Date: 25 January 2019
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.
The negotiated UK-EU Withdrawal Agreement endorsed by the EU Council on 25 November 2018 says very little about future exhaustion of IP rights beyond confirming that rights that have been exhausted before the end of 2020 will remain exhausted. The accompanying political declaration merely says the parties should maintain the freedom to establish their own regimes for the exhaustion of IPRs. Thus, any post-Brexit rule that may specify, going forward, that IP rights in one territory will be considered exhausted in the other is left to a later agreement on the future trading relationship between the UK and the EU.
After March 2019, if there is no deal, the UK government has confirmed that the UK will continue to recognise the EEA regional exhaustion regime from exit day, to provide continuity in the immediate term for businesses and consumers. While this means there will be no change for the importation of goods into the UK, there is no reciprocal declaration from the EU side, so there may nevertheless be restrictions on the resale of goods from the UK to the EEA.
In this paper, we look at how imbalances may develop in trade of grey market goods assuming the UK leaves the EEA, especially if accompanied by a fall in the UK pound.
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 is in the EU, the rule is that when a product is first put on the market by the rightsholder, that product can freely circulate across borders within the EU (indeed, across the EEA) and the rightsholder cannot re-assert its IPRs to prevent this, nor levy a second fee for doing so. This is true under copyright, trademarks and patents (even though a patent, for example, is strictly a national right). For example, an owner of a UK patent for a drug cannot put the drug on the market in, say, France, at a reduced price and use the UK patent to stop parallel importation of the drug into the UK on the basis of the UK patent. The right is said to be “exhausted” by the first sale. By contrast, however, the rightsholder can use the patent to stop importation from France of a drug legally sold in France by a third party without his/her consent.
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. This is one of the elements that gives rise to the “Fortress Europe” label being applied to the EU’s trade policies.
Contrast this with the 30 June 2017 US Supreme Court decision of Impression Products Inc. v Lexmark International Inc. This was a landmark decision in favour of global free trade just months before election of protectionist President Trump. In the light of all that has happened in the US since, it is a decision that has largely passed under the radar. It ruled that rights under a US patent are internationally exhausted by sale of a patented product anywhere (although, bizarrely, distinctions are made for products made under licence). Although it is a victory for free trade, it is not necessarily good news for developing countries. Taking as an example a drug that is badly needed in a developing country but commands a high price in the US – this decision may justify the US patent holder demanding an equally high price around the world. But such a decision merely implements for patented products the long-standing US position under copyright. If a book is sold in, say, Thailand, the copyright owner cannot prevent it’s importation into the US.
Back now to the UK. If the UK leaves the EU without a deal (“hard Brexit”), will the “Fortress Europe” rule still apply, or the “international exhaustion” rule adopted in the US? After all, the latter used to be the rule in the UK long before joining the European Common Market.
Much has changed since the international exhaustion rule applied in the UK. Back then it was not called “exhaustion” but was referred to as an “implied licence” (implied in the act of sale that the purchaser could enjoy the use of the acquired product anywhere in the world he or she pleases).
Take, for example, copyright. Before 1988, the 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, 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 Copyright, Designs and Patents Act 1988 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. Accordingly, no longer being a common law doctrine of implied licence, it is not within the copyright owner’s power to incorporate express terms to override the implication of a licence. E.g. marking “not for resale within the EEA” is unlikely to have any effect.
The EU (Withdrawal) Act of 2018 does not change this aspect of the Copyright, Designs and Patents Act 1988. Accordingly, in a “no deal” scenario, the status quo will continue for copyright. This means that the principle of regional exhaustion will still apply – i.e. once a copy has been put on the market in the EEA (even if the UK is no longer a part of 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. This is perhaps serendipitous, as it conforms exactly with UK Government policy in such a scenario (see below).
As with copyright, the doctrine of exhaustion of rights under a registered trade mark is already incorporated into UK domestic legislation. It is found in Section 12 of the Trade Mark Act 1994. 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. Incidentally, the provision is not rendered meaningless if the UK is no longer part of the EEA. To the contrary, the provision is concerned with the rest of the EEA apart from the UK. Again, this is entirely in line with the UK Government’s policy. (Or, to put this another way, the Government would have to amend the statute for any other policy to apply).
