Report for the Hearing delivered in Case 65/86

I — Facts and procedure

A — The background to the dispute

1. Mr Süllhöfer, the respondent in the appeal on a point of law (hereinafter referred to as the respondent), held patents issued in a number of Member States and in several nonmember countries relating to a process and a device for the continuous manufacture of rigid polyurethane-foam-based laminated panels.

2. Maschinenfabrik Hennecke GmbH, the second appellant (hereinafter referred to Hennecke), is an engineering company which produces plant for the continuous manufacture of polyurethane-based rigid foam panels.

3. At the beginning of 1967 the respondent brought proceedings against Hennecke, claiming an infringement of his German utility model by reason of Hennecke's manufacture of the plant referred to and its use by the company's customers.

4. As a result of further disputes which arose between the parties the respondent terminated the agreement of 9 April 1968 by letter dated 11 January 1974, and challenged the agreement on the ground of fraudulent misrepresentation by letter dated 26 May 1975.

5. The appellants appealed against that partial judgment to the Oberlandesgericht (Higher Regional Court) Düsseldorf, which dismissed the appeal. That court considered that the no-challenge clause in point 2 of the agreement of 9 April 1968 was automatically void pursuant to Article 85 (2) of the EEC Treaty as infringing Article 85 (1) of the Treaty, which, under Article 139 of the German Civil Code, led to the nullity of the whole agreement.

6. The two companies lodged an appeal on a point of law against that decision, seeking the dismissal of the respondent's application for a declaration that the agreement of 9 April 1968 was invalid.

B — Observations of the national court

The Bundesgerichtshof feels that a preliminary ruling on the question referred to the Court is necessary for several reasons.

First, it considers that it is to be assumed that the no-challenge clause in point 2 of the agreement of 9 April 1968 applies not only to the respondent's industrial property rights in Germany but also to the industrial property rights having the same content as his German patent and utility model which he holds in other Member States of the Community.

Secondly, it points out that the court hearing the first appeal considers that a no-challenge clause like that in point 2 of the licensing agreement of 9 April 1968 constitutes a contractual restriction on competition which is incompatible with the EEC Treaty. That attitude corresponds to the Commission's point of view as expressed, for example, in Commission Regulation (EEC) No 2349/84 of 23 July 1984 on the application of Article 85 (3) of the Treaty to certain categories of patent licensing agreements (Official Journal 1984, L 219, p. 15) and Commission Decision 79/86/EEC of 10 January 1979 (Vaessen v Moris) (Official Journal 1979, L 19, p. 32).

Finally, the Bundesgerichtshof observes that the Court has not yet ruled on the question whether a clause such as the above, by which the licensee undertakes not to challenge the validity of technical industrial property rights held by the licensor in several Member States of the European Community which have the same content as those in respect of which he has been granted licences, is compatible with the EEC Treaty.

C — Written procedure

1. The order of the Bundesgerichtshof was received at the Court Registry on 6 March 1986.

2. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted on 4 June 1986 by the Commission of the European Communities, represented by its Legal Adviser, Norbert Koch, on 4 June 1986 by Mr Süllhöfer, respondent to the appeal on a point of law, represented by Oliver C. Brändel, Rechtsanwalt, and on 10 June 1986 by Bayer AG, Leverkusen, and Maschinenfabrik Hennecke GmbH, St Augustin-Birlinghoven, appellants in the appeal on a point of law, represented by D. Hoffmann, Rechtsanwalt.

3. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

II — Written observations submitted to the Court

A — Compatibility of a no-challenge clause with Article 30 et seq. of the EEC Treaty

1. Observations submitted by the Commission

The Commission stresses first of all the fact that, because protection of industrial property is limited to a particular State and as a result of the differing rules applicable in different States, the exercise of industrial property rights by individuals may form a direct or indirect barrier to imports or exports which, the Court has held, may be prohibited under Article 30 et seq. of the EEC Treaty as quantitative restrictions on imports or exports or as measures having equivalent effect. Those provisions apply when the exercise of industrial property rights constitutes a direct barrier to the importation or exportation of goods or services.

