Following its departure from the single market, the UK must decide how to treat parallel imports from the EEA[i] into the UK. Parallel imports tend to reduce prices, so are likely to be welcomed by consumers and businesses relying on imported goods. But they can also reduce the brand owner’s ability to control distribution and may affect quality control or even increase counterfeiting.
What are parallel imports?
While the UK was part of the EU, single market rules on “exhaustion” of intellectual property rights (IPRs), ensured that owners of trade marks and other IPRs could not use their IPRs to prevent the free circulation around the EEA of goods that had legitimately been released onto the market anywhere within the EEA[ii]. These rules supported the European single market and tended to keep prices down by making it more difficult to maintain price differentials between EEA countries, because independent traders (parallel traders) were free to buy in a cheaper country and sell on in a more expensive one.
No parallel trade from the UK into the EEA
However, now that the UK has left the EU it is no longer part of the EEA exhaustion regime. As a result, branded and other IPR-protected goods can no longer be exported from the UK into the EEA without obtaining the consent of the relevant EEA IPR holder, even if the goods have already been freely released onto the UK market. In this respect Brexit has resulted in IPR owners gaining more control over the onward distribution of their goods between the UK and EEA.
Parallel trade from the EEA into the UK continues
However, despite Brexit the UK has continued to allow free circulation of parallel goods from the EEA into the UK. This is an interim decision pending the result of a consultation, which has now been published. The government is canvassing views on what type of exhaustion regime the UK should adopt and offers a number of options. Access the consultation here (deadline for reply 31 August 2021).
Three options and one non-option
Under the “national” option, the UK right holder’s consent would be required to parallel imports from any non-UK country including the EEA. This is the option that would give IPR owners the most control over distribution. However, it is incompatible with the Northern Ireland Protocol under which Northern Ireland remains within the single market in many respects. It is, therefore, not really an option at all.
Unilateral EEA or UK+ option
Under the “unilateral EEA or UK+” option the interim arrangement described above would remain in place. This would allow goods to continue to be parallel imported from the EEA into the UK without the UK right holder’s consent. This option would, for example, continue to allow the parallel import of branded medicines into the UK from the EEA which many argue helps keep costs down for the NHS. The UK right holder would still be able to refuse entry to parallel goods from non-EEA countries, as is the case at present.
Under the international regime option goods could be parallel imported into the UK from anywhere in the world. The 2001 Court of Justice decision in Levi Strauss v Tesco Stores illustrates how this could work. In that case Tesco bought some consignments of Levi jeans in the US and proceeded to sell these in the UK significantly undercutting Levi Strauss’s UK prices. This was successfully opposed by Levi Strauss under current rules. However, if an international regime had been in place Tesco would have been allowed to parallel import the jeans in this way.
Under a mixed regime different rules would apply to different goods or sectors or to different IP rights. Other countries that operate mixed regimes at the moment include Switzerland which allows most goods to be parallel imported but requires consent in relation to medicines. Participants in the consultation arguing for a mixed regime are asked to provide evidence of why a different treatment would be beneficial to the UK and any part of the regime requiring consent to parallel imports from the EEA would need to be squared with the NI Protocol.
The pros and cons
It must be remembered that the UK can only decide on whether to accept parallel imports and from where. The EEA now treats the UK as a third country so that companies owning IPRs in the EEA may refuse to let in parallel imports from the UK. To protect its single market the EU also generally does not allow Member States to adopt international exhaustion[iii].
As explained above, the national exhaustion approach could have been attractive to brand owners, giving them most control over distribution channels. However, the unilateral EEA (UK+) regime may nevertheless be seen as positive for global brand owners as it allows them to control imports from the UK into the EEA at least. Any regime allowing parallel imports is likely to put pressure on prices, so both the unilateral EEA (UK+) regime and the international regime are arguably good for UK consumers and businesses reliant on imports in this respect. However, the international regime is quite extreme in allowing parallel imports from “cheaper” world markets where market conditions may be quite different. The consultation also raises the possibility that an international regime could weaken the perception of IP rights and increase the risk of counterfeits as parallel imports would be accepted from more countries creating confusion about the origin of the goods.
Who is affected?
The sectors thought to be affected most by parallel trade are pharmaceuticals, fast-moving consumer goods, luxury goods, printing and publishing, and automotive. These are all areas in which it is important to IPR owners to control distribution channels to maintain brand image and quality. The consultation also notes that much parallel trade takes place at the wholesale level and so may affect supply chains and that small and medium-sized enterprises may not be aware that they are trading in parallel goods. The choice of regime is also made more difficult by the absence of clear data about the scale of parallel trade in the UK. This was highlighted by a feasibility study carried out by Ernst & Young in 2018 in which they concluded that there was very little data available.