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

Conclusion

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.

Parallel imports and trade marks after B****t

 As everyone knows (well, perhaps not quite everyone), the doctrine of exhaustion tells us that once the owner of intellectual property rights of any type has put goods on a market, those rights are exhausted and cannot be used to control subsequent dealings with those actual goods. In the USA, the first sale doctrine does the same job, and it's an important job where a number of separate jurisdictions form a single market. It has always been an important component of EU law, too, needed to ensure that national intellectual property rights could not be used to partition the single market.

In EU trade mark law, it has therefore been a defence to an infringement action, enshrined in the Directive and the Regulation, subject to some exceptions, to say that the accused goods were placed on the market in the EEA by the trade mark owner or with its consent. Where that is the case, it will usually be impossible for the trade mark owner to use (say) a French trade mark to stop parallel imports entering France from (say) Germany. You could say that trade mark law gives the trade mark owner one bite of the cherry: the subtext (always important to understand) says that the same price should be charged in all the countries of the EU, so there is no incentive for parallel importers. Given that purchasing power in Germany and (say, again) Bulgaria is far from equal, the trade mark owner is highly unlikely to obey the subtext, and it will hurt to obey the letter of the law; but I put that down to politics rather than economics (like so much of the EU).

Up to the end of last year (rounded up to the nearest whole day), the UK was part of this arrangement. Section 12 of the Trade Marks Act 1994 embodied the principle of exhaustion, providing a defence to an infringement action where goods were brought into the UK from another EU Member State. Now of course goods coming into the UK would be leaving the EU, but (in an example of definitely not taking back control) the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 (SI 2019/265) preserves this EEA-wide exhaustion principle. Goods imported into the UK from the EEA will still not infringe - unless there is a legitimate reason for the trade mark owner to oppose the goods entering free circulation in the UK, such as repackaging. There has been some changing of the words of s.12 (recognising that when you talk about the EEA the UK is no longer included) but no change of substance.

I'm probably missing something, because I can't see who benefits from this. Not the manufacturer whose goods are in circulation in the EEA, who must be charging more in the UK otherwise parallel traders wouldn't be interested. Not the UK distributor, who faces cut-price competition from the parallel traders. Not the government, which is losing a bit of VAT. Not even, really, UK consumers, who are unlikely to save very much as the parallel traders are going to undercut the legitimate channels by the smallest amount possible. Only the parallel traders are going to benefit - perhaps the government justifies this by calling them "arbitrageurs" to make it sound as if they are doing something socially useful, rather than just being parasites. Them, and maybe the NHS who are the main customer for parallel imports of pharmaceuticals.

I wonder, though, whether there are any parallel imports entering the UK now? Apart from the delays which the government minimises or denies, there's import duty and VAT to think about and it could be that parallel importing into the UK isn't worth it any longer.

I also wonder how long it will be before the government revisits this part of trade mark law, and decides that there are more votes to be had from moving to an international exhaustion doctrine. It already floated the idea, some 20 years ago, and attracted little or no support from its EU partners - whose support it no longer needs. Cheap jeans for the masses might be seen as a good platform for re-election, and a way to deliver a B****t dividend that is unlikely to arise in any other way.

Exhaustion of trade mark rights after B****t

If and when the UK crashes out of the EU (and whatever agreement is made to soften the blow, it will be a crash, certainly as far as trade marks are concerned) the Trade Marks Act 1992 will not be unchanged. The European Union (Withdrawal) Act 2018 sees to it that the government will be able to change it to take account of the new circumstances - using what have come to be referred to as Henry VIII powers, after that paragon of democracy and due process. One aspect of huge volumes of legislation that will need attention is that the statute book is peppered with references to the European Union, which when they were written included the UK. So, as in the case of public lending right about which I wrote the other day, it might be necessary to change it to "UK and EU". More often, I suppose, it will be changed from "EU" to "UK" - after all, that's what the Will of the People asked for (American readers please note, that statement is heavy with irony).

Section 12 says that the trade mark owner's rights are exhausted when the goods have been placed on the market in the European Economic Area by the trade mark owner or with their consent. Within a single market that's an important exception to the general idea of trade mark protection (or any other form of IP, come to that). So from E-day, or perhaps from the end of the transition period, section 12 should refer to placing the goods on the market in the UK.

Or must it? It's not many years ago - OK, it is quite a few years ago, but it's within living memory - that the UK government thought it would be a nice idea to replace the EU-exhaustion rule with an International-exhaustion one - so if the trade mark owner had placed the goods on the market anywhere in the world they would be unable to resist parallel imports into the EU. The government's idea seemed to be that this would ensure cheap designer clothes for the masses, who would then re-elect it. Our EU partners were almost unanimous in declining to support the UK government in this - as I recall, only Sweden agreed. But after withdrawal we won't have to worry what the EU27 (or the EEA members) think, and given that the government will be casting around for some benefit to highlight to the electorate I have a horrible feeling that this will be back on the agenda.

Positional goods

Many things bother me about the state of the world. One idea that made a deep impression on me when I first read about it in "Social Limits to Growth" by the  late Fred Hirsch is what he called positional goods. I took a couple of Prof Hirsch's courses at Warwick, and learnt a great deal from them (I could have learnt a great deal more, but a memo from him tucked inside my copy of "Social Limits" explains why I didn't: it starts "I don't seem to have been seeing you at the seminar lately ..."). I bought his books, and remember struggling to read "Social Limits" during a sleepless night at the British Grand Prix at Brands Hatch, when camping in a tent brought on an attack of asthma and I spent several hours sitting in the Hillman Avenger in which my brother and I had travelled to the event. But I digress - except that this explains why my attempt to read the book were less than successful.

