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EXHAUSTION OF TRADE MARK RIGHTS

WORKING DOCUMENT FROM THE

COMMISSION SERVICES

INTRODUCTION

This document constitutes the Commission services working document on

exhaustion of trade mark rights that the Commission undertook to prepare at the

Internal Market Council of 21 June 1999.

The working document should serve as a basis for a further and detailed discussionin a Council expert group in order to prepare the EC position on a possible change to

the current trade mark exhaustion regime in the EC. The discussion should focus in

particular on four key issues which were raised at the Internal market Council in

June. These are: a) Possible consequences of different regimes for national trade

marks compared to Community trade marks, b) Differentiation of exhaustion

regimes between different intellectual property rights, c) Differentiation of

exhaustion regimes for different sectors of industry and d) International exhaustion

through international agreements.

The working document explores different options available if it is decided that a

change of exhaustion is necessary. Each option has its own advantages anddisadvantages and will require careful examination before any conclusions can be

drawn. The document does not elaborate on other issues which are also relevant in

the larger context of parallel trade, like competition issues and questions on vertical

restraints. It such in this context be noticed that from the judgement of the Court of

Justice in the Javico case, it is clear that an export prohibition from a third country

may, under certain circumstances, be acceptable under EU competition rules. 1

The four key issues outlined above are - as stated - of relevance when considering

possible merits and problems related to a change from the existing Community

exhaustion regime to that of international exhaustion. The discussion on the legal

and practical consequences of these options must not necessarily be limited to thatbased on this document. It appears useful to address further questions, which are

linked to the implication of the Community exhaustion regime for the function of a

trade mark. In fact it appears that, in the light of recent case law on exhaustion, the

purpose of a trade mark is no longer to function as an indicator of source but also of

good will ("brand") calling for specific distribution systems.

1Javico v. Yves Saint Laurent, case C-306/96 (1998) ECR I-1983.


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Developments in the information society including e-commerce are also of

relevance when discussing the merits and problems of the Community exhaustion

regime, in so far as they open up new possibilities for consumers to obtain brandedgoods which have initially been marketed on foreign markets.

The discussion on exhaustion regimes is not a purely academic one, but has

important economic implications. The following information illustrates the scale and

economic background of the industries that may be affected by the choice of

exhaustion regime: The world market for musical recordings amounts to nearly 30

billion EURO, of which the EU accounts for about 30 per cent. The number of

people employed in that sector is about 600.000. European companies are the

world's leading producers of pharmaceuticals with a turnover of about 93,500

million EURO. The number of people directly employed in the pharmaceutical

industry is about 520,000. The EU is the largest producer of cosmetics and perfumesin the world. This is also the case for confectionery where EU citizens are also the

largest consumers in the world. EU companies producing footwear, leather goods

and alcoholic drinks are also among the world leaders. The EU motor vehicle

industry is a net exporter2. The number of people employed in the vehicle sector

alone is about 1,000,000 (0,7 % of EU total employment).

2National Economic Research Associates "The Economic consequences of the choice of regime of

exhaustion in the area of trademarks" (available on the DG Internal Market web site), Executive

Summary of the NERA study, page20-23 NERA study pages 31,


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I. THE FOUR KEY ISSUES

a. CHANGE OF THE EXHAUSTION REGIMES FOR COMMUNITY TRADEMARKS AND NATIONAL TRADE MARKS. SHOULD THE REGIMES BETHE SAME ?

In theory, there are three options available; (1) to change the exhaustion regime for

both national trade marks and Community trade marks, (2) tochange the

exhaustion regime fornational trade marks only, or (3) )tochange the exhaustion

regime forCommuni ty trade marks only .

The introduction of a full international exhaustion scheme for all types of trade

marks in the Union would require a change to both Directive 89/104 on national

trade marks and Regulation 40/94 on the Community trade mark3.

A change to the Directive would require a qualified majority decision from the

Council and approval through co-decision with the Parliament pursuant to Article 95

of the Treaty. A change to the Regulation on the Community trade mark would

however require an unanimous Council decision, after having consulted the

European Parliament under Article 308 of the Treaty.

If, within the Council, a qualified majority, but not a consensus, could be obtained

for the introduction of international exhaustion then the EC could be confronted with

the possibility of having two different exhaustion regimes, i.e. (1) an international

exhaustion regime for national trade marks, and (2) a Community exhaustion regime

for Community trade marks.

