Flight from Fortress Europe?

This article was previously published in IP Magazine in May 2016

On the 23rd of June 2016, the people of the United Kingdom will decide whether or not to remain within the European Union.

History of the Union

The EU has its origin in a series of treaties concluded during the aftermath of the Second World War. These culminated in the creation of the European Economic Community in 1958. The founding members of the EEC included protagonists from both sides of the conflict. From those beginnings, the EEC evolved into the modern European Union with a total of twenty-eight Member States. The EU incorporates over 7% of the global population and was the world's largest economy in 2014 with a nominal GDP of approximately 18.5 trillion US dollars.

The goal of the EEC, and later the EU, was to promote economic integration between Member States by facilitating a single market and allowing the free movement of goods, services, capital and people across that market. A significant obstacle was the variation in Intellectual Property regimes among different Member States. Over the last three decades, the EU legislature has brought national IP systems into harmony and created new, EU-wide IP rights.

The EU Intellectual Property Regime

The poster-child for the EU Intellectual Property regime is the European Union Trade Mark, formerly known as the Community Trade Mark. A business can own a single EUTM and enforce its rights equally across the whole Union. In some cases, it can also obtain a single injunction preventing the sale of infringing goods anywhere in the EU.

The EUTM's less charismatic sibling is the Registered Community Design. Another unitary right, it protects a registered product design across the whole EU. EUTMs and RCDs operate alongside the pre-existing national systems of trade mark and design registration.

EU directives have also harmonized many aspects of national IP regimes. The most important are the rules on exhaustion of trade mark and design rights. Once a brand owner puts goods on the market in the European Economic Area (the EU, Norway, Liechtenstein and Iceland), it cannot use its rights to prevent resale of the goods. By contrast, where products have been put on the market outside of the EEA, the brand owner can prevent their import into and resale in the EU.

The tests for validity and infringement under national laws are also harmonized. In theory, a party which owns national trade mark or design rights in a number of Member States should obtain comparable enforcement outcomes. These tests fall under the ultimate arbitration of the Court of Justice of the European Union (the 'CJEU'), which regularly provides binding interpretations that must be followed by national judges.

The combination of unitary European Union IP rights and harmonized national IP provisions creates what is known colloquially as 'Fortress Europe' – a regime where IP owners are granted strong powers to prevent the flow of goods into the EU from outside, but have far less freedom to interfere with the flow of goods within the borders of the Union.

So what will it mean for trade mark and registered design owners if Britain decides to leave Fortress Europe?

The fate of EUTMs and RCDs

The most immediate impact, in IP terms, will be on EUTMs and RCDs. Since the scope of those rights is defined by reference to the territory of the European Union, they will no longer provide enforceable rights in the United Kingdom.

Some commenters suggest that the UK may remain part of the EUTM and RCD systems despite leaving the EU. This is wishful thinking. Such an outcome would require substantial amendment to the Council Regulations which create and govern the EUTM and RCD. It is unlikely that the EU institutions will be prepared to revise the Union's own primary legislation in order to accommodate a departing Member State.

It is possible that the UK legislature will pass unilateral national legislation allowing EUTMs and RCDs to be enforced within the UK courts. A similar arrangement is in place in Jersey. However, this would be a short-term solution and would create an imbalance unfavourable to local interests within the UK.

The EU-wide IP rights are balanced against local interests in Member States. For example, an EUTM cannot be registered if it would be offensive to the population of a particular Member State or commonly used in trade in that country. Similarly, the owner of national trade mark rights can prevent the later registration of a conflicting EUTM. These checks and balances will not extend to the UK after its departure from the Union.

Nonetheless, the UK will have to recognise the position of existing EUTM and RCD owners unless it wishes to alienate many international IP owners. The most likely solution will be a grace period during which EUTM and RCD owners will be able to re-register their rights as national UK trade mark and design registrations while retaining the same effective priority dates as the existing EU-wide rights. This is the solution that was adopted in 2011 when the national Montenegrin trade mark system separated from the Serbian trade mark system, which had previously covered both jurisdictions. If the UK goes down this route, it is likely that the re-registration procedure will involve costs for businesses.

