Brexit means a new border will exist between the UK and the European Union (EU), but what will this mean for brand owners? Will you be able to prevent resale of your goods and services from the European Economic Area (EEA)1 into the UK on the basis that your rights have not been exhausted in the UK?

The answer isn't simple and depends on three main factors:

  1. Whether the UK remains in the EEA. If so, rules on exhaustion will not change.
  2. What UK law, rather than EU law, on exhaustion says. Although all EU Directives are supposed to have been implemented into UK legislation, and UK statute read in line with those Directives, in practice there is less detail around exhaustion under UK statute than there is under the Directives.
  3. Whether UK law will be amended so that references to the EEA or the Community become references to the UK.

Below I have set out what exhaustion means, in simple terms, for those who are not familiar with the concept. I then discuss the above three factors and how they might influence exhaustion laws when the UK leaves the EU.

Although there is inevitably a lot of uncertainty around how Brexit will be implemented, and therefore on the effect it will have, there are two key take away points which all businesses should bear in mind in relation to exhaustion. First, check what rights you have registered in the UK; and second, consider what opportunities any changes might present and design your strategy accordingly to optimise benefits to your business.

Exhaustion - put simply

Brand owners are often frustrated that, depending on the distribution model they have in place, they can’t control the channels or countries in which their genuine goods are ultimately sold.

The principle of exhaustion defines the limits on how brand owners can use their IP rights to control how and where their goods are sold. Broadly speaking resellers are permitted to sell goods within the EEA if the brand owner has already authorised that particular product for sale anywhere else in the EEA market because the brand owners' IP rights are said to be "exhausted".

Consider, by way of example, two scenarios in which a brand owner sells a skin care product:

  1. The brand owner sells the skin care product to its distributor in Thailand, authorising sales in Thailand, and that distributor legitimately sells the skin care product on to a retailer in Thailand. A reseller buys that skin care product, imports it into the EEA, and sells it in Greece. The trade mark rights in that skin care product have not been exhausted by the brand owner in the EEA because it was authorised only for sale in Thailand, therefore the reseller is infringing the brand owner’s trade mark rights. The brand owner can therefore prevent that sale into the EEA.
  2. The brand owner sells the skin care product to its distributor in Greece, authorising sales in Greece, and the distributor legitimately sells the skin care product on to a retailer in Greece. A reseller buys that skin care product and sells it in the UK. The trade mark rights in that skin care product have already been exhausted by the brand owner in the EEA therefore the reseller is not infringing the brand owner’s trade mark rights by reselling in the UK. The brand owner is powerless to prevent that sale into UK.

The question is whether the legal position under scenario 2 above will change when the UK leaves the EU. Exhaustion is particularly relevant to the fashion and luxury industry where goods are not perishable and there are price differentials between different markets (both within and outside the EEA), so this question should be on the agenda.

What impact will Brexit have?

What does Brexit mean for exhaustion? Will brand owners be able to prevent resales into the UK from the rest of Europe?

After Brexit, community trade marks and registered community designs may no longer confer the same rights in the UK. There will almost certainly be some conversion of rights, however if your business is heavily UK-focused you may want to consider reviewing your portfolio of UK registered trade marks or UK registered designs to future-proof your portfolio.

Will the UK remain in the EEA?
Currently, EU exhaustion laws have EEA, rather than EU relevance. We therefore need to consider whether the UK will leave the EEA. At this stage, we don’t know the answer to that question. If the UK remains within the EEA there will most likely be no change to exhaustion laws. On the other hand, if the UK leaves the EEA, there will effectively be a new border into the UK which may mean that rights that are exhausted in the EEA are not exhausted here.

What is the law on exhaustion under UK legislation?
UK legislation should be read in line with the relevant EU Directive, however it is worth noting that UK statute generally contains lot less detail around exhaustion than the Directives. In practice, the EU Directives are unlikely to fall away immediately. It is much more likely that their implementation will be preserved, pending piece by piece review and amendment of UK law. Similarly Court of Justice of the European Union case law which interprets a provision of UK law (such as the Trade Marks Directive as implemented in the UK) will likely retain precedential value.

