Exhaustion of Community plant variety rights: selected issues (Angers, August 2011)

Transcription

1 Exhaustion of Community plant variety rights: selected issues (Angers, August 2011) The legal regime of exhaustion of rights is, among the ranks of the breeders exemption and the challenges presented by essential derivation of varieties, one of the mail interpretative problems arising from Regulation (CE) 2100/94 on Community Plant Variety Rights (the Basic Regulation). This paper seeks to provide a fair and balanced view on the subject, integrating all opinions from the plant breeder right s community. However, rather than providing an exhaustive coverage of all legal difficulties surrounding exhaustion, this document picks up specific legal issues which may be of interest for our stakeholders. 1. Introduction to Article 16 of the Basic Regulation The concept of exhaustion is first mentioned in the Preamble of Council Regulation (EC) 2100/94 on Community plant variety rights (the Basic Regulation). According to the Preamble, the scope of protection of Communitarian plant variety rights (PVRs) should be extended, compared with most national systems, to certain material of the variety to take account of trade via countries outside the Community without protection. However, the Preamble then formulates a caveat, stating that the principle of exhaustion of rights must ensure that the protection is not excessive. These programmatic intentions are developed in Article 16 of the Basic Regulation. In essence, its first paragraph enshrines the general principle of first-sale exhaustion: The Community plant variety right shall not extend to acts concerning any material of the protected variety, or of a variety covered by the provisions of Article 13 (5), which has been disposed of to others by the holder or with his consent, in any part of the Community, or any material derived from the said material. This means that the holder of a protected variety (or an essentially derived variety) cannot enforce his rights in respect to acts concerning any material of said variety from the moment he legitimately sells it or otherwise disposes of it within the territory of the European Union. The first sale or disposal of the material exhausts his rights, and he cannot prevent his buyers or licensees from commercializing the material to any third parties. However, Article 16 contains two exceptions to its general rule. There will be no exhaustion of rights if the acts in question: (a) involve further propagation of the variety in question, except where such propagation was intended when the material was disposed of; or (b) involve an export of variety constituents into a third country which does not protect varieties of the plant genus or species to which the variety belongs, except where the exported materials is for final consumption purposes.

2 Article 16, in particular its application to acts outside the territory of the Community, as well as its interaction with harvested material under Article 13(3), raises considerable interpretative difficulties 1. Both issues are addressed in the following sections of this paper. 2. Exhaustion and parallel importation 2.1 Exhaustion within the European Community As from the 1970s, following the progressive implantation of the European common market, the issue of exhaustion has come up for discussion with regard to nearly all intellectual property rights, but specially trademarks, designs and patents. The issue is the tension between the principle of territoriality of IP rights and the principle of free movement of goods between the Member States enounced in Article 34 TFEU 2. Logically, if right holders were allowed to enforce their rights in order to prevent reimportation of their IP-protected goods (i.e. a patented medicine, or a branded t-shirt), the common market would be fragmented. Holders would deploy their rights to parcel the market anew, avoiding parallel importation. Accordingly, the European Court of Justice consecrated the principle of intra-community exhaustion. Once the goods are legally placed on the market within Community territory with consent of the holder, the latter may only invoke their IP rights in order to enforce their essential function which, of course, differs for each type of IP. Naturally, this conflict only concerns domestic IP rights which are granted by each Member State. Since the plant variety rights granted by CPVO have a Community-wide territorial scope, this particular problem does not present itself for our particular protection system. However, in spite of the compromise achieved by Community-wide exhaustion the issues raised by international exhaustion still persist (see Section 2.2). Nevertheless, as mentioned above, this principle of exhaustion is not applicable in two exceptional circumstances, namely if the acts concerned: (a) involve further propagation of the variety in question, except where such propagation was intended when the material was disposed of; or (b) involve an export of variety constituents into a third country which does not protect varieties of the plant genus or species to which the variety belongs, except where the exported materials is for final consumption purposes. The exception set out in Indent (a) is self-explanatory: the right holder will logically be always entitled to prohibit propagation of his variety, since avoiding unauthorized multiplication of the plants is the very core of the protection afforded by a PVR. The purpose of PVR protection would be defeated if, upon first sale, acquirers of the plant variety could multiply it at will. However, the rights of the holder will prima facie be exhausted if he intended such propagation, i.e. by entering license agreements with growers. In such cases, the authorization by means of contract precludes a posterior exercise of the PVR in respect of the propagated material (see also Section 3.1). The second exception set out in Indent (b) is more complex. The intention of the European legislator was to protect breeders from competitors outside the Community, particularly from countries that do not afford protection to the plant genus or species in question. In such cases, the variety protected in the EU, if exported to such countries, is exposed to uncontrolled proliferation: the breeder will miss an equitable remuneration. Accordingly, Indent (b) precludes exhaustion if the acts involve an export of 1 As a matter of fact, the negotiations of the equivalent Article 16 of the 1991 UPOV Convention were extremely arduous and cumbersome. See UPOV, Records of the diplomatic conference for the revision of the International Convention for the Protection of New Varieties of Plants (Geneva, 1991), paras Former Article 28 TEC.

