Important potential changes for businesses importing goods from abroad
The Government has recently undertaken a consultation focusing on the system of importing and exporting IP protected goods by the secondary market into and from the UK. The movement of goods on the secondary market is usually on a wholesale or resale basis and forms an integral part of many supply chains. At present, such goods (called ‘parallel goods’) can move freely from the EEA into the UK but may not be permitted in the other direction. Now that the UK has left the EU, the Government has consulted businesses on the future of the UK’s parallel trading system. It is seeking to understand what the most appropriate regime would be and how any change to the current system should be implemented.
Which businesses may be affected?
Businesses affected by parallel trade include consumer packaged goods, with high inventory turnover, typically sold quickly at relatively low cost, such as household goods, dry goods, packaged foods and pharmaceuticals.
Why is trade in ‘parallel goods’ referred to in terms of the “exhaustion of intellectual property rights”?
IP rights protect intellectual creations. IP rights can be infringed if a party carries out certain actions without the IP rights holder’s permission, including selling or importing a product protected by IP rights. This means that IP owners are able to control the distribution of goods protected by IP. However, the right to take legal action is constrained by a system known as the “exhaustion of IP rights”. Once a product has been placed on the market in a specific territory by or with the consent of the IP rights owner, the IP rights that protect the product are considered to be “exhausted”.
This means that IP rights cannot be used to stop the further distribution or resale of the goods. The system means that distributors and retailers are able to freely move goods (including parts that make up products) around a specified territory. This supports the parallel trade of the secondary sale of legitimate goods. Parallel trade is about the resale and distribution of genuine goods which are lawfully made by the manufacturer, lawfully placed on a market and then moved across territorial borders.
What are ‘grey goods’?
There is another type of trade known as “grey goods”. Grey goods are commonly understood to be goods that have been made legitimately but which are not put on the market legitimately. For example, grey goods may be made as a result of manufacturing overruns that do not pass quality control and so are not intended for the market. They may be put on the market by a person other than the rights holder without the rights holder’s permission.
The position before and after Brexit
Before Brexit, the EU was a single market. Putting goods on the market within the EEA exhausted trade mark rights, design rights and copyright within the whole of the EEA, including the UK, so that the IP owner could not prevent those goods from being imported or resold in other countries in the EEA. Retailers could import and export those particular goods freely within the EEA.
A rights owner could only object to goods coming into a country in the EEA which had been first placed on sale outside of the EEA. For example, a rights owner could challenge imports from the Far East, India, Singapore or China, typically manufactured more cheaply and could be sold at a lower price in the EEA than goods first placed on the market in the EEA.
This system often suited rights holders because they could have different pricing and marketing strategies in different territories and ensure (for example) that only products meeting the strict EEA quality standards were authorised for distribution in the EEA.
After Brexit, goods placed on the market in the UK, which are subject to EU intellectual property rights, may no longer be considered exhausted in the EEA, so they cannot be safely exported to countries in the EEA as the rights owner may object. However, UK intellectual property rights will be exhausted whether they are placed first on the market in the UK or in the EEA, meaning if goods are placed on the market in the EEA first, they can be freely imported into the UK.
This means that businesses exporting IP protected goods from the UK to the EEA might need the right holder’s consent. The current system means, however, that parallel inputs into the UK from the EEA are unaffected. The rights between the UK and the EEA are therefore asymmetrical.
The Government’s consultation
The Government has sought views from businesses as to what the UK’s future exhaustion of the IP rights regime should be. There are four options being considered by the Government:
- Do nothing and keep the existing regime. This is known as ‘regional exhaustion’, where the region is the EEA.
- Adopt a ‘national’ regime – this would mean that IP rights in goods are only exhausted in the UK when they are put on the market in the UK. Resellers would not be able to import goods from outside the UK. However, the Government does not consider this national regime to be reconcilable with the Northern Ireland protocol, which preserves the position that parallel goods may move from the Republic of Ireland and other EU member states into Northern Ireland without restriction. This is therefore not in fact an option for the Government.
- Adopt an ‘international’ regime – this would mean that IP rights in goods would be considered exhausted in the UK once they have been put on the market in any other country around the world. Goods could be imported into the UK from any country in the world without the rights holder’s permission. However, this would not be reciprocal in that other countries could stop exports from the UK because those countries may not have a similar regime.
