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655 Third Avenue, 10th Floor, New York, NY 10017-5646, USA

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inta.org | [email protected]

5 July 2018 Mr. Tim Moss Chief Executive Officer and Comptroller General Intellectual Property Office Cardiff Road Newport, South Wales NP10 8QQ United Kingdom Sent via email to: [email protected]; Cc [email protected]; [email protected] Re: Exhaustion of Trademark Rights after Brexit Dear Mr. Moss, On behalf of the International Trademark Association (INTA), I am writing regarding the ongoing negotiations between the United Kingdom (UK) and the European Union (EU) on ‘Brexit,’ and their impact on intellectual property rights. In addition to INTA’s recommendations sent in November 2017, we would like to provide you with further recommendations on the exhaustion of rights regime that the UK should implement post Brexit. INTA is a global association of brand owners and professionals dedicated to supporting trademarks and related intellectual property (IP) to foster consumer trust, economic growth and innovation. INTA’s members are more than 7,700 organizations from 191 countries. The Association has a particularly strong presence in both the UK (311 members) and the EU27 (1,272 members). Our global membership also is quite diverse with some 30,000 trademark professionals from major corporations as well as SMEs, and from law firms and academia. All this places INTA in a unique and balanced position to provide input on Brexit from the perspective of businesses operating in and with the UK. Given that the UK is among the top 5 EU Member States with the highest contribution of trademark-intensive industries to the economy (i.e., 38.4% contribution to the GDP and 21.5% of the employment in the UK), INTA welcomes the Office’s statement on November 1, 2017 to keep the UK as “one of the best places in the world to obtain and protect your IP” in order to support innovation. We also applaud the UK government’s position that the outcome of the Brexit negotiations should not diminish the current benefits and protections provided to businesses operating in the UK under the current EU membership. Accordingly, the strong level of protection for trademarks which exists in the UK as a member of the EU (and therefore, the European Economic Area or “EEA”) should not be diminished following

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mailto:[email protected]

https://www.gov.uk/government/news/ip-and-brexit-the-facts

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Brexit. This includes the UK’s exhaustion of rights regime. UK brand owners now benefit from a strong “regional” (or “EEA”) exhaustion regime that restricts parallel imports from third countries. Importantly, if there is no legislative adjustment to the exhaustion regime following Brexit (i.e. 29 March 2019 or 31 December 2020, depending on whether or not the proposed Withdrawal Agreement is signed), the current wording of the UK Trade Marks Act 1994 will effectively maintain a form of regional exhaustion applicable to the EEA. Whether this is legally appropriate will depend on whether the UK will remain in the EEA. If the UK does not remain either in the EEA or in some kind of customs union with the EU, the UK Trade Marks Act will need to be amended to provide for a national exhaustion regime in the UK. Otherwise, the Trade Marks Act will effectively provide for a partial international exhaustion regime and will also discriminate against UK businesses wishing to export parallel imports to the EEA. INTA strongly supports the adoption of a national (UK only) exhaustion regime, or if membership in the EEA continues, a regional exhaustion regime, provided that certain criteria are met. National and regional exhaustion regimes provide protection to brand owners, safeguard the good will they build while protecting consumers from confusion, mistake or deception. Once it is decided whether or not the UK remains within the EEA post Brexit, the continuation of the current strong exhaustion regime for the UK requires only minor amendment to the Trade Marks Act of 1994 to ensure the legal certainty that businesses need to continue trading goods in and with the UK. To assist the UK government in its consideration of this matter, we are attaching annexes on the following: (1) further details on our recommendations with regards to the UK exhaustion regime post Brexit; (2) possible amendments to the Trade Marks Act 1994 to achieve implementation of a national exhaustion regime; (3) other considerations relevant to the exhaustion of rights; and (4) legal advice analyzing the various scenarios for a UK national or regional exhaustion regime. We hope that you will find these recommendations and information useful. Please do not hesitate to contact my colleague Hélène Nicora, Chief Representative Officer- Europe at [email protected]/ +3228803722, should you have any questions or need additional information. Sincerely Yours,

