The Doctrine of Exhaustion of Rights in Trademark

By Emmanuel Otumala

Intellectual property rights are monopolistic in nature and a right holder has the exclusive right to use and exclude others from using the trademark as well as the right to introduce it to the market in return for payment. This means that any form of usage without the license of the holder will amount to an infringement actionable by the holder. However, a strict application of this exclusive right of a holder, if not curbed will lead to a commercialization monopoly in favor of trademark holders. Thus, the concept of trademark exhaustion otherwise known as “the first sale doctrine” exists to mitigate the wide discretionary powers of the holder.

Just as the name denotes, the doctrine seeks to “exhaust” the rights of a trademark holder when he has been able to obtain an economic return from the first sale or placing of such product in the market hence, he loses his right of commercial exploitation for such product. That is to say, once a trademark proprietor has put the goods on the market, he loses control over products bearing its trademark, and the intellectual property rights are said to have been exhausted.

In practice, the effect of this doctrine is that once the product bearing a trademark has been legally bought with the consent of the manufacturer, the third-party buyer can use or dispose of such product as he pleases without being liable for trademark infringement. He may resell or refurbish the products bearing such trade mark without any form of restriction.

This doctrine exists therefore to strike a balance between the interests of right holders, dealers, consumers, and the general public by preventing the proprietor from using his intellectual property rights to hinder the further commercialization of the goods.

THE DIFFERENT TYPES OF EXHAUSTIVE RIGHTS

Having established that the rights of a trademark owner do not exist ad infinitum, it is imperative to figure out where it becomes “exhausted”. This is determined by the policy adopted by each country.

Exhaustion of rights can be broadly classified into three and the different nations of the world are given the liberty of making their choice (whether national, regional, or international)

In a country that adopts the national/ domestic exhaustion of rights, the IP owner loses his right to regulate how his product is being distributed within a country upon the sale of such product within that country. This regime of exhaustion is the most restricted in scope and favors the manufacturers as it enables them to set different prices across different countries with higher prices applying in richer countries and vice versa.

According to the World Intellectual Property Organization, regional exhaustion of rights occurs when goods are released with the consent of the rights owner in any country that is a member of a regional market or union. The most prominent example of this is found in the European Union (EU).

Once a product protected by an intellectual property right is lawfully placed on the market within the European Union community, (either by the right holder or with his consent), the commercial rights conferred by that intellectual property right become exhausted under the EU law. In that case, the trademark owner can no longer use the intellectual property right in question to prevent third parties from reselling, renting, lending, or engaging in other types of commercial exploitation of the good.

There is a free flow of goods under an international exhaustion system. The simple act of placing the goods on the market by or with the consent of the IP owner anywhere in the world renders such goods as an openly-traded good and thus, results in the exhaustion of the owner’s rights in that country. This enables retailers to take advantage of price differentials and import from the most cost-effective suppliers.

From the foregoing, it can be established that national exhaustion favors the producer, whereas international exhaustion favors the consumer. Thus, the choice made by each country is a reflection of whose interest the government seeks to protect i.e. whether the producers or the consumers.

EXCEPTIONS TO THE DOCTRINE OF EXHAUSTION OF TRADEMARK

As good and desirable as this doctrine may appear to be, it is not without its exceptions and limitations. This is so since the doctrine only seeks to strike a balance and not to tilt the scale against the proprietor in favor of the buyer of a trademarked product. Hence, there exist certain instances where a person may still be held liable for trademark infringement albeit the holder’s right may have “exhausted.”

The major exception to the doctrine of trademark exhaustion is disclosure. A buyer who has altered, modified, or refurbished a trademarked product owes a duty to inform the buyers of such modification. That what he is selling to them differs from the originally trademarked product and a failure to do this may make him liable for trademark infringement. This brings us to consider the question of why there is an imposed duty to inform prospective buyers of modified or refurbished goods.

It is trite that the two major functions of a trademark are distinctiveness and the function of quality assurance. A trademark function to distinguish one product from a thousand others, for instance, the logo of Mercedes-Benz distinguishes the brand from other manufacturers’ cars. Similarly, trademark functions to serve as a form of quality assurance to consumers, thus, a product ought to have the original quality which consumers have associated with such product.

Therefore, any form of modification or alterations will affect both the distinctiveness as well as the quality of the original product; hence, the seller of such refurbished products bearing the original trademark owes a duty to inform the buyers that the product has undergone a radical change from the original product so as not to mislead the consumers or harm their perception of the original product which by extension may cause damage to the interest and reputation of the trademark holder.

Another exception to the rule of exhaustion is in cases of parallel importation. Parallel import is an unauthorized import of non-counterfeit goods into a country without the permission of the trademark owner from a country where such goods are less expensive to be sold parallel with more expensive goods which are imported from a source controlled by the owner. The problem posed by this is that though it may not alter the trademarked product, it may raise doubts as to the quality or origin of products.

In such a scenario, the defense of trademark exhaustion will only avail provided such goods have not been materially altered after they have been put on the market. A cause of action may be available to the proprietor against the importer where the quality of the genuine goods has been materially altered or impaired.

In conclusion, the doctrine of exhaustion of rights in trademark offers protection to a genuine buyer from trademark infringement while protecting the interest of the trademark owner. It bestows upon the government of each nation a key role in balancing the interests of the consumers against that of the producer.

Emmanuel Otumala is Law student of the University of Ibadan. He is an avid reader, researcher and writer with keen interest in the area of intellectual property rights.

Source: DNLLegalandstyle