Are you familiar with what the 'exhaustion' of intellectual property rights means in UK law? Or that this area of the law governs whether the import of genuine IP-protected goods into the UK is lawful or not?

If your business is involved in or interested in the movement into the UK of genuine goods protected by an IP right, then you need to understand what the law in the UK is regarding the exhaustion of the relevant right. The term 'exhaustion' means the law governing whether the owner of an IP right in the UK can enforce its right, for example to prevent import into or sale in the UK, against genuine goods (i.e. those placed on the market by the right holder's business), or whether the right has been 'exhausted' in respect of those goods and is therefore no longer enforceable.

(There is an important distinction to be appreciated between 'genuine goods' and 'infringing goods'. Genuine goods are those manufactured and placed on the market (somewhere) by, or with the consent of, the owner of the relevant IP (in the country of import). Infringing goods are those manufactured and placed on the market (somewhere) by a person or entity unrelated to the owner (in a broad sense) of the relevant IP and which impinge upon that IP. Exhaustion principles concern genuine goods only).

So what is the law regarding exhaustion in the UK? The answer depends upon the type of intellectual property right concerned, where in the world the genuine goods originated/were first placed on the market, and the circumstances in which the goods were first placed on the market.

Following a consultation in 2021, the UK Government has made no proposal to update the UK's exhaustion regime. The clarification and development of this area of the law therefore rests with the courts.

Some aspects of UK law on exhaustion are clear and, as a consequence of Brexit legislation, will not be changed significantly by the courts. Some aspects of UK law on exhaustion are clear but could be re-directed by the courts. Further aspects of UK law on exhaustion are in need of clarification.

The future direction of the law on exhaustion of IP rights in the UK will therefore in large part be a matter for the courts. In an appropriate case the analysis is likely to engage the law in the UK preceding and outside of EU law, what exactly was kept as 'retained EU-law', what the courts are permitted to do in view of the Brexit legislation in the UK, and how courts in comparable common law jurisdictions have developed their doctrines of exhaustion in recent years.

We now set out to explain, for patents and for trademarks, what the law on exhaustion presently is in the UK, what will remain the same for now (i.e. unless Parliament legislates), and where the law is likely require consideration and clarification by the courts in the near future. In other words, where there is uncertainty that can be explored by interested businesses.

Trademarks and passing off

Passing off – the law now and what is expected in the future

'Passing off' is a cause of action in English law that protects goodwill (for example in a trade name or sign) against misrepresentation that leads to damage. The predecessor to the UK's first registered trademark system, passing off remains a cause of action under the common law that is independent from any cause of action brought under the modern registered trademark system.

In cases of alleged passing off challenging the importation of or dealings in genuine goods, the question of whether the acts complained of amount to a wrongful act depends upon whether the elements of passing off are established. These are: goodwill (in the UK); misrepresentation (in the UK); and damage. In applying and assessing these elements, imported goods are treated no differently to goods sold by the brand owner within the UK. Genuine goods rarely entail a misrepresentation simply as a consequence of their geographical origins, so the regime may be viewed as international. However, where circumstances are such that a misrepresentation is present (for example as to compliance with certain standards), passing off could, potentially, be established.

Originating and remaining a part of the English common law, by long-standing authority, passing off was not impacted by Brexit and is expected to remain settled in the near future.

Trademarks – the law now and possible review in the future

For registered trademarks today, the UK continues to recognise and apply the EEA-regional exhaustion regime, both for trademarks originally registered as UK rights and for trademarks extracted from an EU trademark following Brexit. The EEA-regional exhaustion regime has two fundamental features: (1) exhaustion in respect of goods placed on the market in the EEA (or the UK) by the trademark owner or with their consent, and (2) no exhaustion for goods placed on the market outside the EEA by the trademark owner or with their consent.

