Analysis And Reflection On The Theory of Exhaustion of Trademark Rights

Section I theoretical basis for exhaustion of trademark rights

1.The origin of the theory of exhaustion of trademark rights

The theory of exhaustion of trademark rights has been accepted explicitly or implicitly by most countries in the world, but there are different understandings of its exact content. Even in a country, scholars have different views on this theory. Therefore, neither the Paris Convention for the protection of industrial property nor the TRIPS agreement has made detailed provisions. As a result, there are debates in academic circles about whether trademark rights are exhausted and what rights the trademark owner has exhausted after the trademark goods are sold, forming a theoretical fuzzy area. Theory is the guidance of practice, and the ambiguity of theory also brings disputes in practice.

The origin of any theory comes from the needs of practice. In practice, after the trademark goods are sold or transferred by the trademark owner or Licensee in a legal manner, the buyer is likely to sell again, such as wholesale, retail, resale and so on. This problem arises. Because the first paragraph of Article 52 of the trademark law stipulates that “without the permission of the trademark registrant, using a trademark that is the same as or similar to its registered trademark on the same or similar goods” is an infringement of the exclusive right to use a registered trademark. Therefore, the buyer is only allowed to use the trademark goods purchased by him, and shall not sell them again, otherwise it is a trademark infringement. As a result, the trademark registrant completely monopolizes the sales channels of trademark goods. At the same time, because the buyer bought the trademark goods in a legal way, that is, he paid the corresponding consideration at the time of purchase. It includes not only the value of the commodity itself, but also the apportionment of the expenses of the seller for publicizing the trademark of the commodity, that is, the value of the trademark existing in the commodity. On this basis, the trademark owner monopolizes the sales of the commodity with trademark right, and restricts the buyer’s disposal of the commodity after purchase, which is unfair to balance the rights and interests of both the buyer and the seller of the commodity with trademark right, At the same time, it is not conducive to promoting free competition and the healthy development of the market. Based on the consideration of fairness and efficiency, the rights of the trademark owner should be limited in theory and legal provisions, and the buyer should be allowed to continue to sell. Therefore, someone put forward the theory of exhaustion of trademark rights.

This theory completely solves the problem of the legitimacy of the buyer’s continued sale of trademark goods. Therefore, in order to protect the rights of the buyer and appropriately restrict the rights of the trademark owner, there should be the theory of exhaustion of trademark rights. However, after the sale of trademark goods, the theoretical understanding of which rights the trademark owner has exhausted, whether it is fully exhausted or partially exhausted, is vague. In order to clarify this issue, it is necessary to clarify the rights protected by the trademark law.

 

2.Analysis of exhaustion of trademark rights

What trademark rights have the trademark owner or its licensees exhausted. In this regard, there are the theories of exhaustion of use right, exhaustion of prohibition right, exhaustion of sales right and implied license.

 

2.1. Exhaustion of right of use

According to this theory, when the owner of a registered trademark legalizes the circulation of his goods, the right to use the trademark embodied in the goods will be extinguished after obtaining the consideration from the buyer. Therefore, no matter what form the buyer continues to circulate the goods, it will not damage the trademark rights and interests of the registered trademark owner. Disadvantages of this view:

First, as a kind of commodity logo, consumers often know the goods marked by a trademark by knowing it, and often use the goods attached to the trademark for a long time by establishing loyalty to a trademark (brand). Therefore, many businesses spend a lot of money to promote a trademark. If according to the theory of exhaustion of use rights, after the trademark goods are sold, the use rights of the trademark owner are exhausted, and the buyer can deal with the trademark at will when re selling. If the trademark is torn off, the trademark owner or licensee will not be able to let the final consumers of its products know its trademark, and the efforts of the trademark owner to improve the reputation of the trademark will be in vain. This is obviously unfair to the trademark owner.

Second, according to this theory, if the right to use the trademark owner is exhausted, the buyer can also replace other trademarks on the goods to continue circulation, that is, the so-called “reverse counterfeiting” behavior. This behavior is expressly prohibited by law. Article 52 of the trademark law stipulates that “without the consent of the trademark registrant, changing its registered trademark and putting the goods with the changed trademark back on the market” is an act of infringement of the exclusive right to use a registered trademark. There are also typical cases in practice. For example, the trademark dispute between maple leaf and crocodile occurred in Beijing in 1994. The Singapore crocodile company of Beijing Parkson Shopping Center authorized the dealer Tongyi company to buy the “Maple Leaf” brand clothes produced by Beijing garment factory, tear off the “Maple Leaf” registered trademark logo, and replace it with the crocodile trademark to sell at a high price. Beijing garment factory filed an infringement lawsuit against Tongyi company and other defendants. The case ended with the defendant’s infringement of the exclusive right to use the registered trademark of the “Maple Leaf” trademark. This also proves the error of the theory of exhaustion of use right from the opposite side.

