C-78/70

DEUTSCHE GRAMMOPHON v METRO

In Case 78/70

Reference to the Court under Article 177 of the EEC Treaty by the Han­ seatisches Oberlandesgericht Hamburg for a preliminary ruling in the action pending before that court between

Deutsche Grammophon Gesellschaft MBH, Hamburg,

and

METRO-SB-GROSSMÄRKTE GMBH & Co. KG, represented by the company Metro-SB-Großmärkte GmbH, Hamburg,

Issues of fact and of law

I — Summary of facts and Its principal products are gramophone procedure records which it distributes directly or through its subsidiaries established in The facts which form the basis of the several EEC and EFTA States. Amongst present dispute may be summarized as its 99.55% owned subsidiaries is the follows: company Polydor SA, Paris (hereinafter 1. The company Deutsche Grammophon referred to as 'Polydor') with places of Gesellschaft (hereinafter referred to as business in Paris and Strasbourg. 'DG') is a subsidiary of the company In Germany the records are sold directly Philips Gloeilampen-Fabrieken, Eind­ through retailers and through two whole­ hoven (Netherlands), and of the com­ sale booksellers. DG sells records to pany Siemens AG, Berlin and Munich. those dealers at a price of DM 12-33

JUDGMENT OF 8. 6. 1971 — CASE 78/70

(plus VAT) and the controlled retail the undertaking Metro-SB-Großmärkte selling price is DM 19. The records GmbH of Hamburg, which has a con­ are only supplied to dealers who have trolling interest in Metro. signed a written undertaking ('Revers') 3. DG considered that the sale or its

discovered that it did not possess a pean Communities under Article 3 of written undertaking to observe the con­ Regulation No 17/62, requesting it to trolled prices. Since Metro refused to find that there was an infringement of sign such an undertaking DG severed Articles 85 and 86 of the Treaty and commercial relations. As a result of to require DG, Polydor Nederland NV this, Metro obtained supplies of Polydor and Polydor France to bring such in­ records through the undertaking Rosner fringement to an end. & Co. of Hamburg, selling them to its In addition, since Metro-SB-Groß­ customers for DM 11·95 plus VAT in märkte's objection to the injunction of January 1970 and for DM 12·95 plus the Landgericht Hamburg was dismis­ VAT in February 1970. sed by decision of 22 May 1970, Metro The records in question had been appealed to the Hanseatisches Ober­ pressed by DG in Germany and sup­ landesgericht which, by an order of 8 plied to its subsidiary Polydor in Paris. October 1970, decided to stay proceed­ Polydor had disposed of a number of ings and put the following questions to those records to an undertaking opera­ the Court of Justice under Article 177 ting in a third country which had of the Treaty: supplied a proportion of them to the '(a) Is it contrary to the second para­ undertaking Rosner & Co. The latter graph of Article 5 or Article 85 (1) in its turn resold those records to of the EEC Treaty to interpret

DEUTSCHE GRAMMOPHON v METRO

JUDGMENT OF 8. 6. 1971 — CASE 78/70

vision. It is a provision rendering the are also based solely on the protection Member States subject to an obligation accorded by the Copyright Law. It is which can only be enforced through the not founded on the concerted action of procedure of Article 169 of the Treaty. at least two undertakings but on uni It may be interpreted as governing or lateral behaviour. In other words, it is restricting national legislation on the clear from the above that observance protection of industrial property only at of the distribution rights for Germany the risk of producing intolerable legal is not ensured in the present case by uncertainty.

It must furthermore be all be interpreted in conjunction with explained that the legal protection Articles 36 and 222 of the Treaty. afforded to the rights of a manufacturer Article 36 lays down limitations to the of sound recordings did not come into free movement of goods, in derogation being after the entry into force of the from Articles 30 to 34 of the Treaty, Treaty but was in existence as long ago so far as they are justified on grounds as 1910. DG refers to an expert opinion derived from the protection of industrial of Professor Philipp Möhring which property; it cannot be doubted that accompanied its observations. copyright comes under the system of industrial property within the meaning

stricted. It is precisely this element of this case from the exclusive agreements competition which is absent from the concluded with performers or executants. relationship between DG and its sub First, in this connexion Article 61 of sidiary, Polydor; the situation is rather the Copyright Law and Article 11 of that of the accomplishment of separate the Law on the Protection of Copyright tasks within the same economic entity. and Related Rights (Gesetz über die Furthermore, it must always be borne Wahrnehmung von Urheberrechten und in mind that DG's action against Metro verwandten Schutzrechten) should be is not based on the licensing agreement borne in mind; these prohibit the draw-

ing up of 'exclusive licences' between cluded in this case by the fact that in authors or authors' associations and Germany there is a system of controlled record manufacturers; account should prices which is not found in France. also be taken of Article 78 of the Copy right Law, which provides in this sphere for a 'compulsory quasi-licence'. In any B — Observations of the undertaking event, leaving aside this latter provision, 'Metro' although a record manufacturer is en Metro explains that according to the titled on the basis of exclusive agree wording of Article 17 (2) of the Copy ments to prohibit his competitors from right Law it is the consent given by the 'introducing' the same product onto the holder of the right to the distribution of market, he may not prohibit them from the protected product which occasions recording the same piece of music in a the exhaustion of that right, and not the different interpretation. fact that such distribution occurred on The position which the manufacturer the national territory or abroad; it then occupies on the market therefore has makes the following observations: nothing, in common with the concept