The first of the fundamental features of the EEA's regional exhaustion regime was introduced by the Court of Justice's 1974 ruling in Centrafarm v Sterling[1] and subsequently incorporated into EU and UK trademark legislation. The second of the fundamental features was introduced by the Court of Justice's 1998 ruling in Silhouette v Hartlauer[2]. It is not possible to contract out of the exhaustion rule.[3]

In the UK, the Court of Justice case law establishing the EEA-regional exhaustion regime forms retained EU case law pursuant to the EU (Withdrawal) Act 2018. The same Act provides that in deciding whether to depart from any retained EU case law, a court must apply the same test as would be applied when deciding whether to depart from its own case law. Therefore the Supreme Court will treat retained EU case law as normally binding, but may depart from it where it "appears right to do so".[4]

Additionally, The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 sought to maintain in the UK, following the 31 December 2020 expiry of the Brexit transition period, recognition of an exhaustion defence where one would have applied under the single market regime:

"Anything which…was…an enforceable EU right relating to the exhaustion of rights…is retained EU law…"

On its face, this wording preserves fundamental feature (1) of the EEA-exhaustion regime in the UK. Whether it also preserves fundamental feature (2), for trademarks, would be a question for the courts, but on its face it would seem not to. Fundamental feature (2) is not otherwise provided for in UK trademarks legislation. It would therefore seem to remain judge-made law in the UK, and so to be an area in which the UK Supreme Court (or Court of Appeal) could depart from the retained EU case law if it appeared right to do so.

Accordingly, for now, and until and unless legislation to the contrary is passed in the UK, putting (genuine) goods on the market in the UK or the EU/EEA will continue to exhaust the trademark owner's rights in the UK.

On the other hand, putting (genuine) goods on the market outside the UK/EU/EEA continues not to exhaust the trademark owner's rights in the UK. This is a consequence of the Court of Justice's judgment in Silhouette v Hartlauer being retained EU case law. However, the UK Supreme Court (or the Court of Appeal) could potentially depart from this approach if persuaded that it would be the right thing to do.

Should the courts be persuaded that the right thing to do would be to harmonise the approach taken for goods irrespective of where in the world (outside the UK) they were first placed on the market, a way of doing so would be to move to an international exhaustion regime. The UK trademarks legislation (Trade Marks Act of 1994, section 12) would not appear to prevent the courts from doing this. The existing body of case law defining the EEA-regional exhaustion defence (for example, explaining the rules around repackaging) could be maintained but with application irrespective of where in the world the goods were first placed on the market by the trademark owner. A move to case-law derived international exhaustion for trademarks would be consistent with the established approach in the United States, and with the legislative provision of international exhaustion in India, Singapore and Australia. It would also be consistent with the historical approach to exhaustion in the UK, before joining the European Economic Community in 1973, which was international in nature, similar to the approach taken in Canada today.

In contrast, the provisions of the Northern Ireland Protocol, The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 and section 12 of the Trade Marks Act would appear to hinder a move by the courts in the UK to national exhaustion (i.e. in which exhaustion is recognised only for goods placed on the market in the UK). A move to a national exhaustion regime would also be out of step with the approach taken in UK law historically (before and after joining the EEC in 1973 and, to a lesser extent, since the Court of Justice's 1998 judgment in Silhouette v Hartlauer). Reversion to the UK's pre-1973 approach is also at present prevented, for goods placed on the market in the UK/EU/EEA, by the exhaustion provisions contained in section 12 of the Trade Marks Act of 1994.

Patents

Patents – the law now

For patents, the first of the fundamental features of EEA's regional exhaustion regime described above (for trademarks) was introduced by the Court of Justice's 1974 ruling in Centrafarm v Sterling[5]: putting (genuine) goods on the market in the UK or the EU/EEA exhausted the patent owner's rights in the UK. In 2018, in Parainen Pearl Shipping v Kristian Gerhard Jebsen Skipsrederi[6], the Patents Court (Arnold J) ruled that in circumstances covered by the EEA-regional exhaustion, that doctrine must pre-empt domestic law. Therefore, for genuine goods placed on the market in the EU/EEA by the owner of the relevant patent or with their consent, the EEA-regional exhaustion regime had replaced the approach previously taken under the common law.