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. Going forward, it will be open to the UK Supreme Court to develop or change the law on what are legitimate reasons.
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. It may be noted, however, that marking products “not for resale in the EEA” will make it clear that unequivocal consent has not been given.
Again, the UK courts cannot ignore the clear legislative intention of no international exhaustion, but they can take their own view on what amounts to sufficient consent or its equivalent.
So, this brings us to the question of what happens in a 'no deal' scenario 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. The plain words of Section 12 of the Trade Mark Act 1994 state that resale in the UK would not amount to trade mark infringement. Indeed, the UK Government has published a guidance note saying it will “continue to recognise the EEA regional exhaustion regime from exit day to provide continuity in the immediate term for businesses and consumers” and “there will be no change to the rules affecting imports of goods into the UK, and businesses that undertake this activity may continue unaffected.” We can be confident that this policy will apply in relation to goods subject to copyright and trade marks, but for patented goods, see below.
What about goods put on the market in the UK and marked “not for resale in the EEA”? It would be up to a domestic court elsewhere in the EEA to consider this question, and such a court may very well take the view that, after hard Brexit, the UK stands on an equal footing with any other foreign state with no bilateral trade agreement and may well decide that resale within the EEA can be prevented. Thus, the Government’s guidance note says “There may however be restrictions on the parallel import of goods from the UK to the EEA, and businesses undertaking such activities may need to check with EU right holders to see if permission is needed.”
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, the doctrine is one of regional exhaustion, but with a slight twist, which arises from the fact that products may be patented in some EU states and not others. Thus, the territorial nature of patent rights does not justify restriction of parallel imports between EEA states, and this is so whether or not patent protection is even available in the state of first sale. According to the EU (Withdrawal) Act 2018, the UK courts do not have to be bound by these decisions.
So the government will have to pass legislation if its stated “regional exhaustion” policy is to apply to patented goods. This is because exhaustion is typically raised as a defence to patent infringement. It is a defence based on the EU Treaty (for which reason, in the early days following Centrafarm BV v Sterling Drug, it was referred to as a “Eurodefence”). As such, it is an exception to the general principle that a patent is a territorial right. Without legislation, UK courts are likely to treat such an exception with great caution. There is scant reason to suppose that a UK court will consider a patentee’s UK patent right to be “exhausted” by sale (by the proprietor or with his consent) of a patented product in mainland Europe any more than by such a sale in (for example) the US. There is no recent case of exhaustion being recognized by sale in the US or any other non-EEA country.
Moreover, the legislation needed to implement the Government’s stated policy will, so far as patents are concerned, probably have to be primary legislation. This is because the Eurodefence arises from EU competition law which will no longer apply, and not from “retained EU law” as defined in the European Union (Withdrawal) Act 2018. The powers delegated to ministers under that Act to implement regulations to rectify deficiencies in retained EU law will not apply here. 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 after Brexit 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 different makings on products sold after Brexit (e.g. “not for resale in the EEA”, as above).
Exhaustion of rights under a UK domestic registered design is governed by Section 7A(4) of the Registered Designs Act 1949 (as amended). This being the case, the principles set out above in relation to copyright and trade marks apply equally to registered designs.
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 Copyright, Designs and Patents Act 1988. 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 principles set out above in relation to other aspects of copyright apply here.
It is stated government intention that EU registered trade marks and designs will, by one means or another, be converted into corresponding UK registered trade marks and designs. Accordingly, the above comments apply equally to these rights.
Two significant points emerge from this analysis in the event of a hard Brexit (and until such time as further legislation can be passed):
1. There is likely to be asymmetry in the trade of goods between the UK and the EEA:
2. Patent rights will once again be available to prevent parallel imports from the UK into the EEA and (until legislation can be passed) from the EEA into the UK. With a falling pound, the economic pressure will be more towards import from the UK into Europe.
3. It is unlikely that the Government will have time before 29 March 2019 to legislate for exhaustion of patent rights for parallel imports. The National Health Service has said it is looking into stockpiling medicines in the event of a no-deal Brexit. Any inability to buy from usual parallel import channels will exacerbate the NHS’s supply problems and push up costs.