a licensee although this appears to be contrary to established jurisprudence in the United Kingdom and in Canada that a licensee can confer no better rights than it acquired, regardless of whether notice of the conditions of the license were or were not brought to the attention of the subsequent purchaser.

In a recent judgment of the Supreme Court of Canada in a pharma patent compulsory license case, Eli Lilly and Co. v. Novopharm Ltd. (1998), 80 C.P.R. (3d) 321 at 352, the following statement appears:

In other words, unless otherwise stipulated in the licence, a licensee is generally entitled to pass to a purchaser the right to use or resell the patented article without fear of infringing the patent.

3(a)

If contractual restrictions can be used to limit importation, does it matter whether they are express or implied?

In view of the foregoing response to Q.2(a), assuming the product originated with the I.P. rights owner, in the absence of actual knowledge of the contractual restriction, whether the same are express or implied is irrelevant. If the product originated with a licensee of the I.P. rights owner, then actual knowledge of the restriction would not appear to be necessary.

If contractual limitations are express, are there any particular marking requirements?

No particular marking requirements exist in Canada for patents, trade marks or other I.P. rights that could limit importation save those markings that would come to the attention of the importer-purchaser.

3(c)

If protected products are marked to indicate some marketing restriction, what are the consequences of removal or loss of any marking?

If the products originated with the I.P. rights owner and the markings were removed or lost, the jurisprudence would suggest that a subsequent purchaser would take title to the product free of the restrictions.

4

Does international exhaustion of industrial property rights apply where a product has been put on the market under a compulsory license (if applicable)?

In Canada, only patent rights may be subject to compulsory licenses and those are now restricted to the so-called statutory abuse provisions contained in Sections 65 to 71 of the Canadian Patent Act. By virtue of Section 70 of the Patent Act, a compulsory license granted by the Commissioner of Patents is stated to operate "as if it were embodied in a deed granting a license executed by the patentee and all other necessary parties."

Accordingly, it can be argued that the resultant compulsory license is tantamount to a consensual license and therefore international exhaustion could apply on the same base as a voluntary license.

5

Is "consent", which gives rise to exhaustion, limited to specific arrangements, (for example a relationship with a subsidiary or affiliated company, or an agreement with a licensee), or a question of fact in each case?

In our view, "consent" is a question of fact and is irrelevant to the relationship, although as observed in the Smith & Nephew decision, supra, a relationship of parent and subsidiary may, as a matter of evidence, be very relevant to the question of international exhaustion. In other words, consent by a subsidiary or affiliated company could be considered tantamount to consent by the I.P. rights owner itself.

Smith & Nephew at page 160:

The question as to whether a Canadian subsidiary of a multi-national can sufficiently distance itself from its parent so as to assert rights in a Canadian trade mark owned by the subsidiary against persons importing similarly marked goods originating with the parent offshore is a difficult one which we do not have to answer here. Our situation is far simpler, and it is in my view manifest that the respondent cannot assert rights as a licensee against goods which, directly or indirectly, originate with its licensor.

6

Can an IPR owner object to parallel importation where (a) goods or (b) their packaging have been modified?

Where the goods or packaging have been subsequently modified by someone other than the I.P. rights owner such that the purchaser of the product would be mislead, deceived or confused as to the source of the product or its quality or utility, then the I.P. rights owner would be entitled under Canadian jurisprudence to seek to restrain parallel importation under those circumstances on a number of grounds including depreciation of goodwill in the I.P. rights owner's trade marks, passing off, unfair competition or unfair trading

7

As well as stating the laws in their respective countries, the groups are also invited to (a) make any proposals for changes; and (b) offer any observations of interest on the topics raised above.

There appear to be two approaches prevailing in the published literature, namely: that I.P. rights are national rights and, accordingly, any sale or use of products under those I.P. rights should be limited to the country in which the national I.P. rights were granted. There should be no principle of international or regional exhaustion unless expressly provided by national legislation or regional or international treaty.

This is argued to be particularly applicable to I.P. rights relating to pharmaceuticals, chemicals and foodstuffs which may be released into the marketplace in one geographical area by the I.P. rights owner or its licensee to meet the needs or customs of that area, but may be unsuitable or even harmful to release into another geographical area, for example, pharmas that have been designed for storage and use in cold northern climates may be totally unsuitable in southern warm climates. Certain chemicals may comply with the quality standards in one country but may be quite unacceptable in another.

The other approach is that once the I.P. rights owner has released the particular product into the marketplace, either directly or through an agent or licensee, the owner has been compensated for the particular product and ought not to be able to control further dealings with the product, absent express conditions or restrictions that continue with the product and we expressly brought to the attention of subsequent purchasers or users. A clear exception to this would arise where the product has been substantially altered without the I.P. rights owner's consent, or has been used, held out for use, or sold in a misleading or improper manner.

This latter approach appears to prevail in Canada and possibly the United States of America.

There is clearly some merit in both approaches and a debate on the same would be helpful.

The 1991 AIPPI resolution on Q. 101, "Parallel Import of Patented Products", appears to favour the first approach to international exhaustion, at least for patents of invention.

In view of the divergence of national laws on the issue of international exhaustion, it may be that AIPPI should recommend to WIPO that consideration of an international treaty on this subject would be merited.

Summary

The international exhaustion of Industrial (Intellectual) Property (I.P.) Rights is, with the exception of an express provision in the Canadian Copyright Act, one which has not been addressed in any of the I.P. legislation in Canada to date and, accordingly, it has been left to the Canadian courts to seek to develop a body of law based in part on the jurisprudence in other common law countries such as the United Kingdom.

