Following publication of the 'agreed' text of the draft Withdrawal Agreement (the "Draft Text") between the United Kingdom ("UK") and the remainder of the European Union (the "EU") on 19 March 2018, our intellectual property ("IP") team has produced a suite of briefings on key aspects of the likely implications of Brexit for IP rights and systems across the EU, to inform our clients what changes they will need to consider making to their existing IP strategies and protocols to continue dealing in post-Brexit UK and Europe. The topic of this note is how Brexit will impact the exhaustion of rights doctrine.
This note has also been updated following publication by the UK Government on 24 September 2018 of its guidance to businesses, organisations and individuals on the exhaustion of intellectual property rights in the event of a ‘No Deal’ Brexit (“No Deal Guidance”).
What is the exhaustion of rights doctrine?
The exhaustion of rights doctrine is a limit on IP rights; it concerns the extent to which, after the first sale of a genuine product in which the IP right vests, the IP owner can control the further resale or other subsequent commercial exploitation of that product. The doctrine features highly in the hotly contested area of parallel imports/grey market products, where resellers discover arbitrage opportunities by which – without the permission of the IP owner – they buy goods in low price markets and import them for resale into higher price markets.
International, regional and national exhaustion
The manner in which the exhaustion doctrine is applied, varies from jurisdiction to jurisdiction.
- For instance, the United States leans firmly towards the concept of 'international exhaustion', whereby the IP owner loses any right to control the further resale of the product once it has been sold by it or with its consent in any part of the world.
- Conversely, the concept of 'national exhaustion' means that, although the IP owner can no longer control the commercial exploitation of products which had been put onto a market by or with its consent, the owner could prevent such products from being imported and/or resold in other countries using its IP rights elsewhere.
- Striking a compromise and mindful of the rules requiring the free movement of goods within the EU, a concept of 'regional' exhaustion developed, known as 'Fortress Europe'. Under this concept, once a product has been put on the market in the European Economic Area ("EEA") by the IP owner or with its consent, it cannot assert national IP rights in other parts of the EEA to prevent those goods from being imported and/or resold in other parts of the EEA.
However, under pressure from certain key sectors such as the pharmaceutical, fashion and fine fragrance industries, the European Court of Justice made the position on genuine goods coming from outside the EEA very favourable for the IP owner.
Accordingly, the current position in the UK and other Member States of the EEA is that there is placed upon the person wishing to import genuine goods from outside the EEA a very substantial evidential burden to prove that the IP owner has, expressly or by inference, consented to those goods entering into the EEA market. Under the doctrine of Fortress Europe, other than in rare circumstances, the IP owner can effectively veto the importation of goods into the EEA that have previously been placed on the market outside the EEA by it or with its consent.
Likely post-Brexit position on exhaustion
The conflicting interests between parallel imports, free movement of goods and exhaustion of rights go to the heart of those issues that informed the more general debate that surrounded the UK referendum and the decision by the UK to withdraw from the EU. Exhaustion of rights receives limited attention in the Draft Text. Article 57 reads:
"…Rights conferred by an intellectual property right which were exhausted both in the Union and in the United Kingdom before the end of the transition period [31 December 2020] under the conditions provided for by Union law shall remain exhausted both in the Union and in the United Kingdom…".
Accordingly, Article 57 only relates to goods which will already be in free circulation within the EEA as at the end of the transition period. It does not clarify what is the situation with goods after this date, or indeed goods coming from outside the EEA whether before or after this date.
In this regard, the No Deal Guidance states that, in such circumstances, the UK would continue to recognise the EEA regional exhaustion regime "… to provide continuity in the immediate term for businesses and consumers". This proposal would mean that parallel import of goods can continue from the EEA.
However, the No Deal Guidance stipulates that, while there would be no change on the importation of goods into the UK from the EEA, there may be restrictions on the parallel import of goods from the UK to the EEA. This is because rights protecting goods placed on the UK market initially may not be recognised as having been exhausted by such placement. Businesses involved in such practices would therefore need to check with EU right-holders to see if permission is needed.
Article 57 is an agreed provision of the Draft Text, but its brevity in both scale and scope probably arises from a recognition that it would make little sense for the UK – wishing to strike out as an open and global trading nation – to adhere faithfully to the concept of regional exhaustion post-Brexit in the longer term.
Prior to the ECJ decisions referred to above, the UK courts were leaning towards the concept of international exhaustion, requiring the IP owner to justify why genuine goods placed on a market elsewhere by it or with its consent should not be imported into the UK.
It is not possible to be certain about what will be the position on exhaustion after Brexit but it would be intuitive for the UK to revert back to a concept of international exhaustion, with the remainder of the EEA Member States sticking firmly to the doctrine of Fortress Europe. If so:
- the onus would fall on the IP owner to justify why goods which have been placed on the market by it or with its consent, whether outside the EEA or within the EEA, cannot be imported and/or resold within the UK; and
- if goods have been placed on the market post the transition period in the UK by the IP owner or with its consent, such sales will not prevent the owner from using the Fortress Europe doctrine from preventing their importation and resale into other parts of the EEA.
Brexit would completely overhaul the current position if the UK ceased to be part of the Fortress Europe doctrine.
The UK is the second largest economy within the EEA and its withdrawal is likely to have significant impact on many of the existing distribution arrangements that companies have across Europe and globally. Moreover, a post-Brexit UK will offer a number of arbitrage opportunities, especially if there emerges from the negotiations a soft and lightly policed border between the UK and the Republic of Ireland, which will remain a Member State.
Companies trading with Europe should take account of these changes and adapt their import, resale and distribution arrangements accordingly. See further in the suite of briefing notes for guidance on IP Transactions.
How did we arrive at Brexit?
A truly unprecedented process began on 29 March 2017, when the United Kingdom invoked Article 50 of the Treaty for the Functioning of the European Union ("TFEU"), in response to the referendum held in June 2016.
Never before had a Member State left the European Union.
Since it joined in January 1973, the UK has operated under the fundamental principle that European laws are supreme and have precedence over, if not direct effect on, national law. Brexit therefore presents, both for the UK and the EU, an enormous legislative challenge in that it is estimated that the accumulated body of European law and rules comprises over 12,000 regulations on top of other forms of legislation.
In few areas will Brexit be more disruptive than for IP rights. There has been considerable harmonisation of IP rights and remedies across the 28 Member States. Moreover, European wide trade mark and design registrations have been created, the first truly multinational unitary property rights.
Brexit will change all of this.
At the time of publication, many questions remain about the possible impact of Brexit whether in the sphere of IP or otherwise. Certainly, before the publication of the 'agreed' text of the Draft Text on 19 March 2018, it had not been realistic to provide much by way of constructive advice and detailed guidance.
Following its release, the IP team of Womble Bond Dickinson analysed the published Draft Text in order to produce this suite of briefing notes on key aspects of the likely implications of Brexit for IP rights and systems across the European Union, to inform our clients on what they will need to consider changing in their existing IP strategies and protocols to continue dealing in post-Brexit UK and Europe.
It should be noted the Draft Text confirms the intention of the signatories that, although the UK will leave the EU on 29 March 2019, there will be an extensive transition period lasting until 31 December 2020.