The co-existence of two different schemes within the EC might create confusion

within the market place as well as in the minds of consumers, in particular in

relation to the question of whether a given trade marked product had been lawfully

put on the market or not.

Furthermore, this situation might weaken the position of holders of national trade

marks in the Union vis--vis the holders of Community trade marks. This is because

that holders of national trade marks would be exposed to competition through

parallel trade and increased inter-brand competition whereas the holders of

Community trade marks would still be able to prevent parallel imports on the basis

of their Community trade mark rights. An important element which should be taken

into account when assessing the possible consequences of such differentiation is the

question of whether such a policy would put SMEs in a weaker position than larger

3First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member

States relating to trade marks, OJ N L 40 of 11 February 1989 and Council Regulation (EC) N

40/94 of 20 December 1993 on the Community trade mark, OJ N L 11 OF 14 January 1994.


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companies. In this respect, the extent to which products with national trade marks

are, or would become, the subject of parallel imports should be further studied.

A Community trade mark (CTM) is generally used by companies seeking protectionin at least 4 or 5 Member States. Most Community trade mark holders are therefore

the larger European and non-European (e.g. American) companies. SMEs, whilst

also to some extent using the CTM system, rely much more on national trade mark

systems. This is because they often only supply their local markets.

Any weakening of the position of national trade mark holders in relation to the

exhaustion issue might increase the attractiveness of the CTM system for those

companies, including SMEs, that are confronted with parallel imports and who wish

to maintain the possibility of opposing such imports. However, this would impose a

heavy burden on SMEs in terms of costs and procedures. Larger companies who rely

on the CTM system would however not face any additional burdens.

Clearly, the cost of a CTM is higher than the price of a limited number of national

trade marks and the procedures relating to the registration of a CTM may be more

complex to handle than those necessary to obtain a very limited number of national

trade mark registrations. Trade mark holders for whom the exhaustion regime is of

less importance could continue to rely on national trade marks. It should also be

recalled that in the debate on exhaustion, trade mark holders strongly advocated the

present Community wide exhaustion regime for both types of trade marks.

b. DIFFERENTIATION OF EXHAUSTION REGIMES BETWEEN DIFFERENTINTELLECTUAL PROPERTY RIGHTS

Two options are available: either to change the exhaustion regime fortrade marks

only or to change the exhaustion regime for trade marks and some or al l of the

other categories of intellectual property.

In practice, a great variety of products are covered by multitude of IP rights at the

same time.

In respect of a music CD for example, the music as such may be protected by

copyright and neighbouring rights, the CD technology by patents, and the label by

trade mark rights. Computers for example, may be protected by a trade mark right, a

design right, and patents. The NERA study indicated the relevance of the various IP

rights for a wide range of products.

These examples show that the possible introduction of international exhaustion for

trade marks only would still allow the producer of products which are protected by a

bundle of IP rights, to rely on the other IP rights to oppose the importation of a

given product into the EU.


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There are relatively few type of products which are the subject of only trade mark

protection. The NERA study identified in this respect in particular the clothing

industry, soft drinks, confectionery and alcoholic drinks.

Certain fundamental questions need to be answered before deciding whether the

possible introduction of international exhaustion for trade mark rights should be

extended to other IP rights.

It should be recalled that IP rights, by their very nature, have traditionally always

been granted on a State-by-State basis and with legal effects only in the territory of

the State concerned. This allowed States to define their own policy on the creation,

grant and scope of protection of IP rights as market instruments within their

territories, subject to their obligations under international agreements and for EU

countries their obligations under Community law.

The establishment of the EC as an economic region, has had significant

consequences on the traditional principle of territoriality of IP rights. The creation of

a common market between States providing for, in principle, uniform (economic)

market conditions and based, inter alia, on the principle of free movement of goods

led the EC Court of Justice to introduce the concept of international exhaustion

between the EC Member Sates. This has become known as Community

exhaustion. It should be stressed that the existence of common market conditions

and the principle of free movement of goods within the EC constituted the main

argument for the Court to considerably restrict the possibilities for holders of IP

rights within the EC to rely on these rights to oppose inter-(EC)state trade of theirproducts.

When considering the possible extension of international exhaustion to other IP

rights in addition to trade marks, one should also bear in mind that for each of these

IP rights, the justification for their existence (their raison dtre) and enforcement

are different. Consequently, it is important to examine the question of exhaustion

regime for the IP rights on a case-by-case basis.

