The UK is consulting on four possible regimes, although it seems to rule out national exhaustion as an option. The outcome could have a major impact on IP owners and anyone affected by parallel trade.

What's the issue?

The exhaustion of rights regime determines the ability of IP rights holders to use their IP rights to control what happens to goods bearing those rights once those goods have legitimately been put on the market. In particular, it determines their ability to prevent goods crossing territorial borders (so-called parallel trade). 

The EU operates a regional exhaustion of rights regime. This means that IP rights holders cannot rely on their rights to prevent IP-protected goods legitimately put on the market in the EEA from circulating within the EEA; their rights are said to be exhausted. However, rights holders can rely on their IP rights to object to goods entering the EEA from third countries outside the EEA. 

Since the end of the Brexit transition period, the UK has been unilaterally participating in the EEA regional exhaustion regime. Conversely, the UK is now a third country as far as the EEA is concerned. This means that IP rights cannot be used to prevent goods legitimately put on the market flowing from the EEA into the UK but can now be used to prevent such goods flowing from the UK into the EEA. As far as the UK is concerned this was a temporary measure to ensure the continued flow of goods such as pharmaceuticals from the EEA to the UK. 

What has happened?

The UK government has now launched its much-anticipated consultation on the UK's future exhaustion of rights regime. Four regimes are open for consultation: 

• the current unilateral EEA regime (known as "UK+")
• national exhaustion
• international exhaustion, and 

• a mixed regime.

Given that the government appears to have ruled out a national regime as incompatible with the Northern Ireland Protocol and seems sceptical as to the workability of a mixed regime, the focus seems to be on the existing unilateral EEA regime or international exhaustion.

The outcome of the consultation will be important for all affected by parallel trade, including:

• IP owners
• IP licensors and licensees
• those who parallel import goods and raw materials into the UK
• those who sell or supply such goods, and
• those involved in complex manufacturing and supply chains that involve the UK and third countries.

The government highlights the FMCG, luxury goods, print, publishing, pharmaceuticals, and automotive sectors as being particularly impacted. Since exhaustion applies to trade marks, designs, copyright and patents, the holders of all of these rights may be affected.

The consultation is open for responses from 7 June to 31 August 2021. As well as seeking input from all affected, the government is keen to obtain data on the scale of parallel trade in the UK and the impact of the current regime (past attempts to collect such data having proved largely unsuccessful).

Want to know more?

Four regimes are open for consultation: 

The current unilateral EEA regional/UK+ regime

Under this regime, once goods are legitimately put on the market in the EEA, rights are considered exhausted in the UK. In other words, IP rights cannot be used to prevent goods flowing from the EEA into the UK. The government says that this option would be the least costly for businesses reliant on the EEA for the supply of goods and raw materials, while continuing to provide the same level of choice for UK consumers. The government states that it considers this regime to be compatible with TRIPS (including the Most Favoured Nation provision in TRIPS) and GATT.

National exhaustion

Under this regime, rights are only considered exhausted in the UK once goods are legitimately put on the market in the UK, so IP rights can be used to prevent goods put on the market anywhere in the world from flowing into the UK. The government says that this regime could mean that IP rights are perceived as stronger, but potentially reduce supply and choice (and increase prices) for UK consumers. However, it also says that this option is incompatible with the Northern Ireland Protocol. It is only included in the consultation for completeness and to gather what evidence is available on economic impact.

International exhaustion

Under this regime, rights are considered exhausted in the UK when goods are legitimately put on the market anywhere in the world. IP rights cannot be used to prevent goods legitimately put on the market anywhere in the world from entering the UK. The government considers that this regime could mean that IP rights are perceived as weaker, but potentially increase supply and choice (and decrease prices) for UK consumers. This regime would have significant implications for IP owners in that it would limit their ability to prevent goods from being parallel imported into the UK.

A mixed regime

This would mean that different regimes are adopted depending on the IP right, good or sector in question. Switzerland is given as an example of a country having a mixed regime, with medicines being dealt with differently to other goods. The government highlights that such a regime may be complex, and difficult for consumers and businesses to understand. 

Importantly, the consultation does not cover:

• Exhaustion of rights in purely digital goods (such as music or books bought and downloaded from an online store to be used on a mobile device). 
• Geographical Indications or Plant Variety Rights.
• Counterfeit goods. This is because parallel trade is the trade of legitimate physical goods, not counterfeits.
• Parallel exports. This is because the UK government has no control over the exhaustion of rights regimes of other countries. For example, now that the UK is no longer a member of the EU, IP rights can be used to prevent goods legitimately put on the market in the UK flowing into the EEA. The net result is that those who import and sell goods from the UK into the EEA now have to consider the IP position.

The government also says that it does not expect the new regime to affect goods transiting through the UK. Lastly, the consultation does not cover the detailed law around any exhaustion of rights regime (such as the concept of consent).

Find out more

To discuss the consultation in more detail, please reach out to a member of our Brands & Advertising team. For more brands-related coverage, check out our recent article on the CMA's draft guidance on green claims in advertising, available below.

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