Thursday 8 July 2021

IPO launches consultation on exhaustion of IP rights post-Brexit

The UK government has launched a consultation on the future regime for the exhaustion of IP rights. The consultation is open for responses from 7 June to 31 August 2021. It is going to be a crucial decision which would significantly impact IP owners, consumers, and others involved and affected by parallel trade. 

IP rights give economic incentives for creations, products and innovations of new technology, enabling rights owners to benefit from the information and intellectual goods created. Consumers benefit from the availability of a wider range of innovative or attractive goods. But move away from this justification and you have a plain old monopoly, which means fewer goods being made, innovation being sidelined, and prices being raised.

The doctrine of exhaustion of IP rights exists to balance the different interests of consumers and rights owners when goods move between jurisdictions, preserving competition in situations where the traditional justification for IP protection is not convincing. The doctrine limits the ability of IP rights holders to use their rights to control the distribution of physical goods once they have legitimately been put on the market. Intellectual property rights can be invoked to prevent goods crossing territorial borders, an issue that has caused problems within western Europe since the earliest days of the European Economic Community. “Parallel trade” - goods moving between national markets outside the manufacturer’s official channels, are a challenge to rights-owners’ marketing strategies, but often a key factor in reducing prices.

Price differentials, naturally, lie at the heart of parallel trading. Traders - arbitrageurs, they might prefer to be called - will buy goods where they are cheap and move them to markets where they command a higher price. At one level, this is nothing that has not been going on for centuries: Traders will buy produce where it is grown and move it to where people want to buy it. But in the consumer society it’s far more complicated. Purchasing power differs enormously, even within the European Economic Area, and a rational manufacturer will pitch their prices according to what local consumers can afford - which might represent a fantastic bargain to someone in a richer EU country.

Following Brexit, the UK is no longer bound by the requirements of EU’s rules, which in essence say that once goods have been placed on the market within the European Economic Area any IP rights attached to them will not be infringed if those goods are imported into another Member State (although the rules do provide for cases where there are legitimate reasons for stopping parallel imports, for example where they have been repackaged). The goods have to be free to circulate within the EEA. Notwithstanding all the talk of taking back control, the UK (at least in part because the Northern Ireland Protocol limits its room for manoeuvre) continues to apply the same rules after Brexit, so we are open to trade in cheap pharmaceuticals from The Netherlands; but the EU simply treats the UK as a third country, not within the Single Market, so parallel imports entering EU Member States from here are likely to infringe.

The consultation identifies four possible regimes: 

● The current unilateral EEA regime 

● National exhaustion 

● International exhaustion 

● A mixed regime 

The current unilateral EEA regime 

Once goods are put legitimately on the market in the EEA, rights are considered to be exhausted in the UK. IP rights cannot be used to prevent goods being imported from the EEA into the UK. On the other hand, the EEA is closed to parallel imports from the UK, but that is a matter for EU law so naturally the consultation does not touch on this aspect.

National Exhaustion 

Under this regime, rights are only considered exhausted in the UK once goods are legitimately put on the market in the UK, so IP rights can be used to prevent goods put on the market anywhere in the world from flowing into the UK. But this option has been ruled out by the government because of the inconsistency with the Northern Ireland Protocol, which means no checks are needed on the goods crossing the border with the Republic of Ireland. 

This option was only included in the consultation to gather what evidence is available on economic impact.

International exhaustion 

This regime would automatically allow the import of goods from any country. exports, on the other hand, would be automatically allowed only to those other countries with an international regime. This means that the rights are considered exhausted in the UK when goods are legitimately put on the market anywhere in the world. IP rights then cannot be used to prevent goods from entering the UK from any other country. This would have significant implications for IP owners in that it would limit their ability to prevent goods from being parallel imported into the UK. 

We have been here before, though it was over 20 years ago. Following the Silhouette case, the Commission had a report drawn up entitled "The economic consequences of the choice of regime of exhaustion in the area of trademarks" (NERA/SJ Berwin, February 1999), which found that the issues were complex and the benefit to consumers of changing to international exhaustion likely to be small (in some sectors under 2 per cent). It then consulted widely, including with Member States: in the UK, the result of this was the Eighth Report of the Select Committee on Trade and Industry (9 July 1999). The Commission dropped the idea of changing, though the Select Committee favoured international exhaustion at least for some goods. Which leads us to...

A mixed regime 

This would mean that specific goods and sectors could be subject to one regime and all other goods, sectors and IP rights subject to a different regime. Switzerland has a regime in which most goods can be parallel imported but an exception for medicines which is governed under their national regime. It is going to be a rather complex system if implemented and may be difficult for consumers and businesses to understand, but that doesn’t seem to have given the government pause for thought since the referendum. 

Note that the consultation does not cover some major topics such as: 

Exhaustion of rights in purely digital goods. 

Geographical indications or plant variety rights 

Counterfeit goods 

Parallel exports


Since the “National Exhaustion regime” has been ruled out, the UK government is left with limited possibilities . It will be interesting to see which regime will win the votes for this Post-Brexit battle as this will be of great commercial concern. Will the Government  head towards a “Mixed regime” and implement a complex system for consumers and businesses or getting cheap exports through “International regime” become the vote-winner? Only time will tell.

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