The current UK position in relation to the exhaustion of intellectual property (IP) rights – an asymmetric situation which enables parallel imports to the UK from the EEA but not parallel exports from the UK to the EEA – is set to continue indefinitely. On 18 January 2022, the UK Government announced its response to the consultation process launched on 7 June 2021. It has concluded that there is not enough data available on the economic impact of exhaustion, so – for now – it is not in a position to take a formal decision on any changes to the existing regime. No timetable for a final decision has been set and no further work on the issue is planned.

This outcome has perhaps been on the cards since the Government launched its consultation on exhaustion and parallel trade post-Brexit last year (the Consultation). The Consultation made no formal recommendation, but set out four options:

• maintaining the current situation (asymmetric EEA-wide exhaustion);
• international (global) exhaustion;
• national (UK-only) exhaustion; or
• a mixed regime (different solutions for different industries or categories of IP right).

Since it noted significant legal and/or commercial concerns with each of the three alternatives to maintaining the current asymmetric position (in particular national exhaustion), inaction always seemed likely. However, concerns had been raised by a separate report published by the Taskforce on Innovation Growth and Regulatory Reform (the Task Force), a body established by No. 10, which recommended that the Government use the opportunity created by Brexit to “explore” international exhaustion.

How did we get here?

Since the Brexit transition period ended, on 1 January 2021, UK law on the exhaustion of IP rights has been governed by the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 (the 2019 Regulations). These provide that IP rights in goods legitimately placed on the market in the UK or anywhere else in the EEA are considered exhausted so the goods can lawfully be imported into the UK from an IP law perspective. However, the position is not reciprocated. Under EEA rules, IP rights in goods placed on the market in the UK are not exhausted and the goods cannot be freely exported to the EEA.

The 2019 Regulations were intended as an interim fix. The purpose of the Consultation was to enable to Government to determine the permanent position. However, it noted that “the government has little data on the value and scale of parallel imports to the UK” and referred to the conclusions of a 2018 study by Ernst & Young that business awareness and understanding of the exhaustion issue is limited.

The four options in the Consultation

1. Maintaining the current position

The option of maintaining the status quo, which is summarised in the table below, was identified by the consultation as “the least costly for businesses reliant on EEA for supply of goods and raw materials, whilst continuing to provide the same level of choice for UK consumers”. It also noted the compatibility of this option with the UK’s international obligations, including the Northern Ireland Protocol.

Table 1: exhaustion – current position

2. International exhaustion

Adopting an international regime, would mean that IP rights in the UK would be exhausted once goods were been put on the market anywhere in the world by or with the consent of the right holder. This position is summarised in the table below.

Table 2: international exhaustion

The Consultation noted both advantages and concerns with international exhaustion. It could increase consumer choice and reduce prices. However, it could also create consumer confusion if goods intended for foreign markets – and therefore raising consumer safety issues or embodying unsuitable regulatory standards – enter the UK. International exhaustion could also affect the availability of goods such as books or pharmaceuticals in developing countries (if low price goods intended for use in such countries were diverted to the UK for resale at higher prices – also potentially undercutting prevailing UK prices).

3. National exhaustion

A national exhaustion regime would, as set out below, mean that IP rights were exhausted only if they had previously been put on the market in the UK (again by or with the consent of the right holder).

Table 3: national exhaustion

The Consultation effectively excluded national exhaustion as an option for two reasons. First, it could reduce supply and choice for consumers as parallel imports would not be allowed. Second, and more importantly, it was considered incompatible with the Northern Ireland Protocol, which requires that parallel imports into Northern Ireland from the Republic of Ireland and other EU Member States be permitted without restriction.

4. A mixed regime

Finally, the Consultation discussed the possibility of a “mixed regime” in which different industry sectors, types of goods, or IP rights would be subject to different exhaustion regimes. Switzerland currently operates such a regime with national exhaustion applicable to medicines and EEA-wide or international exhaustion for most other goods. Australia has also experimented with limited parallel import restrictions on books.

The Consultation notes that any mixed regime would be complex, difficult for businesses and consumers to understand, and could raise issues under the Northern Ireland Protocol.

Responses to the Consultation

A total of 150 responses were submitted to the Consultation, most from the pharmaceutical and creative industries. A clear divide emerged between, on the one hand, respondents engaged in parallel trade and, on the other, rights holders. The former emphasising the benefits of parallel trade, with the later expressing greater scepticism. A particular focus was the savings to the National Health Service (NHS) from the parallel import of medicines. The scale of such savings was disputed, and ultimately the Government concluded that accurate figures were difficult to calculate. Indeed, it noted that, since parallel traded goods often do not move via standard distribution channels, quantities and values of such goods are difficult to track.

In terms of the four options set out in the Consultation, the majority of respondents favoured maintaining the current asymmetric exhaustion regime. International exhaustion was opposed by more than half of respondents, with only a small number favouring it. Similarly, there was little support for a mixed regime. About a third of respondents argued for national exhaustion, however a large proportion of respondents accepted the Government’s legal analysis that national exhaustion would be incompatible with the Northern Ireland Protocol.

Practically, businesses responding to the Consultation emphasised the need for a lengthy transition period – of at least 5 years – in the event that any changes were introduced.

Comment

Formally, the Government’s response to the Consultation is not the final word on exhaustion. However, any change to the existing position under the 2019 Regulations now seems extremely unlikely in the short to medium term. Responses to the Consultation favoured the existing regime, showed little support for the alternatives (indeed outright opposition to international exhaustion) and confirmed that economic data that might support any change is very difficult to come by. Perhaps most importantly, business made it clear that a lengthy transition period would be required if changes were introduced. In the circumstances, the current regime for IP rights exhaustion in the UK seems likely to remain in place for quite some time.