I did, however, take on board the idea that there are limits to growth. If everyone moves to the countryside because it's pretty and quiet, it will cease to be pretty and quiet. This is happening right now all around me. And contemplating what I think JK Galbraith identified as the problem of private affluence and public poverty (highlighted by the appalling death toll in the Grenfell Tower fire, which must have at least something to do with the public sector being starved of money), I wonder how the super-rich imagine they will derive any pleasure from their wealth if, as they travel between their City base and their place in the country, they have to negotiate traffic jams and potholed roads, or a rail system brought to a halt by defective signals or a "jumper" (a "person under a train", in official language). Even if they fly, they will see plumes of smoke from burning tower blocks. Not every day, of course, but once in a decade is much too often.

So, houses in the countryside are positional goods. They rely for their value on scarcity. This thought brought me to something else which has troubled me for years (though it is not something that would ever bring about the end of the world*), namely parallel imports of luxury goods. Trade mark owners resist parallel imports because they interfere with their pricing strategy, which is based on maintaining exclusivity, which means that luxury branded goods are positional goods like country cottages. Consumers - some of them, anyway - want to be able to buy them cheap from Tesco, but the whole point about positional goods is that if they are available cheap from Tesco they are no longer worth having.

Hirsch also wrote about the commercialization effect (and yes, he did spell it with a "z"), under which supplying something commercially diminishes the quality of a good or service. Or, to put it another way (as Wikipedia does) "market exchange ... diminishes the inherent value of the transaction by subordinating social well-being to the commodification impulse." And that leads me to think about commodification (a topic on which Marx had a lot to say), which seems to me to be what intellectual property law is all about - taking intangible creations and turning them into something that can be traded. There's a lot to think about here, and I think it is now high time I read the book (which I notice I bought in 1980 at the bookshop at Conservative Central Office, and that in itself raises some interesting questions).

* Although as my old friend - as in, he was a friend a long time ago, but I have not seen him for many years - Sir Michael Fallon once said, "it's not the end of the world - but you can see it from there". No, I won't tell you of where he was speaking.

Parallel imports: consent under Australian law

In Australia, the Full Federal Court has confirmed the trend of recent decisions by reading restrictively the defence of "consent" available to the importers of grey or parallel goods (Paul's Retail Pty Ltd v Lonsdale Australia Limited [2012] FCAFC 130). There is a note of the case here courtesy of Clayton Utz.

Section 123 of the Australian Trade Marks Act is a statutory embodiment of the well established principle in the United Kingdom case, Champagne Heidsieck [1930] 1 Ch 330, which stated that trade marks were badges of origin, designating a genuine source, not badges of control. Just as in modern EU parallel import cases, the important question is whether the goods have been put into circulation by or with the consent of the trade mark owner.

In this case, Lonsdale Australia was a mere licensee, and the principle of implied consent when dealing with related companies had not been definitively accepted into Australian law for the purposes of parallel importation. The Australian licensee was not on the evidence linked to the goods and there was no evidence to suggest that it played any role in the application of the trade marks to any of the imported goods. The Full Court held that it was not necessary to decide the issues considered by the trial judge, because even if Paul's Retail could establish that Lonsdale Australia was bound by its related company's consent, the evidence showed that there was in fact no consent by that related company. But it's interesting to know that those abstruse arguments in which our courts have been obliged to involve themselves are just as important on the other side of the world.

Dutch court holds Bulgarian decision contrary to public policy

It sounds like it should be none of their business, but, as that Dutch IP oracle Nauta Dutilh (and in particular Prof Charles Gielen, who coincidentally acted for the successful party in this case) explain in an article on their website, it's very much the business of the Dutch court when considering whether the Brussels I Regulation applies. Because the Bulgarian court's judgment was contrary to public policy, it did not have to be recognised by the Dutch court.

For a court to hold a foreign court's judgment to be contrary to public policy is powerful stuff. The case concerned Johnny Walker whisky, placed on the market outside the EEA but confiscated in Bulgaria at the instance of Diageo, the trade mark owner. The Sofia district court, on the basis of an interpretation of the relevant law by the country's Supreme Court, held that the importation into the EEA of goods placed on the market outside the EEA with the trade mark owner's consent did not amount to an infringement. That's a view of the rules about exhaustion which is perhaps more archaic than novel. It's certainly surprising. Equally surprising is that five judges dissented. How many judges does the Bulgarian Supreme Court have, for goodness' sake? A lot, apparently, but I can't find its judgments on the web, although I have learned some useful Bulgarian words (and letters in its version of the Cyrillic alphabet: съд is transliterated as "sud", the vowel being my new letter: the word means "court". The Russian sounds the same but with the phonetically equivalent letter у in the middle).

Because the trade mark registrations were held by Diageo's Dutch subsidiary (not an uncommon situation, for tax reasons) the confiscatee brought proceedings in Amsterdam to recover damages. Diageo contended that the Sofia district court's judgment was contrary to public policy within the meaning of Article 34(1) of the Brussels I Regulation. The Supreme Court had gone against the Silhouette judgment (which also involved parallel imports and Bulgaria, though at that time it was not an EU Member State) and should have made a reference to the Court of Justice under Article 267 of the Treaty. The Supreme Court had violated a fundamental principle of EU constitutional law, so not only the district court's judgment but also the Supreme Court's interpretation on which it was based was contrary to public policy.