The UK exited the EU on 31st January 2020. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK only until the 31st December 2020. The EU Treaties, EU free movement rights and the general principles of EU law, will then cease to apply in relation to the UK, and prior EU regulations will only continue to apply in domestic law (by virtue of the European Union (Withdrawal) Act 2018) insofar as they are not modified or revoked by regulations under that 2018 Act.
This article sets out the implications of Brexit for US Businesses operating in or trading with the UK from the end of the transition period. For an explanation of the finalised Withdrawal Agreement, please see: The UK/EU Withdrawal Agreement and Political Declaration
A range of uncertainties remain in relation to Britain's departure from the EU (Brexit), including:
- What will be Britain's future relationship with the EU? This remains to be negotiated.
- What will be Britain's future relationship with non-EU countries? When the UK leaves the EU it will lose the benefit of EU trade agreements with non-EU nations. Britain is seeking to roll-over the EU terms into a new agreement between the UK individually and the relevant country. The UK will have the freedom to negotiate new trade agreements independently, after the transition period.
- What will be Britain's future relationship with the US? The UK has already signed a "mutual recognition agreement" with the US which will, according to the Department for International Trade, be of particular benefit to the pharmaceutical sector. US President Donald Trump has previously promised the rapid conclusion of a full trade agreement with the UK to help the UK Government make Brexit a “great success”. He told The Times newspaper “We’re going to work very hard to get it done quickly and done properly. Good for both sides”. US Trade Representative Robert Lighthizer (President Trump’s chief trade negotiator), separately wrote to Congress that the administration was looking to form a new “cutting-edge” free trade agreement with the UK “as soon as [the UK] is ready”.
UK as a gateway to Europe?
Previously, US businesses that wished to trade or invest in the EU often established operations in the UK as a stepping stone to trading with other EU countries. Will they still do so now that the UK will be outside the EU Single Market, and without the benefit of EU free movement (after the transition period)?
Where US businesses maintain a European distribution centre in the UK, they should consider the potential for double tariffs on products exported to the UK and then re-exported to the EU27 following the end of the Brexit transition period. Such products are likely to face tariffs on entry into the UK (subject to any new UK free trade agreement and subject to WTO rules), and then further tariffs under the EU customs union on re-export to the EU27.
In relation to services, after the end of the Brexit transition period, non-EU businesses which take advantage of UK subsidiaries or establishments for the purposes of the EU Single Market rules may no longer be able to rely on a UK regulatory authorisation as a basis for "passporting" of such services into the EU27. The ability of UK services providers to provide services into the EU27 will be governed by any trade agreement that may in due course be entered into between the EU and the UK. However, it is thought unlikely that the EU will agree to any mutual recognition of "home" state services authorisations in the manner of the Single Market regime, and compliance with "host" state rules will probably be required.
There is a real risk associated with the UK's departure from the European Digital Single Market at the end of the Brexit transition period. The drive behind the Digital Single Market was to provide better online access to products and services at reduced costs, generally increase adoption and acceptance of digital services, and promote common data protection laws. In addition, the UK will lose the ability to influence the development of the Digital Single Market and the EU27 will lose the UK's input. There are significant differences in the attitudes of different European countries towards the use of social and digital media marketing and, in the absence of the UK, these differences may now widen.
UK equity capital market activity has been slowed by the uncertainties created by Brexit, but we have experienced a marked increase in recent M&A activity which may, in part, be a result of the fall in the value of Sterling against other major currencies and the better value available to international buyers of UK businesses as a result.
Existing commercial contracts with UK parties may be affected by the terms of future trade agreements (including any new trade barriers or tariffs), continuing currency fluctuations, and the ability of UK nationals to work in the EU and of other EU nationals to work in the UK (see Employment implications below).
Whether Brexit provides grounds for termination of an existing contract will depend very much on the particular terms and specific facts. Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination following Brexit but their success will come down to the interpretation of the particular clause and the particular facts of the case. Changes in a party's economic circumstances have generally not been held to qualify as force majeure events under English law. It is also possible that parties could seek to argue that a contract has become frustrated as a result of Brexit but again, such an argument will depend on the facts of the particular case.
Brexit may affect disputes over contracts between a party based in the UK, such as a subsidiary of a US company, and a party in another EU Member State or where the subject matter of the contract has some connection to a Member State. EU regulations impact on the choice of forum, recognition and enforcement of judgments, service of legal process and the choice of governing law of contracts. These arrangements concerning the enforceability of choice of law clauses will continue, but as regards jurisdiction and enforcement of judgments, the UK will generally lose the reciprocal benefits provided by these arrangements from the end of the Brexit transition period. However, it is expected that the UK will accede, in its own right, to the Hague Convention on Choice of Court Agreements 2005, whose parties include all EU27 member states.
