1) Definition of exhaustion of rights

This legal concept or doctrine applying to all fields of industrial property means that after a product covered by an intellectual property right (e.g., a patent, trademark, copyright) has been sold by the intellectual property (IP) right holder or by others with the consent of the owner, the IP right (IPR) is said to be exhausted. Exhaustion means that the holder of an IP right may no longer invoke that right to prevent further commercialization of the product after if a product that embodies that IP right has been placed on the market lawfully. This limitation of the protection provided by IPRs is also called the first sale principle, as the rights exhaust at the very first sale of the product. It is important to stress that the IPR only expires in relation to a particular product.

Exhaustion is, of course, only applicable if the product was first placed on the market lawfully, i.e., with the consent of IPR holder. The doctrine of exhaustion does not apply, for example, to the distribution of counterfeit products.

As a practical example, the Swoosh logo on the Nike shoe is protected by trademarks, so Nike shoes may only be marketed by Nike as the trademark owner or with its permission. For example, if Nike shoes are lawfully sold in Hungary, Nike will not be able to control the shoes’ further commercialization; the trademark protection for that product is exhausted, so the purchaser is free to resell it without the permission of Nike.

From a territorial point of view, there are three basic types of exhaustion: national exhaustion, regional exhaustion, and international exhaustion. Each state can choose which regime of exhaustion it applies.

  • National exhaustion: in countries where national exhaustion is applied, the IPR holder is not entitled to control the commercial exploitation of the product after the first domestic placing on the market, as long as the product remains in the country. The IPR is therefore only exhausted in that country.
  • Regional exhaustion: regional exhaustion means that with the first placing on the market in any country in the region, exhaustion occurs not only in the domestic market but also in the whole region, like the EU.
  • International exhaustion: the application of international exhaustion means that the first placing on the market of the product in any country results in worldwide exhaustion.

 

2) Which exhaustion regime does the EU, and thus Hungary, apply?

As a result of the principle of free movement of goods, regional exhaustion of rights has been applied in the territory of the European Union, so a product lawfully marketed in any Member State is subject to exhaustion of rights throughout the EU, i.e., the IP right holder cannot restrict the marketing of the product on the secondary market in the territory of the European Union.

Various EU regulations rule the concept of exhaustion of rights in relation to IPRs, which are directly applicable in the Member States. For example, the protection of the European Union trademark is regulated by the EU Trade Mark Regulation [i.e..Regulation (EU) 2017/1001 of the European Parliament and of the Council of 14 June 2017 on the European Union trade mark]. The concept of exhaustion of rights under this Regulation is as follows

“An EU trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent.”

 

3) The impact of exhaustion on trade: parallel imports

Parallel importis a concept closely related to the exhaustion of rights. Parallel trade refers to international trade (export, import) of products protected by IPRs. Parallel import is a commercial situation where products placed on the market in one country with the authorisation of the IPR holder are imported into the territory of another country without the explicit authorisation of the IPR holder. Whether parallel import infringes the holder’s IPR will be determined by the enforcement regime applied by that state.

If a country applies the doctrine of national exhaustion, the first marketing of the product abroad does not exhaust the IPRs so that the right holder can prevent the import of the same products into the domestic market. In this case, we are talking about the prohibition of parallel imports. The advantage of this regime is that it allows right holders to pursue different price strategies or price discrimination in the different markets they target since the product cannot be imported into the territory of another state without their authorisation.

A product placed on the market in any Member State of the EU that applies regional exhaustion may be freely imported into the territory of another Member State without the authorisation of the IPR holder since the product in question is subject to exhaustion throughout the European Union. In this case, parallel imports are allowed within the territory of the European Union. Control by the holder only covers exports to and imports from countries outside the region.

In the case of international exhaustion, after the product has been placed on the market for the first time in any country, it may be freely imported into any other country without the authorisation of the right holder. It is the most favorable legal regime for parallel imports. The advantage of adopting parallel importation and international exhaustion is that it can lead to increased international competition and more effective satisfaction of consumer needs.

 

4) Current legal situation after Brexit

Since 1 February 2020, the United Kingdom (UK) has withdrawn from the European Union and has become a “third country”. From 1 January 2021, EU law, i.e., the EU rules on exhaustion of IPRs, will not apply to the UK and in the UK.

The consequence of this is that from 1 January 2021, an IPR is not exhausted in the European Union if a good protected by that right has been lawfully put on the UK market.