In general, international exhaustion is applicable in Canada to all forms of I.P. rights including patents, trade marks, copyright, industrial designs and plant breeders' rights.

Section 27 of the Canadian Copyright Act contains a provision expressly prohibiting the importation into Canada of books without the consent of the copyright owner even where the books were produced in another country with the consent of the copyright owner, where the importer knew or should have known would infringe copyright if made in Canada.

In respect of patents of invention, trade marks and other I.P. Rights generally (subject to the copyright exception), international exhaustion applies. The I.P. Rights owner cannot restrict the free flow of products into Canada where the products originated with the owner of the I.P. rights in another country or indeed by any third party that produced the products with the consent of the owner, absent express notice of restriction on resale or export out of the country of origin.

In view of the divergence of national laws on the issue of international exhaustion, it may be that A.I.P.P.I. should recommend to W.I.P.O. that consideration of an international treaty on this subject would be merited.

Résumé

La doctrine de l'épuisement des droits de propriété industrielle (intellectuelle) (P.I.) est, à l'exception d'une disposition expresse prévue à la Loi Canadienne sur le droit d'auteur, un sujet qui n'a pas été abordé dans la législation canadienne à ce jour. Pour cette raison, les tribunaux canadiens ont du chercher à développer des lignes directrices et des critères d'application relativement à cette matière en s'inspirant, entre autre, de la jurisprudence d'autres pays de common-law comme la Grande-Bretagne.

En général, au Canada, la doctrine de l'épuisement des droits est applicable à toutes les formes et catégories de droits de propriété industrielle incluant le droit des brevets, des marques de commerce, d'auteur, des dessins industriels et des obtentions végétales.

L'article 27 de la Loi sur le droit d'auteur est une disposition expresse qui prohibe l'importation parallèle au Canada de livres sans le consentement du titulaire de droit d'auteur même si ces livres sont produits dans un autre pays, et ce, du consentement du titulaire du droit d'auteur, si l'importateur savait ou devait savoir qu'il y aurait violation du droit d'auteur s'ils étaient produits au Canada.

Ainsi, en matière de brevets d'invention, de marques de commerce et d'autres droits de propriété industrielle (mise à part l'exception en matière de droit d'auteur), la doctrine de l'épuisement des droits de propriété industrielle s'applique au Canada. Le titulaire de droit de propriété industrielle ne peut pas restreindre la libre circulation des produits au Canada lorsque les produits proviennent originalement d'un titulaire de droits industriels d'un autre pays ou, d'une tierce partie qui fabrique les produits avec le consentement du titulaire du droit, en l'absence d'un avis exprès de restriction sur la revente ou l'exportation en dehors du pays d'origine.

Vu la divergence des différentes lois nationales à l'égard de la doctrine de l'épuisement des droits de propriété industrielle, il se pourrait fort bien que l'AIPPI. suggère à l'OMPI la mise sur pied d'un traité international dans ce domaine.

Zusammenfassung

Die internationale Erschöpfung gewerblicher Schutzrechte (GSR) ist bisher - mit Ausnahme einer ausdrücklichen Bestimmung im kanadischen Urheberrechtsgesetz [Copyright Act] -im kanadischen Recht noch nicht berücksichtigt worden. Es ist daher den kanadischen Gerichten überlassen, eine Rechtsgrundlage zu entwickeln, die sich zum Teil auf die Rechtsprechung in anderen Ländern stützt, in denen das Gewohnheitsrecht [Common Law] gilt (z.B. Großbritannien).

Im allgemeinen trifft die internationale Erschöpfung in Kanada auf alle Formen der gewerblichen Schutzrechte einschließlich Patenten, Marken, Urheberrechten (Copyright), Musterrechten und Pflanzenzuchtrechten zu.

Paragraph 27 des kanadischen Copyright Act enthält eine Bestimmung, die ausdrücklich die Einfuhr von Büchern nach Kanada ohne Genehmigung des Copyright-Inhabers verbietet, auch wenn die Bücher in einem anderen Land mit Zustimmung des Copyright-Inhabers hergestellt worden sind, wenn der Importeur gewußt hat oder hätte wissen müssen, daß dies gegen das Copyright verstoßen hätte, wenn sie in Kanada hergestellt worden wären.

In Bezug auf Patente, Warenzeichen und sonstige gewerbliche Schutzrechte gilt allgemein die internationale Erschöpfung (mit Ausnahme der Copyright-Bestimmung). Der Inhaber der gewerblichen Schutzrechte (GSR) kann den freien Warenverkehr nach Kanada nicht einschränken, wenn die Produkte von dem Inhaber der Rechte in einem anderen Land oder womöglich sogar von einer dritten Partei stammen, die die Produkte mit Zustimmung des Inhabers hergestellt haben, vorausgesetzt, daß keine ausdrückliche Einschränkung des Wiederverkaufs oder der Ausfuhr aus dem Ursprungsland angemeldet worden ist.

Im Hinblick auf die Verschiedenheit nationaler Gesetzgebung auf dem Gebiet der internationalen Erschöpfung sollte die AIPPI der Internationalen Vereinigung für gewerblichen Rechtsschutz [WIPO] vielleicht empfehlen, daß die Erwägung einer internationalen Vereinbarung zu diesem Gegenstand vorteilhaft wäre.