In the Commission's view, a no-challenge clause included in a licensing agreement does not meet that criterion. It adds that, in the present case, the second sentence of point 2 of the agreement of 9 April 1968 does not relate either to the importation or exportation of the protected equipment or the sale or offer for sale of such equipment within the area of application of the industrial property rights. The no-challenge clause at the root of the reference for a preliminary ruling does not in any way directly affect the parties' behaviour on the market, but only their behaviour in the event of a dispute, whether or not brought before the courts. The clause has only indirect repercussions on the appellants' behaviour in their capacity as suppliers of the protected equipment or the raw material required for its operation.

The Commission also wonders whether it is possible to speak of the exercise of industrial property rights within the meaning of the Court's previous judgments relating to Article 30 et seq. of the EEC Treaty in the case of contractual agreements of the type under consideration.

First, it considers that the no-challenge undertaking is not covered by the specific subject-matter of the industrial property right. Secondly, the Commission contends that licensing agreements do not constitute direct exercise of industrial property rights, although the contractual exploitation of industrial property rights (as, for example, by granting a contractual licence) does also derive from the fact that the holder of the right may exercise the right of exclusion conferred upon him by the industrial property right in question.

The licence agreement to which the main proceedings relate is a direct result of a legal action to enforce rights under a utility model. In the Commission's opinion, however, agreements of this type do not really involve an exercise of the right to exclude others which is inherent in an industrial property right, that is to say a claim to enforce a right deriving from an infringement of that industrial property right. It stresses that only when such claims are raised and, in particular, pursued before the courts may they be regarded as giving rise to barriers to imports and exports and as State measures for the purposes of Article 30 et seq. of the EEC Treaty. The Commission concludes that the question of whether a no-challenge clause of the kind set out in the second sentence of point 2 of the licensing agreement of 9 April 1968 is compatible with Article 30 et seq. of the Treaty does not arise (not, in any event, in the context described here) or, at least, that it should be answered in the affirmative.

2. Observations submitted by the appellants

The appellants observe, first, that the question of whether a no-challenge clause is contrary to Article 30 et seq. of the EEC Treaty cannot be answered in the abstract. It must be determined whether the clause represents a form of exercise of an industrial property right — a patent in this case — which does not derive from the specific subject-matter or main function of the patent and the effects of which are incompatible with Article 30 of the EEC Treaty. The particular circumstances of the case must thus be considered when assessing the lawfulness of the no-challenge agreement.

In the appellants' opinion, the question of infringement of Article 30 of the EEC Treaty does not arise for reasons of principle. They consider, first and foremost, that Article 30 directly concerns only State measures and that the present case involves only private agreements between two undertakings and a contracting party for the settlement of a dispute over industrial property rights.

The present case, moreover, is not comparable to those in which the Court has considered the exercise of industrial property rights by private entities in the light of Article 30. In this connection, the applicants refer to the judgments of 31 October 1974 in Case 15/74 (Centrafarm v Sterling Drug [1974] ECR 1147, at p. 1163), and in Case 16/74 (Centrafarm v Winthrop [1974] ECR 1183, at p. 1195), of 22 June 1976 in Case 119/75 (Terrapin v Terranova [1976] ECR 1039, at p. 1063), of 23 May 1978 in Case 102/77 (Hoffmann-Laroche v Centrafarm [1978] ECR 1139, at p. 1163), of 10 October 1978 in Case 3/78 (Centrafarm v American Home Products Corporation [1978] ECR 1823, at p. 1830 et seq.), and of 14 July 1981 in Case 187/80 (Merck v Stepha/and Exler [1981] ECR 2063, at p. 2080 et seq.). They point out that those cases involved rights of prohibition which had been exercised in such a manner as to directly limit trade between Member States. A no-challenge clause, however, in no way involves such a limitation; it merely confirms the existence of such rights of prohibition without affecting the way in which they may be exercised.

The appellants consider that a no-challenge clause does not affect trade in products covered by industrial property rights and thus, by its very nature, does not come within the scope of Article 30 of the EEC Treaty.

