Is International Exhaustion coming to a shop near you?

A recent Financial Times article ‘Creative Industries warn IP rights under threat by hunt for “Brexit dividends” highlighted that the UK government is again exploring, or at least having pressure placed on it to explore, whether to change the current exhaustion regime.

This continues against a backdrop of the government’s search for potential “Brexit dividends” and the time pressure of upcoming elections in the face of an ongoing ‘cost of living’ crisis.

Before Brexit, the UK subscribed to a regional exhaustion regime. Accordingly, intellectual property rights in goods placed on the market were exhausted once they were sold in the EEA, which included the UK. However, after leaving the EU, the UK was no longer obliged to follow this regime and had the freedom to choose its own exhaustion regime. In the immediate run-up and period following Brexit, the government expressed no interest in changing the regime, maybe because at the time it had too much on its plate.

An international exhaustion regime, in particular, is a highly attractive option for the UK government as they strive to deliver the Brexit benefits, highlighted to the public before the UK left the EU. However, would an international exhaustion regime really be beneficial to the UK as a whole and, in particular, retailers?

Exhaustion Regime Options

As a starting point, we should explore the different options available to the UK in terms of exhaustion regimes.

Regional Exhaustion

Since leaving the EU, the UK has maintained regional exhaustion. However, as the UK is no longer part of the EEA this has led to an asymmetric regime. As such, IP rights are exhausted in the UK once goods are first sold in the UK and EEA. However, IP rights are not exhausted in the EEA, when goods are first sold on the UK market which is why the present regime is described as ‘asymmetrical’.

In practical terms, this means that when goods are first placed on the market in the UK or EEA, these can be resold in the UK, unless there are legitimate reasons to prevent further commercialisation of the goods. The IP rights in these goods would have been exhausted in the UK by first sale in the UK and EEA.

However, when goods are first placed on the market in the UK, they cannot be resold in the EEA. This is, because the IP rights in these goods were not exhausted in the EEA by their first sale in the UK.

National Exhaustion

A national exhaustion regime means that IP rights are only exhausted once the goods have been sold in the UK. As such, IP rights in goods sold in any countries outside the UK, would not be exhausted in the UK. Consequently, these goods could not be resold in the UK. This exhaustion regime would create issues surrounding the movement of goods between Ireland and the UK due to the Northern Ireland Protocol of the Brexit Withdrawal Agreement.  This regime would be the most pro IP rights holder regime and maybe the least friendly to retailers who do not have their own brands.

International Exhaustion

An international exhaustion regime would mean that intellectual property rights in goods would be considered exhausted in the UK when they were placed on the market in any other country. As such, they could be immediately resold in the UK. This is potentially the most pro-retailer regime, but the least attractive to UK IP rights holders.

Mixed Exhaustion Regime

A mixed exhaustion regime consists of different types of exhaustion regimes, which would apply depending on the specific goods or sector. Switzerland, to a degree, follows this regime with regards to pharmaceutical goods.

The Government

Consultation

After leaving the EU, the UK was no longer obliged to subscribe to the exhaustion regime followed by the EU. As such, the government held a consultation in 2021, during which the above four options were considered. The outcome was that there was not enough information to reach a decision on whether the exhaustion regime should be changed. As such, the current regional exhaustion regime would continue.

The Current Situation

The UK government seems once again to be exploring, whether to change the current exhaustion regime in the UK. This time, the change coincides with the government’s search to deliver Brexit benefits promised before the UK left the EU.

As above, an international exhaustion regime would mean that IP rights in the UK are exhausted as soon as they are sold anywhere in the world. As such, the goods could be resold immediately. This would benefit consumers by driving down the price of branded goods.

Indeed, parallel importers, who purchase branded goods in other countries with lower price differentials, would be able to resell these freely at a lower price in the UK. As such, a larger number of branded goods would be available to consumers at a lower price. The government would accordingly be able to deliver the “Brexit dividends” or Brexit benefits that had been promised to the public before the UK left the EU.  In this way, international exhaustion is an attractive option for the government. However, if your are an IP rights owner it would be much harder to control selective distribution channels and such right holders would have to be much more aware of price differentials between their markets as if they become too wide this is a motivation of parallel importers to target a particular brand of product.

