What is exhaustion of intellectual property rights?

One of the fundamental principles of the EU is free movement of goods (including patented products, such as medicines, branded products, such as clothing, and copyright works which are tangible, such as books). This principle potentially conflicts with the intellectual property owner’s rights to prevent importation of genuine goods. A long line of CJEU decisions in the 1970s resolved the tension by establishing the principle of "exhaustion of rights" within the EEA, which means that once goods have been sold (with the rightsholders' consent) anywhere in the EEA, the rightsholder cannot rely on their IP rights to prevent those goods from being resold anywhere within the EEA.  Following the CJEU ruling in Silhouette ^[1], Member States must not deal with parallel imports from non-EEA Member States in accordance with their own national laws and must accept intra-Community exhaustion of rights only. This means rightsholders can rely on their intellectual property rights to prevent goods first placed on the market outside the EEA from being resold in the EEA. Although Silhouette related to trade marks and an interpretation of the provisions relating to exhaustion in the Trade Marks Directive, it is widely thought to apply to patents and copyright by analogy.

Impact of Brexit

When the UK left the EU, the UK and the EU agreed that both parties are free to determine what exhaustion regime should apply to their territories. This means the UK’s no-deal planning on exhaustion (the Exhaustion SI) came into effect as of 1 January 2021. The Exhaustion SI implements a unilateral application of the pre-Brexit regional EEA exhaustion regime.   It ensures that once a product has been legitimately placed on the market in the EEA, that product can continue to be re-sold into the UK, without being prevented by the rightsholder. However, the EU may allow rightsholders to restrict the importation of certain goods from the UK into the EEA that have not previously been put on sale in the EEA. In effect, this has left the UK with a one-way exhaustion regime, until the UK decides on a future regime.

Future regime

The UK is now consulting on what the future regime for exhaustion of rights should be. The options it is consulting upon are: continuation of the unilateral regional EEA regime that came into force on 1 January 2021 (also known as UK+); an international regime and a mixed regime.

A national regime would be the most rightsholder-friendly regime. A national regime means that once a product is first sold in the UK, the rightsholder's rights are exhausted in the UK only, meaning the rightsholder cannot prevent resale of that product within the UK, but can restrict parallel imports of products first sold in a third country. However, the government considers that a national regime would be incompatible with the Northern Ireland Protocol (under which goods may move from the Republic of Ireland and other EU member states without restriction into Northern Ireland) and therefore the option is only included to gather what evidence is available on economic impact. The government is seeking views on this assessment however.

International Exhaustion and Mixed Regime

Prior to the UK joining the single market, it was widely understood that the UK had what was known as an 'international exhaustion' regime, which meant a first sale (by the rightsholder) in a third country (e.g. by an associated company within a group) could result in exhaustion of UK IP rights with the effect that a rightsholder would not be able to prevent parallel imports of genuine goods into the UK. This is the least rightsholder-friendly option.

The government is also consulting on the option of a mixed regime, where a specific good or right is subject to one regime and other goods or rights are subject to a different regime.   This may be aligned according to sectors, such as pharmaceuticals.  However, again, the government says any formulation would need to be in line with the Northern Ireland Protocol. The government also considers a mixed regime may be complex and difficult to understand.

Next Steps

In our view, stakeholders should be concerned about the UK reverting back to an international exhaustion regime. This could result in a number of issues for rightsholders.  As the government points out in the consultation document, reverting to an international regime could result in a significant number of cheap goods flooding in from countries where genuine goods are sold more cheaply. This is a much greater threat to UK retailers and manufacturers now, than it was before the UK joined the EU, because it is much easier for cheap goods to enter the market via online sales. An international exhaustion regime may also negatively affect the availability of genuine goods to consumers in low cost markets as parallel traders buy up stocks from those markets to re-sell in the UK.

Businesses with an interest in parallel trade should consider what the impact of the options the government is consulting on will be for them. Businesses and trade bodies with an interest in parallel trade should participate in the consultation. The consultation documents suggest that the government has had little stakeholder input or data on which to base any decision so far, so the consultation will be a critical part of shaping the future UK regime.

We would be happy to discuss with you the potential impact upon your company’s business and also to help with any submissions you wish to make to the UK government (including via various key trade bodies).

Authored by Stephen Bennett, Sahira Khwaja and Penelope Thornton

^[1] Silhouette International Schmied GmbH v Hartlauer Handelsgesellschaft GmbH [1998]