The clause in question, moreover, had no independent effect other than in conjunction with the free licence and the licence for other countries, and in theory therefore could not constitute an obstacle to the free circulation of goods; furthermore no limitation had been agreed upon to prevent the sale or importation of machines manufactured under licence. The appellants consider that the importance of the patent must also be taken into account and claim that, if it is seen that the patented technique was in fact outdated and thus unable to prevail on the market, the patent was never in a position to have any effect whatever on competition or on trade beteen Member States. The undertaking not to challenge it was therefore equally incapable of limiting competition or trade between Member States, and the ability to have such an effect is a prerequisite for the application of Article 30 of the EEC Treaty.

3. Observations submitted by the respondent

The respondent claims that a no-challenge clause of the type and scope described in the order for reference is incompatible with Article 30 et seq. of the EEC Treaty inasmuch as its effect on trade between Member States is equivalent to a quantitative restriction on imports.

In his opinion, the no-challenge clause prevents not only the main licensee and its sub-licensees, but also other traders operating on the market, from challenging the industrial property rights. For them, respecting those industrial property rights, notwithstanding the presumption that they may be declared invalid, implies the obligation not to manufacture or market protected equipment in a Member State in which the rights exist.

The conclusion of an agreement which is extraneous to the substance of the industrial property right therefore restricts the movement of goods between Member States, and is thus incompatible with Article 30 et seq. of the EEC Treaty.

B — Compatibility of a no-challenge clause with Article 85 of the EEC Treaty

1. Observations submitted by the Commission

In the Commission's view, the agreement of 9 April 1968 does not lay any other restrictions on the licensees Hennecke and Bayer, who are bound by the no-challenge clause. In that regard, the Commission looks at the fact that Bayer granted Süllhöfer a licence under point 3 of the contract (reciprocal licences were granted). In this case, the parties agreed on royalités varying in accordance with the licensee's market behaviour, which might have led them to align their respective behaviour and impose on Süllhöfer a prohibited obligation to procure supplies from Bayer. The Commission considers that Süllhöfer is nevertheless not obliged as licensee to refrain from challenging Bayer's industrial property right, and that such an obligation could not arise from the fact that the agreement is an amicable settlement, inasmuch as that industrial property right was not at issue in the dispute. The Commission thus concludes that the said royalty agreement does not constitute a restriction of such a kind as to modify the nature of the no-challenge clause which is binding on Hennecke and Bayer.

The Commission proposes that the Bundesgerichtshof's question should be answered in the following terms:

2. Observations submitted by the appellants

(a) The preliminary question cannot be answered in the abstract

The appellants observe, first, that the question whether a no-challenge clause is contrary to Article 85 (1) of the EEC Treaty cannot be answered in the abstract. The argument that the effects of such a clause are to be determined in the light of the specific context in which it operates and not in isolation, and that it should therefore be assessed with regard to the general scheme of the agreements concluded by the parties is, in the appellants' view, in accordance with the past practice of both the Commission and the Court of Justice. They cite in that regard the Court's judgments of 25 February 1986 in Case 193/83 (Windsurfing International v Commission [1986] ECR 611, paragraph 96, hereinafter referred to as Windsurfing), of 28 January 1986 in Case 161/84 (Pronuptia [1986] ECR 353, paragraph 27 (1)), and of 30 June 1966 in Case 56/65 (Société technique minière v Maschinenbau Ulm [1966] ECR 235, at p. 248). In those judgments, the Court stressed the need to consider all the elements in the contract, which must be assessed first, and rejected any doctrine of automatic prohibition.

The wording of the reference for a preliminary ruling also shows that the Bundesgerichtshof was not referring to the individual clause in isolation but to its inclusion in a wider context, in this case the licensing agreement. That court thus fulfilled its duty, in view of the need to reach a serviceable interpretation of the provisions at issue, to set out the legal context in which the requested interpretation is to be placed (see the judgment of 30 June 1966 in Case 56/65, cited above, at p. 248).

