Blog: ‘BAD’ Insights: The Law Of Exhaustion And Design Protection Post … – Mondaq News Alerts

In our new “BAD” (Brands, Advertising and Designs)
podcast series, our Intellectual Property (IP) team will explore
critical topics affecting the IP sector and how you can protect
your brands, creations and designs.

What is the law of exhaustion and how does it affect you? Brand
owners need to be aware of the law of exhaustion if they are
involved in the movement of genuine goods protected by an IP
right.

In this first episode of the series, IP team member Jasmine
Lalli will take you on whistle-stop tour of national, regional and
international exhaustion following Brexit and how this affects
brand owners when it comes to the distribution and resale of their
goods.

You will also hear about design protection in both the EU and
UK, the different systems of unregistered design right protection,
and the changes designers need to know about post-Brexit.

Listen to the episode

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Transcript

Automatic: Welcome to the latest episode of
Gowling WLG’s Global Intellectual Property podcast, where we
discuss a range of topics to help you protect your brands,
creations and inventions.

Jasmine Lalli: Hello listeners, my name is Jasmine
Lalli and I am an associate in our IP team here to talk to you
today about the law of exhaustion and design protection in a
post-Brexit world.

This podcast is designed to give you a whistle-stop tour through
these two areas, starting firstly with exhaustion. If your business
is involved in, or interested in, the movement or resale of genuine
goods protected by an IP right, then you need to know about
exhaustion.

In general terms, once a good has been placed on the market in a
specific territory, by or with the consent of the right holder, the
IP rights that protect this good are considered to be exhausted.
Now what does that mean? This means that the IP rights in question
will fall away, the consequences being that the right to take legal
action against infringement has been lost. As a result, there is a
loss of the right to control distribution and/or the resale of
these physical goods.

Let’s take a basic example then just looking at the UK. Say
I buy a pair of second-hand Nike trainers on eBay within the UK
that were originally purchased first hand from a shop also within
the UK. Applying then the law of exhaustion, the trademarks rights
are exhausted from the moment that Nike places them on the UK
market. Nike therefore cannot stop that seller from selling them to
me or for putting them on eBay in the first place by using
trademark infringement as their cause of action.

It’s important to note that the law of exhaustion only
applies to genuine goods, not infringing goods, such as counterfeit
goods. Counterfeit goods will give rise to a separate cause of
action for IP infringement.

Exhaustion also does not apply to digital content. It only
applies to physical goods. Please also note that the rules around
exhaustion will vary both by IP right and by territory, and you may
come across different systems of exhaustion.

There is national exhaustion; whereby the brand owner’s
rights are exhausted for a specific country once goods have been
placed on the market in that country by the brand owner. The
exhaustion here will therefore not extend to other countries or
other regions, so taking again that example I gave you with the
Nike trainers, the brand owner’s rights in that example were
exhausted in the UK but not elsewhere, and they can’t therefore
rely on these IP rights to prevent the unauthorised sale of those
goods in other markets, say for example in China.

There are then also regional and international systems of
exhaustion, which is once goods have been put on the market
somewhere in the world by a brand owner, the owner has exhausted
its rights concerning the sale of those goods in other places
across the globe.

So, turning now to Europe. The EU implements a system of
regional exhaustion to help facilitate the free movement of goods
within the single market. So, in essence, where you place goods in
one member state, the IP rights are considered exhausted throughout
the European Union. The exhaustion of intellectual property rights
underpins this system that allows for parallel trade of certain
goods.

So, just as a reminder for listeners who are unfamiliar,
parallel trade happens when goods that have been sold in the single
market or the European Economic Area (EEA) are then reimported by
unconnected distributors back into the UK, usually to compete with
domestic products. This happens particularly where the products are
sold at a higher price on the domestic market but are cheaper
elsewhere.

You can understand that the EU’s rationale for permitting
the exhaustion of rights across the single market, where they are
placed on the market in one member state. This equal treatment of
member states is to facilitate the free movement of goods
throughout the EU. So, if I place goods on the market in France you
can see why the IP rights would then still be exhausted in Germany.
You would not want a trader in France pursuing a reseller in
Germany, for example patent infringement for medical products.

Let’s look now at the UK’s position post-Brexit. The
current position is that IP rights in goods legitimately placed on
the market in the UK or anywhere else in the EU or the EEA are
considered exhausted, so that the goods can lawfully be reimported
back into the UK from the IP law perspective. For example, say I
sell a product in Germany and then reimport it back into the UK, I
now have no rights to enforce trademark infringement within the UK.
However the position is not reciprocated. So, under the European
rules, IP rights in goods placed on the market in the UK are not
exhausted and the goods cannot freely be exported to the EU. So, we
have this asymmetric approach.

This means that businesses exporting these IP protected goods
from the UK to the EEA might need the right holder’s consent.
As you can appreciate, while this may benefit certain rights
holders who wish to prevent the movement of their IP protected
goods, for others it presents a real administrative burden. So,
since Brexit and the UK’s departure from the EU there has of
course been the question of whether the UK’s laws on exhaustion
will change.

So the UK Government launched a consultation into the UK laws of
exhaustion in the summer of 2021. The options considered were:
firstly, a UK plus regime which was essentially a continuation of
the current unilateral exhaustion regime; a national regime where
the import of goods from any country would not automatically be
permitted, however exports would be automatically permitted to
countries with an international regime; a new international regime,
which would automatically permit the import of goods from any
country assuming there is separate authorisation for regulated
goods, for example medicine, while exports would be automatically
permitted only to other countries with an international regime; or
a mixed regime, where the ability to parallel import goods would
depend on the decision or treatment for the IP right, good or
sector.

So, Switzerland currently operates such a regime, with national
exhaustion applicable to medicine and then EEA wide or
international exhaustion for most other goods. Countries such as
Australia have also experimented with a mixed regime. Australia
introduced a limited parallel import restriction but purely for
books. So, the UK consultation concluded that there would be no
changes and they would therefore continue with the existing UK
regime. IP rights will therefore continue to be considered
exhausted and therefore not enforceable in the UK in respect of
genuine goods put in the market in the EU by the IP right owner or
with their consent, which are then subsequently imported back into
the UK.

Essentially, this position was identified as the continuation of
the least costly for businesses relying on the EEA for the supply
of goods and raw materials, whilst continuing to provide the same
level of choice for UK consumers.

The future direction on the law of exhaustion in the UK will
therefore be in large part a matter for the courts. So, if you are
up for making new law, prepare your arguments and be ready for an
outing to the Supreme Court.

Secondly, in this podcast we wish to briefly cover the issue of
design protection in the post-Brexit landscape. So, the headline
points relate to unregistered design rights.

As a refresher, both the EU and the UK offer systems of
unregistered design right protection, known as unregistered
community design right and UK unregistered design rights
respectively.

The design protection begins from the date you make the designs
in question available to the public, i.e. when they were first
disclosed. The old rule was that disclosing your unregistered
design in either the UK or the EU would entitle you to protection
in both, as the UK was part of the EU. Now then, designs disclosed
in the UK will no longer enjoy the benefit of unregistered
community design protection within the EU post-Brexit.

So in order to attract unregistered community design protection
for a new design, that design must firstly be disclosed within the
EU, which no longer includes the UK. Conversely, in order to
attract UK unregistered design protection, it will be necessary to
firstly disclose the design within the UK. Disclosure in the EU –
no longer sufficient.

It follows therefore that designers may have to decide whether
to disclose first in the EU, to get unregistered community design
protection, or in the UK, to get unregistered UK design protection,
knowing they cannot have both. Obviously, there are pros and cons
to each; the EU is obviously a much broader market than the single
country of the UK, but unregistered design rights last for up to 15
years in the UK and just three years in the European Union.
However, designers may take the practical approach of arranging for
simultaneous disclosure of their designs in the UK and in the EU,
in order to present the argument that the designs were first
released in both. In most instances this could only be done online.
It is not clear whether first disclosure, which takes place online,
for example on a website or on social media, would satisfy the
requirement of first being disclosed in the EU and the UK. There is
a risk that an online disclosure will not satisfy the EU or UK
requirements and hence fail to attract unregistered protection in
either territory.

To ensure a degree of unregistered design protection, designers
may consider disclosing their designs in one territory to get
unregistered design protection there and then registering a
registered design in the other. However, there is a significant
degree of risk in this strategy as you may end up creating a piece
of prior art, by disclosing in one territory thus destroying the
novelty of your design in the other. In this climate, it is of
course then preferable to seek registered design protection in both
the UK and the EU to avoid reliance on unregistered designs
altogether.

So, are there any plans in place from the UK IPO to investigate
this situation further? In the summer of 2022 the UK IPO launched a
call for views into the current UK design system and how best to
improve it post-Brexit. The IP team here at Gowling WLG has been in
touch with them late last year to query what the status was and
they let us know that the next stage of the review has been delayed
to late 2023 or early 2024 at the earliest. In other words, it has
been punted into the long grass. So, it will be a case of watching
this space.

What are the key takeaways then from this whistle-stop tour
through the laws of exhaustion and design post-Brexit?

When it comes to exhaustion rights, the main things to keep in
mind when trading goods are whether the goods being imported or
exported have IP protection at all.

Secondly, the direction of those goods i.e. are they from the UK
to the EU, or from the EU to the UK, or within either
territory.

And finally, whether you need consent of those rights holders
whose rights are not exhausted.

Moving on then to design protection, in the post-Brexit era we
find ourselves in, it is important to remember that designs no
longer qualify for both UK and EU unregistered design protection.
For this reason before disclosing a design, it is important to
consider whether designers would wish to attract unregistered
community design protection or UK protection.

That brings this podcast to an end. Thank you very much for
taking the time to listen and if you have any questions, please do
reach out to the IP team here at Gowling WLG.

Automatic: Thanks for joining Gowling WLG for
this podcast. If you enjoyed this episode be sure to check out our
website at gowlingwlg.com for more useful insights and resources
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