The principle laid down in Centrafarm v Sterling remains in the UK as retained EU case law. It has not been incorporated into the patent legislation in the UK but would seem to be preserved by The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019. Therefore, for now, and unless and until legislation to the contrary is passed in the UK, putting (genuine) goods on the market in the EU/EEA will continue to exhaust the patent owner's rights in the UK.

However, no legislation or case law has introduced in the UK in respect of patents the second fundamental feature noted above of the EEA-regional exhaustion regime as it developed for trademarks. (The question of whether the EEA-regional exhaustion regime precluded national courts from applying an international approach to exhaustion in respect of patents was not ruled upon by the Court of Justice in Silhouette v Hartlauer[7]. The Silhouette case concerned trademarks, and a part of the court's rationale for precluding national courts from applying international exhaustion was that the EU trademarks legislation embodied a complete harmonisation of the rules relating to the rights conferred by a trademark).

In Parainen Pearl Shipping, Arnold J said that he would not exclude the possibility that the 'doctrine of implied licence' may apply in circumstances which did not amount to exhaustion. The 'doctrine of implied licence' is the approach to exhaustion taken under the English common law. Arnold J's comment suggests that it could, potentially, remain applicable in respect of (genuine) goods imported into the UK after being sold in the EU/EEA, if the circumstances were such that EEA-exhaustion was not established.

More significantly, Arnold J's comment suggests that the doctrine of implied licence may in fact remain the approach in the law in the UK to questions of exhaustion in respect of (genuine) goods placed on the market outside the EU/EEA by the owner of the relevant patent in the UK.

Patents – the doctrine of implied licence

The doctrine of implied licence emerged from the nineteenth Century judgment of the Chancery Appeals Court in Betts v Willmott[8] and subsequent case law[9]. It provides that the purchase of a patented article carries with it the right to use or deal in the article in any way the purchaser chooses unless the purchaser knows of restrictions communicated by the patentee by the time of purchase. The right is in the form of an implied licence, and it applies whether the purchase of the article is from the patentee or from an earlier purchaser. If the purchase is without notice of conditions, the purchaser is free to use and deal with the article as they choose. But for as long as subsequent purchasers have notice of the patentee's conditions by the time of their purchase, the conditions continue to attach to the goods and the patentee may assert their rights under patent law in respect of dealings outside of the conditions. The doctrine of implied licence does not discriminate according to the geographical origins of the goods concerned, and so in that sense it is most fairly described as international. The implied licence includes a licence to repair the article, but not to make a new article. The legislative foundation for the doctrine of implied licence remains in place in the UK today.[10]

In United Wire v Screen Repair Services[11], Lord Hoffmann noted that the difference between the theories underpinning the doctrine of implied licence and the principle of 'exhaustion' adopted in some other legal systems was that "an implied licence may be excluded by express contrary agreement or made subject to conditions while the exhaustion doctrine leaves no patent rights to be enforced".

In view of the long-standing authority of Betts v Willmott and subsequent authorities developing the doctrine of implied licence in the UK, and the absence of legislative provision or authority overruling it, for genuine goods first placed on the market outside the EU/EEA by the patent owner or with their consent and subsequently parallel imported in to the UK, the better view is probably that the UK's doctrine of 'implied licence' remains good law.

