The UK's departure from the European Union on 31 January 2020 was followed by the long and well-documented negotiation to strike an acceptable trade deal. It has been clear from news bulletins this year that the agreed deal, implemented on 1 January 2021, has had an inescapable impact on cross-border trade. One important aspect that has not made headlines but has major implications for domestic owners and exclusive licensees of intellectual property rights (IPR) such as trade marks in the UK, lies in the changes to the law relating to parallel imports and exhaustion of rights.
Parallel imports and exhaustion of rights
Normally, any trade, including import and export, of branded goods with registered trademarks can only be done with the permission of the owner of the IPR, for example through a licensed distributor. Parallel importing is where genuine IP-protected goods – not counterfeits – are imported from one territory into another licensed territory. While the default position should be that such imports and exports need the IPR owner's permission, the EEA has adopted a rule known as exhaustion of rights. This states that where the branded goods are sold in one EEA country with the IPR owner's permission, those goods can lawfully be sold or imported/exported into any other EEA country without seeking any further permission. In other words once placed on the market in the EEA the right to prevent the further onward sale of those goods are exhausted. This means that ownership of a registered trade mark in the UK cannot by itself stop the sale of those goods into the UK from another member of the EEA.
Prior to Brexit, IPR-protected goods that were sold legally in the UK could (subject to any contractual limits set by the IPR owner) be freely exported to any other EEA country under the exhaustion of rights rules, and vice versa.
The legal position following Brexit however, creates a more uneven legal position.
- Branded goods sold in the UK can no longer be freely exported to the EEA without permission, as the IPRs are no longer considered exhausted in the EEA by being placed on the UK market. UK businesses looking to export branded goods into the EEA now need to seek the permission of the IPR owner(s) in the EEA in order to export there, with the risk that the IPR owner may refuse that permission and prevent the export.
- Owners of IPR in the UK cannot, however wield this same power over branded goods imported into the UK. This is because IPR in branded goods sold in another EEA country by, or with the consent of the IPR owner in that country are still deemed to be exhausted in the UK, and so can still be freely imported for sale in the UK market even without the UK IPR owner's permission. This poses particular issues for UK exclusive distributors of branded goods because goods sold under the brand elsewhere in the EEA can still make their way legally to the UK market via import, undermining the distributor's exclusivity. It similarly poses reputation damage to brand owners and supplier by undermining their exclusive distribution channel within which a brand owner or supplier would typically place its brand prestige and reputation.
What Businesses Can Do
To address the difficulties posed by parallel imports, it is vital that any distribution agreement granting exclusivity in the UK is looked at carefully.
For businesses being appointed as UK exclusive distributors
Exclusive distributors should always request the right to pursue any claims for third party IPR infringement. This is because, although importing is allowed without the IPR owner's consent, the use of a UK-registered trade mark in advertising without consent of that trade mark's owner is still unlawful. The UK Supreme Court has confirmed that this applies to parallel import sales as well as to sale of counterfeit goods. An exclusive UK distributor with a right to bring claims for trade mark infringements on behalf of the IPR owner can use this right to demand a stop to any advertising of branded goods in the UK that might lead to a parallel import. This can help to reinforce their exclusivity.
For suppliers appointing exclusive distributors
Suppliers appointing a series of separate exclusive distributors across different countries will want make sure that their agreements allow each distributor to sell the supplier's good in their designated territory, but not into other specific territories where the Supplier has granted exclusivity to another distributor. Suppliers should ensure that the contracts build in remedies, for example rights for the Supplier to terminate or remove the distributor's exclusivity rights if the distributor does make active sales (i.e. actively contacts or markets to customers) into those other 'no-go' territories. Then, if the distributor does parallel import goods into those territories, the Supplier has recourse against them under the contract.
A formal consultation is expected to be undertaken by the government this year which may see a levelling up of the current uneven position, but until then IPR owners and exclusive distributors should keep a close eye on whether and how parallel imports of their branded goods are entering the UK and, where necessary, enforce their IPR to stop the marketing of such imports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.