December 7, 2001

Maneesha Mithal
Bureau of Consumer Protection
Federal Trade Commission

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.

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.


Michael Palmedo
Consumer Project on Technology

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