Trade marksserve in particular as an indicator of source and as an important bearer

of goodwill for the producers of the products concerned. Trade marks can be

maintained for an unlimited period of time unlike most other IP rights.

For patents, it should in particular be stressed that they serve as a major instrument

to promote investment in research & development. The availability of patents serves

to promote innovation and employment by ensuring a return on investment for

inventors during a limited period of time (generally 20 years from the filing of the

patent application).


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For the pharmaceutical industry for example, it is known that a key characteristic of

its research-based industry is its reliance on patents.

For design rights, it should be mentioned that they serve as an instrument topromote investment and innovation in industrial design. A design right is generally

granted for a maximum period of 25 years after filing.

Finally, copyright serves to promote and stimulate human creativity. Copyright is

generally granted for 70 yearspost mortem auctoris.

Industry has on several occasions stressed that it is vital for them to be able to

protect various elements of their products using a multitude of IP rights. This allows

them to focus on different issues such as confidence of the consumers in the quality

of a given product (through trade marks) and obtaining a return on the investment

made in the developing of the product (through design and patents).

For certain sectors (for example musical recordings) the enforcement of IP rights is

a major problem. Most problems with piracy occur in countries with poor

intellectual property protection. In the current regime of EC exhaustion it is not

necessary to prove that imported goods are counterfeit, as imports of marked goods

from third countries are not allowed without the consent of the right holders. With

international exhaustion it would be necessary to prove that counterfeit goods were

indeed counterfeit. Therefore the choice of trade mark exhaustion regime could have

an effect on the right holders ability to enforce his trade mark. This could

undermine the fight against piracy and counterfeits.

Finally, it should be recalled that companies tend to be more willing to supply those

markets where there is a high level of IP right protection than those providing a low

level of protection for IP rights.

On the basis of the above, a preliminary conclusion would be that the introduction of

international exhaustion for trade marks only would, from an IP right point of view,

affect only a limited number of sectors in a limited way. The introduction of

international exhaustion for all intellectual property rights would affect all industrial

sectors.

c. DIFFERENTIATION OF EXHAUSTION REGIMES FOR DIFFERENTSECTORS OF INDUSTRY

A differentiation of exhaustion regimes between different sectors could be obtained

through two different alternatives.

It could be decided to introduce international exhaustion only in relation to

specif ic products, included in an exhaustive list.The other approach would be to


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introduce international exhaustion as a matter of principle, but to exclude

in ternational exhaustion for specifi c products, included in an exhaustive list.

The role of trade marks may be of particular importance for certain sectors.International exhaustion may also be considered essential for specific sectors. Some

sectors would be directly effected by a change in exhaustion regime, while other

sectors would remain more or less untouched by such a change. This may depend on

the role of other IP rights, transaction costs, technical barriers, vertical constraints

and price differences.

The pharmaceutical industry has often been referred to as a sector where trade mark

rights and patents play a vital role and where a change in the exhaustion regime(s)

would be extremely delicate. The audio visual industries also continuously stress the

vital importance of copyright and trade marks for the continuation of their business.

These particular industries are however often identified as examples where pricesfor the same products may significantly differ between different states and different

regions.

Generally speaking, the narrower the area of exhaustion, the greater the value the IP

right has as a marketing instrument. Against this, enforcing wider areas of

exhaustion creates pressure to reduce prices in some countries.

Also the role of governments in the pricing and purchasing of medicines has to be

fully considered while analysing the specific situation for the pharmaceutical

industry.

With regard to the possibility of introducing international exhaustion on a sector-by-

sector basis, it should be noted that the main difficulty which will probably arise will

be identifying those sectors to be covered by international exhaustion. In this

respect, a further complication might be that certain products might be classified

under different sectors. In any case, both options, referred to above, would require

careful examination of all the elements which are crucial for the sectors concerned.

d. INTERNATIONAL EXHAUSTION THROUGH INTERNATIONALAGREEMENTS

From a macro-economic point of view, three different options or models are

available to introduce international exhaustion in the Union.

i) On a unilateral basis, through a change to the relevant Community legal

instruments

ii) on the basis of bil ateral agreementswith third countries, and

iii) on the basis of a mul til ateral agreement.


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i. Unilateral introduction of international exhaustion.It has been argued that a unilateral change to the EC legislation would create themost immediate and foreseeable effect on trade but it would also put the EU at a

disadvantage vis--vis trading partners if they did not follow.

Under the unilateral scenario, trade mark holders within the EU could not prevent

parallel imports from products which they have put on the markets in any third

countries. Such a system might increase parallel imports to Europe from third

countries, but it would not compensate Europe through increased parallel exports

from Europe to those third countries.

For some sectors the loss of profits if there were a unilateral change could be twice

that if there were a bilateral (or multilateral) change4.

ii. International exhaustion with specific EU trade partners on the basis ofbilateral agreements.

A second option to provide for international exhaustion would be through the

conclusion of bilateral agreements with certain trading partners.

This approach might provide an opportunity to carefully select the countries with

which the EC would be ready to open the markets for parallel imports to a certain

extent, to ensure that European industry would not be exposed to unbalanced

competition.

Clearly the EU would have to decide on what criteria it would be ready to enter into

bilateral agreements. Such criteria should probably include the level of IP protection

available, the market conditions, the level of pricing and possibly the country's

GNP.

However, it should be carefully considered whether bilateral agreements on this

issue could come under the scope of the WTO Agreements and in particular the

TRIPs Agreement. The "Most Favoured Nation Treatment" clause in Article 4 of

TRIPs for example, provides that with regard to the protection of intellectual

property, any advantage, favour, privilege or immunity granted by a Member to the

nationals of any other country shall be accorded immediately and unconditionally to

the nationals of all other Members.

iii. International exhaustion on the basis of a multilateral agreement.4NERA study pages 80, 88, 90, 97 and 99.


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A third option would be to establish the principle of international exhaustion of trade

marks at the global level through the conclusion of a multilateral agreement, for

example in the context of WTO.

This approach would in principle allow any State to become a party to the

multilateral agreement on international exhaustion of trade marks, unless the idea

would be to build in certain thresholds. In the latter case, important and delicate

criteria as mentioned under (ii) would need to be examined in greater detail.

However, it should be noted that negotiations on a multilateral level may be quite

time consuming. It should also be noted that to overcome possible problems with

TRIPS compatibility, it might be necessary to involve all WTO Members in the

multilateral approach.

III. MISCELLANEOUS

In addition to the elements mentioned above, other issues may also play an

important role. The implications of the future enlargement of the European Union on

this issue of exhaustion will also need consideration, given that enlargement will

extend the free trade area within Europe. The development and the growth of

electronic commerce/Internet should also be taken into account. Due regard has to

be given to the creation of the Internal Market legal framework which will allow

European companies to fully reap the benefit of electronic commerce and the

Internal Market. The introduction and use of new technologies may give consumersaccess to a greater choice of products at lower prices.

.


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III SUMMARY OF OPTIONS AVAILABLE

The following lists summarises the options available for changing the presentsituation.

The final option would comprise one option from each list ((I), (II) and (III)). For

example, one could envisage to change the exhaustion regime for national trade

marks only ((I)(2)), for all sectors ((II)(i)), on a unilateral basis ((III)(A)).

I. Possible changes to the exhaustion regime1. Change the exhaustion regime for national trade marks and Community trade

marks, e.g. amend the EC Directive on trade marks and the Community trade

mark Regulation.

2. Change the exhaustion regime for national trade marks only, e.g. amend the ECDirective on trade marks.

3. Change the exhaustion regime for all IP rights, e.g. change each relevantDirective/Regulation or Convention.

II. Sectors affected(i) Introduce international exhaustion for all sectors.(ii) Introduce international exhaustion for certain sectors only (Opt in).(iii) Introduce the principle of international exhaustion, but exclude certain

sectors (Opt out).

III. Methods of introducing any changeA. On a Unilateral basis.B. On a Bilateral basis.C. On a Multilateral basis.


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ANNEX I

DEFINITIONS

a. Trade marksTrade marks fulfil two mutually dependent economic functions.

First of all they assist and protect the consumer in identifying the source of products

and hence improving their ability to judge quality.

Secondly, they provide a property right to the trade mark holders, by limiting the

rights of other parties to copy their products, specifically by prohibiting the

unauthorised use of their trade mark; this allows trade mark holders to be rewarded

for their investment in product development and product quality, and for theirexpenditure in creating brand image or "branding" of a product.

b. Exhaustion of trade mark r ights withi n the UnionExhaustion of trade mark rights implies that once a branded product has been

put (commercialised) on the market by the trade mark holder or with his consent,

he cannot prohibit the further commercialisation (such as subsequent re-sale) of that

product. His rights in respect of a specific individual item or consignment are

"exhausted" by the act of selling it.

There are two different exhaustion regimes national (or Community/EEA-wide)exhaustion and international exhaustion.

The current EU exhaustion regime is related to the territory of the Member States

(and the EEA) only; a trade mark holder cannot legally prevent the further

commercialisation of a given product within the EU (and the EEA), once the product

has been put on the EU/EEA market by him or with his consent.

c. Parallel tradeFrom an EU perspective, parallel trade (sometimes referred to as the "grey market")

consists of trade in genuine trade mark protected products, which have been firstly

commercialised (by the trade mark holder) outside the EU/EEA, and which are

subsequently imported into the EU/EEA area.

For the purpose of the discussion on exhaustion of trade mark rights, it is also

assumed that parallel trade takes place without the consent of the trade mark owner.

Under this assumption, the authorised goods reach the final consumer through the

intermediaries and distribution networks that are designated by trade mark owner.


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Parallel traders acquire goods, typically without the consent of the trade mark

owner, from some layer of the authorised channel. This can either be directly from

the manufacturer, from an intermediary (wholesaler or middleman) or from

authorised retailers.

Occasionally a trade mark owner may give tacit consent to the disposal of some part

of production through parallel traders. It is a characteristic of the phenomena of

parallel trade, that it could take many different forms and use many different

channels.


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ANNEX II

LEGAL FRAMEWORK

a. Acquis communautai reThe exhaustion regime for national trade marks is defined by Article 7 of Directive

No 89/104/EEC of 21 December 19885, the exhaustion regime for Community trade

marks is defined by Article 13 of Council Regulation (EC) No 40/94 of 20

December 1993 on the Community trade mark6.

According to both instruments, Community exhaustion is the current regime for

both types of trade marks.

In its basic proposal both for a trade mark Directive and the Community trade mark

Regulation in 1980, the Commission originally proposed international exhaustion.

After discussions in the Council and at the explicit request of the European

Parliament it was finally decided to adopt the Community exhaustion regime for

both instruments.

In addition to both trade mark instruments, there are five other Community

instruments in the field of intellectual property, which establish Community

exhaustion7.

The Silhouette case - During the summer 1998 the Court of Justice delivered ajudgement in the Silhouette case8. In its decision, the Court confirmed that Article 7

of Directive 40/89 establishes the absolute principle of Community exhaustion, i.e.

that the wording of the said provision does not allow Member States to extend the

principle of Community exhaustion to international exhaustion.

5OJ No L 40 of 11 February 1989.

6OJ No L 11 of 14 January 1994.

7Council Directive 87/54/EEC of 16 December 1986 on the legal protection of topographies of

semiconductor products (OJ No L 24 of 27 January 1987), Council Directive 91/250/EEC of 14 May

1991on the legal protection of computer programs (OJ No L 122 of 17 May 1991), Council Directive

92/100/EEC of 19 November 1992 on rental and lending right and on certain rights related tocopyright in the field of intellectual property (OJ No L 346 of 27 November 1992), Council

Regulation 2100/94/EG of 27 July 1994 on Community plant variety rights (OJ No L 45 of 15

February 1994) and Directive 96/9/EC of the European Parliament and the Council of 11 March 1996

on legal protection of databases (OJ No 77 of 27 March 1996).

8Case C-355/96, [1998] ECR 676


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Thus, trade mark holders within the Community may rely on their national

trade mark rights to prevent parallel imports of their products when these

imports originate in non-EEA countries.

After the Silhouette decision the question of exhaustion has become an important

issue. Following the Silhouette decision, some Member States have voiced concerns

about the economic consequences of the situation currently applied in the

Community, especially as regards the difficulties for consumers to obtain cheaper

branded products through parallel imports from third countries.

b. Other International instrumentsThe question of exhaustion of intellectual property rights was discussed in the

Uruguay Round in the framework of the Agreement on Trade Related aspects of

Intellectual Property ("TRIPs"). However, the exhaustion issue was too delicate andwas therefore not included in the Agreement on TRIPs9.

