The UK's departure from the European Union has had an inescapable impact on cross-border trade. One important aspect that has not grabbed headlines but has had 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 (e.g. goods bearing a registered trademark) can only be done with permission of the owner of the IPR. This permission is typically given to a licensed distributor. Parallel importing is where genuine IP-protected goods – not counterfeits – are imported from one territory into another . Problems arise if the territory into which the goods are imported is meant to be the exclusive sales territory of a specific licensor and not the importer.

While the default position should be that any imports and exports need the IPR owner's permission, the EEA adopts 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 genuine goods bearing that trade mark, into the UK from the EEA.

The Brexit impact

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, created 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 within 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 to export these, 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 risks reputation damage to brand owners by undermining their exclusive distribution channel, through which a brand owner would typically control its brand prestige and reputation in the UK.

In 2021-22, the UK government ran a consultation to address this legal mismatch but concluded that there was not adequate grounds to justify changing the approach, despite its impact on brand owners and exclusive distributors. The government noted in its response that "any change to the exhaustion of rights framework for the UK has the potential to affect many business sectors and consumers".

What Businesses Can Do

As the legal position on parallel imports is not expected to change in the medium term, it is vital that any distribution agreement granting exclusivity in the UK is looked at carefully, and suppliers use the tools at their disposal to identify, prevent and deter parallel imports.

For 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 UK 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 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 should ensure that their agreements allow each distributor to sell the supplier's goods in their designated territory, but not into other specific territories where the Supplier has granted exclusivity to another distributor. Such contracts should also build in remedies if these divisions are contravened, for example rights for the Supplier to terminate or remove a distributor's exclusivity. This would allow a Supplier contractual recourse against a distributor who parallel imports goods. Additionally, contracts should control what a distributor can do with excess stock held by it upon termination, or (for industries with seasonal stock changes) at end-of-season.
  • Beyond the contract, suppliers can also use commercial tools to monitor the market, to ascertain whether parallel imports are happening and if so, how many. Investigative tools can indicate price and origin of goods; while identifying products with tell-tale packaging or labelling differences might demonstrate that they originated outside the UK market.
  • Suppliers can also seek to influence the buy-side of parallel imports by incentivising customers to shop through the Supplier's authorised distribution channels instead. This aims to deter customers from buying parallel imports, so reducing demand for such imports. Popular incentives include loyalty schemes for shopping through authorised channels, or offering a customer service that exceeds what is offered by the parallel importers. By creating a customer service culture or rewarding loyalty, a Supplier can enhance its brand far beyond the products that are being parallel imported.

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.