EXHAUSTION OF IP RIGHTS  IF THERE IS A NO-DEAL BREXIT

Published: 1 November 2019
The government's Brexit guidelines have sought to retain the present system of EEA-wide exhaustion of IP rights, but a no-deal Brexit would not allow this. By Katharine Stephens (Associate)

Preparing for Brexit presents an opportunity to consider what principle of exhaustion of IP rights should apply to goods sold in the UK – should there be national, international or regional exhaustion? The Government is consulting on this question, but as a temporary measure to come into force on the day the UK exits the EU, the present system of EEA-wide exhaustion will be retained to the extent possible. Post-Brexit, IP rights in goods put on the market in the EEA will be exhausted in the UK but, absent any agreement with the EU, there will be no reciprocity for goods put on the market in the UK and the IP rights in the EEA will not be exhausted. 

The Government’s Brexit guidelines1 stress the need for parallel importers to review their supply chains and, if necessary, contact the relevant IP rights holders for permission to import goods into the EEA. The advice is necessary. Parallel trade from the UK to the EEA does take place, encouraged recently by the significant fall in sterling. A pertinent example is that of the decision of the European Court of Justice relating to the importation into Spain of Schweppes tonic water originally sold in the UK2. In this case, the Court held that the parallel imports could not be stopped despite the division in ownership of the Schweppes marks. The decision would, post a hard Brexit, go the other way. 

Present rules on exhaustion

Free movement of goods within the EU is guaranteed by articles 34 and 36 of the Treaty on the Functioning of the European Union (‘TFEU’) and in the EEA by articles 11 and 13 of the Agreement on the European Economic Area (‘EEA Agreement’). These provisions have given rise to a very significant body of case law from the European Court of Justice, particularly concerning the parallel imports of pharmaceutical products. 

In addition to these rules on free movement of goods, exhaustion of rights has been written into a number of the UK’s IP statutes following the implementation of the relevant harmonising Directive, for example, section 12 of the Trade Marks Act 1994 implemented article 7 of the Trade Marks Directive 89/104/EC3.

Soon after the coming into force of the Trade Marks Directive 89/104/EC, the European Court of Justice was asked to consider whether the Directive left it open to Member States to provide for international exhaustion in the case of Silhouette v Hartlauer4. The Court said ‘no’. In so doing, the Court held that this was the only way in which to safeguard the functioning of the internal market; it could not function if some Member States provided for Community exhaustion whilst others provided for international exhaustion. This has given rise to what is termed ‘Fortress Europe’ i.e. a Europe where the borders are closed to parallel imports absent express consent on the part of the rights owner to such importation.

Some years later, the European Court of Justice held that article 4 of the Copyright Directive 2001/29/EC (the distribution right) also precluded Member States from retaining international exhaustion in Laserdisken v Kulturministeriet5. As the Advocate General noted in that case, there was no reason not to interpret the Copyright Directive in line with Silhouette given the similarity in the wording between it and the Trade Marks Directive. From this, it is safe to assume that the same principle would also apply to designs given the similarity in approach and wording of article 15 of the Designs Directive 98/71/EC. 

Patents, however, are different. Although within the EU and the EEA parallel imports are governed by the TFEU and EEA Agreement, the UK national principle of implied licence governs patented goods put on the market in third countries6. Thus, the owner of patented goods has an implied licence to use, sell and import those goods but the licence may be excluded by express contrary agreement or made subject to conditions. In this way, the law differs from the principle of exhaustion which leaves no patent rights to be enforced. 

Silhouette v Hartlauer ‑ a recap from 1998

Silhouette was a producer of fashion spectacles. They sold some old models to a purchaser in Bulgaria (before Bulgaria joined the EU). Although it was unclear whether a contractual condition attached to the goods, the Court accepted that Silhouette had not consented to the resale in the EEA. Hartlauer subsequently acquired the goods and offered them for sale in Austria.

Silhouette started an infringement action arguing that the adoption of article 7 of the Trade Mark Directive into Austrian law had the effect of excluding the previous law of international exhaustion. The ECJ held that articles 5 to 7 of the Directive were to be construed as embodying a complete harmonisation of the rules relating to the rights conferred by a trade mark and that national rules providing for exhaustion of trade mark rights for products put on the market outside the EEA were contrary to article 7.

Exhaustion of ‘harmonised’ rights post-Brexit

The reason for labouring the history is that it informs the construction and effect of The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 20197 (the ‘SI’). 

Part 3 onwards of the SI amends the statutory provisions on exhaustion in relation to UK IP rights which have been harmonised by an EU Directive, such as trade marks8, designs9 and the distribution right relating to copyright works10. Post-Brexit, such IP UK rights will be subject to: 

  • national exhaustion; and 
  • regional exhaustion for goods first put on the market in the EEA 

However, post-Brexit, the UK will not be a member of the EEA or the EU, and therefore it will be in the same position as third countries; putting goods on the market in the UK will not exhaust IP rights in the EEA and owners of IP rights in the EEA will be able to stop parallel imports from the UK into the EEA.

