IF THE UNITED KINGDOM LEFT THE EUROPEAN UNION WITHOUT JOINING THE EUROPEAN ECONOMIC AREA AS AN EXTRA-EU COUNTRY, THE PRINCIPLE OF EUROPEAN EXHAUSTION WOULD CEASE TO APPLY IN THE BRITISH TERRITORY. IN SUCH CASE, A RESTRICTION OF PARALLEL TRADE FROM AND TO THE UNITED KINGDOM MAY OCCUR, BUT ALSO AN INCREASE IN THE PROTECTION OF IP RIGHTS WITHIN THE UK. THE CHARTERED INSTITUTE OF PATENT ATTORNEYS HAS EXPRESSED ITS COMMITMENT TO FIND, TOGETHER WITH THE STAKEHOLDERS INVOLVED, AN ACCEPTABLE SOLUTION.

European exhaustion and parallel imports: the status quo

Brexit has potentially significant implications for the various areas of intellectual property because IP rights are still territorial in nature. As a matter of fact, based upon the principle of territoriality, the holder of an IP right can enjoy it (only) in the territory of the State or Union of States where the relating title has been filed and is effective. Thus, the exit of the United Kingdom from the European Union would have repercussions on IP rights that are effective in the whole Union, in particular EU trademarks, community designs and future European unitary patents.

A phenomenon of territorial nature is also the exhaustion of IP rights. In brief, by virtue of the principle of exhaustion, once a product covered by an IP right is legitimately put on the market by the proprietor of the IP right or with his consent, such product can circulate freely without the need of any authorization from the IP right holder. After the first transfer of the product, the exclusive right is “exhausted” and the holder of the right will not be able to prohibit the further marketing thereof, unless there are legitimate reasons to oppose it (such as where the condition of the product is altered or impaired).

The principle of exhaustion applies at European level (European exhaustion). It is an expression of the fundamental freedom of movement of goods enshrined in the Treaty on the Functioning of the European Union (TFEU), as interpreted by the EU Court of Justice, and it is set forth in specific provisions: in particular, for EU trademarks, Article 13 of Regulation (EC) No. 207/2009, modified by Regulation (EU) No. 2015/2424, as well as, for community designs, Article 21 of Regulation (EC) No. 6/2002.

The operation of European exhaustion legitimates parallel importation within the EU single market, namely imports of original goods between States participating in the single market by persons other than the distributors authorized for the country of destination. Thus, the parallel importer will be able to profit from the resale of goods at lower prices than those charged by the official retailer, by saving on promotional expenditures already borne by the latter and/or by earning on the price differential existing from country to country for the same product.

The post-Brexit outlook

What would change, after Brexit, for the exhaustion of IP rights? It should be borne in mind that the principle of European exhaustion extends to all the countries of the European Economic Area (EEA), namely, in addition to the EU, also Norway, Iceland and Liechtenstein. Actually, the principle of exhaustion of intellectual property rights at European level is set out in Protocol 28 to the EEA Agreement, signed in Oporto in 1992.

Therefore, if the United Kingdom left the European Union without negotiating entry into the European Economic Area, the rules in force on European exhaustion would cease to apply there. Thus, products already placed on the market in a EEA country could no longer be freely imported into the United Kingdom, and vice versa, without the consent of the holder of the IP right covering the product itself. Indeed, as to the United Kingdom, European exhaustion would be finished.

It is not possible to exclude such eventuality; also because last January the Prime Minister Theresa May said that the United Kingdom cannot possibly remain within the European single market, as staying in it would mean not leaving the EU at all. The Government will push for a free trade agreement with the European Union subject to Parliament’s vote, she said, and such deal should not be based upon an accession to the European single market, but rather on a “new and equal partnership”.

Separate and not linked holders of the same trademark

Yet, a specification should be made. According to the EU Court of Justice (CJEU), there is exhaustion of trademark rights only if the proprietor of the trademark in the country of export and the proprietor of the trademark in the country of import are either the same entity or different entities that are somehow economically or legally linked to each other (e.g. because they are part of the same company group or have concluded a licence agreement).

As a matter of fact, under CJEU case law (recently confirmed by the Court of Milan in an order of 17 October 2016), in case of strict separation in the ownership of a trademark covering parallel imported goods between two EU/EEA countries, the free movement of the product would undermine the essential function of the trademark, inasmuch as consumers would no longer be able to identify for certain the origin of the branded product, and the owner of the right could be held liable for the poor quality of goods for which he is not accountable.

Therefore, independently of whether European exhaustion ceases to apply within the UK after Brexit or not, a trademark owner in the UK will have (as it already has) the right to oppose the parallel importation of branded goods already put on the market in a foreign country by a different, not linked, trademark owner.

What’s next?

In the event that the principle of European exhaustion were no longer operative in the UK, a weakening of parallel trade between the United Kingdom and the EEA countries may reasonably be expected. On the other hand, a more advantageous protective regime may be in force within the UK for holders of IP rights, who in hypothesis could enjoy their exclusive rights more fully, inasmuch as such rights would also extend to the secondary circulation of a product after its first placing on the market.

The Chartered Institute of Patent Attorneys (CIPA), in a paper dealing with the impact of Brexit on the various IP rights, updated last January, highlighted the uncertainty concerning exhaustion of rights and parallel imports, remarking: “The position may change following the UK’s exit depending on the precise arrangement reached”.

Still according to the CIPA, a particular critical issue concerns the Irish border. Namely, it remains to be seen whether this will become a soft or hard border, in the latter case with inspection of commercial traffic between Northern Ireland and the Republic of Ireland after Brexit.

One thing is for sure: should the United Kingdom, in the future, be out of both the European Union and the European Economic Area, a further factor of complexity would add to the exhaustion of IP rights, which is of itself a phenomenon having intricate implications. The CIPA itself has expressed its commitment to contribute to solving this delicate issue, declaring: “This is a complex area and CIPA is working with stakeholders to achieve the optimum position.