Do you know what “exhaustion” of intellectual property rights means? Or that the law in this area governs whether importing genuine IP-protected goods is lawful or not?
If your company is involved or interested in the movement of goods protected by an intellectual property right into Canada, you need to understand the relevant “exhaustion” law in Canada. In fact, the law of exhaustion depends on the intellectual property right concerned.
The term exhaustion refers to the law determining whether an intellectual property right (such as a trademark or patent) can be enforced through an action for infringement, against the sale of genuine goods originally brought to market in a another country, then at the same time imported into Canada.
Canadian patent and trademark law does not provide a statutory defense called “exhaustion” as found in many other countries. In Canada, when we talk about exhaustion, we use the term rather generically, the legal issues involved being slightly different: generally, the principles governing the assessment of infringement apply regardless of geographical origin goods. It is a “common law” approach, with principles entirely consistent with those applied historically in the United Kingdom (in fact still today, to a certain extent) and in Australia. The approach is international in nature but potentially subject to restrictions on the facts.
Canada’s “exhaustion” regime therefore governs (among other things) rules on parallel imports of genuine goods into Canada – what genuine goods can be imported and from where. Here are some additional details:
In Canada, there is no legislative provision dealing with the concept of “patent exhaustion”. Nevertheless, the common law in Canada supports the basic principle that the purchaser of a patented product acquires an implied right to use the product without restriction. In fact, Canadian courts have likened the rights acquired by the purchaser of a patented product to an implicit license. However, there are exceptions.
In particular, when a patentee sells a patented product, the ownership of this product is transferred to the buyer. Accordingly, subject to any agreed restrictions, the purchaser has the exclusive right to do what he wants with the product without fear of infringing the patent, and the patent holder has no further rights with respect to this product. Where there are restrictive conditions imposed by a patentee on a purchaser or licensee, these conditions may run with the products if they become known to the purchaser at the time the product is acquired by the purchaser.
The key question is therefore whether the product was sold with or without restrictions. If no restriction has been imposed, the purchaser acquires general property rights in the product and the rights of the patentee are effectively exhausted with respect to that product. Where the patentee does not communicate to purchasers restrictions on the use of its products which would void the implied right or license to use, the purchaser is free to proceed with the use of the product without restriction.
In practice, it is currently open to a patentee to assert patent infringement where a purchaser of the patentee’s products has violated the applicable restrictions. Such an allegation of patent infringement would be in addition to any contractual claim the patentee may have.
Another somewhat related issue in Canadian law is the distinction drawn between the “repair” of a patented product and the “reconstruction” or “remanufacturing” of a patented product. A legitimate purchaser of a patented product is authorized to repair that product; however, such a purchaser will infringe the patent when the “repair” amounts to a rebuild. Thus, even where a buyer legally acquires a product from a patentee without any restrictions, the buyer’s subsequent activities may constitute patent infringement if the subsequent activities are of a nature to repackage.
In Canada, the Trademark Law does not expressly provide for exhaustion, but the courts nevertheless apply it as a principle in their judgments. Under the Act, the owner of a trademark registration for “hiking shoes”, for example, is protected against third parties who also sell hiking shoes in Canada bearing the same mark (or a mark of trade which is confusing). However, once a specific pair of boots bearing the mark has been sold by the mark owner to its original purchaser (for example, the mark owner’s wholesaler), Canadian courts generally do not consider subsequent resale of this pair of boots by the original purchaser or third parties as infringing the trademark rights of the trademark owner, even if the resale is made against the will of the trademark owner.
In addition, Canadian courts generally follow the principle of international exhaustion. This means that even if the original sale of a pair of hiking boots by the brand owner took place outside of Canada (e.g. the United States), exhaustion still applies when this pair of boots is imported and resold in Canada. Therefore, it may be difficult to prevent third parties from purchasing genuine/branded products from a brand owner in other countries and then reselling them in Canada without authorization. Courts do not consider these “grey market”/”parallel imports” products to be inherently offensive to trademark rights, as the affected products are genuine.
However, even the resale of genuine goods can give rise to liability or injunctive relief if done in a manner that is misleading to consumers. For example, consumers in Canada might associate the mark owner’s mark with insulated hiking boots for use in cold weather, if that was the type of product the mark owner had sold in the Canadian market. If an unauthorized third party began selling gray market boots bearing the mark — but designed and intended for use in a warmer climate — in Canada without alerting consumers to the differences between the two types of boots, the brand owner could credibly seek to restrain this behavior by arguing that consumers are likely to be deceived into buying boots that are materially different from what they wanted and needed.
Another form of deception which may give rise to liability is if the reseller falsely indicates to consumers that he has a relationship with the trademark owner, for example by being its authorized or exclusive distributor. In a recent decision, the Federal Court of Canada found that falsely claiming to be the exclusive distributor of a brand owner can constitute passing off (even if the products themselves were genuine); in this case, the Court found that the defendant’s misrepresentation misled consumers and damaged the reputation of the trademark owner.
There are other resale situations where trademark exhaustion may not apply, such as where the reseller incorporates the trademark owner’s product into an entirely new product but the trademark owner’s trademark remains visible; this can result in a finding of infringement if consumers perceive the new product (which is not from the trademark owner) to be trademarked, leading to confusion as to the source of the new products. Therefore, while Canadian courts generally follow the principle of exhaustion, it does not provide unauthorized dealers with bulletproof vest against trademark claims in all situations.