Will UK law be amended so that references to the EEA become to the UK?
UK legislation refers to exhaustion in the EEA. It is likely that this will be amended in due course to refer to the UK, however again this is not completely clear. Uncertainty around this point will drive lobbying as various stakeholders will have the opportunity to put forward their views on whether, and if so how, UK legislation should be amended.

With the above in mind, if we exit the EEA the position on exhaustion will be as follows:

  • Trade marks - we may be heading towards UK-only exhaustion. This would enable brand owners to take action against resales from the EEA into the UK, giving them more control over sales and also prices.
  • Designs - similarly, we may end up with UK-only exhaustion which would, if it materialised, give UK brand owners increased control.
  • Copyright - the position is slightly more complicated as the law draws a distinction between physical and digital goods. Rights in relation to physical goods will be exhausted in the UK. For the fashion and luxury industry this may have limited impact as products such as clothes and perfume are not protected by copyright in the UK. Of course any photographs, adverts and packaging may well attract copyright protection. The position is less clear in relation to digital goods, as the Copyright Designs and Patents Act is silent in relation to exhaustion of the communication to the public right. The Information Society Directive provides for no exhaustion of this right and as we have said, UK statutes must be interpreted in accordance with the relevant EU Directive. Conversely, the Software Directive provides for exhaustion in relation to software distribution and similarly this is not explicitly stated in UK statute. In practice what this means is that currently digital content (other than software) is not exhausted once it is communicated to the public in the EU and this would not change if the UK were to leave the EU.

What about international exhaustion?
The UK government has, in the past, supported the concept of international exhaustion, i.e. that once a product is put on the market anywhere in the world, all rights are exhausted and a brand owner cannot restrict resales. If, in negotiating Brexit, the UK ends up outside the EEA but adopts international exhaustion, brand owners will not be able to use intellectual property rights to prevent resale of genuine goods in the UK, irrespective of where those goods were first placed on the market. We don't know at this stage how likely this option is, but you may want bear it in mind when planning your business strategy for coming years.

What should you be considering?

As we have seen, the law on exhaustion in the UK post-Brexit remains murky. However in our view two things are clear: first, although EUTMs and RCDs will almost certainly not cease to apply in the UK overnight, now is a good time to review your UK rights; and second, the uncertainty may be an opportunity for you to optimise the position in the UK for your business. On that basis you should be considering:

  1. Reviewing your rights: Do you need to register your brand (trade marks or designs) in the UK as well as the rest of Europe? You are likely to be able to continue to rely on EUTMs and RCDs for some time to come, however if your business is heavily focused on the UK this may be a good time to take stock of what rights you have and what your strategy is going forward.
  2. Future change: Keep an eye on the UK government’s position on exhaustion. If the UK leaves the EEA you may be able to prevent parallel imports from EEA countries into the UK, but the UK signing up to international exhaustion would open the floodgates to the rest of the world. Spend some time thinking about what would be best for your business and what your strategy should be going forward.

Exhaustion – principles under EU and UK law

 

EU UK

 

Trade Marks Article 7(1) and (2) Trade Marks Directive

EXHAUSTION s.12(1) and (2) Trade Marks Act


EXHAUSTION

Registered Design Article 21 Community Registered Design Regulation
EXHAUSTION s.7A(4) Registered Design Act

EXHAUSTION

Copyright – communication to the public (CTP) Article 3(3) Information Society Directive

NO EXHAUSTION s.20 Copyright Designs and Patents Act (CDPA)

ASSUME NO EXHAUSTION

Copyright – distribution right / issuing works to the public Article 4(2) Information Society Directive (Distribution right)

EXHAUSTION s. 18 CDPA (Issuing copies to the public)

EXHAUSTION

Copyright - software Article 4(2) Software Directive


EXHAUSTION No provisions specific to software.