Report for the Hearing in Case C-191/90
I — Facts and procedure
A — Legislative background
1. National law
Patented inventions in the United Kingdom are governed by the Patents Act 1977 (hereinafter Patents Act), which came into force on 1 June 1978.
2. Community law
Apan from Articles 30 and 36 of the EECTreaty, the provisions of Articles 47 and 209 of the Act concerning the conditions of accession of the Kingdom of Spain and the Portuguese Republic and the adjustments to the Treaties should be considered.
Articles 47 and 209 are exceptions to the general rule abolishing, from 1 January 1986, quantitative restrictions on imports and exports and any measure having equivalent effect between the Community and the two new Member states. They provide as follows:
B — Background to the dispute
II — Summary of the written observations submitted to the Court
A — National law applicable to the dispute in the main proceedings
The United Kingdom, SKF, Harris and Generics refer to the abovementioned judgment of the House of Lords (Allen and Hanhurys Ltd v Generics (UK) Ltd and Gist Brocades NV and Others and the Comptroller General of Patents [1986], given by Lord Justice Nicholls, which adjudged the Comptroller to be able to rely on the provisions of the Patents Act in relation to compulsory licences to settle the terms of licences of right.
The United Kingdom nevertheless emphasizes that licences of right must be distinguished from compulsory licences.
These two categories of licences differ both in their nature and in the consequences which flow from them in law.
Licences of right are governed by section 46 of the Patents Act, whose provisions are voluntary. The patentee, may at any time during the life of the patent, apply to the Comptroller for endorsement as Učence of right.
It is only in the specific case of patents whose period of validity has been extended in accordance with the transitional provisions of the Patents Act that that section applies compulsorily.
The consequences which follow from entry on the register of licence of right are identical in both cases. Any person is entitled to a licence under the patent on terms to be agreed by the parties or, in the absence of agreement, terms fixed by the Comptroller. In return, the patent holder is required to pay only half the renewal fees.
Thus the Comptroller only intervenes in a small number of cases to settle the terms of the licence.
With regard to compulsory licences, governed by sections 48 to 54 of the Patents Act, these are granted by the Comptroller where he considers that the application submitted to him is on one of the grounds listed in section 48.
SKF points out more specifically that the objectives envisaged by sections 48 and 50 of the Patents Act, which aim to promote industry within the United Kingdom, had already been implemented by legislation prior to the Patents Act. The rule of practice followed by the competent authorities was the following: where a patentee was working his invention in the United Kingdom, any compulsory licence would preclude importation. On the other hand, where a patentee was working the invention abroad and importing himself, then importation by a licensee would be permitted.
This rule was applied in the same way in the context of the Patents Act 1977. In accordance with the judgment of the Court of Justice in Case 434/85 (Allen and Hanburys v Generics [1988] ECR 1245), all licences of right which have subsequently been settled in the United Kingdom permit both manufacture within the United Kingdom and also importation of products made in other EECMember States.
Generics points out that the Commission has brought infringement proceedings in respect of section 48 of the Patents Act (Commission v United Kingdom Case C-30/90). That case concerns the question of compulsory licences and the discriminatory effect of section 48 in relation to imports from other Member States. It is not however directly related to the present case, which concerns only the issue of importation from outside the Community by a licensee.
Harris refers the Court to the Opinion of Advocate General Mancini in Case 434/85, above, where licences of right under the Patents Act are discussed.
Harris believes that it was a perfectly proper exercise of legislative authority to require, in sections 48(3) and 50 of the Patents Act, that the person to whom the United Kingdom monopoly was granted by virtue of the patent take due account of United Kingdom interests. In the name of those interests the Comptroller may, when settling the terms of a compulsory licence, prohibit importation from outside the Community.
By virtue of the abovementioned decision of the House of Lords, these considerations also apply to licences of right. The Comptroller may, accordingly, where he settles terms for such licences, have regard to the underlying policy which is the furtherance of the special United Kingdom interests.
Harris also refers to the provisions which apply to the grant of authorization to place on the market medical products and the legal proceedings brought by SKF against it when Harris submitted an application for authorization for Cimetidine.
According to the Commission, the relevance of sections 48(3) and 50 of the Patents Act to the present case derives from the practice of the Comptroller not to licence imports from nonmember countries if the product is already being manufactured adequately in the United Kingdom.
B — The first question
SKF maintains that Patents Court's approach of taking into account the existence of manufacturing within the United Kingdom as the sole determining factor for the purposes of imposing restrictions on imports by the licensee is wrong. It constitutes wrongful discrimination against undertakings based in other Member States.
In the first place, such discrimination is contrary to Article 30 of the Treaty.
The terms of a licence of right must be considered from two contrasting standpoints, that of the licensee on whom restrictions are imposed, and that of the patentee whose business and exploitation of the patent may be affected by the acts of the licensee.
In Case 434/85, above, the only relevant standpoint was that of the licensee as the case involved discrimination between several categories of licensee. In the present case, which concerns discrimination between several categories of patentee, the standpoint of the patentee should be considered.
In this respect, the inclusion in the licence of a term permitting imports from nonmember countries where the patentee manufactures the product in another Member State is a measure having equivalent effect to a quantitative restriction on imports.
Products imported from a nonmember country by the licensee will be in competition with those of the patentee, reducing the patentee's sales. Trade between Member States will then be affected since the patentee will be forced to reduce imports from the Member State where he manufactures the product. In the present case, Cimetidine imported from Hungary and Yugoslavia, where patent protection is difficult to obtain, will gradually replace imports by SKF from Ireland.
In the second place, such discrimination may not be justified by Article 36 of the Treaty.
With regard to the first sentence of Article 36, it is hard to see, from the point of view of the patentee, that a clause which diminishes the rights of the patentee by permitting the licensee to import, from nonmember countries amounts to the protection of industrial and commercial property. The specific subject matter of a patent endorsed licences of right still includes the right to object to the grant of licences permitting imports from nonmember countries. The first sentence of Article 36 is therefore inapplicable.
Moreover, the requirements of the second sentence of Article 36 are not satisfied. Discrimination between patentees manufacturing in the United Kingdom and patentees who choose to work their inventions in other Member states is arbitrary because it is not based on any proper ground. The former only have to face competition from manufacturers in other Member States of the Community, the latter face competition from imports from anywhere in the world. Such discrimination is undesirable. It favours purely national working of patents and does not allow manufacturers and consumers to benefit from economies of scale which flow from the centralization of manufacturing operations at a one plant.
The approach adopted by the Patents Court amounts also to a disguised restriction on trade between Member States. It promotes, for the abovementioned reasons, United Kingdom manufacture by patentees, and discourages working of patents by way of imports from other Member States.
The patentee is disadvantaged in the sense that he cannot treat the Community as a single market, and choose his manufacturing base according to purely economic criteria. The application of section 48(3)(b) and 50(l)(c), whose object is to favour national production and, it would appear, most often United Kingdom companies, constitutes arbitrary discrimination (judgment in Case 434/85 Allen and Hanburys, above) and a measure having an effect equivalent to a quantitative restriction (judgment in Case 249/81 Commission v Ireland [1982] ECR4005).
SKF infers from the above considerations that where, by virtue of the discretion conferred upon it, the appropriate authority responsible for settling the terms of a licence of right refuses to permit importation from nonmember countries where the patentee manufactures in the United Kingdom, then it should also refuse to permit such imports in the case where the patentee manufactures in another Member State of the Community.
That analysis does not apply, however, where the patentee is himself working the invention in a nonmember country. In such a case, an inclusion in the licence of a term permitting import from nonmember countries has no effect on trade between Member States.
Finally, it should be noted that, from the point of view of the licensee, a term in a compulsory licence restricting import from nonmember countries has itself no effect on trade between Member States and therefore does not contravene Article 30 of the Treaty (judgment in Case 51/75 EMI v CBS [1976] ECR 811, paragraphs 8 to 21).
SKF proposes, therefore, that the first question should be answered as follows:
Articles 30 and 36 of the EEC Treaty must be interpreted as precluding the competent authority from exercising its discretion to settle a term in a licence of right which permits imports from nonmember countries, in a case where the patentee works the patent by importation of product manufactured in other Member States of the EEC, where it would not in comparable circumstances settle such a term in the case where the patentee works the patent by manufacture in the United Kingdom.
The Commission proposes to reformulate the first question as follows:
Are Articles 30 and 36 of the Treaty to be interpreted as allowing the competent authorities of a Member state to refuse a licence of right to import from nonmember countries when a product is manufactured in that Member State, but to grant a licence to import from nonmember countries when that product is manufactured in another Member State.
