Table of Contents
A. Introduction: Rationalising the Treaty Origins of International IP Law 122
B. Difficulties in Identifying Custom in International IP Law 128
C. The State’s Right to Regulate as a Rule of Customary International Law 131
D. Should International IP Treaties Recognise an Inherent Right to Regulate? 139
E. Conclusions 154
A. Introduction: Rationalising the Treaty Origins of International IP Law
Based on the principal notion of territoriality, the protection of intellectual property (IP) rights is effected by – and hence in the end remains a matter of – domestic law. Usually, the relevant law is that of the country for whose territory protection is sought. In order to ensure protection for their domestic IP owners abroad, states have essentially relied on an increasingly dense network of international agreements that commit the contracting parties to, for example, treat foreign IP owners no less favourably than domestic parties and to provide defined minimum standards of protection and enforcement of IP rights. In that sense, international IP protection is an area of international law that is primarily governed by treaties, which are agreements between states. Other sources of international law, set out in Article 38 of the Statute of the International Court of JusticeFootnote 1 – in particular, ‘international custom, as evidence of a general practice accepted as law’ and ‘the general principles of law recognised by civilized nations’ – have received little attention in the context of protecting IP rights beyond borders.
In their treatise, Abbott et al. observe that sources other than treaty law ‘have been of much less importance to the international IPRs system than to the classical domains of international law’ – to an extent that ‘the link between international IP law and the full body of international law has not been fully established’.Footnote 2 Retracing the history of early international agreements on IP protection, Dinwoodie et al. remark that ‘in the milieu of the nineteenth century international system, positive international law gained its readiest expression in the form of treaties between nation states’.Footnote 3
The focus on treaties as a clear and positive expression of law between states thus seems an obvious one for IP. The principal rationale was to achieve concrete commitments to protect, usually in defined ways by means of exclusive rights operating between private parties for specific types of intangible assets abroad. Arguing for the existence of an unwritten custom that requires such protection, derived from general state practice that had been accepted as law, appears difficult to sustain even todayFootnote 4 and would have been much less convincing in the nineteenth century. In light of the significantly diverging national laws on IP protection (with several countries not granting key rights such as patents at all),Footnote 5 one would have been unable to offer evidence for sufficiently general state practice in the protection of different types of IP rights – let alone being able to show that any such practice of protection was undertaken on the basis of a sense of legal obligation, under international law, to do so. Similarly, basing one’s demands for concrete and effective forms of protection (such as the notion of priority rights, a cornerstone of the Paris Convention of 1883)Footnote 6 on general principles of law recognised among states would have equally been a futile exercise.
It was this demand from IP owners for concrete and specific forms of protection for their intangible assets – such as inventions, indicators of origin, industrial designs and literary and artistic works – that required international agreements, which were the only feasible tool for fast and precise law creation on the international plane. And once IP protection beyond borders had been designed as a treaty-based system from inception, its ‘highly specialised and contained’ nature and the lack of interest from general international lawyers were argued to be contributing factors for the widespread disregard for other (usually more generalist) sources of law within the domain of international IP law.Footnote 7 In addition, the private law origins of IP protection on the domestic plane made engagement with broader public international law doctrines and principles much less inevitable than in related fields, such as international investment law.Footnote 8 At the domestic level, distinct from the protection of the property of aliens against state interferences, IP law essentially operates in the form of private rights, applicable primarily between private parties.
While therefore the origins of international IP protection are essentially (if not solely) treaty-based, this growing field over time has coincided with other areas of international law, including those based on custom. In particular, with the integration of IP as one of the three pillars of trade regulation in the World Trade Organization (WTO) and by subjecting IP to WTO dispute settlement, questions of treaty interpretation, dispute settlement and compliance began to receive an increasing amount of attention from experts in IP, trade and public international law.Footnote 9 Based on the invitation in Article 3(2) of the WTO Dispute Settlement Understanding (DSU), WTO adjudicators and commentators have explored how the ‘customary rules of treaty interpretation of public international law’ operate in relation to the Trade-Related Aspects of Intellectual Property (TRIPS) Agreement and the prior conventions it incorporates by reference.Footnote 10 However, this debate has not ended with an engagement with custom, as codified in Articles 31–33 of the Vienna Convention on the Law of Treaties (VCLT).Footnote 11 Due to the WTO rules on dispute settlement, compliance and cross-retaliation, questions of state responsibility and in particular countermeasures Footnote 12 – for example, via attempts by several countries to suspend their TRIPS obligations to ‘enforce’ favourable WTO rulings – have become part of international IP law. Of course, in the WTO context, and generally also in relation to free trade agreements (FTAs) if they contain an IP Chapter and subject its obligations to dispute settlement, these questions are primarily addressed via treaty law, namely the DSU (and FTA dispute settlement provisions). However, WTO Panels and the Appellate Body have resorted to the underlying customary international law rules on state responsibility in order to clarify and interpret WTO treaty law where necessary.Footnote 13 And where treaty-based dispute settlement systems are not available, Sam Ricketson has rightly pointed to customary international law on countermeasures against a material breach as the potential basis for member states of the Paris or Berne Union to react to instances of non-compliance with commitments under the conventions.Footnote 14
An initial analysis therefore suggests that while the international law – which contains the principal commitments to protect the inventions, indicators of origins, industrial designs or literary and artistic works – is treaty law, the interpretation, application and enforcement of that law has been informed by other areas of public international law. Such areas include those governed by custom (whether predominantly or to a lesser extent). Many of these interfaces remain to be explored more fully,Footnote 15 but this chapter does not offer the space for a comprehensive review of all aspects of customary international law relevant for IP protection beyond borders.
The following sections focus on the customary right to regulate and its interface with treaty commitments to protect IP rights. However, first, an additional example of a well-known customary rule and its reception in the IP context shall suffice to show the complex interplay of treaty and customary rules that is likely at play in the context of international IP law. Even though set out in Article 26 VCLT, the principle of pacta sunt servanda emanates from custom.Footnote 16 In the TRIPS Agreement, it has found general expression in the very first sentence of its first Article: ‘Members shall give effect to the provisions of this Agreement.’ Article 1(1) 3rd sentence qualifies this by leaving members ‘free to determine the appropriate method of implementing [TRIPS] within their own legal system and practice.’ This interplay of custom and its reception – as well as qualification – in IP treaties can also be found in Part III of TRIPS on IP enforcement. Here, Article 41(5) TRIPS adds further clarification on what is not owed by members (including in terms of specific IP courts, law enforcement in general and the distribution of resources for IP enforcement). Article 41(1) otherwise reiterates the pacta sunt servanda rule by demanding that ‘Members shall ensure that enforcement procedures … are available under their law so as to permit effective action against any act of infringement’ of IP rights covered by TRIPS.Footnote 17
Altogether, this example reveals a complex interplay between general and specific treaty rules, underpinned by general principles emanating from customary international law – a scenario where the latter is not necessarily completely superseded by treaty law, but where custom may well serve an important role in informing the proper interpretation of the individual treaty provisions. As the following discussion on the right to regulate shows, one can derive important conceptual, systemic and normative insights from contextualising IP treaty law within its relevant broader international law environment, including customary law.
With these initial considerations on the role of custom and its relation to treaties in the context of international IP law in mind, this chapter proceeds as follows. Section B looks at the difficulties in identifying customary international law, in particular in relation to (primary) commitments on the protection of IP rights beyond borders – while pointing to the sometimes neglected but important role of custom in relation to the (secondary) principles and rules about the interpretation and enforcement of, as well as general public interest defences relating to, IP protection commitments.
Using the customary ‘right to regulate’ as an example, Section C then explores the contours and limits of this right in the context of international investment law. Section D considers whether – and if so, how – this right applies to treaty commitments in relation to the protection of IP rights. It does so by reviewing the potential operational scope of such a customary right the context of international IP law (subsection I); by then asking the question as to whether states have contracted out of this customary right when entering into IP treaties (subsection II); and by identifying the contours of this right in the specific context of the WTO–TRIPS Agreement (subsection III). Section E concludes with some broader observations on the role of customary international law for IP protection beyond borders and the politics and consequences of not properly accounting for custom.
B. Difficulties in Identifying Custom in International IP Law
Custom derives its status as law from a common practice among states, backed by their volition – or at least cognition – regarding the legal (rather than ethical, moral, political or courteous) nature of that practice.Footnote 18 The essence of custom brings with it inherent difficulties. Any serious analysis on customary international law needs to begin with a careful scrutiny as to whether a particular rule, set of rules or principle of custom actually exists and what exactly its content is. Discussing a possible role for custom in international IP law therefore faces the foremost challenge of identifying custom – which essentially involves an empirical exercise of establishing a general practice of states, undertaken with a sense of legal right or obligation.Footnote 19 This methodological ‘two element approach’ – which applies uniformly to all areas of international law – requires one to assess (1) whether there is general practice between states and (2) whether that practice is accepted as law.Footnote 20
The 2018 Draft conclusions of the International Law Commission (ILC) offer instructive guidance on this assessment: for example, that state practice can take many forms, involving all types of state organs; and it must be general, in the sense of being ‘sufficiently widespread and representative, as well as consistent’.Footnote 21 If that is the case, no specific duration is required, and the assessment is relative – that is to say, the required spread and consistency depend on the specific context.Footnote 22 Under the second constituting element, the state practice so identified must be accepted as law (opinio juris), meaning that ‘the practice in question must be undertaken with a sense of legal right or obligation’.Footnote 23 Therefore, general practice must be accompanied by a conviction among states ‘that it is permitted, required or prohibited by customary international law’ – which must be shown in relation to states engaging in the relevant practice as well as those in a position to react to it.Footnote 24
Finally, the ILC Conclusions 11 and 12 offer important guidance on the role of treaties and resolutions of international organisations or intergovernmental conferences in providing evidence for determining the existence and content of custom. As the discussion in this chapter will come back to this topic in greater detail, it suffices to say here that a rule set out in a treaty can serve as evidence for its customary international law status (in terms of codifying, crystalising or giving rise to custom), in particular when that rule is reflected in various agreements between states.Footnote 25 In order to distinguish appropriately between custom and treaty law, it is essential to show that states not only act in accordance with the rule because of the pacta sunt servanda principle but also because they feel that it represents a rule of custom.Footnote 26 (Here, of course, ‘states’ crucially includes those non-parties to the treaty.) Similarly, a provision in a resolution can reflect customary international law, but it cannot, in itself, create custom without being backed by general state practice and opinio juris.Footnote 27
Considering the ILC guidance for our question of custom and IP protection beyond borders, one might usefully pick up the distinction made above between (1) the (primary) norms concerning the protection of IP rights, and (2) the (secondary) principles and rules related to the interpretation and enforcement of IP protection commitments. On (1), the question is then whether it is possible to identify customary rules that oblige countries to protect an IP right in a particular way. In other words, have certain minimum standards of IP protection gained the status of customary rules in international law? On the one hand, one might think of some of the core principles of the international IP system, such as the obligation to offer foreign right holders national treatment. While this question is not examined in full detail here, several arguments speak against a customary national treatment rule: first of all, state practice in relation to newly evolving IP rights that are not covered by an IP treaty (such as a right for database makers or press publishers) shows no widespread, let alone consistent, approach to granting such rights to foreigners.Footnote 28 And while of course almost all countries offer national treatment in relation to copyright, trademarks, patents, industrial designs and other IP rights that are internationally common, there is no evidence that this protection against discrimination is not solely because of the respective treaty commitments in the Paris and Berne Conventions as well as TRIPS. In fact, recent FTAs which add to the national treatment clauses in those IP treaties by clarifying that, for example, legal protection for technological protection measures (TPMs) and digital rights management (DRM) systems falls within the notion of ‘protection’ of copyright, and hence within the scope of the national treatment principle, show that states still consider treaty rules in this area to be necessary.Footnote 29 A further argument against considering national treatment as part of custom follows from the fact that protection of foreign investors and their proprietary assets against discrimination is commonly seen as a treaty standard and not part of custom in international investment law.Footnote 30
In light of the arguments above, identifying a rule of custom to protect IP rights will face a steep uphill battle of showing evidence of general practice that is accepted as law. For the time being, the flurry of new treaties’ rules on IP protection (primarily set out in IP Chapters of FTAs) is not likely to change this situation. While one might see some degree of convergence of IP protection standards in FTAs (for example in relation to test date exclusivity rules, the protection of TPMs and DRMs, or TRIPS-plus border measures or criminal sanctions in IP enforcement), such convergence at best indicates the future prospect for consolidation of these standards on the multilateral treaty level. There is no evidence that those states who are willing to commit to these IP protections in FTAs are doing so because they deem providing such protection to foreign IP owners to be something owed in the absence of the treaty rule.
An example from the China – IPRs dispute shows that a WTO Panel was not even willing to consider various FTA provisions concerning criminal sanctions for IP infringements on a ‘commercial scale’ as subsequent interpretative practice under Article 31(3)(b) VCLT, which would – akin to custom – establish an agreement of the parties, here regarding the interpretation of Article 61 TRIPS.Footnote 31 If common provisions in an FTA do not, in the view of the Panel, meet the standard of a ‘common, consistent, discernible pattern of acts or pronouncements’ among WTO members,Footnote 32 they certainly cannot be considered custom among all states.
In sum, showing the emergence – let alone existence – of a customary international law rule with regard to an obligation to protect IP rights of foreigners in a particular way is not likely to be a very successful undertaking. The following analysis thus focuses on point (2) of the distinction made above, namely to identify custom in relation to the (secondary) principles and rules related to the interpretation and enforcement of IP protection commitments. As already explained, this is straightforward for the ‘customary rules of interpretation of public international law’ which Article 3(2) DSU instructs WTO adjudicators to rely on in clarifying the provisions in WTO Agreements, including TRIPS.Footnote 33 And with regard to customary rules relating to dispute settlement and compliance, especially those on state responsibility deserve further scrutiny for their role relating to IP protection beyond borders.Footnote 34 However, perhaps the most relevant aspect of custom concerns the justifications or defences that a state may rely upon to limit the protection of IP rights in the public interest. It is this question about a customary right to regulate and its application in the context of international IP law to which this chapter now turns.
C. The State’s Right to Regulate as a Rule of Customary International Law
A useful starting point for appreciating a state’s customary right to act in the public interest is the protection of aliens (especially against injuries to their property) as part of customary international law. Initially in the form of general international law on all forms of protection available to foreign legal and natural persons in the host state, the so-called international ‘minimum standard of treatment’ (MST) has developed as the core substantive protection for foreign investors based on custom.Footnote 35 While ambiguity and controversies over the contours of the MST led especially capital-exporting states to demand treaty-based protection via international investment agreements (IIAs), the often expansive protections afforded under these treaties by investor-state dispute settlement (ISDS) tribunals have resulted in a push-back by states, including by means of more concrete and narrow determinations of protection standards – including the MST.Footnote 36
Another expression of the ‘return of the state’Footnote 37 comes in the form of explicit recognition and concretisations, in IIAs as well as in ISDS awards, of a state’s right to regulate in the public interest, also referred to as ‘police powers’.Footnote 38 That right is thus not about customary protection of aliens and their property but the limits commonly accepted to such protection, based on the underlying notion of state sovereignty.Footnote 39 As the discussion below further indicates, this foundation of the right to regulate makes it particularly apt to limit not only customary but also treaty-based protections of investors and their assets.
Within its principal operational context of international investment law, the right to regulate (or ‘police powers’ doctrine)Footnote 40 has been accepted as forming part of custom.Footnote 41 Various forms of state practice, often backed by express opinio juris, are commonly cited in support of this proposition,Footnote 42 such as the provisions on expropriation in Annex B to the US Model BIT (2012), which are meant to mirror custom. The annex begins by emphasising that the parties understand that the substantive rules of BIT on expropriation are ‘intended to reflect customary international law concerning the obligation of States with respect to expropriation’; it then clarifies that ‘[e]xcept in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations’.Footnote 43 Essentially identical text on the type of regulatory measures excluded from the notion of expropriation can be found in Annex 9-B on Expropriation in the CPTPP, and very similar formulations exist, for example, in the Canadian Model BIT,Footnote 44 the CETA,Footnote 45 the Indian Model BIT,Footnote 46 and Article 5(3) of the China – Turkey BITFootnote 47 and Article 20(8) of the COMESA Investment AgreementFootnote 48. As early as 1961, the Harvard Draft Convention on the International Responsibility of States for Injury to Aliens excluded from wrongfulness ‘[a]n uncompensated taking of property of an alien or a deprivation of the use or enjoyment of property of an alien which results from … the action of the competent authorities of the State in the maintenance of public order, health, or morality’. This was subject to further conditions, such as non-discrimination, due process and non-arbitrariness.Footnote 49
Recent agreements such as CETA also show that the right to regulate is not limited to the expropriation standard.Footnote 50 And outside the specific investment law context, one can point to Article 1 of the 1st Protocol to the ECHR, which emphasises that the human rights’ protection of property ‘shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.’ While not all of these treaty provisions on the right to regulate make express reference to customary international law, they generally appear to reflect widespread and representative state practice. That remains true even if one might question whether this (treaty) practice is sufficiently consistent with regard to all contours of the right and can always be considered as being undertaken with a sense of a legal right beyond the treaty in question.Footnote 51
A significant number of ISDS awards have also referred to the right to regulate and have frequently based its existence on customary international law, even where the applicable IIA does not contain a reference to that right. As this chapter cannot engage in a full review of ISDS cases on this topic, it is appropriate to focus on the main IP-related investment dispute where the right to regulate was invoked.
In Philip Morris v. Uruguay, the tribunal had to rule on claims that the host state’s regulations, which in various ways limited the use of brands on tobacco packaging, constituted a breach of expropriation and fair and equitable treatment (FET) provisions in the Uruguay–Switzerland BIT.Footnote 52 Uruguay countered that its measures had been designed to protect the public health of its citizens. The tribunal recognised that while the Philip Morris (PM) trademarks constitute a protected investment, neither under domestic law nor under applicable international (IP) treaties does the investor ‘enjoy an absolute right of use, free of regulation – but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power’.Footnote 53
On the expropriation claim, the tribunal held that not only had PM failed to show that there was a substantial deprivation of its protected investment (as there was no significant economic loss suffered in consequence of the tobacco packaging measures), but importantly also that ‘the adoption of the challenged Measures by Uruguay was a valid exercise of the State’s police powers, with the consequence of defeating the claim for expropriation under Article 5(1) of the BIT.’Footnote 54 Explaining that ‘[p]rotecting public health has since long been recognized as an essential manifestation of the State’s police power’,Footnote 55 the tribunal then systemically integrated the customary right to regulate into the investment protection provisions of the BIT. Even though these treaty provisions are not explicitly subject to the state’s police powers, an interpretation based on Article 31(3)c) VCLT allows for importing such powers from customary international law.Footnote 56 Those powers include a right to protect public health as a specific expression of a general right to regulate, which allows states to protect the public interest if the measures are ‘bona fide actions for the purpose of public welfare’. In other words, they cannot be ‘arbitrary and unnecessary’ but must be ‘directed to the [public welfare] end’ and ‘capable of contributing to its achievement’.Footnote 57 The tribunal found Uruguay’s tobacco packaging measures to meet these requirements and, as elaborated further in relation to the FET claim, highlighted the ‘margin of appreciation’ which regulatory authorities of the host state enjoy when making public policy determinations.Footnote 58 The tribunal continued that, as a matter of principle,
[t]he responsibility for public health measures rests with the government[,] and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health. In such cases respect is due to the discretionary exercise of sovereign power, not made irrationally and not exercised in bad faith … involving many complex factors.Footnote 59
In its analysis, the tribunal refers to a range of further ISDS decisions which have, in various ways, recognised the right to regulate. For example, the tribunal in Saluka v. Czech Republic stated:
It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed to the general welfare. … [T]he principle that the State adopts general regulations that are ‘commonly accepted as within the police power of States’ forms part of customary international law today.Footnote 60
In Tecmed v. Mexico, the tribunal went as far as claiming that ‘[t]he principle that the State’s exercise of its sovereign power within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable.’Footnote 61 And a tribunal established under North American Free Trade Agreement (NAFTA) Chapter 11 confirmed that ‘as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory’.Footnote 62
However, while other tribunals have taken a similar position,Footnote 63 there is also case law finding an expropriation, despite the measure being in support of a public welfare purpose. These cases often focus primarily on the detrimental effect of the measure on the investor’s assets.Footnote 64 Yet others have emphasised the limits of the right to regulate, in particular those which follow from specific obligations that states agreed to in an investment treaty.Footnote 65 In balancing the right to regulate with specific treaty commitments to protect foreign investors, some tribunals have adopted proportionality tests, at times informed by the approach of the ECHR,Footnote 66 which demand some reasonable relationship of proportionality between the means employed and the aim to be realised.Footnote 67 In El Paso v. Argentina, the tribunal’s balancing exercise considered whether ‘the interference with private rights of the investors is disproportionate to the public interest’Footnote 68 – thereby adopting an approach that is more closely aligned with the deferential test in PMI v. Uruguay, which leaves room for a ‘discretionary exercise of sovereign power’ and only reviews whether a decision taken in the public interest is ‘not made irrationally and not exercised in bad faith’.Footnote 69 Similar deferential approaches, at times specifically linked again to the notion of margin of appreciation adopted by the ECHR, have been adopted in relation to FET claims or other aspects of balancing international investment protection and the sovereign power of the state to regulate.Footnote 70
Retracing the nuanced differences in the case law, academic commentators refer to three lines of authority with regard to the method to draw a line between non-compensatory regulation and regulatory expropriation.Footnote 71 While there seems to be some convergence on the basic proposition that ‘[i]t is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police power of the State, compensation is not required’,Footnote 72 various differences on the exact (and potentially additional) conditions as well as on scope of the right to regulate remain.Footnote 73 Different views also exist on the interpretative methods used to import the right to regulate as a customary principle (in whatever exact form) into the specific treaty context. A particular question here is whether references to public welfare and non-discrimination as requirements for the legality of (compensatory) expropriation in the treaty bar an interpretative integration of police powers in order to exclude certain public welfare-oriented and non-discriminatory measures from the notion of (indirect) expropriation altogether.Footnote 74 And while authors have generally recognised an increased tendency to resort to the concept of police powers, Titi for example cautions – in the words of the Tribunal in Saluka v. Czech Republic – that ‘international law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered “permissible” and “commonly accepted” as falling within the police or regulatory power of States and, thus, non-compensable’.Footnote 75
The overall picture that emerges from this necessarily brief review of state practice and opinio juris in recent investment treaties, the ISDS case law applying those treaties in light of what tribunals consider to constitute custom, and academic commentary hence is a somewhat blurry image of a right to regulate, the exact contours of which remain ambiguous. While its basic idea seems to receive increasing support from all sides, the scope and requirements of the right remain particularly elusive. Issues related to scope are: what type of public interests are covered and against which type of claims does the right apply? Issues related to the requirements include: subject to meeting which conditions exactly can the right be invoked? If the conditions include some sort of proportionality test, who decides on the balancing, and with what degree of deference to policy choices made by the host state? The answers remain unclear and are likely to differ depending on the specific (treaty) context. With this rather open assessment, the following section considers how this right might be invoked in the context of international IP treaties.
D. Should International IP Treaties Recognise an Inherent Right to Regulate?
Based on the proposition that – despite its ambiguous contours – the right to regulate ‘reflect[s] the position under general international law’,Footnote 76 the remainder of this chapter considers the role of the right for international IP law – in particular, whether it can operate as an (implicit) limitation to obligations to protect IPRs under international IP treaties such as the TRIPS Agreement. This, in turn, requires addressing at least the following questions: (1) with regard to international obligations of protecting IP, what is the scope of a right to regulate? This is not so much the open question on the exact conditions under which the right can be exercised (as that arguably depends on the individual treaty context) – but concerns, as discussed below, conceptual differences between investment and IP protection in international law. Depending on the so determined scope of the right, a key further question is (2) whether states bound by international commitments to protect IP have contracted out of the right to regulate by agreeing to international IP treaties, in particular TRIPS.
And finally, one needs to consider, in case the right to regulate has not been waived in full by entering into a specific IP treaty, (3) what actually is its (residual) content? In particular, if the conditions under which it is meant to be exercised involve the balancing of different interest (for example under some sort of a proportionality test), can this be decided by international adjudicators? Or does the implementing state retain some degree of discretion or margin of appreciation to which adjudicators have to defer? Since answering most of the above questions will depend on the specific IP treaty context, the following discussion simply sketches the broader analytical parameters within which the questions can be addressed. And since – at the time of writing – the principal forum for adjudicating disputes over international IP commitments is (still) the WTO dispute settlement system, the discussion uses TRIPS as the main example.Footnote 77
I. What Is the Operational Scope of a Right to Regulate in the Context of International IP Protection?
When considering how (if at all) the right to regulate applies in the context of international IP law, one needs to keep key conceptual distinctions between IP and investment protection obligations in mind. As I have discussed in more detail elsewhere, international investment law operates primarily a form of protection against a state interfering with the protected assets of foreign investors (in form of taking property, or treating its owner unfairly).Footnote 78 On the other hand, international IP law essentially obligates states to protect, by means of private rights, various forms of ‘creations of the mind’ as a specific type of intangible asset against unauthorised exploitation and use by third (usually private) parties.Footnote 79 In short: investment protection primarily operates within the vertical relations between a state and a foreign private party, whereas IP law regulates the horizontal relations between private parties. While the discussion below shows that this characterisation of the modes of protection in international investment and IP law is not absolute, the principal question that emerges from it is whether the right to regulate solely applies to measures where the state directly interferes with a protected asset. Or can it also be applied to the regulation of private rights between private parties?
As a basic proposition, one may argue that if the internationally recognised objective of IP rights and their protection is to promote public welfare aims,Footnote 80 then, as a matter of principle, the power of the state to regulate in the public interest continues to apply to at least the same extent – if not more – as when the state directly interferes with private property. Regardless of the endless debates about the purpose of IP protection, within the context of TRIPS, IP rights – even as private rights – are not an end in themselves (and hence not primarily for the benefit of IP owners) but serve as tools to balance the incentive to innovate with the need to maximise access to intangibles with a public good character.Footnote 81
Against this background, there is no argument of principle whereby the regulation of private party relations should be outside the scope of the state’s power to act in the public interest. The intangible nature of what domestic IP laws define as works, inventions, signs or other protectable subject matter inherently entails the need to make policy choices about the availability, conditions, scope and limits of IP protection. And the overarching utilitarian objectives for such protection in the TRIPS Agreement necessarily include the basic idea that the state designs and tailors the legal framework for IP subject matter in the public interest. A right to regulate is therefore not only very much possible for the regulation of private rights in private law relations but is arguably inherent in the very nature of IP. In the context of regulating intangible creations of the mind, such a right hence goes beyond the ability of the state to – for example – expropriate assets in the public interest. While the contours of the right of course need to be properly construed in light of the treaty commitments to protect the IP of foreign right holders, there is no reason why the right to regulate would not also operate within the typical domain of IP protection.
A comparative look back in time at international investment (and human right to property) protection confirms the basic proposition above. Whereas the protection of property assets under international law is primarily conceived as protection against state interference, when that expands to cover a duty to protect property then there is no convincing reason that such a duty is not equally, or more, subject to the state’s right to regulate. The generally rather limited scope of a duty to protect (in contrast to a duty not to interfere) in itself is an expression of sovereignty and the right to regulate. Such a duty is usually construed narrowly in terms of what states actually have to do to protect against third-party interferences with property, and this narrow scope in itself leaves sufficient policy space for the state to regulate.Footnote 82 But even where a duty to act exists, there is no principal reason why the right to regulate should not be generally available for the state to act, while taking the interests of the public and other specific groups into consideration.Footnote 83 Again, much will depend on the specific treaty commitments undertaken and the extent to which they can be construed as exhaustive lex specialis, whereby states have contracted out of their police powers. The next section considers this point in more detail.
Finally, the international IP system also addresses situations where the state might want to directly interfere with property. Generally, the idea that IP rights are merely negative rights to exclude third parties from utilising protected subject matter without authorisation (rather than rights which entail a claim against the state for its undistorted exploitation or use) will often make state interference (in a mere negative right) dispensable.Footnote 84 That is because owning a copyright in a cinematographic work with sexual explicit content, for example, does not entail a right to object to state restrictions on how the work can be distributed, shown in cinemas or otherwise made available to the public; similarly, a patent for a medicine does not prevent state regulatory approval requirements (for example to show the safety and efficacy of the patented medicine). The international IP system acknowledges this core limit of IP rights as merely negative rights in various forms – for example in defining the scope of exclusivity (e.g. in Articles 14, 16 and 28 TRIPS), or in the express recognition of the state’s right to ‘censor’ and otherwise restrict the utilisation of copyrighted works in Article 17 BC.Footnote 85 However, in particular for trademarks, the idea that protected signs are in principle meant to be used in commerce to indicate the (commercial) origin of goods or services requires that the negative rights character is not absolute. Again, the international IP system accounts for this – not in the form of a ‘right to use’ but via a limited protection against trademark use restrictions which are ‘unjustifiable’.Footnote 86
In sum then, the analysis shows that international commitments to protect IP rights are subject to the basic concept of a right to regulate, both with regard to regulating private law relations and by addressing direct state interferences with property. The key question that hence arises is whether this right has been exhaustively addressed in the relevant IP treaties, or whether those treaties leave room for the basic recognition of this right under customary international law.
II. Have States Contracted Out of Their Police Powers by Agreeing to International IP Treaties?
The debates in international investment law about the exact contours of a right to regulate – which, in its basic conception, receives widespread recognition and acceptance – show that the perhaps most important question concerns the relation between a state’s customary police powers and the specific treaty commitments the state has entered into.Footnote 87 When considering this question in the context of international IP law, our focus on TRIPS as part of the WTO legal order means that the analysis has to address: (1) the role that customary international law in general can play within WTO law, and (2) the role a customary right to regulate can play with regard to TRIPS in particular.
In an area that sometimes has been referred to as a ‘self-contained regime’ where rules are essentially derived from the WTO’s own ‘covered agreements’, custom might be argued to play little, if any, role. A default assumption may be to consider a treaty rule to supersede an equivalent rule of custom. But general international law practice and scholarship tell us that unless there is clear evidence (usually in form of an express treaty rule) that the state parties wished to contract out of custom, customary international law principles and rules apply – at least as a source of guiding treaty interpretation. For example, on the applicability of the local remedies rule, the ICJ stated that it ‘finds itself unable to accept that an important principle of customary international law could be held to have been tacitly dispensed with, in the absence of any words making clear the intention to do so.’Footnote 88 The ILC explains the continued role of custom in a world dominated by treaties in similar terms in its report on fragmentation: ‘It is in the nature of “general law to apply generally” – namely inasmuch as it has not been specifically excluded. It cannot plausibly be claimed that these parts of the law – “important principles” as the [ICJ] put it – have validity only as they have been “incorporated” into the relevant regime.’Footnote 89
The basic starting point therefore is that rules of custom (or general international law, as these terms are sometimes used interchangeably) apply – unless there is clear evidence that states, for example by including specific terms in a treaty, wished to contract out of these rules. One then needs to positively identify state intent to exclude a rule of custom – rather than an intention to retain that rule as soon as related treaty rules exist.
What do these insights from general international law mean for WTO law and in particular the IP treaties incorporated into the WTO legal order? In the words of the ILC, there is ‘little reason of principle’Footnote 90 to depart from the above-described principle when applying and interpreting the rules of TRIPS and the IP treaties it incorporates. While WTO dispute settlement is no forum of universal jurisdiction, the Appellate Body has, even in its very first decision, confirmed that WTO law does not operate in ‘clinical isolation’Footnote 91 from other rules of international law. When Panels and the Appellate Body consider claims under the covered agreements (rather than based on non-WTO rules), they must construe the rights and obligations flowing from WTO rules ‘within the overall context of general international law’.Footnote 92 In several decisions, WTO adjudicators have accepted and applied this approach.Footnote 93 In as much as WTO law therefore does not constitute a self-contained regime per se, the same must be true for other WIPO-administered treaties and indeed the (internal and external) conduct of international organisations that deal with IP, such as the European Patent Office (EPO). While one can for example point to the WIPO Global Challenges Division as evidence of engagement with the outer (international law) environment,Footnote 94 such evidence is not required for relying on custom and other generally applicable rules of international law. As the default rule is continued relevance, one would need to show that for example by agreeing to the Patent Cooperation Treaty or by setting up the EPO, contracting states wanted to create self-contained regimes.
Specifically on the WTO members’ police powers, WTO Panels and the Appellate Body have generally recognised a ‘sovereign right to regulate’,Footnote 95 but have underscored that this right needs to be exercised in accordance with the state’s international obligations. With regard to services trade, the Panel in US – Gambling held that ‘[m]embers maintain the sovereign right to regulate within the parameters of Article VI of the GATS. Members’ regulatory sovereignty is an essential pillar of the progressive liberalization of trade in services, but this sovereignty ends whenever rights of other Members under the GATS are impaired.’Footnote 96 On trade in goods, the Appellate Body stated that ‘the object and purpose of the TBT Agreement is to strike a balance between, on the one hand, the objective of trade liberalization and, on the other hand, Members’ right to regulate’.Footnote 97 In terms of how such a balance is to be struck by means of appropriately construing WTO commitments, the Panel in China – Rare Earths
agree[d] with China that an interpretation of the covered agreements that resulted in sovereign States being legally prevented from taking measures that are necessary to protect the environment or human, animal or plant life or health would likely be inconsistent with the object and purpose of the WTO Agreement. In the Panel’s view, such a result could even rise to the level of being “manifestly absurd or unreasonable”.Footnote 98
The conclusion then is that as part of custom, WTO members generally retain their police powers unless there is clear evidence that it has been specifically contracted out in a WTO Agreement. Hence one needs to positively identify states’ intent to exclude the right to regulate, rather than an intention to retain their police powers as soon as relevant treaty rules exists. In the context of WTO dispute settlement, where the competence of adjudicators is limited to deciding claims about consistency with ‘the covered [WTO] Agreements’,Footnote 99 even relatively conservative views allow the importation of custom via treaty interpretation, including on the basis of Article 31:3 c) VCLT.
The analysis in Section I suggests that there is no reason of principle for the right to regulate not also to apply to international IP protection – although the specific IP treaty commitments are of course essential in determining the extent to which the WTO members’ police power has been contracted out. In China – IPRs, China highlighted ‘the right of governments to take the necessary steps to maintain public order’, as reflected in Article 17 BC, and which arguably was ‘not affected by the [author’s] rights given by the Convention’.Footnote 100 The Panel generally agreed with this interpretation, explaining that:
[a] government’s right to permit, to control, or to prohibit the circulation, presentation, or exhibition of a work may interfere with the exercise of certain rights with respect to a protected work by the copyright owner or a third party authorized by the copyright owner. However, there is no reason to suppose that censorship will eliminate those rights entirely with respect to a particular work.Footnote 101
In EC – GIs, responding to the European Community’s argument that since TRIPS lacked a general exception clause akin to Article XX GATT it should be allowed to import and rely on Article XX GATT as defence against a TRIPS violation, the Panel countered as follows:
the TRIPS Agreement does not generally provide for the grant of positive rights to exploit or use certain subject matter, but rather provides for the grant of negative rights to prevent certain acts. This fundamental feature of intellectual property protection inherently grants Members freedom to pursue legitimate public policy objectives since many measures to attain those public policy objectives lie outside the scope of intellectual property rights and do not require an exception under the TRIPS Agreement.Footnote 102
These Panel findings in China – IPRs and EC – GIs confirm the analysis in Section I that the negative rights nature of IP protection under TRIPS is a reflection of the right to regulate.Footnote 103 And where TRIPS does offer some protection against state interferences with IP owners’ ability to use protected subject matter, the Panel and Appellate Body in Australia – Plain Packaging construed the relevant TRIPS commitments in a way that aligns with WTO members’ customary police powers.Footnote 104
The discussion so far shows that WTO adjudication in general and with regard to TRIPS in particular has applied and interpreted relevant treaty commitments to protect IP in light of a right to regulate – even if the adjudicators have not always referred to the customary international law status of the right. With regard to situations where state measures interfere with IP assets (in that the utilisation of IP-protected subject matter is restricted), WTO members therefore have not contracted out of their police powers. However, what about a right to regulate IP rights as ‘private rights’ and how they operate in private law relations? Do treaty commitments to grant and protect these rights (for defined subject matter and subject to certain requirements as well as with certain allowed exceptions, limitation and duration) offer sufficient evidence that WTO members have contracted out of the right to regulate IP in its principal private law domain? Section I showed that, based on the intangible character of IP subject matter and the utilitarian aims of IP protection, a right to regulate follows from the very nature of IP. And as I have argued elsewhere, for state measures which delineate the scope of protection of private rights vis-à-vis the rights of others and the general public to use IP-protected subject matter (such as patented drugs), the negative rights character of IP rights is not sufficient to secure a WTO member’s police powers.Footnote 105 The long-standing debates on access to medicines show that the protection of public health will often require limiting IP protection in order to facilitate the access to essential goods (such as medicines and other health related technologies) via subject matter exclusions, exceptions and limitations, compulsory licences and so on.
Of course, with Articles 27, 30 and 31 for example, the TRIPS Agreement contains a range of provisions allowing WTO members to adopt access-enhancing measures. But there is no indication that their mere existence exhaustively covers the right to regulate – in other words, that WTO members intended to contract out of their customary police powers by signing up to TRIPS. That follows first of all from recognising the appropriate point of departure for this analysis: as discussed above, the general position in international law is that one needs to positively identify state intent to exclude a rule of custom – rather than an intention to retain that rule as soon as related treaty rules exist.Footnote 106 Second, and arguably more importantly, the relevant treaty provisions and their application by WTO members strongly support a continued role for the right to regulate. In the specific TRIPS context, most of the treaty provisions addressing access-enhancing measures contain key terms that are broad, open and undefined – which in turn have commonly been understood and implemented to include policy space for WTO members to protect public interests, including (for example) access to medicines.Footnote 107
The most widespread, representative and consistent state practice recognising this policy space is reflected in the Doha Declaration on TRIPS and Public Health, adopted at the Doha Ministerial Conference in November 2001. Here, all WTO members ‘reaffirm[ed] the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.’Footnote 108 In the terms of the ILC Conclusions, the Doha Declaration constitutes a resolution adopted at an intergovernmental conference that provides evidence for determining the existence and content of a rule of custom.Footnote 109 Since the Declaration was adopted by consensus of all WTO members and is not intended to amend TRIPS,Footnote 110 it also includes evidence of states’ opinio juris for a customary right to regulate within TRIPS. That is to say, the Declaration reflects a sense of all WTO members of a legal right to adopt measures in the public interest – even though they have committed to TRIPS and its obligations to protect IP. In para. 4 of the Declaration, all WTO members
agree that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all.Footnote 111
The negotiation history of the Declaration offers further support for states’ opinio juris that TRIPS does not prevent domestic measures to protect public interests.Footnote 112
Subsequent IP treaty commitments – in particular IP Chapters in FTAs – as well as resolutions of international organisations have frequently referred to and reiterated the importance of the Doha Declaration. As I have discussed in detail elsewhere, FTA contracting parties are, for example, ‘recognising the principles set out in’, ‘affirm their commitment to’, or ‘recognise the importance of’ the Doha Declaration.Footnote 113 Parties have also agreed that in interpreting and implementing their FTA IP rules, they ‘shall ensure consistency’ with the Doha Declaration.Footnote 114 And some FTAs contain language identical or at least equivalent to the right to protect public health referenced in paragraph 4 of DohaFootnote 115 – in the round indicating that the right to regulate as affirmed in the Declaration continues to apply, despite generally more extensive commitments to protect IP under FTAs.
Furthermore, in the United Nations, the General Assembly adopted a resolution on ‘Global health and foreign policy’ in 2016, ‘[r]eaffirming the right to use, to the fullest extent, the provisions contained in the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the Doha Declaration on the TRIPS Agreement and Public Health … which provide flexibilities for the protection of public health, and in particular to promote access to medicines for all.’Footnote 116
More recently, the COVID-19 pandemic has placed global access to medical technology, not only vaccines but also personal protective equipment and ventilators, among others, at the centre of attention. As one of many responses, in the ‘Rome Declaration’ by the G20 countries adopted in May 2021, signatory states agreed to facilitate the global distribution of medical technologies, not least by ‘working consistently within the TRIPS agreement and the 2001 Doha Declaration’.Footnote 117
Overall, while individual invocations of Doha vary, all share the basic idea of using the Declaration as a central reference point for how WTO members can protect public interests such as health in a manner that is consistent with TRIPS (and FTA). And most refer to a ‘right’ of states to protect health within the framework of TRIPS. Applying the ILC Conclusions, these references in treaties subsequent to TRIPS further support the argument of a rule of custom that is ‘codified’ (in the form of Doha references) in a treaty rule (namely, those FTA provision referring to Doha).Footnote 118 The references in the United Nations’ and other resolutions of international organisations offer additional evidence for the existence and content of customary police powers remaining, in spite of treaty commitments to protect IP. With these constant recognitions of the right to regulate in mind, the final section below considers the residual scope of this right in the context of TRIPS.
III. The Contours of WTO Members’ Police Powers in Light of TRIPS
The discussion in Section C on the role of a customary right to regulate and its exact contours in international investment law has shown that much depends on the specific treaty commitments undertaken by the state invoking the right. Attempting to offer some parameters for addressing the same issues in the context of TRIPS hence should start with the relevant obligations to protect IP under the WTO framework. Very much hence depends on the individual TRIPS (or other IP treaty) commitment and the extent to which this already implements a WTO member’s police powers – that is, how far the specific treaty rules at issue offer evidence of the contracting parties’ intent to contract out of custom. Such an individual assessment cannot be undertaken here. The principal approach, however, has been confirmed by WTO members in the Doha Declaration. After affirming that TRIPS ‘can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health’ and that all TRIPS flexibilities should be used for this purpose, WTO members highlight these flexibilities to include, first and foremost, that ‘[i]n applying the customary rules of interpretation of public international law, each provision of the TRIPS Agreement shall be read in the light of the object and purpose of the Agreement as expressed, in particular, in its objectives and principles.’Footnote 119 The WTO members then go on to highlight specific interpretative flexibilities regarding compulsory licensing and exhaustion. Furthermore, under the so-called ‘paragraph six mechanism’, they eventually negotiated a waiver to a TRIPS provision whose operation stood in the way of an effective use of compulsory licensing for public health.Footnote 120
The main mechanism for realising a right to regulate within TRIPS is thus by means of an interpretation and implementation of its provisions which afford sufficient policy space for WTO members to protect public interests such as health. This in turn should be achieved by the full use of TRIPS flexibilities, especially those listed in paragraph 5(a)–(d) of the Doha Declaration. As I have discussed in detail elsewhere, because of its horizontal operational effect, the most important flexibility here is interpreting and implementing TRIPS commitments in light of the agreement’s object and purpose, set out in its ‘Objectives’ in Article 7 and ‘Principles’ in Article 8(1).Footnote 121
In short, that flexibility follows from (1) the interpretative relevance that Article 31(1) VCLT (reflecting customary international law principles of treaty interpretation) affords to these provisions as expression of treaty object and purpose of TRIPS; and from (2) the substance of Articles 7 and 8. The interpretative role of Articles 7 and 8 has to be appreciated relative to other factors informing the interpretation exercise, especially ordinary meaning and context. The more ambiguous and multilayered a provision’s common understanding in relation to the treaty is, the more it needs further determination and concretisation by the treaty’s objective – so that policy space via treaty interpretation depends significantly on the terms at issue.Footnote 122 The substance of Article 7 and especially 8(1) TRIPS then further determines the contours of a right to regulate and reflects the two basic rationales for invoking police powers in relation to IP protection, as discussed in Section I: namely, a state (1) interfering with IP rights to protect the public interest (reflected in the public interest principles of Article 8(1)); and (2) regulating the scope of protection as well as its limits in relations between private parties (as set out in the balancing objectives of Article 7).Footnote 123
The basic concept that emerges is one of a right to regulate which has to be actioned via treaty interpretation, with an important role for the TRIPS object and purpose as set out in Articles 7 and 8 – relative to other interpretative elements. The public interest principles in Article 8(1) confirm the customary police powers of WTO members and crystalise their contours: members may take measures ‘necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development’. Since those measures also must be ‘consistent with the provisions of [TRIPS]’, the policy space to adopt them lies within the interpretative flexibilities provided by individual TRIPS commitments, construed in light of the TRIPS object and purpose. The balancing objectives in Article 7 in turn call for IP protection and enforcement to ‘contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare’.
Broad and open concepts (such as ‘invention’, ‘novelty’ in Article 27, ‘distinctiveness’ in Article 15, or ‘expressions’ – in contrast to ideas – in Article 9) that are commonly used in TRIPS leave it for WTO members to determine their specific meaning and to align the associated interests of IP owners, users and society; hence, the balancing that Article 7 calls for primarily occurs on the level of domestic implementation.Footnote 124 From a right-to-regulate perspective, WTO members have retained sovereignty to ‘customise’ IP protection and to balance all affected interests – unless individual TRIPS provisions entail concrete commitments where no (or few) interpretative flexibilities remain.
Finally, this policy space for tailoring IP protection in line with competing interests and different stakeholders on the domestic level is reinforced by the basic notion of territoriality. The fact that despite almost 150 years of international harmonisation of IP protection, the competence to grant rights over intangible assets remains with the individual nation state is in itself a strong indicator of the right to regulate on the domestic level, not only via norm-setting that builds on the interpretative policy space left by often broad concepts in treaty commitments but also by the principal competence of domestic agencies and courts to apply and adjudicate these norms. While of course territoriality has been (partially) done away with in the case of significantly enhanced socio-economic integration (as in the European Union),Footnote 125 its continued existence within TRIPS and TRIPS-plus frameworks confirms the police and regulatory powers of the state granting, delineating and limiting IP rights.
In sum, the reference to both Article 7 and 8 in Doha’s emphasis on the TRIPS object and purpose highlights the two related but distinct aspects of the right to regulate IP protection. Adopting public interest measures within the contours of Article 8; and shaping IP protection to facilitate socio-economic welfare aims via Article 7. Crystalising the scope and content of a WTO member’s regulatory powers then should be a matter of characterising a domestic measure as primarily within the ambit of Article 7 or 8 TRIPS. A measure that is predominantly delineating or balancing the interests of IP owners, competitors or users falls rather under Article 7; and it is that provision’s terms which serve as principal interpretative guides for construing individual TRIPS commitments that may be implicated by the measure at issue.Footnote 126 Article 8 on the other hand concerns measures taken to protect general public interests such as health or the environment.
