The Significance of Intellectual Property at the Community Level Vis-a-Vis Non-E.U. Trading Nations

When the WTO Agreement, with all its annexes (GATT (1994), GATS and TRIPs being the main ones) that resulted out of the Uruguay Round of Multilateral Trade Negotiations was finally signed on 15 April 1994, the European nations were engaged in a debate of extreme significance as to whether it was the European Community, to the exclusion of the Member States themselves, that had competence over the Agreement, or whether their jurisdiction was a shared competence with the individual Member States. Both representatives for the European Union, and representatives for each Member State had signed the Agreement, the procedure that had been previously agreed upon among themselves, but the European Commission had claimed that the WTO Agreement, with all its annexes, fell within the exclusive competence of the European Community.

A series of questions was submitted by the Commission to the European Court, which questions, in accordance with proper procedure, were then served by the European Court on the Council of the European Union and on each of the Member States. The European Parliament was also permitted, at its request, to submit observations. The substance of the dispute settled very quickly around two of the major annexes to the WTO Agreement, namely, GATS (General Agreement on Trade in Services) and TRIPs (Trade Related aspects of Intellectual Property).

Since the topic of this paper concerns the effect of European intellectual property law on non-EU trading nations, and since the TRIPs Agreement is the most significant of the international conventions that govern the relationship between EU and non-EU nations, incorporating almost entirely the provisions of both the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property, I would like to concentrate somewhat on the questions raised during this disagreement and the implications that were examined for non-EU trading nations.

To begin with, however, and in order to set the context in which the issues raised by the European Commission were being debated, we must first consider what exactly is meant when one talks of intellectual property at the Community level.

What is Intellectual Property at the Community Level?

At the present point in time, one would have to say there are numerous regulations and directives issued by the Community that deal directly with issues relating to intellectual property. Of all these, however, only the Community Trade Mark Regulation of 20 December 1993[1], which finally led to the establishment of the Community Trade Mark Office on 1 January 1996, has been successful in creating true Community level protection of intellectual property in the sense that it operates at a supra-national level, with its own Community level administration and dispute settlement provisions.

In almost all other areas of intellectual property, Community law has concentrated on harmonizing the laws at national level and utilizing the machinery of national regimes as far as possible, rather than creating a supra-national (Community level) regulation. The European Patent Convention, for example, has created a centralized administration, but is better understood in terms of a "bunch" of national patents, each of which is then governed by the respective national law, rather than a community or European patent. For one, the Convention is not Community law but international law, even though it operates over the European region. What is more, a patent issued by the European Patent Office can be subsequently invalidated by the laws of one of the designated countries, whilst remaining valid for the other countries.

One must further appreciate that the harmonization of laws at the national level is a slow and cumbersome process and divergences are bound to remain in the application of the substantive laws, if not in the substantive laws themselves. For EU Member States, the nature of the substantive laws and in some circumstances even the procedural outcome can be measured against the particular Community level directive or regulation concerned to determine whether the national law has conformed as it ought to have done. This process facilitates the harmonization of laws for Members of the EU who can expect on the basis of Community law, a certain common degree of protection, regardless of the particular national regime of the Member State.

Non-EU trading nations can also benefit from the harmonization process insofar as the relevant national laws are starting to all conform to the one ideal. The directives and regulations, however, concern each country's commitments to other EU Member States only. They are exclusively internal. If a directive or regulation is improperly implemented in a Member State, for a non-EU country, recourse must be had, not to directives or regulations, but to other international instruments to which either the Community or the country concerned is party.

Within the context of the questions raised by the European Commission regarding the TRIPs Agreement, the European Council stated that "in principle, where there exists a Community act harmonizing intellectual property rights, the Member States are not obliged to apply to nationals of non-member countries the rules which they are required to adopt."[2]

So, for example, the United States claimed in a release from April 30, 1996 that efforts by US firms to combat high levels of computer software piracy in Germany were being undercut by the apparent unavailability of ex parte search and seizure procedures in civil court cases.[3] The US announced that it would consider "the TRIPs-consistency of this situation" after establishing more definitively the unavailability of these procedures in Germany. Note that it is on the basis of TRIPs, not Community law, that the United States has assessed the situation in Germany. Even if a Community directive existed that obligated Germany to provide such measures, the United States could not appeal to it.

The result is that the EU Member States tend to develop their own national law with a particular approach towards other Member States of the Community, whilst sometimes developing another approach altogether towards non-EU trading nations. Especially is this so in the non-codified countries of Ireland and the United Kingdom, where legislation is usually enacted to implement Community law as it relates to other Members of the Community, whilst the old, sometimes antiquated, Common Law rules continue to apply to those outside the Community.

Since the creation of a supra-national level of intellectual property protection has barely begun to evolve, non-EU Member States are often left to rely on the national laws of the country concerned, with recourse to Community law only in so much as the Community has entered into international agreements with that third country.

The Principle of Exhaustion

The article will now turn to an examination of one of the issues that arose during the European Commission's claims to exclusive competence in regard to the WTO and specifically the TRIPs Agreement. Indeed, it is in the light of what has just been outlined above that the Commission argued for exclusive Community competence to administer the WTO and appended Agreements to prevent inconsistency and confusion in the application of the Agreements in relation to non-EU trading Nations.

The topic raised by the Commission that will be examined here is perhaps the most significant of all the issues raised - the issue of exhaustion of intellectual property rights.


The principle of exhaustion precludes the holders of industrial or commercial property rights from being able to rely on those rights in order to control the movement of products which they have either themselves placed on the market, or which have been placed on the market with their consent. In other words, a company in Germany that owns particular industrial property rights would be legally barred from invoking such rights to prevent the importation back into Germany of products which have been sold by the Italian subsidiary of the company, an English affiliated company or a Swedish licensee, since all of these examples have been granted the permission of the German company to market products involving the industrial rights in question. Such importing back into Germany would be called parallel importing, a term that is often used in connection with the principle of exhaustion.

So, for example, in the 1971 Deutsche Grammophon[4] case, the company tried to use its exclusive rights under German sound recording legislation to stop parallel imports into Germany of records put on the market by its subsidiary in France. Since the European Union is treated as a single market, the Court held that such a restriction on the geographical area in which the French subsidiary could distribute its product would be against the European Union's primary goal of the free movement of goods. It follows then that a licensing agreement involving industrial property would not be allowed to have geographical restrictions within Europe as a term of the licensing agreement. This is subject of course to some exceptions, but a United States company, for example, could not license one organization in France to handle only French distribution and another organization in Greece to handle only Greek distribution of its product.

European Community Exhaustion

There is no legislation at Community level that directly addresses the issue of Exhaustion of intellectual property rights, although certain directives have attempted to attain national harmonization on this issue in regard to specific types of intellectual property.[5] The European Court has developed the doctrine through its application of two provisions in particular of the Rome Convention that established the European Community:

  • Arts. 85-86 - dealing with anti-trust matters
  • Arts. 30-36 - dealing with the free movement of goods

It is through the application of these provisions to intellectual property matters that the Court has consistently held that the goal of these provisions takes precedence over the goal of strengthening the rights pertaining to intellectual property.

Exhaustion in the TRIPs Agreement

The exhaustion of intellectual property rights is mentioned only briefly in the TRIPs Agreement, in Art. 6, which states: "For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 above, nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights." In other words, the TRIPs Agreement allows for the individual member countries to develop their own policies in regard to the question of exhaustion, provided that they observe the principles of Arts. 3 and 4, dealing with national and most favored nation treatment.

In the debate that arose on the question of whether the European Community had exclusive competence over the TRIPs Agreement, one of the concerns raised related to this freedom within TRIPs for individual members to develop their own approach. Specifically, the European Commission argued that if competence was shared between the Community and the individual Member States, there could potentially exist three different types of exhaustion.

The three possible approaches would be:

  1. The individual nation can decide for what could be deemed National Exhaustion, where once the goods are placed anywhere on the national market, the rights can no longer be used to restrict the territory within that national market in which a person or persons duly authorized to market the goods can distribute such goods.

  2. The individual nation can decide for what could be deemed International Exhaustion, where once the goods are placed anywhere on the international market (i.e., in another country) by the holder of rights that exist in that nation, the rights can no longer be used to prevent the duly authorized person or persons to market the goods in any other country.

  3. The individual nation can decide, in agreement with other nations, to provide for a Regional Exhaustion on the basis of some regional free trade or other agreement, such as exists for the European Union.

The Commission argued that the European Union nations could develop their own national laws, either national or international exhaustion, that would then apply to persons and enterprises dealing with that nation. If such persons or enterprises were from another EU Member State, the nation, as a matter of Community law taking precedent over national law, would have to apply Community exhaustion. For non-EU trading nations, however, the national regime would apply.

Furthermore, if that national regime had embraced the concept of international exhaustion, how would that relate to the other Member States of the Community? For example, if Germany held a concept of international exhaustion and a German enterprise placed goods on the Japanese market, the German enterprise could not prevent a parallel importer from importing those goods back into Germany. Now that the goods have been placed on the Community market, Community exhaustion would allow for those goods to be sold all over the EU, in accordance with the doctrine of the free movement of goods. However, Community exhaustion only operates where the goods have been placed on the Community market either by the owner of the right, or with the owner's consent. In this case, consent would be lacking and the right-holder could lawfully oppose any attempted marketing of the goods in any EU State outside of Germany.

The Commission also noted that it would be potentially difficult to determine under which regime a product or service comprising an intellectual property right had been imported into a Member State. In any event, it would have an adverse effect on the principle of the free movement of goods within the Community.

Indeed, international exhaustion did exist in some EU Countries, including Germany, The Netherlands and Great Britain, at least in the area of Trade Mark Law.[6] These countries have now had to change their approach on the basis of the Community exhaustion doctrine that is codified in Art. 13 of the Regulation on the Community Trade Mark.

Exhaustion in the Central and Eastern European Association Agreements

It is significant, however, that the Community exhaustion principle has been developed from the provisions of Arts. 30-36, as stated already, on the free movement of goods, as these provisions have also been written into the Free Trade Agreements signed between the EU and some of the Eastern European Countries.[7] These Association Agreements have been termed the Second Generation Association Agreements, as they follow on from previous agreements, only this time with much stricter disciplines and shorter periods of adoption of Community standards and removal of trade barriers and more wide ranging subject-matter (the previous agreements not dealing with Intellectual Property at all). It is stated in these new Association Agreements that their primary aim is to achieve such a level of full economic integration and elimination of trade barriers for the nation "to seek full integration in the political, economic and security order of a new Europe" and that "the final objective of [the country] is to become a member of the Community and that this association, in the view of the Parties, will permit to achieve this objective."[8]

Yet the approach of the European Commission is that these Agreements do not extend to the same concept of Exhaustion of Intellectual Property rights, even though the same basis for the doctrine as it exists in the EU is also present in these Agreements. An earlier case illustrates the position.

The case was between Polydor Ltd v Harlequin Simons Records[9], and involved the importation into Britain of certain records from Portugal. The defendant was sued in the UK for copyright infringement. They argued, however, that the copyright owner (Polydor) was not allowed to rely upon that right to restrain the importation of the product because of the principle of exhaustion and the records have been lawfully put into circulation in Portugal by him or with his consent.

While Portugal was not at this time a Member State of the EU, a free trade agreement existed that included provisions which mirrored Arts. 30-36 of the Rome Convention. The European Court rejected the argument, however, stating that the similarity of the terms of the Treaty of Rome and those of the free-trade agreement with Portugal "is not a sufficient reason for transposing to the provisions of the agreement the above-mentioned case law, which determines in the context of the Community the relationship between the protection of industrial and commercial property rights and the rules on the free movement of goods." The Court further stated that the agreement, from 1972, did "not have the same purpose as the EEC treaty, in as much as the latter ... seeks to create a single market reproducing as closely as possible the conditions of a domestic market."

One could make a number of observations, however. Given the primary aim of the second generation agreements with Eastern European Countries, it could hardly be said that their purpose is not to create a single market. Furthermore, the provisions of the second generation agreements, as was the case with the Portugal Agreement, are not similar to Arts. 30-36 of the Rome Convention, they are identical. In other words, these Association Agreements, drawn up by the Community, employ the same language as the Rome Convention, but is meant to signify, confusingly, something different and create somewhat of a lesser free trade area than is found within the EU.

This current interpretation of the provisions of the Association Agreements, further, is inconsistent with the declarations of the Essen (1994) and Majorca (1995) summits, as well as the White Paper on Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union. The White Paper states that the full integration of the Central and Eastern European associated countries with the European Union's internal market constitutes the main objective of the Europe Agreements.

Since the current interpretation of these agreements is inconsistent, it might be possible to foresee extension of the Community exhaustion principle in the future on the basis of these agreements. Then the problems of international exhaustion in relation to non-free-trade agreement countries, as outlined above, would become a reality, as Poland has introduced this concept of international exhaustion into its legislation.

Poland's Act on Copyright and Related Rights was passed on February 4, 1994 and came into effect on May 24, 1994. Art. 51(3) introduces international exhaustion of the intellectual property right for all types of works and extends it to all countries with which Poland has a free-trade agreement, obviously not limited to the EU.[10] In any event, Poland has been recently listed as one of only five countries recommended by the European Commission in the Commission's "Agenda 2000" policy document for inclusion in an enlargement of the EU.[11] Presumably, without changes to the international exhaustion currently applicable in Poland, the situation envisaged by the European Commission might just come about.

