Parallel imports: Towards a flexible uniform international rule

Abstract

Parallel imports are goods that are placed into a market in one country which subsequently are traded without the authorisation of the holder of intellectual property rights (‘IPRs’) belonging to those goods in another country. Whether a sale in one nation exhausts the rights of the IPR holder determines the legality of an ‘unauthorised’ resale. The 1996 Agreement on Trade-Related Aspects of Intellectual Property Rights (‘TRIPS’) provided substantive minimum IPRs and non-discriminatory treatment with an underlying goal that IPRs ‘do not themselves become barriers to legitimate trade’. Art. 6 of TRIPS reflects the failure of the parties to TRIPS to resolve the question of exhaustion rights by declaring that TRIPS does not define an obligation on a nation to adopt a particular rule regarding exhaustion of IPRs. This paper articulates that economic analysis of parallel imports and their effects on incentives to innovate lead to the conclusion that certain policies regarding exhaustion rights are more efficient than others on the global scale. Further, a single, rigid uniform rule is, however, unlikely to lead to such a maximally efficient state and would be limited in its ability to address local needs such as specific healthcare exigencies. Therefore, this paper attempts to answer whether a uniform supranational rule regarding parallel imports is desirable, and if so, what such a rule should look like. The section ‘Background principles of IPRs: exhaustion and first-sale’ discusses the background principles of exhaustion rights and parallel imports. The section ‘An economic perspective on exhaustion and parallel imports’ examines economic perspectives towards parallel imports. The section ‘IPRs and the need for flexibility in a uniform rule’ examines the justifications for IPRs individually, that is qua patents or qua trade marks, and asserts that a uniform rule must allow flexibility in light of the differing justifications for IPRs. The section ‘A framework for a flexible rule on exhaustion’ suggests an exhaustion rule and framework. In light of recent economic analyses regarding the effect of parallel imports on incentives to innovate and economic efficiency, a flexible system of national exhaustion only (restrictive of parallel imports) between countries with high trade costs and a system of regional exhaustion among countries with low trade costs is proposed. A procedural framework whereby a country can make an individualised showing of need with respect to particular IPRs in particular goods, for example patent rights in pharmaceuticals, achieves flexibility. An international accord would ensure that deviations from an ideal rule are minimised (thereby limiting negative externalities) but allow local economies to make choices regarding critical local concerns. In particular, the resulting market segmentation would provide cost benefits and the flexibility in the rule would allow additional optimisation with respect to narrow, defined concerns. In summary, two main arguments are made: (1) national exhaustion of rights only (no international exhaustion) with provisions for regional exhaustion in the case of closely linked trading nations is the best uniform rule; and (2) consensus is more likely to be achieved if a uniform rule provides flexibility for countries to deviate at least temporarily from the uniform rule when local exigencies so require.