The Bundesgerichtshofs request for a preliminary ruling also complies with the recommendation from the Bundeskartellamt (Federal Cartel Office) that the national court should state the special circumstances of the case when drawing up its request. The Bundeskartellamt suggested that the Bundesgerichtshof should stay the proceedings in this case, in view of the special circumstances, and refer the matter to the Court of Justice of the European Communities for a preliminary ruling on the compatibility of a no-challenge agreement with Article 85 (1) of the EEC Treaty in the specific circumstances of this case (observations of the Bundeskartellamt of 9 December 1985, in the procedural documents).

Finally, Article 3 (1) of Commission Regulation (EEC) No 2349/84 of 23 July 1984 on the application of Article 85 (3) of the Treaty to certain categories of patent licensing agreements (Official Journal 1984, L 219, p. 15) does not preclude the required examination of the context of the contract taken as a whole — on the contrary, the appellants consider that the fact that no-challenge clauses are excluded by that regulation from an exemption under Article 85 (3) of the EEC Treaty makes it necessary to examine individual cases. Nor does it mean that the clauses referred to in Article 3 of the regulation necessarily infringe Article 85 (1) of the Treaty, which does not contain an automatic prohibition — a suggestion expressly refuted by the Court in its judgment in Case 56/65, cited above. The regulation in question in no way precludes the possibility that, in other circumstances, a no-challenge clause need not constitute an infringement of Article 85 (1) of the EEC Treaty.

(b) The judgment in Windsurfing has not already provided an answer to the Bundesgerichtshofs question

In his observations of 17 March 1986 on the request for a preliminary ruling from the Bundesgerichtshof, the respondent maintained that the Court of Justice, in its judgment in Windsurfing, had made a definitive ruling on the legality of no-challenge clauses in Community law, so that the reference for a preliminary ruling was superfluous and could be withdrawn.

The fact that the Bundesgerichtshof has not withdrawn its request shows that it agrees with the appellants, who observe that the judgment in Windsurfing, the sole aim of which was to review the validity of a Commission decision under indent (b) of the first paragraph of Article 177 of the EEC Treaty, related to a specific case, and that the Court did not rule on the compatibility of a no-challenge clause with Article 85 (1) of the EEC Treaty in every conceivable case. On the contrary, it declined to examine each individual clause in the light of each of the constituent elements of that article, as can be seen from paragraph 97 of the judgment, and did not consider whether the no-challenge clause affected intra-Community trade because it had come to the conclusion that the agreement as a whole had that effect.

The argument, put forward by the applicant in that case, that such clauses generally have the effect of strengthening competition by making the granting of licences more probable was dismissed by the Court (paragraph 92) in view of the interest of the public in a free system of competition, which might be restricted if a patent granted in error were to be buttressed by a no-challenge clause. In the appellants' opinion, however, that statement by the Court can only be regarded, in view of the circumstances of the case, as an answer to the abovementioned argument. They conclude that, in circumstances where such a clause does not affect that interest in a free system of competition, it also does not constitute an infringement of Article 85 (1) of the EEC Treaty.

They add that in the present case, unlike the usual situation with patent licensing agreements, the aim was not to provide the licensees (the appellants) with know-how which they did not previously possess and to grant them the right to use and market a patented technique. In fact, it was clearly a question of preventing the future patentee (the respondent) from unlawfully hindering the appellants' possession and distribution of their own technique. That was achieved by means of a free licence granted for Germany in the contract itself, and a licence subject to the payment of royalties for the other countries, together with a right to grant sub-licences thereunder to customers. In view of the legal position thus achieved, the appellants no longer had any interest in maintaining their opposition to the patent application, so that they were able to withdraw their action. The no-challenge clause merely complemented the licensing agreement. The applicants feel that the difference in the facts is of crucial importance when comparing the present case with the facts underlying the Windsurfing case.

(c) The facts of this case

The applicants consider that the facts of the situation, as they emerge from the procedural documents submitted to the Court, need to be supplemented by certain details which, they stress, are of importance for a proper assessment of the scope of the free licence (and the licence subject to royalties for other countries) and of the right to grant sub-licences to customers, and they submit the following observations.

As the respondent claims that the appellants were the cause of his lack of success, they feel justified in outlining for the Court the technical problems involved by giving a brief description of the differences between the various technical principles at issue in the case.