The situation with these Association Agreements highlights the need for clarity in European intellectual property regulation. One of the requirements of these Agreements, for example, is that the countries become signatories of the European Patent Convention, which, contrary to how it may appear, is not a Community level law but an international convention, even though it operates within the European region. A special feature of the European Patent Convention is its extension procedure. The procedure is used by non-Convention states to associate with the European Patent Organization with increasing success. The extension offers users of the European patent system a simple and cost effective way of obtaining patent protection in a non-contracting state with satisfying results for countries such as Slovenia, Lithuania, Latvia, Albania, and since October 1996 also for Romania. An extended European patent has the same effect as a national patent in the extension state and is subject to the general rules governing scope of protection, infringement, or revocation. A Green Paper that sets out the policies and goals of the EU in that respect was issued in July 1997.

Exhaustion in the EEA Agreement

Worth mentioning as well at this point, is another agreement involving the European region - the Agreement on the European Economic Area (the EEA Agreement). Again, Art. 30 of the Rome Convention - dealing with the free movement of goods - is reproduced in Art. 11 of the EEA Agreement. Article 36 of the Rome Convention - dealing with a limited number of strictly construed exceptions to the free movement principle - has a corresponding rule in Art. 13 of the EEA Agreement. Nevertheless, the EEA Agreement would have found itself in a similar position, presumably, to the Association Agreements of Eastern Europe, except that Art. 6 of the EEA Agreement expressly provides that the provisions of the Agreement are to be interpreted in accordance with the existing case law of the EC Court of Justice when these provisions are identical in substance to corresponding rules of the Rome Convention.[12] Community exhaustion, therefore, would apply also to EEA Agreement Countries.

Most EEA Agreement countries have since become members of the EU, so the problem is not as obvious as it once was. The only countries that are currently not members of the EU are Iceland and Norway. However, some commentators have stated that the exhaustion doctrine will only apply to the EEA Agreement where the goods originated in an EEA Country. If goods are placed on the market, but originate from outside the EEA, the exhaustion doctrine will not apply. The exact position remains in dispute.

The European Court finally held, in the context of the TRIPs Agreement that the Community was not exclusively competent and that there existed a shared competence between the Community and the Member States themselves. This does not rule out, therefore, the possibility for each Member State to develop its own approach to exhaustion, even where the approach is in conflict with the Community wide exhaustion principle of the EU. In such a case, the national approach would be superseded by Community law for EU Member States, but would continue to apply for non-EU trading nations.

Procedural Matters

To conclude our analysis of the significance of Intellectual Property at the Community level vis à vis non-EU trading nations, let us look briefly at some matters concerning the enforcement of intellectual property rights. After all, protection available under substantive legal rules is only so strong as the ease and availability of their enforcement.

It is significant in this regard that TRIPs expends more energy on relevant enforcement provisions than GATT or other Conventions previously have. The general opinion, especially the opinion of the United States, is that this was one of the primary failings of previous conventions. The inclusion of the Dispute Settlement Understanding, and in particular, the cross-retaliation measures provided for, have attempted to provide a more effective means for the proper enforcement of the obligations under the Convention and therefore of intellectual property rights themselves.

Cross-retaliation means that, given the diverse nature of the annexes to the WTO Agreement, yet all forming part of the one agreement, non-compliance in one area of the Agreement can be met by the affected country with "retaliation" in another area of the Agreement.

Within the context of the EU, however, both the Council, Commission and Member State Government representatives were in agreement that the trade in goods aspect of the WTO Agreement falls under the exclusive competence of the Community. As a result, if Member States individually are properly authorized within their spheres of competence, i.e. in relation to GATS or TRIPs, they could not, as a matter of Community law, retaliate in the area of trade in goods.[13]

Since the enforcement provisions have been significantly important in the TRIPs Agreement, I would also like to touch on such matters as they are governed by European Community Law and how this relates to non-EU trading nations. Very briefly, it has been seen that the possibility exists, and indeed does exist, for EU Nations to maintain national laws that are applicable to parties of other Countries, but in that, where those parties are from other Countries within the EU, those national laws are displaced by Community level law. The end result is that one set of rules applies to EU Member States, and another set applies to non-EU Nations. Such is also the case in regard to matters of a procedural nature.