3 variety constituents into a third country which does not protect varieties of the plant genus or species to which variety belongs, except where the exported materials is [sic] for final consumption purposes. In this manner, breeders can exert control over the propagation of their variety directly at Community level. In this respect, the question surfaces if this rule could be applied in a situation where the country of destination does in principle allow the registration of the variety, but the breeder has not acquired protection there. Otherwise, this would imply that breeders are forced to seek protection in every single country where their variety might be exported which in practice places an unreasonable burden upon them 3. First, prosecution of PVRs around the world is costly; second, having a PVR in a country which lacks effective enforcement for PVRs, or where enforcement proves to be unreasonably costly, is of little use for breeders. The large number of Nation States; the legal uncertainty about the existence (or lack thereof) of PVR protection, as well as its scope; language barriers; the difficulties of prosecution in each country and the hurdles of enforcement in distant jurisdiction etc. are all factors that lead us to believe that it is not reasonable to invariably request from breeders (who are often small, relatively unsophisticated legal operators) that they apply everywhere for PVR protection. Accordingly, CPVO is of the opinion that 16(b) should be interpreted in a wide fashion, taking into account the interests of breeders and the threat posed by exportation to certain jurisdictions. So far, no domestic court has had the chance to rule on this matter. In any event, breeders are strongly advised to use contractual mechanisms to limit exportation of variety constituents to countries where they cannot effectively control propagation. 2.2 International exhaustion As explained above, intra-community exhaustion is not an issue for the rights granted by CPVO, since they cover the whole of the Union. On a larger, international context, however, a thorny question arises: can we apply the principle of worldwide exhaustion to intellectual property titles granted by CPVO? Under this type of exhaustion, if the PVR owner, or someone with his consent, places the plant varieties on the market in any jurisdiction whatsoever where he enjoys protection, the owner s rights over this legitimately disposed material would be exhausted upon their return to the EU territory. However, if this principle did not apply, breeders could rely on their rights afforded by CPVO to prevent international reimportation of the protected material Case law development The debate for and against international exhaustion is deeply entrenched. On one side, proponents argue that exhaustion will benefit the consumers, allowing them to access to products at lower prices thanks to parallel trade. On the other, trademark owners strongly oppose exhaustion, since it prevents them from enforcing their distinct pricing and distribution schemes for each region or country, in addition to discouraging investments in innovative, high-quality goods. Over the last years, the question of international exhaustion has surfaced before the European Court of Justice (ECJ), almost invariably in respect of trademarks, where Member States had diverging approaches. The current governing precedent on this subject is the Silhouette 4 case. In this landmark decision, which concerned reimportation of sunglasses from Bulgaria into Austria, the ECJ interpreted Article 7(1) the Trademark Directive 5, ruling that the domestic statutes of the Member States could not establish international exhaustion. Otherwise, internal trade barriers within the European Economic Area (EEA) itself would be created. One year later, the ECJ restated this principle in the Sebago case, which dealt with importation of Sebago s famous Docksides regatta loafers from El Salvador into Belgium. In addition, the Court set out an important rule: that consent had to relate not to the whole range or product line of branded goods, but rather to each individual item. 3 See G. Würtemberger, P. van der Kooij, B. Kiewiet and M. Ekvad, European Community Plant Variety Protection (Oxford University Press, 2006), p C-355/96 Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbh [1998] ECR I Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks.