The respondent's technique consists essentially in allowing excess foam between the belts to escape through a slit situated between the upper belt and the raised edge of the lower belt and channelling that foam through z-shaped folds in the edging strip. The lateral mobility of the bottom sheeting and the edging strip is at the same time supposed to prevent wrinkling. As early as 1963, however, — two years before the respondent lodged his patent application — Bayer had concluded that such a technique was unsuitable. Not only does the escape of the foam mean a loss of costly material, but it also presents a danger that the setting foam will tear the paper lining on the side walls to which, as they are now unprotected, subsequent foam will adhere, jamming the machine. The appellants therefore opted for a closed system. They do not fold the bottom sheeting outwards, but over and inwards beneath the top sheeting, so that no foam should be able to escape. This prevents any loss of material and eliminates an extra operation, the subsequent trimming of the panel to give it a smooth edge. It also prevents any danger of the setting foam tearing thin sheeting material in the lateral slit, and subsequent foam adhering to the side walls.

The respondent's machines use rubber conveyor belts, which the appellants have also found to be unsuitable. The escape of foam at the sides is insufficient to offset any excess pressure at the centre of the belt, and an increase in pressure at the centre jams the upper belt. The rubber belt is no longer pulled along by its rollers, which are by definition smooth, and there is slippage, amounting to complete lack of traction when too much foam is pressing up from below. Again, the result is a stoppage of the machine, which becomes completely clogged with setting foam. The appellants, however, who had previously carried out tests with rubber belts and thus experienced the situation described above, drive their panel belt by means of chains engaged in toothed wheels, eliminating any risk of slippage. They have also developed a hydraulic lifting device for the upper belt, which automatically offsets any excess foam pressure by raising the upper belt.

It is self-evident that the appellants market their own, more advanced, process, and advise their customers to operate the machines in this way in order to avoid the dangers outlined above. The respondent's outmoded technique was no longer of any interest to them once they had seen its weaknesses.

The failure of the technique recommended by the respondent, therefore, was not due to the anticompetitive effect of the no-challenge clause alleged by the respondent before the Oberlandesgericht Düsseldorf, but to the fact that, as early as 1968, his technique no longer met market requirements. Just two of the many possible examples may briefly be mentioned to illustrate this point.

In the Sempiran case, the respondent entered into a contract with Semperit AG of Vienna in December 1974 to set up together Sempiran Ges. mbH, a company governed by Austrian law. At the same time, he concluded a licensing agreement with Sempiran Ges. mbH to grant it an exclusive licence for exploiting his industrial property rights and undertook to provide it with the necessary know-how to grant sub-licences. Semperit GmbH of Deggendorf, a German company, ordered a dual conveyor-belt machine, which was built in accordance with the respondent's instructions. The machine was to be used for the manufacture of rigid polyurethane foam panels with both rigid and flexible coating materials.

Despite intensive efforts, the plant never worked, and Sempiran Ges. mbH was unable to use the licences it had been granted under the licensing agreement. Various proceedings ensued, ending in a settlement. The respondent was obliged to pay Semperit AG DM 750000 and himself buy back the machine delivered, which was completely unfit for use, for a further sum of approximately DM 500000. He also had to bear most of the costs.

The Sika-Norm case is another example of how the respondent's patented technique failed to work in practice.

(d) The proceedings initiated in 1979

In view of the factual circumstances set out above, the appellants feel it necessary to explain why the parties have been in litigation since 1979, and describe the course of the dispute.

In 1979 the respondent brought an action seeking, inter alia, a declaration that the 1968 settlement was invalid, an injunction restraining the appellants from using his process, and a declaration that they were liable to pay compensation.

On 21 November 1982, the Landgericht Düsseldorf declared the settlement invalid on the ground that the appellants had wilfully misled the respondent when the settlement was being reached.

In its judgment on appeal on 19 June 1984, the Oberlandesgericht declared the 1968 settlement invalid on the ground that the no-challenge clause constituted an infringement of Article 85 (1) of the EEC Treaty, thus rendering the whole settlement void.

