Copyright Patent

Eroding IP Exhaustion Through Conditional Sales?


Prashant’s persuasive critique of a recent Delhi High Court judgment dealing with principles of exhaustion was a delight to read. I want to focus on one issue that this case throws up:
Can an IP owner whittle away the normal principle of exhaustion through notices and “conditional” sales i.e. imposing conditions to accompany the sale of a product embodying that IP?

In the case at hand, could one argue that the sale was “conditional”, since the buyer of the book was put on notice of the condition that the book could only be sold or distributed in India? Since the relevant condition was breached by selling outside India, might one argue that there was a breach of contract?

Of course, a breach of contract does not immediately translate to a breach of copyright. In fact, in this case, it may be difficult to argue for breach of copyright, since section 14 of the Copyright Act 1957 saves from copyright infringement any sale or distribution of copies that are “already in circulation”. But could one persuasively argue that any future buyer of the book was on “notice” of the condition and had to adhere to it in terms of not selling the said book outside India?

If this were possible, we (as ordinary consumers) have something to worry about. For all that the IP owner would now need to do is to craftily place such conditions and impact our freedom to do what we wished with a legitimately purchased product. In short, the doctrine of exhaustion as we know it, could be whittled down considerably.

Mrinalini Kochupillai and me authored an article last year dealing with parallel imports and principles of exhaustion in the patent context. We highlight this worrying prospect of conditional sales and advocate for an amendment to ensure that exhaustion is respected in its true spirit and that all “conditions” of sale that attempt to whittle it down are ignored. I reproduce the extracts below, where we deal with this issue in the light of a US Supreme Court case, Quanta vs LGE:

“The Quanta decision is notable for another reason: it leaves open the question of whether or not a “conditional sale” precludes exhaustion. In other words, if the patentee or her licensee imposes a condition on the sale, such as the fact that the product can be used only once, can it be said that the rights in the patented good are still “exhausted” and a buyer is free to ignore the condition? There is a distinction between a suit for patent infringement and a suit for breach of contract.

US case law is almost unanimous in accepting that there could be a breach of contract claim in such cases. However, the court in Quanta did not explicitly decide as to whether the breach of such a condition would constitute a patent infringement as well. The court simply stated that in this particular case, the sale was an “unconditional” one.

Therefore under US law, it may well be possible to introduce “conditions” to accompany sales and thereby erode the principle of “exhaustion”.

Indian law ought to prevent against such a possibility by expressly indicating that exhaustion will prevail, notwithstanding any condition attached to the sale.

….We therefore propose the following amendment:

107B. Exhaustion of Rights
(1) For the purposes of this Act, the rights of a patentee or anyone claiming through such patentee shall be exhausted after a patented article has been sold once anywhere in the world (including within India), by or with the authorization of such patentee.

(2) The provisions of section 107B(1) shall apply in case of sale of any patented article, notwithstanding:

i) any contractual stipulation to the contrary by the patentee or her authorized representatives.

ii) The specific form of transaction between the patentee or her authorized representative and the buyer. In particular, any attempt to classify what is in essence a “sale” of an article as a licence shall be ignored for the purposes of this section.

iii) any notice in relation to the article placed by the patentee or her authorised representatives or any other party selling the patented article; unless such notice is essential to ensure public health or safety.”

For those interested in accessing the full text of this piece, please click here for a free download. Perhaps a clause stipulating that rights over works be exhausted after the first sale, notwithstanding any conditions or notices ought to be introduced into our copyright act to make the position clearer (along with an attendant provision that the same shall not constitute a breach of contract as well). What better time to advocate for such a clause than now when a copyright amendment bill is being scrutinised by a Parliamentary standing committee.

Shamnad Basheer

Prof. (Dr.) Shamnad Basheer founded SpicyIP in 2005. He's also the Founder of IDIA, a project to train underprivileged students for admissions to the leading law schools. He served for two years as an expert on the IP global advisory council (GAC) of the World Economic Forum (WEF). In 2015, he received the Infosys Prize in Humanities in 2015 for his work on legal education and on democratising the discourse around intellectual property law and policy. The jury was headed by Nobel laureate, Prof. Amartya Sen. Professional History: After graduating from the NLS, Bangalore Prof. Basheer joined Anand and Anand, one of India’s leading IP firms. He went on to head their telecommunication and technology practice and was rated by the IFLR as a leading technology lawyer. He left for the University of Oxford to pursue post-graduate studies, completing the BCL, MPhil and DPhil as a Wellcome Trust scholar. His first academic appointment was at the George Washington University Law School, where he served as the Frank H Marks Visiting Associate Professor of IP Law. He then relocated to India in 2008 to take up the MHRD Chaired Professorship in IP Law at WB NUJS, a leading Indian law school. Later, he was the Honorary Research Chair of IP Law at Nirma University and also a visiting professor of law at the National Law School (NLS), Bangalore. Prof. Basheer has published widely and his articles have won awards, including those instituted by ATRIP, the Stanford Technology Law Review and CREATe. He was consulted widely by the government, industry, international organisations and civil society on a variety of IP issues. He also served on several government committees.