Etienne Sanz de Acedo INTA CEO Enclosures

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ANNEX I

MAINTAINING THE STRONG EXHAUSTION OF RIGHTS REGIME OF THE UNITED KINGDOM

Exhaustion of trademark rights: what is at stake? Exhaustion relates to the limits on the rights of a trademark owner to control distribution and resale of branded goods, after they have been put on the market by the trademark owner or with its consent. To the extent that the trademark rights have been “exhausted” after the goods have been so placed on the market, the owner cannot prevent further distribution or resale of these goods. Depending on the laws of a particular country, the following different exhaustion regimes may apply to goods placed on the market by the trademark owner (or with its consent): 1. National: After the trademarked goods have been placed on the market in the relevant

country, the trademark owner cannot prevent further distribution or resale of the goods in that country, but can prevent (on the basis of its trademark rights) the importation into, and sale in, that country of trademarked goods which were placed on the market in another country (unless it has consented to that importation and sale).

2. Regional: After the trademarked goods have been placed on the market in any one of a defined group of countries or a region, the trademark owner cannot prevent further distribution or resale of the goods in any country in that group, but can prevent the importation into, and sale in, any such country of trademarked goods where these were placed on the market in another country outside that group (again unless it has consented to that importation and sale). The European Economic Area (“EEA”) is an example, which also allows the trademark owner in a member state to prevent parallel imports from other member states where there is a “material difference” in the goods to be imported.

3. International: Where a country has an international exhaustion regime, the trademark owner cannot prevent further distribution or resale of goods in that country if it has consented to the placing of those goods on the market in any country in the world.

The current exhaustion of rights regime in the UK The UK is currently part of a regional exhaustion system, with the region being the European Economic Area (being the EU together with Iceland, Liechtenstein and Norway).

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Section 12 of the Trade Marks Act 1994, provides as follows:

(1) A registered trade mark is not infringed by the use of the trade mark in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent. (2) Subsection (1) does not apply where there exist legitimate reasons for the proprietor to oppose further dealings in the goods (in particular, where the condition of the goods has been changed or impaired after they have been put on the market).

This mirrors Article 15 of Regulation (EU) 2017/1001 of the European Parliament and of the Council (the “EU Trade Mark Regulation”), which currently applies to the UK and provides as follows:

1. An EU trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent. 2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.

There may be circumstances in which a trademark owner’s rights have been exhausted in respect of goods first placed on the market outside the EEA, and this has been considered in a number of judgments by the Court of Justice of the European Union (CJEU). These judgments have considered whether, in each case, the trademark owner consented to the importation of those goods into the EEA and the nature of the consent required. According to these judgments, consent may be express or implied, but must be clear and unequivocal, and mere silence is not enough. Brexit – its impact on exhaustion of trademark rights in the UK The UK is due to exit the European Union on 29 March 2019. In March 2018, the UK and EU published a draft Withdrawal Agreement, which provides for a “transition period” ending on 31 December 2020. Article 57 of the draft Withdrawal Agreement provides that rights conferred by an intellectual property right which were exhausted both in the EU and in the United Kingdom before the end of the transition period under the conditions provided for by EU law shall remain exhausted both in the Union and in the United Kingdom. The effect of this is that the regional exhaustion regime discussed above should remain in place until the end of 2020. As matters stand, unless there is a significant change in the position of the UK government, the UK will on Brexit date (whether on 31 December 2020 or 29 March 2019), leave both the EU single market and customs union, and cease to be subject to the jurisdiction of the CJEU.