The appellants point out that there was insufficient investigation of the facts both in the proceedings before the Landgericht and in the appeal to the Oberlandesgericht. It was only in March, and from 2 to 4 June 1986, that the Landgericht, after proceeding with the other claims, first heard the appellants' witnesses. Those witnesses confirmed that the respondent's technique was a known process, that it had been put into practice by the appellants and that it was uncompetitive.

(e) Comparison with the judgment in Windsurfing

The appellants consider that the difference between this and the Windsurfing case is thus self-evident. Here, the licensees had no interest in using the technically outdated process, nor were they prepared, for the same reason, to pay royalties in exchange for the granting of the licence. The withdrawal of the actions challenging the utility model and patent application was consideration enough. Once they had been granted the licence, moreover, the appellants no longer had any interest in continuing to challenge the respondent's patented invention. In those circumstances, whether or not there was a no-challenge clause, freedom of competition was in any event assured.

Secondly, the licence subject to payment of royalties for the other countries was of no effect, since the appellants did not recommend the respondent's process but only their own technique, with the use of which the respondent could no longer interfere. Customers in other countries, moreover, were not bound by the no-challenge clause and could therefore, if they wished, contest the respondent's patents at any time, either in Germany or abroad.

The present case, therefore, unlike the Windsurfing case, concerns a contract whose aim and effect was to enable the licensees to act with regard to their own process on the market as if the respondent's patent did not exist.

The appellants add that if a no-challenge clause were to be regarded as, in principle — per se as it were — constituting an obstacle to free competition because it precludes the possibility of contesting the patent, it would also be necessary to object to the granting of a free licence. That, too, negates the licensee's interest in challenging the patent, and a licence subject to the payment of royalties is no more capable of infringing Article 85 (1) of the EEC Treaty.

The appellants conclude that a no-challenge clause does not constitute an infringement of Article 85 (1) of the EEC Treaty when an examination of the licensing agreement as a whole shows, as in the present case, that the licence was not granted for the purpose of using the invention, but in order to protect the licensee from the possibility that the patent-holder might unlawfully interfere with the marketing of the former's technique. In such a case, the licensee's interest in having the patent revoked has in any event ceased to exist. A no-challenge clause concluded simultaneously with the granting of the licence has no effect of its own on competition.

(f) By reason of its overall structure, the 1968 agreement between the parties is compatible with Article 85 (1) of the EEC Treaty

The appellants emphasize that the effect of a contract with regard to competition is determined by the combined effect of its various provisions, and that there is no independent factual criterion of public interest sufficient in itself to render an examination of all the other factual criteria in Article 85 (1) of the EEC Treaty superfluous.

The concept of public interest referred to by the Court in the Windsurfer judgment (paragraph 92) had already been referred to by the Commission in a number of decisions relating to no-challenge clauses (in, for example, Decisions 76/29/EEC of 2 December 1975 (AOIP v Beyrard), 76/172/EEC of 15 December 1975 (Bayer v Gist-Brocades) and 79/86/EEC of 10 January 1979 (Vaessen v Moris), in the Eighth Report on Competition Policy, paragraph 118 (Pentacon), and finally in Decision 83/400/EEC of 11 July 1983 (Windsurfing International).

In the appellants' opinion, the public interest referred to by the Court is nevertheless not an independent criterion of assessment automatically prohibiting no-challenge clauses. Article 85 (1) as a whole represents the public interest inasmuch as, if an examination of the various points of the agreement between the parties leads to the conclusion that the factual criteria in that article are present, it is in the public interest to consider the clause in question to be invalid. Nor, in the appellants' view, is there any rule of law which can, on the ground of public interest, prevent parties from settling a dispute. And it cannot be in the public interest to prevent such parties, once they have eliminated the cause of the dispute by granting a licence, from entering into an agreement, in this case a no-challenge agreement, by which they consolidate that situation for the future.

In a number of previous decisions, the Commission has acknowledged that a no-challenge clause is unobjectionable when none of the factual criteria set out in Article 85 (1) of the EEC Treaty are satisfied.