Here, one should further differentiate between two types of TRIPS provisions implicated by the measure: (1) a TRIPS provision that has an ‘internal’ public interest test – such as ‘unjustifiable’ in case of trademark use restrictions under Article 20, in contrast to (2) a TRIPS provision which lacks such a test or equivalent internal mechanism. Interpreting the proper meaning of the latter in light of Article 8(1) then requires importing the necessity test inherent in Article 8(1),Footnote 127 whereas construing a provision with an internalised (and hence lex specialis) public interest test usually will lead to that test’s ordinary meaning and context to dominate over the object and purpose reflected in Article 8(1) TRIPS. As confirmed in the Plain Packaging litigation by both Panel and Appellate Body, a specific test in an individual TRIPS commitment replaces the general one in Article 8(1).Footnote 128 The contours of the right to regulate in the context of international IP law hence are framed by three key parameters:
(1) Within TRIPS, the pre-existing IP treaties it incorporates and the subsequent FTAs which refer to it, the customary right continues to exist. It is to be effected by means of a flexible interpretation and domestic implementation of individual treaty commitments to protect IP rights.
(2) That policy space is determined by the interpretative role of the TRIPS object and purpose – relative to the importance of the ordinary meaning and context of the treaty rules at issue. The more open and broad the key terms in these treaty commitments are, the more room remains for the individual WTO member’s police powers.
(3) Because Articles 7 and 8 TRIPS address different aspects of these powers to regulate, a domestic measure should be characterised as to which aspect of the TRIPS object and purpose the measure primarily reflects. Broadly speaking, the TRIPS compliance of measures undertaken to protect a general public interest such as health or the environment (and curtailing IP rights accordingly) should be construed in light of Article 8(1) and especially its necessity test – unless the relevant individual TRIPS commitment offers a more specific public interest test. By contrast, the TRIPS consistency of measures balancing the interests of IP owners, competitors or users (and delineating the content and limits of IP rights accordingly) needs to be determined first and foremost under Article 7.
E. Conclusions
As an area where norm-setting seems prima facie driven primarily by treaties, international IP law appears to leave little room for custom or general principles of law. But if one looks beyond the primary rules that define the protection of IP rights beyond borders, there is ample space for other sources of law – for example with regard to treaty interpretation and state responsibility. In the broader context of treaty rules interacting with custom and general principles, this chapter has reviewed the role that remains for a customary right of states to adopt measures protecting public interests once those states have agreed to protect the IP rights of foreigners. The chapter has shown that the principal difficulty in identifying custom to protect foreign IP via state practice and opinio juris does not apply to this right to regulate, which emanates from basic concepts of sovereignty. The right to regulate has received widespread recognition in other areas of international economic law, even though its exact contours remain somewhat blurry and in turn have to rely heavily on further determination in reference to the specific commitments to protect the assets of foreigners.
Considering how a state’s customary police powers apply in the specific IP treaty context (in particular, the TRIPS Agreement), an important insight from general international law is the continued relevance of custom – unless there is clear evidence that contracting states intended to contract out of custom. This point not only has specific implications for appreciating the contours of a right to regulate in light of relevant IP treaty rules, which are considered above in detail. On a more fundamental level, it reminds us of the continued relevance and ‘background functionality’ of the general – even where detailed rules have been set, usually in favour of the specific interests of IP owners.
The raison d’être to coordinate IP protection beyond borders essentially relies on treaties as a specific legal tool to achieve its principal purpose of protecting IP owners abroad. However, in doing so, this legal protection necessarily becomes a segment of a wider universe. Therefore, appreciating international IP law, as a whole, means viewing the field contextually – that is, as part of a broader operating system, epistemic community or project (depending on how one prefers to characterise international law). Without this contextual perspective, international IP protection will necessarily appear self-contained, and one misses those elements that exist simply because coordinating protection beyond borders relies on the functionality of international law. For our specific question about the role of customary international law, this means that disregarding custom implies not fully accounting for the broader contextual framework within which international IP treaties operate – which in turn leads to further self-isolation and containment of the international IP system.
For a state’s residual police powers to protect public interests, despite specific treaty commitments, this broader view ensures that the default position is not contracting out and self-containment but continued relevance. Custom can therefore retain its role and – in the specific WTO–TRIPS context – serve an interpretative function, unless there is clear evidence that the treaty rules under interpretation exhaustively cover a WTO member’s right to regulate. The Doha Declaration as well as Articles 7 and 8 TRIPS confirm this point and offer further guidance on the contours of the right.
The amount of policy space to (1) interfere with IP rights to protect public interests recognised under Article 8, and (2) balance the interests of various stakeholders in line with Article 7 then is driven by the interpretative role of the TRIPS object and purpose, as well as the degree of openness and ambiguity in the treaty terms under interpretation. Given that the key concepts set out in TRIPS remain undefined and have been implemented in diverse ways for decades (if not centuries), WTO members retain quite some flexibility. And while FTAs tend to include more concrete and detailed commitments to protect foreign IP, their frequent references to Doha and/or Articles 7 and 8 suggest that the same principles apply.
However, practically, perhaps the most important point concerns actually utilising the right to regulate, on the ground. Whether it is about access to patented medicines, regulating the use of (tobacco) brands on products, or setting ‘safe harbours’ from copyright liability, it is within the domestic IP system that measures are adopted and where they can have an impact. This of course follows primarily from the notion of territoriality (which in itself secures significant policy space to regulate). In addition, it also follows from the optional character of most provisions that allow to limit IP rights. Since the raison d’être has generally been to coordinate protection (rather than its limits) beyond borders, contracting states are usually not obliged (under the IP system) to exercise their police or regulatory powers.
Again, however, a broader contextual view can shift the perspective: taking account of other legal orders within international law might point to (treaty or customary) rules or general principles which demand state action. The duty to respect, protect and fulfil the right to health under Article 12 of the International Covenant on Economic Social and Cultural Rights,Footnote 129 for example, then appears as the flipside of the recognition in the Doha Declaration of a ‘right to protect public health’. No matter how much recognition to these ‘external’ norms may be given on the international level, it will be domestic implementation and the effect given at that level that eventually count. With this in mind, the international dimension of a right to regulate – be it based on custom or explicitly set out in treaty terms – is only the prerequisite for actual and concrete action on the domestic level, where intangible ‘creations of the mind’ are turned into legally recognised assets with a concrete scope, limits and duration.
Table of Contents
A. Introduction 158
B. Articles 31–33 VCLT: Overview of Principles Relevant for EPC Interpretation 159
C. Current Practice at EPO 166
I. Data Set Used for the Systematic Analysis of EPO Case Law 166
II. Applicability of the VCLT to the Interpretation of the EPC 167
III. VCLT Interpretation Criteria Applied by EPO (EBoA and BoA) 168
IV. A Controversial Example: Conflict over ‘Native Traits’ at EPO 176
D. Conclusions 187
A. Introduction
For most specialists in the respective fields, general public international law and intellectual property (IP) law are rather different areas of law, with different communities of experts, different fora, and different methodologies – and with few fields of common interest. Even though IP lawyers work on a daily basis with the TRIPS Agreement, the Berne and Paris Conventions, and the European Patent Convention (EPC), they seldom make reference to general instruments and principles of public international law. On the other hand, few public international lawyers take the challenge to analyse the specificities of the numerous international IP instruments. This lack of mutual interest is to be regretted. IP lawyers should expect to benefit from the experience gathered in other areas of public international law. And vice versa, public international lawyers of a general orientation would be surprised by the diversity and richness of IP instruments and principles developed on the international level since the late nineteenth century.
Notwithstanding these – at least so far – missed opportunities, there are some inevitable interfaces between the two areas. One of the most obvious of those interfaces is treaty interpretation. IP instruments have to be interpreted like all other legal texts. And public international law provides a highly developed body of rules of interpretation, which are codified in Articles 31–33 Vienna Convention on the Law of Treaties (VCLT). This chapter offers a systematic analysis of how the European Patent Office (EPO) uses Articles 31–33 VCLT for the interpretation of the EPC.Footnote 1 The EPC may seem a very special case of an IP treaty because of its limited territorial scope and its specific nature. Nonetheless, it is of particular interest because of the large number of cases handed down by the Enlarged Board of Appeal (EBoA) and the Boards of Appeal (BoAs), which serve as the judiciary of the European Patent Organisation. And indeed, the different judicial bodies of the EPO frequently refer to Articles 31–33 VCLT.Footnote 2 This is even more interesting and worthy of further consideration, since the EPO bodies are part of the epistemic IP community. In the following discussion, the basic principles of treaty interpretation according to Articles 31–33 VCLT are explained. Subsequently, the current practice of EPO bodies is analysed in more detail.
B. Articles 31–33 VCLT: Overview of Principles Relevant for EPC Interpretation
The principles of treaty interpretation according to Articles 31–33 VCLT are well known to public international lawyers. Such readers may skip over the following overview, which has no ambition of producing an original contribution to the debate, and continue with Section C, where EPO’s practice is analysed in light of those principles. For IP specialists, it should be of more interest to read about the teachings of public international law experts on Articles 31–33 VCLT.
I. Ordinary Meaning (of Multiple Languages)
According to Article 31(1) VCLT, a ‘treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty’. This general rule is often described as the codification of a ‘textual approach’,Footnote 3 which should not be understood as giving the wording primacy over the other criteria of the VCLT.Footnote 4 However, the emphasis on the ‘ordinary meaning’ makes clear that the goal of interpretation is not the reconstruction of the subjective intentions of the parties if these intentions are not reflected in the text. The goal is rather the determination of the ‘objective’ meaning of the text,Footnote 5 which may by implication refer to the ‘presumed intention’Footnote 6 of the parties. Based on such an understanding, the wording of the treaty is at the same time the starting point and the outer boundary of interpretation. Only what is covered by the ordinary meaning can be a designated as ‘interpretation’. Everything beyond the ordinary meaning must be justified on different grounds, such as international customary law, general principles of law, or judicial decisions.Footnote 7
‘Ordinary meaning’ refers to the use of expressions in the common language – that is, regular or everyday, normal language.Footnote 8 Legal practice refers to dictionaries or encyclopaedias to determine such ordinary meanings.Footnote 9 However, specific legal expressions have to be understood in the sense of their meaning in the legal context; examples are ‘contract’, ‘state’, and ‘damage’. In this regard, it is not a layman’s but a lawyer’s understanding.Footnote 10 A ‘special meaning’ shall only be given to a term ‘if it is established that the parties so intended’ (Article 31(4) VCLT). But how to cope with different understandings in different jurisdictions? In this regard, it is established practice to follow an ‘autonomous interpretation’ approach, which avoids understanding legal expressions in the sense given in a specific jurisdiction (such as ‘contract’ or ‘damage’) but rather as referring to general principles of law, either based on a common usage in other international treaties or on the basis of comparative law.Footnote 11
Interpretation of treaties in accordance with Article 31(1) VCLT must be in ‘good faith’. The International Law Commission (ILC), in its Report of 1966 – as well as some scholars – understand this reference to good faith as flowing directly from the pacta sunt servanda principle in Article 26 VCLT.Footnote 12 Other authorities give ‘good faith’ a broader meaning and understand the term as an overarching principle that obliges parties to ‘act honestly, fairly and reasonably’, to honour legitimate expectations and to ‘refrain from taking unfair advantage’ – such as from an ‘excessively literal interpretation’.Footnote 13
One element specific to international treaties is the issue of multiple languages addressed in Article 33 VCLT. Treaties are typically authenticated in two or more languages. According to Article 33(1), the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail. According to Article 33(3), the terms of the treaty are presumed to have the same meaning in each authentic text. If nevertheless the authentic texts disclose a difference of meaning that the application of Articles 31 and 32 does not remove, the meaning that best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted (Article 33(4)).
It is controversial whether Article 31(1) VCLT expresses a primacy of the textual approach over other approaches in cases in which the wording of the treaty appears clear at first glance. Article 32 VCLT seems to determine that the travaux préparatoires shall not be taken into account in such a case. But is it possible to refer to arguments based on the context or purpose of the provision or the treaty even if the text appears unequivocal at first glance? According to the acte claire doctrine, it is the end of the interpretation if the ordinary meaning of provisions is clear. The doctrine has deep historic roots in Vattel’s maximFootnote 14 and is still supported by some public international law scholars.Footnote 15 Today, most scholars are sceptical.Footnote 16 It is indeed doubtful whether the ordinary meaning of a text can ever be so clear and unambiguous that it is not worth the effort to verify a possible interpretation with regard to other criteria of interpretation.Footnote 17 This doctrine also places potentially undue powers into the hands of the interpreter, who becomes the one to decide what is sufficiently clear not to warrant other elements of interpretation. Experienced lawyers know that almost every rule can be interpreted differently, especially if context and purpose are taken into account. But if the interpretation is ambiguous based on the ordinary meaning, context and purpose, then it is also admitted under Article 32(a) VCLT to take the preparatory works into account. Therefore, the acte claire doctrine should be handled with caution – if not abandoned.
II. Context
One of the main achievements of the interpretation rules of the VCLT is the structuring of the different layers of contextual criteria in Articles 31 and 32. Article 31(1) states in broad language that the ordinary meaning of the terms of the treaty have to be understood ‘in their context’. Articles 31(2) and 31(3) specify what is meant in this regard by ‘context’. Article 31(2) starts with a reference to traditional sources of contextual arguments, namely ‘text, preamble and annexes’. But the contextual interpretation of treaties does not stop there. Context ‘shall comprise’, according to Article 31(2), (a) ‘any agreement relating to the treaty made by all the parties in connection with the treaty’ and (b) ‘any instrument which was made by one or more parties in connection with the treaty and accepted by all other parties’.
Special sources of contextual criteria of interpretation for international treaties are subsequent agreement and practice.Footnote 18 According to Article 31(3), the following ‘shall be taken into account’: (a) ‘any subsequent agreement between the parties regarding the interpretation of the treaty’, (b) ‘any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation’ and (c) ‘any relevant rules of international law applicable in the relations between the parties’.
Subsequent agreement and practice are of special interest for the interpretation of the EPC. Subsequent agreement in the sense of Article 31(3)(a) requires that all the parties to the treaty agree on the interpretation of the treaty.Footnote 19 However, such an agreement is not bound to strict formal requirements; for example, the decisions taken unanimously within a plenary treaty organFootnote 20 or the voting of parties within an international organisation may suffice.Footnote 21
By contrast, subsequent practice does not require an explicit declaration of a common understanding as such. According to the ILC Conclusions of 2018, subsequent practice ‘consists of conduct in the application of a treaty, after its conclusion, which establishes the agreement of the parties regarding the interpretation of the treaty.’Footnote 22 This practice comprises every conduct of state parties in the application of the treaty. As such, national practice is relevant, but only if it is based on the application of the international treaty or its national implementation, whereas the autonomous national law and its application cannot be taken into account.Footnote 23 Inactive parties may still accept,Footnote 24 but deviant practice by some states may hinder the conclusion of subsequent practice in the sense of Article 31(3)(b).Footnote 25
Finally, even if not all, but at least many, parties take part in the respective conduct, such a practice may still be considered as a supplementary means of interpretation in accordance with Article 32. Supplementary means of interpretation are not restricted to the travaux préparatoires. As the ILC Conclusions of 2018 put it: ‘A subsequent practice as a supplementary means of interpretation under Article 32 consists of conduct by one or more parties in the application of the treaty, after its conclusion.’Footnote 26 Subsequent practice in this broad sense covers any application of the treaty by one or more (but not all) parties. It can take various forms,Footnote 27 including the practice of organs of international organisationsFootnote 28 and reactions by contracting states to the decisions of such organs.Footnote 29
III. Object and Purpose
Article 31(1) VCLT states at the end that a treaty shall be interpreted ‘in the light of its object and purpose’. The two criteria of ‘object and purpose’ cannot be distinguished clearly and are amalgamated into one criterion.Footnote 30 ‘Object and purpose’ refers to the aims and ends of the treaty and to the general results that the parties wanted to achieve with the treaty as a whole, not just the specific provision at stake.Footnote 31 As such, the criterion introduces a teleological or functional element into the process of interpretation.Footnote 32
There are several approaches for how to determine the object and purpose of a treaty. It is common ground that the object and purpose of a treaty may be found in the text of the treaty itself, especially in introductory articles or preambles. However, beyond such explicit statements in the instrument itself, it is controversial how ‘object and purpose’ should be determined. The different approaches taken in this controversy are a mere reflex of a more subjective or a more objective theory of interpretation. For those who adhere, within the limits of Article 31 VCLT, to a more subjective theory of interpretation – which gives weight to the intentions of the parties at the conclusion of a treaty – it may seem obvious to refer to preparatory materials for the determination of the object and purpose.Footnote 33 Such an approach entails the risk of falling back behind the textual approach of Article 31 VCLT and giving too much weight to the supplementary means of interpretation in the sense of Article 32 VCLT.Footnote 34 Moreover, limiting the ‘object and purpose’ to aims which have been explicitly mentioned in the preparatory works may freeze the treaty and prevent necessary adaptations to societal needs that were not foreseen at the time of its conclusion (see also infra 5. C.III.5 on dynamic interpretation).
Proponents of a more objective theory of interpretation thus suggest focussing primarily on the inherent purposes of the text and, faute de mieux, of making use of ‘intuition and common sense’.Footnote 35 Such an approach, however – as with all theories of objective interpretation – is in danger of a biased reading of the interpreter’s own preferences into the text. A possible middle ground between the two approaches is to refer to the ‘presumed intentions’ of the parties.Footnote 36
However, every interpretation based on the object and purpose of a treaty must remain within the limits of the ordinary meaning and the contextual criteria.Footnote 37 Moreover, it would be against the principle of good faith to pick a specific aim as the object and purpose of a treaty if, according to the preparatory works, such an aim was clearly rejected by the parties during the negotiations. Nonetheless, if the preparatory works are silent or ambiguous, as is often the case for specific questions not foreseen by the parties, such preparatory works should not be used to prevent a teleological interpretation that is reasonable and justified in light of the overall purpose of the treaty.
As a special subcategory of arguments of object and purpose, considerations of effectiveness play an important role in the interpretation of international treaties, especially with regard to the competences given to international organisations and their organs.Footnote 38 The principle of effectiveness has been the basis for the ‘implied power’ jurisprudence of the International Court of Justice (ICJ), in which the Court developed the idea that international organisations and their organs must be empowered with the necessary competences to fulfil their functions.Footnote 39 Generally speaking, treaty interpretation may not lead to a result where the respective provision cannot reach its aims; or phrased in a positive way: among several possible interpretations of treaty provisions, the one which most effectively serves its object and purpose should be applied.Footnote 40
IV. Preparatory Materials
The preparatory materials of the treaty and the circumstances of its conclusion are not given the same weight as other criteria of interpretation under the rules of interpretation of the VCLT. Article 32 VCLT qualifies them as merely supplementary means of interpretation:
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31 (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.
This concept of a limited recourse to the travaux préparatoires has been taken as a manifestation of the rather textual, objective approach to interpretation in Articles 31 and 32 VCLT.Footnote 41 This point does not hinder courts and other bodies from exploring the travaux préparatoires. However, if the criteria of Article 31 – ordinary meaning, context and purpose – lead to a result which is neither ambiguous nor manifestly absurd or unreasonable, the preparatory works may not be used to change this preliminary result of interpretation.Footnote 42 As such, Article 32 serves as a barrier. Courts and other bodies have to justify on which ground of Article 32 they make use of arguments taken from the travaux préparatoire or the circumstances of the conclusion of the treaty.
V. Other Criteria for Interpretation of Treaties
Treaty interpretation makes use of specific criteria developed over time, which are today codified in the VCLT. The VCLT principles on interpretation are not meant to be exclusive. Other criteria may be used to further concretise their meaning.Footnote 43
A specific element of treaty interpretation is the time perspective. The interpretation of treaties may change over time.Footnote 44 This dynamic element is of particular importance for international conventions with many contracting states, which are difficult to revise. The concept of dynamic interpretation has several facets. According to Article 31(3) VCLT, subsequent agreement or subsequent practice may influence the interpretation. In addition, the meaning of the words may change over time. Treaties may comprise generic terms whose content may change over time, such as ‘invention’ or ‘sound recording’. If such a development could have been expected by the parties, those terms are subject to a dynamic interpretation.Footnote 45 But parties may also expect that certain words have static content and are not subject to change, such as in case of border conflicts. Here it may be a matter of good faith to adhere to the meaning of words at the time of conclusion of the treaty. The European Court of Human Rights (ECHR) applies a special kind of dynamic interpretation when considering the ECHR as a ‘living instrument’ which has to be read in ‘light of the present-day conditions’.Footnote 46
In addition, international courts apply traditional maxims of interpretation and traditional arguments of legal reasoning, such as argumentum e contrario, a fortiori, a maiore ad minus, ejusdem generis, contra proferentem and the maxims of expressio unius exclusio alterius, exceptiones sunt strictissimae interpretationis and lex specialis derogat legi generali – and so on.Footnote 47 Those maxims and arguments are applied in many regions of the world at all levels and in all areas of the law. However, even if phrased in Latin, not all of these maxims can claim to be part of the customary law of treaty interpretation. Treaty interpretation should never rely exclusively on one of these maxims or arguments but should always confirm the result with reference to the criteria codified in Articles 31–33 VCLT.Footnote 48
C. Current Practice at EPO
I. Data Set Used for the Systematic Analysis of EPO Case Law
The following analysis of EPO case law citing the VCLT is based on a structured search in the BoA decisions database.Footnote 49 The database search was performed with the search term ‘Vienna Convention’. From the 165 entries in the result list (obtained on 10 July 2020), eighty entries remained after sorting out double or multiple registrations of decisions in different languages or versions. A further four decisions were removed in which the VCLT was cited by only one of the partiesFootnote 50 but not by the board. Seventy-six entries remained as the basis for content analysis, which was performed by the author of this chapter.Footnote 51
The seventy-six entries comprised twenty-five decisions by the EBoA,Footnote 52 twelve decisions of the Legal Board of Appeal, thirty-seven decisions of Technical Boards of Appeal, and two decisions of the Disciplinary Board of Appeal. The seventy-six entries were analysed with regard to the VCLT articles and the criteria used for interpretation. Seventy-six may appear a relatively small number of entries compared with the full body of EPO case law, which today exceeds 100 EBoA and 35,000 BoA cases.Footnote 53 However, the number as such is still noteworthy given the fact that courts rarely reflect with explicit considerations about their methods of legal reasoning. For the EPO boards, the VCLT serves as the focal point for methodological reflections.
