Exhaustion of Patent Rights in Brazil

The concept of exhaustion of rights has never been expressly included in Brazilian legislation and only now with the new Industrial Property law (Law nº 9279/96), which came into force on May 15, 1997, this has finally happened.

Referring specificaly to exhaustion of patent rights, the Brazilian law adopts the concept of national exhaustion, expressed by the combination of its articles 42 (which defines the rights conferred by a patent) and 43 (which refers to exceptions of those rights).

Article 42 grants the patentee the right to prevent importation of products protected by the patent, as well as products directly obtained by a patented process. Article 43 (IV), on the other hand, states that those rights do not apply "to a product manufactured in accordance with a process or product patent that has been placed on the internal market directly by the patentee or with his consent".

In view of the fact that this provision has never been in any previous IP legislation in Brazil, there is almost no court decisions involving exhaustion of rights and virtually none involving exhaustion of patent rights or any dispute involving parallel. importation of patented products.

International legislation, in turn, adds very little to the question. The two main international treaties referring to IP rights are the Paris Convention and the TRIPS agreement.

The Paris Convention

The only provision contained in the Paris Convention which refers to importation of patented products is article 5quater, which establishes that

"When a product is imported into a country of the Union where there exists a patent protecting a process of manufacture of the said product, the patentee shall have all the rights, with regard to the imported product, that are accorded to him by the legislation of the country of importation, on the basis of the process patent, with respect to products manufactured in that country."

This article, however, refers to importation of products protected by a process patent in member countries, without making any mention or distinction as to the origin of the product or whether was it placed in the international market by the patentee or with his consent. In other words, it does not directly address the question of parallel importation, actually leaving the question to national laws.

The TRIPS agreement

Article 6 of the TRIPS agreement establishes that no provision contained in the Agreement can be used in adressing exhaustion of IP rights in a dispute settlement conducted under the scope of the Agreement. This means that commercial disputes between member countries involving the issue of exhaustion of IP rights can not be judged based on the provisions of the TRIPS agreement.

In a first glance, one could be led to understand that the TRIPS agreement, by "washing its hands" as far as questions involving exhaustion of rights are concerned, is in favour of the adoption of international exhaustion of rights, that is to say, in favour of allowing parallel imports.

This can be easily contested, however, by the fact that TRIPS is an agreement intended to address IP matters from a commercial perspective and, from this point of view, prohibitions to parallel importation can not be seen as non-tariff trade barriers, as some bodies of opinion understand, since parallel importation and exhaustion of rights are questions basically referred to infringement of patent rights, that is to say, an essentially private matter.

After these initial considerations, I will address the hypothetical cases proposed by Mr O’Reilley based on the Brazilian law.

HYPOTHETICAL SITUATIONS

Basic Facts

ABC Company invented a novel microprocessor chip. ABC acquired and owns a patent covering the chip in many countries worldwide, including each of Argentina, Australia, Brazil, Canada, China, all countries of the European Union, (except Belgium), Japan, Mexico and the United States. The claim scope of each patent is essentially the same and broadly covers the chip.

Case 1

ABC makes the chips in France and sells them in France to XYZ. The chips as sold are not marked with any patent numbers, and XYZ does not know about any ABC patent. XYZ resells the chips to customers in countries around the world. ABC sues XYZ for patent infringement based on sales in each country (other than France) in which ABC owns a patent. In each country, how does the court decide ?

Article 42 of the Brazilian Industrial Property law (law nº 9279/96) grants the patentee the right to prevent unauthorized third parties from importing to the country a product which is protected by a Brazilian patent. Article 43 (IV), on the other hand, provides an exception for products placed in the internal market by the patentee or with his consent.

The question here is whether a product sold in the external market by ABC would not carry therewith an implicit authorization for its buyer (XYZ) freely to resell it anywhere in the world, due to an exhaustion of rights ocurred with the first sale in France.

In spite of the absence of court decisions addressing this particular point in Brazil, in my view the probabilities are more favourable to the patentee, in view of the following aspects :

(i) the act of infringement is carried out, according to article 42 above, by the importer of the chips and not directly by XYZ.

(ii) article 42 is the general rule, while article 43 refers to exceptions and specificaly mentions the internal market;

(iii) it is reasonable to expect that it was not ABC’s desire to allow XYZ to export the product bought in France to other markets where ABC also has patents for the same product; and

(iv) there is no express consent from ABC allowing importation to Brazil of the products sold in France to XYZ.

In view of those aspects, it is my opinion that a Brazilian court would very likely decide in favour of ABC.

Important note: It is to be noted, however, that there is a slight possibility of the court construeing the situation in the sense that XYZ could be considered a contributory infringer under §1º of article 42 (since its exporting act assumes, necessarily, an importing act, which is a direct infringement under article 42), or even as a direct infringer, if the court construes the act of exporting to Brazil as a sale in Brazil (which, again, is a direct infringement under art.42).