In Decision 72/238/EEC of 9 June 1972 (Raymond-Nagoya) (Journal Officiel 1972, L 143, p. 39), for example, the Commission observed that if there was no apparent reason for anticipating any restriction of competition on the market a no-challenge clause was not prohibited. The Commission also attached decisive importance to the question whether, in a given case, a no-challenge clause had as its effect the restriction of competition when, in Decision 78/193/EEC of 23 December 1977 (Penneys) (Official Journal 1978, L 60, p. 19), it held that such a clause did not constitute an appreciable restriction of competition because it was limited to a period of five years. That period is generally regarded as reasonable for establishing the use of a trade mark, and the possibility that the trade mark protected by the no-challenge clause might be subject to cancellation within those five years is remote, regardless of the existence of the clause.

The Commission has, however, found that a no-challenge clause infringed Article 85 (1) of the EEC Treaty inasmuch as the clause limited the licensee's actual or potential competitivity (Commission Decision 72/237/EEC of 9 June 1972 (Davidson Rubber Co.), Journal Official 1972, L 143, p. 31, and Ninth Report on Competition Policy, paragraph 107, ACCv Fabry). There is no question of any such limitation in the present case, where the appellants are licensees under a free licence. Their competitivity in relation to the respondent was thus not limited.

The appellants also consider that the no-challenge clause does not constitute an infringement of Article 85 (1) of the EEC Treaty in connection with the licence subject to the payment of royalties for other countries.

They observe in that regard that the distinction between a free licence for Germany and a licence subject to royalties for other countries could not result in a compartmentalization of national markets. The appellants consider that, had they none the less built and marketed within Germany dual conveyor belt systems as defined in the patent under their free licence, they could also just as easily have supplied them in other EEC countries. Their customers could have used them without fear of being prevented from doing so by reason of the respondent's foreign patents.

The same would still have applied if the respondent had assigned his foreign patent to a third party. Lawful entry into free circulation would have exhausted the rights under the patent, according to the Court's judgment of 31 October 1974 in Case 15/74 (Centrafarm v Sterling Drug [1974] ECR 1147).

Furthermore, the lawful use of the patented process by foreign customers might at most have raised the question of royalty payments. If the licensees (the appellants) had passed the royalties on to their customers and those customers had felt that their competitive position was thus affected, it would have been possible for them to bring revocation proceedings against the patents at any time. The appellants consider that, in so far as the no-challenge clause covers the foreign rights (an interpretation which they have always contested and continue to contest), it could not be binding on sub-licensees in other countries. Each sub-licensee, who would have been entitled to consult the procedural documents under Article 31 of the (German) Law on Patents, could have availed himself of the same arguments already used by the appellants in their opposition to the patent application.

The applicants conclude that there could thus be no restriction of competition with regard to possible sub-licences subject to royalty payments.

3. Observations submitted by the respondent

The respondent considers that the question raised by the Bundesgerichtshof should be answered in the negative. The no-challenge clause defined in the order for reference is characterized by its extensive nature, affecting the territories of several Member States, together with industrial property rights and competitive relationships in those States. Such a clause is therefore incompatible with Article 85 of the EEC Treaty.

In that regard, the respondent submits the following considerations.

Such a clause is obviously likely to have an appreciable effect on trade between Member States of the EEC and distort competition, since the licensor and licensee can prevent any third party from exploiting the subject-matter of the licence in several Member States.

The competitive advantages obtained by the appellants through the free licence were decisive not only on the German market but also on the (export) markets of other Member States because in both cases the patent-holder's other licensees had to pay royalties.

While it is true that the respondents were also to pay royalties for items manufactured abroad, that meant no disadvantage for them inasmuch as they manufactured and marketed the protected equipment in the Federal Republic of Germany under their free licence, thus automatically exhausting all the industrial property rights existing in the other Member States. In that connection, the respondent cites the Court's judgments of 8 June 1971 in Case 78/70 (Deutsche Grammophon v Metro [1971] ECR 487), and of 31 October 1974 in Case 15/74 (Centrafarm v Sterling Drug [1974] ECR 1147).

The free licence was granted in exchange for the no-challenge clause, as it was only on the basis of that clause that the appellants obtained the licence.

Without the no-challenge clause, therefore, they could not have acquired the advantage which restricts and distorts competition within the common market.

1 Language of the Case: German.