Third, the function of trademark is to distinguish the producers of goods, which is closely related to the after-sales service of goods. When consumers use trademark goods, if there is a quality problem, consumers can find the producer of the goods through the trademark, which is convenient for the maintenance and replacement of the goods. According to the theory of exhaustion of use rights, after the goods with trademark rights are sold, the middlemen dispose of the original trademark at will, which makes consumers unable to find the source of the goods, which is not conducive to the after-sales service of the goods. Especially for some high-tech commodities, general middlemen are unable to repair them except producers. Therefore, from this perspective alone, the theory of exhaustion of use rights is seriously harmful to the protection of consumer rights.

Fourth, the laws of most countries clearly stipulate or imply the license. When the quality of the trademark goods changes in the sales process, and the continued sale will harm the reputation of the trademark, the trademark owner can stop the continued sale of the trademark goods according to the exclusive right of two trademarks.

For example, Article 13 of the EC trademark regulation stipulates that the owner of the community trademark has no right to prohibit the use of the community trademark on the goods marked with the trademark on the community market by him or with his consent, unless the owner of the trademark has legitimate reasons to object to the continued sale of the goods, especially if the quality of the goods has changed or damaged after the goods are put on the market. Also, according to paragraph 3 of Article 23 of the current Taiwan trademark law, “where goods with trademarks are traded and circulated in the market by the exclusive owner of the trademark or a person with his consent, the exclusive owner of the trademark shall not claim the exclusive right to use the trademark for the goods. However, in order to prevent the deterioration, damage or other legitimate reasons of the goods, this restriction shall not apply.” According to the meaning of the right of use in the preceding article, it is obvious that the basis for the trademark owner to implement this act of stopping sales is the right to use trademarks. Therefore, the theory of exhaustion of the right of use deviates from this.

From the above discussion, it can be seen that although the theory of exhaustion of use right can solve the legitimacy of the sale of trademark goods by the buyer, it is not conducive to the protection of the rights of trademark owners, consumers and other legal subjects, but also easy to cause market chaos and unfair competition. Therefore, after the first sale of trademark goods, the right to use the registered trademark of the trademark owner has not been exhausted.

 

2.2. Exhaustion of prohibition

According to this theory, if the trademark holder attaches its effectively registered trademark to the goods with the permission of the trademark owner, the further resale and distribution of the relevant goods need not be licensed again if the same trademark is attached (the blueprint of this view is the provisions of Article 13 of the European Community Trademark regulations). After the goods are sold, the trademark owner has no right to prohibit a third party from using the trademark in respect of the goods unless he has legitimate reasons. This theory is not only conducive to protecting the rights of buyers, but also harmless to the rights and interests of trademark owners and consumers. However, it must be emphasized that the exhaustion of the prohibition right here only exists on the goods sold by the trademark owner, which does not mean that the middleman has the right to use the registered trademark of the trademark owner on the goods produced by him.

 

2.3. Theory of exhaustion of sales rights 

Some scholars see from the causes of the exhaustion theory of trademark rights that the focus of the problem lies in the fact whether the buyer has the right to resell. Therefore, it is inferred that what the trademark owner exhausts when selling trademark goods is the right to sell. The irrationality of this theory:

First, the object of the right of sale is trademark goods, not trademarks. However, as mentioned above, the rights protected by trademark rights are rights based on trademarks, that is, trademark rights, but not rights based on trademark goods. Therefore, trademark rights do not belong to trademark rights, let alone the exhaustion of trademark rights.

Second, trademark goods belong to movable property, and the rights generated on its basis naturally belong to the category of property rights. When the buyer purchases goods from the trademark owner, with the transfer of the ownership of the trademark goods, the right of the trademark owner to sell the trademark goods naturally belongs to the elimination, which has nothing to do with the trademark right of the trademark owner. Therefore, the elimination of the right to sell the trademark goods cannot be used to explain the exhaustion of trademark rights.

 

2.4. Trademark implied license (authorization) theory

Some scholars explain the exhaustion theory of trademark rights with the implied license of trademark use, and believe that “in the vertical resale process of goods from manufacturers, sellers, retailers to consumers, there has been an implied authorization to use the trademark, and at the time of resale, the exclusive right of the trademark has been exhausted, and the subsequent use of the trademark is not restricted by the exclusive right, which is illegal.” Implied authorized use or implied licensed use refers to the substantial licensed use behavior expressed by the Licensor and the licensee without signing a license contract, and its foothold is licensed use. It is incorrect to understand the theory of exhaustion of trademark rights with license. Embodied in:

First, the licensed use of trademarks means that the trademark owner permits the licensee to use the registered trademark of the trademark owner on the goods manufactured by the Licensee. The theory of exhaustion of trademark rights is aimed at the goods manufactured by the trademark owner. The objects of the two are different.

