Select Committee on Trade and Industry Eighth Report


Legal position and uncertainty

        (a)  In the deliberate absence of any accepted rule of international exhaustion, countries are free (providing there are no other constraints [as there are for EEA countries]) to decide how to apply the doctrine of exhaustion. In the absence of an internationally agreed norm, the issue of whether actual or implied 'consent' has been given to the placing of a trade marked product on the market has to be decided afresh on the facts of each individual case (paragraphs 9 and 10).

      (b)  Prior to the UK joining the European Union, it was widely understood that the UK national law (as in many other countries) recognised international exhaustion of trade mark rights; this was not however a major issue until recent years. The 1989 Directive, by avoiding the issue of international exhaustion, consciously left an area of uncertainty as to whether Member States could also allow for international exhaustion in their national legislation. In the absence of any clear direction either way in the 1989 Directive, the UK Government chose in the Trade Marks Act 1994 to avoid the broader issue of international exhaustion. The Silhouette judgment not only confirmed that international exhaustion was not compatible with the 1989 Directive; it specifically excluded Member States from adopting the principle (paragraphs 11, 12, 13, 16 and 19).

      (c)  The judgment in the Davidoff case further demonstrates the state of uncertainty and flux in the legal position over exhaustion and consent. Some of the issues surrounding trade mark "exhaustion" and consent have been repeatedly ducked in European and national legislation. We recommend that the Government consider adding to the Intellectual Property Rights (IPR) Action Plan a commitment to provide a legal framework for IPR which offers all those involved a greater degree of legal certainty (paragraphs 3 and 24).

Trade marks and different products

        (d)  Whilst we recognise the value of trade marks to brand owners, a trade mark's primary role is as a mark of origin; to reassure consumers of the authenticity and quality of the good they are buying. In this light, we are concerned that brand owners use the same trade mark on what are inherently different goods in different markets, thus misleading consumers. Where companies produce different goods for different markets under the same trade mark in recognition of differences in public taste or for other reasons, these should be more clearly identified by appropriate labelling. We would favour, in broad terms, an international regime which would ensure that the same trade mark is not applied to products which purport to be the same, but which are significantly different (paragraphs 25, 27 and 29).


        (e)  We were interested to learn of the existence of a voluntary dispute procedure [for look-alikes] in one sector: it is an example which producers and retailers in other sectors would do well to imitate (paragraph 33).

      (f)  We were surprised to learn that look-alikes would be covered during the Competition Commission's investigation into potential uncompetitive practices in supermarkets. We would, however, welcome the Commission taking this opportunity to examine the issue of look-alikes from the standpoint of competition. We are not convinced that the law is deficient in this area; the simple fact is that, whatever the law, brand owners are understandably reluctant to start legal proceedings against the supermarkets who are their largest customers (paragraph 36).

Motor cars and motorbikes

        (g)  Although we accept that there are bound to be areas of conflict between vehicle manufacturers and grey importers, we would be most concerned if these lead to problems in servicing which could ultimately endanger not only owners and grey importers but others as well (paragraph 45).

      (h)  So long as grey import vehicles can meet common safety, environmental and security standards there seems to be no overwhelming reason why any differences in specification, in themselves, should be a reason for preventing consumers from choosing to purchase them (paragraph 46).

      (i)  The Minister told us in oral evidence "It would be very interesting to see the Department of Transport's results in terms of the examination of vehicles which it has allowed in up to now to see if there are big differentials in terms of vehicle safety". We recommend that an assessment of this information is made publicly available in order to clarify where the main safety problems arise and to address the manufacturers' legitimate concerns (paragraph 46).

      (j)  We recommend that the Government consider the feasibility of implementing a labelling scheme for grey import vehicles other than personal imports. Any label should indicate that as a result of buying a grey import vehicle, there is the possibility of some problems in servicing. We also recommend that the Government considers running a consumer awareness campaign in order to ensure that consumers are fully informed of the existence of grey imports and are aware of the consequences of buying a grey imported vehicle. We are of the opinion that if consumers are aware of the fact that they are purchasing a grey import car or motorbike and that there may be some unforeseen consequences, then it is up to individual consumers to weigh up the pros and cons of purchasing these vehicles (paragraph 48).

