Samsung at the Supreme Court: Nationalising Exhaustion?

As expected, Samsung appealed the Delhi High Court order endorsing the concept of “international exhaustion” (parallel imports) under the Indian Trademarks Act. For those not in the know, we’ve outlined the concept of exhaustion and contrasted “international” with “national” exhaustion in this article here.

For ease of convenience, let me illustrate this with an example.

Assume that Apple Inc owns the trademark “iPhone” in the US, EU, India and several other jurisdictions including Bangladesh. An India retailer figures out that the iPhone sells cheaper in Bangladesh than in India. He imports the phones from Bangladesh into India and begins selling it here. Apple sues him, alleging that his sales within India amount to an infringement of their trademark (despite the fact that he is essentially selling Apple’s very same iPhones, without alteration of any sort). The reason Apple does this is to ensure complete control of its markets and to preserve its exclusive licensing relationship with partners in India, Bangladesh etc.

If the law in question recognises the doctrine of international exhaustion or parallel imports, Apple will not be able to prevent the Indian imports and sales, since it had already sold the “iPhones” that are now in circulation.
However, if the law disregards the notion of international exhaustion (and recognises only national exhaustion), then Apple could prevent the said imports.  Such disregard however flies in the face of “free trade” and often works to the detriment of consumers who might have otherwise been able to access cheaper versions of perfectly legitimate branded good.

From a purely jurisprudential perspective, the law leans in favour of international exhaustion (also referred to as the “first sale” doctrine) and has traditionally been very averse to any control over goods that had been purchased legitimately, a view best expressed in an 1886 copyright case (Henry Bill vs Smythe).

Besides, the very essence of trademark law is to guard against customer confusion of any sort. An iPhone by Apple is an iPhone by an iPhone by Apple…no matter how many times it changes hands! Permitting circulation of legitimately purchased trademarked goods across borders does not in any way run counter to this basic underlying rationale of trademark law. If at all anything, it supports it!

However, given the present dynamics involving international trade and market power, it is not surprising that leading corporations hope to liquidate the concept of international exhaustion and convert it to a rather etiolated “national exhaustion” doctrine, wherein a branded good can change any number of hands within the territory of a nation, but the moment it is imported or exported, permission from the brand owner has to necessarily be procured.

Back to the facts underlying the Samsung appeal:

The Times of India reports thus:

“The Supreme Court has issued notices on a complaint filed by South Korea’s Samsung Electronics against the sale of imported Samsung-branded products without its authorisation, an issue which has major implications for trade and business in the country.

..Samsung was represented by senior counsel T R Andhyarujina, while Shyam Divan

appeared on behalf of local traders who were importing and selling printers bearing the Samsung trademark without the company permission. A three-judge bench, led by Chief Justice Altamas Kabir, issued the notices which will have to replied to within four weeks.
Samsung had earlier sought an order from a lower court seeking an injunction restraining the traders from infringing and diluting its trademarks, but failed. The Delhi High Court had on October 3, 2012, ruled that local traders can import goods bearing a registered trademark into India and sell it further without any authorisation from the registered proprietor. It held that such sales were legal under the Trade Marks Act, 1999.
But the company claimed that the HC had ….wrongly applied the principle of international exhaustion to the Indian market.”
Delhi High Court: Division Bench vs Single Judge
Given that I am a strong supporter of international exhaustion and have had several heated debates and writings on this front, I really hope the Supremes uphold the order of the Delhi High Court.
In this order, the high court (bench comprising of Justices Pradeep Nandrajog and Siddharth Mridul) effectively reversed the decision of a single judge who’d held that the Indian trademark act recognised only  “national” and not “international” exhaustion.

A large part of the interpretative dispute turned on whether or not the Statements of Objects and Reasons underlying the Trademarks Act could be used as an aid to interpretation. This Statement, which made it clear that our legislature (while introducing section 30 (3) and (4) of the present trademarks act) was keen on “international exhaustion” reads thus:

“Sub-clauses (3) and (4) recognize the principle of ‘exhaustion of rights’ by preventing the trade mark owner from prohibiting on ground of trade mark rights, the marketing of goods in any geographical area, once the goods under the registered trade mark are lawfully acquired by a person.”
While the single judge refused to consider these aids in view of the fact that the statute admitted of a very plain and simple direct reading, the appellate bench (speaking essentially through Justice Nandrajog) disagreed, holding instead that the Statement of Objects and Reasons was a very important “aid” and could be read in to resolve any ambiguity in interpretation. The appellate bench tellingly notes:
“We have noted herein above that the learned Single Judge, though has opined that his conclusion is based on a plain reading of the statute, but actually is the result of a laborious decision which spans 156 pages. Surely, it would be a contradiction in terms to write 156 pages on a subject of interpretation of a statute and simultaneously maintain that a plain reading of the statute is being done.”
In what is now coming to be a pattern of sorts, Justice Nandrajog intersperses his astute legal analysis with a litany of literary outpourings, likening the legal dispute to a maritime voyage filled with ships, lighthouses and what not. He introduces the dispute thus:
“While chartering the voyage the learned Single Judge has steered the ship in the choppy waters guided by what he saw to be lighthouses. Since we are re- navigating the same waters, our job in appeal would be to see : Whether what were perceived to be lighthouses were actually mirages, and due to which, on the wrong belief that these were rocky areas, the course of the ship was steered in a wrong direction to reach a wrong port of destination.”

As this “international exhaustion” laden legal vessel enters the choppy waters of the Supreme Court, one can only hope that it does not go down like the Titanic. But that the Supremes uphold the fine legal reasoning of the Delhi High Court and dock it on firmer legal shores.

