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Brexit and Exhaustion of IP Rights: Too difficult to quantify?

Posted on 23 July 2019

Brexit and Exhaustion of IP Rights: Too difficult to quantify?

The potential impact of Brexit on the treatment of parallel imports into the UK is proving to be one of (many) difficult issues to resolve.  Parallel imports are genuine products which are imported from another country without the permission of the intellectual property owner. As we reported in October 2018, the UK government has decided, as a 'temporary fix', to align unilaterally to the EU/EEA regime from Exit day to allow continuity of supply of parallel imports into the UK. However, unless an agreement is reached between the UK and the EU, there will be no reciprocity, meaning that EU IP rights owners will be able to prevent the movement of parallel imports from the UK to the EU.  

In relation to the long term position, the government decided to commission EY to conduct a feasibility study, simply to determine whether it would be possible to estimate the scale of parallel trade across the UK economy.  The aim then would be to be in a position to identify a future exhaustion regime, with the options being:

  • National exhaustion: which will restrict parallel trade as an IP owner's rights will only be exhausted when goods using its IP rights have been put on the market in the UK by the IP owner or with its approval. 
  • International exhaustion: the least restrictive of parallel trade as, once the IP owner's goods are put on the market anywhere in the world, they would not be able to prevent the resale of those goods into the UK.
  • Retain regional EEA exhaustion, albeit this would, without agreement between the UK and the EU27, be on a unilateral basis.  As things stand, it would mean that IP owners would be able to use their EU IP rights to stop goods entering the EU from the UK.

However, the central finding in EY's Report of its assessment of 30 economic studies was that, other than in the pharmaceutical sector, there is very little data on parallel trade (for pharmaceuticals, parallel trade accounts for 5-10% of total pharmaceutical imports), although parallel trade is likely to also be significant for alcohol and parts of the automotive sector. Further, EY's attempts through its partner Kantar, to conduct 30 completed surveys (which involved contacting more than 900 businesses) failed to generate any successful interviews.  This suggests low awareness of the issues surrounding parallel imports, or perhaps a reluctance to speak on it, due to either stigma or normalisation.  Stakeholder interviews confirmed that there is limited data on the scale of parallel trade (other than for pharmaceuticals) and also generally confirmed no appetite to change from the current regional exhaustion regime.     That said, the Report also notes that publishers and luxury drinks producers consulted explicitly favoured a national regime; pharmaceutical stakeholders were divided between manufacturers and distributors; and the majority of stakeholders interviewed resisted a move to an international exhaustion regime.  Further, stakeholders from alcohols, pharmaceutical and publishing sectors did not support an unreciprocated regime, other than perhaps as a temporary measure.  Our experience of working with UK retailers over the years suggests that parallel imports from the EU are a regular part of their sourcing mix.  We would expect them to advocate international exhaustion as it would enable them to scour the world for the cheapest prices.  However, it would appear that they did not contribute to EY's Report, though it does note that a further avenue of research is continuing stakeholder interviews, focused on distributors and retailers.  

Next steps

The study authors conclude that, whilst there are potential avenues for further research, there is not a clear and conclusive research methodology available to estimate reliably the scale and impact of potential changes to the parallel trade regime. 

Following publication of the study, the UKIPO issued a new guidance note on Exhaustion of IP rights in the event of a No Deal in which it confirms that the topic is one of its priorities and that it is committed to engaging fully with stakeholders and consulting before any policy changes are made.

Following the 1998 European Court of Justice decision in the Silhouette case which crystallised the principles of European Community-wide exhaustion, and outlawed Member States adopting international exhaustion, in 1999 the House of Commons Select Committee on Trade & Industry invited evidence on a range of IP issues which included an examination of parallel trade.  Having taken oral and written evidence from a very broad range of stakeholders, the Select Committee recommended moving towards a regime of international exhaustion with reserved sectors where such a principle could be shown to have severe detrimental effects. The Committee believed that a flexible approach would lead to cheaper goods for consumers whilst addressing the needs of different sectors.  Of course, the world has moved on a great deal since 1999 but it will be interesting to see how the government responds to the EY report.

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