As the end of the transition period draws near and new laws and regulations are set to come into effect at 11.00pm UK time on Implementation Period Completion Day (31 December 2020), it is important to appreciate the impact of the changes to businesses navigate through a post-Brexit era. Once the UK is no longer part of the European single market, what will it mean for parallel trade and exhaustion of intellectual property (IP) rights when goods are exported out of the UK into the EU and vice versa.
1. What is exhaustion of IP rights?
The doctrine of exhaustion of IP rights is the principle that, once an article has been placed lawfully on the market by the IP rights owner or with his consent, there will be no infringement of those IP rights if that article is subsequently placed within a certain territory by a parallel trader. Exhaustion can apply nationally, regionally and internationally depending on the applicable legal regime in a particular territory, and the regime that applies in a specific territory can be mixed or asymmetrical. Regional exhaustion of IP rights applies to the European single market, which currently includes the UK, and this prevents IP rights holders from using that right to stop the importation of a product into a European single market country where it has been lawfully placed on the market in another European single market country. In other words, an IP holder cannot use its IP rights to prevent parallel import (sometimes called grey imports) of goods within the European single market.
2. What is parallel trade?
Parallel trade, in the context of the European single market, is the reference to the importation and exportation into a country within the European single market by a third party trader of goods that have been placed on the market in another country within the European single market by the IP rights owner or with its consent. In other words, the cross-border sale or trade of goods by third party traders within the European single market.
3. How will exhaustion of IP rights apply?
From 1 February 2020, the UK has become a “third country” and is no longer a member state of the European Union. During the transition period, EU law applies in its entirety to and in the UK. However, after the end of the transition period, EU law providing for the exhaustion of IP rights will no longer apply to the UK. This means that an IP rights holder may oppose the import of goods into the EU (or a country of the European single market) even though such goods have been lawfully put on the marker in the UK by that same IP rights holder or with his consent.
After IP Completion Day, the UK can unilaterally determine which exhaustion regime it wishes to apply within its own boundaries. The UK government has implemented regulations which will continue to recognise EEA exhaustion. This means that IP rights owners will not be able to prevent parallel imports from the EEA into the UK where the goods are lawfully placed in the market by the IP rights owners or with their consent. Consequently, an asymmetrical exhaustion regime will apply to cross-border trade between the UK and the EEA.
UK businesses will therefore need to check if they need to obtain an IP owner’s permission before they export goods from the UK to the EEA.
4. What will happen to IP rights exhausted prior to IP Completion Day?
IP rights which were exhausted both in the EU and in the UK before the end of the transition period under the conditions provided for by EU law will remain exhausted both in the European Union and in the United Kingdom after IP Completion Day.
5. Impact on parallel trade
Parallel traders can take the following proactive steps in light of the changes to the exhaustion regime for cross-border trade between the UK and the EEA:
- Keep a detailed inventory log of goods placed in the market by the IP rights holder or with his consent in the EU and the UK prior to IP Completion Day. Exhaustion will continue to apply to such goods for cross-border trade between the UK and the EEA.
- Check which goods exported from the UK to the EEA are protected by IP rights (for example, goods branded with a trade mark) and, where relevant and practicable, seek consent from the IP rights holder for future imports into the EEA.
- Consider whether there is a need to review the business arrangements, business model or supply chain based on the outcome discussions with the relevant IP rights holder.
IP rights owners should consider the extent to which they wish to retain control of the cross-border trade for their IP protected goods from the UK to the EEA after 1 January 2021 and implement a strategy accordingly.
It is worth noting that the ability to assert IP rights to prevent the importation of products into a certain jurisdiction based on the doctrine of exhaustion of rights is distinct from a commercial agreement that restricts the importation of products into that same jurisdiction. Such a commercial restriction may give rise to separate competition law considerations.
6. Exhaustion in Northern Ireland
The Protocol on Ireland/Northern Ireland, which is to apply after IP Completion Day, does not provide for the exhaustion of IP rights in the EU in cases where a good has been legally put on the market of Northern Ireland. Therefore, after the transition period ends, the legal position on exhaustion of IP rights is the same if goods are first placed in Northern Ireland as in the rest of the UK.
7. What is the relevance of the “most favoured nation” principle of the World Trade Organisation to exhaustion post IP Completion Day?
The UK and all EU member states are members of the World Trade Organisation (WTO). Under WTO rules, WTO members cannot discriminate between their trading partners and must allow access to their market on the same terms for all WTO members. Any favour provided to one country must be offered to all – the “most favoured nation” principle. An exception to this principle applies to free trade agreements. If the UK does not reach an agreement with the EU on its future trade relationship after IP Completion Day, WTO rules will apply to trade between the UK and the EU member states.
In the case of IP, the most-favoured-nation principle would apply to any advantage, favour, privilege or immunity accorded to the nationals of a WTO member. One consequence of no-deal between the UK and the EU post IP Completion Day could be that other WTO member states may bring a dispute before the WTO to demand that the UK ought to extend the same favourable treatment to its nationals on the MFN principle. This could eventually result in the UK entering an international exhaustion regime by the “back door”.
 Referred to as IP Completion Day