Draft Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018

Chris Skidmore Excerpts

Monday 21st January 2019 General Committees

[The Minister for Universities, Science, Research and Innovation (Chris Skidmore)]

I beg to move,

That the Committee has considered the draft Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairship, Mrs Moon. The draft regulations, which were laid before the House on 27 November 2018, ensure that the UK domestic rules for the exhaustion of intellectual property rights will continue to function in a predictable manner in a no-deal scenario.

UK businesses are very reliant on IP rights, with IP-intensive industries generating more than one quarter of UK employment and 43% of UK GDP in 2013. The UK is recognised for its strong IP regime. It was ranked No. 3 in the world by Taylor Wessing’s global intellectual property index for 2016, with the enforcement regime specifically ranked No. 1 by the US Chamber of Commerce in 2017.

The IP framework is designed to provide a balance. It should reward creators of IP and encourage innovation while balancing the needs of other businesses and consumers by managing the scope and duration of and exceptions to existing IP rights.

What is exhaustion of IP rights? The intellectual property framework provides rights holders with the right to control distribution of a protected product. However, once a product has been placed on the market within a specified territory by, or with the permission of the rights holder, the IP rights cannot be used to prevent the further distribution or resale of that product—the IP rights are considered to be exhausted.

The UK is currently part of a regional European economic area exhaustion regime, meaning that IP rights are considered to be exhausted once the products that they protect have been put on the market anywhere in the EEA with the rights holder’s permission. That facilitates the free movement of IP-protected goods across borders within the EEA.

The UK laws that currently provide for that regional exhaustion regime need to be amended to ensure that they continue to function appropriately after exit. Doing nothing is not a desirable option in this instance, as the legal uncertainty that would ensue would expose business to the risk of mitigation and the development of legal principles that could constrain future policy making in this area.

The draft instrument provides a solution. The rules relating to exhaustion for UK businesses and others importing goods into the UK will remain the same until such time as a future decision is made on what exhaustion regime is best for the UK in the future, for which the Government are considering options. Although extensive research is under way, I stress that such an important decision should not be rushed. We will ensure that we have a robust evidence base and that we have consulted fully with stakeholders before any decision is made.

While that evidence is gathered, the continuity provided by the statutory instrument will be welcomed by stakeholders, who are very much in favour of maintaining the status quo of the regional EEA regime. The SI ensures that there will be no change to the position on the exhaustion of rights in relation to the parallel importation of goods from the EEA into the UK. There may, however, be restrictions on what can be exported from the UK to the EEA on the same parallel basis, but that is a matter for the European Union legal system and not something that the Committee can control.

The practical effect of the no-deal SI is that traders based in the UK can continue existing parallel trade into the UK from other EEA states. That is important across several sectors, including medicines and food. Beneficiaries include the NHS, which will continue to have the ability to maintain security and diversity of the supply of medicines from the EEA. By sourcing medicines at the best price from within the EEA under the regional exhaustion regime, the NHS currently saves about £100 million a year.

The draft instrument is therefore extremely important to support the movement of goods and the supply of central commodities such as medicines. It provides clarity and legal certainty for businesses and consumers by preserving the status quo as far as possible. This is a necessary technical fix for UK laws to prepare for our exit from the EU, and I commend the draft regulations to the Committee.

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[Chris Skidmore]

I thank the hon. Member for Sefton Central for the points that he has raised. I will endeavour to respond to some of the points that are specific to the statutory instrument.

The draft SI is clear that it will maintain the status quo. Regulation 2 ensures that the domestic exhaustion framework is the same after exit as it was before exit. The provision delivers, as far as possible, a continuation of the current regional exhaustion regime. This approach simply ensures that what happens currently will continue after exit day, and allows for IP-protected goods in the secondary markets to continue to be imported from the EU. We are not rushing to any alternative international exhaustion system; the draft regulations simply maintain the current regional exhaustion regime. This will ensure continued consumer choice and resilience in the supply of goods into the UK. As this will be a continuation of the current system, there is no reason to anticipate any increase in parallel-traded goods after exit. Indeed, this will ensure that the NHS continues to save £100 million a year as a result of being part of the regional exhaustion regime.

The hon. Gentleman asked about pharmaceutical innovation. The Government have done a lot of work to promote innovation in their creative industries, which represent the backbone of our business community. They give great emphasis to promoting businesses that create value. Our industrial strategy and sector deals are a great example of that, but of course the Government pursue a balanced economy that also promotes trade and the movement of goods. This plays an important part in developing a balanced economy for all types of business across the UK.