Re-registration of EUTMs and RCDs and the increase in new national filings are likely to place administrative pressures on the UK Intellectual Property Office. Although the UK IPO is one of the most efficient and user-friendly IP registries in the world, it will certainly require significant additional resources in order to maintain its high service levels during the period following an EU exit.

The fate of EUTMs and RCDs is likely to be one of the more straightforward aspects of an EU exit. It is far harder to predict the impact as the UK's trade mark and design systems gradually 'deharmonize' from the European Union IP regime.

Exhaustion

The fact that the UK will no longer be subject to the EU rules on exhaustion of trade mark and design rights means that it will now sit outside the curtain wall of Fortress Europe. Owners of trade mark and design rights within the EU will be able to prevent their goods from being imported into the EU from the UK. This will have an impact on parallel importers and on the secondary markets for many goods. In principle, the owner of an international automobile brand will be able to prevent someone in the UK from selling their cars second-hand to a buyer in continental Europe.

The UK may develop a national exhaustion rule for trade marks and designs which would allow IP owners to prevent the resale within the UK of any goods which were not first placed on the market in the UK. Such a measure would be very popular with international brand owners since it would allow for significant price differentials in the UK. However, in all likelihood the UK will come under pressure to move in the other direction and adopt universal exhaustion rules for trade marks and designs.

Universal exhaustion means that once goods are placed on the market anywhere in the world, then IP owners cannot use their IP rights to prevent resale. This is the starting point for the majority of non-EU countries, although many limit the exhaustion of IP rights in cases where imported goods are materially different from those placed directly on the market in the jurisdiction.

If the UK adopts universal exhaustion rules, this will make it much easier for low cost goods to be parallel imported into the UK from other parts of the world. While this may reduce prices for consumers, it is likely to create headaches for UK businesses that operate within the distribution chains of international brands. It is also likely to be a flashpoint for tensions between distributors and brand owners and could give rise to increased disputes in this area.

Divergent Jurisprudence

Aside from exhaustion, an exit from the EU also means that UK judges will no longer be bound by the CJEU when examining trade mark and design cases. A number of UK judges have expressed regular frustration with the CJEU's interpretations and may relish greater autonomy. This will have a subtle but significant long-term effect and is likely to lead to a substantial divergence between jurisprudence in the UK and in the rest of Europe.

Historically judges in the UK have leaned in favour of the defendant in trade mark and design matters. By contrast, a number of the civil law jurisdictions in continental Europe, notably France and Germany, have favoured claimants. It is arguable that this tendency arises from divergent economic history. Britain has long been described as 'a nation of shop-keepers' while France and Germany are historically dominated by industrial and agricultural production. Since the retailer is most often on the defendant side of trade mark litigation, perhaps that is where the sympathies of a British judge tend to lie.

In the long-term, this judicial inclination may lead to a narrowing of the scope of IP rights in the UK compared with other jurisdictions. Circumstances that would result in trade mark infringement in the EU will be less likely to constitute trade mark infringement in the UK. While this may make it easier for retailers and distributors operating solely within the UK, it is also likely that this disconnect will create unexpected disputes for UK businesses entering the European market.

Next Steps and Action Points

If the British people do vote to leave the European Union on the 23rd of June, there will be no immediate change. The UK government will need to give notice of its secession from the Union and there will be a minimum two year negotiation period before the UK actually ceases to be part of the EU. So businesses will have a reasonable opportunity to adjust their IP strategies.

No action is needed until after the referendum. If Britain votes to leave the EU, we would recommend that:

• new EUTM and RCD filings are duplicated with national UK filings
• distribution and licensing arrangements are revisited
• transitional provisions relating to existing EUTMs and RCDs should be carefully monitored