Under Indian Patents Act, 1970 Section 107A (b), allows for parallel importation of patented products if they are sourced from a legally authorized seller, without constituting patent infringement. This provision reflects the Doctrine of Exhaustion, which aligns with the TRIPS agreement. The section has evolved over time i.e, initially in the 2002 amendment required that the source of the product to be authorized by the patentee, but in the 2005 amendment broadened this to include products from anyone authorized under the law, not necessarily the patentee.
Introduction
Judicial precedents on Section 107A (b) in India are sparse. There are two main interpretations, one suggests that “duly authorized under the law” refers to the exporting country’s laws, supporting international exhaustion, while another argues it should be limited to Indian law, protecting domestic patent rights.
In 2012 Customs Circular, the Indian government implied that “under the law” pertains to the exporting country’s regulations. A public interest litigation challenging this circular did not resolve these ambiguities. The case of Strix Limited v. Maharaja Appliances also failed to clarify the term “duly authorized under the law.”
However, during a 2011 WTO trade policy review, India confirmed that it follows international exhaustion principles, meaning that patented products can be imported from any source authorized by the law of the exporting country. This interpretation allows Indian companies to import products from countries where patents are not enforced, potentially raising concerns about compliance with international IP standards.
Article 6 of the TRIPS agreement allows member states to adopt international exhaustion of intellectual property rights in their own laws. Countries can define how this exhaustion applies domestically without breaching TRIPS principles. The exhaustion principle often supports health policies by making expensive lifesaving drugs more affordable through parallel imports. Thus, member states are encouraged to implement parallel import rules as flexibly as possible to improve access to essential medicines.
Parallel Import & Patent Infringement
Parallel import is that of the patented or marked goods are purchased in a foreign market and resold in the domestic market. Instead, active parallel imports occur when foreign licensees enter the market in competition with the holder of the patent or of the trade mark.
Before the Patent (Amendment) Act, 2002, the Indian Patent Act, 1970, didn’t address the concept of patent exhaustion. The Doha Declaration highlighted the need for international exhaustion to make medicines more affordable. The 2002 amendment introduced Section 107A (b), allowing parallel imports only if the product was bought from someone authorized by the patentee. This limited the scope of parallel imports and hindered access to cheaper medicines. For example, if Company XYZ buys a machine from India and tries to import it into Japan, it could be blocked if the Indian seller wasn’t authorized by the patentee, even though the product was originally sold at a lower price.
The 2005 amendment revised this by stating that imports from anyone legally allowed to sell or distribute the product are not infringing, even if they are not directly authorized by the patentee. This change removed barriers to parallel imports, aligning better with international exhaustion principles. The principle means that once a patented product is sold anywhere by the patentee or with their consent, their rights are exhausted, and they cannot control further sales or imports of that product. However, if the initial sale wasn’t authorized, subsequent sales may still infringe the patent.
Under WIPO, in economic terms, parallel imports represent cross-border arbitrage. IP owners often set different prices for the same product in various markets based on local factors like purchasing power. When a patented product is sold at a lower price in one market compared to another, third parties may be motivated to import it into the higher-priced market to exploit the price difference. However, several factors and regulations influence whether parallel imports occurs.
- Under a national exhaustion regime, once a patented product is sold in a country (Country X), the patentee’s rights are exhausted in that country, preventing them from blocking resale or importation of that product within Country X. However, the patentee can still block imports from other countries (like Countries Y and Z) where the product was not sold.
- In a regional exhaustion regime, the patentee’s rights are exhausted when the product is sold in any country within a defined regional market. This means that once a product is sold in one member country, it can be imported and sold in other member countries without infringing on the patent. For example, if Countries X, Y, and Z are part of a regional agreement, a sale in Country X would exhaust patent rights across all three countries, allowing imports from any of these countries. Conversely, a sale in a non-member country would not exhaust patent rights in the member countries, so the patentee could prevent imports into those countries.
- Under the international exhaustion rule, a patent owner’s control over a patented product is exhausted once it is sold legally anywhere in the world. This means that in a country with international exhaustion, if a product is sold legally in any country, it can be imported into that country without infringing on the patent. For example, if Country X follows international exhaustion, then patented products sold legally in Countries Y or Z can be imported into Country X without any patent infringement, because the patent rights in Country X are already exhausted for products sold in those other countries.