Second, the first paragraph of Article 40 of the trademark law stipulates that the Licensor shall supervise the licensee to use the registered trademark.

In practice, because trademark goods may be resold many times after being sold by the trademark owner, it is difficult for the trademark owner to supervise the reseller to supervise the trademark goods. In licensed use, such multiple sublicenses are not allowed.

Third, the second paragraph of Article 40 of the trademark law stipulates that those who are licensed to use the registered trademark of others must indicate the name of the licensee and the origin of the goods on the goods using the registered trademark. After the sale of trademark goods, the resale of trademark goods by the buyer is often to keep the goods as is, and often does not add its own name and origin to the goods. Therefore, it is not feasible to explain the exhaustion theory of trademark rights with the implied license of trademark.

To sum up, it is unscientific and unreasonable to adopt the general statement of exhaustion of trademark rights. It is also easy to misunderstand that it is the exhaustion of all trademark rights of the trademark owner. In essence, in order to balance the rights of both the trademark owner and the buyer, after the trademark goods are sold, the trademark owner exhausts only the prohibition right in the exclusive right of trademark, that is, the partial exhaustion of trademark rights. In this regard, we must have a clear understanding that we should make clear provisions in the law to avoid disputes in practice.

 

3. The regional principle of exhaustion of trademark rights

In the discussion of domestic scholars, there are also different views on this issue. Some scholars believe that the exhaustion of rights can be divided into three situations: international exhaustion, domestic exhaustion and regional exhaustion; Some scholars believe that exhaustion of rights is international exhaustion; Other scholars believe that the exhaustion of rights can only be international exhaustion. Different opinions will bring different results. Regional exhaustion is based on treaties or multilateral agreements, and its regional scope is limited to contracting parties. There is no substantive difference between regional exhaustion and domestic exhaustion. The most typical example is the European Union. In order to solve the conflict between the principle of free movement of goods within the EU and the regional protection of trademark rights, the EU has established the principle of exhaustion of rights within the EU through legislation and jurisprudence, and recognized the legitimacy of parallel imports from EU Member States.

In essence, the principle of exhaustion of rights should be the exhaustion of rights in the international context. It should not and cannot be domestic exhaustion or regional exhaustion.

First of all, as a kind of “identification mark”, the main function of trademark is to identify goods and distinguish different goods providers. This function is realized by the combination of trademark and specific goods. A simple trademark has no practical significance. Only when combined with commodities can it become a tool and means for the subject of commodity rights to obtain property interests. The trademark owner attaches the trademark to his goods and puts them into the market. Consumers choose and then buy according to different trademarks, and the function of trademark right can be realized. What the exhaustion of trademark rights controls is the relationship between the circulation of physical goods and the trademark rights carried by physical goods, that is, once the obligee or the trademark rights agreed by the obligee are put on the market, the trademark rights carried by it will be exhausted.

The exclusive right of the trademark owner to the goods with trademarks is one-off. He only enjoys the “exclusive right to put the goods on the market for the first time”. No matter how the goods are put on the market, he has obtained benefits when putting the goods on the market, and his investment in trademark rights has been rewarded. Just because the trademark is attached to the goods, it is meaningful. Some scholars put forward the concept of “trademark right on specific goods”. Because “the principle of exhaustion of rights can only be applied to each individual product, not to a certain model of products and a series of products. The purpose of the principle of exhaustion of trademark rights is to prevent the trademark owner from claiming twice for the same product. That is to say, the legitimate purpose guaranteed by the exclusive right of the trademark owner has been fully realized after the obligee has implemented the exclusive right to put the products with trademarks on the market.”

Secondly, although the same trademark right is based on the laws of different countries, which reflects the different legal relations of the trademark legal systems of different countries, its content of rights is basically the same. In the exhaustion of trademark rights, trademark rights are the trademark rights obtained by the trademark owner in various countries, not only in other countries. It should be noted that trademark rights are regional, but the exhaustion of rights is not the exhaustion of all trademark rights, or more accurately, the right to control the protected products through trademark rights after the first sale is exhausted. Moreover, the trademark owners of the same trademark in different countries are often the same or related, and they can restrict each other through economic or legal connections. Such as the internal control of multinational companies or the constraints of the Licensor on the exclusive licensee. The trademark owner pays great attention to the quality of goods for his own interests. When he signs a license agreement or contract, he usually makes some restrictions or regulations on the quality of goods produced and distributed by the other party to ensure the goodwill of the trademark owner.

