Victor Caddy, director at IP specialist Wynne-Jones, advises if movement of goods can be restricted under the terms of a new licence agreement, and whether the Treaty of Rome still stands.
The licensing sector is all about IP and brand extensions, many of which are creative and warrant protection.
Every business has some IP (defined as unique creations of the mind) and some of that can be protected legally by copyright, registering a trade mark or a design right, as well as by filing a patent.
However, the whole area of IP can be a confusing minefield for business leaders because it’s presided over by a niche legal profession, is a specialised business area and, by its very nature, intangible.
IP specialist Wynne-Jones has been listening to many industry queries over the past year or so – and in partnership with LicensingSource.net – it is now launching The IP Surgery, to help answer those burning questions. We want your questions, so we can provide the answers.
Today’s question: With impending Brexit and understanding that there are currently no trade deals in place, from January 1, for UK and Ireland licence deals can we restrict movement of goods into Europe under the terms of a new licence agreement? Does the Treaty of Rome still stand? And what are the conditions for a pre-existing licence agreement (signed prior to January 1, 2021)?
Victor says: “Licensing is a means of allowing a third party to use your intellectual property without infringing it. Usually, such rights are granted on a territorial basis. However, under the Treaty of Rome, and the principle of the free movement of goods, a UK-based licensee with a UK-only licence that was approached by a retailer from an(other) EU country and asked to sell licensed products to them, could do so, even though this amounted to sales outside of the territory of the licence.
These sales are known as ‘passive sales’ because they are initiated by the would-be purchaser and not by the UK licensee. Of course, in practice, it is easy for parties interested in trading this way to contrive a situation where the sales are deemed to be ‘passive’. After the transition period ends on 31st December 2020, the Treaty of Rome will cease to apply in the UK and a UK company with a UK-only licence will be in breach of their agreement if they fulfil passive sales requests from EU-27 countries (i.e. from countries still in the EU). As things currently stand, in the absence of an agreement between the EU and the UK governing the future trading relationship between the EU and the UK, once the Transition Period ends, it will be an infringement of a licensor’s trademark rights for a UK-only licensee to sell products to purchasers in EU-27 countries, irrespective of whether the licence was signed before or after 31st December 2020.
While we are on the subject, it is worth considering what will happen the other way around. In other words, can EU based licensees sell products to UK based purchasers after the Transition Period ends? Will the UK continue to be covered by the licence? Here we need to make a distinction between existing licences and new ones. With existing licences, the answer is that it will depend on the wording of the licence. Definitions of ‘Territory’ such as ‘the EU as constituted from time to time’, or ‘as constituted at the date of this Agreement’ are unambiguous, but where the Territory is simply defined as ‘the European Union’, the position is less clear and there is room for debate (i.e. good news for lawyers…).
The answer is likely to depend on the factual background of the licence, (meaning it requires case by case analysis). For example, was the term ‘European Union’ simply used as a convenient shorthand for a list of countries, (in which case, the licence would continue to cover the UK) or was it used because it had specific factual or legislative implications on the subject matter of the contract? If the correct interpretation is that the UK remains part of the licensed territory, there is a second question about whether the new UK trademark right derived from the EU trademark that the UK IPO will create automatically on 1st January 2021 is automatically included in the existing licence, even though it isn’t mentioned in the licence.
This is easier to answer, since the UK Intellectual Property Office has confirmed that, where a licence permits use in the UK under an EU trademark before the end of the transition period, the UK clone will be treated as being included in the existing licence. With new licences, however, if the territory is the EU, and the UK isn’t mentioned (and there isn’t a separate licence for the UK), the licensee will be unable to make sales – passive of otherwise – to UK purchasers without being in breach of the licence agreement.
A related subject is parallel trade and exhaustion of rights. Parallel trade is the import and export of genuine intellectual property (‘IP’) protected products, where those products have been placed on the market within a specific territory by, or with the permission of, the rights holder. Once this has been done, the rights holder is deemed to have exhausted its rights and cannot use them to prevent further distribution or resale of those products. Hence a parallel importer/exporter will buy products in a territory where they are relatively cheap and sell them in one where they command a higher price.
The EU and UK have agreed that IP rights exhausted in the EU and the UK before the end of the transition period will remain exhausted in both areas indefinitely. From 1st January 2021, however, EU law providing for the exhaustion of IP rights will no longer apply to the UK so an IP right will not be exhausted in the EU if a product protected by it has been lawfully put on the UK market. This means that the right owner can oppose parallel imports from the UK into the European Economic Area.
Consequently, businesses that export IP-protected goods from the UK to the EEA will need to ensure they have permission from the right owner. The UK government has been debating the options for what exhaustion regime should apply from next year. This is one area where things could change, depending on whether or not there is a deal. Also, there is particular scope for ambiguity in Ireland if there is no hard border. If a licensed product is put on the market in Ireland, has the trademark been exhausted in the EU thereby preventing the rights holder from enforcing the trademark against the licensed products in the EU?
Finally, the small print… there is still much uncertainty about exactly how things will be in this area after the Transition Period ends and, irrespective of whether or not there is an agreement between the EU and the UK before the end of the year, the UK Government could unilaterally change the rules after 1st January 2021.