Only one illustration will be given in the context of private litigation in matters that involve intellectual property within the courts of the United Kingdom. Two recent decisions of the English Courts[14] will prove extremely problematic for anyone outside the EU trying to enforce foreign intellectual property rights. With regard to jurisdiction, English law used to abide by a rule that was known as the Moçambique Rule, after the name of the case in which the House of Lords developed the rule in 1893. According to this rule, English courts "would not try actions [in England] arising out of transactions abroad which are by their very nature local".[15]

The rule was basically directed at Immovable Property, i.e. land. The reasoning meant that any action that involved a question of rights over land that was not situated in England, should not be judged by English courts. Recognizing the undesirability of such a rule in modern times, the English Parliament eventually enacted the Civil Jurisdiction and Judgments Act 1982, s. 30 of which states,

(1) The jurisdiction of any court in entertain proceedings for trespass to, or any other tort affecting immovable property shall extend to cases in which the property in question is situated outside...the United Kingdom unless the proceedings are principally concerned with a question of title, or the possession or right to that property.

While the intent was to abolish the Moçambique Rule altogether, the Courts have now held that intellectual property rights are "movables". At the same time, it is recognized that by their very nature, they cannot be moved. Therefore, if the right exists in a jurisdiction other than England, it must involve a "transaction abroad that is by its very nature local." Since, however, the 1982 Act only abolishes the rule in regard to immovable property, as regards intellectual property, the rule remains.

For EU States, jurisdiction is based on the Brussels Convention, which, without going into details, completely circumvents the problems of jurisdiction a party would otherwise encounter. It remains, then, that a non-EU party would be unable to enforce a foreign intellectual property right in an English court.

This is but one brief example of how differences at the national level within EU States can lead to a discrimination between non-EU and EU Members. Even at the procedural level, significant consequences can result for the field of intellectual property.

Concluding Remarks

By way of conclusion, it can be said that non-EU trading nations wishing to benefit from the protection of intellectual property rights in the EU need to examine the particular circumstances of each situation carefully. The application of intellectual property rights is by no means uniform throughout the EU, and the exact interaction of such application with non-EU countries is even less certain. Of no less significance in this regard are the procedural regulations that provide for the enforcement of intellectual property protection. Both substantive and procedural laws, further, can impact significantly on matters of intellectual property, even when they are themselves of a general nature containing no explicit intellectual property provisions.

Karl Pilny is a partner in Coudert Brothers' Berlin office.


[1] 40/94; [1994] OJ 1994 L11/1

[2] Opinion of the Court of Justice of November 15, 1994 - No. 1/94, cited in 27 IIC (1996), p. 518.

[3] "Fact Sheets. 'Special 301' on Intellectual Property Rights and 1996 'Title VII' Decisions," published on the Internet,, p. 8.

[4] Deutsche Grammophone GmbH v. Metro-SB-Grossmärkte GmbH [1971] E.C. 487

[5] cf. Keine Parallelimporte aus Drittstaaten - Decision of the Munich Court of Appeal (29 U 4086/95).

[6] cf. reference by Stanislaw Soltysiski, "International Exhaustion of Intellectual Property Rights Under the TRIPs, the EC Law and the Europe Agreements," in GRUR Int. 1996, p. 320, n. 34; cf. also in reference to Germany, note 1 above.

[7] Agreements, for example, exist between the EU and Hungary, the Czech Republic, Slovakia, Romania, Bulgaria and Albania. Art. 36 of the Rome Convention is reproduced, for example, in Art. 35 of the Poland Agreement and Art. 35 of the (twin) Hungary Agreement.

[8] Taken from the Agreement with Hungary, the Preamble; cf. Soltysiski op. cit., p. 324.

[9] [1982] E.C.R. 329; [1982] 1 CMLR 677; [1982] FSR 358

[10] Janusz Barta and Ryszard Markiewicz, "The New Polish Copyright Act - Standards and Particularities," in 26 IIC (1995) p. 345.

[11] Issue No. 75, "Coudert Weekly Trade Globe," 11-17 July, 1997, p. 4.

[12] cf. CCH Europe - Ivo Van Bael & Jean-François Bellis, Competition Law of the European Community, 3rd ed. p. 233, n. 37.

[13] cf. p. 529 of the TRIPs Jurisdiction Judgment.

[14] Pearce v. DVC Arup and Partnership Ltd., March 7, 1997and Coin Contracts Ltd. v. Suzo International (UK) Ltd., March 26, 1997. For discussion of these cases, cf. Lawrence J. Cohen "Intellectual Property and the Brussels Convention" [1997] 7 EIPR 379-382.

[15] British South Africa Company v The Companhia de Moçambique [1893] AC 602.