Thirdly, the main purpose of claiming domestic exhaustion of rights is to protect the interests of domestic trademark owners, while ignoring the interests of consumers. Because the domestic exhaustion of rights to prevent parallel imports will bring monopoly and separatism to the trademark owner, so that it can obtain huge profits. Allowing parallel imports will enable consumers to have more choices with better quality and lower price, and promote the free competition of similar goods in the market. Parallel imports are genuine goods, not fake and shoddy goods. Therefore, preventing parallel imports only to protect the goodwill and interests of trademark owners, the quality of goods and after-sales service guarantees will bring greater losses to consumers. The current legal system has gradually emphasized the public interest by simply protecting personal interests. Sacrificing the interests of consumers does not meet the requirements of today’s society.

In addition, at present, the owners of intellectual property rights in the world are mainly concentrated in developed countries. They maintain their monopoly position in this field through strict intellectual property legal system. There are monopoly high prices (such as drugs) in many commodities, which makes many developing countries unable to obtain this commodity, making it difficult to improve or even decline domestic social welfare.

 

Section II  Judicial Practice Of  Trademark Exhaustion Theory

In March, 2013, researcher Xu Zhao creatively put forward the standards and criteria for judging the exhaustion of trademark rights in judicial practice in the case of undertaking enterprise domain name rights, trademark rights and unfair competition disputes. The standards and norms have been recognized by the Beijing higher court.

Hong Kong Daban bread and pastry Co., Ltd. sued the court on the grounds that Beijing Hengrui Taifeng Technology Development Co., Ltd. infringed on its domain name right, trademark right and unfair competition.

Mr. Xu Zhao handled the case on behalf of Beijing Hengrui Taifeng company. After careful analysis and study of the facts of the case, it clearly proposed to the court how to judge and identify the legal relationship between enterprise domain names, trademark rights and unfair competition and the basis for differentiation. That is, the judicial recognition standard and basis of trademark infringement and unfair competition in enterprise domain name disputes.

Determining whether the registration and use of enterprise domain name rights constitute infringement is the focus of correctly trying domain name disputes according to law. The existing laws and regulations stipulate four elements for determining that the registration and use of domain names constitute infringement or unfair competition: legitimate rights and interests, confusion and misunderstanding, legitimate reasons and subjective malice. These four conditions are integrated and indivisible.

According to his research results and judicial practice, Mr. Xu Zhao put forward relevant judgment standards for these difficult cases that are extremely confused in the process of judicial practice and administrative law enforcement. Now, judicial and administrative law enforcement agencies have widely used them in handling such cases.

When the dispute of enterprise domain name right involves the intersection of trademark infringement and unfair competition, it should first be regulated within the scope of the relevant provisions of trademark infringement. If it is recognized as constituting trademark infringement, it should not be recognized as constituting unfair competition at the same time.

“E-commerce” has strict considerations, which need to meet that the transaction must be completed through the website, and the website will eventually cause confusion or misunderstanding among consumers and divert the “traffic” of the trademark owner by operating the same or similar products or services as the trademark owner.

According to the introduction of Daban company, the company holds the trademarks of “Daban Da Ban” and “Daban Da Ban and figure” registered on cakes and other goods, as well as the trademarks of “Tai Pan”, “Da Ban” and “Daban ice skin” registered on moon cakes and other goods. The above trademarks are now within the period of validity.

Daban company believes that Hengrui Taifeng company’s use of the words “Daban”, “Daban ice skin” and “Tai Pan” to publicize and sell relevant goods on the “Daban moon cake network” infringes the exclusive right of Daban company to use registered trademarks.

It is understood that Hengrui Taifeng company is a channel business, mainly engaged in gift certificates, gold and silver and other gifts. In 2012, Daban company found the “Daban moon cake website” with the website “www.dabancake.com”, which uses the words “Daban”, “Tai Pan” and “Daban ice skin” to promote and sell all kinds of moon cakes of Daban company. After inquiry, the registrant of “Daban moon cake website” is an employee of Hengrui Taifeng company named Li Shenghui.

Both the Beijing Second Intermediate Court and the Beijing higher court recognized Xu Zhao’s suggestions and propositions on the standards and norms for judging the exhaustion of trademark rights. In this regard, they believed that the behavior of Hengrui Taifeng company did not constitute trademark infringement, and decided to dismiss all the lawsuits of Daban company.