The Hague Convention requires exclusive jurisdiction clauses in the signatory states to be upheld by the courts of those states and also provides for the enforcement of judgments concerning contracts containing such clauses in signatory states. This means that an exclusive jurisdiction clause, drafted in accordance with the Hague Convention rules, in favour of the English courts, will be upheld by UK and EU courts if entered into after 31st December 2020.
If the parties draft a non-exclusive English jurisdiction clause or an asymmetric jurisdiction clause (where the parties submit to the jurisdiction of one or more designated courts, but this submission is exclusive for some parties and non-exclusive for others), the reciprocity of the current enforcement regime will disappear at the end of the Brexit transition period and the Hague Convention will not apply to such arrangements. This will create uncertainty and the parties in that situation should instead consider using exclusive jurisdiction clauses favouring the English courts (for all claims) or arbitration. Arbitration clauses are likely to become increasingly popular on the basis that enforcement is through the New York Convention of 1958 rather than EU regulations.
In drafting new contracts, parties should expressly take account of Brexit. For example, territorial provision referring to the EU will not in future include the UK.
For US companies with nationals from other EU Member States working in the UK, the rights of those individuals to continue to live and work in the UK following Brexit are now protected under the EU Settlement Scheme provided they register their new status by 30th June 2021. The online registration scheme offers a simple, convenient method for many EU national employees and their family members to apply for a new immigration status based on UK law. Those in possession of a permanent residence card issued under EU law will also need to exchange it with a new immigration status under UK law. There is no fee to register, and more than 2 million EU nationals have registered since the scheme opened to the public.
Once the transition period ends on 31st December 2020, the Government is expected to implement new Immigration Rules which will apply to all non-UK nationals. Whilst the details of the new Immigration Rules are not set in stone, we expect that UK employers will face significant cost pressure as a result of having to budget for work visa fees for EU nationals as well as non-EU nationals. We also anticipate a teething period whilst navigating the new Immigration Rules, which will create confusion and delay. Nonetheless, we do not expect the Government to introduce additional obstacles in the way of recruiting skilled non-UK nationals from overseas as the UK needs to attract and retain the best global talent in order to compete in the post-Brexit economy.
Intellectual property implications
The effects of Brexit on intellectual property law is significant, especially as regards the unitary character afforded to some intellectual property rights, notably Community, i.e. EU trade marks and design rights. The UK Government has announced that all existing EU trade mark/registered community design right holders will be granted an equivalent trade mark or registered design right in the UK. In respect of pending applications, applicants have a grace period of 9 months from Brexit to apply in the UK for the same mark or design to retain the priority date of the original application.
The UK ratified the Agreement on a Unified Patent Court in 2018, which means that the UPC system may still go ahead but with a delayed start date at some currently indeterminate time(although the whole process is currently being delayed in the German courts). Whether the UK will remain within the UPC is a matter of debate, since although the UPC is not an EU institution, certain EU principles and structures are embedded within the UPC system. Enforcement rights may be an issue once the European Court of Justice ceases to have jurisdiction in Britain. The UK will therefore only be able to join the UPC after Brexit, if indeed the UPC gets off the ground and if special provision is made for its anomalous position.
Interestingly, as regards exhaustion of intellectual property rights, the UK government has in the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 (the 'SI') an asymmetric regional exhaustion.
In summary, the SI provides that the present system of EEA-wide exhaustion will be retained to the extent possible. Following the end of the transition period, 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 such reciprocity for goods put on the market in the UK; putting the goods on the market in the UK will not exhaust the intellectual property rights in the EEA.
Therefore, although owners of UK intellectual property rights will not be able to prevent parallel imports from the EEA, as the UK will no longer be a Member State, owners of rights in the EEA will be able to prevent parallel imports from the UK. The Intellectual Property Office's guidelines on exhaustion and parallel trade post Brexit, therefore stress the need for parallel importers to review whether they will need the EEA-based intellectual property rights holder's permission to export goods to the EEA.
This note covers the position only at a general level, not by reference to sector-specific requirements. US businesses should take account of sector-specific rules and regime changes affecting their UK operations that will be brought about by Brexit.
This is an amended and updated version of articles previously published in the California Daily Journal and insidecounsel.com.