It should also be noted that the doctrine of implied licence has been complicated in recent decades by the 'post-Tilghman' line of authorities, in which a number of first instance judgments accepted that where goods were placed on the market by a licensee rather than the patentee themself, the Betts v Willmot principle did not apply. Instead, the rights at common law of the purchaser of the goods, and of any subsequent purchaser of the goods, were limited by the terms of the licence granted to the licensee. This line of authority stems from a mis-statement of the facts in the Tilghman case[12] by an American court in the 1920s[13] and therefore a mis-statement of the principle to be drawn from that case, which was accepted by a court in Kenya in the 1960s[14] and then by the Chancery Division in an interim injunction application in 1973[15]. The approach was subsequently followed by the Patents County Court in 1992[16] and by the Patents Court in 2013 in HTC v Nokia[17]. The approach of the post-Tilghman line was expressly rejected by the Privy Council in 1911[18] and is inconsistent with the detailed explanation of the common law approach given by the High Court of Australia in 2020 in Calidad v Seiko Epson[19]. The post-Tilghman line of judgments therefore represents an area of uncertainty in UK law outside of EU law. The ratio decidendi of the Court of Appeal's judgment in the Tilghman case was that a licensee under a patent stands in a different position from the purchaser of an article made under the patent: where a licensee for a foreign territory seeks to import goods into the UK outside the terms of its licence, the patentee may exercise its patent rights against the licensee to prevent import into and sale in the UK.

However, clarification of the law as it presently stands, and consideration as to the future direction of the law regarding exhaustion in respect of patents, can be expected when a suitable case reaches the courts.

Patents – possible review in the future

A way of harmonising the approach taken for goods irrespective of where in the world (outside the UK) they were first placed on the market would be to move to an international exhaustion regime. The existing body of case law defining the EEA-regional exhaustion defence (for example, explaining the rules around repackaging) could be maintained but with application irrespective of where in the world the goods were first placed on the market by the trademark owner. A move to case-law derived international exhaustion for patents would be consistent with the approach in the United States[20], and with that more recently adopted by the High Court of Australia[21]. More broadly, it would be consistent with the historical approach to exhaustion in the UK (Betts v Willmott / the doctrine of implied licence) which was international in nature, similar to the approach taken in Canada today. It would remove the uncertainty in the case law in the UK at present in the form of the 'post-Tilghman' line of authorities. It would also enable the alignment of principles with those employed in trademark law.

In contrast, the provisions of the Northern Ireland Protocol and The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 would appear to hinder a move by the courts in the UK to a national exhaustion regime for patents; a national regime would also be out of step with the approach taken in UK law historically. Reversion to the doctrine of implied licence entirely appears hindered by The Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019; but the implied licence doctrine may remain good law for goods placed on the market outside the EU/EEA and subsequently imported into the UK.

So what is the law on exhaustion of intellectual property in the UK?

Well, IP rights continue to be considered exhausted, and therefore not enforceable in the UK, in respect of genuine goods put on the market in the EU/EEA by the IP right owner or with their consent and subsequently imported into the UK. The UK's Brexit legislation means this is unlikely to be changed by the courts in the UK through case law, and the Government has indicated that it will not be making any changes to the legislation in the near future.

For genuine goods placed on the market in the wider world (outside the UK/EU/EEA) by the IP right owner or with their consent, and subsequently imported into the UK, the current legal position depends upon the right concerned. For trademarks it is relatively clear; for patents it is less so. For IP generally, this is an area in which the courts could re-steer the law, potentially taking an approach that harmonises the position across the different IP rights and/or aligns the approach taken for imports of genuine goods from the wider world with that for imports of genuine goods from the EU/EEA.

So if you are up for making new law, prepare your arguments well and be ready for an outing to the Supreme Court.

For more detailed analysis of the emergence of patent and trademark law in the UK, how it resulted in the UK's approach to exhaustion prior to and outside of EU law, and the emergence of the EU doctrine of exhaustion, please have a look at our September 2021 paper titled 'Exhaustion of Intellectual Property Rights in the UK: The Past and The Future'.

Please speak with Gordon Harris to discuss the article further, or for more on the UK's exhaustion regime for patents and trademarks and what it means for you and your business.

