Article, Brexit, Reforms for the EU

The end of ‘Fortress Europe’? The implications of asymmetrical UK-EU intellectual property rights after Brexit

James Taylor

  1. Brexit and the future of IP rights

For some time, businesses have been awaiting clarifications about the future of the UK-EU relationship with regard to intellectual property rights. The Intellectual Property Office (IPO) has declared it will convert all EU registered trademarks into UK marks without charge to bridge the gap that will soon exist in law between UK and EU IP rights. As regards patents, it is clear that Brexit will not have a decisive effect,  since it appears they will be governed by a separate system and an independent court.[1] The most immediate question, and currently the most uncertain, concerns the ‘exhaustion’ of IP rights. If there were a deal along similar lines to the current Withdrawal Agreement signed in November 2018, equivalence of IP rights could be expected throughout the two-year transition period that such a deal would trigger. In preparation for the event of a no-deal, however, the UK Government has laid statutory instruments[2] before Parliament that state Britain’s intention to continue honouring the principle of regional IP right exhaustion within the European Economic Area (EEA) following Brexit.

The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations state that the UK will regard the scope of IP rights as unchanged. Despite no longer being obliged to do so under EU law, it will treat those rights as exhausted once the products they protect have been put on the market anywhere in EEA region. However, it is unlikely that this would be reproduced under EU law, leaving the UK and EU with asymmetrical legal frameworks for intellectual property. In their regularly updated advice for businesses, the Government advises that parallel importers will be able to import into the UK in the aftermath of Brexit, while surreptitiously adding that:

 ‘there may…be restrictions on the parallel import of goods from the UK to the EEA’.

At present, IP rightholders enjoy control over their products until the point of first sale anywhere in the EEA region. Once a rightholder has put their product on the market in Hungary, for example, they can no longer control the commercial exploitation of their product anywhere within the EEA region. Parallel importers may re-sell that rightholder’s product as they like throughout the region, taking advantage of price differentials across different markets. There are many advantages to the UK continuing to recognise the exhaustion of IP rights as though it were still a member of the EEA regional exhaustion regime after Brexit. Parallel importers would be able to import into the UK from Europe, fostering competition and making a wide range of goods more affordable to consumers. This is because the freedom of parallel traders to buy a product in a country where it is sold cheaply and import that product for sale in other countries will accordingly enable them to undercut domestic sellers by charging lower prices. In doing so, they would be making a range of goods accessible to consumers for less.

  1. Regional exhaustion – a continuation of the status quo

Ideally, the current situation of mutual recognition by both the UK and EU of the EEA regional exhaustion would continue for the time being, at least until plans for future regulations or equivalence recognition. Of course, the problem with continuation is that the UK Parliament has ruled out the UK’s membership of the EEA Customs Union post Brexit. Harmonising legislation has incorporated the architecture of EEA regional exhaustion set out in the Designs Directive 98/71/EC, the Copyright Directive 2001/29/EC and the (Trade Marks) Directive (EU) 2015/2436, meaning that one-sided regional exhaustion will be legally enforceable in the first instance under UK domestic law, while no obligation for reciprocal enforcement by the EU will exist. Breaking the walls of ‘Fortress Europe’ would therefore come heavily at the expense of the prisoner, to adapt the established metaphor.[3] Owners of EU IP rights will be able to enforce those rights to the exclusion of parallel importers seeking to import into the EEA from the UK. This could result in considerable difficulties for the trade of many essential goods that currently flow freely across borders, particularly because the undoubted depreciation of Sterling will make parallel importing from the UK into the EEA highly profitable and desirable for traders in the immediate aftermath of Brexit.

Besides this disadvantage to traders seeking to parallel import from the UK into the EEA, an asymmetrical IP rights regime could punish EU consumers.  Indeed, this might foreseeably put political pressure on the EU to negotiate some kind of equivalence that prevents the free movement of goods throughout Europe becoming encumbered  by the UK’s departure. While the UK Parliament has denied the possibility of EEA membership, the Government is essentially trying to replicate it unilaterally through its no-deal contingency planning, perhaps in the hope that the EU will reciprocate and effect some kind of de facto harmonisation of IP rights after Brexit by continuing much the same as they did before. Before the EU can take any steps in this regard, the UK must clarify its intention. But the UK’s intention in relation to IP right exhaustion – like every other major decision on Brexit – is in a state of flux.

  1. National exhaustion

While the Intellectual Property (Exhaustion of Rights) EU Exit Regulations commit the UK to regional exhaustion, there are groups lobbying for a change of gear after Brexit. A national exhaustion regime, whereby IP rightholders may control the sale of their products within the UK that were not first put on the market there is advocated most notably by the International Trademark Association. A letter sent to the UK Intellectual Property Office by International Trademark Association in July 2018 noted that such a national exhaustion regime would  ‘provide protection to brand owners [and] safeguard the good will they build while protecting consumers from confusion, mistake or deception’. A national regime would make UK IP rights more powerful at the expense of parallel importers. What comes at the expense of parallel importers tends also to come at the expense of consumers. It would, for example, become much more expensive to source individual car parts from outside the UK, meaning that vehicle maintenance and repair would become much more expensive. This option would normalise the status of the UK as a third party to the regional EEA exhaustion regime, and put a stop to the uncertainty of asymmetry.

