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Commentary

UK Government to hold consultation on exhaustion of IP rights

Date: 24 February 2021

In the ‘70s and ‘80s, before the Euro, and at a time when the UK pound was high, products protected by intellectual property rights (particularly patented pharmaceuticals) could be purchased more cheaply in Europe and imported into the UK. A set of rules developed that prevented the IPR holder from re-asserting rights in a manner that prevented free movement of those goods within the EU (now the EEA). The IPRs were said to have been “exhausted” by the first sale.

 

On 14 February 2019, the UK Government enacted a statutory instrument that implements a “status quo” policy, whereby the UK would continue to recognise the EEA regional exhaustion regime following Brexit. Under that regime, first sale of a product anywhere in the EEA with the consent of the rightsholder precludes the rightsholder from re-asserting the right when the product is imported to the UK. This was implemented to provide continuity in the immediate term for businesses and consumers. While this means no change for the importation of goods into the UK, it is not within the UK Government’s power to declare that IP rights in Europe are exhausted by first sale in the UK.

 

The EU-UK Trade and Cooperation Agreement of 24 December 2020 does not alter this position, the deal leaves each party to set its own rules on when and how intellectual property rights may be exhausted.

 

This leaves an imbalance in the rules governing trade in grey goods between the UK and the EEA. The UK government says it plans to publish a formal consultation “in early 2021” on what should be the country’s policy going forward.

 

Exhaustion of rights

 

Exhaustion aims to encourage open trade whilst also protecting rights holders. Essentially, it limits the extent to which rights holders can assert their rights after the first authorised sale of a genuine product controlled by their IPRs. Exhaustion of rights is therefore an extremely important consideration in relation to parallel imports.

 

While the UK was in the EU, the rule was that a product first put on the market by the rightsholder could freely circulate across borders within the EU (indeed, across the EEA) and the rightsholder could not re-assert its IPRs to prevent this, nor levy a second fee for doing so. For example, an owner of a UK patent for a drug could not put the drug on the market in, say, France, at a reduced price (or license someone else to do so) and use the UK patent to stop parallel importation of the drug into the UK on the basis of the UK patent. This rule still applies between EU member states. It applies under copyright, trade marks and patents (even though a patent, for example, is strictly a national right).

 

In such cross-border dealings, the right is said to be “exhausted” by the first sale.

 

The principle does not extend beyond the borders of the EEA. If a rightsholder has sold a product outside the EEA, they can withhold consent for it to be imported into the EEA and thereby maintain a price differential between the different markets. When considering exhaustion of rights, governments and courts of member states are not free to rule otherwise (see e.g. Silhouette v Hartlauer). This is one of the elements that gives rise to the “Fortress Europe” label being applied to the EU’s trade policies. Having now left the EU, there is the potential for UK courts to depart from such precedents.

 

Rights that were exhausted remain exhausted

 

Intellectual property rights which were exhausted either in the EU or in the UK before 31 December 2020 remain exhausted. When considering a particular product, it is important to know whether it was first put on the market before that date.

 

Exhaustion policy for the present

 

Now that the UK has left the EU, the UK is free to adopt its own policy. For the present, the UK Government has chosen to continue the policy of regional exhaustion of IP rights. For trade marks, copyright and design rights, the February 2019 regulation does this by amending the relevant statutes so that first sale in the UK or the EEA gives rise to exhaustion of the right. For patents, the same policy is adopted, but by a different approach. Here we attempt to explain that approach and what it means. Only then can we consider what it ought to be.

 

Click here for more information on how Brexit has affected Intellectual Property rights protection in the UK: Trade Marks and Designs after Brexit 

 

Copyright law after Brexit

 

Before 1988, UK copyright legislation only protected the right of first publication and did not concern itself with permitting nor restricting distribution. This changed with the enactment of the Copyright, Designs and Patents Act 1988 (CPDA), which introduced a right to issue copies of a work to the public, as a separate right to the right to first publication, this newly defined right being limited to the first distribution in the EEA. Thus, section 18 defines the “issue to the public” of copies of a copyright work as being a restricted act and “issue to the public” means putting into circulation in the EEA for the first time with the rightholder’s consent - but only the first such act.

 

The CPDA does not use the term “exhausted” or “exhaustion”, but the effect of limiting the right of distribution to just the first putting into circulation is that the doctrine is now adopted as legislation.

