Benefits of parallel imports suffice to apply the exhaustion:

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It is beyond doubt that restricting parallel imports benefits trademark owners and the local licensees. The application of the doctrine of international exhaustion and resultants parallel imports are resented by the local licensees.

The economic interests of the consumers appear to justify the application of the doctrine of international exhaustion so as to reap the benefit from lower prices, resulting from parallel importation and greater competition. If the parallel imports do not interfere with the distinguishing, origin and quality functions of a given trade mark, the two benefits listed above would suffice to apply the principle of exhaustion.

Some experts equate the benefit of lower prices due to competition among white and grey goods with national interest. Import monopoly in the hands of local rights holder cannot benefit developing countries even if the imports mature at lower prices.

It is submitted that at times, domestic production, using local raw materials and resources may serve the national interest better even if the consumer has to pay higher end prices as it contributes by way of spin off effect to employment and the economy. Creation and export of jobs is a serious enough issue.

Meaning and exhaustion of rights:

The argument advances in the cases is that once the goods marked with the trademark are put in the market by the owner or by the licensee, the exclusive right in sell those goods bearing the trademark is exhausted by this first act of putting the trademarked goods into the market. A third party may, after legitimately purchasing these goods, sell them in any of the country markets. The owner or any of the licensees cannot prevent the sale  of such trademarked goods, on the basis of above mentioned theory.

Rights holder earns his due by putting the goods for first sale:

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It is based on the concept of free movement of goods put into circulation by the consent or authority or right holder. The right of restricting further movement is exhausted, because the rights holder has already earned his part, by the act of putting the goods for first sale in the market.

It means if the marked goods are once put on the market by the owner or with his consent, and once purchased legitimately, the IP owner or any one deriving his title from him cannot prevent sale of such goods, the exclusive rights to sell the goods which bears the mark get exhausted by the first sale, the right to sell the goods bearing the mark cannot be exercised twice in respect of the same goods.

A definition of the principle of exhaustion is as follows:

Once a branded product has been put on the market by the trademark proprietor or with his permission, the trademark is exhausted, which means that the  rights therein are not infringed by further circulation of the product within the area where the same proprietor owns these rights, even if national boundaries are passed.

Object of IPRs is to protect the right and right related goods and not the distribution system. Once the right is manifested in the goods which have been put on the market by the free will of the right holder, his right is exhausted there and he has no control over the goods from the IPRs viewpoint, they then would be governed by the rules of trade, and in this sense IPRs become trade related.

Conflict with territoriality principle:

The exhaustion of rights principles comes in enshrined in the Paris convention. Parallel imports can possibly be allowed only by the application of the doctrine of international exhaustion of rights to the cases where there is a common connection among the trade marks.

Common ownership or connection:

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It cannot be applied to cases where there are two independent trademarks, belonging to two different right holders, similar to get-up and appearance. Exhaustion refers to international exhaustion in relation to the trademarks which are connected either by parent-subsidiary or common connection.

The exhaustion principle is applied differently in different jurisdictions with varying combinations of ownership of the trademark or of origin/source of the trademark. The application of the exhaustion of rights principle or common control exception to the monopoly right of import of trade marked goods encourages completion inter se among the licensee and or manufacturers of trademarked goods. It results in prohibition of possibility of markets allocation/segmentation by trademark proprietors.

Forms of exhaustion:

Exhaustion may take three forms: International, domestic and regional exhaustion (specified countries)

Domestic exhaustion:

Under domestic exhaustion, once the goods have been put on the domestic market by the right holders or by third parties with his consent his right is exhausted in the domestic territory. Domestic exhaustion is generally provided for in almost all countries. The 1999 act provides for domestic exhaustion in section 30. Merely providing for domestic exhaustion and not for international exhaustion has been opposed on the ground that, it allows the right holder to extend exclusive right over the entire distribution system. Thus, it has the potential of eroding competition from within.

International exhaustion:

In international exhaustion when the goods are put into the market, by the right holders or with his consent in any country, the rights are exhausted for other national jurisdiction as well.

Regional or EEC practice of community:  level exhaustion:

A third form of exhaustion was evolved by EEC, i.e. exhaustion within community. In the EEC, the exhaustion principle extends to the territories of member countries. In the example under the heading parallel imports, if the U.K. licensee exports to France or Italy, the exhaustion principle would be applicable. Within the territory of EEC any sort of control on destination of goods is expressly prohibited by the EEC regulations. Once the goods have been placed in the market of any EEC member under the authority of the trademark owner, it can be freely marketed in any other country without any control by the trademark owner, even if the trademark rights are different in some of these countries. This has been necessitated by the competition requirement of the treaty of Rome (1957) and has been done by application of the exhaustion principle.

Dichotomy of existence and exercise of IPRs:

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The European court of justice has drawn a dichotomy between the existence and exercise of the rights. The court recognized the existence of rights, but stated that the exercise of these rights comes in conflict with the treaty of Rome and competition is impinged which cannot be allowed. Thus the trademark rights continue to exist but are not allowed to be exercised to restrain free flow of goods within EEC. It is not relevant that the goods are not protected by trademarks in the country where they were first put into circulation.

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