Starting January 1, 2021, at the end of the Brexit transition period, the UK legal framework will sever from the EU one. The extent to which the UK legal system will run in parallel to the EU one and for how long is still unclear, but UK authorities have been releasing guidance on how business will operate as of January 1, 2021. One area of particular interest to the pharmaceutical industry is how parallel trade will be regulated in terms of IP rights.
The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019, will come into force on January 1, 2021, which explain how the doctrine of exhaustion of IP rights will apply in the UK from January 1, 2021 (Part 2, Regulation 2). As a consequence there will be amendments to the relevant IP statutes, for example, the Trade Marks Act 1994, the Registered Designs Act 1949 and the Copyright, Designs and Patents Act 1988. The legal framework applicable to parallel trade and in particular how the doctrine of exhaustion of IP rights will apply in the UK is further clarified in guidance issued by the Intellectual Property Office in the UK titled “Exhaustion of intellectual property ( IP) rights and parallel trade from January 1, 2021.” In addition, the guidance also explains how the doctrine of exhaustion of IP rights will apply in the EU/ EEA from January 1, 2021.
Interestingly, there will be asymmetry between the regimes for parallel trade applicable in the UK and the EEA. The guidance provides that IP rights holders will not be able to prevent parallel trade from the EEA into the UK by arguing a breach of their IP rights. In contrast, IP rights holders will be able to prevent parallel trade from the UK into the EEA because the doctrine of exhaustion of IP rights will cease to apply to goods placed on the UK market.
The doctrine of exhaustion of IP rights is enshrined in the EU/EEA legal system and its case law and is a natural consequence of the principle of free movement of goods within the EEA/ EU). It prevents an IP right holder from invoking its IP rights to stop further distribution or resale of the IP-protected goods that were placed on the EU/EEA market by the IP right holder or with its consent. The IP rights are deemed to be exhausted.
The doctrine of exhaustion of IP rights has led to significant challenges for the pharmaceutical industry, which had to face the unwanted parallel trade of large volumes of medicinal products from low price countries into high price countries. This is mainly due to the lack of EU harmonization of prices, which remains the prerogative of the Member States, and resulted in parallel traders exploiting price differences among Member States by buying medicinal products in the low price countries and importing them into the high-price countries to the detriment of the IP right holders.
As the UK has departed from the EU/EEA, it will no longer be the case that goods legitimately placed on the UK market will be able to freely circulate into the EEA. As of January 1, 2021, the doctrine of exhaustion of IP rights will cease to apply to goods that have been placed on the UK market. A third party that seeks to distribute or sell a product placed on the UK market in the EEA would potentially be at risk of an IP infringement claim unless it has the express or implied consent of the IP right holder.
However, the UK has decided, for the time being, to apply the doctrine of exhaustion of IP rights to goods legitimately placed on the EEA market (EEA products) so that the IP rights of such goods will continue to be considered exhausted in the UK. In practice this means that IP right holders will not be able to raise their IP rights to oppose their goods’ being imported from the EEA into the UK.
The approach of the UK to embrace the doctrine of exhaustion after the transition period is likely to have been triggered by the necessity to ensure that the UK market will not face shortages of goods imported from the EEA due to concerns from the parallel traders that they may be facing infringement proceedings from IP right holders for breach of their IP rights.
It is unclear what the long-term position will be because the guidance explains that after January 1, 2021, the UK will have an opportunity to decide what its permanent exhaustion regime should be, and the government plans to publish a formal consultation in early 2021.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP