I'm So Tired: IP Rights Exhaustion

While the current pandemic has brought out the best in people, it has also shed light on some unsavoury behaviour. There have been numerous media reports of individuals hoarding packages of disinfecting wipes and other essential items in order to resell them at a profit. Some manufacturers of branded masks and other personal protective equipment and supplies have found unauthorized third-party "distributors" reselling their products, or outright counterfeits, at highly inflated prices. This has the potential to hurt the manufacturers' reputations, as well as exposing them to scrutiny by governments.

Some manufacturers have sought to exercise their intellectual property rights to stop third parties from offering genuine products at inflated prices. Unfortunately, the law in Canada does not provide a simple remedy for a manufacturer to enforce its intellectual property against a third party selling genuine (i.e., not counterfeit) products. This limitation is due to the doctrine of exhaustion (referred to as the first sale doctrine in the US).

In the most basic terms, the doctrine of exhaustion stands for the proposition that the enforceability of the intellectual property rights embodied in a tangible object are extinguished, or “exhausted”, after its first sale. It limits intellectual property rights upon the transfer of ownership of a material object. The transfer will often involve a sale. The rule, common law in origin, allows for the resale of patented articles, trademark-emblazoned clothing, and books, without infringement.

Although there are no express provisions in either the Canadian Patent Act or Trademark Act that embody the doctrine, “exhaustion” is recognized at common law.

In Eli Lilly and Co. v. Apotex Inc., the Supreme Court of Canada adopted the principle that the sale of a patented article exhausts the patentee’s rights in that article. The Court went further and held that subsequent purchasers are not bound by contractual limitations imposed by an intellectual property rights holder, unless brought to the purchasers' attention at the time of acquisition.

The Supreme Court of Canada had earlier adopted the doctrine of exhaustion into Canadian trademark law in Consumers Distributing Co. v. Seiko Time Canada Ltd. That case involved a watch manufacturer seeking to prevent the unauthorized sale of its products in Canada. The plaintiff had alleged various violations of its trademark rights. The Court held for the defendant.  Although the Court’s discussion focused mainly on the issue of passing off, the Court expressly endorsed the doctrine of exhaustion in trademark law, explaining that “the distribution of a trade-marked product lawfully acquired is not, by itself, prohibited under the Trade-marks Act of Canada, or indeed at common law.”

The Copyright Act does contain statutory provisions which can be seen as embodying the doctrine of exhaustion. Specifically, the definition of “copyright” is limited such that, in the case of a work that is in the form of a tangible object, the right to sell or transfer of ownership of the tangible object does not extend to an object that has not previously been transferred in or outside Canada with the authorization of the copyright owner. The applicability of the doctrine of exhaustion in Canadian copyright law was confirmed by the Supreme Court of Canada in Théberge v Galerie d'Art du Petit Champlain Inc. The ruling in that case can be seen as an endorsement of the principle that use of tangible property containing intellectual property does not constitute infringement of copyright. It also implies that once an object embodying a copyrighted work is sold, or its ownership transferred, the copyright holder cannot control how it is used.

Where does that leave a manufacturer faced with public backlash when its genuine products are being resold at exorbitant prices? Here are some points to consider:

  • Consider the applicability of the doctrine of exhaustion in the context of parallel imports (often referred to as grey marketing)? Parallel importation refers to the practice of buying genuine branded products abroad and selling them in competition with a local distributor of the foreign vendor (and/or its parent company or group of companies). There is nothing inherently wrong with parallel imports. The basic principle is that if a purchaser buys product legally in a foreign country, the foreign vendor has been paid appropriately for its products and has no further rights to control the resale of its goods. Moreover, the sale of the legitimate foreign purchased goods in Canada cannot be claimed to amount to unlawful passing off. Even if the products appear, to a consumer, to be products sold by the Canadian affiliate of the foreign vendor, since they are legitimate branded products, there is no misrepresentation to the consumer as to the source of the goods. However, the doctrine of exhaustion does not apply where (i) the genuine goods or related services are "materially different" from what the brand owner is selling or has authorized for sale in Canada, or (ii) the intellectual property rights owner in Canada is not the same as the one in the jurisdiction in which the product was first sold. If the only difference is the sale price, the question will be whether that constitutes a “material” difference.
  • a brand owner can rely on passing-off if the third-party reseller is holding itself out as an authorized distributor or dealer of the branded product when that is not the case.
  • in the case of counterfeits, the doctrine of exhaustion does not apply and the full range of remedies will be available to the intellectual property rights owner.
  • in the case of fraud in connection with safety-related products, or if there is otherwise a risk to public health or safety related to the sale of the product,  intellectual property rights owners may also refer the matter to law enforcement or government regulatory bodies. The owner can also seek to have websites or listings on online marketplaces taken down and can seek the removal of false or misleading social media content.
  • if there is "price gouging" or an other exorbitant price being charged, refer it to the relevant government regulators.
  • in connection with any of the above, build in a public relations strategy to inform potential customers and the public.

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