Intellectual property, competition rules, and the emerging internal market: some thoughts on the European exhaustion doctrine.

• Author: Westkamp, Guido

INTRODUCTION I. THE EMERGENCE OF THE EXHAUSTION RULE A. Territorial Restrictions and Competition Law B. Technology Transfer and Vertical Restraints II. BLOCK EXEMPTIONS AND EXHAUSTION A. Scope of Application for Intellectual Property Rights B. The Twofold Meaning of Consent C. Territorial Restrictions as Sector-Specific Exemptions on Exhaustion? 1. Market Freedom and Differentiation of Market Levels 2. Potential Disparities Between Block Exemptions III. THE MYTH OF EUROPEAN EXHAUSTION: THE DOCTRINAL STATUS OF ARTICLE 30 EC IN COMPETITION LAW A. Construction of Intellectual Property Under Article 30 EC: A Matter of Intellectual Property Regulation? B. Implemented European Intellectual Property Regulation: The Applicability of Article 28 EC and Permissible Restraints IV. THE EFFECTS OF HARMONIZING TERRITORIAL RESTRAINTS: THE BLIND SPOTS A. Partial Inapplicability of Article 30 EC? B. Territorial Restraints and National Exhaustion Rules C. Non-Territorial Restraints and European Exhaustion CONCLUSION INTRODUCTION

The doctrine of exhaustion plays an important role in European intellectual property law to preserve the free movement of products protected by intellectual property rights. However, despite the seemingly uncomplicated principles of this doctrine, a high degree of uncertainty as to its proper doctrinal foundations persists as it is applied in a variety of different legal contexts. This Article traces the application of the doctrine of exhaustion through the different legal contexts in which it is applied, assesses the status of the doctrine, evaluates the interpretation and scope of the doctrine within European Community law, (1) and aims to highlight pertinent issues regarding the doctrine in relation to both domestic and cross-border issues. The history of the treatment of the doctrine of exhaustion evidences a remarkably complex structure: the formulation of the exhaustion rule under Article 30 EC (2) was subsequently incorporated into secondary intellectual property legislation, and the European exhaustion rule was implemented into national laws. This has made it difficult to formulate more refined rules governing licensing provisions restricting the free circulation of goods. This has also resulted in uncertainty as to the proper definition of the exhaustion rule and its guiding principles. As discussed in this Article, it has also resulted in an unintelligible equation between the basic freedoms to provide, on the one hand, trade and services under European Community law and, on the other hand, to provide classification of economic rights in intellectual property.

1. THE EMERGENCE OF THE EXHAUSTION RULE

   Article 28 EC incorporates the principle of free movement of goods, and it prohibits quantitative restrictions on imports between Member States and all other measures of equivalent effect. (3) Under Article 30 EC, however, national law may derogate from the principle of free movement of goods if the measure in question is justified and proportional in relation to the impact of the prima facie contravention of Articles 28 and 29 EC and the specific objective the national rule seeks to accomplish. (4) In relation to intellectual property cases, the European Court of Justice (ECJ) has established that a violation of Article 28 EC may be justified only if the existence of the right is concerned, (5) which was later specified so as to relate to the specific subject matter. (6) The doctrine of exhaustion has been employed as to underpin these distinctions. (7)

   Intellectual property lawyers often deem the jurisprudence regarding the interface of intellectual property and the principle of free movement of goods as an unswerving interpretation of the proprietary scope of territorial intellectual property rights within a European context. Thereby, this perception has created a notion that precludes any derogation from the principle of free movement of goods. One reason for such a result is the lowest common denominator solution, as formulated by the ECJ in relation to territorial restrictions. The free circulation of goods is consistently favored.