II. Applicability of the VCLT to the Interpretation of the EPC
The EBoA took the first opportunity in its very first case to clarify that the provisions on interpretation of the VCLT may be applied when interpreting the EPC. The EBoA rightly stated in ‘Second medical indication’, G 5/83, that the provisions of the VCLT did not apply ex lege to the EPC, since according to Article 4 VCLT they apply only to treaties which are concluded by states after the entry into force of the Vienna Convention with regard to such states. At the time of conclusion of the EPC, the VCLT was not yet in force. However, the EBoA also rightly stated that other international (ICJ, ECHR) and national highest courts (German Federal Constitutional Court, English House of Lords) had applied the principles codified in the VCLT to situations to which the Convention strictly did not apply before. The EBoA therefore concluded that it should do the same.Footnote 54 This approach is in line with the prevailing opinion in public international law that the rules on interpretation of the VCLT represent a codification of former customary international law, which may be applied even if the VCLT cannot be applied ex lege.Footnote 55
III. VCLT Interpretation Criteria Applied by EPO (EBoA and BoA)
1. Ordinary Meaning
The EPO EBoA and BoAs attach considerable importance to the ‘ordinary meaning’ of EPC provisions, but do not stop at this textual approach. Article 31(1) is the most cited VCLT provision in EPO case law.Footnote 56 The ordinary meaning of the provision is typically used as the starting point of interpretation. The EPO BoAs use dictionaries to explore the ‘ordinary meaning’ (see e.g. T 1194/97Footnote 57) taking the different language versions into account. However, the few decisions that cite Article 33 VCLT (e.g. T 557/94 and T 276/97) do not use the specific criteria provided for in that Article. Arguments of ‘special meaning’ in the sense of Article 31(4) are taken up by the EPO boards, but the hurdle to overcome the ‘ordinary meaning’ is high (see e.g. J 16/96,Footnote 58 T 1173/97Footnote 59 and T 1553/13Footnote 60). The EPO boards refer to the ordinary meaning of a provision as the limit of interpretation; according to J 9/07, no interpretation may conflict with the expressed wording of the respective provision.Footnote 61 The argument of ‘good faith’ plays an important role when discussed. According to the BoA decision in T 154/04, it forbids any reference to concepts of older law not taken up by the EPC.Footnote 62 Good faith also prevents an ‘overly literal interpretation which is clearly outside what can conceivably be based on the meaning of the provision taken in context’ (see T 557/94Footnote 63).
In two recent opinions and decisions, G 2/12 and G 1/18, the EBoA rejected the acte clair doctrine. In G 1/18, the EBoA stated that even where the ‘wording reveals the provision’s meaning clearly, it must then be examined whether the outcome of this literal interpretation is confirmed by the meaning of the words in their context.’Footnote 64 And in G 2/12 the board states: ‘It could well be that the wording only superficially has a clear meaning.’Footnote 65 The EBoA then discussed systematic, teleological and historical arguments. This discussion adequately describes the practice by EPO board not to stop the interpretation where the wording appears to be clear at a first reading.Footnote 66
2. Context
The EPO EBoA and BoAs regularly refer to the closer context of other EPC provisions when interpreting the EPC and cite Article 31(1) VCLT as the basis.Footnote 67
Less frequently, the boards make use of the other sources of contextual arguments listed in Article 31(2) VCLT. Among the seventy-six entries analysed for this chapter, six decisions cite Article 31(2) VCLT.Footnote 68 The EBoA rightly refers in G 5/83 to the Protocol to Article 69 EPC as an ‘agreement made between all the parties in connection with the conclusion of the treaty’ in the sense of Article 31(2)(a) VCLT.Footnote 69
More questionable is the practice of BoAs to refer to materials from the Diplomatic Conference of 2000 as ‘agreement’ in the sense of Article 31(2)(a) or as an ‘instrument’ in the sense of Article 31(2)(b). In T 318/14, the BoA indeed denies documents from the conference proceedings the status as agreement under Article 31(2)(a) VCLT – but only because they were adopted by a majority vote and not by an unanimous vote.Footnote 70 Even more critically, the BoA in T 2136/15 makes reference under Article 31(2)(b) VCLT to the proposal of the Swiss delegation during the Diplomatic Conference of 2000, since it was accepted by all parties as the wording of the later adopted Article 54(4) EPC.Footnote 71 Such an approach blurs the line between agreements or instruments in the sense of Article 31(2) VCLT and preparatory works, which can only be taken into account as supplementary means in the sense of Article 32 VCLT.Footnote 72
Fifteen EPO decisions make explicit references to ‘subsequent agreement’ and ‘subsequent practice’ under Article 31(3) VCLT.Footnote 73 Several decisions deal with the Implementing Regulations to the EPC, which were initially adopted by the EPC contracting states but have been subject to regular changes by decisions of the Administrative Council (AC) of the EPO on the basis of Article 33(1)(c) EPC. In G 1/91,Footnote 74 G 2/12Footnote 75 and G 3/19,Footnote 76 the EBoA refers to later adopted Implementing Regulations as ‘subsequent agreement or practice’ in the sense of Article 31(3)(a), (b) VCLT. This is in line with the approach to refer to decisions of plenary organs of international organisation, or to the voting of states within such organs, as subsequent agreement or practice.Footnote 77 Nonetheless, if an amendment to the Implementing Regulations is based on a decision of the AC, the characterisation as ‘subsequent agreement’ is more obvious than the characterisation as subsequent practice.
In opposition to this approach, the BoA in T 1063/18 takes the view that changes to the Implementing Regulation by the AC cannot be seen as subsequent agreement in the sense of Article 31(3)(a) VCLT, if they represent in substance an amendment to the EPC as interpreted by older case law of the EBoA. Such an amendment to the EPC made by the AC could only be effected on the basis of and in accordance with Articles 33(1)(b) and 35(3) EPC, which permit certain changes to the EPC itself by the AC, within a given strict procedure. Yet, as analysed in more detail below, the EBoA has come to a different result after a referral by the president of EPO in G 3/19, even if not based on the argument of subsequent agreement but rather of dynamic interpretation.Footnote 78
In J 16/96, the BoA refers to a decision taken by the AC as subsequent agreement in the sense of Article 31(3)(a) VCLT for the interpretation of the Implementing Regulations; however, since the Implementing Regulations are not a treaty according to the VCLT, the BoA applies its principles mutatis mutandis.Footnote 79
Three BoA decisions discuss whether the TRIPS Agreement or EU instruments shall be considered as subsequent agreement or practice under Article 31(3) VCLT.Footnote 80 In T 1054/96, the BoA considers TRIPS Agreement, the UPOV Convention and the Community Plant Variety Rights Regulation 2100/94 as subsequent practice, but denies any conflict with the EPC provisions at hand. Regarding the proposed Biotechnological Inventions Directive (later adopted as Directive 98/44), the BoA rejects a characterisation as subsequent practice, because not all EPO contracting states are EU member states.Footnote 81 In J 10/98, the board denies considering TRIPS as subsequent agreement because not all EPO contracting states are WTO/TRIPS contracting states.Footnote 82 The same argument is made by the BoA in T 377/95 in more general terms.Footnote 83 The question remains whether the TRIPS Agreement, the UPOV Convention and other international treaties, as well as EU instruments, should be considered ‘relevant rules of international law applicable in the relations between the parties’ in the sense of Article 31(3)(c) VCLT – rather than being viewed as subsequent agreement or practice ‘in the interpretation’ or ‘in the application’ of the treaty. Apart from that question, the BoAs deserve support regarding the conclusion that Article 31(3)(a),(b) VCLT requires an agreement or practice by all parties of the treaty. Nonetheless, the BoAs could have taken into account the cited instruments as subsequent practice in a broader sense under Article 32 VCLT.Footnote 84
Three cases discuss the possible function of national legislation or practice as subsequent agreement or practice under Article 31(3) VCLT. In T 318/14, the BoA is explicit that ‘of course, the national legislation of the Contracting States could have converged … and could have replaced the initial intention of the legislator by agreement or practice’.Footnote 85 However, in the concrete case, the BoA denies such a convergence. A similar approach – although more implicit – is applied in G 1/97.Footnote 86 By contrast, in T 377/95 the BoA uses ‘a broad agreement among Member States to the EPC, if not consensus’ to support its line of argument.Footnote 87 References to national legislation and practice as subsequent practice – rather than subsequent agreement – are indeed possible under Article 31(3)(b) VCLT. However, this recourse to national law requires that the practice is based on the application of the EPC, such as in national revocation proceedings based on Article 138 EPC, and not on the application of the autonomous national law as such.Footnote 88
A special methodological problem is raised in T 154/04:Footnote 89 can the preparatory materials from the Diplomatic Conference of 2000 be taken into account as subsequent agreement in the sense of Article 31(3)(a) VCLT for the interpretation of the EPC in its original version of 1973? The case was decided on 15 November 2006, thus before the entering into force of the revised EPC on 13 December 2007. In such a scenario, it is not a question of whether the travaux préparatoires for the provision at hand may be relabelled as subsequent agreement or practice, which should be avoided in light of the special requirements of Article 32 VCLT. Rather, the case raises an issue of application when instruments or provisions have not yet entered into force. In the concrete case, the BoA uses the argument from the materials only to confirm an interpretation that it sees as justified on other grounds. Such an approach does not conflict with the more subtle principles of application in time of treaties as established in Article 28 VCLT. However, the picture may change if the revision of the treaty leads to a different result. In such a scenario, it would be more difficult to refer to provisions not yet entered into force or to the respective materials.Footnote 90
3. Purpose and Teleological Arguments
The EPO boards make constant use of arguments based on the purpose of EPC provisions. Out of the seventy-six entries analysed for this chapter, twenty-nine decisions refer to ‘purpose’ as a criterion for interpretation,Footnote 91 and seven refer at the same time to ‘teleological interpretation’.Footnote 92
On closer examination, sixteen of these twenty-nine decisions determine the purpose of the provision at hand and not the EPC as a whole, with references to the preparatory works, and they follow a subjective approach. This line of argument is clearly visible in T 377/95, where the BoA explains that an EPC provision should be interpreted ‘in the light of its object and purpose. This corresponds closely to the so-called teleological method, i.e. the one by which the judge tries to adhere as closely as possible to the intentions of the legislator, while reading and understanding the words of the treaty in their normal sense, given the context in which they were written.’Footnote 93 Such an approach risks mixing up the criteria of ‘purpose’ and ‘preparatory works’. It also poses the risk of an originalist method of interpretation that prevents an adaptation of the law in light of the present-day conditions.Footnote 94
A smaller group of cases tries to overcome that subjective approach. The EBoA in G 2/12, G 2/13 directly refers to a more objective definition of ‘purpose’: ‘Like national and international courts, the Enlarged Board applies the method of teleological interpretation in the construction of legislative provisions in the light of their purpose, values, and the legal, social and economic goals they aim to achieve. In this, the Enlarged Board examines their objective sense and purpose.’Footnote 95 However, in the paragraphs that follow, the EBoA is not able to determine such an objective purpose: ‘Thus, the object and purpose of the exclusion under Article 53(b) EPC is not sufficiently obvious to answer the question whether or not the clause is to be construed in a narrow or broad way.’ What follows is an extensive discussion of subsequent agreement or practice and, even more extensively, a ‘historical interpretation’.
Interestingly, most decisions and opinions which try to explore the objective purpose of a given EPC provision, without giving too much weight to the preparatory works in this regard, discuss questions of procedural law. Examples are T 26/88 (the automatic revocation in case of late payment of fees), T 951/91 (exclusion of facts or evidence not submitted in due time), J 18/04 (concept of time limit) and G 3/08 (admissibility of the EPO president’s referrals to the EBoA). In a few exceptional cases, the boards used the objective purpose to decide on substantive matters of patent law, such as in T 1137/97 and T 935/97 (computer program ‘as such’). Considerations of effectiveness, as often made by international courts – especially with regard to the competences given to international organisations and their organs (‘implied powers’) – are not discussed.
This summary paints an overall picture of a judiciary which is willing to develop its own concept of an objective purpose of the legal order of the EPC only with regard to relatively technical and procedural questions. By contrast, it shies away from such an approach and calls for the legislature if substantial issues of patent law are at stake.Footnote 96
4. Preparatory Materials
Even though Article 32 VCLT stipulates that preparatory works may only be used under certain conditions as supplementary means, the EPO EBoA and BoAs regularly refer to the materials from the Diplomatic Conferences of 1973 and 2000 and to other travaux préparatoires. Forty-two of the seventy-six decisions analysed for this chapter cite more or less extensively from those preparatory works.
Few decisions reject a recourse to preparatory works with reference to Article 32 VCLT, such as T 26/88,Footnote 97J 9/07Footnote 98 and G 3/98.Footnote 99 A number of decisions discuss the requirements of Article 32 VCLT and use the preparatory works either to confirm an interpretation already developed on the basis of the criteria of Article 31(1) VCLT, such as J 9/84,Footnote 100 T 1402/13,Footnote 101 and G 1/15;Footnote 102 or to overcome an ‘ambiguous’ interpretation’, such as T 2369/10;Footnote 103 or to avoid an ‘unreasonable’ result, such as J 6/83.Footnote 104 Such lines of argument are in compliance with the structure and spirit of Articles 31 and 32 VCLT.
Yet, there are also several examples in the EPO case law where the boards cite preparatory works without any visible analysis of the requirements of Article 32, sometimes even as the primary justification of an interpretation. Examples are T 128/04,Footnote 105 G 2/06,Footnote 106 T 2459/12Footnote 107 and T 773/10.Footnote 108 Such an approach has to be criticised, not only because it sets aside the hierarchy of criteria expressed in Articles 31 and 32 VCLT, but also because it must be understood as a further expression of a primarily subjective theory of interpretation.Footnote 109
5. Other Criteria of Interpretation
The EBoA and BoAs of the EPO which use references to the VCLT in their decisions typically adhere to the criteria codified therein. However, there are some important deviations from the scheme of Articles 31–33 VCLT.
As early as its first comprehensive explanation of the principles of interpretation of the EPC, in G 5/83, the EBoA explained that in addition to the criteria of the VCLT, the EPO boards should strive for an interpretation which is in line with the national patent systems of the EPC contracting states:
In the interpretation of international treaties which provide the legal basis for the rights and duties of individuals and corporate bodies it is, of course, necessary to pay attention to questions of harmonisation of national and international rules of law. This aspect of interpretation, not dealt with by the provisions of the Vienna Convention, is particularly important where, as is the case with European patent law, provisions of an international treaty have been taken over into national legislation. The establishment of harmonised patent legislation in the Contracting States must necessarily be accompanied by harmonised interpretation. For this reason, it is incumbent upon the European Patent Office, and particularly its Boards of Appeal, to take into consideration the decisions and expressions of opinion of courts and industrial property offices in the Contracting States.Footnote 110
The convergence with national patent law of the contracting states, as envisaged by the EBoA, is indeed different from subsequent practice in the sense of Article 31(3)(b) VCLT.Footnote 111 If national courts apply the provisions of the EPC, such as Articles 52–57 and 138 EPC in national revocation proceedings, such a practice should be taken into account on the basis of Article 31(3)(b) VCLT. However, if national legislatures or courts develop their autonomous national patent systems based on the model of EPC provisions, one may wonder whether such practice may still be considered as ‘any subsequent practice in the application of the treaty’ under Article 31(3)(b) VCLT. This may be the case if the national practice is a reaction to the treaty.Footnote 112 However, there may also be cases not covered by ‘subsequent practice’. For those cases, the broader claim for convergence raised in G 5/83 may play a role.
For a long time, EPO boards have been reluctant to make use of a ‘dynamic interpretation’. Few decisions have discussed the concept explicitly, with exceptions being T 1054/96,Footnote 113 G 3/98Footnote 114 and G 2/12Footnote 115 – but those three decisions cited ‘dynamic interpretation’ only to demonstrate that in the given case, even a dynamic interpretation would not provide a sound basis to override the other criteria of interpretation. The recently decided case G 3/19 could be a turning point in this regard. The EBoA here used a dynamic interpretation to reverse a decision that was just five years old in the highly controversial area of biotechnological inventions, with reference to a change to Rule 28(2) EPC Implementing Regulations.Footnote 116 However, one should note that the board did not justify this dynamic interpretation with a reference to the changing social, economic or political circumstances but with a decision taken by the broad majority of the AC of EPO.
Regarding the use of traditional maxims of interpretation, the EPO boards’ approach does not follow a consistent pattern. The maxim expressio unius est exclusio alterius is applied at several occasions, such as in G 5/83Footnote 117 and T 2369/10,Footnote 118 whereas the principle of narrow interpretation of exclusions – a patent-specific version of the maxim exceptiones sunt strictissimae interpretationis – is rejected by the EBoA in its latest decisions on that point, with the argument that such a principle cannot generally ‘be derived from the Vienna Convention’ (see G 1/07Footnote 119). In G 2/12, the EBoA nevertheless states correctly that ‘a narrow interpretation might well result from applying the general principles of interpretation to a specific provision with regard to specific legal and factual circumstances.’Footnote 120 The principle of narrow interpretation of exceptions does indeed not provide a conclusive argument for the interpretation of a given provision; it obscures its own premise that the provision at hand is an exception. However, the fact that a rule of interpretation is not codified in the VCLT does not as such hinder the EPO boards from applying that rule.Footnote 121
IV. A Controversial Example: Conflict over ‘Native Traits’ at EPO
1. Background of the Legal, Social and Economic Conflict over ‘Native Traits’
The discussion so far has presented an overview of the criteria of interpretation, mainly codified in Articles 31–33 VCLT, and of their use by EPO boards. In this section, one controversy about the ‘right’ interpretation of the EPC is explored in more detail.Footnote 122 Since the mid-2000s, the EBoA and BoAs have had to deal with a new type of patent claim for innovative plants resulting from classical breeding methods, so-called ‘native traits’. The subject matter of the contested patents are vegetables for human consumption, namely tomatoes, broccoli and pepper. The conflict has repercussions on neighbouring markets, especially food and energy crops and ornamental plants.
‘Native traits’ is a generic term which describes innovative plants resulting from the classical breeding methods of crossing and selecting, refined by genetic analysis of the plants chosen for the breeding (so-called ‘smart breeding’). These plants are of particular interest for the seed industry and the agricultural sector, since genetically modified plants are strictly regulated in the European Union and – even more importantly, are not yet widely accepted by consumers. Seed companies may protect their investments in those innovative plants in the European Union by registration of plant variety rights, based on the Community Plant Variety Rights Regulation 2100/94 or the respective national plant variety legislation. However, such a protection is granted only for specifically defined subject matter, that is, a ‘variety’, and is limited in scope. Therefore, seed companies seek more generous patent protection for innovative plants, with broad patent claims covering traits which are useable in several varieties.
Yet, patents on food plants raise sensitive political, economic and legal issues - which can only be addressed here with a broad brush. Non-governmental organisations fear that a further monopolisation of food plants may endanger biodiversity and food production, especially in the Global South. Small and medium-sized enterprises (SMEs) in the breeding industry – at least traditionally – prefer plant variety rights over patents, since the registration is possible without the help of patent attorneys and is therefore cheaper; the global agrochemical industry players prefer patents. Moreover, SMEs are accustomed to using pre-existent plant materials of their competitors as the basis for their own breeding programmes, which is possible without licence fees under plant variety legislation (so-called ‘breeder’s exemption’Footnote 123) but not under patent law.Footnote 124 The global agrochemical companies prefer their own materials or use wild accessions. The issues behind the controversy over patents on tomatoes, broccoli and pepper are therefore a mere reflection of a deep political and economic conflict between different interest groups and actors engaged in the plant sector.
2. The Controversy over Article 53(b) EPC at a Glance
Among lawyers, the discussion has mainly focussed on the interpretation of Article 53(b) EPC, which excludes ‘plant or animal varieties or essentially biological processes for the production of plants or animals’ from patentability. The two famous cases of ‘Tomatoes/Broccoli I’ and ‘Tomatoes/Broccoli II’ advanced through the stages of proceedings at EPO to the EBoA in 2010 and 2015 respectively. The third case, ‘Pepper’, has more recently been decided.
In ‘Tomatoes/Broccoli I’, G 2/07 and G 1/08, the main issue was whether smart breeding processes, which combine steps of classical crossing and selecting with technical steps of genetic analysis of the plants, are nevertheless excluded from patentability as ‘essentially biological processes’ in the sense of Article 53(b) EPC. The BoA answered the question in the affirmative and closed the door of the patent system for smart breeding process claims, stating:
Such a process does not escape the exclusion of Article 53(b) EPC merely because it contains, as a further step or as part of any of the steps of crossing and selection, a step of a technical nature which serves to enable or assist the performance of the steps of sexually crossing the whole genomes of plants or of subsequently selecting plants.Footnote 125
In ‘Tomatoes/Broccoli II’, G 2/12 and G 2/13, the main issue was whether plants which are the product of such ‘essentially biological processes’ may be claimed as a product if the claim is not limited to a specific variety but drafted in more generic terms. The EBoA affirmed such an approach and opened the door for such product claims: ‘[t]he fact that the only method available at the filing date for generating the claimed subject-matter is an essentially biological process for the production of plants disclosed in the patent application does not render a claim directed to plants or plant material other than a plant variety unallowable.’Footnote 126
The EBoA decision in ‘Tomatoes/Broccoli II’ has provoked criticism not only by non-government organisations, breeders associations and legal scholars but also by EPC contracting states, which have amended their national patent Acts to avoid such product claims.Footnote 127 In addition, the European Commission published a Notice on certain articles of the Biotechnological Inventions Directive 98/44 in 2016, which explained that the parallel and more detailed provisions of the Directive would have to be interpreted to the contrary, thus excluding product claims of this kind.Footnote 128 In 2017, the AC of the EPO followed and amended Rule 28(2) EPC, which now explicitly states that ‘[u]nder Article 53(b), European patents shall not be granted in respect of plants or animals exclusively obtained by means of an essentially biological process.’Footnote 129
These developments led to a new appeal proceeding before the BoA, namely ‘Pepper’, T 1063/18, concerning pepper plants and fruits obtained by a smart breeding process (i.e. marker-assisted selection). The BoA did not see a justification to deviate from the earlier EBoA interpretation of Article 53(b) EPC given in ‘Tomatoes/Broccoli II’ and also rejected the appellant’s request to refer the case to the EBoA. In reaction, the president of the EPO in 2019 referred the question to the EBoA regarding whether Rule 28(2) EPC is in conformity with Article 53(b) EPC and, as a consequence, whether the EBoA should change its interpretation in light of the developments after its ruling in ‘Tomatoes/Broccoli II’.Footnote 130 With the involvement of the EBoA, the BoA, the AC, the EPO president, the contracting states and the European Commission, the conflict over Article 53(b) EPC has evolved into an institutional conflict about the competences of the different actors. The EBoA finally decided the case G 3/19 in May 2020 and reversed in substance the decisions in ‘Tomatoes/Broccoli II’.
