The UK’s future regime for the exhaustion of IP rights

On 31 August 2021, CIPA submitted a response to the UK IPO’s consultation on the UK’s future regime for the exhaustion of IP rights. The response was organised by Alasdair Poore on behalf of the Trade Mark Committee.

Members of CIPA advise businesses on all areas of intellectual property, including patents, registered and unregistered designs, registered trade marks and corresponding rights, confidential information and copyright.

Client businesses come in all flavours and colours. Those seeking intellectual protection and exploiting intellectual property as owners, licensees, distributors and other users.

And also those whose business may be affected by third party intellectual property protection, whether as users of goods or services covered by intellectual property rights, importers or exporters, distributors or resellers, or agents for such businesses such as internet and online advertisers or intermediaries.

Members represent clients who have a range of different interests in the impact of an exhaustion of rights regime.

There are, however, several clear messages:

1. WHICH APPROACH:

a. It is strongly in the interests of intellectual property rights holders to have a national exhaustion regime, in preference to UK+, with an international exhaustion regime significantly behind both:

• A national regime allows intellectual property rights holders and their licensees or distributors to tailor their approach to development of and servicing a market for a product or service to specific jurisdictions and the consumers or businesses within those jurisdictions. They are in the best position to determine an optimum business model for their exploitation of rights.
• Introducing competition and “choice” from other markets imposes arbitrary constraints on their approach which are not necessarily beneficial to the consumer, and are likely to create market inefficiencies. The objective of intellectual property rights is to incentivise innovation (technical or marketing) by a reward derived from a degree of exclusivity.
• Consumers in a particular jurisdiction are in a position to determine whether they wish to pay an acceptable price for the benefits conferred by the innovations – for example in relation to brands, the investment in product or service design or innovation, or the consumer perception of value from a brand; or in relation to technical innovation, the benefits conferred by the innovation.
• The position is clearly evidenced in relation to price and the difference between developing economies or those economies where consumers are less well off than in the UK. There, an efficient market may not work at the same price as would sustain an efficient market in a developed economy or where the average individual pay or business income is lower.
• There are clear examples in relation to availability of pharmaceuticals. If exhaustion, for example on an international level, is permitted, it may destroy the incentive for the innovator to supply pharmaceuticals to the low price economy at all, if they can then be imported into the higher price economy.
• Similarly, in relation to the pricing of telecoms and IT innovations, the same issues of price differentials driven by local market circumstances can be seen (e.g. Unwired Planet International Ltd v Huawei Technologies Co Ltd [2017] EWHC 2988 (Pat) – licensing rates in China 50% of rest of world). Differentials in achievable pricing may simply result in loss of supply or inefficient service levels (for example where the local distribution network cannot be maintained.
• If there are market inefficiencies that lead to the potential for super profits in one jurisdiction relative to another, IP exhaustion is a poor (and economically inefficient) and idiosyncratic method of overcoming the market inefficiencies. That is particularly apparent in relation to economies that have wide differences.
• Where economies are closer in character there may be efficiencies to be obtained by increasing the scale of distribution which may to some extent offset the other market inefficiencies – and it is clear that the EU single market has historically created some significant benefits in the scale and ease of distribution. However, that is dependent on market convergence within a single market, the reverse of the position since withdrawal. Even in those circumstances, one can see that the idiosyncratic impact needs to be protected against – see for example the pharmaceutical cases involving Spain (on accession to the EU) and Poland (local pricing controls).
• In addition in a diverging market or one in which the UK wishes to maintain the potential for divergence other factors may play a significant part. For example, similar issues may arise in other areas, such as food, where local incentives subsidise farming or farmland, which might particularly have an impact in relation to the EU and UK+.
• It would be preferable and fairer to IP owners and consumers to use other mechanisms to combat market inefficiencies.
• In relation to UK+ there is one obvious divergence, namely the inherent size of the market. Asymmetric exhaustion means that distributors in the EU will have an inbuilt advantage or market size in relation to their pricing. That means that goods and services may flow more readily from the EU to UK with price advantage; the reverse flow will not be possible so that sales in the UK will not be supported by the potential market in the EU, leading to an incentive for distribution to be set up by IP rights holders in the EU rather than in the UK; and a disincentive to be a distributor in the UK compared to the EU, when addressing a smaller market at potentially higher prices. While this may be seen as an advantage to the consumer, the natural impact is that any price deficiency is reflected in some other aspect of the supply, such as service levels. Alternatively (or in addition), IP rights holders will be advised on means for created separate markets in the absence of reliance of intellectual property rights. This will divert investment from innovation to creating “artificial” barriers to cross-border trade.
• Accordingly, asymmetric exhaustion is seen as having significant potential disadvantages for the consumer as well as the IP rights holder (because it is a smaller market)leaving aside other factors.
• A further disadvantage for consumers and businesses supplying consumers of UK+ style exhaustion without a proper single market may be that online supplies may be made directly into the UK, while leaving consumers/businesses with a requirement to enforce in the EU – with IP owners having to rely on interpretation by the CJEU of IP rights infringement (e.g. from trade mark use or copyright infringement).
• CIPA therefore strongly supports a national exhaustion approach if this is possible, over UK+, for IP owners and believes that for consumers and distributors, other means of overcoming market inefficiencies should be considered before any encroaching on the scope of enforcement of IP rights.

2. IMPLEMENTING CHANGE:

a. No final decision should be made as to the exhaustion regime at present, as the impact of UK+ is still not clearly understood, and there may be reasons (including the European Union’s view on the provisions in the NI Protocol which may affect the most appropriate choice for the future. We believe that the position is strongly in favour of saying that Article 7.1 of the NI Protocol does not preclude national exhaustion. The reasoning has been set out well by Guy Tritton and Katharine Stevens: simply, it is that Article 7.1 NI Protocol does not apply to intellectual property and was not intended to; and even if it is considered that it should apply, the reservation in Article 36 in relation to protection of intellectual property should apply because the UK is not in a single market with the EU (any longer) and the rights (eg trade marks) in question are UK rights to a harmonised EU right.

b. CIPA is in favour of permitting a reasonable period of time for business to adjust to any change in the now prevailing approach of unilateral exhaustion (UK+).

Different regimes may well mean that for any business, a different business model is appropriate, and businesses should be given a reasonable period of time to adapt their business models. Examples are reorganising their distribution arrangements or licensing models.

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