Brexit IP Licensing: Waiting For Godot?

By Patricia Cappuyns and Jean-Christophe Top

On 29 March 2017, the UK invoked art. 50 TEU, signalling the start of what is proving to be an increasingly difficult divorce from the EU. The fumbling protagonists, the media and the unprecedented scale of the operation have turned it into a nail-biting roller coaster on the world’s stage. At this point, it’s anyone’s guess when Brexit will actually happen, if at all. The continuous disagreement between British MP’s on how Brexit should come about has resulted in one Prime Minister resigning, two deadlines for Brexit being largely ignored, and more time being allotted to the UK to sort out its issues. Though the situation is looking rather bleak, there is some light in the darkness. Both the UK and EU have done their IP homework and have provided some useful tools for existing and future post-Brexit, pan-EU license agreements. In this contribution, we assess what the practical consequences of Brexit will be for trademark and patent licensing, and IP exhaustion.

Background

On 23 June 2016, the UK organized its now (in)famous Brexit referendum to consult the electorate on whether they wanted the UK to remain in or leave the EU. A small majority of 51.89% of voters were in favor of leaving the EU, and although the referendum technically wasn’t binding, the government had promised to implement its outcome. The clock for the withdrawal process was started on 29 March 2017, allowing the UK a two-year period 2 for negotiations and preparations. This original Brexit deadline of 29 March 2019 came and went, since MP’s were unable to adopt a common policy in time. The UK was granted a postponement until 12 April 2019, which has recently been extended to 31 October 2019.

It's safe to say that this chain of events has resulted in nothing but confusion and uncertainty regarding if and when the UK will actually leave the EU. Fortunately for the LES community, the fate of IP-related issues is less uncertain and IP-heavy industries have already been presented with some welcome reassurances. Deal or No Deal, the UK and EU provided some useful information on post-Brexit IP rights and how to license them.

The UK has adopted Guidance Notices 3 and new statutory instruments 4 in the event of No Deal to ensure a smooth transition to the post-Brexit contractual world. In the event of a Deal, the current Draft Withdrawal Agreement 5 and UK Withdrawal Act 6 are designed to anticipate the upcoming changes. These documents offer a welcome clarification on the subject of IP licensing and related issues, such as the definition of licensed territory and governing law, as well as the post-Brexit exhaustion of IP rights.

Trademark Licensing

For trademarks and most other IP rights, the UK offers a rather straightforward solution. Deal or No Deal, the UK plans on automatically converting all EUTMs into equivalent UK clones of those rights. 7 These clones will effectively provide the holder with the same rights as the EUTM, but only for the territory of the UK. These new UKTMs will be subject to renewal in the UK and can be assigned and licensed independently from the EU right. 8 There is even an opt-out possibility for holders that don’t need the new UK trademark because they, for example, won’t use it or don’t want to pay renewal fees in the UK. 9 More information on the practical implications is in the guidance notices of the UK IPO and in a number of documents drafted by INTA, the International Trademark Association. 10 Of specific interest for this article is what will happen with existing pan-EU license agreements and what to keep in mind when drafting a new pan-EU license agreement post-Brexit.

Existing Pan-EU License Agreements

What happens with your existing license agreement if the designated territory is the EU? What happens if the designated territory specifically includes or excludes the UK? Again, the UK offers a fairly simple answer: any license or security interest that refers to an EUTM and authorises acts in the UK will be treated as if it applies to the comparable UKTM, meaning the EUTM license will automatically also be a license for the new UKTM. 11 Until recently, this would have meant that there would be some divergences between a licensee’s rights under the EUTM and under the new UKTM 12 . This situation was recently remedied by the implementation of the new Trade Mark Directive 2015/2436 resulting in an alignment of the two regimes.

The only notable remark here is that a UKTM license is only effective against a third party who acquires a conflicting interest if the license has been registered at the UK IPO. In other words, licensees will have to register their licenses at the UK IPO if they want to be able to act against later licensees with conflicting rights. Moreover, an exclusive licensee only has the right to enforce a UKTM in its own name if the UKTM has first been registered at the UK IPO. UK law normally provides that licenses and securities registered at the UK IPO within a period of six months after they are entered into, are granted certain protections which do not apply to unregistered transactions. But how can you register a license that relates to a right that doesn't exist yet? The UK No Deal guidance notices are rather vague on this point, but do provide that the UK will extend the period within which license and security interests must be recorded in the UK register in respect of the UKTM to 12 months from Brexit day, if these transactions were already registered in the EUTM register before Brexit day. 13 Registering such a license at the UK IPO costs 50 GBP and can be done by the licensee himself if he supplies a copy of the license. 14

Aside from this registration issue, existing licenses should continue to work as they do now.

New or renegotiated pan-EU license agreements

When drafting a new license agreement or renegotiating an existing one, these are the main issues for the parties to keep in mind:

1. Do you really want the new UKTM and corresponding license? What if you previously didn’t use the UK part of the EUTM? In that case, it’s best to just opt-out of the new UKTM altogether to avoid registration and renewal fees in the UK.

