IISD Commentary
Opinions and insights from the International Institute for Sustainable Development
June 2007
The Exhaustion of Intellectual Property Rights
Should countries favour consumers or private interests?
By Mark Halle
Sometimes, making the right choices on trade policy So far, so good, but where exactly have the rights
means going down to the engine room, understanding expired? The answer depends on the choice made by
the machinery and knowing what gauges, dials or each country. Their choice is to define the scope of the
valves to adjust. Trade policy, more than most other exhaustion as being their national territory, a defined
public policy areas, is vertically integrated and cannot region (such as the European Union) or the entire
always be got right from the captain’s deck. The fact world. “Parallel Importation” by Frederick M. Abbott
that you emerge covered with grease spots is just part examines the pros and cons of the different options
of the price to pay. from economic and social welfare points of view.
A new IISD paper by Frederick Abbott1 looks at one A regime of national exhaustion is clearly the most
such issue—that which is known as “exhaustion of restricted. It allows the producer to set different prices
rights” under patent, copyright and trademark law. for, say, a new pharmaceutical product, applying
The WTO’s agreement on Trade-Related Intellectual higher prices in
Property Rights (TRIPS) accords States the liberty to richer countries,
choose their own exhaustion regime from among
three possibilities: national, regional or international.
What does that mean, and what is the significance of
To simplify, national exhaustion
choosing one option over the other? tends to favour the producer,
while international exhaustion
First, though, what is exhaustion? The holder of a
patent for an invention has the right to a payment
tends to favour the consumer.
when the invention is sold. But when that invention or
product is sold, the patent-holder has no further
rights over the new owner’s private use of the and lower prices
invention. His or her rights under patent law are where the market cannot bear as much, or where it is
“exhausted” by virtue of the sale and the patent- seeking to establish a position against strong
holder’s recompense. The same is true of copyrights competition. While retailers may import from cheaper
and trademarks. Once you pay for your iPod, you have markets, they may then be subject to tariffs or other
the right to display and refer to its Apple trademark border measures that could bring the price once again
publicly. And when you buy the latest John Grisham close to those prevailing on the home market. In the
bestseller, your right over that book includes language of economics, national exhaustion allows
displaying it publicly, lending it to your friends and more market segmentation.
making photocopies of your favourite pages because
the author’s rights were exhausted with the purchase. 1 See Parallel Importation: Economic and social welfare dimensions,
by Frederick M. Abbott, at
http://www.iisd.org/pdf/2007/parallel_importation.pdf
In a regime of international exhaustion, once a while international exhaustion tends to favour the
product is put on the market anywhere, it is consumer. So, in debating the choice, it is interesting
considered an openly-traded good, with its import to observe whether governments and parliaments are
and sale subject only to national regulation, such as more attentive to private interests or to the public
that governing public safety and health. This allows good. There are no prizes for guessing which way the
retailers to take advantage of price differentials to decision goes in most technologically advanced
import from the cheapest reliable supplier. countries.
An intermediate solution—which resembles national This situation is not dissimilar to trade policy cast
exhaustion more than it does international—is to more broadly. How do governments balance the
define the scope of exhaustion as being a given interests of the wide mass of consumers—usually
geographical region. For example, it is in common use poorly organized—with the interests of private
in the European Union. But regional exhaustion tends players—usually vocal and well organized? A
to apply in markets with broadly similar conditions. forthcoming IISD book examines precisely that.
What are the implications of the choice for human
welfare? In fact they illustrate a conundrum that Mark Halle, based in Geneva, is IISD’s Director of Trade
bedevils the entire trading system. To simplify, and Investment.
national exhaustion tends to favour the producer,