 

The February 2019 regulation affirms this aspect of the CPDA. It amends the Act such that the principle of regional exhaustion will still apply – i.e. once a copy has been put on the market in the United Kingdom or the EEA by or with the consent of the copyright owner, there can be no further restriction on putting that copy into circulation in the UK.

It is worth at this point distinguishing a right that is exhausted from a right under which sale of a product might convey an implied licence to deal in that product (including, for example, an implied licence to import). An implied licence may be negated by express agreement or made subject to conditions. By contrast, the principle of exhaustion leaves no rights to be enforced. Accordingly, it is not within the copyright owner’s power to incorporate express terms to negate the exhaustion. E.g. marking goods sold in the EEA with “not for resale within the UK” is unenforceable under UK law as now amended.

 

Trade Marks after Brexit

 

As with copyright, the doctrine of exhaustion of rights under a registered trade mark is incorporated into UK domestic legislation. It is found in Section 12 of the Trade Mark Act 1994 (TMA). Section 12(1) provides that a registered trade mark is not infringed by the use of the trade mark in relation to goods which have been put on the market in the EEA under that trade mark by the proprietor or with his consent. As for copyright, the provision is amended to cover first putting on the market in the United Kingdom or the EEA.

 

Thus, the UK legislative intention is one of regional exhaustion and not international exhaustion.

 

So, what happens now if a trade mark owner instructs his or her distributor in the EEA to mark goods “not for resale in the UK”? As matters stand, this would be unenforceable. Section 12 of the TMA as amended states that resale in the UK would not amount to trade mark infringement. Indeed, the UK Government guidance says the IP rights in goods placed on the EEA market by, or with the consent of the right holder will continue to be considered exhausted in the UK and that parallel imports into the UK from the EEA will be unaffected.

 

Section 12(1) does not apply where there exist “legitimate reasons” for the proprietor to oppose further dealings in the goods, particularly “where the condition of the goods has been changed or impaired after they have been put on the market.” There is extensive CJEU jurisprudence as to what alterations, repackaging, relabelling and rebranding amount to “legitimate reasons” for making an exception. These rules, developed by precedent, are “retained EU case law” as defined by the European Union (Withdrawal) Act 2018 so (until any other legislation is adopted), they continue to apply after Brexit.

 

Looking at trade mark exhaustion outside the EEA, the legislation (UK domestic and EU) does not categorically say that a trade marked product put on the market outside the EEA can be prevented from entering the EEA, but this is the clear implication. This is confirmed and developed in another line of CJEU jurisprudence which holds that exhaustion only occurs where the consent of the trade mark proprietor to marketing within the EEA is expressed unequivocally. Such consent is first and foremost determined by the terms of the distribution agreement between the parties. The UK now stands on an equal footing with any other foreign state with no agreement on mutual recognition of exhaustion, and nothing in the trade agreement changes this. Courts of the EEA can be expected to uphold trade mark rights to prevent resale within the EEA. Marking products sold in the UK or anywhere else outside the EEA with “not for resale in the EEA” will make it clear that unequivocal consent has not been given. Thus, the Government’s guidance note says “goods placed on the UK market by, or with the consent of, the right holder [after the transition period] may no longer be considered exhausted in the EEA.”

 

This situation of imbalance could be changed as a result of the imminent consultation and, if new law is introduced, it could be specific on what amounts to sufficient consent or its equivalent.

 

UK Patents after Brexit

 

For patents, the default situation is a little different. In the case of patents, the doctrine of exhaustion derives from ECJ jurisprudence. It has not been written into any UK statute.

 

As for copyright and trade marks, the doctrine is one of regional exhaustion, but with a slight twist, which arises from the territorial nature of patent rights, by which products may be patented in some EU states and not others. Exhaustion is a defence to patent infringement, but the defence is not limited to products first put on the market within the territory of the patent. The territorial nature of patent rights cannot be used to justify restriction of parallel imports between EEA states. A product placed on the market by or with the consent of the patentee in one EU Member state must be free to be moved to another member state, whether or not patented in the state of first sale).

 

Moreover, when it comes to patents, the UK Courts recognize a doctrine of implied license by sale of a product anywhere in the world. The defence of non-infringement by implied licence is rarely successful but has co-existed for many years alongside the doctrine of regional exhaustion. It is available to a purchaser who buys a patented product from the patentee outside the EU and imports it into the UK.

