Could IPO plans exhaust court options post-Brexit?
The UK Intellectual Property Office (IPO) has proposed legislative changes to the post-Brexit status quo in the area of the ‘exhaustion’ of IP rights.
The reasoning for the IPO’s proposals is unclear. It must be asked whether secondary legislation is the appropriate mechanism for directing an area of the law that traditionally lies in the remit of the courts in the UK—particularly where the secondary legislation proposed would seem to fetter the discretion of the courts to align the law in the UK with international norms.
The Retained EU Law (Revocation and Reform) Act 2023
The Retained EU Law (Revocation and Reform) Act 2023 (REULA) will, from the end of 2023, make a number of changes to the law, and the operation of the law, in the UK. First, it will revoke a long list of identified legislation. Second, it will end the principle of supremacy of EU law. Third, it empowers relevant national authorities to “restate”, to any extent, “any secondary retained EU law”.
For this third purpose, the national authority concerned may use words or concepts that are different from those used in the law being restated. It may also make any change which the national authority considers appropriate for the purpose of resolving ambiguities, removing doubts or anomalies, or facilitating improvement in the clarity or accessibility of the law.
As we explained in our article REULA’s End of Supremacy of EU Law will Impact IP Law in the UK from 2024, explains High Court, while the provisions of intellectual property law that are to be revoked at the end of 2023 are limited and historic, the end of the principle of supremacy of EU law will have a marked impact on the approach to be taken by the courts to the interpretation of EU-derived domestic legislation, such as the provisions in the Trade Marks Act 1994 governing infringement.
Well into the autumn of 2023, the UK Intellectual Property Office’s (IPO) guidance stated that it had no plan to enact any principles established in the case law in order to maintain their policy effects when the supremacy of EU law ends. This meant that the onward development of intellectual property law in the UK would rest with Parliament and the courts, in accordance with the REULA.
The position of the UK IPO has since changed.
The changes to UK IP legislation
On October 17, 2017, the IPO stated that the UK intellectual property system is aligned internationally on many aspects of IP, which supports international trade. Therefore it will maintain current policy positions “but will introduce some limited technical reforms which are in accordance with the aims of the REULA” (the IPO’s guidance on ‘Intellectual Property and Retained European Union Law: the facts’, in which the announcement is contained, is available here).
Two draft statutory instruments (SIs) were announced, which would be laid in draft before Parliament and subject to the affirmative resolution procedure by the end of the year.
The first of the SIs—The Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023—looks “to implement some technical changes to IP REUL, amending provisions in four pieces of legislation mainly to make them more relevant to a UK context”.
The changes would concern auditing requirements for collective management organisations, currency adjustments from euros to sterling, replacing an address for service in the EEA to one in the UK for proceedings in the Copyright Tribunal, and enabling new members of the World Trade Organization (WTO) to receive protection in the UK for designs.
The second of the SIs— The Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023—represents a surprisingly interventionist course from the IPO, which says that the proposed regulations “will maintain the existing regime while the government makes a decision on the UK’s future exhaustion regime”.
The law on exhaustion in the UK
Once goods have been put on the market by the proprietor of an IP right or with their consent, the owner of the IP right is generally prevented from asserting that right (by making claims of infringement) to interfere with subsequent dealings in the goods they have sold. Different legal systems achieve this in different ways.
One way is by an ‘exhaustion’ defence: the IP right is said to have been exhausted by the first marketing of the goods, and so may no longer be enforced in respect of those goods.
In the course of the UK’s membership of the EEC/EC/EU, exhaustion became a part of IP law in the UK, largely replacing the UK’s older, common law doctrines.
Pre-Brexit, the UK was within the EEA-regional exhaustion regime. The IP right owner could not interfere with subsequent dealings in goods which had been placed on the market anywhere in the EEA by them or with their consent.
The UK continues to recognise UK+EEA exhaustion. (The EU no longer considers the UK to be within the EEA-exhaustion regime).
The government’s consultation
On June 7, 2021 the government announced a consultation on exhaustion. It sought to consider a number of policy options: 1) UK (continued) unilateral recognition of exhaustion for goods placed on the market by the right owner in the UK or the EEA; 2) a move to a national regime; 3) a move to an international regime; and 4) a move to a ‘mixed’ regime.
The consultation concluded with a statement on January 18, 2022 that “there is not enough data available to understand the economic impact of any of the alternatives to the current UK+ regime” and “[a]s a result, it has not been possible to make a decision based on the criteria originally intended”. The government said that further development of the policy framework needed to happen before reconsidering the evidence and making a decision on the future exhaustion of the IP rights regime.
Identifying the status quo
In practice, the consequence of this non-action was that the status quo was maintained. The status quo comprised what the legislation said post-Brexit, and the retained EU case law in the area.