According to the Europe Agreement, the candidate countries are obliged to provide

for the same level of protection of IPR as the EU including enforcement of such

rights. There is no specific agreement on exhaustion regimes10.

c. Legal situation with in important tr ading partners US and JapanUS applies a priori a national exhaustion regime for trade mark rights in cases

where products are not from the same corporate entity or where parallel imports may

cause "consumer confusion". The national exhaustion scheme applies also inprinciple in the field of patents and designs.

Further to a recent Court decision in Japan11, it is considered that international

exhaustion applies in the field of patents and trade marks, unless, through licences, it

is otherwise agreed.

9Article 6 of TRIPS: nothing in this Agreement shall be used to address the exhaustion of

intellectual property rights.

10Bulgaria OJ L 323/93, Estonia OJ L 68/98, Cyprus OJ L 133/73, Czech Republic OJ L 115/92 ,

Hungary L 347/93, Latvia OJ L 26/98, Lithuania OJ L 51/98, Malta OJ L 61/71, Poland OJ L 114/92,

Romania OJ L 81/93, Slovakia OJ L 115/92 , Slovenia OJ L 344/96, Turkey OJ L217/64 and OJ L

35/96

11BBS Kraftverzeug Technik AG - v - Racimax Japan KK& Jap Auto Products KK (Heisei (1995)

(o) N.1998 (July 1, 1997).


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ANNEX III

BACKGROUND

I. INTRODUCTION

I denti fi cation of the problem

The question of exhaustion of trade mark rights has become an important issue.

Discussions within the Council and discussions in hearings and meetings, organised

by the Commission services have shown that the views between Member States as

well as between the various interested circles are divided.

It is sometimes claimed that the actual Community exhaustion regime on trade

marks within the Union constitutes an important barrier for (parallel) trade andcreates artificially high prices for consumer goods within the Union.

Those advocating the Community exhaustion regime claim that this system is

necessary for the promotion of investment in innovation and in high-quality goods.

II. THE NERA STUDY

With a view to obtaining a clearer picture of its economic effects, the Commission

launched a study on the possible economic consequences of a possible change of the

current Community exhaustion regime. The study has been carried out by the

NERA institute in London and was presented to the Commission in February 1999.

According to the study the issue of exhaustion is very complex and may have an

impact not only on prices, but also on product quality, product availability, after-

sales services (guarantees), employment, distribution agreements, market

segmentation, etc. The study also shows that the impact of a change in the existing

Community exhaustion regime would be minimal in certain sectors like alcoholic

drinks and confectionery, whereas it may have more significant consequences in

others such as consumer electronics, domestic appliances and footwear. The study

calculates that the lowering effect on prices would range from "negligible" (soft

drinks) to "small" (around 1% for footwear, musical recordings, motorcars) or

"moderate" (around 2% for consumer electronics).

a. Arguments for the present exhaustion r egimeThe study lists a number of arguments in favour of retaining the present

arrangements, i.e. Community exhaustion.


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The main argument for maintaining the current exhaustion regime is that it is

essential to protect EC competitiveness and innovation, in that it guarantees a

return on investment in new products.

Further it was held that the present exhaustion regime provides a higher economic

reward to firms that invest in the quality or style of their products, and that this

incentive is necessary in order to maintain the range of products and the quality of

goods and associated service that EU consumers expect. A change to international

exhaustion would reduce the value of intellectual property and put European

companies at a disadvantage against countries not applying the same regime.

The study also indicates that a change in the exhaustion regime for trade marks

would not necessarily lead to a tangible change on the market. Right holders have

also other means to control the distribution of their products, such as setting up

selective distribution networks prohibiting sales to unauthorised dealers. The studyalso suggests that parallel imports may confuse the consumer as a result of problems

such as instructions in foreign language, lack of after-sales service, quality etc.

Finally, it is stated that international exhaustion would lead to more imports of

counterfeit products, thus having a severe negative impact on health and safety of

consumers.

b. Arguments for a change to in ternational exhaustionBesides a reduction of prices, the study lists a series of other arguments in favour of

changing to international exhaustion.

Parallel imports would increase (inter-brand) competition, by reducing the

possibility for a trade mark holder to exploit his position in that brand and to set

higher prices in certain markets, and by increasing competition in the distribution of

the product. Beside this claimed effect from a change in the exhaustion regime, the

study lists a series of other arguments in favour of changing the present regime.