3. Function of VCLT Criteria Reflected in the Conflict Over Native Traits
The conflict over native traits is of special interest in the context of this chapter because the EPO boards and the EPO president make extensive use of arguments based on the VCLT. An evaluation of these arguments requires a presentation of the decisions in further detail.
a. G 2/07, G 1/08 ‘Tomatoes/Broccoli I’: Emphasis on Legislative History
Starting with ‘Tomatoes/Broccoli I’, G 2/07 and G 1/08, the EBoA began its interpretation of Article 53(b) EPC by summarising the older case law of EPO boards, before referring to Rule 26(5) EPC. The latter rule defines ‘essentially biological processes’ in accordance with the definition given in Article 2(2) of the Biotechnological Inventions Directive 98/44 (Directive).Footnote 131 Rule 26(5) EPC and Article 2(2) of the Directive, according to the EBoA, have to be interpreted following the principles of Articles 31 and 32 VCLT.Footnote 132 This itself is remarkable, since the EBoA seems to treat a European Directive without further ado – as if it were an international treaty, ignoring that the CJEU considers EU law since the famous decision in Van Gend & Loos (1963) as a new legal order of its own nature.Footnote 133 In what follows, the EBoA mainly refers to the ordinary meaning of the terms ‘crossing’ and ‘selecting’ and refers to the principles of good faith as enshrined in Article 31(1) VCLT.Footnote 134 From there, the board continues to state in a brief paragraph that the Recitals of the Directive would ‘contain nothing on the object and purpose of the definition given’.Footnote 135
After that, without discussing any of the conditions laid down in Article 32 VCLT – although it would have been easy to declare that the wording of Article 2(2) of the Directive is ambiguous or obscure – the EBoA enters into an extensive exploration of the legislative history of the provision of the Directive.Footnote 136 Ultimately, this discussion turns out to be unhelpful: ‘As a result, the legislative history of the Biotech Directive does not assist in determining what the legislator intended to say by the wording which was eventually adopted for Article 2(2) Biotech Directive. On the contrary, it must be concluded that the contradiction between the terms of the provision cannot be further clarified.’Footnote 137 The board concludes that the ‘term must be interpreted on its own authority. This is for the Enlarged Board to do.’ Should this point not be the starting point of any interpretation based on Articles 31 and 32 VCLT?
The EBoA again enters into the discussion of textual arguments, this time focussing only on the EPC,Footnote 138 then discusses several approaches suggested by older BoA case law and submissions during the procedure based on contextual arguments,Footnote 139 before finally entering in an extensive analysis of the legislative history of Article 53(b) EPC 1973.Footnote 140 The reasoning then stops abruptly. The EBoA seems to have learned enough from the obscure legislative history to finally exclude smart breeding processes from being patentable subject matter.
The reader may forgive this detailed reproduction of the EBoA’s line of arguments. But such a complete reproduction seems necessary to understand what is not mentioned by the EBoA, which is the crucial question of whether the European patent system, to fulfil its function, should grant the requested patents or not. Do inventors and companies need exclusivity for smart breeding processes (and the products thereof) to have a sufficient incentive to spend their time and resources in the development of such technologies?Footnote 141 Or should the European patent system abstain from such patents and preserve the actors’ freedom to operate? This more general object and purpose of the EPC, and more specifically of Article 53(b) EPC, is not mentioned in a single word. Instead, the EBoA uses a subjective approach of interpretation and confines itself to the role of a commentator on legislative documents.
b. G 2/12, G 2/13 ‘Tomatoes/Broccoli II’: Judicial Self-Restraint
In ‘Tomatoes/Broccoli II’, G 2/12 and G 2/13, the references to Articles 31 and 32 VCLT are again clearly visible – but again have been the subject of criticism. The EBoA’s outline of the decision is structured along the criteria of interpretation of the VCLT. Following a general explanation of the criteria of Articles 31 and 32 VCLT,Footnote 142 the EBoA reiterates that exclusions from patentability in the EPC are not subject to a general principle of narrow interpretation of exceptions; however, the interpretation of the provision at hand with regard to all criteria of interpretation may nevertheless lead to a narrow interpretation.Footnote 143 After that, the EBoA starts its interpretation of the exclusion of ‘essentially biological processes for the production of plants’ in Article 53(b) and the effect of this provision on product claims on plants and plant parts with a ‘grammatical interpretation’. In this regard, the EBoA refers to the wording of the provision as the starting point and rejects the approach, to stop the interpretation after an analysis of the allegedly clear wording. However, the board seems not really convinced of the possibility of different grammatical meanings of the provision at issue when it concludes that ‘[f]or the sake of the argument, more than one meaning could in principle be attributed to the wording.’Footnote 144 The following systematic interpretation discusses several arguments from the context of the provision: ‘The meaning of the wording in question is to be established in the context of the relevant provision itself. In addition, the provision as such must be interpreted taking into account its position and function within a coherent group of related legal norms.’Footnote 145
After an extensive analysis of different systematic arguments with typically logical conclusions, some of which could also be construed as the opposite,Footnote 146 the board concludes that ‘the systematic interpretation of Article 53(b) EPC does not support giving the process exclusion a broad meaning to the effect that product claims or product-by-process claims are thereby excluded from being patentable.’ From here on, the course of the further line of argument is predefined; the board apparently sees the proponents of a broad understanding of the exclusion carrying the burden of argument.
Under the heading of ‘teleological interpretation’, the EBoA refers to its task of construing ‘legislative provisions in the light of their purpose, values, and the legal, social and economic goals they aim to achieve’.Footnote 147 But then, as in ‘Tomatoes/Broccoli I’, G 2/07 and G 1/08, it again quickly concludes that ‘the object and purpose of the exclusion under Article 53(b) EPC is not sufficiently obvious’. The board here makes a full stop without considering any possible objective social or economic function of the provision at hand. The following reference to subsequent agreement or practice in the sense of Article 31(3) VCLTFootnote 148 rightly considers the Implementing Regulations to the EPC as subsequent agreement. Since Rule 26(1) EPC calls for the use of the provisions of the Biotechnological Inventions Directive 98/44 as means of interpretation of the EPC, the EBoA considers Articles 2(2) and 4 of the Directive in detail before concluding that the Directive ‘does not provide a basis for extending the process exclusion under Article 4(1) Biotech Directive and Article 53(b) EPC to products of such processes.’
The board continues with a detailed exploration of the preparatory materials of Article 53(b) EPC.Footnote 149 Even though Article 32 VCLT is cited at length, the board does not explain whether it uses the materials for confirming an interpretation already taken (which seems more likely) or whether it considers the provision to be ambiguous or the result to be unreasonable. The outcome of this analysis is that ‘there is no reason in the travaux préparatoires to assume that a product that is characterised by the method of its manufacture but claims protection regardless of that (or any other) method was meant to be excluded.’ Again, the burden of argument lies with the position of a broader interpretation. It seems to be irrelevant for the EBoA whether there is – or is not – a reason in the materials to assume that the exclusion should be construed narrowly.
In the ‘first intermediary conclusions’ that follow,Footnote 150 the board summarises its arguments so far and concludes: ‘As is apparent from the above, considering its wording, context, original legislative purpose and legislative history, the process exclusion of Article 53(b) EPC does not extend directly to a product claim … other than a plant variety.’
Being aware of the social, economic and political dimensions of the dispute, but emphasising that the EBoA considers only legal questions, the board nevertheless discusses whether there is a need for ‘secondary considerations’. With regard to a possible dynamic interpretation, the EBoA starts its reasoning with a questionable definition: ‘Such a “dynamic interpretation” might come into play where considerations have arisen since the Convention was signed which might give reason to believe that a literal interpretation of the wording of the relevant provision would conflict with the legislator’s aims. It might thus lead to a result which diverges from the wording of the law.’Footnote 151 This concept raises doubt in two regards. The first question is whether a dynamic interpretation is limited to the function of better achieving the original legislature’s intentions vis-à-vis the present situation. Rather not, if the legislature could not foresee those later developments. Here, the interpreter must either seek to establish the presumed intentions of the legislator with regard to new developments or go along with an objective interpretation approach.Footnote 152 Second, does a dynamic interpretation legitimise diverging from the wording of the law? Clearly not. It may justify preferring one possible interpretation, within the limit of the text of the provision, over another possible interpretation, but it does not allow for going beyond the limit of the ordinary meaning of a provision.
Finally, the EBoA considers whether allowing patents on products arising out of essentially biological processes would lead to a ‘legal erosion of the exception to patentability’ – since that could pave the way for a circumvention of the exclusion by ‘skilful’ claim drafting. The board then rejects this concern.Footnote 153 The following arguments of fact and law discuss how it could be proven that the product has (or has not) been produced by an essentially biological process and whether the EBoA should take the scope of such patent claims into consideration. The answer, again, is negative: ‘The aspect of the scope of protection conferred by such a claim has no direct impact on the point of law referred.’ This point is understandable, given the institutional setting of Article 64(2) EPC, which confers the scope of protection to the authority of the EPC contracting states. However, can the EBoA design a reasonable patent regime without consideration of the scope of the granted IP rights? As a final argument of the decision, the EBoA emphasises that it
is aware of the various ethical, social and economic aspects in the general debate. … However, considering such general arguments in the present referrals does not fall under the judicial decision-making powers of the Enlarged Board. … It has to be borne in mind that the role of the Enlarged Board of Appeal is to interpret the EPC using generally accepted principles of interpretation of international treaties. It is not mandated to engage in legislative policy.
One might ask, in turn, whether the highest judiciary of the EPO should not be prepared to engage in judicial policymaking if the legislature cannot react in a timely manner, given the static character of the EPC with its high number of contracting states. The line of argument of the EBoA stops here. Patents on plant products from essentially biological processes were from then on granted by the EPO.
What can the reader learn about the interpretation method of the EBoA from the decisions G 2/12 and G 2/13? The EBoA relies on the criteria enshrined in Articles 31 and 32 VCLT but applies those criteria in a way that is not prescribed or mandatory under the VCLT. The EBoA allocates the burden of argument on one of the possible interpretations, without any justification; it puts much weight on systematic arguments which could also be inverted; it applies a rather subjective approach in putting much emphasis on the preparatory works; it denies a dynamic interpretation which goes beyond the original intentions of the legislature; and, finally, it is not willing to reveal what it considers to be the objective purpose of the provision at hand – and of the EPC at large. Such an approach may be compliant with the criteria enshrined in Articles 31 and 32 VCLT if one adheres to a rather subjective theory of interpretation. But a different, more objective approach would be equally in line with Article 31 and 32 VCLT, if not more so.
c. T 1063/18, G 3/19 ‘Pepper’: Dynamic Interpretation
In the ‘Pepper’ case, T 1063/18, the BoA explains that the recently amended Rule 28(2) EPC would be in conflict with Article 53(b) as interpreted in G 2/12, G 2/13. The board considers whether there were reasons to deviate from the interpretation of Article 53(b) EPC given by decisions G 2/12 and G 2/13 due to the developments following said decisions. Such developments could potentially be taken into account as subsequent agreement, in accordance with Article 31(3)(a) VCLT. However, in what follows, the board rejects this argument with reference to the special competence given to the AC to change the EPC directly under Articles 33(1)(b) and 35(3) EPC: ‘If the adoption of Rule 28(2) EPC by the Administrative Council … were to be considered a subsequent agreement in the sense of the Vienna Convention and used for the interpretation of Article 53(b) EPC, this would reverse the meaning of Article 53(b) EPC as interpreted by the EBoA.’Footnote 154 There would be no room to consider a change to Rule 28(2) EPC, which in substance amounts to a change of the EPC, as subsequent practice.Footnote 155 The board further states that ‘[i]t goes without saying, that the Notice is not such a subsequent agreement either, as the Commission does not represent the Contracting States of the EPC.’Footnote 156 Since as a consequence, the board does not see a reason to deviate from the interpretation of the EBoA, it also sees no reason to refer the case again to the EBoA.
With regard to the explicitly mentioned ‘interest of plant breeders to freely perform crossing and selection without being hampered by patents’ and the ‘interest of inventors to benefit from their work and that of society to encourage technical development’, the BoA does not see itself in a position to balance the interests involved. It states: ‘However, balancing these interests is a matter for the legislative body. Such considerations cannot play a role in the legal assessment of the issues raised in the present case.’Footnote 157 This line of reasoning fits perfectly well into the greater picture of a judicial self-restraint at the EPO, which shies away from any independent consideration of the social, economic and political issues raised by the cases at stake.
However, T 1063/18 has not been the final chapter in the ‘Pepper’ case. The president of the EPO took the initiative and referred the case to the EBoA, now renumbered as G3/19. The president’s referral raised a number of complicated questions with regard to its admissibility. For the purpose of this chapter, the substantial questions of interpretation of Article 53(b) EPC are topical. The main arguments of the EPO president were, first, that Article 53(b) should be interpreted in conformity with the Biotechnological Inventions Directive 98/44, which according to the Commission’s Notice precludes product claims on plants from essentially biological processesFootnote 158; therefore, Rule 28(2) was supposedly not in conflict with Art 53b) (within the meaning of Art. 164(2)); second, a considerable number of developments of subsequent agreement and practice in the sense of Article 31(3) VCLT, which occurred after the EBoA decisions G 2/12 and G 2/13, would now justify changing the interpretation of Article 53(b) EPC.Footnote 159
According to the referral, all thirty-eight EPC contracting states had declared to be in line with the Commission Notice; all twenty-eight EU contracting states (at that time) declared their alignment with the Commission Notice. The ten non-EU EPC States voted in favour of Rule 28(2) EPC. Moreover, the referral provided a list of seven EPC contracting states which have changed their national patent laws to exclude such product claims, with a number of additional reform projects being anticipated.Footnote 160
In consideration of these arguments and the several submissions of amicus curiae briefsFootnote 161, the EBoA in its ‘Pepper’ decision G 3/19 of 14 May 2020 finally came to the conclusion that
the exception to patentability of essentially biological processes for the production of plants or animals in Article 53(b) EPC has a negative effect on the allowability of product claims and product-by-process claims directed to plants, plant material or animals, if the claimed product is exclusively obtained by means of an essentially biological process or if the claimed process features define an essentially biological process.
As such, G 3/19 reversed in substance the decision made just five years earlier, namely G 2/12 and G 2/13 in ‘Tomatoes/Broccoli II’. With regard to the grammatical, systematic, historical and teleological interpretations of Article 53(b) EPC, the board confirms its older decisions.Footnote 162 As to subsequent agreement or practice – which has been the decisive argument of the EPO president – the board confirms its understanding, already explained in G 2/12, that Rule 26(5) Implementing Regulations could be regarded as subsequent agreement. Therefore, the Biotechnological Inventions Directive 98/44 had to be taken into account as supplementary means of interpretation. But this would not lead to the result that products of essentially biological process were excluded, since the Directive would not ‘directly lead to the conclusion’.Footnote 163 The Commission Notice would have no binding effect on the EPO.Footnote 164 This is certainly true; however, it could still be a candidate for subsequent agreement among many contracting states under Article 32 VCLT,Footnote 165 since the European Parliament and Council confirmed the Notice in political statements.Footnote 166 Moreover, legislative reforms in eleven of the thirty-eight contracting states – which the board rounds down to ‘roughly a quarter’ – did not amount to a subsequent agreement between all the parties of the EPC. This point again neglects that an agreement or practice of many contracting states may be an argument in the framework of Article 32 VCLT. The turning point of the board’s reasoning comes at the very end, under the heading of dynamic interpretation:
As set out above, the Enlarged Board in its current composition endorses both the conclusions and the reasoning of decision G 2/12 (supra). However, this is not to say that, with decision G 2/12, the meaning of the exception to patentability under Article 53(b) EPC has been settled once and for all, for it may emerge at a later point that there are aspects or developments which were unknown at the time the decision was issued or irrelevant to the case, or were otherwise not taken into consideration.Footnote 167
The board further states that ‘[a] particular interpretation which has been given to a legal provision can never be taken as carved in stone, because the meaning of the provision may change or evolve over time.’Footnote 168
The adoption of the new Rule 28(2) EPC Implementing Regulations had to be taken into account. This would not violate the principle of separation of powers: ‘Having regard to the wording of Rule 28(2) EPC and the travaux préparatoires for that Rule, the Enlarged Board accepts that it was the EPC legislator’s intention to establish, by this means, a particular interpretation of Article 53(b) EPC.’Footnote 169 Nonetheless, ‘in order to ensure legal certainty and to protect the legitimate interests of patent proprietors and applicants, the Enlarged Board considers it appropriate that the new interpretation of Article 53(b) EPC given in this opinion has no retroactive effect on European patents containing such claims which were granted before 1 July 2017, when Rule 28(2) EPC entered into force.’Footnote 170
As a conclusion, one must welcome that the EBoA found a way out of the institutional conflict between the different bodies and institutions at the EPO and at the EU. One may hope that this is now the final word on the patenting of products exclusively obtained by means of an essentially biological process.Footnote 171 The decision in G 3/19 has been the first under the chairmanship of the new President of the Board of Appeal, Judge Carl Josefsson. It shows the necessary sensitivity regarding the political challenges which EPO is facing – even though it does not explicitly enter into a discussion of the purpose of the rules. The broad reference to dynamic interpretation is certainly the most interesting part of the decision. The coming years will show whether G 3/19 will turn out to be a milestone on the way to a more active judiciary at EPO, or whether the EBoA in ‘Pepper’ merely yielded to the enormous political pressure.
D. Conclusions
This chapter offers a first systematic analysis of the seventy-six decisions and opinions of the EBoA and BoAs of the EPO that make explicit reference to the VCLT interpretation criteria. It explores whether the EPO boards’ use of those criteria matches with the current teachings of public international law experts on the VCLT. The EPO boards make extensive use of Articles 31–33 VCLT and discuss the different criteria enshrined in the VCLT in detail. This body of case law should be of interest for public international law scholars. At the same time, the patent law community would greatly benefit from the insights of public international law experts if they were to comment directly on the EPO boards’ practice.
The analysis of EPO case law in this chapter has shown that the different EPO boards regularly refer to the ordinary meaning and to contextual arguments when interpreting EPC provisions, including arguments of subsequent agreement and practice in the sense of Article 31(3) VCLT. These arguments are in line with the criteria codified in Article 31 VCLT. By contrast, the EPO boards do not exhaust the potential of a purpose-oriented interpretation. Arguments based on purpose are limited to the purpose of specific provisions and do not discuss the purpose of the EPC as a whole. So far, the EBoA has rejected the idea that it should balance on its own right the social, economic and political interests at stake.
In a fast-changing technical and social environment, the EPO boards must develop their own answers for the present-day challenges of patent law. It is up to them to develop what the objective purpose of the European patent system should be, especially what should and what should not be protected by patents. Instead, the boards give remarkable weight to oftentimes obscure preparatory works, a method one would not expect from a judiciary that justifies its own reasoning on the basis of Articles 31 and 32 VCLT. This subjective method of interpretation is also clearly visible in the current conflict over patents on innovative plants, which is examined as an example in this chapter. Such a judicial self-restraint of the EPO boards, especially of the EBoA as its highest body, appears to be dysfunctional in a system in which the legislature is a static international organisation like the EPO. It is futile to refer controversial topics to the legislature if the legislature cannot act in due course.
In light of the technical advances to be expected in the coming years, it will be highly interesting to further observe how the EPO boards will manage the task described in this chapter – and to what extent they will benefit from insights into public international law. The last case analysed in this chapter, the EBoA decision ‘Pepper’, G 3/19, recalls the importance of a dynamic interpretation of the EPC. It raises the hope that the EPO boards will make use of the full potential of the interpretation criteria developed under the VCLT in the future.
Table of Contents
A. Introduction 190
B. The Impact of WTO Law 197
C. The TRIPS Agreement 200
D. The General Agreement on Tariffs and Trade (GATT 1994) 206
I. Quantitative Restrictions and National Treatment (Articles XI and III:4) 206
II. Protection of Intellectual Property Rights (Article XX(d)) 208
III. National Security Exceptions (Article XXI) 225
E. The General Agreement on Trade in Services 226
F. Preferential Trade Agreements 228
G. Conclusions 229
A. Introduction
Ubiquity is perhaps the most characteristic feature of intangible intellectual property (IP) rights to exclusive information. These rights to control information are inherent in all products (goods and services) protected by IP, whatever their physical or immaterial form. They follow the fate of the product and create legal uncertainty in downstream operations related to the sale and use of these products.
To what extent should a rightholder define the fate of products on the market? To what extent should the rightholder be able to control secondary markets and the parallel importation of original products on different markets, making good use of price differentiation? There is no doubt that the rightholder is entitled all along to protect products from piracy and counterfeiting and the use of property without consent, including products produced under compulsory licensing. The need to provide legal security in downstream markets, however, led to the limitation of proprietary rights up to the first sale of the product. Rightholders decide how and when to market a particular product. Once the product is placed on the market, rights to control the marketing of the particular products entailing IP end. This is what we call ‘exhaustion of rights’ (épuisement, Erschöpfung).Footnote 1 The first sale doctrine, used in the United States, deploys similar effects. An alternative approach was implied licensing, originally used in common law, which addressed legal security by presuming the absence of restrictions imposed on buyers of products protected by IP rights.
Today, the principle of exhaustion of IP rights is universally recognised within the multilateral trading system and is codified in Article 6 of the TRIPS Agreement of the WTO, which entered into force in 1995, but without legally defining the principle.Footnote 2 The precise scope of exhaustion in relation to sale and licensing agreements is a matter of domestic law.Footnote 3 In digital trade, the contours are blurred. Exhaustion raises new difficult and unresolved issues – which call into question the principle of exhaustion in the first place.Footnote 4
What has remained controversial ever since the term was introduced by Joseph Kohler in 1878Footnote 5 is the geographical scope of exhaustion. Does it merely apply to first sales within a particular national jurisdiction? Or do rights exhaust independently of where a product has lawfully been introduced into the market? The dichotomy of national exhaustion and international exhaustion has ever since dominated the discourse and policymaking, with both legislators and more frequently courts of law defining the concept domestically and for different forms of IP protection.
