The UK Intellectual Property Office (UKIPO) has published a consultation on the UK’s exhaustion of intellectual property rights regime and what changes might be appropriate post-Brexit, including how such changes should be implemented. The consultation, which runs for 12 weeks, commenced on 7 June 2021 and will close at 23.45 on 31 August 2021.

The Ministerial Foreword talks about the need for “the intellectual property system to strike a balance between protection offered to creators and investors, and the need to allow fair competition, wide consumer choice and fair market pricing“. The Secretary of State for Business, Energy and Industrial Strategy highlights the UK’s post-Brexit “freedom to choose our own exhaustion of IP rights regime … and find the balance which best serves the needs of the UK economy, the UK public and the UK as a whole“.

Follow this link to read the consultation document and locate the response form.

Below, we outline the principles behind the different types of exhaustion regime, and summarise the options proposed by the consultation, highlighting the issues associated with each.

What is exhaustion of rights? 

The exhaustion of intellectual property rights is a restriction an owner’s right to enforce its intellectual property rights. Where an item has been put on the market by, or with the consent of, the owner of the IP rights in it, then these rights are “exhausted” and can no longer be used to prevent or control distribution, or further sale of the item. So, in the UK, placing the item on the market with consent would mean that the IP rights owner could not prevent any subsequent sales  of the item in the UK via its IP rights, once the item had been purchased by another party. This is national exhaustion. This term is also used to refer to a situation where this is the only type of exhaustion recognised such that IP rights can be asserted in the UK against any product put on the market in another jurisdiction (even where this was with the rights owners’ consent) and used to prevent its importation into the UK. Below we have referred to the latter as “exclusively national exhaustion”.

Until the UK left the EU, exhaustion of rights in relation to trade marks for example, would apply if an item was put on the market with consent in Germany and was then imported to the UK – the trade mark rights would have been exhausted on that first marketing in Germany and thereafter the item could move freely around the EU and EEA.  This is regional (EEA-wide) exhaustion of rights. This still applies to goods put on the market in the EEA with consent in relation to their sale within the EEA.

However, following the end of the Brexit transition period, the EU no longer considers items first put on the market in the UK as having their rights exhausted in the rest of the EEA, but the UK has continued to recognised the IP rights in goods first put on the market with consent in the EEA as exhausted in the UK (ie it has retained this principle of regional EEA-wide exhaustion in respect of such goods entering the UK market). The purpose of the consultation is in part to consider whether this unilateral exhaustion recognition by the UK in relation to products first put on the market in the EEA should continue. In the consultation, this current regime is known as UK+.

Due to the UK’s adoption of the EU law status-quo into UK law at the end of the transition period, the decision of the CJEU in Silhouette v Hartlauer C-355/96 (1998) – that EU member states (as the UK was then) are not free to allow full international exhaustion (ie that rights in goods first put on the market anywhere in the world by the rights owner or with its consent, are exhausted and so cannot be used to prevent importation into an EU member state (including the UK at the time)) and that the EEA-wide exhaustion was the only regional/international exhaustion that could be applied – is still part of UK law. However the UK can amend this law now it is no longer in the EU, if it wishes. There is also provision in the TRIPS agreement for signatory states to choose their own exhaustion regimes.

Four options proposed and the issues arising for each

Option  Type of regime  Inbound parallel import of goods Outbound parallel import of goods Issues raised 
1. UK’s unilateral
application of
a regional EEA
regime, otherwise
known as a
“UK+” regime.
Only automatically
permitted from EEA
countries (assuming there
is separate authorisation
for regulated goods such
as medicines)
Not automatically
permitted except to
countries with an
international regime.
No guaranteed reciprocity from EEA member states (currently none in place).

The UK government states that that the maintenance of the UK+ regime does not engage the Most Favoured Nation clause of GATT as exhaustion is not determined by the nationality of the IP owner or business moving the goods but by the location where the relevant goods are placed on the market.

2. National Not automatically permitted from any country Not automatically
permitted except to
countries with an
international regime.
National exhaustion already applies within the UK for goods first put on the market (with consent) in the UK. An exclusively national exhaustion regime would mean that UK IP rights could be used to prevent the importation and distribution of items being imported into the UK that were first put on the market in any non-UK location.