Footnotes:

[1] Centrafarm BV & Anr v Sterling Drug Inc (Case 15/74) and Centrafarm BV & Anr v Withrop BV (Case 16/74), 31 October 1974
[2] Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH C355/96
[3] Peak Holding AB v Axolin-Elinor AB [2004] ECR I-11313
[4] The Practice Statement (Judicial Precedent) of 26 July 1966; the effect of which on the Supreme Court was confirmed in Austin v Southwark London Borough Council [2010] UKSC 28)
[5] Centrafarm BV & Anr v Sterling Drug Inc (Case 15/74) and Centrafarm BV & Anr v Withrop BV (Case 16/74), 31 October 1974
[6] Parainen Pearl Shipping & Ors v Kristian Gerhard Jebsen Skipsrederi AS & Ors [2018] EWHC 2628 (Pat)
[7] Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH C355/96
[8] Betts v Willmott (1870-71) LR 6 Ch App 239, Chancery Appeals Court, Lord Hatherley L.C.
[9] Incandescent Gas Light Co Ltd v Cantelo (1895) 12 RPC 262, High Court King's Bench Division; Incandescent Gas Light Co Ltd v Brogden (1899) 16 RPC 179, High Court, King's Bench Division; Badische Anilin und Soda Fabrik v Isler [1906] 1 Ch 605 at 610, High Court Chancery Division; The Scottish Vacuum Cleaner O. Ltd v. The Provincial Cinematograph Theatres Ltd 1915 1 S.L.T. 389, Court of Session; Dunlop Rubber Co Ltd v Longlife Battery Depot [1958] 1 W.L.R. 1033, High Court Chancery Division; Sterling Drug Incorporated v C.H. Beck Limited & Anr [1973] RPC 915, High Court Chancery Division; Solar Thomson Engineering Co. Ltd & Anr v. Barton [1977] R.P.C. 537, High Court Chancery Division; Roussel Uclaf S.A. v Hockley International Ltd. & Anr [1996] RPC 441, High Court Patents Court, United Wire Ltd v Screen Repair Services (Scotland) Ltd [2000] UKHL 42, House of Lords; Schütz (UK) Limited v Werit (UK) Limited [2013] UKSC 16, Supreme Court
[10] The UK's doctrine of implied licence developed against the background of the specific nature of the right conferred by the grant of a patent in the UK: the Statute of Monopolies of 1623, section 6, confirmed that patents conferring monopolies could continue to be granted by the exercise of the royal prerogative, and the provision remains in force in the UK today. Conceptually, this meant that the grant of a patent could confer upon the patentee more than merely a negative right to exclude others; arguably it conferred also a positive right to control subsequent use of the patented goods. Against this background, the doctrine of implied licence emerged as a way of preventing the owner of a patent from unduly seeking to control dealings in the patented goods after their first purchase.
[11] United Wire Ltd v Screen Repair Services (Scotland) Ltd [2000] UKHL 42
[12] Société Anonyme des Manufactures de Glaces v Tilghman's Patent Sand Blast Company (1883) 25 Ch D 1
[13] Curtiss Aeroplane and Motor Corporation v United Aircraft Engineering Corporation 266 Fed. 71 (1920)
[14] Beecham Group Ltd v Shewan Tomes (Traders) Ltd [1968] RPC 268
[15] Minnesota Mining & Manufacturing Company & Anr v Geerpres Europe Limited [1973] FSR 133
[16] Wellcome Foundation Limited v Discpharm Limited & Ors [1993] FSR 433
[17] HTC Corporation v Nokia Corporation [2013] EWHC 3247 (Pat)
[18] National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15; [1911] AC 336
[19] Calidad Pty Ltd & Ors v Seiko Epson Corporation & Anr [2020] HCA 41
[20] Impression Products, Inc. v. Lexmark International, Inc., 581 U. S. (2017)
[21] Calidad Pty Ltd & Ors v Seiko Epson Corporation & Anr [2020] HCA 41, High Court of Australia