Exhaustion of intellectual property rights and the principle of territoriality in the United States

Abstract

The geographical scope of exhaustion is a highly contested issue in intellectual property law. Exhaustion occurs when the owner of an intellectual property right transfers ownership of a particular embodiment of that right, such as by selling a book or a DVD embodying a copyrighted literary work or movie, a machine with a patented design, or a consumer product sold under a trademark. Geographical scope refers to the geographical limits, if any, within which the sale must take place, or the article must be manufactured, in order to trigger exhaustion. Under a regime of national exhaustion, intellectual property rights to a particular article are exhausted only if it is sold or manufactured within the country whose intellectual property laws the rights owner has invoked. With international exhaustion, the location of sale or manufacture is irrelevant, and any authorized transfer of ownership results in exhaustion. The difference between the two exhaustion regimes is of great importance to both producers and consumers. National exhaustion offers the producer a tool by which it may segment markets geographically, preventing parallel importation of intellectual-property-containing products that are intended for another national market, and allowing it to sell the product at different prices in different markets. Consumers, on the other hand, may prefer a regime of international exhaustion, which may result in a broader selection of goods on the secondary market as well as the ability to purchase a cheaper version of a good that was originally sold at a lower price in a foreign market.Courts that have addressed the scope of exhaustion under the U.S. patent and copyright laws have sometimes invoked the well-established proposition that those laws have no extraterritorial reach. Some courts have held that this principle of territoriality implies a regime of national exhaustion.In this chapter I seek to clarify the relationship between the geographical scope of exhaustion and the territorial limits on the effectiveness of intellectual property laws. I demonstrate that, contrary to what some courts have held, national territorial limits on the scope of the intellectual property laws are consistent with a regime of either national or international exhaustion. I also show that the principle of national treatment, which underlies the system of treaties that governs international aspects of intellectual property protection among most of the world’s countries, is likewise consistent with both national and international exhaustion.