What the legislation said included Brexit amendments introduced into UK legislation pursuant to the EU (Withdrawal) Act 2018 (as amended) for some IP rights—those for which the legislation provided for ‘exhaustion’. The changes were made to enable the pre-Brexit exhaustion defence to infringement to continue to be recognised in respect of genuine goods placed on the market in the UK or imported into the UK after they had been placed on the market in the EEA.
Additionally, the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulation 2019 provided (in regulation 2) that:
“(1) Anything which—
(a) was, immediately before IP completion day, an enforceable EU right relating to the exhaustion of rights of the owner of an intellectual property right under Articles 34 to 36 of the Treaty on the Functioning of the European Union or Articles 11 to 13 of the Agreement on the European Economic Area, and
(b) is retained EU law by virtue of section 4 of the European Union (Withdrawal) Act 2018,
has the same effect on and after IP completion day, despite the UK not being a member state, as it had immediately before IP completion day.
(2) In this regulation “enforceable EU right” has the meaning given by section 2(1) of the European Communities Act 1972 (as that Act had effect immediately before its repeal by section 1 of the European Union (Withdrawal) Act 2018).”
This meant that anything which would have amounted to an exhaustion defence on December 31, 2020, would continue to do so thereafter.
The legislation also stated that in certain circumstances the courts in the UK could depart from the retained EU case law (for example the Supreme Court could depart where it appeared right to do so). However, the presence of the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulation 2019 (regulation 2) on the statute books meant that the courts could not narrow the reach of any existing exhaustion regime to one that was national, rather than UK+EEA, in scope. (Additionally, for trademarks, the exhaustion regime is expressly stated to be UK+EEA in its scope in s.12 of the Trade Marks Act 1994 (as amended)).
Nor could the courts narrow any available exhaustion defence by altering the specifics of its operation, for example by introducing re-labelling requirements less favourable to a parallel importer than was stated in the retained EU case law.
It is arguable that there is nothing in the wording of the current legislative provisions that would prevent the Supreme Court from departing from the regionally-restricted nature of the present regime by expanding its reach, should the Supreme Court consider it right to do so. International exhaustion regimes for trademarks are operated by countries such as the United States, Canada, UAE, Singapore and Australia.
In respect of patents in the UK, no provisions have ever existed establishing an exhaustion defence in the governing legislation. As of December 31, 2020, retained EU case law prevented member states operating a national exhaustion regime. The sole application of the concept of exhaustion as a defence to patent infringement in the UK was in a first instance judgment of Justice Arnold in the Patents Court in 2018 (Parainen Pearl Shipping & Ors v Kristian Gerhard Jebsen Skipsrederi & Ors [2018] EWHC 2628).
This means that the courts, in respect of patents, presently have no legislative constraint on the continued operation of the long-standing and more international common law doctrine of implied licence, or on a move to an international exhaustion regime, should they consider this right. Notably, in recent years, after detailed legal argument and reasoning, both the US Supreme Court (Impression Products v Lexmark International, 137 S.Ct 1523 [2017]) and the High Court of Australia have moved to such a regime (Calidad & Ors v Seiko Epson & Anr [2020]).
Since Brexit, a case that might test the development of the law in this area in the UK has not yet reached a first instance judgment.
Although the government parked its consultation for lack of understanding of the economic impact of the alternatives, the courts were left with a certain degree of legislative freedom in which to conduct a full legal analysis. For example, it remains to be seen whether the Supreme Court would support different treatment, for the purposes of exhaustion, of imports of genuine goods from the EU compared with the same genuine goods imported from the US or Australia, in view of legal principles and the UK’s post-Brexit trading relationships.
Proposed changes
Against this background, the changes proposed by the IPO in The Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023 are notable because they would operate as a constraint on the discretion of the Supreme Court to develop the law in this area, as its counterparts in the United States and Australia have done.
First, for patents, for the first-time legislative provision would be made for an exhaustion defence in the UK. The defence would apply to products “put on the market in the United Kingdom or the European Economic Area by or with the consent of the proprietor of the patent”. The provisions would fall to be interpreted according to domestic principles of statutory interpretation. The identification of the UK+EEA as the geographical area applicable to the defence may be interpreted as deliberately distinguishing between the UK+EEA and the rest of the world, and so operate to constrain the freedom that presently resides with the Supreme Court to expand any exhaustion regime applicable to patents to an international one. (For unregistered design rights the IPO makes a similar proposal, and so similar points arise).
Second, for trademarks, the IPO’s proposal would introduce more prescriptive wording than is presently found in the legislative provisions providing for the exhaustion defence. The amendment to s.12 TMA would be as follows:
“(1) A registered trademark is not infringed by the use of the trademark in relation to goods which have been put on the market in the United Kingdom or the European Economic Area under that trademark by the proprietor or with his consent.