4 In 1999, the debate was reignited by two very similar cases, Zino Davidoff and Levi Strauss 6, both referred to the ECJ by the High Court of London. In Zino Davidoff, Davidoff toiletries had been reimported from Singapore into the UK. Although it was agreed on that the products were not marketed within the Community with the explicit consent of the trademark owner, it was unclear whether Davidoff s consent to the marketing of the products in Singapore and other Southeast Asian implicitly extended to the sale around the globe. In Levi Strauss, the same issue of consent surfaced again when two British retailers reimported and sold in the UK genuine Levi s jeans coming from American, Mexican and Canadian distributors. The sale contracts with the said authorized distributors contained no restrictions as to the markets in which the clothes could be sold. The British legislation, which is biased towards international exhaustion, contained a rebuttable presumption that consent for further circulation exists, unless explicitly and directly stated in the contracts. When confronted with this issue, the ECJ emphasized the need of a consistent interpretation of the notion of consent throughout the EEA. In this vein, it stressed that renunciation of the trademark rights should be unequivocally demonstrated, and not simply inferred from the holder s silence or another series of proxies (i.e. absence of warning labels), and thus found the British rules to be incompatible with Community law. With Levi Strauss and Zino Davidoff, the ECJ drove yet another nail into the coffin of international exhaustion for trademark rights Application to Community plant variety rights In spite of the above development in the field of trademarks, the treatment of international exhaustion for PVRs under the Basic Regulation remains largely uncertain. Article 16 of the Basic Regulation unequivocally enshrines the principle of intra-community exhaustion, but is silent about international exhaustion. In this regard, it is disputable if the term in any part of the Community could be construed in such fashion as to, sensu contrario, hint at an exclusion of international exhaustion. In absence of any pronouncement on the matter by the European Court of Justice, it appears to us rather reasonable to conclude that international exhaustion should not apply in the realm of PVRs. Some legal arguments may support this position: First, ruling out exhaustion is more in line with the intentions of the legislator as expressed in the Preamble to the Basic Regulation. Excluding exhaustion on the international level is a mechanism to take account of trade via countries outside the Community without protection. CPVO maintains that, as a general rule, exceptions and limitations in the scope of PVR protection should be interpreted with restraint. In this case, ensuring breeder protection rather calls for exhaustion. Second, the principles set out in the case law of the ECJ regarding international exhaustion of trademarks (Silhouette, Zino Davidoff and Levi Strauss cases) can be analogously applied to plant variety rights. This Office does not identify any legal or economical rationale to discriminate between plant variety rights and other Intellectual Property, i.e. trademarks. Accordingly, CPVO believes that the principle of extra-community exhaustion after volitional firstsale does not apply to plant varieties protected by a Community PVR Exhaustion and harvested material Another problematic issue involves the interaction between the principle of exhaustion and materials harvested from protected varieties. The term harvested material refers to all products of the harvest, 6 Joined cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. And Others v Tesco Stores Ltd. And Others [2001] ECR I For the interaction between international exhaustion and harvested materials, as well as products derived from harvested material, see infra, section 3.1.

5 i.e. fruits, vegetables, flowers, cereals, fodder, and fibres 8. The question is if and how the rights afforded to the holder can apply in respect of acts concerning the material harvested by the breeder. If so, this would mean that the holder can control the production chain; i.e. he may prevent sale or exportation of flowers or fruits bred by a licensee, or enforce certain conditions for commercial distribution. Article 13(3), enshrines the principle of exclusion of harvested material from the scope of protection. However, if two cumulative conditions are met, the prerogatives set out in Article 13(2) will exceptionally apply to harvested material as well: a) The harvested material must be obtained through the unauthorized use of variety constituents of the protected variety. b) The holder must not 9 have had reasonable opportunity to exercise his right in relation to the said variety constituents. The notion of unreasonable opportunity is not further defined by the Basic Regulation and ultimately is up for national courts to define 10. Accordingly, if these two conditions are not met, the rights of the holder in respect to the harvest are exhausted once he disposes of the constituent varieties. The breeder will be able to freely dispose of the products without any interference from the right holder. 3.1 International exhaustion and harvested materials As a corollary, the issue of the interaction between international exhaustion and harvested materials comes to mind 11. If - as CPVO suggests - the principle of international exhaustion for PVRs is rejected, would this mean that the rights of the holder are applicable only in respect of the variety itself, or also on the products of the harvest? Unlike trademark owners, holders of Community PVRs are not only concerned about reimportation of the variety constituents themselves (in particular seed material), but of harvested products (i.e. fruits or ornamental flowers) or products made directly from the harvest (i.e. fruit jam, flour, cotton yarns). Therefore, it is of little practical use for breeders if their rights on the constituents are not exhausted upon first-sale outside Community territory, but they are unable to prevent the harvest from entering the European market. In this disadvantageous situation, countries that do not guarantee PVR protection, or do it insufficiently, could become safe harbours for exporters which may bring harvested material and consumer goods back into the European territory. Thus, this issue, far from being a mere academic dispute, is of the greatest importance for European breeders. Unfortunately, the interaction between the notion of international exhaustion and Article 13(3) is extremely controversial and, as of today, we remain largely in the dark as to a convincing answer on this issue. The Basic Regulation is unable to provide an intuitive solution for this problem. As a matter of fact, the interpretation of Article 13(3) to an international situation may degenerate into an inextricable conundrum. 8 Würtenberger et al. (2006) A first reading of Article 13(3) might illogically suggest the opposite. Unfortunately, this provision is yet another example of the extremely poor drafting of the Basic Regulation, which is plagued with confusing formulations. The meaning of this article is much clearer in other versions (i.e. Spanish, German, French or Italian language) of the Basic Regulation. 10 Würtenberger et al. (2006) 119. These authors suggest that if material has been propagated illicitly, and the holder of the Community plant variety right has only been informed about the subsequent marketing of harvested material derived therefrom, then it can be understood that he lacked reasonable opportunity to exercise his right. Similarly, CPVO believes that, following the grant of the title, the holder can exercise his rights in respect of material harvested between the publication of the application and the grant. In practice, another thorny question has arisen: whether ex-post licensing or regularisation of plantings made before the grant of the Community PVR precludes exercise of rights in respect of the harvest. CPVO holds that such regularisation is indeed nothing but an exercise of rights. As such, it prevents the application of the exceptions to the general rule of Article 13(3). 11 For a more general discussion of exhaustion and harvested materials, see infra, Section 3.

6 As CPVO proposes (see Section of this paper), a first volitional sale of the variety constituents outside of the Community will not exhaust the breeder s rights. However, this does not necessarily mean that the right holder is allowed to invoke his rights to prevent reimportation of harvested materials. The expression breeder s rights refers to the scope of protection enshrined in Article 13 of the Basic Regulation. Therefore, under Article 13(3), the prerogatives of the breeder listed in Article 13(2) do not cover acts in respect of harvested material. Accordingly, even if rights are not exhausted and thus opposable, they would not as a general rule cover acts concerning the harvest, unless two exceptional circumstances are met: a) the harvest is obtained through unauthorized use of the variety constituents and b) reasonable opportunity to exercise his right. a) harvest obtained through unauthorized use of variety constituents: the first rule refers to the unauthorized use of the variety constituents themselves. Thus, if plants have been propagated without consent of the right holder, and material has been harvested from such plants, there is little doubt that this condition is met. This would be a clear cut case. However, this condition does not seem to be fulfilled if no illegitimate propagation has happened, but the material is grown from duly authorized plants. In this regard, the term unauthorized use is confusing. One could argue that growing fruit or flowers from legitimate constituents with the purpose of exporting the harvest back to the Community is not an authorized use of the said constituents. This is an admittedly far-fetched interpretation, which does not seem compatible with the spirit of Article 13(3). It would create a transnational cascade of control on the harvested material, which is difficult to justify and, in addition, very hard to enforce. A more creative, intellectually refined approach would argue that no authorization could possible happen outside the Community, since the term authorization does not refer to consent in abstracto, but strictly in respect to the CPVO-granted IP title, whose territorial scope of application is confined to the EU. However, the UPOV Explanatory Notes In Respect of Harvested Material 12 has pointed out that unauthorized acts can only occur in the territory of the member of the Union where a breeder s rights has been granted and is in force. b) reasonable opportunity to exercise his right: this condition is again open to interpretation. Again, one may believe that no reasonable opportunity could possibly have existed, since the CPVO title is restricted to the Community territory. This is consistent with the aforementioned Explanatory Notes, which maintain that the reasonable opportunity relates strictly to the breeder s right in the territory concerned by such right. Therefore, it is at least disputable if the exception to Article 13(3) could be construed in such a way as to invariably allow breeders to prevent reimportation of harvested material. Würtemberg et al. (2006) 13 consider that it is possible, but these authors fail to acknowledge the interaction between Article 16 and Article 13(3). Even if not exhausted, the scope of rights is still the one established in Article 13: the limitation in respect of harvested material remains. As elaborated above, there are some arguments which may circumvent the general rule on harvested materials of Article 13(3). However, they are far from being clear-cut and involve a quite creative interpretation of this provision, which may not be easily accepted. Hopefully, the ECJ will have the chance to rule in this important question. 3.2 Contractual limitations of exhaustion and competition law In a similar vein, another question involving exhaustion comes up: the interaction between the imperatives of competition law and contractual agreements that seek to control the distribution of seed material. A key element differentiating PVRs from other types of IP is that plant varieties are able to reproduce themselves. Quite understandably, right holders are interested in maintaining a high degree of control over subsequent propagations of the material along the production chain. To do so, restrictive agreements with licensee-growers are entered into. Yet this control will fall under the 12 UPOV Explanatory Notes In Respect of Harvested Material Under The 1991 Act Of The UPOV Convention (draft version). 13 Würtemberger et al. (2006) 120.

7 scrutiny of Community or domestic competition law, as these agreements have the potential to unlawfully restrict or distort competition in the marketplace. Competition law and its bearing on licensing and distribution agreements is a subject of extraordinary complexity which cannot be tackled in the frame of this paper. However, it is worth looking into the specific interaction of PVR exhaustion and vertical agreements between right holders and their licensees in regards of harvested material. The key question is how much control may be exerted, through contractual means, by right holders over plant materials after first-sale exhaustion has taken place. The first case worth mentioning is La Hesbignonne 14. Two clauses in a licensing agreement came under scrutiny. One of them allowed the licensee to propagate so-called basic seeds (seeds intended for propagation) and then to sell reproductive seeds (seeds for sowing by farmers), but banned the export of the basic seeds. In this fashion, the right holder sought to control the propagation of basicseeds, which are essential to exhaust the investment in developing the variety, limiting it to a few approved institutions. The ECJ approved this contractual practice, arguing that controlling the propagation of basic seeds was not an improper exercise of the PVR. This issue surfaced again on occasion of the Sicasov decision 15. Under Sicasov, the breeder is allowed to control the destination of basic seeds even after they have been put on the market with his consent. Accordingly, contractual clauses that ban the licensee from selling or exporting basic seeds would be legitimate under Article 101 TFEU, as it is essential to protect the PVR. In other words, it is part of the right s subject matter. By contrast, the breeder s right of control is exhausted after he produces (or authorizes the production) and places on the market reproductive seeds which can only be used by farmers for the production of consumption goods. As of control of the harvested material itself (i.e. flowers), it does not seem possible once the first volitional sale within the Community has taken place. 3.3 Contractual restrictions concerning the harvested material vis-à-vis third parties. What to expect from future developments? Lastly, another particular problematic involving exhaustion is the legal consideration of contractual restrictions concerning harvested materials vis-à-vis third parties. This thorny issue has surfaced on occasion of the Greestar-Kanzi case, which is still pending before the European Court of Justice. Nevertheless, the opinion recently delivered by A.G Jääskinen 16 provides some hints as how the ECJ will approach this issue. Better3fruit was the right holder for the Nicoter Community PVR. In 2003, it entered an exclusive licensing agreement (the Agreement) with breeder Nicolaï NV (Nicolaï). Better3fruit was keen on enforcing stringent quality standards for the harvested apples. Accordingly, by virtue of the Agreement, Nicolaï was obliged to subject his sales of Nicoter apple trees to third parties a series of conditions concerning cultivation and sales. In essence, Better3Fruit sought to establish a sort of selective distribution scheme for apple trees 17. However, in 2004, Nicolaï perfected a sale of 7000 apple trees to grower Mr. Hustin without enforcing any contract regarding cultivation of the fruit. Mr. Hustin then grew and harvested the apples, selling them to a certain Mr. Goosens. In the meantime, due to disagreements, Nicolaï and Better3fruit resolved the Agreement. Nicolaï was succeeded as the sole licensee by another company, Greenstar-Kanzi Europe NV (Greenstar). Greenstar then sued both Mr. Hustin and Mr. Goosens for PVR infringement. Eventually, the matter reached the Belgian Hof van Cassatie, which submitted a request for a preliminary ruling. In essence, the Belgian court sought to ascertain whether the right holder or his licensee could proceed against a 14 C-258/78 Louis Erauw-Jacquery Sprl v La Hesbignonne [1982] ECR I Commission Decision of 14 December 1998, No. IV/35.280, OJ [1999] L 4/ Opinion of AG Jääskinen in case C-140/10 [not available in English yet]. 17 Ibid, para. 14.