International Exhaustion and Retailers

Who is positively impacted?  

As above, parallel importing businesses can benefit from international exhaustion. Indeed, any goods that they purchase abroad could be immediately resold in the UK at a lower price than goods sold by the original brand in the UK. These parallel importing businesses would obtain greater profit margins, which could benefit the UK economy. Also, many retailers who only sell other brands could benefit. For example, in the early nineteen nineties there were a series of cases involving supermarkets importing ‘cheap’ branded clothing and footwear from the US. This trade was ultimately prevented by the ‘fortress EU’ policy of the EU with regard the exhaustion regime.

Consumers could also benefit, as there would be a greater availability of branded goods being sold at lower prices.

Who is negatively impacted?  

However, there are some potential drawbacks to an international exhaustion regime. Indeed, the original brand owners would essentially be competing with parallel importers, selling the exact same goods at a lower price. This could lead to lower sales volumes and profit margins for these brand owners, which could also affect the economy. The Publishers Association has stated that exhaustion regime changes could lead to a loss of around £2 billion to the publishing industry. SMEs in particular, may struggle where the original brand is not readily available, for example, if their only point of sale is their website.

Such increased competition and loss of sales could disincentivise brand owners from continuing to invest in their businesses, which could have a knock on effect for the economy. For example, the Publishers Association also noted that the UK’s export market could also become disincentivised, given that goods sold abroad are only reimported into the UK at a lower price. The pharmaceutical sector has also raised the issue of profits being delivered back to distributors rather than those who originally invested in the business.

There is also a knock-on effect for end consumers. International exhaustion could also lead to a proliferation of counterfeiters, who could benefit from the relaxation of rules and the fact that the resale of goods at a lower price is a more popular practice. A high number of cheaper and fake products could enter the UK market and be sold to consumers, many of whom may not even know that the goods are not genuine. Notably, the pharmaceutical sector has highlighted concerns regarding lower-quality medicines being supplied to UK consumers.

It is telling that in the 2021 consultation, which was greatly contributed to by the creative and pharmaceutical industries, a national exhaustion regime was a highly popular option.  Indeed, this option means that the IP rights in less goods would be exhausted once sold, given that the rights can only be exhausted when they are sold in the UK specifically.

However, this would be an unlikely course of action to be taken by the UK government, given the issues regarding free movement of goods within the island of Ireland outlined above.

Conclusion

The question of whether the UK will change its current exhaustion regime is clearly still open and is being explored by the government. One government spokesperson states that they are “considering all options”. The government also seemed keen to balance the interests of different stakeholders, stating they wanted to “ensure our intellectual property regime incentivises innovation while enabling competitive markets and greater consumer choice”

However, there is also the question of whether the government would be able to hold another consultation before the general election that must be held by the end of 2024.

If they are able to do this, the two main contenders appear to be regional or international exhaustion. The regional regime does limit the exhaustion of IP rights more than an international exhaustion regime. This appears to be more beneficial for right holders and also arguably has some benefits for end consumers and the wider economy. However, the current regime also puts parallel importers at a disadvantage and ultimately prevents the UK government from delivering promised Brexit benefits.

International exhaustion would allow the government to recoup these benefits and deliver them, through cheaper and more widely available branded products for consumers. Nevertheless, the potential impact of international exhaustion on all stakeholders, including brand owners, the creative and pharmaceutical industries, as well as the consumer, will need to be evaluated.

Although the government is currently exploring the different options, for them, international exhaustion does appear to be the most attractive. However, as mentioned above, there are other interests that will need to be weighed. There is also time pressure for a decision to be reached before the next general election in 2024. Whichever decision is taken, it will clearly have a wide-ranging and significant impact for all stakeholders and be a key aspect of the UK’s political and economic landscape following Brexit.

This article was prepared by Trainee Trade Mark Attorney Melissa Buamah