Revisiting the exhaustion of IP rights

by | Aug 24, 2021 | Blog, Intellectual Property

A topic that has recently resurged is the exhaustion of IP rights and what it means for companies doing business internationally.

This is due to the impacts of Brexit (see our recent post-blog on this topic) and what this means in terms of IP rights in the EU and UK.

In fact, the UK Intellectual Property Office recently opened a consultation process seeking public views on how this matter should be resolved going forward.

Here, we give a brief overview of this often-critical issue.

What are parallel imports?

Also known as “Grey Market goods” the term parallel import refers to the situation where goods that are the subject of IP rights are imported to a specific market and commercialized without the IP owner’s consent.

Importantly, this principle does not deal with counterfeit goods, but a situation where the goods in question are produced and sold legally and after being sold into a new market.

The practice is regulated under both intellectual property and competition law.

What does Exhaustion of IP Rights mean?

The “Exhaustion of IP rights” refers to the level of control an owner of intellectual property has over the distribution of his or her products.

Under the exhaustion of rights principle, once goods are sold in a specific market by the owner or with his or her consent, they will not be able to prevent the resale of such goods in that market by others – i.e., the exclusive right of sale becomes “exhausted.”

Depending on the jurisdiction, distinct types of rules may apply to this scenario.

For example, national exhaustion considers that once a product has been put into circulation in the domestic market with the consent of the owner (the first sale), he or she cannot prevent its resale, claim a respective profit, or sue for infringement of IP rights. In this case, exhaustion will not apply to other countries or regions, so the owner may still prevent such actions in other jurisdictions.

The principle of international exhaustion, on the other hand, considers that where goods are placed in any market or jurisdiction with the consent of the IP owner, the rights of the IP owner will become exhausted in the country applying the rule.

The principle has significant consequences and is far-ranging. It can apply, for example, to software patents, in cases where technology is sold or redistributed through the use in software products.

In South America, countries have adopted diverse positions. In Brazil, the Industrial Property Law adopts a national exhaustion system for both patents and trademarks, but the decisions of the courts in this respect have not always been straightforward (this topic will be addressed in our future blog post on the exhaustion of IP Rights in Latin America).

Exhaustion of IP Rights in the European Union

Before the introduction of the single European currency, products could be bought for cheaper in the other EU States and then imported into the UK.

As a result, the EU created regulations that prevented the holder of IP rights from asserting these in a way that infringed the free movement of goods principle under EU law.

Thus, the exhaustion or “first sale” doctrine was introduced in the EU context, meaning that once a product is sold with permission of the IP owner within the region, the associated IP rights will be exhausted, balancing the protection of IP rights and fair competition.

Hence, the EU adopted a regional system on exhaustion of IP rights.

What is the current position due to Brexit?

Since January of this year, the UK is no longer bound by EU law and no longer a part of the single European market. In 2019, the UK Government enacted legislation under which it continues to recognize the principle of exhaustion post Brexit.

This means that, as it stands, the exhaustion principle still applies with respect to the first sale of products in EU member states. However, at this time, the first sale of products in the UK will not exhaust IP rights in Europe in a corresponding manner.

This has led to increased debate on whether the current position should be maintained. A second choice for the UK government would be to implement a national type of regime where parallel imports will not automatically be allowed into the UK (this type of regime has been ruled out by the UK government as it could be incompatible with the Northern Ireland Protocol, by restricting trade across the Irish border).

Other possibilities include an international regime (the goods are considered exhausted in UK once they have been put in any market) or a type of mixed regime (where certain goods and sectors are excluded from the exhaustion principle).

The UK Intellectual Property Office is currently seeking contributions from the public on the future of the exhaustion of the Intellectual Property rights regime and any workable solutions to be implemented. The consultation process is open until 31 August 2021.

Further information and the relevant forms for participation can be found here.

Want to discuss this topic further?

As discussed above, the current position is that parallel imports from the EU to the UK will be allowed, while at the same time a rights holder can prevent the parallel export of goods from the UK into the EU.

On the one side, it is argued that the present position is positive from a UK consumer perspective, to keep diverse low-cost EU goods in the UK market. On the other, it is argued that the position of IP owners who have invested time and cost into their brand and the marketing of their products is being ignored.

In any case, it is important for businesses to understand the legal position on the exhaustion of IP rights within a specific market. In some circumstances, it is necessary to take preventive action to ensure that the relevant IP rights stay protected.

At Daniel law, we are following these developments with great interest and evaluating the potential effects on our clients’ IP rights together with our international partners. If you have any questions on this topic do not hesitate to reach out to us.

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