Select Committee on Trade and Industry Minutes of Evidence


Examination of witnesses (Questions 384 - 399)

TUESDAY 11 MAY 1999

MISS E M CRATCHLEY and DR J L BETON

Chairman

  384. Good morning. We have been looking at matters relating to intellectual property and we have had a number of people and we are very pleased to welcome you this morning. One of the things which we have been concerned with and which we should like to raise with you is the question of international exhaustion, which we understand is a concept which you do not have much sympathy with. On the other hand, we find that there are some areas where the degree of content which constitutes intellectual property is perhaps not so great. We are thinking here for example about whether there are any areas where you could accept unrestricted parallel trade. We have taken evidence, for example, from Tesco about clothing. We have already had from them the possibility that small motor cycles might come in and we know that larger motor cycles are coming in. Apart from your principled opposition to the concept of international exhaustion, would you see areas where you might be prepared to relax your opposition or do you see this as a seamless concept which must embrace everything?
  (Miss Cratchley) We really see it as a seamless concept. We have never really been in favour of discrimination against one sector or various sectors. Although having discussed this question beforehand, we do have to say that there are some sectors, some of which you have mentioned, where in the ultimate we might have to live with international exhaustion. As a matter of principle, we think it is preferable to have a seamless concept rather than say you can have international exhaustion for clothing but not for drugs. The definition might get a bit difficult, but I suppose it would be possible to do.
  (Dr Beton) It is possible. This does happen in other sectors. We do not like it because once you start to divide the market up, then you get invidious arguments about whether this should be in and that should be out and so on; such things are difficult.

  385. May I put it to you this way? If consumers are having to pay artificially high prices for goods, as they seem to have been doing in the motor cycle market prior to parallel trading, two things have happened as a consequence of parallel trading: one, the price has come down; two, the recognised suppliers have responded by decreasing their prices, that is they have had to respond to competition. Then in areas like selling a perfume, we find that airlines, who invest no money in the sales or the presentation of the perfumes sell them in the aisles of an aircraft speeding through the sky and they do so at a reduced price compared to the prices one might pay in Oxford Street if one went into Selfridges or wherever. The idea in Selfridges and other places like that was that they had trained staff and they spent a lot of money on presentation. But it seems that some of the suppliers are prepared to tolerate the sale of their goods in aircraft at reduced prices but not in a local pharmacy which is getting supplies through parallel trading.
  (Miss Cratchley) That is a question of lifestyle. If you are in an aeroplane, then you are obviously fairly well off and you are going somewhere and it is all very nice and you can buy some perfume and maybe it is reduced in price, though I must confess I have found that the reduction in price is not that great on perfume, whereas if you go and buy Chanel No. 5 in Tesco's, the ethos is not quite the same.

  386. It smells the same though.
  (Miss Cratchley) I know it smells the same but that is not the brand image. If my husband gave me Chanel No. 5 and I found a Tesco sticker on the bottom I would be rather annoyed, but that is brands. Yes, he should have peeled it off, but knowing my husband, he might not have done.

  Chairman: You are not married to a Scot who would be delighted.

Mr Hoyle

  387. I am amazed that you say the good people of Chorley should be ripped off and they should not be allowed to buy from Tesco, but that is another argument. That is what you are suggesting and that is what you are trying to defend, but I will move on a little bit, if I may. Prior to the UK joining the EU, British courts interpreted UK law as recognising an implied licence when a product protected by an IP in the UK was sold abroad. The TMPDF say that British courts had a doctrine of implied licence prior to joining the EU. The Chartered Institute of Patent Agents claim that the English courts have historically favoured international exhaustion. Why the differing interpretation? Can you briefly explain the UK situation prior to the UK joining the EU? How does the doctrine of implied licence differ from international exhaustion? If companies were not deterred from locating in the UK when there was an implied licence, why should they be deterred if international exhaustion is applied?
  (Dr Beton) Implied licence means that if you do not put terms in your sales contract, the goods are then freed from any intellectual property right you might have. But you were allowed to put in restricted terms, especially geographical resale terms. These terms had to be brought to the notice of subsequent purchasers and as the chain gets longer, eventually these drop out and the protection vanishes. There has been a recent case which confirmed this. I cannot remember all the facts of it. Exhaustion is another matter, because what exhaustion means is that you have lost your rights, whether you put geographical resale restrictions on or not. Everybody talks about exhaustion in the United States. This might be so in a very restricted trademark area, but it is not so for patents for instance. People do put geographical restrictions on and it is not an anti-trust offence to do that. You might almost say that we in our common law jurisdictions, in the United States and here and Commonwealth countries, have followed the implied licence path of getting a fair balance between the manufacturers and the consumers. On the continent on the other hand, they came up with exhaustion which is a much more peremptory doctrine. That of course is what you have with regional exhaustion under the Treaty of Rome and as confirmed by the European Court.

  388. It is interesting because, in fairness, in America the prices are a lot cheaper. It is only in the UK where we really get a good hammering from all the companies. I believe goods in the UK are over-priced; there is no doubt about that. In fairness to America, they do get much better value. Let me take you to somewhere like Sweden, a Scandinavian country, where recent research indicates net benefits from international exhaustion. What in your opinion makes Sweden so different from other countries including the UK?
  (Dr Beton) The main thing is that there is a much smaller manufacturing sector. In that report prepared by the Swedish competition authorities, of which I have a copy, they do not even ask the manufacturing sector what they thought about it. It is very, very curious. The other thing is that there is an awful lot of conjecture and theorising in this report. They calculate an effect on prices of 0.2 per cent, but then they think that there would be some indirect competitive effects which would make it 0.4 per cent. That is total conjecture: one cannot be sure of that figure at all. The other thing they do is cherrypick certain sectors. They cherrypick the ones which particularly affect the consumer: clothing, car parts, footwear, things of that sort. Interestingly, they say that in the pharmaceutical sector there is no international exhaustion as such, there is only regional exhaustion. That has never caught up with them in Sweden, so they are not bothered by it.

