December 7, 2001
Maneesha Mithal
Dear Ms Mithal,
I am writing to request permission to participate in the FTC's December
19, 2001 roundtable on the Hague Convention. I will be appearing on
behalf of the Consumer Project on Technology. My testimony will focus
on a narrow issue concerning the impact of business to business (B2B)
contracts on consumers. Specifically, I will focus on the issue of
contracts that seek to overturn national policy on the first sale
doctrine, including but not limited to cases involving national or
international exhaustion of intellectual property rights.
It is our view that the Hague convention should explicitly acknowledge
that member countries may pursue different policies on the issue of the
first sale doctrine. It is well known that this is the case now. For
example, while the Japanese FTC has ruled that efforts to restrict
parallel trade in pianos are ruled violations of antitrust law, the UK
restricts parallel trade in Levi Jeans. The US generally accepts
international exhaustion for trademarks, but is more restrictive in
terms of copyright law. The United States recognizes the first sale
doctrine for books sold to libraries and video cassettes sold to rental
agencies such as Blockbuster, while some European countries do not.
South Africa has recently battled US trade officials and litigation from
39 pharmaceutical companies for the right to authorize parallel trade in
pharmaceuticals. Members of the European Union permit parallel trade in
medicines within the EU, while the US is still debating whether or not
to permit parallel trade in pharmaceuticals between the US, Canada and
Europe.
The WTO's Agreement on Trade Related Aspects of Intellectual Property
(TRIPS) clearly states that different national policies on the
exhaustion of intellectual property rights are permitted, in Article 6.
For the purposes of dispute settlement under this
Agreement, subject to the provisions of Articles 3
and 4 nothing in this Agreement shall be used to
address the issue of the exhaustion of intellectual
property rights.
We are concerned that the provisions of Article 4, 10, 12 and 13 of the
proposed Hague Convention could be used to block domestic applications
of the first sale doctrine, or block parallel trade, even in countries
that want to authorize such practices.
This is a clear case where so called B2B contracts will directly harm
consumers, if they are uncritically enforced under the treaty.
To illustrate how this might work, suppose that movie studios used
non-negotiated contracts for the sale of videos that included a choice
of court provision, and suppose further that the designed foreign court
rejects the first sale doctrine. This would seem to have the practical
effect of overturning a US Supreme Court decision on the issue of first
sale doctrine for video rentals in the USA. Suppose further that book
sales to libraries (defined as businesses under the proposed Hague
convention) included non-negotiated contracts, that have a choice of
court clause and mandatory book lending fees (something some publishers
want). And the Hague provisions could be used to prevent the South
Africa government from benefiting from its hard fought legal victory
over the pharmaceutical companies in seeking to authorize parallel trade
in pharmaceutical drugs, or frustrate efforts by our Congress to
authorize parallel trade in medicines between the US, Canada and the
US.
These of course are only a few of many cases where sellers will seek to
use the strong contract provisions in the Hague to undermine national
policy on the first sale doctrine. Virtually any seller who was seeking
to block parallel trade or a domestic use of the first sale doctrine
could use the provisions of Article 4 to have an anti-first-sale court
enforce a no-first-sale contract, or to point to a court where
resolution of infringement cases would be hostile to the first sale
doctrine.
Sincerely,
Michael Palmedo
Bureau of Consumer Protection
Federal Trade Commission
via mmithal@ftc.gov
Article 6
Exhaustion
Consumer Project on Technology