With the advent of the European Economic Community (EEC) and today’s European Union, and the combination of national and international exhaustion that emerged with the doctrine of regional exhaustion or community-wide exhaustion, international exhaustion is applied among the Members of the Union, whereas national exhaustion is applied to third states and the rest of the world. The linkage of international trade law and IP was first established by means of applying the disciplines of European competition law, addressing the segregation of markets on the basis of trademark and patent law. The founding and leading case of Grundig/Consten in 1966 is a landmark not only for competition law but also in defining the relationship between trade law and IP law.Footnote 6 Subsequent case law placed the issue of exhaustion under the umbrella of free movement of goods.Footnote 7 Exhaustion was subsequently extended to the European Economic Area (EEA), but not to other free trade agreements or economic cooperation agreements concluded by the Union worldwide. The concept, somewhat astonishingly, has not become an essential part of the TRIPS-plus provision in preferential trade agreements in fostering freer trade and abolishing barriers to international trade.Footnote 8
The geographical scope of exhaustion is of critical importance in dealing with parallel imports in international trade. We understand this term to refer to the trade of original products placed on the market by the rightholder in a different national jurisdiction and then reimported or exported to third markets in parallel to contractual distribution systems. Such trade is also called ‘grey market’ trade.Footnote 9 The term creates an aura of illegitimacy of such trade, allegedly facilitating counterfeiting and piracy; however, grey market trade clearly needs to be distinguished from illegal activities and the trading of competing generic products.Footnote 10
While national and regional exhaustion, on the one hand, allow for parallel trading and arbitrage within a particular nation and union, respectively, and foster competition, they also allow for barring the importation of such products placed on the market abroad or reimported from abroad. Such exhaustion excludes competition from these products and allows full price differentiation and market segmentation. These effects are based on the theory that IP rights only exhaust in relation to particular markets independently. International exhaustion, on the other hand, limits the scope of IP rights wherever geographically an original product was placed on the market with the consent of the rightholder, irrespective of national or regional jurisdiction. In effect, parallel imports, or reimports, cannot be barred by invoking exhausted IP rights. International exhaustion, in effect, fosters free trade and competition and reduces the effectiveness of price differentiation.Footnote 11
The introduction of national exhaustion and eventually regional exhaustion brought about such effects domestically in the process of nation building and the creation of a single European market. These doctrines, however, fostered the enclosure of national markets in Europe, substantially contributing to what is called ‘Fortress Europe’. One would expect that the multilateral trading system operates on the basis of international exhaustion, fostering free trade and competition in a globalising economy. Upon the adoption of the WTO agreements, efforts were made to strengthen international exhaustion, in particular in trademark law.Footnote 12 Reality and the law are far from achieving that, as industries have consistently lobbied governments and courts of law to foster national exhaustion, in particular in the field of patents, in order to effectively control national distribution systems and benefit from price differentiation, with a view to increasing profits and funding research and development.Footnote 13 As a result, the world faces a panoply of different regimes among countries, frequently even varying among different forms of IP protection.Footnote 14
The European Union consistently and comprehensively applies regional exhaustion to all forms of IP rights.Footnote 15 Efforts by the Commission to adopt international exhaustion have failed. The US case law has resulted in international exhaustion for copyright and trademarks, and in 2017 it extended the doctrine to patent protection in Impression Products v. Lexmark International,Footnote 16 while the federal government (United States Trade Representative) continues to push for national patent exhaustion in trade negotiations. Japan has relied upon the doctrine of implied licensing.Footnote 17 China’s law still seems to be unsettled regarding trademark and copyright exhaustionFootnote 18 but is based on international exhaustion in patent law.Footnote 19
Few countries adopt international exhaustion across the board but rather differentiate among different forms. For example, upon completion of the Uruguay Round, New Zealand and Australia introduced international exhaustion in copyright and trademarks, albeit in varying modalities.Footnote 20 Switzerland applies international exhaustion in trademark and copyright but applies regional exhaustion in patent law, with the exception of national exhaustion of products subject to regulatory approval, especially pharmaceutical and agrochemical products.Footnote 21
These examples show that doctrines of exhaustion are applied in line with economic structures and vested interests. Even developing countries, which are interested in attracting competing products, refrain from using international exhaustion across the board due to fears of undersupply and the growing interest of domestic producers that depend on IP protection. There is hardly a field in IP law which is more defined by market power and political representation of industries and traders than by rational choice in light of weakly organised consumers.
The Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artist WorksFootnote 22 do not address the problem of exhaustion of rights, and efforts to argue in favour of national exhaustion on the basis of territoriality of IP protection are not conclusive one way or the other. Territoriality of rights does not exclude considering facts produced abroad and assessing them legally for the purpose of domestic effect (as we prominently know from competition law). Arguments that the function of patent law and limited duration of rights, unlike trademark law, inherently call for national exhaustion have been refuted in the literature.Footnote 23 Articles 4bis(1) and 6(3) Paris Convention use the same concept of independence, and a different interpretation is not justified. Territoriality is limited to defining the existence and the scope of rights and their legal effects in a particular jurisdiction. It inherently includes the possibility of different regulations of exhaustion and thus the role of parallel importation.
With the advent of WTO law in 1995, conventional wisdom suggests that Article 6 of the TRIPS Agreement comprehensively deals with the issue of exhaustion of IP rights, leaving Member States of the WTO ample policy space to adopt suitable variants of the exhaustion doctrine commensurate with their needs, industrial structure and welfare policies, subject to the principles of national treatment and most-favoured nation (MFN) treatment.Footnote 24
This paper argues that Article 6 TRIPS does not exhaust the issue of exhaustion and that other provisions and agreements within the multilateral trading system need to be taken into account in assessing the problem of parallel trading of products protected by IP rights. We set out with a brief analysis of pertinent TRIPS provisions, including the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works. The main focus is on the impact of GATT 1994 and the General Agreement on Trade in Services (GATS). Finally, we look at preferential trade and cooperation agreements beyond the realm of the European Union.
In doing so, we keep in mind that important sectors are subject to strict governmental regulation, in particular pharmaceutical and chemicals. We also keep in mind that the control of and enforcement related to parallel trade are increasingly difficult in the age of electronic commerce and digital trade,Footnote 25 while security interests in trade are increasing. The doctrines of national and regional exhaustion imply that parallel importation can be effectively controlled and stopped at borders and within jurisdictions, which is increasingly difficult. Monitoring cross-border flows of goods in retail is thus increasingly difficult, and it is almost impossible for non-physical products and digitally traded services. Preventing and limiting parallel trading by taking recourse to contractual and non-contractual policies of companies to segment markets and to achieve price differentiation become more important.
The field has increasingly shifted to disciplines of competition policy, which still lack global standards and operate under the influence of major jurisdictions, in particular the United States and the European Union. IP protection in turn needs to focus on combating counterfeiting and piracy. However, these are distinct from parallel trade, albeit often termed ‘grey’ and allegedly difficult to separate.
This paper concludes that WTO law undermines the operation of national and regional exhaustion. These doctrines are overbroad and cannot apply across the board. Other less intrusive trade policy instruments are available to address legitimate concerns raised in the context of parallel importation and reimportation of original products. The multilateral trading system is, in result, simply and essentially based upon exhaustion while allowing for sectorial control and limitations of parallel trading by other means. The WTO law revisited offers a more solid ground than national and regional exhaustion in the age of cyberspace and the digital economy. Whether or not the issue discussed in the paper will eventually be litigated in the WTO is of secondary importance. The analysis of WTO allows for formulating new approaches to an age-old problem in the process of policy formulation and law-making.
The paper thus makes a contribution to the interface and interaction of different international agreements. In doing so, it is hoped that the paper may also contribute to countering the tradition of there being divergent epistemic academic communities in law – IP, commercial law, competition law, and trade and public international law – in discussing exhaustion and parallel trade. The problem requires a holistic approach.
B. The Impact of WTO Law
With the advent of the TRIPS Agreement, IP standards were introduced in the multilateral trading system of the WTO. While IP so far had been limited to restricting trade under the exceptions, it now became a constituting pillar of the multilateral trading system.
The TRIPS Agreement substantially enlarged the rules on IP, but did not remove the potential relevance of other agreements within the system – and of public international law in general.Footnote 26 Intellectual property rights are partly addressed in Article IX and Article XX(d) of GATT, and the TRIPS Agreement did not remove the existence of these provisions.Footnote 27 There was no intention in the negotiations on IP to reduce existing GATT obligations. The preamble of the TRIPS Agreement explicitly recognises in para. (a) ‘the applicability of the basic principles of GATT 1994’. TRIPS is not part of Annex I, which prevails over GATT. Similarly, new agreements – such as GATS or the Agreement on Technical Barriers to Trade (TBT) and the Agreement on the Application of Sanitary and Phytosanitary Measures – may have a bearing on parallel trade issues.Footnote 28 They are not consumed by the provisions of the TRIPS Agreement on exhaustion of rights.Footnote 29
It was argued that the TRIPS Agreement, in particular Article 6 on exhaustion, amounts to lex specialis which consumes, and exhausts, so to speak, related provisions of other agreements under the Vienna Convention of the Law of Treaties (VCLT).Footnote 30 The doctrine applies to the treatment of the same subject matter, and the more specific and detailed rules apply.Footnote 31 However, the subject matter of defining IP rights and exhaustion on the one hand, and of parallel importation products placed on markets of different countries on the other, do not share the same object and angle. While the former defines the scope of rights, the latter deals with import or export restrictions. The former is based upon the nationality of the rightholder while the latter conceptually relies upon the geographical origin of goods traded, independently of the nationality of the rightholder. Of course, the two areas are closely interrelated, but conceptually they remain separate.
Issues of parallel trade thus exist legally independent of the doctrine of exhaustion. The problem of banning parallel importation in international economic law is therefore not one of conflicting norms but rather competing norms in different agreements, which need to be reconciled within the overall WTO system to the utmost extent possible.Footnote 32
It is well established in WTO law and jurisprudence that several agreements may apply to a particular issue. For example, the assessment of plain packaging of cigarettes entailed the TBT, GATT, and the TRIPS Agreement. The examination of protection of trademarks and geographical indications in the European Union concerned both TRIPS and GATT provisions, in particular Article XX(d). One agreement does not consume the other, and neither occurs earlier or later in time.Footnote 33 The principle of lex posterior of Article 60 VCLT does not apply among WTO agreements. They all, including the substantive provisions of the Paris and Berne Conventions, entered into force on 1 January 1995 for the purpose of WTO law. Even looking at exhaustion and parallel trade in tandem does not exclude the potential application of WTO agreements beyond TRIPS. A particular regulation or measure may be consistent with one but not another of the agreements. In such cases, if a failure to comply with WTO law is found in one agreement and not the other, Members nevertheless are called upon to remedy domestic law and practices.Footnote 34 The more stringent rules apply.Footnote 35
Each of the WTO agreements has its own internal balance, and provisions specifically relating to one agreement – such as Article 6 TRIPS or Article XX GATT and its interpretation – cannot simply be transferred and read into another agreement.Footnote 36 The provisions of these agreements mutually inform each other in the process of interpretation of particular rules.Footnote 37 They are context in the meaning of Article 31(3)(c) VCLT and need to be taken into account in construing particular provisions in one of the agreements. Thus, even if the reach of Article 6 is extended beyond the TRIPS Agreement to all WTO law, including GATT and GATS, the carve-out and exemption do not render other pertinent provisions of the multilateral trading system inoperable in assessing restrictions of parallel imports and reimportation. Henning Grosse Ruse-Khan convincingly argues that measures permissible under the TRIPS Agreement do not exclude that they are inconsistent with GATT obligations.Footnote 38 It will be seen that Article 6 TRIPS allows Members to choose different variants of exhaustion; it does not oblige them to do so, whereas they incur mandatory obligations under GATT.
The integration of IP in the WTO multilateral trading system is not a formality and it does not lack implications for rights and obligations.Footnote 39 Squaring open trade and exclusive rights may lead to challenges of traditional perceptions and notions, just as it was seen above that the integration of IP in EU law and the single market substantially altered perceptions, in particular in the field of exhaustion.Footnote 40 It therefore is necessary to assess all pertinent provisions transgressing the TRIPS Agreement, to which we turn first.
C. The TRIPS Agreement
I. Exhaustion (Article 6)
The TRIPS Agreement of the WTO incorporates the substantive provisions of the Paris and Berne Conventions and sets minimal standards for the protection of IP in its different forms. It entails provisions on registration and enforcement of rights which Member States need to respect in domestic civil, administrative, and penal procedures.Footnote 41 In respect of exhaustion or rights, standards defined in Article 6 are minimal and essentially reflect an agreement to disagree. Efforts by Switzerland and the United States to anchor mandatory national exhaustion failed to the benefit of policy space of Member States in regulating exhaustion and thus the parallel importation of IP-protected products. Likewise, efforts to adopt international exhaustion by Australia, Brazil, India, and New Zealand equally failed.Footnote 42 Countries thus have remained free to operate exhaustion doctrines as they wish, even among different forms of IP.
Such policy space is secured by a carve-out from WTO dispute settlement. It was agreed that ‘[f]or the purpose of dispute settlement under this Agreement … [n]othing in this Agreement shall be used to address the issue of exhaustion of intellectual property rights’. It is important to note that Article 6 does not grant Members a right under international law to select whatever doctrine of exhaustion they prefer. Nor does it impose adopting a particular variant of exhaustion. The carve-out remains subject to specific obligations within Article 6 and within the TRIPS Agreement and other WTO agreements, to the extent that they affect parallel importation, as discussed below.
The first exception to this carve-out was made within Article 6 for issues relating to Article 3 and 4, that is, national treatment and MFN treatment. Panels and the Appellate Body have jurisdiction to assess claims regarding unequal applications of exhaustion between domestic and foreign rightholders as well as those of different countries. They cannot assess otherwise the lawfulness of exhaustion under the TRIPS Agreement. The recognition of de facto discrimination in WTO law and under the TRIPS Agreement also includes neutral configurations of regulations which, however, in practical effect disadvantage foreign rightholders.Footnote 43 For example, an exhaustion regime which would allow domestic rightholders to import parallel traded goods without extending the privilege to foreign nationals and foreign-controlled companies is contrary to Article 6. National treatment issues, however, are unlikely to occur. Under national and regional exhaustion, rightholders trading domestically are treated less favourably than those trading with third countries, as domestic trade is subject to exhaustion while foreign trade is privileged, subject to more stringent rights under national or regional exhaustion within the overall framework.
More importantly, differential treatment of rightholders from different countries is inconsistent with Article 6. This raises the question of privileged treatment within a customs union or a free trade agreement commensurate to Article XXIV GATT and Article V GATS. The TRIPS Agreement does not provide for an equivalent of preferential trade exceptions, but defines in Footnote Footnote 1 ‘nationals’ to include all natural and juridical persons domiciled within the separate customs territories (customs union) and irrespective of their nationality in the passport. It treats the Union, in other words, as a single entity for the purpose of the agreement. It allows applying international exhaustion among the Members of the union while applying national exhaustion to the rest of the world.
The same is true for the introduction in 2017 of regional exhaustion in the Eurasian Economic Union.Footnote 44 The European Court of Justice in Silhouette treated regional exhaustion as a mandatory rule, implying national exhaustion vis-à-vis third countries.Footnote 45 Rightholders within the European Union or the Swiss-Lichtenstein Customs UnionFootnote 46 can be privileged in relation to foreign rightholders or companies domiciled abroad. At the same time, the footnote does not extend to free trade agreements, which by definition do not entail a single external tariff and do not qualify as separate customs territory. Early non-application of regional exhaustion to a European Free Trade Association free trade partner in Polydor thus is still in line with WTO law.Footnote 47 Privileges among Members, such as extending regional exhaustion to the Protocol 28 of the Agreement on the EEAFootnote 48 or introducing unilaterally regional exhaustion in the case of Switzerland, could therefore be challenged before the WTO.Footnote 49
In Maglite, the EEA Court held that the doctrine of regional exhaustion of the EEA does not extend to third country relations but leaves EFTA States free to operate their own doctrines of exhaustion.Footnote 50 Hence, Article 6 TRIPS may partly explain why regional exhaustion has not been included in free trade agreements and modern comprehensive cooperation agreements – such as the Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) and in preparations for the Transatlantic Trade and Investment Partnership (TIPP) between the European Union and United States.Footnote 51 The extension from national exhaustion to regional exhaustion would need to be extended to all rightholders of WTO Members under the MFN clause of Article 4 of the TRIPS Agreement, resulting in international exhaustion.
Finally, the question arises whether the carve-out of Article 6 only applies to international dispute settlement before the WTO or to judicial dispute settlement in general. The provision of Article 6 and the prohibition to address the issue of exhaustion does not extend to domestic courts, the application of the TRIPS Agreement potentially under a doctrine of monism and direct effect, or when taking considerations of exhaustion into account in the process of consistent interpretation of domestic law in line with obligations under international law.Footnote 52 Article 6 is relevant both in recognising the fundamental principle in the first place and in recognising the policy space granted. Importantly, the provision before domestic courts stands on the same footing as other provisions of the WTO, in particular GATT and GATS, which enjoy the same position in domestic law as the TRIPS Agreement. A domestic court thus would need taking into account, on par, all of WTO law.
II. Trademark Rights Conferred (Article 16)
While Article 6 TRIPS addresses exhaustion, other provisions of the same agreement are otherwise important to the underlying issue of parallel trade and reimportation, bringing about a second exception to the carve-out. In defining the scope of trademark protection, Article 16(1) provides that ‘[i]n case of the use of identical sign for identical goods or services, a likelihood of confusion shall be presumed’. The provision facilitates combating counterfeiting and places the burden of proof on the defendant to rebut the presumption. In the case of parallel importation of original and identical products that are placed on the market abroad by the same multinational company and its subsidiaries, it can be readily demonstrated that there is no likelihood of confusion – in fact, that there is no confusion at law. As a consequence, trademark protection cannot be invoked, and the importation of such goods cannot be barred even under a doctrine of national or regional exhaustion. The particular configuration of importation of identical products placed on different markets by the same company and its subsidiaries therefore result in effect in applying the doctrine of international exhaustion in trademark law. The effect is in line with the International Law Association (ILA) recommendation to apply international exhaustion in trademark lawFootnote 53 and a widespread practice to this effect in many countries.
The provision, however, also explains why multinational companies, while using the same trademark in different countries, modulate the physical property of products – such as coffee or chocolates – in terms of quality and composition in order to establish a likelihood of confusion, based upon which market segmentation and effective price differentiation can be achieved.Footnote 54 While Article 16 TRIPS introduces international exhaustion for identical products by the back door, so to speak, it is important to note that this merely amounts to a minimal standard which can be overcome by more stringent protection. Thus, the doctrine of regional exhaustion in EU law overrides the effect of Article 16 and allows companies to prevent and bar parallel trading into the European Union even of identical products under trademark law.Footnote 55
Even within the European Union, protection goes further and undermines the regional exhaustion of rights. The Court of Justice ruled that the scope of trademark protection includes the aura of the environment of sales, thus barring the sale of luxury products to discount stores even by third parties.Footnote 56 It is examined below whether regional exhaustion and restrictive use are also consistent with GATT rules. Yet, to the extent that domestic law does not settle the matter, parallel imports cannot be banned in accordance with Article 16 TRIPS, given the direct effect or consistent interpretation of domestic law.
III. Patent Rights Conferred (Article 28)
The minimal scope of patent rights under the TRIPS Agreement explicitly includes the importation of products. It was argued that the right to import inherently amounts to a doctrine of national exhaustion in patent law as minimal standards which cannot be undermined.Footnote 57 That point of view ignores that the right to import is subject to Footnote Footnote 6 of the TRIPS Agreement, which refers to the application of Article 6. Thus, the right to import is effective under doctrines of national and regional exhaustion but void whenever a country opts for international exhaustion in patent law.Footnote 58 Therefore, an obligation to national exhaustion cannot be established under the TRIPS Agreement.
IV. Compulsory Licensing (Articles 31 and 31bis)
Article 31(f) TRIPS Agreement limits compulsory licensing to predominantly serve the domestic market. The provision does not allow for export licensing, and exports to third countries where the product is protected can be stopped by the rightholder. Legally, such trade is not parallel trade as the product is not original and the rightholder has not consented to the licence and to marketing. Legally, rights are not exhausted. In result, the TRIPS Agreement allows one to fully bar the exportation of such products. An exception to this exists for trade in pandemic drugs. The implementation of the 2001 Doha Declaration on the TRIPS Agreement and Public Health brought about an elaborate and restrictive system of trading under compulsory licensing of pandemic pharmaceuticals, allowing the exportation of medicines under patent protection to developing countries in need.Footnote 59 Article 31bis of the TRIPS Agreement imposes strict conditions prohibiting the re-exportation of such products and thus bans trading of such products, with a view to securing adequate supplies within countries in need and avoiding price undercutting on third markets. The ban on trade is essentially based upon the fact that these transactions are based upon compulsory licensing to which the rightholder has not consented. Rights therefore are not exhausted, and trade restrictions are justified.
V. Control of Anti-competitive Practices (Article 40)
WTO law and the TRIPS Agreement do not yet entail substantive standards on anti-trust and competition law. Article 40 of the TRIPS Agreement, however, carves out domestic law to restrict ‘specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market’. The TRIPS Agreement and its standards, including Article 6, cannot be invoked to limit the scope of anti-trust rules defined in domestic law. Parallel imports and the exhaustion of IP rights may thus be addressed both in rules relating to voluntary licensing – as well as other conditions unrelated to licensing. The latter include the possibility of regulating parallel traded goods and reimportation, with a view to avoiding market segmentation and price differentiation and resulting, in effect, in the adoption of international exhaustion – which amounts to a third exemption from the carve-out of Article 6 TRIPS. It is recalled that the case law introducing regional exhaustion into EU law based upon the free movement of goods in the 1970sFootnote 60 was substantially founded on competition law. As discussed, Grundig/Consten addressed market segmentation based upon domestic trademark law – which, at the time in France, was based on national exhaustion.Footnote 61 While regional exhaustion was confirmed in the case law,Footnote 62 qualifications subsequently emerged in the field of pharmaceuticals because strong regulatory government involvement in the sector precluded free trade.Footnote 63 In Sot Lelos/GlaxoSmithKline, the Court held that the refusal to supply wholesalers in order to prevent parallel imports amounts to an abuse of dominant position under Article 82 EC (102 TEFU), unless it can be demonstrated that the volume ordered substantially surpasses the past volumes required to mainly supply domestic markets.Footnote 64 Protection of parallel imports here is partly based upon protecting the single market of the European Union and partly based upon consumer welfare by allowing for lower prices, to the benefit of hospitals and health insurance. Accordingly, restrictions on parallel imports in pharmaceuticals were found justified if research funding suffers and price reductions are not passed on to consumers.
For similar reasons, the courts also endorsed the possibility of dual pricing in licensing agreements and thus restricting parallel trade. In doing so, the Court of First Instance (the General Court) relied on the rather economic approach of the Chicago School by justifying the implied restrictions to competition, whereas the European Court of Justice upheld the protection of competition as an institution and relied upon exceptions of Article 81(3) EC (Article 101(3) TEFU) to this effect.Footnote 65
The problem arose in the first place due to regional exhaustion which no longer allows barring parallel trade within the Union. The quantitative test introduced in the pharmaceutical sector, given strong government intervention and price controls, amounts de facto to a limitation of regional exhaustion. It seeks to prevent parallel trading and does not affect independent parallel trade effectively taking place. Beyond the Union, and in relation to third countries, there is no need for such restrictions due to regional exhaustion and the possibility to bar parallel imports in the first place. But the test adopted to rely upon existing market shares and the possibility to refuse excess supplies, with a view to limiting parallel trade, amounts to trade restrictions – which is of interest also from the point of view of rules on trade in goods, in particular GATT 1994. It may offer a less intrusive measure than banning imports outright under national or regional exhaustion.Footnote 66 We should also note that the arguments made relating to innovation and welfare are independent of the geographical scope of exhaustion. They may also be applied, and even more so, under the doctrine of international exhaustion.
D. The General Agreement on Tariffs and Trade (GATT 1994)
I. Quantitative Restrictions and National Treatment (Articles XI and III:4)
Import restrictions on parallel trade in original products placed on markets abroad amount to quantitative restrictions, which in principle are outlawed by Article XI of the GATT: ‘No prohibitions or restrictions other than duties, taxes and other charges, whether effective through quotas, import or export licences or other measures, shall be instituted or maintained …’. Restrictions imposed at the border upon importation by measures enforced by customs authorities fall under this provision. Certain exemptions exist relating to agricultural products in Article XI(2). To the extent that regulations addressing parallel importation operate within Members upon importation, for example injunctions or damages awarded, they fall under the provision of national treatment in Article III(4) of the GATT, including border measures under the Note to Article III.
These rules apply irrespective as to whether goods imported are protected or not by IP rights. Hence, it is not necessary that measures applied to imported and domestic products are fully identical.Footnote 67 Substantive or procedural measures applying partly or exclusively to imported products, but not to domestically traded products, are dealt with as a violation of national treatment if they treat imported products less favourably than domestic like and competing products.Footnote 68 The doctrines of national and regional exhaustion, granting extended rights to rightholders, deploy such effects, whereas they are absent under international exhaustion, which treats imported and domestically traded products alike and does not entertain border measures focusing on the importation of products.
