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Consultation on the UK's future regime re exhaustion of rights and parallel trade

Posted on 15 June 2021

One of the most challenging issues to resolve following the UK's departure from the EU is the approach to take in relation to imports of parallel goods into the UK, and the extent to which intellectual property rights holders and their authorised licensees can prevent such trade. In large part driven by a concern to ensure continued supplies of medicines after 1 January 2021, the Government decided unilaterally post-Brexit to participate in the European Economic Area (EEA) exhaustion regime. It has now issued a consultation to consider a number of options for the UK's future regime for exhaustion of intellectual property rights and parallel trade. The consultation closes on 31 August 2021.

Whilst the Government had described unilaterally applying the EEA regime post-Brexit as a 'temporary fix', this option (termed 'UK+ regime) remains one of the four options for consideration in the consultation:

  • UK+ regime – maintain unilateral participation in the EEA regional exhaustion regime
  • National exhaustion regime
  • International exhaustion regime
  • Mixed regime, potentially comprising differing approaches for certain sectors, products and/or IP rights. 

The options being considered will need to be reconciled with the UK's obligations under relevant treaties and agreements. In particular, whilst many rights holders would no doubt prefer a national exhaustion regime to be implemented – which would mean that IP rights would only be exhausted once goods are placed on the market in the UK – the Government says in its consultation document that it does not consider a UK exhaustion regime to be reconcilable with the Northern Ireland Protocol, which requires that goods can move between the EU (including the Republic of Ireland) and Northern Ireland without restriction.

In setting the scene in his foreword to the consultation, the Secretary of State for Business, Energy and Industrial Strategy recognises that the choice of a new exhaustion of rights and parallel trade regime is a "difficult and possibly contentious one", with the consultation document further noting that the arguments for and against the various options on the table are "complex and finely balanced". The Government expresses no view as to its preferred option, but with a range of stakeholders likely to be affected – IP owners, authorised licensees, distributors, manufacturers, retailers and consumers - the challenge for the Government will be in striking the right balance between these competing interests.

What are parallel imports?

Parallel imports (as defined in the consultation) are goods that are lawfully manufactured by a rights holder or under licence and are lawfully first placed on the market, and then moved across territorial borders. This is often in order to benefit from price differentials in different markets (alongside other contributing factors). Key sectors for parallel trade include fast-moving consumer goods, luxury goods, print and publishing, pharmaceuticals and automotives.

Rules relating to exhaustion of IP rights prevent an IP owner exerting control over the movement of those goods in certain circumstances. The European Union/EEA applies a regime of EEA-wide exhaustion. This means that when an IP owner puts goods on the market (or they are put on the market with their consent) within the EEA, they cannot enforce their IP rights in relation to those goods to prevent their resale in the EEA (except in limited circumstances). Following an EU Court of Justice decision in 2008 (Silhouette), EU Member States are prohibited from adopting an international exhaustion regime. This means that goods put on the market outside of the EEA cannot be imported into the EEA without the IP holder's consent.  

What is the current situation?

On leaving the EU, the UK decided unilaterally to participate in the EEA-wide exhaustion regime. Accordingly, goods put on the market in the EEA can continue to be imported into the UK without requiring the consent of the relevant IP owner. However, as the UK is now no longer in the EEA, the same does not apply for goods put on the market in the UK. In that situation, the relevant IP owner may be able to prevent the goods being exported to the EEA, as its IP rights will not have been exhausted (because the EU does not allow for international exhaustion to be applied in EU Member States).

The consultation and previous studies

The consultation focuses on parallel trade of genuine physical goods into the UK. It does not cover counterfeit goods; purely digital content (such as downloaded music or books); Geographical Indications; and Plant Variety Rights.

In 2019, the Government commissioned 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, with a view to identifying a future exhaustion regime. Unfortunately, that report (which we discussed here) was inconclusive, with limited engagement in certain sectors during the research. As a result, and due to a lack of available data (the Government points out that no country has left a regional exhaustion regime before), the consultation is light on detail in relation to the likely economic impact of the different exhaustion regime options. Instead, it seeks further information from affected businesses as to the impact of parallel trade on their business and in their sector, in order to inform the policy decision to be taken.

The consultation and related Impact Assessment set out the benefits and costs of each of the regimes under consideration, for all relevant stakeholders.  

Option 1: UK's unilateral application of a regional EEA-exhaustion regime, known as 'UK+ regime'

Under this 'do nothing' option, parallel imports of goods into the UK will continue to be automatically permitted from EEA states, but not from elsewhere. This reflects the current situation, applied from 1 January 2021 as a result of the decision to participate unilaterally in the EEA regime. It involves asymmetry in that it may not be possible to export parallel goods to EEA countries without a rights holder's consent.

The Government considers that the UK+ regime is compatible with both the Trade Related Aspects of Intellectual Property Rights agreement (TRIPS) and the General Agreement on Tariffs and Trade (GATT), and in particular with the Most Favoured Nation (MFN) provision in TRIPS. The Government's view is that the UK+ regime does not engage the MFN principle because exhaustion is not triggered by the nationality of the IP owner or the business moving the goods, but where the relevant goods are placed on the market.

Option 2: National Exhaustion

Under a national exhaustion regime, IP rights in goods would be considered exhausted in the UK only once they are placed on the market in the UK. This option would be most attractive to IP rights holders but the Government's position is that such a regime is not reconcilable with the Northern Ireland Protocol which requires parallel goods to be able to move from the EU (including the Republic of Ireland) into Northern Ireland without restriction. Accordingly, as an option, the Government states that it is only included in the consultation for 'completeness' and to gather appropriate economic evidence impact. That said, the Government does seek views on its assessment of the point.

Option 3: International Exhaustion

Under this option, parallel import of goods into the UK would be automatically permitted from any country in the world.

Option 4: Mixed Exhaustion regime

Under a mixed exhaustion regime, different sectors, goods or IP rights could have different regimes applied to them. Any form of mixed regime in the UK would also need to be reconcilable with the Northern Ireland Protocol.

This is, understandably, the least fleshed out option in the consultation document but the Government cites examples of countries applying a mixed regime, including Switzerland and the US. Switzerland has a national regime for medicines, but otherwise operates an international exhaustion regime. In the US meanwhile, there is an international exhaustion regime for copyright and patents, with a national regime for trade marks but which allows parallel imports in certain situation.

 

Other relevant factors in the policy decision making process

The consultation identifies a number of other factors that may be affected by the exhaustion regime chosen:

  • Licensing, territorial rights and contracts: a change in the exhaustion regime could impact on licensing (in terms of the value of a particular licence), and on contractual clauses relating to what can and cannot be imported and exported into a particular area.
  • Products with complex supply chains for components and source parts (such as fashion and the automotive sector): the exhaustion regime selected will impact on the manufacturing of such complex products.
  • Goods in transit
  • Consumer choice and potential consumer confusion
  • Potential effect on innovation
  • Interaction with unregistered design rights: because of the rules relating to first disclosure of Unregistered Community Designs, it is possible that permission from a rights holder would be needed to parallel export goods from the UK into the EEA, even where that product is not protected as an unregistered design in the UK.

 

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