interpretation of Article 86 of the legislature adopted the Copyright Law Treaty. after the ratification of the EEC Treaty The existence of an abuse' of a dominant it did not intend to prejudice the prin position must be discounted, first, where ciple of commercial freedom as it con the holder of the right relies solely on sidered that the question whether mar the law and that law grants the holder keting occurred on the national territory absolute territorial protection. or abroad does not affect the exhaustion Secondly, DG cannot be required to of the right. ensure the application of identical prices

A limitation of this nature can only be many of records purchased in France intended to prevent the exhaustion of the can be profitable, particularly for inter right prescribed by Article 17 (2) of the mediaries). Law. Finally, an abuse of a dominant position Apart from the licensing agreement, DG within the meaning of Article 86 is pre- and Polydor are engaged in a concerted

pose excessively high selling prices in (a) The second paragraph of Article 5 the various countries. It is quite impos­ of the Treaty sible for the trade to throw off this domination because the best-known per­ The second paragraph of Article 5 of formers are bound by exclusive contracts. the Treaty is not a self-executing pro­ Metro supplies, in a schedule to its ob­ vision. Furthermore, in adopting Article servations, information on the 'celebrity' 85 of the Copyright Law the Federal of the relevant performers. Government has not infringed that In these circumstances the exercise or the provision. It is clear in particular from right of distribution constitutes an abuse Articles 36 and 222 of the Treaty that of a dominant position which is prohibit­ the Member States have in fact re­ ed by Article 86 of the EEC Treaty. tained the power to settle independently their own systems of idustrial property C — Observations of the Government of and may thus within the framework of the Federal Republic of Germany this power afford legal protection to situations which were not previously The Federal Government explains first covered or which were governed in a of all that in its view it is not certain different way. that the sole possible interpretation of (b) Article 85 (1) of the Treaty Article 17 (2) of the Copyright Law is that based on the principle of 'territori­ The Federal Government queries first ality' which guided the court making whether an agreement concluded be­ the reference. In this connexion it re­ tween a parent company and its sub­ calls that legal writers also put forward sidiary—which from an economic point another interpretation to the effect that of view is wholly dominated by the the exclusive right is exhausted when former—may be described as an 'agree­ the objects reproduced are marketed ment' within the meaning of Article 85 abroad by the holder of the right or by (1) of the Treaty. In any event, where a third party under a licence which is the parent company can give mandatory also valid for the national territory. instructions to its subsidiary, the very

the exclusive right regarding reimporta­ tions into Germany actually rests on a D — Observations submitted by the 'concerted practice', that is to say, on a Commission of the European harmonization of action and behaviour Communities which is not accidental but deliberate and intentional. The Commission sets out the reasons The Federal Government concludes that which in its view led the German court the situation described in the first ques­ to apply Article 177 of the Treaty, even tion does not conflict with the second though the proceedings in the main paragraph of Article 5 of the Treaty. action are interim proceedings. After Nor does it conflict with Article 85 (1) noting that the first question might be of the Treaty in that the economic interpreted as requesting the Court to dominion exercised by the parent under­ give a ruling on German law, it ob­ taking over its subsidiary is such that serves that the Court nevertheless has there is no competition between them. the power to isolate the essential points If this were not so, everything would for the purposes of the interpretation depend on the wording of the licensing of the Treaty. agreements and on the other relevant The Commission recalls the provisions circumstances of the present case. of Articles 17 (2) and 85 (1) of the Copyright Law and states that there is (c) Article 86 of the Treaty no definite and unanimous view of the The Federal Government does not rule ambit of Article 17 (2). In this con­ out the possibility of a dominant posi­ nexion it is futile to invoke the prin­ tion in the relevant sector but considers ciple of 'territoriality', which properly this to exist only in exceptional cases. It speaking merely implies that the pro­ is furthermore related to a number of tection to be accorded by the courts factors such as the wording of each over the national territory must be exclusive agreement, the type of music assessed in accordance with the rules of in question—light music or instru­ national law; it does not however pre­ mental music—and so on. vent a State from making this protection Likewise, the question whether a manu­ dependent on external factors. The facturer of sound recordings may be Commission considers the question from said to 'abuse' a dominant position the point of view of other national depends on a number of factors. Differ­ laws and observes that the principle of ences between delivery prices in the territoriality makes it possible for the various Member States do not by them­ holder of a right to prohibit 'parallel selves prove such an abuse: it must be imports' and that its application to the ascertained whether they are justified present case leads to the sharing and by differences in production costs, taxa­ partitioning of the markets. In the case tion, and so on. In addition it is neces­ of copyright this consequence is all the sary to confirm whether the final price more evident (as compared with patent