(2) Subsection (1) does not apply where:
(a) there exist legitimate reasons for the proprietor to oppose further dealings in the goods for the purpose of protecting the proprietor’s property (in particular, where the condition of the goods has been changed or impaired after they have been put on the market), and
(b) the opposition to those dealings interferes with the rights of any other person no more than is necessary to achieve that purpose.”
The wording indicated in bold is not present in the most recent version of the EU Trade Marks Regulation (2017/1001, article 15) or the EU Trade Marks Directive (2015/2436, article 15). Pre-Brexit, the latter was implemented into the law in the UK in the Trade Marks Act 1994 (s.12). Under domestic interpretation principles, the inclusion of the wording indicated in bold in s.12 TMA may operate to restrict the freedom of the courts to develop the operation of the exhaustion defence in UK law.
(In fact, the proposed wording for patents would include equivalent wording to that shown in bold for s.12 TMA. So not only would the proposed amendments codify, for the first time, an exhaustion defence for patents, the codification would also be more restrictive on its face than any existing codification in respect of any other IP right).
Third, for designs (all types), copyright and trademarks, the IPO’s proposals would split the existing defence into two defences:
- “anything which forms part of assimilated law as a result of section 3 of the European Union (Withdrawal) Act 2018”, and
- “after being put on the market in the European Economic Area by or with the consent of” the owner of the right.
Additionally, the cover-all provision of the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulation 2019 provided (reg 2) noted above, would be repealed.
The wording indicated by paragraph a) adapts and preserves the effect of existing wording referring to retained EU law. It is unnecessary because the REULA states in section 5, that after the end of 2023 retained/retained EU wording is to be known by the word ‘assimilated’, and so there is no need amend or repeal the cover-all provision of the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulation 2019 or the Brexit amendments referring to retained EU law.
The wording indicated by paragraph b) is new wording. If it is duplicative of paragraph a), then it is unnecessary. However it does not appear to be duplicative: it must be interpreted according to domestic principles of statutory interpretation, and therefore may, as noted above, operate to restrain the options available to the Supreme Court should it be called upon to consider the development of this area of the law.
Are the changes needed?
The government, following its consultation, reached the conclusion that it could not make a positive decision to legislate for a UK+EEA regime; and so it left the onward development of the law in this area with the courts. The courts are where, historically in the UK legal system, the development of the area of the law broadly described as exhaustion has always been. The courts are also where, in comparable common law jurisdictions, this area of the law has been analysed, rigorously, and developed in recent years.
Would the IPO’s proposed changes confer more certainty? Is there any need for legislative change in order to prevent a move by the courts to a national exhaustion regime, for any IP right? Such a move would cause conflict with the delicate mechanisms developed for Northern Ireland; and for many IP rights such a move is already prevented by the existing legislative provisions. Nor would such a move be in keeping with the historical approach in the UK or the modern approach in comparable legal systems.
Continued recognition of UK+EEA exhaustion is supported (and in some cases mandated) by the existing legislative provisions and case law; no change to the existing legislation is needed in order to maintain it.
Whether continued recognition of UK+EEA exhaustion is consistent with legal principle and/or the UK’s international trading relationships and obligations, or such considerations favour a broader, international or mixed regime, is an important question of law.
The government has not grasped the opportunity presented by the consultation to conduct the necessary analysis and there is no indication of it returning to the subject in the near future. However the courts could do so, as and when the need arises. In fact the Supreme Court bench must be the most competent body of law-makers in the UK, and the most qualified part of our legal system, in which to consider the legal position and balance competing arguments for and against the various options (to the extent available in view of the present state of the legislation).
The proposed changes go beyond restating the existing law, and, we suggest, beyond “technical reforms” in accordance with the REULA. A clear aim of the REULA is to end the principle of supremacy of EU law, so that the case law in the UK may be developed by the courts in the UK.
The IPO’s proposals would operate to impede the UK courts’ freedom to do this, without any present basis in legislation or case law (particularly for patents) for doing so, and without a concluded parliamentary consultation process considering the economic and legal merits of different options.
The proposals would also impede rather than facilitate the ability of the UK courts to align the law in the UK, at a broad level, with modern international norms in comparable legal systems. The IPO has not (so far) published guidance explaining why the proposed legislative changes regarding exhaustion are needed, and for what purpose.
Kate Swaine is co-head of intellectual property at the law firm, Gowling WLG. She can be contacted at kate.swaine@gowlingwlg.com
Ailsa Carter is an IP principal associate at the law firm, Gowling WLG. She can be contacted at ailsa.carter@gowlingwlg.com
