Examining Exhaustion of IP Rights in the United States and China

The doctrine of exhaustion, also known as the first-sale doctrine, is a cornerstone of intellectual property (IP) law. By limiting the control that IP holders can exert over their goods after the first authorized sale, this principle ensures that exclusive rights do not unnecessarily hinder competition or consumer access. Despite the existence of numerous international agreements on intellectual property, such as the TRIPS Agreement, IP rights protection and enforcement still largely operate at the national level. Countries retain the flexibility to implement their own IP laws and regulations based on their domestic priorities, economic policies, and legal traditions.

The United States and China, as two of the world’s largest economies, approach the exhaustion doctrine from distinct legal and economic perspectives. The United States, with its established judicial framework and case law tradition, often leads the way in shaping international exhaustion norms. In contrast, China, as an evolving economic powerhouse, applies its civil law-based system to meet the demands of its domestic and international markets.

Despite these differences, the exhaustion doctrine reveals surprising similarities between the two nations. Both recognize the need for balance: protecting the interests of IP holders while facilitating the free movement of goods. This article examines how the doctrine operates in the United States and China across trademarks, copyrights, and patents, highlighting the similarities, differences, and broader implications for international trade and IP law.

Types of Exhaustion

The doctrine of exhaustion is applied differently across jurisdictions and is typically categorized into three main approaches: national exhaustion, regional exhaustion, and international exhaustion. Each approach determines the extent to which an IP rights holder can control the distribution and resale of their goods after the first authorized sale or distribution.

a. National Exhaustion

Under the national exhaustion approach, the rights of an IP holder are considered exhausted only within the country where the goods were initially sold or distributed with the authorization of the rights holder. This means that once the goods are sold domestically, the IP rights holder cannot prevent their resale within the country. However, the rights holder can still prevent the importation of goods from other countries, thereby controlling parallel imports. National exhaustion is primarily aimed at protecting the domestic market and allowing IP rights holders to maintain different pricing strategies across countries, as seen in jurisdictions like China.

b. Regional Exhaustion

Regional exhaustion is a concept applied within a group of countries that have agreed to common rules regarding exhaustion. In this approach, the exhaustion of IP rights occurs within the entire region once the goods are sold or distributed with the authorization of the rights holder in any member country. This promotes the free movement of goods within the region, fostering a more integrated market. However, IP rights holders can still restrict the importation of goods from countries outside the region, retaining some control over their pricing and distribution strategies, as is the case in the European Union.

c. International Exhaustion

The international exhaustion approach posits that once the goods are sold or distributed with the authorization of the IP rights holder in any country, the rights are considered exhausted globally. This means that the IP rights holder cannot prevent the importation or resale of goods from any country, promoting the free movement of goods across borders and increasing competition. However, this approach can present challenges for IP holders seeking to maintain control over pricing or distribution strategies across different markets, as illustrated by the United States in its application of international exhaustion to patent law.

Exhaustion in the United States

The U.S. doctrine of exhaustion applies to copyrights, patents, and trademarks, albeit with variations in scope.

a. Copyrights

The U.S. Copyright Act, under Section 109(a) explicitly states that the owner of a lawfully made copy of a copyrighted work has the right to sell, lend, or otherwise dispose of that copy without requiring the copyright holder’s permission. This codification forms the backbone of the first-sale doctrine for copyrights, granting significant flexibility in the resale and redistribution of copyrighted goods.

However, the interpretation of the first-sale doctrine has faced challenges in the digital era. A prominent example is Capitol Records v. ReDigi Inc. 910 F.3d 649 (2d Cir. 2018), where the court ruled that ReDigi’s platform, designed to facilitate the resale of lawfully purchased digital music files, infringed on the copyright owner’s exclusive reproduction rights under Section 106 of the Copyright Act. The court emphasized that transferring digital copies inherently involves reproduction, which is not protected under the first-sale doctrine?.

Section 602(a) of the Copyright Act introduces additional complexity, addressing the importation and exportation of copyrighted works. This provision restricts the unauthorized importation of copies acquired outside the United States, deeming it an infringement of the copyright holder’s exclusive distribution rights. This restriction was notably clarified in the landmark Supreme Court case Kirtsaeng v. John Wiley & Sons, Inc. 579 U.S. 197, 136 S. Ct. 1979 (2016), where the Court upheld the principle of international exhaustion for copyright-protected goods, allowing legally purchased goods abroad to be imported into the United States for resale?.

b. Patents

In patent law, the exhaustion doctrine is recognized as a fundamental principle, although it is not codified in statutory law. Instead, it is firmly established through case law. The Supreme Court’s decision in Impression Products, Inc. v. Lexmark International, Inc. 581 U.S. 360, 137 S. Ct. 1523 (2017), reaffirmed the broad application of the doctrine to patented goods. The Court held that once a patentee authorizes the sale of a patented product, the patentee’s rights in that specific product are exhausted, regardless of any post-sale restrictions or the location of the sale.  “[R]estrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.” This decision affirmed the principle of international exhaustion for patents, highlighting that a patent holder’s decision to sell a product extinguishes their rights over that product worldwide.