Copyright and Patents: International Exhaustion Under Attack?
All in all, the principle of international exhaustion is coming under serious attack in India. It made headlines in 2011 when the government executed a stunning volte face and hurriedly removed an amendment to section 2(m) of the copyright bill that would have recognised international exhaustion and legalised parallel imports in India. This was particularly surprising, given that the said amendment was initially proposed by the very same government and had found strong support in a Parliamentary committee report reviewing the bill.
Upon strong opposition in Parliament, the government promised to refer the issue to a committee. And refer it did to a committee under the chairmanship of noted economist, Prof Rajesh Chadha of the National Council for Applied Economic Research (NCAER).
The Chadha committee held a series of consultations and meetings with a number of stakeholders and is expected to issue its report shortly.
A little after the copyright volte face above, the notion that our patents act endorsed the doctrine of international exhaustion was questioned by Sai Deepak, in a pubic interest litigation (PIL) filed before the Delhi High Court. Unfortunately, the court ducked the issue, holding that the petitioner lacked standing (locus standi) to file the PIL.
Assuming the patents act does endorse international exhaustion (and I strongly believe it does), does section 107A restrict itself to an exhaustion principle or does it go beyond?

I’d ruminated extensively on this issue (along with Mrinalini Kochupillai, an ex blogger at SpicyIP and dear friend who now does stellar work around plant variety protection at the Max Planck), in this paper here, offering suggestions on how one might interpret this provision to ensure compliance with that behemoth of an international instrument called TRIPS.

As we debate this issue in India, its interesting to note that the US Supremes are also ruminating over whether or not to endorse international exhaustion.

Certainly, interesting (and dare I say, exhausting) times ahead for many of us, as we struggle to stave off attempts to “nationalise” international exhaustion!

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10 thoughts on “Samsung at the Supreme Court: Nationalising Exhaustion?”

  1. Do you think there is some justification for sticking to national exhaustion in the case of luxury goods?

    In the case of luxury goods, lower prices actually adversely affect the reputation of the mark, which is what tradeamark law seeks to protect.

    Can there be a “carving -out” of sorts for this particular category of goods?

  2. Thats a great question Anon. As I understand it, a great number of these luxury goods sell at the same price in India, as they do in the US/EU. In which case, the likelihood of price arbitrage or that of a market for parallel imports is rather minimal, no? i’ve in fact noticed that in many cases, some of the imported brands (in India) cost more than they do in the US/EU.

  3. Ok, a related question is why we need trademark law to regulate the second sale of goods at all, then. Essentially, international exhaustion gives the re-seller the right to freely sell at any price, whereas national exhaustion lets the trademark owner regulate the re-seller’s price.
    Why should trademark law get into these questions?

  4. Shamnad.. would be interested in your viewpoint on exhaustion vs. the right to hold garage sales/christmas basement sales that is common in the West, or even our desi version of recycling by selling to the local kabadiwala for reuse??

  5. Sorry Shamnad.. forgot to add my name to the last comment @7.52 AM

    Does not take away from my interest in your viewpoint on this issue – whether a second sale in a garage/front law/jumble/to a kabadiwala etc. would be impacted by the principles that govern exhaustion?
    And if they would be – are they practically enforceable!!!

    Or do the principles of exhaustion apply only to a second sale for a purely commercial purpose such as re-export for sale in bulk?

    In patents and in the Indian context, this would also extend to “repair” that we have people carry out without the express authorisation of the seller of the product.

    Another interesting point – would my refusal to take out an AMC with the seller of a product and this being treated by the seller as a waiver of warranty also result in a waiver of trademark/patent rights by the seller.


    Guru Nataraj

  6. Hi Nataraj,

    Great questions.

    Most garage sales would be safe in my view, since they implicate only national exhaustion…which is permitted by most IP regimes…. And even if they were not covered, you are absolutely right–would be tough to enforce them.

    I guess repairs would be permitted barring contractual stipulations to the contrary….but then again, this raises issues of privity. Not sure on the AMC point though. Can you please elaborate a bit more? Thanks

  7. Dear Shamnad,

    Anon @8.01 pm was me…

    The question of an AMC related issue arose simply because, I guess, I spent too much time thinking about this :-).

    Practically all vendors of branded products persist in their attempts to get you as a purchaser to sign an AMC, and end with dire warnings that any repairs in the absence of an AMC, by any but an authorised outlet would render the warranty void.

    In a situation like this (which frankly is to coin a term, a “retail reality”, would I, being a customer, not be empowered to rely on exhaustion of all IP rights when my refusal to sign an AMC (annual maintenance contract – which includes an extension of warranty on some parts), and the consequent admonition by the vendor of loss of warranty, also amounts to a loss of IP rights. Simply put, the purpose of IP (whether patent/TM/design) is primarily also tied down to the quality of the product and a warranty as to its origin. At least, in the area of TM, where the value of the right is a significant function of the goodwill. The right of quality would also include a warranty that what I have bought will not fall apart on me. If this proposition is accepted, then an absence of an AMC, if accompanied by a denial of warranty rights by the manufacturer, should also act as a waiver of IP rights!! Or is my though process too far fetched!!!!!


  8. Hi Shamnad,

    Still wondering on this point:

    Essentially, international exhaustion gives the re-seller the right to freely sell at any price, whereas national exhaustion lets the trademark owner regulate the re-seller’s price.
    Why should trademark law get into these questions?

  9. Hi Nataraj,

    Sorry that I couldnt respond earlier. AMC does raise some interesting issues. But speaking from a strictly technical standpoint, should the existence of an AMC implicate exhaustion at all? The AMC and related warranties are not available if the “good” in question transfers hands in a way not envisaged by the initial owner/licensee who offered the warranty in the first place. But why should this influence exhaustion. In other words, exhaustion would dictate that there is no bar on transferring the said good; notwithstanding the fact that the warranty guarantee may not transfer. Or am I missing something here?

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