8 third party for acts concerning plant material sold by the licensee, when the limitations established in the licensing agreement had not been respected in the frame of the sale. Further, the Hof van Cassatie asked the ECJ if the fact that the buyer had (or had not) been informed of the said limitations had any bearing on the infraction. A.G Jääskinen has pronounced himself clearly in favour of exhaustion. He advocated a strict view on the exceptions to Article 16(a) and 13(3), observing that the plant material had been placed on the market with the consent of the right holder. In his opinion, the fact that Nicolaï had breached his contract with Better3fruit by failing to impose limitations on Mr. Hustin could not be held equivalent to a lack of right holder s consent. Rather, Better3fruit had exhausted his right by placing the variety on the market and thus exploiting the economic value of this right. Therefore, he could only rely on his IP rights to prevent an unauthorized propagation of the apples which was not the case, as Nicolaï had simply failed to respect obligations concerning the selectivity and conditions of the tree s distribution. The answer of the ECJ is still pending, and it is fairly difficult to predict the outcome. A.G Jääskinen favours a very strict interpretation of the notion of first volitional sale, which departs from the principle set out in the field of trademarks in the well-known Copad 18 case. In Copad, which is a cornerstone of Greenstar s arguments, the ECJ had ruled that no consent of the right holder existed if the products were placed on the market in disrespect of a licensing agreement. A.G Jääskinen rejects the precedent set out in Copad 19, and maintains that Better3Fruit has to enforce his licensing agreement by means of the common law of contracts, and not through actions based on the grounds of IP, as his rights are exhausted. Further, although A.G Jääskinen fails to mention this fact, the Copad case dealt with selective distribution of luxury goods ( Dior -branded corsetry), and the ECJ was then specially keen to emphasize the particular circumstances of the luxury market, where a breach of selective distribution schemes poses a threat to the reputation, allure or prestigious image of the brand. One may argue that the luxury component is central to the rationale of Copad. It is disputable if the exigencies peculiar to the luxury goods market and thus to the Copad precedent could be applied, mutatis mutandis, to Greenstar s distribution scheme for apple trees. In any case, the ECJ will have to strike a balance between exhaustion and the enforceability of breeders distribution schemes. 4. Conclusion Unfortunately, many issues concerning the regime of exhaustion of Community plant variety rights still lack a conclusive answer. In particular, the treatment of international exhaustion in regards to seeds, harvested material, and consumer goods made directly from harvested material is of special importance for beneficiaries of CPVO s system. Accordingly, a pro-breeder interpretation is advisable, and maintains that the principle of international exhaustion, in line with the present case law on other IP rights (i.e. trademarks) does not apply under Article 16 of the Basic Regulation. Unfortunately, it is unclear if this rejection of exhaustion may also allow breeders to fight reimportation of harvested materials. Hopefully, the European Court of Justice will have the chance to pronounce itself on this topic and uphold this view. Lastly, the ECJ will soon have to rule on the Greenstar-Kanzi case, where it will hopefully find a right balance between the call for exhaustion and the protection of breeders, and more particularly the enforcement of their contractual distribution schemes and commercial practices. 18 C-59/08 Copad SA v Christian Dior Couture SA, Vincent Gladel and Société industrielle lingerie (SIL) [2009] ECJ I Opinion of AG Jääskinen, para. 46.