- A mixed regime – this would mean that a specific product, sector or IP right would be subject to one regime and all other products, sectors and IP rights would be subject to a different regime. For the UK, the regime will still need to be in line with the Northern Ireland protocol. Such a regime could become very complex, not least because goods attract different intellectual property rights.
Most countries who are the UK’s main trading partners have an international regime for IP rights, with some reservations for certain goods and IP rights.
Which systems are best for who?
IP owners can benefit from national exhaustion as this increases their control over the distribution of products. It can allow for increased distribution because the right owners can segment markets without creating the risk of the rights owner’s national distribution networks being undercut by resales from such countries. A national system also allows IP owners to produce goods specific to the national country’s needs. However, this can create issues such as significantly reduced choice for consumers, as well as the risk of supply shortages if products cannot be regularly distributed between territories based on demand. Prices may increase for goods because of lack of competition.
International exhaustion tends to be a more consumer friendly solution because it increases competition amongst the IP owner and lawful importers, driving prices down. However, it can also result in harm to the consumers through the sale of lower quality products in countries with higher or different quality standards. Products which do not meet a specific territory’s requirements may flood the market. The international regime may mean more loss of control to rights holders and IP rights may be considered weaker, which may lead to less investment in innovation.
Assessing the impact of change on your business
It would be sensible for all businesses that engage in parallel trade, or are part of a supply chain where parallel trade takes place, to undertake an assessment as to how they may be impacted by the Government’s decision.
Many businesses have not been aware of the consultation taking place, or may not have undertaken an assessment of the cost and benefits of the current regime, in terms of choice and availability of suppliers, prices paid and regulatory standards. Businesses should be ready to make an assessment of their models if the Government changes from the current unilateral regional regime to a model which either allows parallel imports from anywhere in the world, or alternatively prohibits parallel imports into the UK unless the rights holder’s permission is obtained.
For example, if the exhaustion regime was to change in a particular country, licensing could be affected. Should international exhaustion be introduced, the licensee may not be willing to pay as much for the licence, as the goods can be parallel imported from other countries and sold more cheaply. Should national exhaustion be introduced, a licence in that country could become more valuable, because there would be no parallel importation of the goods. As such, the rights owner would be able to charge the licence holder more for the licence.
Some products may require complex supply chains which rely on components and spare parts sourced from the secondary market, or which take goods and transform them into different goods. Depending on the exhaustion regime implemented, there may be impact on the manufacturing of such products. By way of example, within the fashion sector goods, such as fabric with patterns protected by copyright and garments protected by design rights, are moved across borders in order to manufacture a completed product. If a national regime is chosen, it would be difficult to move these goods across borders, because various rights holder’s permission would be needed. If an international regime is chosen, movement of these types of goods would be easier.
It is critical for businesses to give some thought to the potential impact of the outcome of the Government’s consultation before any change is introduced. If any change is made to the IP exhaustion regime, because of the consultation, a common view is that there should be at least an 18 months’ transition period in order to allow UK businesses time to identify and implement any necessary operational changes.
If you’d like to discuss any of these issues or have questions about the article, please contact Melanie McGuirk in the IP team.
Melanie McGuirk
Partner, Dispute Resolution
T: +44 (0) 161 393 9040 M: +44 (0) 7790 882567
Melanie specialises in the resolution of disputes relating to intellectual property, reputation management and trade libel. Her focus is on the enforcement and protection of intellectual property and reputations, brand strategy and management, with particular experience in the retail, fashion and manufacturing industries. She is a named leader in the field of IP in the North West by both Chambers & Partners and the Legal 500.
How to win friends (followers) and influence people
The fairly recent, but meteoric, rise in influencer marketing promotions has attracted the attention of the UK’s independent advertising regulator, the ASA.
Cross border trade – can website sales targeting one region infringe rights in another?
This case was a trade mark infringement claim brought in the UK court against companies within the Amazon group.
Our quarterly retail update is designed to bring you the latest news and legal developments relevant to the retail sector. If there are any areas you would like more information on or if you have any questions or feedback, please do not hesitate to let us know via our feedback form or get in touch with any member of our team.
Copyright in this publication is owned by Pannone Corporate LLP and all rights in such copyright are reserved. Pannone Corporate LLP is a limited liability partnership registered in England and Wales with number OC388393. Authorised and Regulated by the Solicitors Regulation Authority. A list of members is available for inspection at the registered office, 378-380 Deansgate, Manchester M3 4LY. We use the terms “partner” to refer to a member of the LLP.