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Parallel Imports and the Exhaustion Doctrine: Lessons for Nigeria

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In the US Supreme Court decision in the Kirtsaeng case, discussed previously, the dissenting opinion written by Ginsburg J contained some interesting observations about the approach of the United States government to the issue of exhaustion of intellectual property rights and parallel imports. In particular, Ginsburg J observed that while the majority decision of the court ‘places the United States solidly in the international exhaustion camp’, it is the position of the dissent which favours a national exhaustion doctrine that is consistent with ‘the stance the United States has taken in international negotiations’. The dissent judgment points out further that the US government ‘reached the conclusion that widespread adoption of the international exhaustion framework would be inconsistent with the long term economic interests of the United States’.

The comments of Ginsburg J reflect the important fact that policy considerations affect the type of exhaustion doctrine adopted by a particular country or even, in contemporary times, a politico-economic region. It is thus no news that there is a polarity or diversity of exhaustion regimes within the global community. While some countries favour a national exhaustion regime, there are those who favour an international exhaustion regime while a third group favour or are obliged to adopt a ‘regional’ exhaustion doctrine. The lack of international consensus regarding the form of exhaustion doctrine to adopt is reflected in the most significant instrument of recent times obliging countries to provide for protection and enforcement of intellectual property rights. That is, the WTO’s Agreement on Trade Related Aspects of Intellectual Property (TRIPS) which states that nothing in the Agreement shall be used to address the issue of exhaustion (Article 6).

To recap briefly, the exhaustion doctrine is broadly the principle that once an intellectual property right holder sells or authorises/approves the sale of a product subject to the intellectual property right, the purchaser of the product is at liberty to do with the product as s/he pleases including reselling the item. This is also known in some contexts and some countries as the ‘first sale’ doctrine. A major source of controversy, however, is that rights holders sometimes choose to sell the same product at different prices in different markets (especially different countries). Sometimes this enables a right holder to maintain a high price for the product it markets in a particular country which of course in turn opens up an opportunity for enterprise minded third parties to import the cheaper version from another market/country i.e. ‘parallel imports’. If the country in question applies a national exhaustion doctrine, the right holder will be more likely to secure prohibition of the parallel imports. On the other hand, if the country applies an international exhaustion doctrine the third party importers are more likely to be able to continue to market the parallel imports.

For poorer economy countries, it is easier to see how particular policy and economic considerations may suggest the adoption of an international exhaustion doctrine which would ordinarily allow the sourcing of products from the cheapest markets. Further, specific needs for certain products in an important sector may dictate a legislative framework that will support the sourcing of those products at comparatively low costs. This has been especially true in the understandably emotive respect of medicines generally and HIV/AIDS drugs particularly. A good example of this is the South African Medicines and Related Substances Control Act (especially No 90 of 1997) and the enormous controversy that it generated.

In the case of Nigeria, the view is often expressed that Nigeria applies a national exhaustion doctrine – at least in relation to patents. This view is usually based on the provisions of section 6(3)(b) of the Patents and Designs Act which provides in effect that rights under a patent ‘shall not extend to acts done in respect of a product covered by the patent after the product has been lawfully sold in Nigeria ….’ Some amount of caution is called for however. In the first place, the provision has not been fully tested for judicial confirmation of whether it does indeed obligate a national exhaustion doctrine in respect of patents. Second, the provision obviously only concerns patents specifically and does not extend to other forms of intellectual property such as trademarks or copyright; bear in mind that Kirtsaeng concerned copyright specifically. Third, proposed new legislation is expected to see the replacement of the provision with one that is thought to clearly provide for international exhaustion in that rights under a patent will not extend to acts done in respect of a product covered by the patent ‘after the product has been lawfully sold in any country’.

More generally, Nigeria is a common law country which inherited and adopted principles and doctrines from the common law of England and still regards decisions of the English courts on common law principles (generally excluding any modifying effect of European Union law) as of helpful and often persuasive effect, though not binding. Accordingly, the view is also held that the common law as it is applied in Nigeria probably incorporates the principle of the implied licence long recognised in common law since Betts v Wilmott (1871). The summary of this principle is that if a patentee sells or allows the product covered by a patent to be sold and does not impose any restriction on resale, the purchaser is considered at liberty to use or resell the product wherever s/he wishes.

Considering that in the absence of restriction, the principle of the implied consent can make parallel importation lawful, it can be seen as very close to the international exhaustion doctrine. Nevertheless, significant differences exist: for example, as the implied consent principle is essentially based on ‘agreement’, albeit implied, notification of restrictions to a licensed foreign seller will possibly be enough to prevent such licensee from being able to engage in parallel importation lawfully. Depending on the circumstances, it may also be that notification to third party foreign purchasers would also be enough to prevent them too from being able to engage in parallel importation lawfully. Compare this with the case of Kirtsaeng where it was noted, inter alia, that ‘Wiley Asia’s books state that they are not to be taken (without permission) into the United States.’

In light of the provision of section 6(3)(b) of the Patents and Designs Act, it is perhaps unlikely that the Nigerian courts will apply the implied consent principle in relation to patents. In other respects, there are cases in Nigerian jurisprudence where courts have been willing to grant protection in the form of injunctive relief to a local (‘sole’) distributor, and by extension its foreign licensor, against another party engaging in parallel importation e.g. Bright Motors v Honda, and The Honda Place v Globe Motors (based on parties’ ‘Terms of Settlement’, suit No. LD/1643/96). In the absence of specific provision in relation to trademarks and copyright nevertheless, it is at least arguable that the Nigerian courts may potentially be persuaded to consider and apply the implied consent principle or a form of it.

It is noteworthy that even in the United Kingdom where the adoption of a regional exhaustion doctrine (EU and EEA wide) is now obligatory and in spite of important rulings of the ‘European Court of Justice’ (e.g. the Silhouette, Davidoff & Levi Strauss cases) narrowing the possibilities for finding consent, the jurisprudence still accommodates the possibility of consent. In current English jurisprudence the consent of a right holder may still justify the importation into the UK (or even into the EU/EEA) of a product lawfully marketed outside the EU/EEA where it can be demonstrably established to the satisfaction of the courts that the right holder ‘has renounced his right to oppose placing of the goods on the market within the European Economic Area’; (‘unequivocal implied consent’). See for example Mastercigars Direct Ltd v Hunters & Frankau Ltd; Corporacion Habanos SA v Mastercigars Direct Ltd & another.

Accordingly, it will not be particularly surprising if the Nigerian courts are persuaded to apply an international exhaustion doctrine whether explicitly or in the form of an implied consent approach, particularly if anticipated legislation confirms the adoption of international exhaustion in relation to patents specifically. Although, in Kirtsaeng the US Supreme Court’s decision was based on particular American statutory provisions, it may be that the Kirtsaeng decision will embolden supporters of an international exhaustion regime in claiming that the adoption of such a regime is not per se an indication of hostility towards or lack of support for intellectual property rights and their protection.

There may be concern about other potential effects of the adoption of an international exhaustion regime. In the particular circumstances of Nigeria one such concern would be whether adoption of an international exhaustion regime would encourage the flooding of the Nigerian market with counterfeit products with particular concerns about fake medicines. Ordinarily, the adoption of an international exhaustion regime should not per se lead to an increase in the marketing of counterfeit products since the doctrine itself would allow the parallel import of genuine products marketed by or with the consent of the right owner. Nevertheless, in light of the particular danger posed by counterfeit drugs, it is incumbent on relevant authorities in any event to ensure the effective operation and enforcement of extant Nigerian statutory provisions aimed at combating that particular problem which exists even in the absence of an international exhaustion regime.

Parallel Imports and the Exhaustion Doctrine: A Thai Take Away in the USA

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The recent judgment of the Supreme Court of the United States in the case of Kirtsaeng v John Wiley Inc is already attracting a lot of attention. This is understandable because of its effect in rightly being seen as confirming that, at least in relation to copyright specifically, the US law presently recognises the concept of ‘international exhaustion’. In the decision in Kirtsaeng the US Supreme Court confirmed (in a majority decision) that the ‘first sale doctrine’ (another expression for ‘exhaustion doctrine’) applies in respect of copyrighted works manufactured abroad with the permission of the copyright owner.

In summary, the exhaustion doctrine deals with the extent to which the owner/holder of certain intellectual property rights (‘IPR owner’) in respect of a particular product can control an individual item or copy of that product after the item or copy is sold by or with the authorisation of the IPR owner. Generally, a ‘national’ form/version of the exhaustion doctrine, which some countries operate, recognises that once an individual item or copy manufactured within the country is sold, by or with the consent of an IPR owner in respect of the item or copy, the purchaser can do whatever he likes with the individual item or copy as, in other words, the rights of the IPR holder are ‘exhausted’ by that authorised sale. The more controversial aspect of the exhaustion doctrine is whether an ‘international exhaustion doctrine’ applies or is to be recognised. Under an international exhaustion doctrine the rights of an IPR owner will also be ‘exhausted’ in respect of items or copies sold by the IPR owner or with its consent in any other country. An international exhaustion doctrine could obviously have a hampering effect on the strategy of an IPR holder to market a product at different prices in different countries or regions. At the same time an international exhaustion doctrine may provide arbitrage opportunities, through ‘parallel imports’, for some people with a particular ‘enterprising’ orientation —- like the defendant in Kirtsaeng v Wiley.

