The UK exits the EU on 31 January 2020 ("exit day"). By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK until 31 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. In relation to exhaustion of IP rights, The Intellectual Property (Exhaustion of Rights)(EU Exit) Regulations 2019 will apply.
Exhaustion is a highly charged subject and Brexit has stirred up the old arguments again. The question has been what principle of exhaustion should apply post Brexit? Should there be:
The argument pits IP owners wanting to protect national markets against those who advocate that parallel trade is good for consumers. The key driver for parallel trade is the price differential between different markets. Government price control, in particular in the pharmaceutical sector, fosters parallel trade, as can exchange rate differences. IP rights holders argue that this leads to lower profits and does not incentivise them to invest in R&D. It also impacts emerging industries in developing countries. On the other hand, proponents for international exhaustion argue that it facilitates competition in the distribution of products, creating more competition and helping to reduce prices.
In a 2019 study commissioned by the Intellectual Property Office, Ernst & Young ('EY') concluded that parallel trade is a fundamentally difficult area to quantify as there is a paucity of data to back up either side's argument. The only exception is in the pharmaceutical sector where the data indicates that parallel trade is significant, being between 5 to 10% of total pharmaceutical imports by volume. This is estimated to save the NHS almost £100mn per annum.
The EY study also recorded that the clear preference of industry is that there should be no change to the current regime of EEA-wide exhaustion. This is, indeed, what the Government has attempted to do in The Intellectual Property (Exhaustion of Rights)(EU Exit) Regulations 2019 (the 'SI').
The solution in the SI: 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 IP rights in the EEA.
Therefore, although owners of UK IP 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 IP rights holder's permission to export goods to the EEA.
The SI is silent on the issue of parallel trade into the UK from third countries. However, it is obvious that the existing regime is intended to continue. The differences in the rules governing patents and those IP rights which have been harmonised by the EU will therefore be maintained after the transition period.
Harmonised IP rights - A bit of history on exhaustion
Exhaustion of rights has been written into various of the UK's statutes following the implementation of the relevant harmonising Directive. For example:
Soon after the coming into force of the Trade Marks Directive 89/104/EC, the European Court of Justice (as it was then called) was asked to consider whether the Directive left it open to Member States to provide for international exhaustion (Silhouette v Hartlauer, Case C-355/96). 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. free movement within Europe, but the borders are closed to parallel imports absent express consent on the part of the rights owner to such importation.
Some years later, the Court held that article 4 of the Copyright Directive (the distribution right) also precluded Member States from retaining international exhaustion (Laserdisken v Kulturministeriet, Case C-479/04).
The same principles would apply to designs given the similarity in approach and wording of the Designs Directive to both the Trade Marks Directive and the Copyright Directive. As the Advocate General noted in the Laserdisken case, there was no reason not to interpret the Copyright Directive consistently in line with Silhouette given the similarity in the wording between it and the Trade Marks Directive.
Harmonised IP rights - How is exhaustion dealt with in the SI?
The reason for labouring the history is that it informs the interpretation of the SI. Part 3 onwards of the SI amends the statutory provisions on exhaustion in relation to those harmonised IP rights providing that, after the transition period, such rights will be subject to:
- national exhaustion; and
- one-way exhaustion for goods first put on the market in the EEA.
The SI is silent on the issue of imports of products from third countries. At present, section 6 of the European Union (Withdrawal) Act 2018 provides that Silhouette and Laserdisken will be 'retained EU case law' and will apply to any 'retained EU law' 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 the transition period unless and until the Supreme Court or Parliament decides otherwise: There will be no change to international exhaustion or to a concept of implied licence.
Despite the fact that there are no similar cases in relation to other harmonised rights namely designs, databases and semiconductor chip topography rights, there is little reason to think that Silhouette and Laserdisken will not be considered as applicable retained case law.
However, one note of caution should be sounded. The European (Withdrawal Agreement) Act 2020 will, following consultation, amend section 6 of the European Union (Withdrawal) Act 2018 to enable the Government to set out in regulations the circumstances in which specified UK courts would not be bound by retained EU case law. This would enable a change to the restrictive wording which provides that only the Supreme Court or Parliament are not bound by retained EU case law.
Patents – imports from the EEA
Patents are different. National patent law has been harmonised to some extent by The European Patent Convention, but this is not an EU instrument and it does not contain any provisions on exhaustion of patent rights. Free movement of goods within the EU is therefore 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 Court of Justice of the European Union, particularly concerning the parallel imports of pharmaceuticals.
The position after the transition period in relation to exhaustion of patents rights, and indeed other IP rights, is dealt with by part 2 of the SI. It provides that:
- was, before [IP completion day [i] ], 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
- is retained EU law by virtue of section 4 of the European Union (Withdrawal) Act 2018
has the same effect on or after [IP completion 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 after the transition period and the European Court of Justice's case law to date will continue to apply. This will govern the parallel importing of goods, after the transition period, 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 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.
Patents – imports from third countries
At present in the UK, the principle of implied licence still governs patented goods put on the market in third countries (see Betts v Willmott  6 Ch App 239 and subsequent cases). Thus, the owner of patented goods has an implied licence to use, sell and import those goods. Such a licence may be excluded by express contrary agreement or made subject to conditions. In this way, it is different from the principle of exhaustion which leaves no patent rights to be enforced.
In recognising the concept of implied licence, the UK differs from many other Member States which generally provide, subject to the principle of free movement of goods within the EEA, that a national patent can be asserted against parallel imports.
As before, the SI is silent on the rules governing imports from third countries. After the transition period, the principle of implied licence will continue to govern imports into the UK of patented goods put on the market in third countries by or with the consent of the patent owner. There is no relevant EU case law to be retained on this point; Silhouette is not applicable. However, because of the way in which part 2 of the SI has been drafted, the principle of implied licence will not apply to parallel imports from the EEA.
The Government has done what can to preserve the status quo in the SI, absent any agreement with the EU. The one important change to flag is that owners of EEA IP rights will, following the transition period, be able to block the entry of parallel imports from the UK and, to that extent, the exhaustion regime will be asymmetric. We will have to wait and see whether there is any change to this during the course of the negotiations with the EU and whether there is any change in the longer term to the principles of exhaustion governing IP rights in the UK.
This article is part of our Brexit series.
An earlier version of this article was referred to by the Minister for Universities, Science, Research and Innovation (Chris Skidmore) in the House of Commons Delegated Legislation Committee debate on the Draft Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018.
[i] The term introduced in the European Union (Withdrawal Agreement) Act 2020 for the end of the transition period is "IP completion day", IP standing for implementation period. By Schedule 5, paragraph 1(1) of this Act, "exit day" in the SI is replaced with "IP completion day".