The judgment of the Court in Allen and Hanburys, above, although concerning different facts, requires that a negative reply be given to this question. That judgment declared discrimination as between products manufactured in one Member State and products imported from another Member State to be contrary to Community law. Moreover, the Commission has brought infringement proceedings against discriminatory provisions contained in United Kingdom legislation on compulsory licences, and in particular sections 48(3)(a) and 50(1 )(c) of the Patents Act (Case C-30/90 Commission v United Kingdom). Those proceedings, according to the Commission, deal with substantially the same point as the present case.
In so far as the practice of the competent authorities for settling the terms of licences of right acts as an incentive to manufacture in the United Kingdom and discourages the patent owner from treating the common market as a single market and from deciding where to manufacture within that market on the basis of purely economic considerations, it affects intra-Community trade and constitutes arbitrary discrimination. It is therefore incompatible with Articles 30 and 36 of the Treaty.
This does not mean that the Comptroller is obliged to allow imports from nonmember countries. He need merely, when settling the terms of a licence of right in relation to those imports, treat manufacture in the United Kingdom and manufacture in another Community country on the same footing.
In relation to the first part of the question, Harris claims that in settling terms of licences of right the competent authority may, in pursuance of the interests of the United Kingdom envisaged by sections 48 and 50 of the Patents Act, prohibit importation of products covered by the patent from countries outside the Community. This construction does not run counter to the judgment in Allen and Hanburys, above, which only involves prohibitions on the importation of products covered by a patent from Member States.
As regards the conditions under which the competent authority exercises that power, which are the subject of the second part of the question, Harris maintains that that authority is not acting in disregard of any Community law provision when refusing to impose on the licensee a term prohibiting the importation of a product covered by the patent from nonmember countries where the patentee does not manufacture the product in the United Kingdom.
Harris puts forward the following argument in support of that view:
1. There are no apparent grounds for contending that the Comptroller's refusal to prohibit the licensee from importing patented products from outside the Community would impede Community trade. In the present case, in the absence of any such prohibition, the patentee is free to manufacture and sell in the Community and the licensee is free to manufacture in the United Kingdom and import raw material from suppliers located both inside and outside the Community. The royalty set by the Patents Court constitutes fair compensation for the patentee, whose legitimate interests are thereby protected.
2. On the contrary, the imposition of the obligation on the Comptroller to prohibit the licensee from importing from nonmember countries would have serious detrimental consequences for trade, in particular for Community trade, and would cause serious competitive distortions.
3. Furthermore, to compel the Comptroller to impose such a prohibition at the stage of settling terms of the licence of right would constrain him to take account of non-United Kingdom interests when the underlying policy of the abovementioned provisions of the Patents Act is to facilitate the commercial working of patents in the United Kingdom.
Its arguments are as follows:
1. The competent authority may indeed rely upon sections 48(3)(a) and 50(l)(c) of the Patents Act in determining whether to permit a licensee of right to import the patented products from outside the Community.
2. Articles 30 and 36 of the Treaty do not prevent the competent authorities from discriminating, on the basis of the Patents Act, between cases where the patented product is manufactured domestically and cases where the patented product is manufactured in another Member state.
Furthermore, Article 89 implicitly recognizes that there is a clear divergence between the Member States as regards the grant of compulsory licenses which requires adjustment over a period of time.
The United Kingdom refers to the judgment of the Court in Allen and Hanburys Limited, above, concerning patents endorsed as subject to licences of right, but points out that it cannot be applied in the present case, which concerns trade between a Member State and a nonmember country.
C — The second question
SKF submits that neither of the matters set out in this question should affect the answer to the first question. The effect of section 48(3)(a) and 50(l)(c) of the Patents Act 1977 in this case is to create arbitrary discrimination as between manufacturers in the United Kingdom and those in other Community Member States.
A patentee who does not manufacture the product in the United Kingdom is penalized. The loss or dilution of his monopoly rights by the grant of a licence of right authorizing imports from nonmember countries cannot adequately be compensated by the right to receive a fair return on his patent.
Furthermore, the obligation to work the patent in the United Kingdom is not necessary, as the United Kingdom market's needs can be satisfied by imports from other Member States.
The Commission wonders whether the factors in this question should be separated from the first question. In any event, it believes that these factors do not affect the answer to the first question.
