Exhaustion of IP rights: Northern Ireland issues will shape UK decisions

The UK Intellectual Property Office (IPO) is expected to publish the public feedback it received in its consultation on the future exhaustion of IP rights regime to be adopted in the UK soon. However, it is unlikely to take a firm decision on the new policy until the future of the Northern Ireland Protocol is settled.

Exhaustion of rights pre- and post-Brexit

The principle of the exhaustion of rights essentially provides that once goods have been placed on the market by a rightsholder or with their consent, the rightsholder cannot then prevent the onward sale of those goods by asserting its IP rights, which extend to preventing the first sale into a new territory. As a result, where the IP rights relating to goods have been exhausted, there will be the opportunity for others to engage in the parallel trade of those goods.

The exhaustion of rights is not a one-size-fits-all principle applying consistently across all IP rights. Instead, it has been introduced into UK law predominantly through EU legislation and case law, and at different points in time in respect of each IP right. 

Pre-Brexit, the UK was part of the EU which operates a regional exhaustion of rights regime. Once goods have been put on the market anywhere in the single market, such goods can flow freely around the European Economic Area (EEA) and rightsholders cannot assert their IP rights to prevent this. 

However, on the whole, IP rights can be asserted to prevent goods from outside of the EEA entering the European market without the rightsholder’s consent. This is because, for non-EEA goods, the IP rights are not considered ‘exhausted’ when the goods are first put on the market. The effect of this is commonly termed ‘fortress Europe’ because goods can move around within the EEA market but not in respect of those goods put on the market by rightsholders in non-EEA markets.

We say ‘on the whole’ because for trade marks, copyright and designs, there is – in all important respects – harmonised legislation across the EU, and Court of Justice of the EU (CJEU) case law interpreting it, which expressly provides for exhaustion within but not outside the EEA. However, patent law is not harmonised across the EU, and while the CJEU has previously determined that the exhaustion of patent rights applies within the EU, there has been no determination at EU-level on the position of patent rights exhaustion with regard to non-EEA goods. Therefore, the preferred view is that, applying historic UK case law, in the UK at least, patent rights cannot be asserted in respect of goods put on the market outside the EEA.

Following the end of the Brexit implementation period (IP completion day) on 31 December 2020, the UK ceased to be part of the EEA and therefore the rights relating to goods put on the UK market are not considered ‘exhausted’ from the perspective of EU countries. Rightsholders there can prevent the flow of goods they put on the market in the UK into any EEA territory.

However, rather than immediately adopting its own new exhaustion of rights regime, the UK decided to maintain the status quo. This means that, although the UK is no longer part of the EEA, the rights in goods put on the market in the EEA are considered exhausted in the UK. This ‘UK + EEA regional’ exhaustion regime currently in place means UK rightsholders cannot prevent the flow of goods from the EEA into the UK.

What about goods from outside the EEA post-Brexit?

The case law of the CJEU which determined that, save for patents, international exhaustion of IP rights cannot apply in respect of goods put on the market outside of the EEA still applies in the UK as retained EU law, though it is open to the Court of Appeal in England and Wales and UK Supreme Court to diverge from that case law. The cases ruled on by the CJEU considered the interpretation of EU law. Now, though, with the UK no longer part of the single market and the Treaty on the Functioning of the EU (TFEU) not operating in Great Britain at least, there may be scope to challenge this. The likelihood is, however, that in respect of goods put on the market both outside the EEA and within, the position on exhaustion of rights in the UK will remain as is until the UK government direct a change in approach.

What about Northern Ireland?

As with the rest of the UK, Northern Ireland adopts the same UK + EEA regional exhaustion of rights regime. Goods can flow freely from Ireland, or anywhere else in the EEA, into Northern Ireland without rightsholders being able to enforce their rights. The Northern Ireland Protocol also provides that certain EU legislation must be adopted in Northern Ireland to enable goods to flow around the island of Ireland; both in and out of Northern Ireland. However, the slight wrinkle is that, as part of the EEA, Ireland cannot adopt a different exhaustion of rights regime to the other territories. Therefore, notwithstanding the Protocol, rightsholders in Ireland can still enforce their IP rights to stop their goods put on the market in Northern Ireland flowing into that country. 

What will the UK IPO consultation determine?

The decision by the UK government to adopt an asymmetrical regime, whereby EEA rightsholders may prevent the import of UK goods but UK rightsholders cannot do the same in respect of goods from the EEA, has provoked discontent and disbelief in many quarters. However, the current UK exhaustion of rights regime was considered a temporary solution until, following a consultation, a more permanent regime is fixed. 

The UK IPO ran a consultation over the summer, concluding on 31 August 2021, asking respondents whether the UK should keep the current exhaustion of rights regime, or change it.

According to the consultation, four possible options are under consideration. The government has set out how it considers how each option might impact businesses in an impact assessment published alongside the consultation document.

Option 1: Maintain the status quo

This is the option to continue to ‘do nothing’, which was the approach adopted on IP completion day so that we now have the unilateral application of an EEA regional exhaustion regime. However, while this is in many respects the easy option, as the EU is unlikely to reciprocate and bring the UK back into the fold, this approach is likely to become increasingly politically objectionable.