The defendant was a Thai national who had gone to the USA as a student. On realising that copies of certain books in his native Thailand were cheaper than the copies on sale in America, he arranged with acquaintances to have Thai copies bought and sent to him which he then resold at a profit in the USA. John Wiley Inc was the copyright holder in respect of the books who had granted permission for the manufacture and sale of the copies in Thailand on condition that those copies were not for sale in the USA. Accordingly, John Wiley sued in the US courts for the alleged infringement of its rights. Ultimately, the decision turned on technical issues of interpretations of specific provisions of the American Copyright Act 1976 (USC Title 17) primarily with the court finding in favour of the defendant in a majority decision.

The court held that while section 106 of the Copyright Act confers some rights on the copyright owner, including distribution rights, those rights are qualified by the provisions of sections 107-122 of the same Act. In particular section 109(a) sets forth the ‘first sale doctrine’ and provides that the owner of a copy ‘lawfully made under this title’ can sell or otherwise dispose of the possession of that copy without the authority of the copyright owner. The court (majority opinion delivered by Breyer J.) held that ‘lawfully made under this title’ means made ‘in accordance with’ or ‘in compliance with’ the Copyright Act and that this extends to copies manufactured outside the USA with the permission of the copyright owner. In other words, the ‘first sale doctrine’ operates to protect the owner of a copy of a work even though the work was manufactured outside the USA, and that owner may dispose of that copy without the permission of an owner of copyright in respect of the work concerned.

Another significant provision considered by the court was section 602(a)(1) of the Copyright Act which provides that importation into the US of copies of copyright work without the authority of the copyright owner is an infringement of the copyright owner’s exclusive distribution right under section 106. Ordinarily, this provision might have been expected to entitle the claimant Wiley to succeed in the action against Kirtsaeng. There was, however, the small technical matter that the US Supreme Court had ruled in a previous case that the reference in section 602 to a copyright owner’s exclusive distribution rights under s.106 also incorporates the limitations to those distribution rights contained in sections 107-122 and especially the first sale doctrine under section 109: Quality King Distributors, Inc. v. L’anza Research Int’l, Inc.  523 U. S. 135, 145 (1998).

The consequence, evidently, is that while importation of copies of works without the authority of the copyright owner may prima facie be an infringement of the copyright owner’s exclusive distribution right, the defence of the first sale doctrine applies to such importation as much as it applies to sale of domestically manufactured copies. This is because in each case the exclusive distribution right derives from section 106 which in itself is subject to the limitation on that right by, inter alia, the first sale doctrine as expressed in section 109(a). It was recognised, in the written opinions of the judges, that this decision would have a serious curtailing effect on the scope of application of section 602 with Kiagan J (joined by Alito J), while supporting the majority decision, suggesting that perhaps it was intended that section 602 should have an effective import prohibition but one that does not interfere with the first sale doctrine or that removes first sale protection from every copy manufactured abroad.

A number of matters are worth bearing in mind about this unquestionably important decision of the court in Kirtsaeng. In the first place, the judgment was made in the specific context of copyright and it will be premature to read the judgment as adopting ‘international exhaustion’ in the US in respect of different types of intellectual property (and the court even suggests that a lessee of a copy is not protected, unlike a purchaser/owner). Nevertheless, the majority opinion in particular has a clear colour and ringing tone of consumer protection. Breyer J observed that the first sale doctrine is ‘a common law doctrine with an impeccable historic pedigree’ and, after quoting approvingly from a 17th century dictum of Lord Coke, said: ‘A law that permits a copyright holder to control the resale or other disposition of a chattel once sold is similarly “against Trade and Traffi[c], and bargaining and contracting.”’ He also said: ‘American law too has generally thought that competition, including freedom to resell, can work to the advantage of the consumer.’ Very significant too is the dismissal of the argument that the interpretation of section 109(a) adopted by the court will make it difficult or impossible for publishers (or copyrights owners) to divide foreign and domestic markets with the retort that there is no basic copyright law principle that publishers are especially entitled to such rights. Finally, it is similarly significant that the court pointed to a range of instances (referred to dismissively in the dissent as a ‘parade of horribles’) when important institutions and organisations may be negatively and undesirably affected if the court were to adopt an interpretation denying first sale protection to copies manufactured abroad.

In a subsequent post, we plan to compare this decision with the attitude towards exhaustion of IP rights in the United Kingdom as another common law (yet ‘European’) example and also in Nigeria as an example from a developing country.