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In such a case, if the Withdrawal Agreement is agreed, the UK’s exhaustion regime will need to be defined as a national regime in respect of the period after 31 December 2020. If no Withdrawal Agreement is agreed (in which event there will be a Brexit without a deal, with no transition arrangements in place), the UK’s exhaustion regime will need to be a national regime in respect of the period after 29 March 2019. One question which may arise is whether the UK will be able, under its international treaty obligations, to continue with the existing regional exhaustion regime. To answer this question, INTA sought the advice of senior intellectual property barrister, Christopher Morcom QC of Hogarth Chambers, who also is a distinguished member of INTA (see Annex 4). Having considered the agreement on Trade-Related Aspects of Intellectual Property (TRIPS) and the General Agreement on Tariffs and Trade (“GATT”), Mr. Morcom made these conclusions: 1. If the UK were not to remain a member of the existing EEA and customs union, it would not

be in breach of its obligations under these agreements if it were to adopt a national exhaustion regime.

2. If the UK were to remain a member of the existing EEA and customs union or becomes after Brexit Date a member of a “customs territory” (covering the UK and the remaining EEA) within the meaning of art XXIV of GATT, there would appear to be no prohibition under these agreements for the UK to maintain the existing regional exhaustion regime.

3. If the UK were not to remain a member of the existing EEA and customs union or becomes a

member of such a “customs territory,” there appears to be no other basis on which the UK could lawfully continue to provide for any kind of regional exhaustion of trademark rights.

If the UK were to leave the EEA and customs union (and the jurisdiction of the CJEU), and become a “third country” vis a vis the EEA but leaves in place the existing language of Section 12 of the Trade Marks Act of 1994 (i.e., “EEA exhaustion”), the effect would create the anomaly of partial “international exhaustion.” This means that members of the EEA would be able to export parallel goods to the UK without any conditions (other than what is effectively a material difference standard), while there would be no reciprocity given to UK parallel importers into the EEA. Likewise, non-EEA countries would not be able to ship parallel imports to the UK. However, regardless of whether or not the UK remains a member of the EEA, section 12 of the Trade Marks Act 1994 will remain in force after Brexit Date, and, assuming that the Withdrawal Bill is enacted in more or less its current form, Article 15 of the EU Trade Mark Regulation will form part of UK domestic law. If the UK is no longer a member of the EEA, amending legislation will need to be enacted to provide for a national exhaustion regime under UK trademark law. Finally, adopting an unqualified exhaustion regime (without any qualifications on consent or a material differences standard), would represent a much more significant departure from the law as it currently stands, and would go beyond anything the UK had before EU/EEA regional exhaustion.

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INTA’s position on the exhaustion of trademark rights INTA has a long-time established position which advocates a national exhaustion regime, i.e., covering independent countries. INTA believes that national exhaustion is in the best interests of consumers, trademark owners and the general public, as it helps ensure that consumers are given the ability to distinguish products and have confidence in the products they are buying and the source of those products in each country. This is beneficial to innovation and encourages thriving trade. INTA also supports regional exhaustion, but only in the case of a group of countries which have adopted a single, common market with an overriding governmental authority, which operates rules and regulations in the field of intellectual property for the common market, and which operates a court system which has the ultimate authority on the interpretation and enforcement of those rules and regulations. The European Union (or by special treaty the European Economic Area) is an example of such a single market. However, treaties allowing free trade in a given area may not meet the relevant criteria. INTA disapproves of international exhaustion (see Annex 3 for a discussion of issues), except in circumstances where the trademark owner has positively consented to the importation of goods bearing its trademarks. Such consent will usually be express, but may be implied from circumstances that unequivocally demonstrate that the trademark owner has renounced any intention to enforce its rights. In those countries that currently follow international exhaustion, and in which political or other conditions make it highly improbable that national exhaustion would be implemented, INTA’s position is that a “material differences” standard should be adopted in order to exclude parallel imports that are materially different from those products authorised for sale by the trademark owner in the domestic market. Material differences do not need to be only physical in nature, as many non-physical differences (such as the absence of product support, replacement parts, warranty, or instructions in the consumer’s native language) may be material to the consumer. Nor do the differences in question need to be so extreme as to threaten the health or safety of the consumer, as the consumer’s legitimate expectations may be defeated regardless of the risk of physical harm. Further, in disputes concerning parallel imports, INTA advocates that it is for the parallel importer or subsequent trader alleging consent to prove both consent and the absence of a material difference, and not for the trademark owner to demonstrate the absence of consent or the existence of a material difference.

