Parallel import and the UK cost-of-living crisis

What is parallel import?

Parallel import is a commercial activity in which distributors and resellers take advantage and make profits from the price difference of products sold in different markets (known as ‘arbitrage’).  The price differences may be due to deliberate differential pricing in marketing strategies as well as intellectual property (IP) rights exhaustion, where IP holders’ right and control in the product is exhausted after the first sale of products bearing their IP in a given market – the UK, the European Economic Area (EEA), or international (also called the ‘First Sale’ doctrine).

If a country adopts an international exhaustion system, it means IP holders would lose control of further dealings of the products bearing their IP nationally and internationally once it is sold, and third parties could come into the international supply chain freely. After the first sale, the IP holder would lose the rights or power to control the product in this geographical market, and that is why resellers or distributors would be able to sell on and make profits from the price differences.  Note that parallel import is NOT removing IP rights for goods but rather it suggests that the IP holders’ right is exhausted after the first sale.

A few words on IP and parallel import

IP rights include trademarks, design, copyright, and patents. A single consumer product may exist with multiple layers and various forms of IP rights.  The protection of IP rights would secure IP holders’ market monopolistic power which inevitably leads to the unilateral power to set market price. A product will be more inaccessible and unaffordable if it has more layers and forms of IP compared to a generic one without IP protection.  However, IP rights are not absolute. A balanced IP system would have inbuilt exceptions, exclusions, and flexibilities in order to avoid abuse of power. Parallel import is considered to be one of the IP flexibilities which aim to strike a delicate balance amongst various stakeholders’ interests, including users (consumers, students, and patients), producers, the society, and market competition.

Complexities around international exhaustion

After leaving the EU, the UK Government launched a consultation assessing the risks and opportunities in moving away from the EEA exhaustion regime. The result of the UK Government consultation in 2021 shows that the majority of respondents favoured keeping the status quo, which is the current UK unilateral application of the EEA exhaustion regime, and only a small number favoured an international exhaustion regime.3 This means that brand owners would exhaust their IP rights for subsequent sales within the EEA, but still retain control on any subsequent sales outside the EEA. While international exhaustion may benefit large retailers such as supermarkets to use existing supply chains and move large quantities of cheap goods into the UK, it nevertheless brings adverse effects on the creative industries and brand owners.

The issue also attracts conflicting views in the pharmaceutical and health industries. While international exhaustion would potentially open up more avenues for medical product provision, it would also jeopardise brand holders’ ability to segment the global market and set differential pricing strategies across markets at various levels of development, which is also key to promoting consumers’ access to products.

As the UK is one of the top IP exporters in the global economy, the move to international exhaustion would lead to domestic revenue losses for many brand manufacturers.  In addition, earlier research by the European Commission concluded that international exhaustion is complex, involving pricing, product quality and after-sale services. It suggested the price difference of changing to an international exhaustion regime would be marginal.2

Findings

Due to many complexities, the UK Government is unlikely to move on to an international exhaustion IP regime only for easing the current cost-of-living crisis. For essential day-to-day product provision, perhaps a realistic alternative for UK purchasers would be to transition to a different lifestyle, for example, considering the purchase of supermarket own-brand or unbranded products to avoid the premium price afforded by IP protection. Buying preloved items would significantly extend the overall life span of products and also contribute to the climate change and sustainability agenda.

• ¹ UK’s future exhaustion of intellectual property rights regime: summary of responses to the consultation, 18 January 2022, at: https://www.gov.uk/government/consultations/uks-future-exhaustion-of-intellectual-property-rights-regime/uks-future-exhaustion-of-intellectual-property-rights-regime-summary-of-responses-to-the-consultation
• ² Seminar of Internal Market and Consumer Affairs Ministers, Lund 27-28 April – parallel imports and prices, MEMO/01/157, Brussels, 26th April, 2001, at: https://ec.europa.eu/commission/presscorner/detail/en/memo_01_157