Comparative Analysis
In Japan, the Tokyo High Court applied the international exhaustion rule in the 1995 case BBS Kraftfahrzeug Technik AG v. Kabushiki Kaisha Racimex Japan and Kabushiki Kaisha JapAuto Prods. This ruling overturned the earlier 1969 Osaka District Court case Brunswick, which had held that parallel imports were illegal if the goods were patented in Japan. However, in 1997, the Japanese Supreme Court did not adopt the international exhaustion principle. Instead, it ruled that a patent holder in Japan could not block the importation of the same product into Japan from another country unless it could prove that the gray market importation was contractually prohibited and there was evidence of such a restriction on the product.
In Brunswick Corp. v. Orion Kogyo, K. K., a 1969 Japanese case, the Osaka District Court addressed the issue of parallel importation of patented goods. The case involved an automatic bowling pin device first sold in Australia by a sublicensee of Brunswick, which held patents in both Australia and Japan. The defendant imported used devices from Australia into Japan and was sued by Brunswick for patent infringement. The court ruled against the defendant, upholding the principle of territoriality of patent rights as outlined in the Paris Convention. It concluded that while patent rights are exhausted in the country of the initial sale (Australia, in this case), this does not affect the enforceability of the patent in Japan. The court rejected the argument for extending international exhaustion to patents, emphasizing that patent rights are distinct and must be individually maintained and enforced in each country. Thus, even though Brunswick was compensated for the devices in Australia, it was entitled to enforce its Japanese patent and collect royalties on the imported goods. The court granted Brunswick’s request for an injunction and the disposal of the infringing devices.
In the E.U. is in force the European Union exhaustion principle. Goods patented (or marked) traded for the first time in the European Union or in the European Economic Area can be freely traded inside European Union (or European Economic Area). The patent or trade mark holder can, instead, opposite to parallel importations inside E.U. or E.E.A.
In the U.S., the doctrine of patent exhaustion is recognized, but the government has consistently opposed the principle of international exhaustion. During TRIPS negotiations, the U.S. argued against international exhaustion, particularly for patents and pharmaceuticals. The U.S. government believes that allowing international exhaustion could harm the research and development capabilities of companies by reducing their ability to control patent exploitation and pricing in different markets. The only exception in U.S. law to this stance is for trademarks, where gray market imports are allowed if the U.S. trademark holder is the same as or affiliated with the foreign trademark holder. This exception is based on the belief that trademark protection does not have the same impact on research incentives as patents do.
A study by NERA in 1999 found that the European Union’s exhaustion principle, which applies within the EU, did not significantly reduce price differences among EU countries. This study suggested that parallel imports from countries like the U.S. and Japan might lower company profits more than they reduce consumer prices.
In theory, international exhaustion could help eliminate market segmentation and lower prices for consumers. However, studies on parallel imports are often based on limited evidence and anecdotal data. Recently, there has been a shift toward restricting parallel imports, especially for drugs, to protect research and development. This shift may be influenced by economic challenges and a move towards protecting businesses and fostering innovation. Balancing the benefits of parallel imports (which reduce prices for consumers) with the need to incentivize innovation (by ensuring adequate returns for patent holders) is challenging. The key is to provide fair compensation to intellectual property holders while avoiding excessive market control.
The interaction between parallel importation and patent infringement involves intricate legal and economic issues. The international exhaustion principle supports market integration and benefits consumers by making IP-protected goods cheaper and more accessible. It also counters monopolistic practices by patent holders and their licensees, fostering competition and leading to lower prices. For consumers, parallel imports expand product availability, increase choices, and promote consumption, particularly benefiting those in developing markets with more affordable options.
Most developing countries follow global or international exhaustion principles, as highlighted by the NERA report. However, allowing parallel imports without adequate quality controls poses risks, such as product alterations or substandard goods. To safeguard consumer interests, developing countries should implement quality control measures and learn from the practices of developed countries to mitigate these risks.
Conclusion
There is intersection between parallel imports and patent infringement is complex, reflecting on various nations intellectual property rights. India has a balance innovations and adoption of International exhaustion under Section 107A of Patents act, 1970. While international exhaustion fosters market integration and consumer benefits, it also presents challenges, including potential quality control issues and economic impacts on patent holders. Effective quality controls and informed policy adjustments can help mitigate risks while leveraging the advantages of parallel imports for broader market accessibility and competition.
Author: Yashaswini S, PES University
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