House of Commons - Trade and Industry

Select Committee on Trade and Industry Eighth Report

V INTERNATIONAL EXHAUSTION OF TRADE MARK RIGHTS IN THE EU

84. There are a number of arguments put forward for and against the extension of exhaustion of trade marks from EEA to international. The bulk of these arguments can apply to most sectors, with some exceptions. The NERA report identified many of these arguments, which were clearly summarised in evidence by the Licensing Executives Society (LES).

Arguments against extending exhaustion

85. The arguments against extending exhaustion and retaining the status quo emphasise the following negative effects of international exhaustion:

"lower returns for trade mark owners which would inhibit investment in new brands, encourage firms to retire certain products from the market and lead to reduced quality and choice;

higher prices in markets outside the EEA and the possible withdrawal of products from those countries;

possibility of higher prices in the EEA if firms exit from lower margin markets so that fixed costs can no longer be spread over a wide volume of sales;

reduced effectiveness of trade marks in assuring quality and identifying origin;

possible reduction in quality and after-sale service;

difficulty in enforcing common technical or safety standards within the EU;

adverse impact on the future economic development of advanced economies which rely heavily on products with substantial IP content; and

reduced ability to detect and prevent counterfeits."[249]

Arguments for international exhaustion

86. The dominant argument in favour of international exhaustion was, unsurprisingly, lower prices. As LES summarised the further points:

"parallel imports provide additional competition, reduce the ability of the trade mark owner to exploit its position by setting higher prices in some markets than others and increase competition in the distribution of products;

the fundamental function of a trade mark is to protect consumers, not to create elements of monopoly in the market;

international exhaustion is consistent with the trend towards liberalisation of international trade;

new trends such as purchasing over the Internet will make it increasingly difficult to sustain the existing regime;

parallel importers would have the same incentives to offer good service as authorised distributors;

consumers would be prepared to forgo certain benefits in return for lower prices;

technical and safety standards will restrain parallel imports in many sectors; and

counterfeit problems should be attacked directly by effective detection and deterrence and not by inhibiting legitimate competitive activity."[250]

Potential effects

87. The Committee has received evidence strongly in favour of international exhaustion of trade mark rights and strongly against it. Unsurprisingly, the split lies between brand owners and manufacturers and grey and parallel importers. Opinions are also divided amongst those without an overriding interest. Mrs Singleton of Singletons Solicitors believes the UK should lobby for international exhaustion: "once suppliers have put their goods on the market anywhere in the world they should not be able to enforce intellectual property rights to prevent their further export".[251] Davies Arnold Cooper recommend that the European Commission accept international exhaustion.[252] The Institute of Trade Mark Attorneys told the Committee that "international exhaustion should apply when the goods are genuine".[253] Mr Willoughby of Willoughby & Partners stated that "for a brand owner to be deprived of his statutory right to control unauthorised use of his trade mark and to be deprived of his right to control what goes on the market under his name, the countervailing public interest will have to be overwhelming".[254] The TMPDF stated that: "the weakening of intellectual property rights by removing the right to resist parallel imports will lead to loss of sales within the EU, both in quantity and value. This will seriously and adversely affect the commercial positions and profitability of much industry in the UK and elsewhere in the EU".[255]

SWEDISH RESEARCH

88. In September 1998 the Swedish Government commissioned the Swedish Competition Authority to "investigate and analyse how the Swedish market and Swedish consumers and producers would be affected were Sweden to change its established legal practice and apply the principle of regional exhaustion of trade mark rights".[256] The report estimated that parallel goods were significant in the areas of: clothes, components and spare parts for cars, and shoes, and of some importance in foodstuffs, snow scooters, golf equipment, tyres and motorcycles. Price reductions in relation to normal prices are estimated as being around 10-30% in those industries where parallel imports are of major importance, but up to 50-70% in clothing. The report noted that the existence of low price imports and an awareness that such imports can be stimulated by high prices on the Swedish market "puts pressure on prices of normal sales through established prices".[257] The report looks at the effects of operating EEA rather than international exhaustion and concludes that:

— consumers would find prices rising which in total are estimated as equivalent to a single inflationary injection of 0.4% but in some areas the increase would not be significant;

— parallel importers would lose sales (SEK 5,500m) with a corresponding reduction of employment (around 5,500 people);

— established retailing would have increased sales (SEK 3,000m) and increased employment (around 3000 people) and profits of SEK 100m;

— state tax revenues would be reduced by SEK 750m, there would be an increase in unemployment benefits of SEK 350m as a consequence of the net increase in unemployment of 2,500 people.

The final conclusion was that "parallel imports do in fact lead to increased consumer benefits in Sweden".[258]

89. It has become very clear that, despite the NERA study into the consequences of trade mark exhaustion and the Swedish research, there is actually a deficit of empirical research measuring the impact of international exhaustion in both the short and long term. Dr Kim Howells told us that "there is very little basic research on costing this. We do not know what the implications are for the British economy".[259] Lord Simon has "instigated research into the Swedish proposals for international exhaustion of trade marks".[260] Following oral evidence and our request for additional information, the DTI made available to us the Government's assessment of the implications of international exhaustion for UK trade, based on the NERA and Swedish research. The main conclusion is that "whilst the impact of a change to international exhaustion for trade marks might be substantial in certain sectors, the overall impact on UK trade is likely to be limited."[261] Those sectors most at risk from increased parallel trade are also sectors where import penetration is "substantial", around 50% (and approaching 100% in trainers). "Increased parallel imports are thus most likely to replace existing imports".[262] Whilst we appreciate that it is difficult to determine empirically the precise size and character of the flow of parallel imports, we share the Minister's concern that very little empirical research has been undertaken into the potential effects of international exhaustion. Although we are satisfied that we have received enough anecdotal and other evidence to point the way forward, it would be imprudent for the European Commission or Member State governments to come to any final decisions without further study.

Conclusion

90. In our opinion, in the areas of clothing and shoes, perfumes and toiletries, and motor vehicles, the potential consumer benefits of international exhaustion of trade mark rights outweigh the dis-benefits. In some sectors the consumer benefits may, however, be outweighed by the problems that international exhaustion would bring with it; particularly in the pharmaceutical and music industries. Whilst a seamless approach to international exhaustion would be preferable, we do not see the justification for retaining EEA-wide exhaustion for trade mark rights for all sectors in order to protect one or two sectors. We recommend that the Government and the European Commission work towards adoption of a broad principle of international exhaustion of trade mark rights, allowing grey imports of goods but affording exceptional protection to those sectors where such a principle could be shown to have severe detrimental effects. Such a flexible approach would not only lead to cheaper goods for consumers, but would address the different needs of different sectors.

91. An integral part of this approach is the need to ensure that consumers are aware that the products that they are purchasing through the grey market may not be identical to those goods supplied through the official distribution channels in the UK. The American system is to require that in such cases the goods be labelled as 'materially and physically' different. We have some reservations over the detailed operation of the practicality of marking goods as 'materially and physically different'. However, we agree with the Minister that the American system for informing consumers about grey goods may provide a useful template for the way forward.[263] We recommend that, in tandem with encouraging all concerned to move towards a regime of international exhaustion with reserved sectors, the Government and Commission design procedures for those sectors where international exhaustion is to apply for labelling of grey goods which are materially different to those of the same brand on the domestic market.

249 Ev, p170 Back

250 Ev, p170 Back

251 Ev, p159 Back

252 Ev, p220 Back

253 Q450 Back

254 Ev, p176 Back

255 Ev. P99, para 5 Back

256 Parallel Imports - Effects of the Silhouette Ruling, Konkurrensverket, p8, para 1.2 Back

257 Parallel Imports - Effects of the Silhouette Ruling, Chapter 6, Overall Assessment, p61-62 Back