Exhaustion of rights is a highly charged subject and Brexit has stirred up the old arguments again. The question has been what principle of exhaustion should apply post Brexit? Should there be:
- national exhaustion (as advocated by INTA);
- international exhaustion (which the US Supreme Court recently confirmed applies to the sale of patented articles, see Impression Products v Lexmark International); or
- regional exhaustion (as there is presently)?
The argument pits IP owners wanting to protect national markets against those who advocate that parallel trade is good for consumers. With the threat of a hard Brexit, some in the pharmaceutical industry have been warning that adopting national exhaustion would cause drug prices to increase and could cause supply chain shortages risking access to some drugs. The consensus which has developed since the referendum has been to retain the status quo.
The Government's solution: asymmetric regional exhaustion
At the end of November 2018, the Government published The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018 (the 'draft SI') and explanatory note. The draft SI puts flesh on the bones of the Government's guidance note published in September 2018 on exhaustion of IP rights in the event that there is a no-deal Brexit.
In summary, the draft SI provides that the UK will continue to recognise EEA-wide exhaustion of IP rights. But, since there is no such reciprocal provision in the latest version of the draft withdrawal agreement with the EU, and Parliament has rejected the idea of joining the EEA, this means that the provisions on exhaustion are asymmetrical. Therefore, although owners of UK IP rights will not be able to prevent parallel imports from the EEA, as the UK will no longer be a Member State, owners of rights in the EEA will be able to prevent parallel imports from the UK. In a statement that significantly underplays the issues for those who import goods already put on the market in the UK into the EEA, the Government, in its guidance note states:
"Businesses undertaking such activities may need to check with the EU right holder to see if permission is needed."
Parallel trade from the UK to the EEA does take place, encouraged recently by the significant fall in sterling. A pertinent example is that of the decision of the Court of Justice of the European Union (Case C-291/16) relating to the importation into Spain of Schweppes tonic water originally sold in the UK. In this case, the Court held that the parallel imports could not be stopped despite the division in ownership of the Schweppes marks. The decision would, post a hard Brexit, go the other way.
The draft SI is silent on the issue of parallel trade into the UK from third countries. However, it is obvious that the existing regime is intended to continue. The differences in the rules governing patents and those IP rights which have been harmonised by the EU will therefore be maintained post Brexit.
Harmonised IP rights - A bit of history on exhaustion
Exhaustion of rights has been written into various of the UK's statutes following the implementation of the relevant harmonising Directive. For example:
- section 12 of the Trade Marks Act 1994 implemented article 7 of the Trade Marks Directive 89/104/EC (now article 15 of Directive (EU) 2015/2436);
- section 18 of the Copyright Designs and Patents Act 1988 (as recently amended by SI 2018/995) on issuing copies to the public implemented article 4 of the Copyright Directive 2001/29/EC; and
- section 7A of the Registered Designs Act 1949 implemented article 15 of the Designs Directive 98/71/EC.
Soon after the coming into force of the Trade Marks Directive 89/104/EC, the European Court of Justice (as it was then called) was asked to consider whether the Directive left it open to Member States to provide for international exhaustion (Silhouette v Hartlauer, Case C-355/96). The Court said 'no'. In so doing, the Court held that this was the only way in which to safeguard the functioning of the internal market; it could not function if some Member States provided for Community exhaustion whilst others provided for international exhaustion. This has given rise to what is termed 'Fortress Europe' i.e. a Europe where the borders are closed to parallel imports absent express consent on the part of the rights owner to such importation.
Some years later, the Court held that article 4 of the Copyright Directive (the distribution right) also precluded Member States from retaining international exhaustion (Laserdisken v Kulturministeriet, Case C-479/04).
The same principles would apply to designs given the similarity in approach and wording of the Designs Directive to both the Trade Marks Directive and the Copyright Directive. As the Advocate General noted in the Laserdisken case, there was no reason not to interpret the Copyright Directive consistently in line with Silhouette given the similarity in the wording between it and the Trade Marks Directive.
Harmonised IP rights - How is exhaustion dealt with in the draft SI?
The reason for labouring the history is that it informs the interpretation of the draft SI. Part 3 onwards of the draft SI amends the statutory provisions on exhaustion in relation to those harmonised IP rights providing that, post Brexit, such rights will be subject to:
- national exhaustion; and
- one-way exhaustion for goods first put on the market in the EEA.
The draft SI is silent on the issue of imports of products from third countries. However, Silhouette and Laserdisken will be 'retained EU case law' under section 6 of the European Union (Withdrawal) Act 2018. As a consequence, the principles laid down in these cases will continue to apply after exit day unless and until the Supreme Court or Parliament decides otherwise: There will be no change to international exhaustion or reversion to a concept of implied licence on Brexit.
Despite the fact that there is no similar case law in relation to other harmonised rights namely designs, databases and semiconductor chip topography rights, there is little reason to think that Silhouette and Laserdisken will not be considered as applicable retained case law.
Patents – imports from the EEA
Patents are different. National patent law has been harmonised to some extent by The European Patent Convention, but this is not an EU instrument and it does not contain any provisions on exhaustion of patent rights. Free movement of goods within the EU is therefore guaranteed by articles 34 and 36 of the Treaty on the Functioning of the European Union ('TFEU') and in the EEA by articles 11 and 13 of the Agreement on the European Economic Area ('EEA Agreement'). These provisions have given rise to a very significant body of case law from the Court of Justice of the European Union, particularly concerning pharmaceuticals.
The position post Brexit in relation to exhaustion of patents rights, and indeed other IP rights, is dealt with by part 2 of the draft SI. It provides that:
a. was, before exit day, an enforceable EU right relating to the exhaustion of rights of the owner of an intellectual property right under articles 34 to 36 [TFEU] or articles 11 to 13 [EEA Agreement]; and
b. is retained EU law by virtue of section 4 of the European Union (Withdrawal) Act 2018
has the same effect on or after exit day, despite the United Kingdom not being a Member State, as it had immediately before exit."
Since the principles of free movement of goods and exhaustion under the TFEU and the EEA Agreement are 'retained EU law', the law governing imports from the EEA to the UK immediately post Brexit will remain as it presently stands. This will also include the Court of Justice's case law since 'retained EU law' includes 'retained EU case law'. However, as already noted, there is, at present, no such reciprocal provision to allow parallel importation of goods from the UK to EEA.
Patents – imports from third countries
At present in the UK, the principle of implied licence still governs patented goods put on the market in third countries (see Betts v Willmott  6 Ch App 239 and subsequent cases). Thus, the owner of patented goods has an implied licence to use, sell and import those goods. Such a licence may be excluded by express contrary agreement or made subject to conditions. In this way, it is different from the principle of exhaustion which leaves no patent rights to be enforced.
In recognising the concept of implied licence, the UK differs from many other Member States which generally provide, subject to the principle of free movement of goods within the EEA, that a national patent can be asserted against parallel imports.
As before, the draft SI is silent on the rules governing imports from third countries. Post Brexit, the principle of implied licence will continue to govern imports into the UK of patented goods put in the market in third countries by or with the consent of the patent owner. There is no relevant EU case law to be retained on this point; Silhouette is not applicable. However, as already noted, the principle of implied licence will not apply to parallel imports from the EEA.
The Government has done what can to preserve the status quo in the draft SI. The one important change to flag is that owners of IP rights in the EEA will, following Brexit, be able to block the entry of parallel imports from the UK.