These possibilities, however, could prove to be of little practical significance, due to the extremely slow process of judicially summoning XYZ in its country of origin and, if condemned in the infringement action, having it actually paying damages to the patenteee. I believe that ABC would always prefer to sue the importer in Brazil or to sue XYZ in its country of origin directly.

Case 2

The same as Case 1, except ABC makes and sells the chips to XYZ in Belgium. ABC has no patent in Belgium. Is the court decision in your country any different ?

The fact that the chips were sold to XYZ in Belgium, where ABC does not have a patent, should have no effect in the decision taken by the court, since the question would be examined considering the Brazilian law versus the act of importation.

Case 3

The same as Case 1, except the chips, when sold, are marketed with each patent number, but otherwise XYZ is not advised of any resale restriction. Is the court decision in your country different ?

Again, this should not alter the decision. One thing that must be kept in mind is that any court decision on an infringement action, would necessarily have to be based on facts occurred in Brazil and on the person carrying out the act of infringement, which in this case (as well as in cases 1 and 2) would be the importer domiciled in Brazil. The fact that the products are marked with the number of the Brazilian patent would have no effect in my opinion in the decision of the infringement action and could possibly have an adverse effect, of stressing to the judge that the products are actually legitimate products made by the patentee, thus leading him to understand that an infringement would not be possible.

Case 4

The same as Case 1, except at the time of sale to XYZ in France, ABC makes XYZ sign an agreement which states:

Purchase of these chips does not give XYZ any license or right to use or sell the chips in any country (except France) in which ABC owns a patent covering the chips. XYZ hereby agrees not to use or sell a chip in any such country without prior written permission from ABC.

How do the courts decide the patent infringement claim arising from XYZ’s sale of chips ?

In this case a new fact has been introduced, namely, a written agreement, whereby XYZ agrees not to sell the chips in other countries where ABC has a patent.

Notwithstanding this new fact, the question referring to the infringement action itself remain unaltered, since the basic facts which the court should consider are the same, namely, the Brazilian law and the infringer in Brazil. The agreement between ABC and XYZ would not, in my opinion, have any influence in the decision as to the infringement, but would, very likely, provide basis for ABC for sueing XYZ for breach of contract in its country of origin.

Case 5

The same as Case 4, but XYZ sells the chips in France to Big Computers Inc. without any notice of the restriction in the agreement set out in Case 4. Big Computer puts the chips into computers and sells the computers around the world. ABC sues Big Computer in each country in which ABC has patents (except France) for patent infringement based on sale of the chips as components of computers. How do the courts in your country decide the infringement issue ?

The same comments apply to this case as in the former four cases, as far as the infringement action is concerned.

In any case, the infringement would be determined based on the actual patent claims (which I am assuming refer only to the chip) and damages could be calculated, amongst other criteria, based, for example, on the percentage represented by the patented chips in the net sales price of the computers.

Case 6

The same as Case 5, except that each chip, when sold to XYZ and resold to Big Computer has a label on it that states:

This chip is not licensed for use or sale outside of France.

How do the courts decide the claim of infringement against Big Computer ?

The same comments apply with regard to the infringement action as in cases 1-5 above.

Case 7

The same as Case 1, but prior to any sale of chips, ABC granted to a chip maker in each country an exclusive license solely under ABC’s patent in that country to make, use, sell, offer for sale and import chips in that country. When XYZ sells chips bought from ABC in France in the country of the licensee, ABC sues for infringement. How does the court in your country decide the issue ?

Again, the same general rules apply to the infringement determination, but in this case the licensed chip maker in Brazil would very likely be co-plaintiff, together with ABC, against the infringer.

Case 8

The same as Case 7 where each patent is exclusively licensed to a company in the country that issued the patent. A first exclusive licensee in one country makes chips in that country and sells the chips in a second country exclusively licensed to another. ABC sues the first licensee in the second country for infringement. If your country is the second country, how is it decided ?

As mentioned above, ABC, together with the second licensee could only sue the importer to Brazil of the chips produced and sold by the first licensee in its country. The hypothesis of sueing XYZ, as commented above, is remote and of reduced possibilities of success.

Case 9

At the time ABC obtains its patents, Little Co. in its country obtains a prior use right permitting it to make and sell in that country chips identical to ABC’s chips. Chips made by Little Co. are purchased by XYZ in Little Co.’s country and resold in a country in which ABC has a patent. ABC sues XYZ for infringement of the ABC patent. How do the courts in your country decide the case ?

Firstly, prior user rights would permit Little Co. to make and sell the chips under the same conditions it had been operating until the granting of ABC’s patent in Brazil. Accordingly, the amount of chips sold by Little Co. (total sales) could not be increased after granting of ABC’s patent.

This could turn it unworthy for XYZ to buy from Little Co.