Some of the interviewees point at the fact that trade mark legislation is intended to

provide assurance of origin of a product and not to be an instrument of market

segmentation. Further it is stressed that there is little evidence that consumers would

be confused if more parallel imports were to be permitted.

Moreover, some important trading partners partially implement international

exhaustion with no evidence of alleged ill effects such as poor consumer service or

lack of availability.

Finally, it is stated in the study that sometimes manufactures use parallel trade when

they wish to off-load excess supplies.


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III.TWO HEARINGS ON EXHAUSTION

During spring 1999 the Commission arranged for two meetings on exhaustion - one

with representatives of the Member States and one hearing with interested circles.

a. Meeting wi th the Member StatesOn 26 April DG XV, together with the Legal Service, DG 1A, DG III, DG IV and

DG XXIV, met with representatives from the Member States. The objective of this

meeting was to inform Member States in detail on the NERA study, to discuss the

main findings, and to allow the Member States to express their (preliminary) views

on the preferred exhaustion regime. The researchers from the NERA Institute made

a presentation of the study. At the meeting, Sweden presented a study on exhaustion

carried out by the Swedish Competition Authority12.

Regarding the methodology of the study, it became a subject of argument whether

the issue of trade mark exhaustion could be discussed separately from the questions

concerning exhaustion of other intellectual property rights. The question was also

raised, to what extent associations of parallel traders were involved in preparation of

the study. It was further pointed out that the study assumes constant price levels,

whereas the prices encountered in parallel trade transactions often are inconsistent

and specific to the circumstances. It was finally suggested that issues such as

potential problems for certain sectors, the impact of electronic commerce on the

issues involved and the effects caused by different characteristics of parallel

imported products should be studied in greater detail.

Certain delegations expressed their doubts on the conclusions of the study with

regard to the presumed negative effects of international exhaustion.

It was also mentioned that the positive long-term effects of international exhaustion

should have received more attention, whereas on the other hand it was suggested

that the potential negative impacts on consumers caused by a change of regime had

been played down. The suggested increase in employment was said to be

contradicted by the finding that profits of trade mark proprietors would decrease.

Finally, the question why there were no numerical estimates of long-term effects

was also raised.

The estimated effects of a change of regime varied, with some delegations pointing

to price reductions and increased competition to be anticipated, other expressing

12

"Parallel imports - Effects of the Silhouette Ruling", Swedish Competition Authority, Report Series

1999:1.


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concern over the fate of distribution chains, after-sale-services and guarantees as

well as suggesting that there is a link between parallel importing and product piracy.

In particular two delegations presented strong but diverting views on the exhaustion

issue; one delegation expressed strong support for the present Communityexhaustion regime, whereas another delegation strongly pleaded for a change to

international exhaustion.

It emerged from the meeting that a considerable number of Member States are still

in the process of examining the matter in greater detail.

b. Hearing wi th i nterested circlesOn 28 April 1999, DG XV organised a hearing at Brussels with around 180

representatives of interested parties13on the subject of exhaustion.

The interested circles were given the opportunity to express their views on the

NERA study, the issue of the trade mark exhaustion as such, and the possible impact

of a change from Community to international exhaustion for trade marks. Around 60

interventions were made.

As regards the estimated effects of a change in current trade mark exhaustion

regime, representatives of all industries emphasised the important role of trade

marks and other intellectual property rights as incentives for innovation and

research. It was held that international exhaustion would weaken the position of

trade mark proprietors and have implications for their strategic behaviour, this in

turn leading to losses in innovation, production and employment.

Representatives from the pharmaceutical industry expressed their concern that

extending the exhaustion regime in the field of trade marks would initiate a similar

change in the field of patents with even worse effects for their sector; corresponding

fears with respect to copyright exhaustion were expressed by the Audio-visual

industry.

It was suggested that allowing international exhaustion would complicate the fight

against counterfeiting and piracy: therefore, support of Community exhaustion was

strongly advocated from industry.

Representatives of foreign trade associations, parallel trader's associations and

consumer organisations underlined the welfare benefits resulting from free trade.

13

Associations of parallel importers, associations of trade mark holders, associations of different

sectors of industry, consumer's associations etc.


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According to these groups a change to an international exhaustion regime would

lower prices, increase product availability and increase consumption in the

Community.

Position papers

The Commission has received around 50 position papers from interested circles.

