Should the UK import “exhausted” brands?

One of the many unknowns for the UK in the wake of Brexit is what model of “trademark rights exhaustion” will apply in future.

Lawyers predict this could have a major impact on the fashion industry, in particular.

An “international exhaustion” model has the potential to drive down prices, reinvigorating the high street. But it could damage British distributors, who risk being undercut by retailers, and customers, sourcing products overseas at more competitive prices.

Rob Lucas, Partner and Head of Intellectual Property at Shulmans LLP sent RRN this comment on the issue:

“Trade mark exhaustion governs the ability to buy a genuine, branded product and resell it under the brand name concerned.  Whilst it may seem quite sensible within the sector to be able to buy a branded item of clothing, such as a pair of Levi jeans, and sell them on to your distributors, retailers and customers with that identity attached, the legal position is not that simple.

“At present the UK is subject to rules on trade mark exhaustion which apply within the European Economic Area (EEA).  These rules apply “regional” exhaustion, which means that you can source genuine branded clothing anywhere within the EEA, move those items to another country also within the EEA, and sell them using the same brand name.  Likewise, if you place your own branded products on the market in the EEA, a third party can buy those products, export them and resell them under your brand.

“However, under regional exhaustion the position changes when products enter or leave the EEA boundary. Where product enters the EEA, the brand owner can stop the resale of the products even though they are genuine products. So, if you sourced Levi jeans from the USA, you could be stopped from importing them into the UK and reselling them using the Levi name.

“After Brexit, the political ideal of being an open, freely trading nation suggests that we might revert to our pre-EU days of “international” exhaustion. This would allow businesses the most freedom, affording them the ability to buy genuine products from anywhere in the world and import them into the UK for resale. As there is often a significant price difference between products in the UK and overseas, UK fashion businesses would be able to take full advantage of those savings providing a substantial new revenue and margin opportunity.

“The ability to source products at a lower price could therefore drive down RRPs (recommended retail prices) as added value for consumers, and offer customers greater choice, with the potential to ultimately revitalise the high street. Although this might sound like the best outcome, there are several factors that should be considered.

“In direct contrast to the desired outcome of driving up sales in UK stores, there is the chance that this potential change in legislation could instead lead to an increase in customers buying direct from overseas. Likewise, UK retailers may be tempted to source products overseas for a more competitive price than could be offered by a British distributor. There is also the danger in exported products entering the UK market at a much lower price than was ever intended for this territory, allowing them to be stocked by retailers that the brand would never have willingly sold to by choice with the potential to impact on the brand’s overall positioning.

“International freedoms also raise concerns regarding issues of quality and consistency, as there is a consumer misconception that the branded goods they know and love are of the same quality in all the countries in which they are sold. In reality, product quality can vary drastically depending on where you are in the world. Whilst customers may be able to source their favourite brands in the UK at a lower price, there is a high chance they may experience a reduction in quality compared to usual UK standards, which in turn could compromise brand loyalty and reputation. There is also the potential for increased volumes of counterfeit goods, with fakes being harder to spot due to varying levels of quality being imported.

“With no clear indication as to how the Government will determine the exhaustion approach post Brexit, retailers and brands alike are advised to consider their current distribution models, safeguarding brand identify and current sources of revenue.”