The SI is silent on the issue of imports of goods from third countries into the UK. However, in relation to such rights, Silhouette and Laserdisken will be ‘retained EU case law’11  and will apply to any ‘retained EU law’12 which includes such provisions as section 12 of the Trade Marks Act 1994. As a consequence, the principles laid down in these cases will continue to apply after exit day i.e. international exhaustion will not apply unless and until the Supreme Court or Parliament decides otherwise. 

Exhaustion of patent rights post-Brexit

The position post-Brexit in relation to exhaustion of patent rights is dealt with by part 2 of the SI. It provides that:

‘Anything which
(a) was, before exit day, an enforceable EU right relating to the exhaustion of rights of the owner of an intellectual property right under articles 34 to 36 [TFEU] or articles 11 to 13 [EEA Agreement]; and
(b) is retained EU law by virtue of section 4 of the European Union (Withdrawal) Act 2018  13  
has the same effect on or after exit day, despite the United Kingdom not being a Member State, as it had immediately before exit.’

Thus, the principles of free movement of goods and exhaustion of IP rights under the TFEU and the EEA Agreement will be retained in UK domestic law post-Brexit and the European Court of Justice’s case law to date14 will continue to apply. This will govern the parallel importing of goods, post-Brexit, into the UK (and effectively provides a backup to the provisions of the SI relating to harmonised IP rights). Thus, patented goods put on the market in the EEA post-Brexit will be exhausted in the UK but, as before, parallel imports going in the other direction (UK to EEA) may be stopped as coming from a non-EEA country.

In relation to patented goods being imported from third countries into the UK the SI is, again, silent. However, in contrast to the position on harmonised IP rights, the current national law will apply; in other words the national principle of implied licence will continue to govern imports into the UK of patented goods.

Temporary nature of arrangements in the SI

The Government has made it clear that the provisions in the SI are temporary. This has stirred up the old arguments about what sort of exhaustion regime the UK should adopt. In doing so, IP owners wanting national exhaustion in order to protect national markets are pitted against those who advocate for international exhaustion on the basis that parallel trade is good for consumers because it creates competition and reduces prices.

To assist in deciding the way forward, the Intellectual Property Office commissioned Ernst & Young to study the extent of parallel trade in the UK. Their report published earlier this year concluded that it is a fundamentally difficult area to quantify as there is a paucity of data except in the pharmaceutical sector where the data indicates that parallel trade is significant, being between 5% and 10% of total pharmaceutical imports by volume. This is estimated to save the NHS almost £100m per annum, a figure which was used in the debate in the House of Commons Delegated Legislation Committee in support of adopting the SI.15

Conclusion

We will have to see what the Government proposes to do in relation to exhaustion of IP rights in a post-Brexit world. The clear preference of industry, as recorded in Ernst & Young’s report, is that there should be no change to the current regime of EEA-wide exhaustion. Within the constraints of a no-deal Brexit, this cannot be delivered, however, through SI, the Government has tried to do the next best thing, imposing an asymmetric, regional exhaustion regime. 


Notes and references
  1. ‘Exhaustion of IP rights and parallel trade after Brexit’ published on www.gov.uk on 14 October 2019 and accessed on 15 October 2019.
  2. Schweppes SA v Red Paralela SL, Case C-291/16, 20.12.17.
  3. Now article 15 of Directive (EU) 2015/2436.
  4. Case C-355/96, 16 July 1998.
  5. Case C-479/04, 12 September 2006.
  6. Betts v Willmott [1871] 6 Ch App 239 and subsequent cases.
  7. SI 2019 No. 265.
  8. Section 12 of the Trade Marks Act 1994.
  9. Section 7A of the Registered Designs Act 1949.
  10. Section 18 of the Copyright Designs and Patents Act 1988.
  11. Section 6(7) of the European Union (Withdrawal) Act 2018.
  12. Section 6(3) of the EU (Withdrawal) Act 2018. If it is argued that, because of the amendment made by the SI to the exhaustion regime to include national exhaustion, the relevant retained EU law has been modified, section 6(6) of the EU (Withdrawal) Act 2018 provides that section 6(3) is not prevented from applying ‘if doing so is consistent with the intention of the modifications’.
  13. Section 4 of the EU (Withdrawal) Act 2018 provides for any rights under, for example, the TEU, the TFEU and the EEA Agreement to continue after exit day and to be recognised and available in domestic law.
  14. But the UK courts are not bound by any decisions made by the European Court of Justice on or after Brexit – section 6(1) of the EU (Withdrawal) Act 2018.
  15. See Hansard’s report dated 21 January 2019. 

Katharine Stephens is co-head of Bird & Bird’s IP department in London and a member of the International IP Steering Group. Katharine has a broad IP practice, mostly focused on litigation of patents, trade marks and designs. Katharine’s background is in engineering. 

Also published in the Brexit edition of the CIPA Journal.