Matthew Kennedy submits a different view. He argues that IP protection (cum national or regional exhaustion) is controlled by Article III(4) GATT alone. Domestic regulation covers all laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation and distribution of imported and domestic like products. Domestic IP laws implementing the TRIPS Agreement, including Article 6, correspond to that description, including border enforcement under the Ad Article III Note, which may be taken to exclude the application of Article XI.Footnote 69 Kennedy applies the approach taken by the Panel on Sec 337 Trade Act to parallel importation. Seizure of goods applies to both imported and domestic products as ‘consignments imported through unauthorised channels can ultimately be of either origin, as can the products that the right holder authorises for supply of the domestic market’, leaving WTO Members to adopt exhaustion rules according to Article 6 TRIPS.Footnote 70
This approach allows for reconciling GATT and TRIPS rules, thereby avoiding tension and conflict. However, from the trade angle, it does not consider the fact that the seizure of parallel imports at the border, or upon importation, is based upon an extended scope of IP protection (right to import) which does not apply to domestic products, which affects the conditions of competition between foreign and domestic products. Under exhaustion in any of the variants, there is no right to ban the parallel trade of products first sold on the domestic market and traded parallel to authorised channels. Whether or not Article XI GATT applies to such bans and seizures, we therefore find that national and regional exhaustion grants treatment that is less favourable to imported like products and thus is contrary to Article III(4) GATT.
II. Protection of Intellectual Property Rights (Article XX(d))
Violations of the prohibition of import restrictions and of national treatment may be justified under the provision of Article XX GATT. Additional exemptions, besides Article XI:2, exist in Article XXI (discussed below) and the Agreement on Safeguards for temporary relief. Import restrictions of products protected by IP rights – such as patent, trademarks, geographical indications, or copyright – may in particular take recourse to Article XX(d) of the General Agreement:
Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:
…
(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;
It will be argued that the ban on parallel trade under national or regional exhaustion (permitted under Article 6 TRIPS) readily meets the test of Article XX(d) GATT. National and regional exhaustion form part of the domestic rules and regulations to be enforced, and the ban on parallel trade is necessary to implement the rule. The analysis under Article XX(d), however, is more complex and not limited to the rule of national or regional exhaustion, but extends to the objectives and rules of the overall domestic system of IP as informed by international law, in particular the TRIPS Agreement.Footnote 71 Article XX(d) entails a complex process of weighing and balancing pertinent factors and interests at stake which transgress the specific rule on exhaustion.Footnote 72
In assessing exceptions invoked under Article XX GATT, jurisprudence of panels and the Appellate Body first examine two requirements of the subparagraphs invoked, namely, scope and necessity or relatedness, and turn to the so-called ‘chapeau’ in the third step.Footnote 73 We therefore start with the analysis of paragraph (d), which in particular invokes the protection of IP and the prevention of deceptive trade practices. There are essentially two tests to comply with. First, the measures and regulations at hand must serve laws and regulations which are themselves compatible with the General Agreement. Second, the measures taken must be necessary. The Appellate Body set out the requirements in Thailand – Cigarettes as follows:
177. A Member will successfully discharge that burden and establish its Article XX(d) defence upon demonstration of three key elements, namely: (i) that the measure at issue secures compliance with ‘laws or regulations’ that are themselves consistent with the GATT 1994; (ii) that the measure at issue is ‘necessary’ to secure such compliance; and (iii) that the measure at issue meets the requirements set out in the chapeau of Article XX. Furthermore, when Article XX(d) is invoked to justify an inconsistency with Article III:4, what must be shown to be ‘necessary’ is the treatment giving rise to the finding of less favourable treatment. Thus, when less favourable treatment is found based on differences in the regulation of imports and of like domestic products, the analysis of an Article XX(d) defence should focus on whether those regulatory differences are ‘necessary’ to secure compliance with ‘laws or regulations’ that are not GATT-inconsistent.Footnote 74
We note that the first requirement entails two components. First, laws and regulations must not be inconsistent with the provisions of GATT 1994. Second, the measure must be designed to secure compliance with such provisions, entailing an assessment of aptitude or capacity and thus the relationship of the two elements. Overall, Article XX(d) uses a three-step test. This essentially reflects an operation of the principle of proportionality, even though the term has not been explicitly used in WTO jurisprudence.Footnote 75
1. Laws and Regulations Not Inconsistent with the Agreement
Until recently, the provision of Article XX(d) was rarely referred to and used, and the requirement to secure compliance with laws and regulations not inconsistent with the GATT Agreement gave rise to confusion. How can this requirement be squared with the fact that the measure itself has been found inconsistent with Articles XI or III:4 of the GATT? In Thailand – Cigarettes, the Panel equated the measure found inconsistent under Article III to be relevant here and obviously engaged in erroneous circular reasoning,Footnote 76 while Thailand failed to properly identify the relevant measure to be realised by means of a rule inconsistent with Article III GATT, resulting in the failure of the defence.Footnote 77 In Columbia – Textiles, the Panel simply used its analysis under Article XX(a) on public morals and failed to complete the necessity test under Article XX(d). The finding was reversed by the Appellate Body.Footnote 78
The measure imposed and found inconsistent with Article XI or III(4) needs to be distinguished from the laws and regulations which it implements. In the present context, consistency or inconsistency do not relate to the doctrine of national or regional exhaustion, or the ban on parallel importation, but to the laws and regulations which the doctrine of national or regional exhaustion and the ban of parallel imports serve to implement and realise. This point is sometimes misunderstood and also leads to the said circular reasoning in the literature.Footnote 79
The rules at stake pertain to the domestic order. They may form part of international law as applied domestically, but cannot be those of others, for example partners of a free trade agreement.Footnote 80 Rules and regulations relate to conduct of kinds of actors, private or public, and encompass a broad range of measures.Footnote 81 The Appellate Body considers the list of areas addressed to be illustrative and thus open-ended.Footnote 82 In the case of IP, these are the rules relating to the scope of protection granted under domestic law to products protected as well as the very purpose of granting exclusive rights in these respective fields. Laws and regulations are not limited to specific functions but encompass the entire field subject to compliance. The Appellate Body held in India – Certain Measures Relating to Solar Cells and Solar Modules, referring to Argentina – Financial Services:
5.110 The Appellate Body has stated that a “measure can be said ‘to secure compliance’ with laws or regulations when its design reveals that it secures compliance with specific rules, obligations, or requirements under such laws or regulations”. It is important, in this regard, to distinguish between the specific rules, obligations, or requirements with respect to which a measure seeks to secure compliance, on the one hand, and the objectives of the relevant ‘laws or regulations’, which may assist in ‘elucidating the content of specific rules, obligations, or requirements’ of the ‘laws or regulations’, on the other hand. The ‘more precisely’ a respondent is able to identify specific rules, obligations, or requirements contained in the relevant ‘laws or regulations’, the ‘more likely’ it will be able to elucidate how and why the inconsistent measure secures compliance with such ‘laws or regulations’. Thus, in assessing whether an instrument constitutes a ‘law or regulation’ within the meaning of Article XX(d), a panel should also consider the degree of specificity or precision with which the relevant instrument lays down a particular rule of conduct or course of action within the domestic legal system of a Member, as opposed to simply providing a legal basis for action that may be consistent with certain objectives.Footnote 83
Applied to the field of IP, and to competition in a broader sense, it follows that law and regulations are not limited to specific provisions but envisage compliance with the system of IP as a whole, entailing all its relevant components in the domestic law at hand. It is not a matter of exclusively focusing on the purpose and scope of patents, trademark copyright and other forms in isolation but rather of taking into account the broader purpose of these rights within the overall system of economic law. This includes the goals and principles providing their foundations as well as offering the balance of the interests of the different stakeholders involved – and which the principle of exhaustion is supposed to serve. This is the landscape which also provides the background for assessing the aptitude (or capacity) and necessity of the measure which was found to be inconsistent in the first place with the provisions of the GATT Agreement.
While the matter of object and purpose of IP rights in the context of para (d) has not yet been addressed in WTO jurisprudence, the European Court of Justice in applying similar restrictions under then Article 30 EEC Treaty (now Article 36 TFEU) held, in Merck/Stephar, as follows: ‘It must be stated that in accordance with the definition of the specific purpose of the patent, which has been described above, the substance of the a patent right lies essentially in according the inventor an exclusive right of first placing the product on the market’.Footnote 84 The Court thus concluded that the importation of pharmaceuticals first marketed in a country short of patent protection into a Member granting such protection does not amount to a violation of the patent right. Article 36 TFEU does not entail the requirement of laws and regulations not inconsistent with the agreement. Applying the findings of the court to Article XX(d) GATT, it would read that the measure imposed – namely, banning importation – does not serve the purpose and scope of patent rights as recognised by the agreement.
The question is whether GATT law equally limits the function of patents and other rights to the right to define the first sale. We do not think so. The European Court of Justice ruled prior to the advent of TRIPS Agreement and prior to the harmonisation of patent law in the EU. The very purpose of patent law, and indirectly also of trademark and copyright law, is to reward for investments made and to allow appropriate compensation, which are necessary to incentivise investments in light of market failures otherwise existing in non-rivalrous and non-exclusive information markets. Borrowing from competition law, we also include the function of consumer welfare in this equation, which is inherent to the goals of IP. In assessing the functions of IP, the principles and objectives in Article 7 of the TRIPS Agreement, binding upon Members, must be taken into account as relevant context. That includes the promotion of technological innovation and the transfer and dissemination of technology ‘to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to balance rights and obligations’. In addition, the principles set out allowing Members ‘in formulating or amending their laws (not necessarily limited to IPRs) adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development’ need to be taken into account. Implicitly, this agenda also relates to human rights and the Sustainable Development Goals (SDGs). These measures also include appropriate disciplines against the abuse of IP rights (Article 8:2 TRIPS). A more complete mission statement would include product differentiation, preventing consumer deception (trademarks) and the promotion of cultural diversity and values (copyright). Finally, it should be added that combating counterfeiting and the use of IP without consent amounts to the major purpose of IP, albeit outside the realm of parallel trade in original goods.
The protection and enforcement of IP in domestic law must serve all these ends, which places IP in the broader framework of international economic law. It is not limited to defining the first sale of a protected product. Nor is it limited to the protection of investment, but serves the purpose of a multitude of goals fostering consumer welfare – which needs to be taken into account in balancing the partly competing interests at hand.
It would seem that these objectives and goals all are in line with the provisions of the GATT Agreement, as it broadly recognises the protection of IP rights in Article XX GATT and in Article IX recognises marks of origin as well as non-trade related concerns. Moreover, the objectives are in line with the TRIPS Agreement, the very purpose of which is to provide such protection and define the scope of rights in greater detail. Whatever the regulation of parallel trading, it should support the goals and objectives set out above.
Under the rules of Article 31(3)(c) of the Vienna Convention on the Law of Treaties, the provisions of the TRIPS Agreement need to be taken into account in interpreting the notion of ‘not inconsistent with this Agreement’. We therefore conclude that – unlike the limitation on first sale in EU law – the protection of investment and of consumer welfare is not inconsistent with the agreement and restrictions of trade compatible with the first condition under Article XX(d) GATT. We thus turn to the requirement of necessity of such measures.
2. Not Incapable to Secure Compliance with Laws and Regulations
Further specifying the requirements of Article XX(d), the Appellate Body held in Korea – Various Measures on Beef that the measure must be one ‘designed’ to secure compliance with the laws and regulations that are not inconsistent with some provisions of GATT 1994:
157 For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally under paragraph (d) of Article XX, two elements must be shown. First, the measure must be one designed to ‘secure compliance’ with laws or regulations that are not themselves inconsistent with some provision of the GATT 1994. Second, the measure must be ‘necessary’ to secure such compliance. A Member who invokes Article XX(d) as a justification has the burden of demonstrating that these two requirements are met.Footnote 85
In India – Certain Measures Relating to Solar Cells and Solar Modules, the Appellate Body elaborated on the requirement that the design must be capable of securing compliance with laws and regulations found consistent with GATT:
5.58 As to the first element of the analysis contemplated under Article XX(d), the Appellate Body has stated that the responding party has the burden of demonstrating that: there are ‘laws or regulations’; such ‘laws or regulations’ are ‘not inconsistent with the provisions of’ the GATT 1994; and the measure sought to be justified is designed ‘to secure compliance’ with such ‘laws or regulations’. An examination of a defence under Article XX(d) thus includes an initial, threshold examination of the relationship between the challenged measure and the ‘laws or regulations’ that are not GATT-inconsistent so as to determine whether the former is designed ‘to secure compliance’ with specific rules, obligations, or requirements under the relevant provisions of such ‘laws or regulations’.Footnote 86
It is thus a matter of demonstrating a relationship between the measure challenged and the laws and regulations not inconsistent with GATT 1994, and assessing whether the measure is not itself ‘incapable’ to secure compliance with such laws and regulations – before necessity can be assessed. Capability and necessity thus amount to two elements otherwise assigned to the principle of proportionality in international and domestic law, but not deployed in WTO law.
The doctrine of exhaustion of IP rights clearly serves the purpose of defining the scope of rights and bringing about legal security in commerce related to products protected by IP. The issue before us is whether the same holds true for its geographical variants of national and regional exhaustion (both found to contravene Articles XI or III GATT), which enlarge the scope of rights compared to the domestic realm. Rightholders enjoy enlarged powers to control markets. The ban on parallel imports thus affects the balance of rights and obligations within the system of IP protection and its different forms to which laws and regulations in the present context relate. It was seen that all its objectives need to be taken into account and cannot be limited to the protection of investment and innovation. The dissemination of technology and consumer interests equally need to be considered.
Clearly, the right to ban parallel imports on the basis of national and regional exhaustion is capable of strengthening the position of rightholders – which explains the strong support for the right among industry. It is a different question whether banning parallel imports is equally capable of serving other goals and objectives of IP protection and of maintaining an overall balance between rightholders and users within the system. Resulting market segmentation and price differentiation may weaken the dissemination of products and of technology and potentially hamper consumer interests. At the same time, they may benefit consumer and public interests through fostering research capacities and output. The answers depend upon empirical studies on parallel importation.
It is interesting to observe the resemblance between the analysis here and the one undertaken under competition law to assess the limitations to sell or of a dual pricing system, both limiting parallel trade by selling restrictions.Footnote 87 All pertinent interests need to be considered in the examination and equation, and much will depend upon the finding regarding whether national or international exhaustion are equally beneficial for consumers and the public at large. It is at this stage that the economic analysis of parallel importation needs to be considered. Empirical studies have been scarce, and the field remains a somewhat grey area. The theoretical literature, led by Keith Maskus and Mathias Ganslandt, shows a complex configuration which strongly depends on the particularities of a sector and regulatory environment, including trade and transportation costs, and which does not lend itself to conclusions one way or another as to whether the prohibition of parallel trade is capable of producing welfare effects.Footnote 88 Parallel trade often takes place on the wholesale level, allowing for differentiated pricing in retail.
Much also depends on the findings regarding whether parallel trade produces these effects for consumers and the public at large and whether gains are passed on to society, for example in public health and insurance, or instead are substantially pocketed by parallel traders who free-ride and undermine the research capacities of rightholders. A ban might not be suitable to produce such effects in the context of regional integration. In the context of the European Union, national exhaustion of rights was – and will be – found unable to secure the goals of market integration and the creation of corresponding welfare effects, despite resisting industry interests. Empirical studies in pharmaceutical trade have confirmed this finding.Footnote 89
A ban may be suitable among jurisdictions of great divergence and difference in economic and social development. In 1999, the National Economic Research Associates report on trademark exhaustion concluded that the introduction of international exhaustion in the European Union would have vastly divergent effects on different sectors.Footnote 90 The point is that the test of capacity and aptitude of a ban on parallel importation needs to be assessed on a case-by-case basis. The findings imply that both national and regional exhaustion are conceptually overbroad as they also entail configuration where they are not capable of enforcing the laws and regulations of the domestic IP system.
For cases where the capacity of restrictions on parallel trading to secure compliance with the overall IP system, its rights, objectives, and principles is affirmed, we turn to the third test of necessity.
3. Necessary to Secure Compliance with Laws and Regulations
Necessity in terms of Article XX(d) GATT amounts to a demonstration that the measure is (i) indispensable to achieve the goals of said laws and regulations and (ii) that no reasonably available less intrusive alternative exists. In WTO case law, the burden of proof to show that the measure is not necessary lies with the claimant, challenging the ban on parallel trade and thus of national or regional exhaustion.
Necessity in the case law entails a process of balancing different interests and of assessing whether the measure is well calibrated to the cause and purpose. Interests of rightholders need to be balanced with public interests in securing adequate supplies at reasonable costs and in fostering competitive relations. For example, in pharmaceuticals, the interests of rightholders to recuperate investment and to fund research and innovation, shared with the health system and consumers, need to be balanced against the financial constraints of the health system and the interest of consumers and hospitals to foster competition and to have access to less expensive medication – which supports parallel traded original and generic products.
The Appellate Body held in Korea – Various Measures on Beef that balancing and weighing of these factors results in a determination of whether or not the measure is indispensable. The spectrum ranges from necessity in terms of indispensability to the quality of making a contribution to secure compliance with laws and regulations, taking into account the importance of public interests at stake:Footnote 91
164 In sum, determination of whether a measure, which is not ‘indispensable’, may nevertheless be ‘necessary’ within the contemplation of Article XX(d), involves in every case a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports.Footnote 92
In Argentina – Financial Services, the Appellate Body recalled that in balancing these factors, the trade restrictiveness of the measure and the importance of laws and regulations to be enforced need to be considered. The analysis cannot be limited to an assessment of whether or not the measure involves some restrictions on trade.Footnote 93
As a practical matter, is it up to the defendant to convincingly demonstrate that national or regional exhaustion is indispensable to – or at least contributes to – a secure return on investment as well as consumer welfare and other non-trade concerns mentioned above. Such demonstration can be readily provided in combating counterfeited and pirated products, as rights are not exhausted in the first place. Similarly, necessity can be demonstrated in the case of importation of products made under compulsory licensing for which IP does not allow for exportation, with the exception of pandemic drugs. Necessity is more difficult to demonstrate in the case of banning the import of original products.
Article 6 TRIPS is relevant in the context and needs to be considered in assessing necessity under Article 31(3)(c) of the Vienna Convention on the Law of Treaties. It has to be taken into account because it could inform the application and interpretation of Article XX(d) and the necessity test. WTO Members using national or regional exhaustion will argue that the ban on parallel imports is indispensable to enforce IP rights as defined in domestic law, which entails market segmentation and price differentiation. It will also be argued that GATT and TRIPS do not exclude the national and regional exhaustion of IP rights and that Article 6 TRIPS explicitly allows for these as a matter of policy space. But Article 6 TRIPS does not prejudice the answer. Neither is there a right and a requirement for Members to use these doctrines under international law, nor a prohibition to use them. As stated at the outset, Article 6 TRIPS does not consume the application of other WTO agreements, and exhaustion remains subject to the disciplines of other WTO agreements to the extent that they address parallel importation. In result, Article 6 does not dispense from demonstrating under Article XX(d) GATT that a ban on parallel importation is indispensable to secure the enforcement of IP protection.
The fundamental question therefore is whether any import restrictions are indispensable to protect the purpose of IP in terms of investment protection, advancing innovation, consumer welfare and the general interests of the public at large. If the restrictions are limited to protecting the right of first sale, as held in Merck/Stephar above,Footnote 94 it is evident from that logic that no restrictions are justified, resulting in the doctrine of international exhaustion. However, we look only at the right to first sale but also the system as a whole regarding the laws and regulations relating to IP. Hence, maximising rents by means of market segmentation, serving the dual goals of recuperating investment and making profit (with a view to fund research and further product development), must be balanced with public interests in terms of price competition, adequate supplies and access – all with a view to fostering consumer welfare.
Banning parallel trade amounts to the most restrictive trade measure available in terms of quantitative restrictions on importation. At the same time, it is unclear to what extent the measure, if enforced, contributes to welfare. Even in cases where the banning of imports shows such effects, it is doubtful that they outweigh the gains to the overall system of IP protection, innovation and the welfare of an economy. In addition, it should be noted that enforcement fully depends upon the initiative of the rightholder and is not enforced by government per se. This is yet another indication that the public interest at stake is of much lower weight than the trade restrictiveness of banning parallel importation in the first place.
Balancing these interests may result in different outcomes, depending on the industry and product involved. Again, recourse to economic analysis is required. The matter varies from case to case. Particular configurations may exist in the fields of pharmaceuticals and chemical products that are subject to regulatory approval and price controls, which need to be taken into the equation. There may be configurations where restrictions of parallel trade may be justified under the necessity test, making at least a contribution to the enforcement of laws and regulations. A ban on parallel trade found to be capable of securing compliance with IP protection is likely to pass the first test of necessity, as it makes at least a contribution to this effect, even though it is not indispensable to produce the welfare effects sought by laws and regulations. At the same time, the balancing test again shows and confirms that outright prohibitions of parallel imports under national or regional exhaustion, as applied to third countries, are overbroad as a matter of principle. They inherently include configurations where this requirement of necessity is not met. They per se do not stand the test of necessity under Article XX(d) in the abstract.
The second test of assessing whether reasonably less intrusive alternatives are available is more important in the present context. It is understood that – in line with the principle of proportionality – alternative measures inherently are deemed less intrusive than the measure challenged. The test faces the difficulty that the claimant needs to show what is good for another jurisdiction, while the government of the latter insists that the measure is necessary and respects the principle of proportionality – that is, no less intrusive instrument can effectively achieve the goals of law or regulation. We also note that in the field of environmental protection, a different and less stringent standard of relating to the environmental law and regulations applies under Article XX(g) GATT, which does not apply in the present context. For example, in EC – Trademarks and Geographical Indications, the Panel found that the possibility of reporting or inspection offers a reasonable and less intrusive alternative to the requirement of mandatory foreign government participation in the protection of geographical indications (GIs). It is up to the claimant to demonstrate that a less intrusive alternative is reasonably available. It is important to note that the burden of proof to maintain the measure being imposed and challenged lies with the defendant.Footnote 95
In the present context, it is a matter of assessing whether a ban on parallel importation that is found to be capable and which makes at least a contribution to enforcing laws and regulations relating to the overall IP system is necessary, in the sense that less intrusive alternatives to achieve such implementation of objectives, principles and rights of IP are not reasonably available. We recall that the ban on parallel importation amounts to quantitative import restrictions or a violation of national treatment and is thus in conflict with the fundamental principles of WTO law. We also recall the finding that a ban on parallel importation strongly depends upon the particular configuration and the context and that a general rule of national or regional exhaustion is overbroad.
The question is whether alternative measures need to be located within the regulatory world of IP itself, or whether governments, instead of authorising outright market segmentation, can and should refer to other public policy tools. In addition, the question arises to what extent answers can be found within the realm of private conduct, subject to disciplines of competition law and policy. We note that parallel trade is a problem mainly in areas subject to strong governmental intervention and regulation, in particular in the field of pharmaceuticals. These products are not solely subject to IP protection but rather a host of regulation, ranging from funding basic research and training to regulatory approval and price controls as well as competition law. It does not amount to a major shift to address ad hoc the problems of parallel importation by other and newer means, short of imposing a general ban on the basis of national exhaustion. The same applies for customs union operating regional exhaustion, in particular the European Union.