I want to turn to the Silhouette ruling from the Court of Justice of the European Union and the requirement to implement a regional exhaustion regime. It is clear that EU case law before exit will continue to apply in relation to the interpretation of EU-derived domestic law after exit under the withdrawal Act. EU case law before exit relating to the effects of this law will continue to apply under section 6(3) of the withdrawal Act, and this draft SI should provide legal clarity for businesses. For the purposes of the Committee, I note that an article was published on 14 January by the law firm Bird & Bird LLP on the Government’s draft SI stating that Silhouette

“will be ‘retained under EU case law” under section 6 of the European Union (Withdrawal) Act 2018. As a consequence, the principles laid down in these cases will continue to apply after exit day unless and until the Supreme Court or Parliament decides otherwise”.

It adds:

“The Government have done what can be done to preserve the status quo in the draft SI.”

[Bill Esterson]

The legal opinion demonstrates exactly what the problem is. The Minister said, “until the Supreme Court or Parliament decides otherwise”. Perhaps he will acknowledge that he has confirmed that this can be challenged or changed, and that we cannot just rely on retained EU case law. Perhaps he could comment on the request by one of the Lords for a sunset clause to time-limit the period during which he and his colleagues develop alternatives.

[Chris Skidmore]

I will speak about alternatives later, but I have already made the point that there is no rush to develop alternatives. As Bird & Bird made clear, there will be no change to international exhaustion or aversion to a concept of implied licence, or some of the fears that the hon. Gentleman has raised—[Interruption.] No, because this Government will look at all alternatives—I will turn to those in a moment—but this SI is intended to preserve and protect the current regime, not to change it. He mentioned the impact on business, and that is what this SI is for: to protect and preserve the current business regime.

The hon. Gentleman made an extensive contribution on impact assessments in other countries. The impact assessments that we follow in this Parliament are intended to look only at the impact of the legal instruments to which they are attached. This SI maintains the status quo within the UK, and hence there is no anticipated impact on business. The impact assessment for this SI followed the better regulation framework and is in line with Her Majesty’s Treasury’s Green Book guidance. The impact was assessed and compared with the static acquis baseline—that is, by reference to existing EU regulations and directives. The SI simply fixes deficiencies in law that will be retained under the European Union (Withdrawal) Act 2018, allowing current systems or regulatory provisions to continue to operate in a no-deal scenario. The impact analysis therefore focuses on the direct impact of the relevant SI alone. Analysis of the wider impact of the UK’s exit from the EU has previously been published, in the form of the long-term economic analysis published in November 2018.

The hon. Gentleman also asked about the cost to export. Clearly, no data is available on the potential impact on parallel exports from the UK to EEA countries, and any loss to UK businesses is hypothetical. It will depend on how rights holders wish to assert their rights in relation to parallel goods crossing from the UK to the EEA. All I can say is that this SI obviously provides the maximum possible certainty in maintaining our relationship across exhaustion rights in a regional sphere. Failure to pass this SI would therefore create significant difficulties.

The hon. Member for Cardiff South and Penarth mentioned the technical notices and the impact on small businesses. The technical notices are part of the support that we are providing to businesses. Given that this is a complex area of law, we are also encouraging businesses that engage in parallel trade, especially those that export, to seek legal advice on the actions they should take following the UK’s exit from the EU.

[Stephen Doughty]

Does the Minister appreciate that there are genuine concerns, particularly among self-employed musicians—I draw attention to my entry in the Register of Members’ Financial Interests—and small creative companies and games companies? They are deeply concerned not only about the impact of Brexit, but about what this chaos will cost them, whether or not there is a deal, in getting such legal advice, which those in what are often low-pay industries could do without.

[Chris Skidmore]

Passing this SI today will provide the maximum possible certainty by creating the national exhaustion regime, allowing companies and creators to have that security by keeping the status quo. That is what this SI is about. We are not having a wider debate about Brexit today; this is about ensuring that, when it comes to changing this technical apparatus in law, the regime continues as it has done previously. The SI simply ensures that we can continue to tick on as we have done in the past. Its implementation is essential to ensuring that the current arrangements continue. Failing to pass this legislation before we exit would leave a period of legal uncertainty, during which businesses could incur significant litigation risks. The SI maintains arrangements that continue to support the movement of goods to the UK. For example, this could help with NHS resilience in the supply of medicines at a cheaper cost.

