Cross-border flow of goods and IP protection

For goods protected by trade marks, patents and similar proprietary rights cross-border movements are often restricted. IP rights are national or regional in scope. So a product sold in one country may infringe local rights if imported to another.

There are limits to this ability to mount barriers at borders however, notably in the “exhaustion” concept.

Within a country, IP rights in a product are considered “exhausted” when that product is placed on the market by or with the consent of the owner of relevant IP rights in it. This means that onward sale of the product (even without the authorisation of the owner) cannot infringe those IP rights.

Different ways to be exhausted

How this applies if the product crosses borders is dealt with differently from country to country. There are several different possibilities:

• A national exhaustion regime: Under this system, IP rights are exhausted only in respect of products placed on the market within that country. Products placed on the market in another country and imported into that country would not be covered unless the IP owner had consented to importation through a licence agreement, for example. 
• An international exhaustion regime: This system deems IP rights in products as exhausted wherever in the world the product is placed on the market with the IP owner’s consent.  
• A regional exhaustion regime: This is similar to national exhaustion but regionally based. IP rights in products are exhausted only if they are placed on the market in a particular international region (the EU, for example).  
• A “mixed” exhaustion regime: Here the applicable exhaustion regime depends on the sector or goods involved (eg medicines) or the IP rights concerned (eg patents, trade marks).  

And a further tweak: it is typical that if the condition of goods has been changed or impaired after they were put on the market, exhaustion no longer applies and onward sale will then infringe the relevant IP rights.

The EU regional exhaustion system is based on Article 34 of the Treaty on the Functioning of the European Union (TFEU). Art. 34 seeks to prevent measures having equivalent effect to quantitative restrictions between EU countries. The EU Court has interpreted Art.34 as meaning that IP rights are exhausted within the EU once goods are put on the market, by the owner or with their consent, anywhere in the EU. This principle has been built into EU legislation dealing with trade marks, designs and copyright. Essentially this meant that onward sales across the EU were covered, with some restrictions around goods that had been altered. Note that the regime applies across the European Economic Area, but we refer to the EU for simplicity.

The impact of Brexit

While the UK was a member of the EU (and indeed until the end of the Brexit transition period on 31 December 2020) it was part of the EU regional exhaustion regime.  

Since the expiry of the Brexit transition period, the UK has unilaterally maintained this regional exhaustion regime. As a result, IP rights are still considered exhausted in the UK in respect of goods placed on the market anywhere in the EU as well as the UK.  However, the EU has not reciprocated, so EU IP rights are not exhausted where goods are placed on the UK market, and so the importation of these goods from the UK into the EU could lead to legal action.

A menu of choices for the UK

The unilateral maintenance by the UK of the regional exhaustion regime was only a “stop gap” measure to avoid post-Brexit disruption.  The UK Government has now launched a consultation (link here) as to which exhaustion regime it should ultimately adopt. 

The closing date for responses to the consultation is 31 August 2021. A response form is provided (link here).  Responses can focus on areas of interest and need not address every question.

Different options are under consideration. These are:

1. Continue with the UK’s unilateral application of a regional EU regime (the “UK+” regime)
2. A national regime
3. An international regime
4. A “mixed” regime

These regimes are analysed in some detail in the Impact Assessment (link here) attached to the consultation.  By way of overview, the approach taken in the consultation is set out below.

1. “UK+” regime

Continue with the UK’s unilateral application of a regional EU regime.

The UK government considers this to be compatible with its international obligations under the Trade Related Aspects of Intellectual Property Rights agreement (TRIPS) and the General Agreement on Tariffs and Trade (GATT). 

However, there is no guarantee of reciprocity from the EU, and this is unlikely. We expect this will make option 1 politically unpalatable.

2. National regime

Only UK sales lead to exhaustion of UK IP rights. The UK Government notes that this regime would favour IP owners, giving them greater control over the trade in their goods. The flip side of this is a potential reduction in supply and choice for consumers.

Most importantly, the Government does not consider a national regime to be reconcilable with the Northern Ireland Protocol (intended to allow the free movement of goods between Northern Ireland and the Republic of Ireland).  If so, then it appears that a national exhaustion regime will be “off the table”.  However, we understand that the Government would welcome any robust challenge or alternative views.

3. International regime

Sales in any country lead to exhaustion of UK IP rights. The Government notes the potential benefit to consumers of this model. Consumer choice and supply would be enhanced if goods could be parallel-imported from anywhere in the world.

There appears to be strong political support for option 3. The report of the Taskforce on Innovation, Growth and Regulatory Reform (link here) in the section headed “Proposal 17.4: Liberalise parallel imports laws to reduce prices and increase choice for consumers” strongly advocates for an international regime, while acknowledging that there“may be some limited areas where it is justified to restrict parallel imports for example when drug companies make drugs available in less developed countries at low prices compared with their prices in wealthier countries”.

Despite these indications, we understand that the Government is genuinely open to the other three options and want to be driven by data they receive in the consultation. 

4. Mixed regime

A combination of different models depending on sector or type of IP. The Government notes that any formulation of a mixed regime would need to be in line with the provisions of the Northern Ireland Protocol. Such a model may be complex and present challenges for businesses and consumers to understand.  Evidence would be needed to demonstrate why different treatment would be beneficial to the UK and how it would align with legal obligations. It appears to us that this regime is unlikely to be adopted: we understand that the Government prefers a “simple solution” (ie one regime). 

What does this all mean for life sciences businesses?

The issue of the exhaustion of IP rights is of real importance in the pharmaceutical sector, in particular.  There have been numerous high-profile court judgments dealing with the parallel importation of repackaged and relabelled pharmaceutical products. A change in the UK’s exhaustion regime (particularly to international exhaustion) will have a substantial impact on this industry, with the potential for a sharp increase in cross-border flows of medicines into the UK.

Bearing in mind that an international model appears to be the current front-runner, this consultation offers a genuine opportunity for business to have its say as to which option the UK adopts. Well-supported evidence of likely impacts will, we believe, be considered seriously in shaping the future regime.

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