  1. International exhaustion

Another alternative might be that the UK adopts international exhaustion, whereby IP rightholders lose the right of commercial exploitation over their goods once they have been placed on the market for the first time anywhere in the world. Like a change from a regional to a national exhaustion regime, such a change could be implemented relatively straightforwardly in law by substituting the words ‘in the European Economic Area’ that currently define the catchment area of rights in the harmonising legislation for ‘anywhere in the world’. For example, s.1(1) of the Trade Marks Act 1994 would read:

“A registered trade mark is not infringed by the use of the trade mark in relation to goods which have been put on the market anywhere in the world in the European Economic Area under that trade mark by the proprietor or with his consent.”

This exhaustion regime is the weakest for rightholders and has the most liberalising effect on parallel trade. Such a shift seems unlikely, however. Rather than being a natural shift to the previous state of affairs (the UK adhered to an international exhaustion regime before joining the EEA in 1992), reverting to international exhaustion would constitute an active deviation from EU Court of Justice rulings that will become transposed case law under the EU Withdrawal Act. The CJEU made clear in that international exhaustion regimes could not be adopted by Member States. It was then decided that a ‘Fortress’ approach would be the only way to safeguard the internal market. Laserdisken v Kulturministeriet, a seminal case in interpreting article 4 of the Copyright Directive, subsequently reinforced the impermissibility of international exhaustion regimes being adopted by Member States. Under s.6 of the EU Withdrawal Act, these decisions will be ‘retained EU case law’, and accordingly, will continue to steer the UK against adopting an international exhaustion regime until such a time as they are explicitly addressed by the UK courts or Parliament.

  1. The threat to the pharmaceutical industry

Far from being a theoretical game for EU and UK legal and policy staff to deliberate, the form that the future relationship between the EU and UK takes in relation to intellectual property rights is going to have a significant impact on some vital industries that affect the access to essential goods. For instance, it is likely that the pharmaceutical industry will be affected by any change to UK-EU IP exhaustion rights.  This is because a shift away from the current EEA regional exhaustion regime to a national regime would have an anticompetitive effect on the market.  IP rightholders could set prices for a new drug product according to a country’s wealth, or according to the trader’s interest in establishing a foothold in a given national market. With parallel imports being excluded, costs would be driven up, and it can be reasonably be assumed that such price hikes will be passed along to the consumer. On the other hand, large-scale drug producers have warned that any exhaustion regime that diminished the strength of IP rights could undermine the research and scientific innovation that leads to medical breakthroughs, but which depends on a certain degree of restrictive market control.

  1. Half in, half out

We are currently looking at a halfway house scenario on harmonisation of IP rights that could be described as partial international exhaustion. This is hardly satisfactory, and although the possibility of de facto continuation of the status quo after Brexit day would mitigate the disruption caused by a no-deal outcome, a clear statement of intent from the EU is necessary to give certainty to businesses and exporters who are undoubtedly watching the clock with increasing anxiety. Will EEA regional exhaustion be honoured with a third-party state for any length of time if there is no deal?  International exhaustion looks unlikely, since even a hard Brexit would not cancel the effect in domestic law of CJEU jurisprudence that forbade such an open regime. Alternatively, a regime of national exhaustion seems probable, although it would benefit the rightholders and disadvantage importers, distributors and consumers. If one thing is clear, the anticipated asymmetry of rights cannot last. Whether sympathy ultimately tips in favour of IP rightholders or consumers, the gate to ‘Fortress Europe’ can hardly be left ajar.

 

The author

James is a GDL candidate at City, University of London and a Student Affiliate at UKAEL.

 

 

 

[1] The Unified Patent Court is a proposed court that will govern European patent rights of contracting states. Its jurisdiction will enter into force upon ratification by the German Constitutional Court, the procedure for which is still underway.

[2] The government laid the following six Statutory Instruments in Parliament between 23 July 2018 and 31 January 2019: The Design Right (Semiconductor Topographies) (Amendment) (EU Exit) Regulations; The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations; The Trade Marks (Amendments etc.) (EU Exit) Regulations; The Patents (Amendment) (EU Exit) Regulations; The Intellectual Property (Copyright and Related Rights) (Amendment) (EU Exit) Regulations; The Designs and International Trade Marks (Amendment etc.) (EU Exit) Regulations

[3] The combination of unitary European Union IP rights and harmonized national IP provisions creates what is known colloquially as ‘Fortress Europe’.