Exhaustion of intellectual property rights is a principle by which, once branded products placed on a particular market, with the consent of the brand owner, the later distribution and sale of those items cannot be prohibited by the brand owner, the rights have been exhausted. Exhaustion can apply internationally, regionally or nationally. In the UK, pre-Brexit, an EEA-wide regional exhaustion regime applies.
As a precaution in the event of a ‘no deal’ Brexit, subordinate IP legislation has been laid before Parliament for approval and which is intended to be in place at Exit Day in that scenario. On the issue of exhaustion, the legislation is the, The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018 (the “Exhaustion SI”). The Exhaustion SI was laid before Parliament in November last year.
Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018
In relation to trade mark exhaustion, the Exhaustion SI provides for the UK to continue to recognise EEA-wide exhaustion as provided for under the EUTM Regulation and the authority of the landmark Silouette case in which the Court of Justice of the EU (CJEU) ruled out the adoption of an international exhaustion approach by EU member states. This will be by way of retained legislation under the Withdrawal Act. However, this regional exhaustion regime can only have asymmetric application, biting on imports into the UK and cannot dictate the impact on those UK businesses engaged in parallel exporting from the UK to the EEA.
Debate on the Exhaustion SI
The Exhaustion SI required approval by the Affirmative procedure. This means it had to be approved by both the House of Commons and the House of Lords. The SI was approved by the Delegated Legislation Committee of the Commons on 21 January 2019 (despite clear division in the Committee and grave reservations about the lack of consultation and an impact assessment).
In presenting the Exhaustion SI in the Lords, the Minister, Chris Skidmore, stated,“…the draft instrument provides a solution. The rules relating to exhaustion for UK businesses and others importing goods into the UK will remain the same until such time as a future decision is made on what exhaustion regime is best for the UK in the future, for which the Government are considering options. Although extensive research is under way, I stress that such an important decision should not be rushed. We will ensure that we have a robust evidence base and that we have consulted fully with stakeholders before any decision is made.”
It was reiterated that the purpose of the SI is to provide a temporary fix to ensure that UK based traders may continue parallel trade into the UK from other EEA states with minimum disruption and to support the movement of goods and the supply of central commodities. This would be of particular importance to many sectors, in particular, the medical sector and the NHS’ ability to maintain the supply of medicines from the EEA. The full Lords debate took place on 6 February and the SI was approved with continued and firm criticism of the absence of a sunset period or adequate consultation.
Impacts on Business
The impact on businesses is immense. One of the serious implications highlighted in the debate related to the parallel trading of pharmaceuticals. Pharmaceutical companies in the UK sell products to developing countries at a significantly lower price than charged in the EU. Without adequate certainty and protection, a parallel trader may buy the stock of the cheaper medicines and sell them back within the UK. In the absence of an order to prevent such parallel trade, pharmaceutical companies may be forced to curtail their sale of lower-cost medicines to developing countries, something they don’t want to do for policy reasons. The proposal to maintain a regional exhaustion regime as set out in the SI will be welcomed by many, including these pharmaceutical companies.
The position for parallel exports is more precarious. The Government’s advice to “seek guidance from the desired export territory” is of little assistance. No further comfort was given in the Lords debate yesterday where it was indicated that the UKIPO will give advice, but cannot force the EU to mitigate the position. As noted in the Commons debate, there is also a lack of guidance from the Withdrawal Act. This generates the huge expense of obtaining the necessary legal advice and/or approvals, creating a drain not only large corporations, but especially for smaller enterprises, such as those in the design and creative industries, who are likely to suffer the most.
The uncertainty will continue for all. The retention of the regional EEA-wide exhaustion regime as provided for in the SI will only be in place until a fuller consultation has taken place. Also, retained legislation under the Withdrawal Agreement will only be in force unless or until it is overturned by Parliament or the UK Supreme Court. As a result, the potential for parties to challenge the regional exhaustion regime remains open.
What you can do
- Prepare for asymmetric, regional exhaustion now. If you are a parallel trader, seek legal advice from local attorneys in your target markets within the EEA on the local rules that will likely apply to exports from the UK to those markets post Brexit, including reviewing existing distribution agreements.
- Participate in the ongoing consultation on the future regime for the UK, through trade bodies and IP organisations. Clients who are particularly affected are also encouraged to contact the UKIPO and their Parliamentary representatives directly to raise awareness of this important issue.