The consultation suggests that this could increase the value of UK IP rights and allow increased segmentation of markets, but also could limit consumer choice and impact supply chains and increase consumer prices.

More significantly, a national regime may not be compatible with the Northern Ireland Protocol as is recognised in the consultation document which says that this option is included for completeness.

3. International Automatically permitted from any country (assuming there is separate authorisation for regulated goods such as medicines). Not automatically
permitted except to
countries with an
international regime.
This could weaken UK IP rights but could increase consumer choice and reduce prices.

However, there is a risk of consumer confusion in relation to goods intended for other markets, and of counterfeit goods being imported under cover of parallel imports, states the consultation document.

Cheaper goods intended for least developed countries might be diverted to the UK and reduce the supply available to those countries (in particular in relation to pharmaceuticals and educational books).

4. Mixed (different treatment for a specific IP right, good or sector) Ability to parallel import will depend on any decision on treatment for a specific IP right, good or sector. Not automatically
permitted except to
countries with an
international regime.
Such a mixed regime approach is already used in some states (eg Switzerland which allows the parallel import of most goods but in relation to medicines there is a national exhaustion regime – see 2 above).

A mixed regime for the UK would need to be in line with the Northern Ireland Protocol.

The consultation document suggests that a mixed regime could prove confusing for consumers and businesses – eg one based on a particular regime for patents compared to other IP rights might cause problems where several different IP rights are present in one product. Different regimes for different sectors would require significant evidence to demonstrate why this would be beneficial to the UK and align with legal obligations.

 

Other issues – licensing, territorial rights, products from components and transformed goods, goods in transit, impact on innovation 

A change in the exhaustion regime would be likely to impact on the value of territorial licences and distribution contracts, it is suggested in the consultation document. For example, where international exhaustion is introduced, the value of a licence in the UK will be likely to reduce; equally, should exclusively national exhaustion be applied in future, that licence could become more valuable. Contracts would likely need to be renegotiated in many cases in any event, were there to be a change of regime, which would be a cost to business generally.

Where complex products are concerned, ones which rely on supply chains with components from multiple sources, these might be adversely affected by changes to exhaustion regimes. Cross border movements of products at different stages of manufacture is already an issue post-Brexit for some manufacturers and this could add to the complexity and costs.

There have been several CJEU decisions in recent years looking at the status of goods in transit across the EU and whether EU-wide or individual EU member state IP rights could be asserted in relation to them when they land in an EU airport on their way to a non-Eu destination, or are stored temporarily within the EU, or are travelling by land across the EU. In most cases the decision was determined by the evidence or likelihood of such goods making their way onto the EU market. The consultation acknowledges that movement of goods into the UK for storage and then subsequent movement out again is not likely to be prevented by the UK’s exhaustion of rights regime in its current state (UK+) where the goods are being imported for storage from an EEA state.

Innovation may be impacted by the choice of exhaustion regime, suggests the consultation document. The consultation states that with an exclusively national regime, rights holders have more control over the distribution of their goods and as a result, says the consultation document, “IP rights would be considered to be strong. This means that people may be more likely to innovate or create goods that can be protected by IP because they would have more protection and a higher return on their investment into the time taken to innovate or create. In an international regime, rights holders would have less control over the distribution of their goods. This means that IP rights may be considered to be weaker and people may be less likely to innovate or create. This is because they would have less protection and return over their investment“. Whilst this may well be the case in relation to UK sales, it presupposes that UK rights are the only rights that innovators are interested in, rather than also those involved in the worldwide market.

The consultation also highlights the particular issues relating to unregistered design rights relating to the qualification for such being dependent on where the design was first disclosed. See the consultation paper for more detail on this.

Implementation

The consultation also asks stakeholders what implementation regime they would prefer in terms of length of transition or implementation period, in order to make necessary changes to supply chains and any other aspects of their business models.  This will be a key area of commercial concern.

 

Key contact

Rachel Montagnon
Rachel Montagnon
Professional Support Consultant
+44 20 7466 2217