10 comments.

  1. Mahendra Singh

    Dear Shamnad,

    An American publisher that sells a book for the Dollar equivalent of Rs 5500/- in US offers the same book to Indian consumers for Rs. 850/-, by bringing out a low cost edition through its Indian subsidiary. There is no change in the book’s contents (although the paper quality is slightly inferior). Now if the publisher puts a notice on the book’s cover stating that it may not be sold outside of India, you’d consider the notice as “craftily put?” I fail to understand how such a restriction is against the interest of the consumer who has already availed the benefit of low price. What’s more beneficial for the consumer? Paying Rs. 5500/- or paying Rs. 850/- and accepting the reasonable restriction regarding not exporting the copy? I think it’s a WIN-WIN situation that benefits the publisher as well as the Indian consumer. You have no objection to the practice of unscrupulous traders buying low cost copies from India in bulk and selling them in the US, making supernormal profits at the cost of the publisher and author? If this practice were to be legalised, how many people in US would buy the original edition? I’m no fan of the MNCs but your portrayal of international publishers as greedy capitalists out to cheat the hapless Indian consumer doesn’t seem quite fair to me.

    Regards,

    Mahendra

    Reply
  2. Shamnad Basheer

    Dear Mahendra,

    I don’t think you read my post carefully. My concern is not so much about the present case as much as it is about the potential of IP owners to push more and more conditions and slowly whittle away the freedom of the buyer. Today, we have a condition barring exports. Tomorrow, we may have a condition barring sales in other states of India. In the patent context, we may even have conditions restricting first time usage of the product in certain ways.

    IP rights themselves are complex and we have a regime that permits the splitting of rights, of owners, of products on which they apply, of markets, etc etc. Now with conditions after conditions imposed on products sold to consumes, we’re just going to get into a super complicated maze, where for every use of a consumer item, one may have to approach a lawyer!

    We often speak about the “certainty” of the law. But I wonder why we never think about the simplicity of the law?

    Reply
  3. Mahendra Singh

    Dear Shamnad,

    For the sake of “certainty” and “simplicity”, I’ll again limit myself to the case at hand, viz. restriction on export of low-cost editions. In the publishing industry, the practice of publishing low-cost editions in third world countries is quite old. Equally old is the imposition of restriction against sale or resale abroad. Over the last three decades or so, I haven’t seen IP owners in this industry attempting “to push more and more conditions and slowly whittle away the freedom of the buyer.” There’s been no change in the post-purchase restriction over these years. So, without any empirical evidence, one cannot simplicitically presume that IP owners would strangulate the consumer with ever-increasing restrictions on his liberty.

    You are advocating a blanket ban on post-sale restrictions, including in the arena of copyright/book publishing. Doing so would legalise leakage of low cost versions into first world markets on a large scale and faced with declining sales of expensive original editions, the publishers would simply stop publishing low cost editions, forcing readers in the third world to buy original editions at several times the cost – not a very rosy scenario from consumer welfare perspective!

    If “certainty” and “simplicity” are important in law, so is the “balancing” between the interests of IP owners and those of consumers. Any limitation on post-sale conditions should, in my view, be restricted to conditions that are unreasonable. Banning even reasonable restrictions may be counter-productive, as pointed out above.

    Regards,

    Mahendra

    Reply
  4. Shamnad Basheer

    Dear Mahendra,

    Fortunately (or perhaps unfortunately, depending on which side of the fence you are on), there is an answer to fears of benevolent producers refusing to come up with low priced editions in poorer countries. A liability or a compulsory licensing regime! If the terms of the GBS settlement are anything to go by, even our first world friends are now edging close to such a liability regime.