Unlike copyright law, U.S. patent law lacks provisions akin to Section 602 of the Copyright Act that restrict the importation of patented goods sold abroad. Consequently, U.S. patent law provides broader freedom for parallel imports, making it more aligned with international exhaustion principles

c. Trademarks

Much like patents, the doctrine of exhaustion in U.S. trademark law is not codified in statutes but is well-established through judicial precedents. One of the foundational cases is Prestonettes, Inc. v. Coty 264 U.S. 359 (1924), where the Supreme Court ruled that a trademark owner’s rights are exhausted following the first authorized sale of a product bearing the trademark. The Court further clarified that subsequent resales or redistributions of the product are permissible, provided the product is not materially altered or misrepresented in a way that could harm the reputation associated with the trademark?.

Notably, like patent and unlike copyright, there is no specific statutory provision in U.S. trademark law that restricts the importation of genuine trademarked goods sold abroad, implying that U.S. trademark law also recognizes a form of international exhaustion.

Exhaustion in China

China’s approach to exhaustion reflects its evolving IP system, which applies the doctrine differently across copyrights, patents, and trademarks.

a. Copyrights

Although China’s Copyright Law does not explicitly codify the exhaustion doctrine, it has been delineated through judicial interpretations and case law. According to these rulings, the right of distribution held by a copyright owner is considered exhausted after the first authorized sale or distribution of a physical copy. This means that once a lawful original or copy of a work is placed into circulation on a tangible medium, the copyright holder cannot restrict its resale or further distribution.

However, the exhaustion doctrine in China does not extend to digital goods or the right of communication through information networks. This exclusion prevents the application of “digital exhaustion,” a concept increasingly debated worldwide. For example, courts in China have ruled that the unauthorized resale or sharing of digital files infringes upon the copyright holder’s exclusive reproduction and communication rights?.

b. Patents

The principle of patent exhaustion is explicitly codified in Article 69 of the Patent Law of the People’s Republic of China. This article states that once a patented product, or a product directly obtained through a patented method, is sold by the patentee, or by any unit or individual with the patentee’s permission, the patent rights are considered exhausted. As a result, any subsequent use, offering for sale, sale, or importation of that product by others does not constitute infringement.

The provision applies regardless of whether the patentee is a domestic or foreign entity, and sales can occur either within China or internationally. This suggests that both domestic and international exhaustion are recognized under the law for products that are sold or authorized for sale by the patentee. However, the law does not differentiate between sales with contractual limitations and those without, leaving uncertainty about whether such restrictions can override the principle of international patent exhaustion.

c. Trademarks

China’s Trademark Law does not explicitly reference the exhaustion doctrine, but the principle has been upheld in various judicial decisions. The right to control further circulation of trademarked products is considered exhausted once the owner has placed the products on the market. However, the doctrine does not apply when the resold products are materially different from the original, as this could lead to customer confusion about the product’s source and quality. Even though it is generally accepted that the international exhaustion regime applies, this is not accepted uniformly. This principle has been tested and upheld in various cases, such as disputes over the resale of refurbished electronic products bearing the original manufacturer’s trademark.

A Shared Commitment

The United States and China, as two of the world’s largest economies, share a complex and interdependent trade relationship, with bilateral trade in goods reaching approximately $575 billion in 2023. This extensive exchange has significant implications for IP law, as both nations strive to protect and enforce IP rights within the context of their economic interactions.

Historically, the United States has expressed concerns over China’s IP practices, citing issues such as inadequate enforcement and forced technology transfers. Interestingly, when it comes to the doctrine of exhaustion, both nations exhibit significant similarities. In both the United States and China, once an IP-protected product is sold with the authorization of the rights holder, the IP holder’s control over that specific item is considered exhausted. This principle allows for the free resale and distribution of goods, facilitating secondary markets and promoting consumer access.

In summary, while the United States and China have distinct legal frameworks and ongoing challenges in IP law, they converge on the exhaustion doctrine, underscoring a shared commitment to balancing IP protection with market fluidity.

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Author: ruskpp
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