The hon. Member for Sefton Central also talked about the potential consequences of an international exhaustion regime. I have already stated that this is about extending the legal framework to ensure that we protect the current regional exhaustion regime. When it comes to any further alternatives, the legal and economic arguments for various options are complex, which is why the Government are conducting research on the best exhaustion regime for the UK. Were there to be a change, the Government would introduce it only following evidence gathering and analysis, alongside engagement with a wide cross-section of stakeholders. The Government are conducting a feasibility study that will look into the levels of parallel trade between the UK and the EU. That study is ongoing and the evidence from the report will form part of the next steps in the Government’s decision-making process. I believe it will be published by Ernst and Young in 2019. Obviously, the response to the report and any further policy measures will take time. There is no compelling reason to rush to an alternative system until we have seen the evidence and listened to businesses and consumers.

The hon. Gentleman mentioned public consultation. Since the referendum result, the Intellectual Property Office has engaged with businesses in several sectors about the implications of exit. I visited the IPO’s offices in Newport on Friday and found an excellent organisation whose workforce have high morale and are determined to deliver maximum possible certainty as we approach the EU withdrawal day of 29 March. I have seen the charts and I reassure the hon. Gentleman that the IPO is doing all it can to engage with stakeholders.

The usual wide engagement with businesses and individuals was not possible on a draft no-deal instrument when the Government were in the middle of sensitive negotiations on the withdrawal agreement. Public consultation on no deal would also have risked prejudicing the ongoing discussion with the EU about our future membership. However, as I said, the IPO engaged with stakeholders across a wide range of sectors, including rights holders. That was consistent with the approach to no-deal legislation across Government, as I mentioned last week in our previous discussion on statutory instruments.

[Bill Esterson]

The Minister has read out a comprehensive note. From reading Lords Hansard, it appears to me that the only person who had spoken to the IPO was a member of the Grand Committee. The feedback I have had suggests that there has been engagement only when people have taken the initiative and called the IPO. The Minister made the extraordinary comment that there should not be public consultation on the SIs because of sensitivities—that is what I heard him say. However, without proper consultation, how can the SI be accurate? How could it have been drawn up in a way that ensures that the draft regulations do the job they need to do? Perhaps that explains why the problem of EU-retained case law is so prominent and has been criticised so much in the Lords and in the correspondence that I have received.

[Chris Skidmore]

The consultations that have taken place at IPO level are clear that the overwhelming number of stakeholders believe that the preservation of the status quo is in the best interests of all the sectors at the moment. If the hon. Gentleman decides to vote down the SI, he will send a clear message to those sectors that, with 60 or 70 days to go, he wants to ensure maximum possible instability. I ask him to think carefully as we go through these no-deal SIs. He has described the industries in the creative sector as vital to the UK economy and our global brand, and I entirely agree with him about that. I urge him not to vote down an SI that simply provides certainty, stability and the maximum possible opportunity for those businesses to carry on their day-to-day operations without any change.

The hon. Gentleman mentioned the Lords debate. The Government have written to Lords who participated in it and I am happy to provide him with a copy of the letter. It gives a clear response to their queries, which the hon. Gentleman mentioned. He can also see the evidence of the letter with regard to the points that he made about the sunset clause and the consultation.

I hope that I have satisfactorily addressed the points that have been made. To summarise, the Government are preparing for all scenarios and the SI is essential in preparing the UK for the possibility of leaving the EU without a deal. The draft regulations ensure a continuation of current systems as far as possible, delivering the status quo for imports into the UK. Many stakeholders have endorsed that approach.

The draft regulations aim to ensure as much continuity and certainty as possible in the immediate period after no deal. A long-term decision on the exhaustion regime will need to be informed by careful assessment of the balance of interests, and the Government will undertake a comprehensive programme of economic analysis and consultation to achieve that. For now, it is important that the draft regulations are in place to ensure that there is a clear, predictable and legally defined exhaustion regime in the UK in the event of no deal, and to maintain a regime that continues to protect IP holders’ rights while giving choice to consumers in the UK across a range of goods, including essential commodities such as food and medicines.

In addition, the draft regulations provide certainty in the immediate term for businesses and consumers, and limit friction in the trade of goods between the UK and the EEA. I hope that the Committee will support the draft regulations.

Question put.