In June 2021, the Intellectual Property Office published a consultation on the UK’s future regime for exhaustion of IP rights post-Brexit. The consultation ran until 31 August 2021. The IPO is currently analysing the feedback received.

CIPA has published its response to the consultation, essentially saying that the Government’s least preferred option, i.e., having a national exhaustion of rights regime, is CIPA’s preferred regime.

Which approach?

In the consultation, the Government proposed four options: (i) UK’s unilateral application of a regional EEA regime, i.e., there is no change to the position on parallel imports from the EEA into the UK, although parallel exports from the UK to the EEA could be prohibited, known as a “UK+” regime; (ii) a national exhaustion regime; (iii) an international exhaustion regime; and (iv) a mixed regime.

CIPA says that it is strongly in the interest of IP rights holders to have a national exhaustion regime, in preference to UK+, with an international exhaustion regime significantly behind both of those in CIPA’s list of preferences. In CIPA’s view, a national regime would allow rights holders, their licensees and distributors, to tailor their approach when developing and servicing a market for a product or service to specific jurisdictions. CIPA says that introducing competition and “choice” from other markets would impose arbitrary constraints on rights holders which are not necessarily beneficial to the consumer and would be likely to create market inefficiencies. CIPA notes that the objective of IP rights is to incentivise innovation (technical or marketing) by a reward derived from a degree of exclusivity.

In CIPA’s view, the position is clearly evidenced by the differences between developing economies and the UK economy, for example. In developing economies, an efficient market may not work at the same price as in a developed economy.

CIPA uses the pharmaceutical industry as an example, saying that if exhaustion on an international level is permitted, it could destroy the incentive for an innovator to supply pharmaceuticals to the low-price economy, as they can import into the higher price economy instead. The same is true in relation to the pricing of telecoms and IT innovations (see Unwired Planet International Ltd v Huawei Technologies Co Ltd [2017] EWHC 2988 (Pat)).

CIPA says that where there are market inefficiencies that lead to the potential for super profits in one jurisdiction relative to another, IP exhaustion is a poor (and economically inefficient) method of overcoming them. This is particularly apparent where there are wide differences between economies.

Where economies are closer in character, CIPA says that some efficiency may be gained by increasing the scale of distribution, which may to some extent offset market inefficiencies, and it is clear that the EU single market has historically created significant benefits in the scale and ease of distribution. However, that is dependent on market convergence within a single market, the reverse of the position since the UK’s withdrawal from the EU. Even where there is market convergence, CIPA says that the idiosyncratic impact needs to be guarded against (see for example the pharmaceutical cases involving Spain (on accession to the EU) and Poland (local pricing controls)).

In CIPA’s view, it would be preferable and fairer to IP owners and consumers to use other mechanisms to combat market inefficiencies.

In relation to the UK+ option CIPA says that there is one obvious discrepancy, which is the size of the markets. Asymmetric exhaustion means that distributors in the EU would have an inbuilt advantage or market size in relation to their pricing. Therefore, goods and services may flow more readily from the EU to the UK, given the price advantage, than from the UK to the EU, as sales in the UK would not be supported by the potential market in the EU. This would lead to IP rights holders establishing their distribution centres in the EU rather than in the UK, and disincentivising distributors in the UK. While this may be seen as an advantage to the consumer, CIPA says that the natural impact would be that the price deficiency gets reflected in some other aspect of the supply, such as service levels. Alternatively, (or in addition) IP rights holders would create separate markets where they cannot rely on IP rights, which will divert investment from innovation to creating “artificial” barriers to cross-border trade.

Accordingly, CIPA says, asymmetric exhaustion has significant potential disadvantages for the consumer as well as for the IP rights holder.

A further disadvantage of a UK+ style exhaustion regime without a proper single market, CIPA says, may be that while online supplies would be made directly into the UK, enforcement would remain in the EU under the CJEU.

CIPA therefore strongly supports a national exhaustion approach, if possible, over a UK+ regime, and believes that for consumers and distributors, other means of overcoming market inefficiencies should be considered before implementing a system that encroaches on the scope of enforcement of IP rights.

Implementing change

In CIPA’s view, no final decision should be made as to the exhaustion regime at present, as the impact of UK+ is still not clearly understood, and there may be reasons, including the EU’s view, on the provisions in the Northern Ireland Protocol that may affect the most appropriate choice for the future.

CIPA says that it is strongly in favour of Article 7.1 of the NI Protocol being interpreted so as not to preclude national exhaustion. CIPA points to the analysis of Guy Tritton and Katharine Stevens (but does not provide a reference) who have said that Article 7.1 does not apply to IP and was not intended to; even if it is does apply, the reservation in Article 36 in relation to the protection of IP should apply because the UK is no longer in a single market with the EU and the rights are UK rights.

Finally, CIPA says that it is in favour of permitting a reasonable period for business to adjust to any change to the current approach of unilateral exhaustion (UK+) so that business models can be adapted. For a link to the full response, click here.