    And will such a regime disincentivise publishers from creating more? Oops..i forgot…they dont actually create! its the authors we must be concerned about and must therefore ask: will a CL regime impact their incentives?

    This is where your point on empirical evidence and simplistic assumptions really come in handy. Lets whittle away exclusivity through a CL regime and then see if we get a lower number of books each year? Unfortunately, we weren’t offered empirical evidence when we crafted these regimes in favour of rights holders. Surprisingly, each time an exception needs to be carved out, empirical evidence is now insisted upon. Clearly, what’s sauce for the goose has not been sauce for the gander!

    Reply
  5. Rajiv

    Empirical data: India ranks 16th in the world in publication of books per capita.
    (Source: http://www.wolframalpha.com/input/?i=Number+of+books+published+per+year+per+country )

    From these statistics, the following can safely be concluded: 1. that there are at least some authors from India whose books are sold across the world and in developed markets like UK and US. (Example-literature-At least some of the booker award winners in the past decade, science-quite a few in engineering and medicine)
    2. Content is non-discriminating in appeal: A book such as on Operational Amplifiers by Ramakant Gaekwad appeals equally to the intended audience. A book such as A Suitable boy…appeals equally..

    There is no benevolence on part of either publishers or authors for sale of books at a lower price in India. This is because the literate population in India who reads such books (eg. readers of this blog) is proportional to the number of people in the US. So even though the amount received per book is less (~1/10th based upon USD 110 vs Rs. 650), it is offset from the sheer numbers. It is pure business.

    However, if the publishers see that there is market cannibalization (different market is being effected by the sale of the product in another market), they might think twice. They might be tempted to set the price for the entire world at a same level. This would neither benefit the author nor the reader.

    Perhaps some more thought needs to be applied before adopting the advocated provisions.

    Reply
  6. A

    Dear Shamnad,

    In spirit I agree with you that any IP right and its application at the end of the day be in the benefit of general public at large; and not just the IP owner.

    However, I think you also made the same mistake that PrAshant did in his earlier post about the John Wiley case. The real crux of the matter was the violation of distribution right enclosed within the Plaintiffs’ copyright by the Defendants. The court was swayed by the fact that Defendants’ export violated the distribution right of the Plaintiffs, which is part of its copyright. It was not influenced by the conditional sale argument.

    I also agree with Mahendra when he says that the court only acted in the interest of the Indian students. I say fine balance of interest.

    APANJOT SAHOTA, Advocate

    Reply
  7. Shamnad Basheer

    Dear Apanjot,

    The mistake you make is that you’ve completely missed a fundamental section in the copyright act. Section 14(ii) clearly states that the copyright owner has the exclusive right only to “issue copies of the work to the public not being copies already in circulation.”. If the copies have already been sold once, then clearly they are “already in circulation”.

    Reply
  8. Shamnad Basheer

    I omitted to mention:

    Section 51(b) dealing with infringement, should, in my view, be subject to the overarching principle in section 14.

    In other words, the right to sue for distribution is only limited to copies that otherwise infringe and not to ones already in circulation at the behest of the copyright owner.

    Reply
  9. A

    Dear Shamnad,

    In my understanding, in order for a copyright owner to lose control of his work, he must issue his work by putting it in circulation. In this case, the Low Price edition books were never circulated in any area other than Indian Sub-continent. So, I think the plaintiffs only exhausted their rights in India and not in other parts of the world where it was yet to circulate the said books.

    The essence of the matter is “circulation”. If the work has been circulated in a territory, the Copyright owner cannot control its further distribution. But if the work is yet to be circulated in a particular area (in this case, US & UK) I think the copyright owner can control his work’s distribution as it directly affects the economic component of his copyright.

    The Plaintiffs were not concerned about resale of LPEs in India, but only about resale in those territories where the LPEs were yet to be circulated. The Plaintiffs have argued that the circulation of LPEs in territories other than Indian Sub-continent (US, UK etc) is infringement of their “distribution right” in its gamut of copyright; as the Plaintiffs have never circulated their works in such other territories.

    Therefore, the interpretation of Sec 14 read with its explanation as put forth by Justice Bhat in Warner Bros does not apply here.

    APANJOT SAHOTA, Advocate

    Reply
  10. Shamnad Basheer

    Dear Apanjot,

    But aren’t you forgetting the basic IP principle of territoriality. Once this copy gets out to the US, Indian courts don’t have jurisdiction right? And plaintiffs must sue in the US, which is what they did here as well.

    Reply

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