  389. Could not geographical resale contract terms be enforced in practice and would they not be seen as anti-competitive now?
  (Dr Beton) They are not anti-competitive in the United States and were never so considered here. The developing countries apparently do consider them anti-competitive and if you sell your goods in a developing country—and this is one of the difficulties—there is likely to be a local rule saying that you may not put export restrictions on the goods. The effect of that is to give up exporting to developing countries or to licence them. This is most unfortunate.

  390. Does it really stop companies?
  (Dr Beton) Yes; yes. It is hard enough for them to export as it is, with our high exchange rate. If they are supplying a low-priced market and the goods are going to come straight back, that stops them.

  391. So it is about companies setting up market share and not being bothered about whether they are giving value for money in the UK. That is the danger. Would you say South Africa was a developing country, because I would not? We certainly know that that is one area where perfume is coming back into Europe. How do you explain that?
  (Dr Beton) I have not considered South Africa. It is a very strange place, is it not? It was a developed country once.

  392. Are you saying it is no longer developed? That is strange.
  (Dr Beton) No, not necessarily. It is a developed country, it is regarded as a developed country but it has a huge poor population.

Chairman

  393. Could you give us some examples of the areas and the goods which you think are being affected in the way you have described them?
  (Dr Beton) Exports to probably the whole of black Africa would fall in that category of low-priced markets. This is probably equally true of South America and Asia. I do not know the details of those. The US is also a low-priced market.

  394. In these circumstances would you say therefore that people refuse to export because they are frightened of re-importing?
  (Dr Beton) At the moment they do not have to worry about it because the goods do not come back. In the past they relied on their geographical restrictions and this seemed to work. One has also to bear in mind that the market is far more global now than it was say 20 or 30 years ago. As it globalises, these problems become larger and larger.

Mr Laxton

  395. You made reference to the US market. What are your views on the situation where the US are allowing the restriction of grey goods if they are physically and materially different, although if they are labelled as such they will not get involved in restricting those through their Customs services.
  (Dr Beton) It is a very complicated situation in the United States. In practice patented grey goods do not come back, but they seem to be able to rely on the geographical restrictions. With copyright grey goods it depends what they are. If the work has been made abroad, apparently they can stop them coming back. If the work was made in the United States and they label the things abroad—and this is what they were doing in the Hanson case—then the Supreme Court has said no. That is because they have to be treated as though they were goods sold first in the United States then sent out and re-imported. Moving over to the trademark situation, if the goods are different, then quite clearly grey imports can be prevented from coming back, re-entering. If the mark is different and can be held to cause confusion in the market, then again they can stop the goods coming back. For instance, you might have a licensee abroad and you make him use a somewhat different mark, then this could be regarded as confusing the American consumer so it cannot re-enter. If the goods are identical with an identical genuine mark then that is the one case where the goods do come back.
  (Miss Cratchley) I had a case when I was employed by my former company who were selling Shield soap here and Shield soap was sold in the United States, the formulation was different and the packaging was somewhat different but Shield soap was exported from the UK into the US and eventually our subsidiary in the US managed to stop it. I am not sure that is a bad thing because if the consumer is buying something which he thinks is going to be the same as what he bought last time, that is the home-produced product, and it is different, then at least there ought to be a warning. If you do think you are going to buy the same thing and you get it home and think it is not the same, then that is not good for the consumer.

  396. You said in part of your evidence to us that you thought it highly unlikely that parallel importers would offer guarantees and services which are equivalent or appropriate to the EU market. Do you see that as a particular problem? Consumers are pretty sophisticated about things. For example, if we buy a piece of kit over here, electrical goods for example, often very strong attempts are made to get you to buy lifetime, five-year guarantees, all that sort of business and most people, myself included, say thanks, but no thanks. Are people not really sophisticated in terms of picking and choosing what sort of guarantees they would want and additional services?
  (Miss Cratchley) I would have thought they probably are. I agree with you as far as hi-fi equipment is concerned. I am not going to buy a lifetime guarantee. If it goes wrong in five years' time I shall go out and buy another one. I am not sure about things like motor cycles, cars; I am not mechanically minded. If my motorbike went wrong, and it is an expensive item, it is not something I am going to junk and buy another one, I would feel much happier if I knew I had some aftersale service and a reputable distributor I could go to talk to about it.
  (Dr Beton) I would not dare buy a parallel imported second-hand Honda motorbike, which I believe is what has being gone on. I would be worried about what the first owner did to it and I would not touch it.

Mr Berry

  397. Is that not a case against second-hand motorbikes?
  (Dr Beton) I suppose it is.

  398. So are you going to ban that?
  (Dr Beton) No; you take your chance on it. I believe that some of these parallel imports were in fact second hand goods.

Mr Hoyle

  399. What evidence do you have to back up your comments?
  (Dr Beton) What I have seen in the press. There has been a fair amount in the press about these Honda motorbikes.


 
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