Option 2: National exhaustion

A national exhaustion regime would mean that only goods put on the market in the UK can flow around the UK. Goods put on the market in any other country, European or otherwise, can be stopped from entering the UK market by relying upon UK IP rights.

This regime is likely to be most appealing to brand owners as it would provide for further restrictions of trade across UK borders. It would enable UK prices to be set without fear of undercutting from products imported from lower priced EU markets. It would also provide greater protection against consumer confusion that may occur if products manufactured to different standards or to different specifications, to meet the requirements of the local market or origin, are imported into the UK.

Option 3: International exhaustion

If an international exhaustion regime were to apply, goods put on the market in any country, anywhere in the world, can be parallel imported into the UK and IP rights cannot be asserted simply to prevent the first sale of that product in the UK.

International exhaustion was, in effect, the regime that applied in the UK prior to the emergence of the concept of exhaustion of rights and fortress Europe under EU law in the 1990s.

While IP rightsholders cannot rely upon their rights to simply prevent the import and first marketing of their products in the UK, there may still be circumstances in which it is possible to raise objections to the sale. For example, where the imported goods have been modified or are different to the equivalent UK product. However, this requires more extensive monitoring by rightsholders and the appropriate notices to be provided by parallel traders.

The notification process and review of sample imported products has been a feature in the pharmaceutical industry for years, but manufacturers in other industries, such as electronic goods or others that require UKCA certifications, would likely need to improve their procedures and enforcement efforts if they wished to ensure their rights were protected under an international exhaustion regime. 

Option 4: Mixed regime

The final option floated by the UK IPO is that of a mixed regime whereby certain IP rights or certain types of goods may have a different exhaustion regime applied to them.

An example of a mixed regime is that adopted in Switzerland, which is not part of the EU or EEA but is part of the European single market. Switzerland has adopted a unilateral EEA regional exhaustion regime with the exception of fixed price goods, primarily medicines, for which national exhaustion applies.

The reality is that, for the UK, no single regime will be best for all product categories or suit all stakeholders so a mixed regime may help to address particular difficulties with some goods or rights, and medicines is one of the stand-out industries from which rightsholders will likely be pushing hard for different treatment if an international regime is pursued.     

Why does the Northern Ireland Protocol impact the decision?

While presenting four options in the consultation, the UK IPO in the same breath indicated that the national exhaustion regime would not be an option because it would conflict with the Northern Ireland Protocol, and a mixed regime would be challenging for the same reason. 

The Northern Ireland Protocol was agreed to avoid a hard border on the island of Ireland following Brexit. It provides that, to enable the movement of goods from Ireland to Northern Ireland without such a border, certain EU laws must apply in Northern Ireland. It also states that ‘quantitative restrictions on exports and imports shall be prohibited’ between the EU and Northern Ireland. The UK IPO has interpreted the latter requirement to mean that exhaustion of rights between the EU and the UK, or at least Northern Ireland, must apply. If not, rightsholders enforcing their IP rights in Northern Ireland in respect of goods coming over the border, would be a prohibited ‘restriction on imports’. 

However, this interpretation is the subject of debate and no doubt any lawyers who have provided their rebuttal on this point as part of the consultation will also point to the contrasting view of the European Commission that the Protocol does not mandate the exhaustion of rights. As a result of the EU’s position, rightsholders in Ireland can enforce their IP rights in respect of goods arriving from Northern Ireland. The UK IPO’s interpretation of the Northern Ireland Protocol is another position that may be politically difficult to maintain and this, or the Commission’s position, may well be subject to challenge in the future before the EU or Northern Irish courts.

The Protocol is unlikely to remain in its current form, however.

Keeping open the Irish border has resulted in the creation of an Irish sea border between Ireland and Great Britain resulting in additional challenges for the supply of goods and trade between Great Britain and Northern Ireland. Of particular concern has been the supply of medicines to Northern Ireland. This, among other difficulties, has led to discussions between the UK and the EU over changes to customs procedures for goods heading into Northern Ireland, possible changes to the regulation of medicines in the region and, if resolution of these issues cannot be reached, taking safeguarding measures which could threaten the entire operation of the Protocol.

Each side has made proposals, which includes a suggestion from the UK to carve out medicines from the Protocol, but significant differences need to be overcome before an agreement will be reached.

When will a decision from the UK government on exhaustion be made?

A decision from the UK government on the future exhaustion of rights regime is not likely to be reached anytime soon. The feedback received from respondents to the consultation is expected to be published imminently, but a final decision over the future regime to be adopted in the UK is unlikely to be made before we are well into 2022, if not beyond.

The UK government first has to grapple with the challenges posed by the Northern Ireland Protocol. With the UK IPO’s view being that various exhaustion regimes are inconsistent with the Protocol, they are unlikely to reach a final decision – and have been encouraged at least by certain quarters of the legal community not to do so – before the future of the Protocol has been settled.