The K-Zone: Free movement of goods, and intellectual property

One of the founding principles of the EuropeanCommunities was the FreeMovementOfGoods, mandated by what are now Arts. 25-30 of the ECTreaty. The ECJ has taken a very expansive view of the type of activities that can amount to barriers to trade, so it is unsurprising that the relationship between intellectual property (IP) and free movement of goods would present a problem for the Court eventually. If ownership of IP in some product or another -- perhaps a trademark or a patent -- allows the right-holder to control how the product is distributed, then clearly there is the scope for such control to amount to a barrier to trade. If it does, then EC law obliges the member state to take steps to remove the barrier. In addition, since the Treaty articles on Free movement of goods undoubtedly have DirectEffect (see, e.g., VanGend1963), a person who believes his business has been affected by a restriction on trade by the exercise of intellectual property rights will have a cause of action under EC law in the national courts.

For a great many products -- computer software and music are obvious examples -- the owner's intellectual property is the only thing of value in the product. The tangible medium of distribution -- if there is one, which is increasingly uncommon -- is of little or no value. Even where the IP right is attached to tangible goods -- where it is, for example, a patent or trademark -- the IP right might contribute more to the value of the product to the consumer than the goods themselves. For example, a manufacturer may have spent many years and a great deal of money building up a reputation for high quality, and will rightly wish to prevent other people using its trademarks on inferior goods. The manufacturer may also wish to control how the product is sold -- which retail outlets stock it, for example -- and the price for which it is sold.

It is important to understand how important this issue is in the commercial context. Businesses are rightly very protective of their IP rights, and wish to exploit them to the full extent of the law. Businesses are very keen to prevent a `grey market' developing, in which their products are traded by unauthorized agents to the detriment of the price. If, for example, a manufacturer of `exclusive' designer clothes is allowed to use its trademark to prevent those goods being imported from a country in which they are sold more cheaply, and then sold in supermarkets alongside washing powder, then the manufacturer can probably squeeze twice as much money out of the consumer for the same product. Similarly, if a pharmaceuticals company can prevent its products being imported and sold to retail outlets and hospitals by unauthorized agents, it can control the point of supply and keep prices artificially high.

However retailers, who wish to pay the lowest price for the products they sell, and comsumer rights groups, have argued strenuously that trademarked and patented goods should be subject to the same free movement of goods as any other product. Clearly a producer of, for example, potatoes cannot exercise control over the price of its products once it has sold them, nor can it seek to prevent them being imported or exported in ways which might undermine its profits. So the vital question is the extent to which IP rights continue to attach to goods once they have been put on the market.

It has to be recognized that the EC Treaty does not seek to undermine IP rights within member states. Art. 295 says:

``This Treaty shall in no way prejudice the rules in Member States governing the system of property ownership.''

Moreover, where free movement of goods is concerned, Art. 30 relaxes the obligation on member states to remove barriers to importation where such barriers are necessary for the

``...protection of industrial and commercial property.''

Trademarks and other IP clearly fall within this category. It is also settled law within the EC that the owner of IP rights is entitled to control how products manifesting those rights are put onto the market within the member state (ArsenalVReed2002).

However, Art. 30 goes on to state that, even where a general class of prohibitions might be acceptable,

``Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.''

So, on the one hand, we have Art. 295 which seeks to uphold property rights, and the caselaw of the ECJ that makes it clear that manufacturers can exploit their IP rights to control how a product is put on the market. On the other, we have the limitation of Art. 30 that prevents its being used as a disguised restriction on trade, and previous case law of the ECJ that shows an extreme reluctance to allow member states to rely on Art. 30 (e.g., Dassonville, Cassis de Dijon_).

Consequently, in one of the first cases on this issue -- CentrafarmVWinthrop1973 -- the ECJ had to decide how to reconcile these conflicting provisions and interpretation traditions. It came to the conclusion that what an IP right guarantees is the right of the owner to control how the product is put on the market for the first time. After that, the normal rules on free movement of goods apply. The ECJ denied that `goodwill' was a property right or, at least, a property right within the scope of Art. 295. After the first sale, the IP rights were essentially `exhasuted'. Therefore, the manufacturer was not entited to prvent his products being purchased in one member state and imported into another.

There were a number of subsequent cases, many of these also involving the importer Centrafarm, in which manufacturers attempted to argue that IP rights were not exhausted on first sale. CentrafarmVHoffmanLaRoche1978 concerned the importation into Germany of the drug diazepam, which was sold by Roche under the name `Valium'. The unauthorized importer had purchased large quantities of the Roche product, and repackaged them in different package sizes still under the name `Valium'. Roche argued that the act of repackaging whilst using the same name was a new use of the trademark and, being unauthorised, was a violation of the owner's IP rights. The ECJ accepted that repackaging could, in principle, amount to a new use of the trademark, and could be restricted by the manufacturer, unless the importer can show that: