Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by the Trademarks Patents and Designs Federation


  1.  TMPDF includes among its members many large UK companies, as well as smaller ones and UK subsidiaries of foreign parents. Through the Federation, common positions in relation to the acquisition, scope and use of intelluctual property rights (which include patents, trade marks, designs and copyrights) can be presented. The Federation welcomes this enquiry and appreciates the opportunity to submit points for consideration.

  2.  The Court of Justice of the European Communities (ECJ) has made a number of decisions concerning the exercise of intellectual property rights. It has often been the case that little or no distinction has been made in those decisions between the various categories of right, and a substantial number of decisions have related to cases where the right concerned was a patent. In view of this, many of the points in this submission will be in relatively general terms, not restricted to trade marks. In recent decisions, the ECJ has confirmed that so-called "international exhaustion" principles do not apply, to trade mark rights at least, in the European Union (EU).

  3.  The Federation is very concerned by recent attacks on the legitimate use of an intellectual property right in an EU country to resist so called "parallel imports". Parallel importation may take several forms; we are here concerned with the import to the EU of a product whose nature or marking infringes an EU right and which has been first sold in a non EU country, to which the product may have been exported or where it may have been produced locally under licence, such that it can be said that the EU right owner has consented to the sale in that country. If the right to resist this form of parallel importation were to be regarded as "internationally exhausted" by the foreign sale, and thus effectively abolished, then in some circumstances the product might be able to enter the EU market at a lower price than that of the product when put on the EU market directly. This would occur when traders were able to buy the product in sufficient quantity in a country where the price was significantly lower than in the EU and after transporting to the EU, be able to re-sell there at less than the previous EU price. It must be stressed that such unrestricted parallel trading would have a serious and damaging effect on the health of EU based companies and their ability to provide longer term investment and employment in the EU.

  4.  The Federation is aware of a recent study on the economic consequences of the choice of a regime of exhaustion in the area of trade marks, carried out for the European Commission by the National Economic Research Association (NERA). This study explains some of the disadvantages of an international exhaustion regime specifically in relation to trade marked products in a number of product fields and indicates some of the risks to the EU economy if such a regime were introduced unilaterally [because the EU would encounter the full range of problems caused by parallel imports, while its major trading competitors, such as the USA and Japan, would not]. The study appears to suggest that bilateral agreements with these competitors to accept international exhaustion might be possible. It should be noted, however, that such agreements would not be permissible under the rules of the World Trade Organisation (WTO), which require that any advantage given to one country must be given to all. A multilateral agreement involving all members of WTO is also suggested. This seems, in the Federation's view, very unlikely to come about and for reasons which appear below would be much against the legitimate and reasonable interests of the EU and its industry. Finally, the NERA study appears to conclude that the longer term effects of international exhaustion on the EU are more important [than any possible short term advantages to some EU consumers] and difficult to predict. It concedes that the effects could include relocation of production [away from the EU] as well as product and distribution strategies, with consequent economic impact. The Federation considers that the longer term effects may be difficult to predict in detail, but are clear enough in general terms and will be very damaging to the EU.


  5.  Industry in the EU relies heavily on intellectual property rights of all categories, trade marks being very important for many particular products, to protect investment in research and development, promotion, distribution and service networks, quality, reputation and guarantees. 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, with adverse consequences for the EU economy and for employment prospects. Major manufacturers in the EU and also from non EU countries will be seriously discouraged from developing new UK or other EU facilities. Existing facilities will be put at risk of relocation to non EU countries. Small and medium enterprises (SMEs) trying to expand into foreign markets will be badly hit by the loss in quantity and value of EU sales.

  6.  The EU right owner may not have an intellectual property right in the exporting country from which the parallel imports come, and thus cannot be said to have exhausted his right there. It is often the case that no worthwhile right can be obtained in the country concerned. Equivalent rights may not even be available in that country and if they are, they may be expensive, procedurally difficult to obtain and of doubtful enforceability.