2. Closely related to point 1, is the vulnerability of the trademark to cancellation due to the absence of genuine use in the EU in the five years following its registration. When a EUTM is registered, the holder is required to use that trade mark within a period of five years following its registration, or else his trade mark becomes vulnerable to cancellation. In the face of Brexit this seems rather problematic, since many EUTMs have never been used in the UK or, vice versa, are only being used in the UK. To avoid any unjust and unintended outcomes, the UK has provided that any use of the mark in the EU, whether inside or outside of the UK, made prior to Brexit day will count as a use of the comparable UK right. 15 However, it’s worth noting that use of the EUTM in the EU (and outside of the UK) after Brexit day, will not constitute ‘genuine use’ in the UK. 16 The same reasoning applies to the Deal-scenario, but then the holder receives more time due to the implementation of a transition period until 31 December 2020. 17,18 In short, companies that don’t use EUTMs in the UK and aren't planning on doing so in the future, shouldn’t bother with the newly created UKTMs. Otherwise they will pay unnecessary registration and renewal fees and incur the risk of their trademark being revoked once the five year period for ‘genuine use’ has expired.

3. Do you want to change the governing law or choice of forum now that the UK will no longer be part of the EU? 19

4. Are you sure that the wording used in the license agreement will ensure a continued license in the UK? For example, the license might not authorise the use of the trade mark in the UK. It might also contain different wordings than ‘EU’ or ‘EUTM’. In that case, it will most likely depend on the factual background of the license whether or not it will extend to the UK post-Brexit. 20

Another good option is to ‘Brexit-proof’ your contract by including clauses that effectively allow the parties to renegotiate the agreement when Brexit finally arrives. Other options include force majeure clauses and adjusted termination of contract clauses, in the event where the initial conditions under which the agreement was concluded are too significantly altered. Whatever the preferred course of action, it is strongly recommended to anticipate any unintended consequences of Brexit by renegotiating licenses now or including such clauses that allow renegotiation or termination in the future.

Patent licensing

What will the consequences of Brexit be for patents and patent licensing agreements? Short answer: there are none.

As long as the UPC does not enter into force (and at this point we don’t know when or if it ever will), 21 patents are still governed by national law, although the application process has been harmonised in Europe by the European Patent Convention (EPC). But since the EPC is not an EU institution, Brexit won’t affect these European patents. 22 The EPO itself has also confirmed that Brexit won't have an impact on UK membership of the EPO. 23 Patents and patent licenses will remain unaffected.

The only real issue is what will happen with the regime concerning compulsory licensing, which is based on EU law. Fortunately, the UK has provided that both the provisions on compulsory licensing of overlapping rights between UK patent rights and UK plant breeder rights and provisions for compulsory licensing of patents relating to the manufacture of pharmaceutical products for export to countries with public health problems, will remain in place. 24

Exhaustion of IP Rights

A closely related question to the subject of licensing is the post-Brexit exhaustion of IP rights, a crucial issue for industries built around parallel imports of medication, chemicals, clothing and the like. When an IP-protected product has been placed on the market in the European Economic Area by or with the consent of the right holder, that right is exhausted, meaning it can no longer be exercised by the holder to prevent subsequent commercial uses by third parties of that product within the EEA. An example is the pharmaceutical industry: parallel import companies buy pharmaceuticals on the cheap in one EEA member state to resell them for a profit in another EEA member state that allows a higher resale price. Since there has been a first sale of the pharmaceutical in one EEA member state, its patent protection is exhausted, leaving a parallel importer free to resell it anywhere else in the EEA as long as a certain number of legal and regulatory requirements are met, depending on the member state.

This fairly simple principle of regional exhaustion is now challenged by Brexit, since it looks like the UK will also leave the EEA when it leaves the EU. 25 The result is that the IP right on a product only sold in the UK, will only be exhausted for the UK, and not in the entire EEA. Vice versa, if a product is only sold in the EEA, the attached IP right will only be exhausted in the territory of the EEA, but not in the UK.

Or at least that would be the case, were it not for the UK publishing a Guidance Notice 26 and new Draft Statutory Instruments 27 specifically stating that it will continue to recognize the EEA-wide exhaustion of IP rights. It follows that the UK will in essence apply a principle of asymmetric exhaustion. If an undertaking licenses a trade mark or other IP right in the UK, parallel importers will no longer be able to buy and resell it in the EEA post-Brexit. Companies that want to sell an IP-protected product in the EEA will be required to obtain a license first. The same will not apply the other way around. If an undertaking licenses a trade mark or other IP right in the EEA, parallel importers will still be able to buy and resell the product in the UK post- Brexit. This principle of asymmetric exhaustion should be given some thought when assessing whether or not to renegotiate existing license agreements.

Conclusion

The Brexit saga is still in full swing and is set to keep us on the edge of our seats a little while longer. While Brexit has caused much confusion in many areas of the law, at least the consequences for users of the IP system appear to be fairly well regulated. On Brexit day, EUTM holders will be presented with an equivalent UKTM and their existing licenses will continue to designate both the EU and UK if they did so before. For the full EUTM licensee protection, it is very much advised to register the license at the UK IPO as soon as the new UKTM comes into existence.

For patent holders and their licensees, it will be business as usual, unless and until the UPC enters into force. For more on the UPC, please refer to the edition of les Nouvelles of March 2017. 28

Last but not least, the principle of regional EEA exhaustion will be replaced by a principle of asymmetric exhaustion.

Until Brexit arrives, companies are well advised to check their existing license agreements and ‘Brexitproof’ them through renegotiation now or by including clauses that allow renegotiation or termination in the future. Brexit might not be due for a while, it might not even happen at all, but at least the IP community will be prepared for all possible outcomes.

All footnotes are available in the pdf version.