 

One of many difficulties in relying on such a defence is that it is not enough to have bought the product from a licensee. When buying from a licensee, it is the local patent that is licensed and it has been held that a licence under a foreign patent is not the same as a licence under a domestic patent and does not prevent the patentee from exercising its right to prevent importation.

 

This co-existence of a doctrine of international implied licence with a doctrine of regional exhaustion is not inconsistent with the “one exhaustion rule for all” decision in Silhouette, when one bears in mind that Silhouette related to a regional trademark right rather than a national patent right.

 

The first of these defences to patent infringement (exhaustion) is now considered an “enforceable EU right” as defined by the European Communities Act 1972. As such, the EU Withdrawal Act allows the government to pass secondary legislation for its regulation, so the February 2019 regulation provides that an “enforceable EU right relating to the exhaustion of rights of the owner of an intellectual property right” has the same regional exhaustion effect despite the United Kingdom not being a member State. Thus, it continues to be the case that a patentee’s UK patent right will be “exhausted” by sale (by the proprietor or with his consent) of a patented product in mainland Europe.

 

Viewing the question from across the channel, German courts have ruled that a product made or sold with the patentee’s consent outside the EEA and imported (legally, but without specific consent for further distribution), into an EEA state where there is no patent protection, does not carry with it the right to import into another EEA state where there is patent protection. This cannot be changed by UK legislation. No unilateral legislation introduced by the UK Government can declare the rights in a German patent to be exhausted by sale in the UK.

 

Given that patentees do not typically protect their products in all EEA states, a product sold now in the UK by the patentee or with his/her consent can be exported to a state where there is no patent protection (say, Denmark, to take a state where patent protection is less common). But it is then open for the patentee to sue for patent infringement if that product is distributed in, say, Germany (to take a state where patent protection is most common). The patentee will want to be sure that the product was not sold in the UK pre-Brexit and stockpiled. Patentees might be wise to use makings on products now that distinguish them from products sold before Brexit (e.g. “not for resale in the EEA”, as above).

 

Read more here on UK Patents after Brexit: Patents after Brexit 

 

UK registered Designs after Brexit

 

Exhaustion of rights under a UK domestic registered design is governed by Section 7A(4) of the Registered Designs Act 1949, which is amended by the February 2019 regulation. This being the case, the principles set out above in relation to copyright and trade marks apply equally to registered designs.

 

Semiconductor topography rights after Brexit

 

These rights are introduced into UK domestic law by virtue of the Design Right (Semiconductor Topographies) Regulations 1989, the effect of which is to amend the CPDA. Section 8(2) of the Regulations negate the semiconductor topography right in relation to an article that has been previously sold within the territory of any [other] EU member state with the consent of the person entitled to import it into or sell it within that territory. The February 2019 regulation deletes the word “other”. The principles set out above in relation to other aspects of copyright apply here.

 

EU Trade Marks and Designs

 

EU registered trade marks and designs now give rise to corresponding UK registered trade marks and designs. Accordingly, the above comments apply equally to these rights.

 

Summary

 

There is asymmetry in the trade of grey market goods between the UK and the EEA:

  • where goods are first sold in the EEA, trade mark owners and other rightsholders will not be able to prevent resale in the UK (unless the goods have been altered or repackaged), even if the goods are marked “not for resale in the UK”, BUT
  • where goods are first sold in the UK and there is no clear consent for resale in the EEA rightsholders may well be able to prevent resale in the EEA. Marking “not for resale in the EEA” is not definitive, but can indicate that consent is not given.

 

Future policy

 

Any inability to buy from usual parallel import channels will exacerbate supply problems for the NHS and push up costs. A 2019 study commissioned by the UKIPO estimates that parallel imports to the UK amount to £1bn per annum – at least 5% of the total UK pharmaceutical market by volume. It also estimates a “direct” saving to the NHS of almost £100m per annum (but it may be noted that this saving is “through the reimbursement of pharmacies” and a 1999 select committee report does not equate savings by pharmacies with direct financial benefits to the Government).

 

The consultation will be important to weigh up the conflicting interests of patentees and consumers, in particular the NHS.

 

 

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