4. Less Intrusive Policy Options and Instruments
It is submitted that a number of less intrusive measures are possibly available for addressing legitimate concerns. These tools may be employed in different sectors, essentially replacing a general ban on parallel importation. Without going through a GATT analysis, Frederick Abbott suggests a similar approach in addressing the complexities of the pharmaceutical market by trade policy and trade regulations tools.Footnote 96 Some are governmental, falling under the ambit of WTO law (a–c). Others pertain to contractual relations and the realm of competition law, which is not addressed in WTO law but is admissible under Article 40 TRIPS (d–f). While the first group entails governmental administration, the latter remains in the hands of operators and thus does not fundamentally alter allocation of powers in managing imports and exports.
Finally, in examining alternatives to national and regional exhaustion, today’s realities of international online sales need to be taken into account. The aptitude and capability of banning parallel importation with a view to segmenting the markets, in the age of international online trading, is seriously questioned. The doctrine depends upon private action and does not involve public enforcement at the border or inside the country, except by courts of law and custom authorities acting upon private action. The original market of products is increasingly difficult to trace, and customs authorities are unable to stop consignments other than through random checking. Traditional tools, such as preliminary injunctions of courts, fail to work in online business. Alternative measures therefore may not only be less intrusive but also more suitable and capable than an outright ban on parallel trading.
a. Import and Export Tariffs
Members of the WTO are entitled to apply import and export tariffs to protect domestic production or needs, within the limits of bound tariffs in their respective schedules of commitment.Footnote 97 Members of the WTO can possibly reduce the problems caused by varying purchasing powers of different countries, which leads to price differentiation, by imposing applied tariffs on parallel imported products – with a view to protect domestic production and in particular research activities. The option of increasing trade costs has not been actively studied and used to this effect, as the reduction and elimination of product tariffs has been a major goal of multilateral trade negotiations and free trade agreements. Tariffs, of course, induce higher consumption prices and in effect burden domestic consumers. Tariffs therefore cannot be used in isolation, but may complement other measures, with a view to achieving an overall balance of interests by protecting the prices ranges of domestic research industries and eliminating undercutting imports by parallel traded products. At any rate, tariffs are less intrusive than the effects of national or regional exhaustion amounting to outright import restrictions. Countries facing the problem of shortage of supplies due to parallel exportation and sales of stock at higher pricing abroad may resort to export duties on such products. These measures are less intrusive alternatives compared with quantitative restrictions under the necessity test of Article XX(d) GATT. The options are not available within customs unions and free trade agreements under Article XXIV GATT, which bans the imposition of new tariffs and requires existing ones to be gradually dismantled.
b. Labelling
Parallel traded products are genuine and of equal quality. They are subject to the same technical standards and regulations under the TBT Agreement.Footnote 98 They are essentially the same, and consumers are not deceived. Producers may be required to label products by indicating market destinations and product characteristics in order to inform consumers and traders alike. The practice is well known in the distribution books under copyright protection, justifying different price levels. Labelling has been recognised under the TBT Agreement as a main alternative to quantitative restrictions and a viable alternative under the necessity test.Footnote 99 It entails both voluntary standards and mandatory regulation. In the end, consumers should decide what they buy, independently of the geographical origin of the product.
The law on labelling is essentially controlled by the TBT Agreement, and particular labels may be challenged under these provisions. Labelling of products traded in the original form may require informing consumers about the original destination for sale and consumption – and thus that the product is a parallel import (destined for sale and consumption in country X). The policy is of increasing importance in light of the online sales of products. Consumers ordering via the Internet should know about the origin and the markets of destination of products, in part to be sure that these products comply with the laws and regulations in force in the country of consumption. Labelling of regulated products often requires the repackaging of products for the purpose of parallel trade.
Pharmaceuticals are required to provide information in the language or languages of the country of importation, which may be different from the exporting country. Such requirements increase the costs and prices and may reduce the incentives to parallel trade in the first place. Particular provisions exist in the WTO for pharmaceutical products imported under Article 31bis of the TRIPS Agreement, restricting the re-exportation of products.
c. Import Authorisation and Licensing
Governments may require import authorisation of products, in particular for pharmaceuticals, in relation to regulatory approval and marketing.Footnote 100 Article XIII provides the foundations for import licensing of products subject to quantitative restrictions or tariff quotas. The tool allows for calibrating applied tariffs and linking them to quantitative restrictions. This approach is clearly less intrusive than a flat ban on imports. Such prohibitions, considering MFN, are deemed lawful only to the extent that the restrictions are not selective but apply to all Members alike.
In allocating quotas, GATT law requires taking into account existing and prospective patterns and volumes of trade. The Agreement on Import Licensing Procedures sets out a number of provisions to ensure fair and equitable procedures both for automatic and non-automatic licensing by government authorities.Footnote 101 Importantly, the system is not limited to ‘first come, first served’ and existing patterns but also needs – in Article 5(j) – to be open for newcomers. While these rules mainly relate to the importation of agricultural products, it is conceivable to selectively apply them to sensitive parallel traded products with a view to managing overall supplies and striking a balance between domestic and imported products.
d. Price Controls
Members of the WTO are free to operate price controls over regulated products, in particular pharmaceutical and chemicals, applying to both domestic and imported products.Footnote 102 Neither GATT nor TRIPS address the issue. Excessive controls, which erode returns on investment, may undermine the protection of patents as well as trademark law, in particular in the case of generics, and give rise to non-violation complaints under Article XXIII(1)(b) GATT. Such complaints, however, have been suspended for the TRIPS Agreement under an extended moratorium.Footnote 103 Moreover, price controls have been in place for pharmaceuticals in most countries and fail the basic test for non-violation complaint, which protects legitimate expectations and requires a measure to be unexpected.Footnote 104 Moreover, even if non-violation were to be found, measures need not be withdrawn.Footnote 105 Governments thus are able to address the problem of price undercutting and excessive pricing by setting price ranges for products, whether domestically sold or imported, and whether patented or under trademark protection (generics).
e. Implied Licensing
Implied licensing has been a traditional tool in common law for addressing parallel trade prior to the advent of national and regional exhaustion. Implied licensing presumes that the rightholder does not object to importation or reimportation, unless explicitly stated otherwise. It only applies to contractual relations; furthermore, it is less intrusive than the doctrines of national or regional exhaustion but more restrictive than international exhaustion. It allows companies to discipline wholesale and retail within the international distribution system, subjecting contractual violations to sale restrictions and damages, subject to disciplines of competition law and policy. Licensing thus may deploy a deterrent impact on parallel trade without banning it. The shortcoming of implied licensing is that it is limited to contractual relationship. It does not extend to parallel traders outside the system of distribution, to whom no contractual relation exists, and for which rightholders need to be able to rely upon their IP rights. While licensing may thus be a relatively unintrusive option for parallel trade within contractual relations, it does not offer an alternative to addressing outside and independent traders – which led to the doctrine of exhaustion as applied within a country.Footnote 106
f. Restrictions of Supply
Companies seeking to limit parallel trade may reduce the supplies to destinations which may use those supplies to parallel export into other jurisdictions. Developing countries, fearing such effects in the pharmaceutical sector, partly refrained from adopting international exhaustion in patent and trademark law, as long as they do not yet dispose of effective disciplines in competition law or price controls. Restrictions of supply to wholesalers are not addressed by WTO law unless governments are directly or indirectly involved. These restrictions are subject to competition law and potentially amount to an abuse of a dominant position and the prohibition of cartels. Such measures are compatible with Article 40 TRIPS Agreement and may justify exceptions under Article XX(d) GATT and Article XIV GATS.
The case law of the European Court of Justice discussed calibrated restrictions of supplies in the wholesale supplies of pharmaceuticals, limiting in effect parallel trading in terms of government regulation, innovation and consumer welfare. It was seen that these factors may justify restrictions on a case-by-case basis, under Article 101(3) and Article 102 TEFU or by recourse to general regulation (block exemptions and guidelines).Footnote 107 Competition law and policy thus offers the potential for less intrusive and tailor-made answers to address the needs of specific sectors, compared with the doctrine of national and regional exhaustion. Problems relating to restrictions of digital trade, in particular the refusal to sell to foreign online customers or geo-blocking, may best be addressed with disciplines of competition law and policy.
The option presupposes that a Member State of the WTO disposes of a workable system of competition law. Much progress has been made in recent years with the support of the International Competition Network.Footnote 108 Common disciplines were developed within comprehensive trade and cooperation agreements, in particular CETA between the European Union and Canada. However, the linkages discussed also support the case to bring back negotiations on minimal standards on competition law into the WTO and to explore and define the relationship between this body of rules and trade regulation.Footnote 109
g. Product Differentiation
Finally, producers may revert to product differentiation mainly in the field of trademark-protected goods. By alternating the physical properties of a product, the presumption of consumer deception using the same trademarks for the same products allows for banning the sale of such products marketed abroad upon importation due to trademark protection under Article 16 TRIPS Agreement.Footnote 110 Such restrictions are not based upon national or regional exhaustion, but equally apply under the doctrine of international exhaustion due to the protection of consumers from deception. These restrictions, together with licensing and contractual relations, allow companies to partially segment markets and employ product differentiation in terms of physical qualities, restricting parallel trade if they wish to do so.
5. Chapeau of Article XX GATT
The chapeau of Article XX applies once the necessity test under Article XX(d) has been complied with (i.e. a ban on parallel trade is found justified). To the extent that such a ban is based upon the doctrine of national or regional exhaustion, the chapeau essentially addresses whether this amounts to an abuse of rights in a particular configuration at hand.Footnote 111 Outright prohibitions of parallel trade as applied ergo omnes should not pose a problem; complex regulations may treat different countries differently beyond the realm of Article XXIV GATT. Less likely, they will amount to a disguised restriction of trade, to the extent that the regulation is transparent and without a hidden agenda. It will be objected that a GATT approach lacks legal security and predictability, because it follows a case-by-case approach. In reality, however, it is a matter of assessing the problem in a number of controversial sectors, in particular pharmaceuticals and chemicals and other goods subject to regulatory approval. The jury is still out, and it is here that national and regional exhaustion is defended most ardently.
In many areas of patent law and other forms of IP, the test is likely to confirm that less intrusive measures than national or regional exhaustion offer well calibrated solutions. The continued application of national and regional exhaustion thus essentially amounts to an exception which may or may not be justified in complex regulatory areas under the necessity test. The GATT rules substantially undermine the operation of national and regional exhaustion in international law, and we concur with the view that overall, a general ban on parallel imports does not meet the necessity test.Footnote 112 Predictability can be readily achieved by adopting, on the basis of GATT rules, a doctrine of international exhaustion subject to specifically defined exceptions and recourse to different policy tools in addressing specific problems in specific sectors.
III. National Security Exceptions (Article XXI)
National security was not at the forefront of trade rules until recently. The evolution of the digital and cyber economy mean that the role of big data and artificial intelligence is increasingly interlinked with security interests. Governments are entitled to adopt measures for their essential security interest in case of a national emergency. The Panel in Russia – Traffic in Transit held that the notion is justiciable and the provisions do not offer a general carve-out.Footnote 113 Not any interest can be deemed to be essential and is subject to invocation in good faith.Footnote 114 In the first case ever assessed, the Panel recognised situations of armed conflict, latent armed conflict, heightened tensions of crisis or of general instability, which entitle governments to invoke national security.Footnote 115
It is difficult to anticipate how this situation translates into IP and parallel trade of hardware falling under GATT rules. Potentially, the importation of goods can be blocked under embargo and economic sanctions, irrespective of IP, which inherently includes parallel importation. Importation may be also blocked in the context of cyber-technology due to the risk of manipulation of products sold and marketed abroad for security reasons. The potential of abusing national security for political and protectionist reasons is increasing. National security and trade are increasingly overlapping, with the latter dominated by the former in the age of cyber-warfare and the digital economy. It will be a matter of developing more precise rules in the field. Importantly, however, the provision operates independently of the geographical scope of exhaustion. It also applies to international exhaustion and offers a safeguard of last resort.
E. The General Agreement on Trade in Services
The GATS seeks liberalisation of services in four modes of cross-border trade: to consumers, for consumption abroad, for investment abroad through commercial presence and for investment abroad through the presence of natural persons. While MFN applies across the board, national treatment is limited to particular concessions granted in schedules of Members, often subject to further qualifications.Footnote 116 The relationship of GATS and schedules to IP has not been well explored. The same holds true for distribution services under Article III GATT. These issues may be relevant mainly in the field of copyright protection, which covers a number of important cultural and digital services.
The European Court of Justice held in Coditel II that cultural services and the right to control a performance is not subject to exhaustion.Footnote 117 The redistribution of bought electronic books made available to an electronic library for redistribution was held by the Court in Tom Kabinet to amount to a communication to the public by the library and thus not subject to exhaustion.Footnote 118 Exhaustion – let alone its geographical variants of national, regional and international exhaustion – increasingly seem outdated in services.Footnote 119 The problem of legal security in downstream markets thus needs to be addressed by prohibitions or licensing, which in turn are subject to disciplines and competition or anti-trust law safeguarded by Article 41 and the principles of non-discrimination, both MFN and national treatment under Articles 3 and 4 TRIPS Agreement.
Products resulting from services, however, are not necessarily excluded from exhaustion.Footnote 120 The European Court of Justice held in Usedsoft that the right of distribution of a copy of a computer program is exhausted if licensed with a right to use the copy for an unlimited period.Footnote 121 Problems relating to parallel trade thus cannot be excluded for resulting products in downstream markets. Such problems are not yet well known, partly because most countries apply international exhaustion in the field of copyright.
Regional exhaustion, however, in the European Union may lead to comparable problems encountered under GATT rules. The ban on parallel importation of a product protected under copyright, trademark or patent law may undermine the value of commitments made in the schedules of concessions. Operators of Members may be entitled to cross-border trade and establishment but may be barred from importing products put on the market under a licence or acquired as a third party in another Member. For example, a company offering music streaming in the United States may be barred from offering licensed works in the European Union due to regional exhaustion of copyright, fostering market segmentation and eliminating competition despite the right to cross-border trade in the field of related cultural services. Access to websites may be blocked, or certain jurisdictions excluded from online sales of services. Or, assuming that big data is proprietary information and protected by copyright, the flows and use of such data licensed to a subsidiary in a different jurisdiction could be barred from being used under regional exhaustion within the European Union. Proprietary information stored by a company in a cloud in a particular jurisdiction and licensed for use could thus be stopped and banned from being used in the European Union by a third party without the consent of the rightholder. This may force rightholders to store proprietary information within the European Union in order to secure access and use. The impact of IP protection on managing and harnessing big data remains to be explored.Footnote 122
In the end, all of this could conflict with MFN obligations under Article II GATS and in sectors that are subject to schedules with national treatment obligations of Article XVII and Article VI. The latter provides that in scheduled sectors, ‘each Member shall ensure that all measures of general application affecting trade in services are administered in a reasonable, objective and impartial manner’.
Under GATS, restrictions of national treatment and non-discriminatory market access may be justified under Article XIV GATS, which is modelled after Article XX GATT discussed above. Panels and the Appellate Body recognised the parallel structure and methodology with Article XX(d) GATT.Footnote 123 Interestingly, the provision does not entail an explicit reference to IP rights but is limited, in the present context, to measures necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this agreement, including those relating to (i) the prevention of deceptive and fraudulent practices. Panels and the Appellate Body recognised that the list is non-exhaustive.Footnote 124 Laws and regulations relating to IP protection therefore are subject to the same analysis made under Article XX(d) GATT, including the necessity test discussed above.Footnote 125
Again, it would seem questionable that national exhaustion or regional exhaustion of IP rights, to the extent that exhaustion applies in the first place – such as in software – could be justified across the board as a matter of principle, which amounts to overbroad prescriptions, while restrictions may be justified on a case-by-case basis. Finally, it is important to note that national security exceptions under Article XIVbis may play an increasing role in areas related to the digital economy, and trade restrictions on IP-related products may be justified in defence of essential national security interests. For example, import restrictions on copyright-protected online software and updates of programs may be justified in these terms, even though a country operates international exhaustion in copyright law covering big data and digital trade. Overall, as under GATT, national and regional exhaustion is overbroad and may conflict with provisions of the GATS Agreement. On the other hand, the latter being stricter in scheduled sectors, undermines the operation of national and regional exhaustion and calls for tailor-made restrictions under Article XIVbis or the invocation of essential national security interests.
An entirely different issue here is the enforcement of such disciplines in the digital economy. It remains an open question as to how restrictions of electronic commerce induced by national or regional exhaustion can be effectively enforced.
F. Preferential Trade Agreements
Finally, we turn to the impact of Article XXIV GATT and Article V GATS allowing for the formation of the preferential trade agreements (PTAs). Such agreements privilege some states or separate customs territories and thus deviate from the MFN principle. Under the TRIPS Agreement Footnote Footnote 1, as discussed earlier, such privileges are limited to customs unions and separate customs territories, but do not extend to free trade agreements and agreements on comprehensive economic cooperation where Members keep their own external economic regime.Footnote 126 Under GATT, privileges relating to parallel trade can be extended, and limited, to customs unions as well as to free trade areas. Under GATS, they can be extended to all Members of an economic integration agreement, essentially eliminating all discrimination of service providers.
Both Article XXIV(5)(a) and (b) GATT and Article V(4) GATS provide that regulations within the PTA must not (on the whole, in customs unions) be more restrictive towards the rest of the world. To the extent that a country allows for parallel trade and international exhaustion prior to joining a customs union or a PTA, a return to limitations of parallel trade and regional exhaustion is inconsistent with these provisions. The Silhouette ruling of the European Court of Justice, mandatorily imposing regional exhaustion to Austria and leaving international exhaustion behind, was inconsistent with this requirement.Footnote 127 Article XIV and Article V GATS thus further undermine the doctrine of mandatory regional exhaustion applied across the board by the European Union and EEA, unless the latter keeps international exhaustion in relation to third countries in accordance with the Maglite ruling.Footnote 128
The discrepancy between GATT, GATS and TRIPS may explain why the doctrine of regional exhaustion, developed in the EEC, has not been extended to free trade agreements, with the exception of the EEA Agreement – which includes the EU Member States of Norway and Iceland. One would expect that regional integration amounts to a mainstay of modern economic trade agreements. In fact, the agreements remain silent or, in the case of the United States, positively prescribe national exhaustion of patentsFootnote 129 or leave the issue entirely to the parties, such as in the 2020 United States–Mexico–Canada Trade Agreement (USMCA).Footnote 130
Importantly, the privileges accorded under regional trade and integration agreements can only stand to the extent that national or regional exhaustion can be justified under Article XX GATT. Where it is found that the necessity test is not met in the first place, the operation of national or regional exhaustion is undermined and preferential rules cannot be justified under Article XXIV either. The configuration again, as a result, steers towards the adoption of international exhaustion as a general rule, while leaving national and regional exhaustion to more specific sectorial exceptions.
G. Conclusions
Both GATT and GATS undermine the operation of national and regional exhaustion in Article 6 TRIPS by means of rules applicable to the restrictions of parallel trading. These agreements do not regulate parallel trade amounting to international exhaustion but rather result in treating national and regional exhaustion as subject to the disciplines of Article XI, III and XX GATT – in particular the necessity test, and thus also result in the need to calibrate rules on parallel trade in line with the principle of proportionality. The impact of GATS on parallel trade is much less explored and remains unclear. It may be largely non-existent, to the extent that copyright is operated under international exhaustion or rights to not exhaust in the first place in the digital age. It may, however, cause problems under regional and national exhaustion. Rights to provide services under the four modes of the agreement and in schedules may tend to undermine national exhaustion, to the extent that the latter impedes these market access rights by limiting cross-border trade in services protected by IP rights.
A comprehensive analysis of WTO rules shows that the issue of exhaustion is not limited to Article 6 TRIPS Agreement. Article 16 TRIPS shows that even provisions within that agreement have a bearing on parallel trade. While states formally remain free to define the geographical scope of exhaustion as they wish and prefer, the application of the GATT Agreement – and potentially also the GATS Agreement – undermines the operation of national and regional exhaustion. As a practical result, the multilateral trading system undermines the operation of national and regional exhaustion and implies that these doctrines are used as exceptions where less intrusive regulations are not workable.
In particular, the necessity test of Article XX(d) GATT and of Article XIV GATS, applying the principle of proportionality, does not allow for uniform answers. Based on the economic analysis of welfare effects, the answers will vary from sector to sector, from right to right and even within one field. Assessments may also differ in light of the industry and regulations at hand. It needs to be examined to what extent one of the tools listed, or additional ones, may satisfy the regulatory purpose of IP protection at hand. It is possible that national or regional exhaustion will stand the test, if workable and less intrusive alternatives fail. It however no longer stands as a general proposition across the board.
A close analysis of WTO law, in particular GATT 1994, reveals that the doctrines of national and regional exhaustion are constitutionally overbroad.Footnote 131 They privilege rightholders in external relations on all accounts, and they go beyond the scope of rights in domestic commerce without assessing the welfare effects. Exhaustion is binary, either national or international in a particular case, and tertium non-datur, granting additional rights in one case but not the other. Such rigidity is hardly able to cope with the complex economic configurations in different sectors identified by economists. A more nuanced approach is required in international economic law. An assessment under Articles XX GATT calls for a sectorial cost–benefit analysis, which may or may not justify the ban of parallel importation. The point is that under the text of necessity and proportionality, neither the test of capacity nor of indispensability can be met across the board, and in many configurations the concerns can be addressed by recourse to more specific trade instruments – entailing tariffs, labelling, import licences, price controls, restrictions of supply and product differentiation. These options often are not only less intrusive but also more capable to address modern regulatory challenges in parallel trade in the age of digital trade and climate change.
Today, tensions mainly arise in patent law. While there is a general trend in trademark and copyright to apply international exhaustion, the area of patent law – and in particular the pharmaceutical and chemical sector – remains conceptually controversial. The problem exists across the board for all forms of protection with the doctrine of regional exhaustion in the European Union. It is in patent and EU law that a more in-depth assessment and work on alternate and less intrusive regulations of parallel trade are warranted, which may eventually lead to the revision of Article 6 of the TRIPS Agreement. The adoption of international exhaustion in patent law by the US Supreme Court and by China pave the way to revisit national and regional exhaustion doctrines in domestic law and international agreements, taking into account WTO rules beyond the TRIPS Agreement. Technological developments will support this evolution. It would seem that the doctrine of national and regional exhaustion is increasingly ineffective in the age of digital economy and transboundary sales. Traditional tools of implementation in private law and border enforcement need to be redesigned for the digital age. Finally, the need for enhanced transfer of technology in renewable energy and sustainable agriculture, to address climate change mitigation and adaption, calls for rethinking the doctrine of national and regional exhaustion.Footnote 132 It is imperative to encourage dissemination of clean technology as a matter of common concern of humankind.Footnote 133
We recall that Josef Kohler introduced the doctrine and notion of exhaustion in the process of nation building, without distinguishing between national and international exhaustion.Footnote 134 The doctrine was not meant to segregate markets beyond national borders, implying international exhaustion. Geography no longer should matter in exhaustion. It is time to go back to the roots of the doctrine and to address regulatory challenges by appropriate means and ‘clinical surgery’. We should simply talk about the exhaustion of rights in international economic law and leave fine-tuning of cross-border parallel trading to international trade regulations in different sectors of the economy.
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