Exhaustion of rights consultation

The launch of the consultation

The UK Government has launched a consultation on the UK’s future exhaustion regime for Intellectual Property (IP) rights. The consultation aims to collate information as to what the most appropriate exhaustion regime for the UK to adopt would be.

The exhaustion of IP rights for goods exported from the UK into the European Economic Area (EEA) was one of the biggest changes brought about by Brexit and the UK currently has a system where goods can be freely imported from the EEA to the UK without fear of IP infringement but not from the UK to the EEA.

The consultation seeks to gather data from businesses and consumers regarding:

• The extent, value and impact of parallel trade in different sectors;
• Businesses control over their supply chains and infringements of their IP rights;
• Price differences and influencing factors;
• How aware respondents are of the change to the exhaustion regime that occurred at the end of UK-EU transition period on 31 December 2020 and;
• The costs and benefits of the current exhaustion regime.

What is “exhaustion of rights”?

Exhaustion of IP rights is rooted in the principles of parallel trade. The principle of exhaustion means that once a product has been lawfully been placed on the market with the IP rights owner’s permission, that product can subsequently be re-distributed or re-sold within a certain territory by a parallel trader without infringing the owner’s IP rights. In essence, the principle of exhaustion aims to set a limit on the ability of IP right holders to control the distribution of goods protected by those rights.

What is “parallel trade”?

Parallel trade is the import and export of legitimate goods (protected by IP rights) across borders. Parallel trade occurs when the IP right owner puts, or consents to the goods being placed on the market in a specific geographic territory. When this occurs the IP rights of the goods are classed as “exhausted”. This is because the owner cannot rely on the IP rights of those goods to prevent the goods being re-sold or re-distributed to other territories.

The position in the UK pre and post the end of the Brexit transition period (31 December 2020)

• Pre-Brexit
  

Before the end of the Brexit transition period, the UK was part of the EU’s regional exhaustion of IP rights regime. The rule under the regime provided that any goods first placed on the market by (or with the consent of) the IP rights holder would be considered exhausted in the rest of the EEA and this included the UK as it was part of the EEA at the time. Therefore the rights-holder could not re-assert its intellectual property rights to prevent this or charge a second fee for doing so. In practice this meant that that the goods could be parallel imported into the UK from the EEA, and vice-versa: parallel exported out of the UK into the EEA.

• Post-Brexit

Following the end of the Brexit-transition period (31 December 2020) the UK is no longer part of the EEA’s exhaustion of IP rights regime. Since then however the UK has participated in the EEA’s regional exhaustion regime meaning that the IP rights in goods first placed on the market in the EEA are considered exhausted in the UK. The goods can therefore be parallel imported into the UK from anywhere in the EEA without the permission of the IP rights holder. However, conversely the IP rights in goods first placed on the market in the UK are not considered exhausted. Therefore, a rights holder may stop the parallel export of goods first put on the market in the UK into the EEA. In practical terms anyone wanting to parallel export goods from the UK to the EEA must obtain permission from the IP rights holder.

The four options set out in the consultation

The consultation paper sets out four options for a future exhaustion regime in the UK and discusses the potential impacts of these options. A summary of the options is as follows:

• Unilateral EEA (UK+) regime: This provides that the current regime would stay in place and there would be no further changes; i.e. parallel imports would be permitted only from the EEA to the UK, except to the extent that any other EEA member state chooses to reciprocate and allow parallel imports from the UK. The consultation paper notes that this option is considered compatible with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
• National regime: A national regime provides that only IP rights in the UK are to be exhausted. This would mean that parallel imports from outside the UK are prohibited. This regime is considered to be incompatible with the Northern Ireland Protocol, which allows goods to move freely from EU member states (including the Republic of Ireland) into Northern Ireland. A benefit of a national regime may be that IP owners gain greater control over their products. This may also assist in enforcement action against infringements, as well as potentially meeting regulatory quality and safety requirements. However, the regime may negatively impact consumers as is likely to result in reduced supply and consumer choice and, in-turn, an increase in the price of products.
• International regime: An international regime provides that IP rights are exhausted in the UK if they are placed in the market of any other country (and not just the EEA). Goods may freely be imported into the UK from the rest of the world without the permission of the right-holder, while the extent of parallel exports being permitted from the UK would depend on the law in the destination country. This option may reduce the value of IP rights (including their value to licensees) and could cause product safety and quality issues, and possibly impair access to certain goods such as pharmaceuticals and educational books). This may also increase the incidence of shipments of legitimate parallel goods being used to mask counterfeit goods. However this regime could benefit consumers in that it may improve consumer choice and reduce prices. The regime may also be a benefit to manufacturers who have a complex supply chain.
• Mixed regime: A mixed regime provides that specific goods, sectors or IP rights are subject to one regime, while others are subject to a different regime. The consultation paper notes that a mixed regime may be difficult for businesses and consumers to understand, and might be difficult to apply if a product embodied IP rights that were variously subject to both regimes.

Conclusion

The consultation paper notes that the Government does not have a preferential option for the UK’s future exhaustion regime and it will assess all of the options in light of the evidence and feedback received from the consultation. It does however highlight that any new regime will need to comply with existing treaty obligations such as the Northern Ireland Protocol therefore a national regime may be less appropriate.

A link to the Government’s consultation document can be found here.  The deadline for responding to the consultation is 11.45 pm on 31 August 2021.

If you have any questions, please contact Nick Phillips or any member of the Intellectual Property team.

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