Exhaustion of rights

EU-flagThis article was originally published in World IP Review, and is reproduced with kind permission. Click here to view the original

If the UK leaves the EU without joining the European Economic Area, the principle of trade mark rights exhaustion—as imposed by EU treaties and case law—would cease to apply in the UK, requiring the UK to adopt a new model. Kate O’Rourke of the Chartered Institute of Trade Mark Attorneys and Olivia Gray of Charles Russell Speechlys report.

Until the UK joined the EU and the common market was enforced, the UK largely followed the concept of international exhaustion of rights. This meant that if goods were put on the market anywhere in the world with the rights owner’s consent, then the rights owner could not prevent the onward sale of those goods anywhere in the world.

However, during the 1970s, the regional exhaustion of rights principle was developed by the European courts to prevent the use of industrial property rights dividing the common market.

The principle has since been incorporated into national and EU laws by section 12 of the UK Trade Mark Act 1994; and article 7 of the EU Trade Marks Directive (2008/95)

The combination of unitary EU IP rights and harmonised national IP provisions creates what is known in some circles as ‘Fortress Europe’.

Section 12 of the Trade Mark Act 1994 is derived from article 7 of the directive and is largely identical. It states the current rules on the exhaustion of rights of trademarks in the UK:

  • A registered trademark is not infringed by the use of the trademark in relation to goods which have been put on the market in the European Economic Area (EEA) under that trademark by the proprietor or with his consent; and
  • Subsection (1) does not apply where there exist legitimate reasons for the proprietor to oppose further dealings in the goods (in particular where the condition of the goods has been changed or impaired after they have been put on the market).

In other words, once a brand owner puts goods on the market in the EEA, which comprises the EU, Norway, Liechtenstein and Iceland, it cannot use its rights to prevent the resale of the goods within the EEA. The registered right is “exhausted” by the first marketing of the goods.

However, the concept of exhaustion is not absolute. Section 12(2) of the Trade Mark Act allows a proprietor to use its registered rights to oppose further dealings in the goods where there exists a “legitimate reason” to do so. It provides a non-exhaustive list of such reasons and case law has extended these, which can now be explained under three headings.

1. Altering the condition of the goods

This is where the condition of the goods (as opposed to their packaging) has been altered after they have been put on the market—particularly when the alteration comprises the addition of a component not approved by the proprietor (Sony Computer Entertainments v Tesco [2000]).

2. Repackaging, relabelling and rebranding

In these cases, the product has been repackaged, relabelled or rebranded, but the condition of the goods has not been altered.

In the case of Bristol-Myers Squibb v Paranova (1996) the court formulated a five-condition test which a repackager must satisfy in order to avoid infringement:

  • It must be necessary to repackage to market the product;
  • There must be no effect on the original condition of the product and proper instructions;
  • There must be clear identification of the manufacturer and importer;
  • It must be presented in a way that is not damaging or detrimental to the reputation of the trademark or its owner); and
  • They must provide notice to the proprietor.

The case of Pharmacia & Upjohn v Paranova [2000] extended the reach of the above conditions to cover relabelling and rebranding cases: any form of repackaging, relabelling or rebranding must abide by these conditions to avoid infringement.

3. Luxury goods

The case of Dior v Evora (1998) opened the gates for the argument that damage to the reputation of a brand should be considered to be a legitimate reason. However, it was not until the case of Copad v Dior (2009) that the Court of Justice of the European Union ruled that Dior could oppose the resale of goods if the resale “damages the reputation of the trademark”, and a third legitimate reason was thereby born.

The impact of Brexit

If the UK were to leave the EU without negotiating to stay in the EEA or re-joining the EEA (in a capacity other than as a member of the EU), the principle of European exhaustion would cease to apply in the British territory. The UK will have to decide which set of exhaustion rules will be adopted between regional, national or international exhaustion.

1. Regional exhaustion: the Norwegian model

Norway (as one of the three EFTA states that is party to the EEA Agreement) has access to the European single market. In return, it is obliged to make a financial contribution and accept a wide range of EU regulations. If the EU and the UK were to agree on a similar model, the UK will stay closely connected to the EU as a member of the EEA. The UK would still be included within Fortress Europe and IP exhaustion rights would essentially remain the same.

However, this type of ‘soft’ Brexit does not currently appear very likely since the UK would have to accept personal rights for EU citizens, such as the freedom to move, live and work in the UK. Of course, this model would also require the cooperation of the other EEA countries.

2. National exhaustion

National exhaustion is very restrictive on parallel importers. The placement of products on the domestic market, with the consent of the owner of the IP right, exhausts the national right to control the subsequent circulation of the products in the domestic territory, i.e., once sold in the UK, IP rights owners cannot stop these products being resold in the UK.

The placement of the products on other markets (not in the UK), with the consent of the owner of the IP right, will not exhaust the national right to control the subsequent circulation of the products in the domestic territory, i.e., IP rights owners could prevent the resale within the UK of any goods which were not first placed on the market in the UK.

This regime is followed in countries including Brazil and Russia.

National exhaustion allows the IP rights owner to set different prices for, say, a new pharmaceutical product, applying higher prices in richer countries, and lower prices where the market cannot bear as much, or where it is seeking to establish a position against strong competition. National exhaustion allows for more market segmentation.

National exhaustion tends to favour the IP owner.

3. International exhaustion

As mentioned above, prior to the UK harmonising its IP laws with the other member states of the EU, it had largely applied a doctrine of international exhaustion.

International exhaustion is the least restrictive on parallel importers. Once the IP rights owner (or another with their consent) puts the goods on the market anywhere in the world, they cannot prevent the resale of the goods based on their IP rights in any other country where international exhaustion applies. The underlying principle of this is that IP rights owners have already been rewarded from the initial sale and should not use their national IP rights to restrain the subsequent resale of those goods.

This principle is generally followed in a number of countries including Australia, Canada and the US.

International exhaustion tends to favour the consumer.

A difficult decision

The position after Brexit is unclear. Given the current negotiating stance of the UK government, it is unlikely that the UK will continue to be part of the European single market. Therefore, we could revert to the position that existed before the UK’s entry into the EU—international exhaustion.

Some argue that the abandonment of Fortress Europe and the resumption by the UK of international exhaustion is not only desirable but completely in accord with a post-Brexit world in which the UK would embrace global free trade.

The introduction of international exhaustion would potentially reduce anti-competitive behaviour and benefit the consumer. Importers and resellers could also benefit from the introduction of international exhaustion. In situations where IP rights owners have consented to the first sale of goods, there would be no legal cause (with potential limited exceptions such as changes to quality) to stop the goods being resold or imported into the UK. Importers and resellers would have the benefit of exploiting currency and demand fluctuations to secure lower prices for goods, which could in turn benefit the end consumer.

On the other hand, IP rights owners may wish to extend the existing controls against parallel importers and seek national exhaustion. Alternatively, brand owners may seek to restructure their distribution agreements and networks to address a situation where, post-Brexit, the UK becomes a parallel import free zone.

It is likely that lobbying from industry will continue for some time as different sectors will be affected in conflicting ways, examples of which are set out in Table 1, below.

As with most Brexit-related matters, what the government will decide to do is currently unknown.

Exhaustion-table