https://www.inta.org/Advocacy/Pages/ExhaustionofTrademarkRightsandParallelImportation.aspx

https://www.inta.org/Advocacy/Pages/AMaterialDifferencesStandardforInternationalExhaustionofTrademarkRights.aspx

https://www.inta.org/Advocacy/Pages/BurdenofProvingConsentinParallelImportCases.aspx

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UK after Brexit – INTA’s recommendations:

INTA urges the UK government to not diminish the strength of the protection of trademarks under the current exhaustion regime, and to amend the Trade Marks Act of 1994 to conform the statute to the adopted exhaustion regime recommended by INTA.

INTA would support the UK maintaining its existing regional exhaustion regime if the UK were to remain part of the EEA.

If the UK were not to remain a member of the EEA after Brexit Date, INTA strongly

recommends that the UK adopt a national (UK only) exhaustion regime.

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ANNEX 2

Proposed amendments to the UK Trade Marks Act 1994

If the UK does not remain a member of the EEA and therefore adopts national exhaustion, an

amendment to section 12 of the Trade Marks Act would be required.

Such an amendment would be straightforward and has the benefit of providing trademark owners with some degree of certainty from the Brexit Date, because the questions of “consent” and ”legitimate reasons” in EU/EEA exhaustion are fairly settled CJEU law, which, as matters stand, will continue to apply from the Brexit Date unless and until deliberately changed by Parliament or by the UK Supreme Court. We suggest the following amendment to the Trade Marks Act 1994 to provide for national exhaustion:

(1) A registered trade mark is not infringed by the use of the trade mark in relation to goods which have been put on the market in the United Kingdom in the European Economic Area under that trade mark by the proprietor or with his consent.

(2) Subsection (1) does not apply where there exist legitimate reasons for the proprietor to oppose further dealings in the goods (in particular, where the condition of the goods has been changed or impaired after they have been put on the market).

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ANNEX 3

Considerations Relevant to Exhaustion of Rights Trademark protection via national or regional exhaustion carries the following benefits to businesses and consumers: Helping consumers to make secure purchasing decisions: Throughout the world, trademarks serve to assist consumers in identifying the specific product they are looking for and may have already purchased for years, and/or in finding a branded product that is intended to deliver a certain level of quality, service and consumer satisfaction, which is backed up by a reputable manufacturer and local distributor and appropriate warranties. Safety issues may also play a role in a consumer’s decision to purchase the respective product. Adapting products to markets is needed for the benefit of consumers: Consumers in each country have specific wishes and needs based on cultural, language, environmental and other market conditions in their country. Given the wide diversity of personal preferences among consumers and of environmental standards and conditions in unrelated cultures and economies, products bearing the same trademark often vary when produced for sale in different markets. For example: 1. personal care or cleaning products sold for use in some countries are formulated to meet hard

water conditions which do not exist in other countries;

2. a brand of toothpaste in one country may taste different from the same brand sold in another country because the trademark owner has researched local flavour preferences and tailored the product accordingly;

3. ingredients in motor oils need to be adjusted according to the climate in which they are

intended to be sold; 4. packaging, manuals and instructions may be in a foreign language, and may lack domestic

telephone numbers and other contact details for customer support; 5. in the case of electronic goods, issues may arise with goods manufactured for use in countries

with different electrical standards; 6. products may emanate from a country with different environmental protection laws or waste

packaging laws. Fostering innovation and research, and enhancing goodwill for businesses: Trademark owners design their products, packaging, sales and distribution networks to meet such specific wishes and needs. Consumers expect that products will be appropriately formulated for their

