Examination of witnesses (Questions 384
TUESDAY 11 MAY 1999
MISS E M CRATCHLEY
and DR J L BETON
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
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.
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
(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 countryand this is one of the difficultiesthere
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
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
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.
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
abroadand this is what they were doing in the Hanson casethen
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
(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.
397. Is that not a case against second-hand
(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.
399. What evidence do you have to back up your
(Dr Beton) What I have seen in the press. There has
been a fair amount in the press about these Honda motorbikes.