Harris has not examined the first question separately from the second question.
Generics submits that the application of sections 48 and 50 of the Patents Act to compulsory licences will be dealt with in Case C-30/90. The factors referred to in that question, therefore, do not affect the answer to the first question.
Generics proposes the following answer to Question 2(b):
It makes no difference whether, in the exercise of his discretion whether or not to allow importation from a third country, the Comptroller is regarded as being required by the Patents Act 1977 to adopt the abovementioned policy, or whether in adopting such a policy he is regarded as merely having reference to the factors set out in section 48(3)(a)
In either case, the Comptroller's decision, in the absence of legislation pursuant to Article 113 of the Treaty, is a matter for national legislation which, in the present state of Community law, has not yet been harmonized.
The United Kingdom Government also proposes that the Court reply that the factors concerning compulsory licences in the question do not affect the answer to the first question concerning licences of right.
The Spanish Government has not submitted observations on this question.
D — The third question
The Spanish Government submits that it is contrary to Articles 30 and 36 of the Treaty for the competent authority, in settling the terms of a licence of right in respect of a patent for a pharmaceutical product, to include a term restricting importation of that product from Spain or Portugal.
Article 47 of the Act of Accession does not provide any basis for such a condition.
That article, which restricts the general principle of the free movement of goods enshrined in Article 30 of the EEC Treaty and Article 42 of the Treaty of Accession, was worded in such a way as to limit as far as possible the effects at variance with that principle. It must, therefore, be interpreted narrowly.
The right to give effect to the restriction provided for by that article is vested solely in the patentee or his beneficiary. Furthermore, the exercise of that right is merely optional.
If the competent authority were to impose a restriction on importation by virtue of these provisions, it would commit a twofold infringement. In the first place, it would thereby arrogate to itself rights which belong solely to the holder of the patent or his beneficiary and, in the second place, it would change a right in the domain of the inventor into an obligation imposed on the holder of a licence of right.
This would ignore the underlying reason for Article 47 of the Act of Accession, which is to offset the injury which might be caused to certain holders of a patents for pharmaceutical products registered in the Member States of the Community of Ten as a result of their inability to obtain comparable protection for those products in Spain before 7 October 1992. The formula was devised to enable the holder of the patent to invoke his right to prevent parallel exports from Spain for a limited period (until 7 October 1995).
Comparison of Article 47 with the national rules on licences of right tends to support this construction.
Article 47, whose aim is to offer compensation for the damage caused by the inability to obtain in Spain a monopoly on the exploitation of a pharmaceutical product under a patent, may not be applied in the context of national rules on licences of right which do not safeguard any monopoly of manufacture or marketing.
A term included in a licence of right restricting the importation of pharmaceutical products from Spain and Portugal cannot, therefore, be justified by the derogations provided for in the Act of Accession, and is contrary to Article 30 and 36 of the EEC Treaty.
The Commission, the United Kingdom Government, Generics and Harris submit observations which, in substance, agree on the question raised.
Those observations are based on Articles 47 and 209 of the Act of Accession.
Articles 47 and 209 of the Act of Accession oust the doctrine of exhaustion of rights since a patentee can enforce his patent against the importation of his own goods. According to SKF, these articles go further than that doctrine because the words even if mean that he can also enforce his patent against other goods made or imported by third parties, including licensees.
The transitional provisions allow the patentee to regard the products in question as products emanating from nonmember countries.
In the absence of explicit wording, patents subject to licences of right should not be excluded from the application of the provisions in question. It should be recalled, furthermore, that where a patent is subject to a licence of right, the patent holder is not to be deemed to have exhausted his rights (judgment in Case 19/84 Pbarmon v Hoechst [1985] ECR2281). Under those circumstances, if a patentee can enforce the patent against importation of his own products, a fortiori, he can enforce it against goods made and imported by third parties without his authorization.
Neither the principles laid down by the judgement in Allen and Hanburys, above, concerning the application of Article 30, nor the provisions of Article 36 apply in this case since the restriction on the importation of products from Spain and Portugal are based on the derogating provisions of the Act of Accession.
1 Language of the case: English.
2 Article 47 Act of Accession
3 Article 209 Act of Accession
4 Article 47 Act of Accession
5 Article 209 Act of Accession
6 Article 47 Act of Accession
7 Article 209 Act of Accession