   These various issues share common ground: most of the uncertainties concerning the application of the exhaustion rule stem from the ambiguities that exist regarding the status and treatment of intellectual property rights under European law. Under national laws, intellectual property rights remain territorial, theoretically allowing for restrictions in relation to preventing parallel and reimports and, to a certain degree, allowing for restrictions on the product market in which protection may be offered. (8) The ECJ has applied the provisions on contractual restrictions on European Community trade (9) as well as the free movement of goods principle (10) in order to curtail the control of owners of intellectual property. (11) This jurisprudence has inadvertently created a notion of exhaustion as a fundamental principle of a distinct "European intellectual property law." (12) The interpretation of this jurisprudence as establishing a rather rigid exhaustion rule has, thus, led to the reformulation of a European exhaustion principle in secondary legislation, which--in the case, for example, of directives--is then transformed into the body of national laws. However, it remains an open question as to whether the ECJ truly established rules pertaining to intellectual property rights that inadvertently--or, at least, reflexively--have led to a higher degree of harmonization.

   This Article argues that this is not the case. The exhaustion doctrine has been utilized as a pattern of argument by the ECJ to arrive at decisions that maintain the underlying aim of establishing a common market. In this regard, this Article undertakes analyses of the status of the exhaustion rule as applied in different scenarios in order to identify the rule's boundaries.

   The application of the exhaustion rule, as established by the ECJ, concerns the loss of control in the exercise of distribution or importation rights over subsequent acts of distribution. The assessment of the exercise of intellectual property rights does not pose many difficulties. The ECJ, early on, purported that it was competent to scrutinize the exercise of intellectual property rights; the existence of intellectual property rights, however, remained a matter of national law and was not to be called into question. (13) Although this distinction between the ECJ's role with respect to issues of the exercise versus the existence of intellectual property rights met with substantial criticism for being too vague and tautological--indeed, a right that exists but cannot be freely exercised is a nudum ius--the systematic approach of the ECJ merely evidences that the conflict must be resolved under the existing language of Articles 28, 29 and 30 EC. (14)

   In order to frame the current debate regarding the status of the exhaustion doctrine, a brief historical outline of the ECJ's treatment of territorial intellectual property rights is in order. The first cases to address the interaction between the EC Treaty provisions and the exercise of territorial intellectual property rights regarding the scope and effect of exclusive licensing agreements were resolved under the rules on competition law, in particular Article 81(1) EC (formerly Article 85(1)). (15) The ECJ emphasized that license agreements containing territorial restriction clauses, which allowed the owners of the intellectual property rights to prevent reimports, violated the rules on competition. (16) In the absence of an "agreement," as required under Article 81 EC, the ECJ eventually began to apply the provision on the free movement of goods. Article 28 EC (formerly Article 30) prohibits Member States from imposing "[q]uantitative restrictions on imports and all measures having equivalent effect." (17) The ECJ has consistently determined, for example, that attempts to exercise intellectual property rights on the strength of their territorial effect constituted such equivalent effect. (18)

   Article 30 EC (formerly Article 36) then allows a derogation from the principle of free movement of goods for the protection of industrial property. (19) However, when first applied by the ECJ, the derogation for industrial property rights did not provide a blanket justification for every conceivable exercise of a national intellectual property right. In the context of the derogation provided for under Article 30 EC, the ECJ generally instituted a balancing test--this balancing test then later provided the basis for the European exhaustion doctrine. In order to demarcate the boundaries between a permitted exercise of an intellectual property right and the concerns of the internal market, the ECJ initially based its decisions on the distinction between the existence and exercise of intellectual property rights. It held that, whereas the existence of rights remained unfettered by European Community law, the ECJ was competent under the EC Treaty to evaluate the exercise of such rights. (20) Such "exercise" was, in turn, to be evaluated in accordance with the specific subject matter test; accordingly, derogations from the free movement of goods principle could only be justified to the extent that the exercise of intellectual property rights was within the "essence" of the right, (21) giving the ECJ an extremely flexible tool with which to overcome the adverse effects of territorial intellectual property rights and, thus, giving preference to the free movement of goods principle. Hence, once the exercise of a national intellectual property right could not be considered to be necessary in order to maintain the specific subject matter or essence of the right, the right holder was no longer permitted to rely on it and, consequently, any further control was curtailed and deemed an improper exercise of such a right. (22) Thereafter, the actual concept of exhaustion was first...