Clothing and footwear: selective distribution agreements

        (k)   We have seen little or no evidence that the selective distribution networks, in a relatively low service and technological sector such as clothing, work in the favour of consumers. Such networks serve as much to maintain high prices as they do to carry out the legitimate function of preserving the brands image. Under EU law such agreements must be objectively justifiable; we would be surprised if some of those agreements described to us would pass this test. We recommend that the Government actively encourage the Commission to instigate studies into the realities of the operation of selective distribution agreements (paragraph 54).

Food and drink: consumer protection

        (l)  In the case of food and drink it is particularly important that consumers are fully aware of any differences in the contents of similarly branded food and drink products where these have not been produced for the UK market, and that they are clearly marked in English as such (paragraph 60).


        (m)  As parallel and grey importers exist primarily because price differentials exist, the fear that international exhaustion would have a substantial impact on the UK music industry indicates that there may indeed be quite substantial price differences outside the EU. We acknowledge that the music sector is in many ways different from those examined above. Whilst copyright is the most important intellectual property right, international exhaustion of trade mark rights may have a damaging effect on UK copyright industries (paragraphs 63 and 66).


        (n)  We recommend that Ministers encourage the new European Commission to continue the work of its predecessors in addressing the conflict between the need to complete the Single Market in pharmaceuticals and the desire for Member States to retain control of healthcare expenditure and pharmaceutical prices (paragraph 71).

      (o)   We are concerned that there is evidence that pharmaceutical products are being prescribed to patients with incorrect or missing instructions, instructions in foreign languages or in broken sets lacking batch numbers. We urge the Government to consider how the procedures for parallel importing of pharmaceuticals can be tightened up to eliminate such problems (paragraph 72).

      (p)  We would hope that the additional costs to the MCA attributable to parallel importing are fully reflected in the charges to the importers for licences. We have received conflicting accounts over the extent to which parallel trade brings financial benefits to the Government through lower wholesale prices. The evidence suggests while only a small proportion of the profit of parallel trade in pharmaceuticals accrues to the taxpayer in the form of lower levels of reimbursement to pharmacists, there are no overwhelming arguments in public policy to restrain such trade (paragraphs 72 and 76).

      (q)   We accept that the nature of the pharmaceutical market means that any move towards international exhaustion of intellectual property rights could have severe consequences (paragraph 77).

Other countries

      (r)  We have not found it easy to gather authoritative and consistent information on the doctrine of exhaustion as it is applied worldwide. There would be some benefit in an international body undertaking to set out clearly and unambiguously the situation of exhaustion as applied to intellectual property rights in the major trading nations. We recommend that the Government seeks to have such a task undertaken by the World Trade Organisation (paragraph 78).


        (s)   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 (paragraph 89).


      (t)  From the evidence we have received, car and motorbike manufacturers are both supplying the grey market and decrying grey trading, presumably at the prompting of their official dealer network. Likewise, we can only conclude that a number of clothing and footwear manufacturers at the very least connive in the supply of goods to the grey sector while naturally preferring to retain the option of using trade mark rights to halt it (paragraphs 42 and 66).


      (u)  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 (paragraph 90).

      (v)  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 (paragraph 91).


      (w)  We are aware of no particular demand for changes in the copyright regime towards international exhaustion. Given the importance of the copyright industries to the UK, we would recommend the exercise of great caution before proceeding down this path (paragraph 95).


        (x)  The Competitiveness White Paper set out an IPR Action Plan which included a number of objectives for patents- for example, to push for an EC patent which is affordable and easy to enforce, to ensure harmonisation of 'petty' patents, and to press the US to introduce a 'first to file' system. These are in broad terms admirable objectives: we will be tracking progress in their implementation together with the other objectives of the White Paper (paragraph 99).


        (y)  There is little or no evidence to connect the discussion over international exhaustion of trade mark rights with the problems of preventing counterfeiting and enforcing anti-counterfeiting legislation (paragraph 109).

      (z)  We look forward to seeing details of additional resources to be devoted to the fight against counterfeiting and piracy in the forthcoming White Paper on consumer strategy. Whilst the main weight of such action must be directed at those who manufacture and trade in counterfeits, some consideration could usefully be given to measures to bring home to those who connive in the trade by knowingly purchasing counterfeit or pirated goods the degree of responsibility they bear. Raising public awareness of the damaging effect of counterfeiting and its recognition in the public mind as an offence of dishonesty, is an essential pre-requisite to acceptance of more effective action against counterfeiting (paragraph 110).

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Prepared 8 July 1999