With the United Kingdom ("UK") due to leave the European Union ("EU") on 31 October 2019, draft statutory instruments are beginning to emerge which provide a more concrete insight into the intellectual property landscape post-Brexit.

This note provides an update on our previous article 'Brexit and… exhaustion of rights' following the publication of The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 (the "Exit Regulations") which set out the amendments to existing legislation which will govern how exhaustion of rights will operate following Brexit.

Exhaustion of rights

Currently, the EU implements a system of regional exhaustion, known as 'Fortress Europe', to help facilitate the free movement of goods. Once the intellectual property ("IP") owner has, or has authorised a third party to, put a product on the market in the European Economic Area ("EEA") – being the EU Member States plus Iceland, Norway and Lichtenstein – the IP owner cannot assert its national rights in order to prevent those goods from being imported and/or resold in other parts of the EEA.

Therefore, anyone wishing to import genuine goods into a country within the EEA must prove that the IP owner has, expressly or by inference, consented to those goods being placed on the market in the EEA. This system provides an effective mechanism under which, other than in rare circumstances, IP owners can successfully prevent the importation of goods into the EEA that have only been authorised for circulation outside of the EEA. Amongst other objectives, this can assist IP owners in maintaining different pricing and marketing strategies in different territories, as well as ensuring that only products meeting strict EEA quality standards are authorised for distribution in the market.

Before Fortress Europe

In our previous note, we observed that pre-Fortress Europe the UK courts were leaning towards the concept of international exhaustion – in cases such as Revlon v Cripps & Lee (1980) and Colgate-Palmolive v Markwell (1989) – which requires the IP owner to justify why genuine goods placed on a market elsewhere (by it or with its consent) should not be permitted to be imported into the UK. We suggested that it would therefore be intuitive for the UK to revert back to a concept of international exhaustion, in line with its wish to strike out as an open and global trading nation.

The Exit Regulations

The practical impact of the provisions on exhaustion is that protection/rights are asymmetrical.

(a) Goods authorised for sale in the EEA

The Exit Regulations have confirmed that '… anything which was, immediately before exit day, an enforceable EU right relating to the exhaustion of rights of the owner of an intellectual property right…and is retained EU law…has the same effect on and after exit day, despite the United Kingdom not being a member State, as it had immediately before exit day…' (Section 2 of the Exit Regulations).

The Exit Regulations also amend legislation relating to copyright and registered trade marks and designs, to ensure the continuation of the Fortress Europe regime in relation to goods which will already be in free circulation within the EEA at exit day. The impact of these changes is to add expressly "the United Kingdom" ahead of the EEA (i.e. '… put on the market in the United Kingdom or in the European Economic Area…'), meaning that UK IP rights will be exhausted regardless of whether protected products are first put on market in the UK or in the EEA.

The position on patents is slightly different, given that national patent protection is harmonised under the European Patent Convention ("EPC"), which is not a construct of EU law. However, the free movement of goods within the EU is guaranteed under the Treaty on the Functioning of the European Union and the Agreement on the EEA, both of which will be "retained EU law" (in accordance with Section 2).

Consequently, the law governing patent-protected imports from the EEA to the UK immediately post Brexit will remain as it presently stands.

(b) Goods authorised for sale in the UK

Unlike the current situation where goods authorised for sale in the UK can be freely sold throughout the EEA, this will not be the case post-Brexit.

Although, as explained above, owners of IP rights in the UK will be unable to prevent parallel imports from the EEA – because the UK is required to recognise that such rights have been exhausted – no such agreement has been made by the EU, suggesting that owners of IP rights in the EEA will be able to prevent parallel imported products which have only been authorised for sale in the UK.

In such circumstances, it should be noted that patents are (again) treated differently from other IP rights. In the UK, the principle of 'implied licence' applies – whereby the owner of patented goods has an implied licence to use, sell and import such goods (subject to any express agreement to the contrary and/or special conditions). However, unlike the UK, the laws of certain other EU Member States provide that a national patent can be asserted against parallel imports, subject only to the principle of free movement of goods within the EEA.

By way of an example, if a patent owner authorises the sale of patented goods in the United States:

  1. if the patented goods were imported into the UK for resale, the patent owner could not enforce its UK patent to prevent the resale of such goods in the UK, as the reseller can rely on its implied licence in defence of any infringement action; but
  2. if the patented goods were imported into the EEA, the patent owner would be able to enforce its national patent rights – in respect of those EEA member states where there is no "implied licence" – in order to prevent the resale of such patented goods.

It is anticipated that, post Brexit, this principle will continue to govern imports into the UK of patented products put on the market in third countries by or with the consent of the patent owner.

Looking forward

It appears that, at least in the short-term following Brexit, the intention is that the laws on exhaustion of rights in the UK will continue as before. Many commentators have speculated upon whether the UK should consider adopting national, or international, exhaustion rather than the regional exhaustion which has been imposed through Fortress Europe.

  • National exhaustion: IP owners tend to benefit from national exhaustion, as it increases their control over the distribution of products. As a result, it can allow for increased distribution in emerging countries, as lower costs in such territories would not create the risk of the owner's national distribution networks being undercut by resales from such countries. However, this can create issues such as significantly reduced choice for consumers, as well as the risk of supply shortages if products cannot be readily distributed between territories based on demand.
  • International exhaustion: This solution tends to be more consumer-friendly, by increasing competition (amongst the IP owner and lawful importers), thereby driving prices down. However, it can also result in harm to consumers through the sale of lower quality products in countries with higher (or different) quality standards, meaning that products which do not meet a specific territory's requirements may flood the market and/or be more readily available.

It may be that, upon reflection, the UK decides that regional exhaustion (such as that already in place) would be the best means of protecting the interests of consumers and IP rights-holders but the asymmetry of protection offered – given that the EU has not made any assurances to respect the exhaustion of rights in products put on the market in the UK – means that the "status quo" cannot feasibly be maintained. Indeed, one could question as to why the UK would not want to adopt a doctrine of international exhaustion after its withdrawal from the EU, since the proponents of the Leave campaign have stressed the importance of UK businesses to seek out arbitrage opportunities and to avoid being unduly shackled in doing so. Much will depend on how closely aligned will the UK remain with the non-tariff requirements of the EU post Brexit.

On a related topic, on 2 August 2019, the UK government announced its plan for the creation of 10 free ports, shortly after Brexit, where businesses could import goods and then re-export them outside normal domestic tax and customs rules.

Impact

The exhaustion of rights doctrine has a wide application, relevant to anyone that owns IP rights and trades within the EEA, as indeed has been encouraged by the fall in sterling.

Companies need to consider these changes and, where appropriate, adapt their import, resale and distribution arrangements accordingly.