    It is extremely expensive indeed, well beyond the means of most SMEs and even large companies to secure protection in all countries where marketing of the relevant products (under licence where necessary) might occur. Moreover, procedures for securing rights in many countries are extremely slow and difficult, such that marketing might take place long before rights have been granted. Even when granted, it can often be very difficult to exercise the rights against copyists in the country concerned, because of slow, cumbersome and uncertain court procedures. In all these situations, marketing in the country concerned often has to be at a "commodity price" which does not reflect research, development, promtion and infrastructure costs, in order to compete with copyists who have had no such costs.

  7.  The products put on the foreign market will be adapted to that market and will often have different characteristics, to meet different consumer requirements and different regulations. They will be subject to different guarantees and after sale service. They might undermine the right owner`s reputation if they were to be re-sold on the EU market. It is highly unlikely that the parallel importer will offer the guarantees and service that are appropriate to the EU market and an addiitonal burden will fall on the right owner, to defend his reputation, if parallel imports become admissible.

  8.  The countries covered by the World Trade Agreement do not constitute a customs union and economic area such as the EU, or even a free trade area. In the world outside the EU, there are still many tariff and non tariff barriers, considerable differences in economic conditions, state price controls and government regulations. Thus the exhaustion principles applied within the EU are not appropriate for more general application.

  9.  Product prices within a given market are affected by such matters as distribution and servicing costs, sales volumes, company taxation, state regulations and other infrastructure expenses, such as advertising and premises costs, labour costs and salary levels determined by local conditions and whether intellectual property rights, if held, are effective. Currency exchange rates too can result in imports being cheaper than locally manufactured products. It is not surprising therefore that there can be, quite legitimately, significant price differences between different markets.

  10.  The price at which the EU right owner sells the products in question in a non EU country has to reflect the economic level and situation of the country concerned. Manufacturers in low labour cost countries may be licensed to make the products so that they can be put on the market there at a price reflecting local market conditions. Undesired parallel import of these products to the EU could destroy EU development and manufacture.

  11.  Companies aim to set prices which make a proper contribution to innovation, development, and promotion costs, as well as the basic manufacturing costs. To obtain this contribution, the "innovation price", effective and enforceable intellectual property rights are necessary, otherwise copyists, who have none of the innovation and promotion costs, will have free rein to secure much of the market. There would soon be no innovation or promotion. In many countries it is not possible to achieve a proper innovation price, due to the cost, complexity and delays in securing rights or their non availability or the difficulty in effectively enforcing them through local court systems. Such problems are worst for SMEs. However, it can still be worth selling in such markets because the sales help to support production levels and can thus contribute to basic overheads. However, products sold on such markets will be very vulnerable to purchase by parallel traders if parallel imports become legitimate.

  12.  Under an international exhaustion regime, the main beneficiary will often be a trading company which has done nothing to create or promote the product concerned. The trading company will buy the product in quantity in any country where prices are relatively low and transport it for re-sale where prices are higher. In many cases, the trading company will put the product on the higher priced market with only a relatively small difference in price. The "benefits" will often go more to the trading company than to consumers. International exhaustion will prevent innovative companies from achieving an adequate return on their investment in innovation and give the profits which should fund further development to trading companies which neither innovate nor build up markets.

  13.  To mitigate the adverse effects of international exhaustion regime, if it is introduced, an innovative company may withdraw from some foreign markets altogether, or may sell in them at higher prices than commercially appropriate. Not only will there be less technology transfer, and consumers in those markets will be adversely affected, but also sales volumes will be reduced, with adverse consequences for all involved in development, production, distribution and sales in the EU market. EU prices would be likely to rise. There might also be more copying and counterfeiting in the foreign market if the legitimate product is not sold there at an appropriate price, with added problems for international trade.

  14.  In general, an international exhaustion regime will make it much easier for counterfeits and unauthorised products to enter the EU. Since even a legitimate product which is a parallel import from a foreign country will not necessarily have the same specification as the product intended for the EU market, and unauthorised products may be derived from a production overrun by a licensee, it will be often very difficult to identify counterfeits.

  15.  Another strategy likely to be adopted by EU manufacturers, if an international exhaustion regime is established, will be to relocate their production and development facilities to countries which do not follow international exhaustion regimes, and/or to countries where production costs are much lower than in Europe, thus depriving the EU economy of investment and employment.

