Parallel imports: Government's contentious claims of a 'temporary fix' in a 'no deal' Brexit

Posted on 02 October 2018

Parallel imports: Government's contentious claims of a 'temporary fix' in a 'no deal' Brexit

In its latest series of Brexit Technical Notices, the UK Government has promised to adopt a 'temporary fix' in relation to the treatment of parallel imports in the event of a 'no deal' Brexit; the UK will 'unilaterally align' to the EU/EEA regime from Exit day to allow continuity of supply of parallel imports into the UK. This is set out in the Government's Notice on Exhaustion of IP Rights and also in its earlier Notice in relation to medicines and medical devices. The Government states that this is just a 'temporary fix' and that it is currently considering all options, with any substantial changes occurring only after a full research programme and consultation (it has already announced an economic analysis in relation to parallel imports of pharmaceutical products).

However, unilaterally aligning to the EU/EEA regime by no means guarantees that pharmaceuticals and other products or ingredients relied upon by UK businesses and consumers will arrive in the UK. A 'no deal' scenario definitely means increased red-tape and costs and will almost certainly result in delays. Further, the Notice has no impact on the movement of parallel goods from the UK to the EU which EU IP rights owners will be able to attack following a 'no deal' Brexit.  

Background

The issue concerns genuine goods that are imported into a market and sold there without the owner's consent. Rules relating to 'exhaustion of rights' prevent the IP owner exerting control over the movement of those goods in certain circumstances. Presently, EEA-wide exhaustion of rights applies. 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).

In the event of No Deal Brexit, and in the absence of an agreement between the UK and the EU, the principle of EEA exhaustion of rights will no longer, by default, apply to the UK. In this event, the UK has three options:  

  1. Continue to apply EEA-wide exhaustion unilaterally (which it plans to do as at least an interim measure);
  2. National exhaustion. This will restrict parallel imports as an IP owner's rights will only be exhausted when the goods are put on the market in the UK (i.e. IP owners can utilise IP rights against genuine goods from outside the UK being imported into, marketed or sold in the UK); or
  3. International exhaustion. This is the least restrictive regime for parallel imports; once an IP owner puts their goods on the market anywhere in the world, they cannot prevent the resale of those goods in any other country.

What will the Government decide?

In the event of no agreement being reached between the UK and the EU, the decision as to what form of exhaustion to take post-Brexit will, no doubt, be a heavily lobbied issue, given the competing interests involved. Perhaps the most likely outcome is retention of the Government's proposed temporary fix of unilateral alignment with EEA-exhaustion but there are a few points worth bearing in mind. First, if there is no agreement, the UK will not be part of the EEA-exhaustion regime for the purpose of enforcing EU rights in the EU. For example, if goods protected by an EU trade mark are put on the market in the UK, the trade mark owner will still be able to rely upon its right to prevent importation of those goods into the EU; its trade mark rights will not have been 'exhausted' by the sale in the UK. However, the Draft EU Withdrawal Agreement does confirm that rights which were exhausted in both the EU and the UK before the end of the proposed implementation period (end December 2020) will remain exhausted in both territories.

Whilst the Notices deal with IP/exhaustion of rights issues, they overlook the serious practical and financial challenges that result from a no deal Brexit (although some of these are alluded to in the Government's Technical Notice on Trading with the EU if there's no Brexit deal). These will include UK businesses having to be registered, to submit customs declarations on imports (and exports), and to pay tariffs (which will be on non-preferential WTO terms) and VAT (although the Government has announced that UK VAT registered businesses will be able to account for import VAT on their VAT return rather than on the goods' arrival at the UK border which will help to mitigate the adverse cash-flow impact).

Even if HMRC is recruiting staff in anticipation of these changes, 53% or £341bn of all UK imports come from the EU and will suddenly fall under a completely new system so questions have to be asked about HMRCs capacity to handle all of those imports differently. Further there are serious questions over whether their systems, processes and people will be updated to handle the changes and whether businesses will know what they have to do to import products and be able to get it all done in time and correctly.  Delays and raised costs are clearly inevitable.  Furthermore, these issues are likely to have a knock-on effect on other parts of the economy reliant on EU imports which could result in more serious supply-chain issues.

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