It means that the right holder, or a person with his or her consent, may inter alia oppose to the import by third parties of such good into the European Union or to the putting, resale, or otherwise commercial exploitation of such good into the European Union market in so far as such import or commercial exploitation would constitute an infringement of the IPR concerned.

The UK is currently working on which regime of exhaustion it will apply to imports into the UK of goods lawfully placed on the market in the European Union. Under the current regime, goods lawfully marketed in the European Union are subject to exhaustion IPRs and can therefore be freely imported into the UK without the right holder’s authorisation. In this respect, the UK’s exhaustion regime is, therefore, the same as it was before Brexit.

 

Let’s look at what this means in practice through an example:

  • Imports into the UK from the EU

If Nike shoes (covered by a trademark) are first placed on the market in Germany, under the current UK rules, the trademark protection is deemed to be exhausted by the time it is placed on the market in Germany. As a result, the shoes are free to be imported into the UK.

  • UK exports to the EU

If the Nike shoes were first placed on the market in the UK and the trader wishes to export them to the EU, he will need the consent of the trademark proprietor, as the shoes placed on the market in the UK are not subject to exhaustion of rights in the EU.

 

The consequence of this regulatory asymmetry is that UK IPR holders are unable to take action against parallel imports into the UK from the EU. In contrast, EU right holders can enforce their IP rights and can step up against parallel imports from the UK into the EU. As a result, businesses in the UK and the EU do not have equal rights to take action against parallel imports, which is particularly disadvantageous in industries where licensing plays a major role.

 

5) Possible scenarios after Brexit

 

The UK is at a crossroads. According to the UK IP Office, the UK’s future IPR regime will have to choose between 4 options[1]:

  • Unilateral EEA or UK+ regime

In this option the UK would continue to unilaterally apply a regional EEA regime, which the government refers to as a “UK+” regime. In practical terms, this means that there would be no change to the position on parallel imports – that is, parallel imports from the EEA into the UK would continue to be allowed. However, as at present, parallel exports from the UK to the EEA could be prohibited. This option would be the least costly for businesses reliant on EEA for supply of goods and raw materials, whilst continuing to provide the same level of choice for UK consumers. As there is no guaranteed reciprocity from another EEA member state, it may not be possible to export parallel goods to other EEA countries.

  • National regime

If the UK were to hypothetically adopt a national exhaustion regime, the IP rights in goods would be considered exhausted only in the UK once they were put on the market in the UK. Accordingly, businesses would not be able to parallel import goods from outside the UK. This regime could mean that IP rights would become perceived as stronger, as it offers rights holders greater control over the trade of their goods. From a consumer perspective, a national regime may lead to reduced consumer choice as parallel imports would not be allowed. In addition, prices of goods may increase as there would be potentially fewer goods in the market and IP rights holders would have more control over their goods.

However, a national regime may not 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.

  • International regime

If the UK were to adopt an international regime, the IP rights in goods would be considered exhausted in the UK once they had been put on the market in any other country. This means that these goods could be parallel imported into the UK from any country in the world without the rights holder’s permission. Parallel exports from the UK to other countries could still be stopped by the rights holder because other countries may not consider the IP rights in the goods to be exhausted.

From the perspective of the rights holder, they would lose control of the parallel trade of their goods after those goods had been first placed on the market anywhere in the world. On the other hand, it may pose a risk to consumers too, as although supply would increase and prices would fall, but goods imported from abroad would not necessarily comply with UK regulations, products of lower quality or which do not comply with national standards or may not be covered by warranty may be placed on the market.

  • Mixed regime

Some countries have “mixed” regimes where a specific good, sector or IP right are subject to one regime and all other goods, sectors and IP rights are subject to a different regime. For example, Switzerland has a regime in which most goods can be parallel imported but there is a national regime for medicines. In addition, within the last few years, Australia has experimented with parallel import restrictions on books.

 

6) Summary

The choice between the different exhaustion regimes applied by countries and regions are not only decisive for individual IPR holders, but also affects international trade, the price level of products and consumer protection through its impact on parallel imports. Although the impact of Brexit may not be felt by European right holders due to the unchanged European IPR regime, UK right holders should be cautious about exporting to the EU due to the current uneven legal landscape. However, the current situation could change at any time, and the UK government is currently working on the choice of a future rights exhaustion regime, which will have a significant impact on the legality of parallel imports between the EU and the UK.

[1] Intellectual Property Office: Consultation in the UK’s future exhaustion of intellectual property right regime (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/991669/Consultation-on-the-UKs-future-exhaustion-of-intellectual-property-rights-regime.pdf)

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