  16.  An international exhaustion regime is likely to discourage innovation and raise costs in any country or region which adopts it. Technology transfer to such a country or region will be chilled. The USA in particular will not adopt such a regime comprehensively when contrary to US trade interests. Europe would put itself at a disadvantage to the US by adopting such a regime.

  17.  Consideration of this subject can be unduly influenced by occasional high profile cases where it is argued that the prices of certain branded consumer goods are substantially higher in Europe than in some other countries. There are many reasons for differences in price levels between different countries, some of which have been discussed above. The differences can in most circumstances be fully justified and there is no reason because of them to attack intellectual property rights. In the few situations where there are no good objective reasons for price differences, competition law, either UK or EU, can be invoked. (For example, in a high profile case concerning compact discs examined by a Parliamentary select committee and the Office of Fair Trading (OFT) not long ago, it was determined that price differences between the USA and UK were not the result of the exercise of intellectual property rights.)

  18.  With specific reference to branded products, it is to be observed that consumers are not obliged to buy proudcts of a particular brand name. The brand name gives no monopoly over the specification and manufacture of the products themselves. It is nearly always an option for a consumer to buy a competing product of similar specification (except where there is also extensive patent or design protection) from a different manufacturing source. Consumers may of course choose a product of a particular brand not only for its expected quality, but also because of the personal status that possession of a high value branded product is thought to confer. It is their choice.

  19.  Some commentators suggest that the exercise of an intellectual property right in the USA and Japan is already subject to forms of international exhaustion. To some extent, this results from a misunderstanding of the systems actually in force. In Japan international exhaustion is not recognised. Recent court decisions have interpreted the law as providing for "implied licence", such that the right owner can resist the import of products first put on a foreign market with his consent, provided that geographical restrictions on further sale have been imposed. Moreover, the import of products which are not made to Japanese specification can be resisted. In the USA, the law is similarly interpreted as providing for "implied licence" as regards foreign sales, and geographical restrictions can be imposed on these. In particular, the 1988 trade mark code provides that an imported product which carries a mark which copies or simulates a US mark or which leads the public to believe the product has been manufactured in the USA can be prohibited under the US right. Such a product will not be stopped on entry under customs procedures when it is identical with that normally on the US market and when the foreign trade mark is identical and in common ownership with the US mark, though court actions have established at the least that if the imported product differs in a material way, eg, as to labelling, warranties and/or content, which presumably would cover after sales service, it may be prohibited. By contrast with Japan and the USA, under the exhaustion regime practised in intra Community trade within the EU, contract terms imposing geographical restrictions on further sale would be invalid. Moreover, parallel imports of goods meeting different specifications can be prohibited in those countries.

  20.  British law is currently in line with EU law, and parallel imports can be prohibited by rights owners. However, before the UK joined the EU, British courts interpreted UK law as recognising an implied licence when a product protected by an intellectual property right in the UK was sold abroad. While seeing no reason to change the present Community rules, the Federation would have no great problems with returning to the doctrine of implied licence.

  21.  Finally, it is worth noting that there is nothing in intellectual property law to prevent UK consumers acquiring products in non EU countries and importing them to the UK for personal non commercial use, eg by mail order or by the Internet or in personal luggage.


  An international exhaustion regime will have the following disadvantages for the EU (particularly including the UK) and its industry:

    —  Loss of "innovation price" sales in EU will lead to downturn in research and development. Technology transfer to the EU will be chilled;

    —  Loss of direct sales volume in EU by EU based industry will weaken the EU economy and employment;

    —  Some companies will react by opting out of foreign markets or increasing prices in those markets. Either way, a loss of production and increase in prices within the EU will result;

    —  Other companies will be encouraged to relocate production outside the EU, with consequent loss to the EU economy;

    —  The main beneficiaries will be trading companies, many of which are not based in the EU. These will not devote profits to research and development or promotion of new products;

    —  Guarantees and after sales service are unlikely to be provided by parallel traders. They are not the responsibility of the rights owner, since the products will have been resold in a market for which they were not intended, but nevertheless will be a burden;

    —  Entry of counterfeits to the EU will become easier.

20 May 1999

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