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country, and in the correct condition. Businesses wish to assist the consumer in identifying the sought-after product, quality and satisfaction, as it also benefits the business by encouraging repeat purchases, as well as new purchases from consumers who become familiar with the trademark. Well-designed products that are of consistent quality generate goodwill, and goodwill enhances the value of the trademark, which in turn typically generates more sales and supports additional research, marketing and product innovation. Moreover, trademark owners may find their relationships and contractual obligations for distribution of their goods in each jurisdiction to be harmed by the sale of parallel imports, and the loss of sales by these distributors can also impact on future research and product innovation. Price differences can be explained: Furthermore, the prices at which products are sold can vary from country to country for a great variety of legitimate reasons, among them different design features, different market conditions, different environmental standards, increased costs of production or distribution given the size of the local market and labour and material costs, regulatory requirements, and government subsidies and taxes, as well as differences in culture. Parallel importers are free-riding on the investment of brand owners without providing benefits to consumers: Parallel importers are those who import branded goods into one country from another country on which they have been placed on the market by or with the consent of the trademark owner. They exploit the above-mentioned conditions by buying products in a country where they are relatively cheap and selling them in a country where the price is higher (for the reasons stated above), ignoring that products are often designed to meet specific tastes, needs, environmental, cultural, language, and other market conditions in a specific country or region. Parallel importers argue that parallel trade enhances competition and benefits consumers by providing for a larger distribution of branded products at lower prices, although studies have consistently shown that the financial benefit to the consumer is minimal. It is the parallel importer who benefits financially. However, they typically spend less time and effort to ensure the quality of the product and may provide little, if any, warranty or service. Also, in case of the parallel importation of pharmaceuticals, various studies on the situation in the European Union, for example those of the York University, the Economic and Social Research Council in Great Britain, the London School of Economics and the Danish study from Odense, have effectively come to the conclusion that that the savings resulting from the introduction of parallel imports would be negligible in terms of total health care costs and between two-thirds and four-fifths of the price difference between the source and destination countries would be lost to the intermediaries. The reputation of the brands and the traceability of products to ensure quality are at stake: Price alone is not a consumer’s only concern when buying a product. The consumer relies on the trademark to identify specific goods or services that will meet certain expectations about the quality and characteristics of the product and the level of after-sales service. If these expectations are not met because a consumer receives a product intended for sale in another market, even if

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he or she has not been deceived in any way about the product, the consumer will be disappointed, and be left with no recourse, and they will usually blame the trademark owner. For trademark owners, parallel imports often lead to an inability to control the quality of their goods. If goods intended for consumers in one country are sold without authorisation in another country, the trademark owner loses the ability to ensure that consumers are receiving goods designed for their consumer preferences and needs and potentially to satisfy governmental regulations. Both trademark owners and consumers may suffer financially as a result of parallel imports. Consumers may find they have wasted money on differently formulated products that do not meet their expectations based on their past experience with the similar product formulated for sale where they live. Additionally, equipment produced for other markets may not carry a valid manufacturer’s warranty in the jurisdiction where it is purchased, and may not be serviced as readily as products manufactured for that jurisdiction. Also, many parallel imports are of “old” stock (often nearing the sell-by date) and for some products (e.g. perishable or medical) there is no certainty that they have been kept or transported in appropriate conditions. Parallel imports are often linked to counterfeiting: Finally, a further risk arises as those trading in counterfeit goods may exploit channels used to import, distribute and sell parallel goods, mispresenting counterfeit goods as ‘cheaper’ parallel products. Criminals may seek to pass off counterfeit goods as parallels or mix counterfeits with parallels, exploiting consumers’ lack of familiarity with packaging and other discrepancies.

ANNEX 4

Advice of Christopher Morcom QC RE: ‘Brexit’ and Exhaustion of Intellectual Property Rights

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