Parallel trade is the import and export of genuine intellectual property protected goods. Parallel trade occurs when the intellectual property rights to these goods have been “exhausted”. That is, they have been put on the market within a certain territory by or with the permission of the rights holder. Exhaustion of intellectual property rights means that the intellectual property rights cannot be used to prevent further distribution or resale of those goods.
The goods have been manufactured by or under licence from the trade mark owner and are therefore not counterfeits, but they may have been manufactured or packaged for a particular territory of distribution and are imported into another territory contrary to the trade mark owner’s intention.
Intellectual property exhaustion refers to the extent to which an intellectual property rights holder can control the distribution of its branded goods. Under the concept of exhaustion, once an intellectual property rights holder has sold a product to which its intellectual property rights are attached into a particular territory of distribution, it must allow the resale of that product in that territory of distribution. The trade mark rights covering the product are said to have been “exhausted” by the first sale. After the UK’s withdrawal from the EU, Union law continued to apply in the UK until 1 January 2021.
Thus, products in which intellectual property rights exist could previously be imported from the UK into the other EU and EEA (EU + Iceland, Liechtenstein, Norway) states according to the exhaustion principle without infringing trade mark, design, patent or other intellectual property rights.
If a product legally protected in the EEA is placed on the market outside the EEA by the manufacturer, it may not be distributed in the EEA without the manufacturer’s consent. The manufacturer may prohibit the distribution of its products on the basis of its intellectual property rights if it has placed the products on the market outside the EEA and they were not intended for countries in the EEA.
Within the EEA, the principle of exhaustion means that once the right holder has given consent to place the intellectual property protected goods on the market, they cannot revoke it. Once the protected goods have been placed on the EEA market by the intellectual property rights holder, or with their consent, they can no longer prohibit the further distribution of those goods within the EEA.
Thus, a product bearing a trade mark, for example, can be resold within the EEA without the consent of the trade mark right holder and can therefore be imported into another country within the EEA.
The UK left the EU on 31 January 2020. Thereafter, pursuant to the Withdrawal Agreement of October 2019, a transitional period applied until 31 December 2020, during which EU law continued to apply in the UK. The principle of EEA-wide exhaustion thus remained in place.
Art. 61 of the Withdrawal Agreement expressly provides that intellectual property rights which were exhausted under the terms of EU law both in the EU and in the UK before the end of the transitional period, i.e. before 1 January 2021, remain exhausted both in the EU and in the UK. Thus, goods placed on the market in the UK by or with the consent of the intellectual property right holder by 31 December 2020 will also be deemed to be exhausted in the rest of the EU and vice versa.
The transitional period expired on 31 December 2020 and thus the question arises as to which regulation applies to exhaustion with regard to parallel imports in the EU and the UK from 1 January 2021.
The EU rules now no longer apply to the UK. The UK and the EU have concluded a trade agreement that entered into force on 1 January 2021. However, Article IP 5 of the agreement explicitly left the question of exhaustion open and gave the contracting parties the freedom to determine whether and under what conditions the exhaustion of intellectual property rights occurs.
In the UK, “The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019” currently apply until further notice. These provide that the system of EEA-wide exhaustion will be maintained as far as possible. From 1 January 2021, rights in goods placed on the market in the EU or EEA by or with the consent of the right holder will therefore continue to be deemed exhausted in the UK.
The UK government has been in the process of conducting a consultation on how parallel trade should be managed in the UK in the future since the beginning of 2021. So far, no plans for changes have been announced.
In the EU imports from the UK into the EU are considered third country imports since 1 January 2021. Therefore the rule after the end of the transitional period is that an intellectual property right is not exhausted in the European Union if goods protected by that right have been lawfully put on the market in the UK. This means that the right holder or a person with their consent may prohibit the importation of such a good by a third party into the European Union or the placing on the market, resale or other commercial exploitation of such a good on the European Union market, where such importation or commercial exploitation would constitute an infringement of the intellectual property right concerned.
Thus, so far, there is an asymmetric regional exhaustion with respect to the EU and the UK and it remains to be seen whether this will continue or whether a bilateral arrangement can be found between the EU and the UK with respect to exhaustion.
Companies importing intellectual property protected goods from the UK into the EU/EEA will therefore need to review their business agreements and supply chains to ensure that they include the right holder’s consent to import the goods into the EU/EEA, as they will need the right holder’s consent to import intellectual property protected goods into the EU/EEA from 1 January 2021.