IV.COMMISSION WORKING PAPER

At the Internal Market Council on 21 June 1999, Commissioner Monti reported

from the two hearings and announced that he envisaged to charge the Commission

services with the preparation of a working document for discussion at Council

working group level during the autumn 1999. The working document should focus

on key issues which merit further examination before taking any final decisions onthe matter of exhaustion.


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ANNEX IV

THE NERA FINDINGS

The NERA researchers drafted the following table to present the relevance of the

various IP rights for specific products.14

Sector Trade mark Copyright Design Patent

Footwear and leather goods High Low High Low

Musical recordings High High Low Low

Motorcars High Low High Only for components

Consumer electronics High Generally low Medium/high Only for components

Domestic appliances High Low Medium/high Only for components

Cosmetics and perfumes High Low Medium/high Low/medium

Clothing High Low Low Low

Soft drinks High Low Low Low

Confectionery High Low Low Low

Alcoholic drinks High Low Low Low

On the basis of the above table, the NERA researchers concluded the following.Trade marks are clearly the most important form of intellectual property protection for the

sectors we have examined, with the exception of musical recordings, where copyright is for

obvious reasons also of great importance. Even for musical recordings, trade mark holders

tend to regard trade marks as important because trade mark rights are often easier to

enforce. Design protection is also fairly important in a number of sectors. Overall theavailability of other forms of intellectual property protection would appear to offer only

limited comfort, even if these operated with different and more restricted exhaustion

regimes. For analytical convenience we make the working assumption that trade marks are

the dominant form of protection, and that possibly different regimes for the other forms of

protection will not alter the effects we describe.

The NERA study revealed the following overall assessment of the scope for parallel

trade for the following sectors15.

14

Executive Summary NERA report, Relative Importance of Different Intellectual Property Rights,

table 4.3, p. 13.

15Executive Summary NERA report, Qualitative Assessment: Scope for Increase in Parallel Trade,

table 4.9, p. 19.


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Sector Pricedifferences

Transactioncosts

Technicalbarriers

Tradepolicy

Verticalconstraints

Currentparalleltrade

Overallscope

Footwear and

leather goods

++ + + - - - +

Musical

recordings

+ ++ ++ - - ++ ++

Motorcars + + - ++ - - +

Consumer

electronics

++ -/+ - - - + +

Domestic

appliances

++ - - + - - +

Cosmetics and

perfumes

+ - - ++ - ++ ++

Clothing + + + -- - + +

Soft drinks ++ --- + - + + +

Confectionery + -- + - + + +

Alcoholic drinks --- -- + - - + -

++ and + indicate strong and moderate positive influence tending to promote parallel trade; - - and

- indicate negative influences tending to reduce parallel trade; blank denotes neutral effect

In the NERA report certain interesting conclusions are drawn from this table.

For the footwear and leather sector, for example, there are rather considerable price

differences, which would stimulate parallel trade; on the other hand there are also

elements that have the potential of discouraging parallel trade like import duties and

tight vertical restraints/long-term relationship.

According to the study the scope for extra parallel trade after a change of exhaustion

regime would be moderate overall, but may be greater in some segments of the

market for these goods.

For the market for motor cars, technical barriers constitute a significant deterrent for

parallel imports. The study therefore only foresees some low to moderate

penetration of parallel imports, in particular from Japan. The study notes that also

other considerations than price are also important for vehicles and that it is not clear

to what extent purchases of parallel imports will enjoy service, guarantees etc.

On cosmetics and perfumes the study states that there may be quite a high level of

parallel imports for premium products, though the price level outside Europe is often

the same or higher. The savings that would encourage parallel trade come according

to the study from avoiding the cost of retailing in a luxury setting and selling the

products in non-traditional outlets. According to the study, this might damage the

luxury image of the products.


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The clothing market is characterised by price differences in particular for premium

brand names, and of tight vertical restraints for luxury clothes. In the study the

assumption is made that parallel imports may limit the market as a whole although

focussed on a small number of premium brands.

For soft drinks the study does not foresee any increase in parallel imports as the

prices differ within Europe and the transport costs would be relatively high. The

market for alcoholic drinks has barriers in terms of transaction costs and vertical

relationships. As the prices for alcoholic drinks are relatively low it is estimated that

it is unlikely that the level of parallel imports to Europe would increase.

Documents

Exhaust En