or trade-mark rights) since that right which could jeopardize the attainment may be extended to other countries of the objectives of the Treaty. without any formality. The problem is thereby raised as to whether the second paragraph of Article (a) The second paragraph of Article 5 5 has been observed or infringed. The of the Treaty Commission emphasizes the scope and objectives of that article and recalls that The prohibition on importation or dis­ all national authorities, including the tribution of imported products conflicts courts, are obliged to observe it. An in particular with the principles set out interpretation of Article 85 of the copy­ in Article 3 (a) and (f) of the Treaty, right Law conferring the power in ques­ namely, free movement of goods and the tion on the proprietor of the copyright institution of a system ensuring freedom would furthermore fail to take account of competition within the common market. of the fact that that provision was adop­ ted after the entry into force of the The Treaty does not intend to prohibit Treaty. restrictions on competition arising from the existence of industrial property rights (b) Article 85 (1) of the Treaty or literary or artistic property rights but, (i) With regard to the licensing agree­ in Article 36, it outlines the boundary ments the Commission considers that between the existence of those rights, according to their wording they do not which is recognized by the Treaty, and exceed the limits of DG's rights and the exercise of those rights in a way that the facts of the case do not allow a which is contrary to one of the funda­ finding to be made as to whether re­ mental objectives of the Treaty. The strictions on competition were agreed or power conferred upon the holder of the form the subject-matter of a concerted exclusive right to prohibit the distribu­ practice. tion in one Member State of protected since they were concluded between a articles which have been lawfully mar­ parent undertaking and its subsidiaries, keted in another Member State involves whose capital is almost entirely owned an exercise of the said right which by the parent undertaking, these agree­ does not accord with those objectives ments do not fall under Article 85 (1) since its effect is to impede the free of the Treaty. Article 85 (1) might be movement of goods between Member relevant if it were found that those States. agreements contain clauses restricting It does not appear that such a prohibi­ competition which would of necessity tion follows from a legislative measure form the subject-matter of agreements directly infringing Article 30 et seq. of drawn up between the subsidiaries and the Treaty. Article 85 of the Copyright their customers, but this cannot be de­ Law does not directly govern the ques­ duced with certainty from the licensing tion and at all events it merely opens agreements.

Law. Taking account of the fact that (1) The legislative provisions of a Mem­ DG has fixed the level of final prices ber State, or their interpretation by the in Germany, has in practice prohibited courts, which confer upon the holder of its customers from importing DG records an exclusive right to a sound recording into Germany without its authorization the power to prohibit importation or and is itself actively engaged in enforc­ distribution within a country of copies ing observance of the imposed prices which the holder of the right or its and promptly taking action against any dependent undertaking has distributed infringement which comes to its notice, in another Member State jeopardize the the conclusion must be that in this attainment of the objectives of the case it is relying upon Article 85 of Treaty. Such a right is not inherent in the Copyright Law merely to enforce an the industrial and commercial property agreement falling within Article 85 (1) safeguarded by Article 36 of the Treaty. of the Treaty. Decisions of the courts in favour of the exercise of such a right are contrary (c) Article 86 of the Treaty to the obligation imposed upon the The Commission expresses its opinion Member States by the second paragraph on the concept of a 'dominant position' of Article 5 of the Treaty. and then sets out the criteria according (2) Article 85 of the Treaty is applic­ to which the court making the reference able where, in pursuance of an exclusive must determine the position of DG on right to reproduce and distribute sound the German market. It considers the recordings, the reimportation from one position of that undertaking on the said Member State of sound recordings dis­ market and the special nature of the tributed by the holder of the right or market in sound recordings and con­ its dependent undertaking in another cludes that DG, together with another Member State is prohibited, and where undertaking (the Phonogram Ton the holder of the right has concluded GmbH), occupies a dominant position with dealers in the importing country on that market. agreements requiring the latter to re­ With regard to the problem of an 'abuse' frain from distributing the imported of its position on the market, the Com­ products except with the consent of the mission draws attention to the provisions former and at the imposed price.

Grounds of judgment

1 By an order of 8 October 1970, which was received at the Court Registry on 7 December 1970, the Hanseatisches Oberlandesgericht, Hamburg, referred to the Court of Justice, under Article 177 of the Treaty establishing the European Economic Community, certain questions on the interpretation of the second paragraph of Article 5, Article 85 (1) and Article 86 of the Treaty.

The first question

2 In the first question the Court is asked to rule whether it is contrary to the second paragraph of Article 5 or Article 85 (1) of the EEC Treaty to interpret Articles 97 and 85 of the German Law of 9 September 1965 on copyright and related rights to mean that a German undertaking manufacturing sound recordings may rely on its exclusive right of distribution to prohibit the marketing in the Federal Republic of Germany of sound recordings which it has itself supplied to its French subsidiary which, although independent at law, is wholly subordinate to it commercially.

3 Under Article 177 the Court, when giving a preliminary ruling, is entitled only to pronounce on the interpretation of the Treaty and of acts of the institutions of the Community or on their validity but may not, on the basis of that article, give judgment on the interpretation of a provision of natonal law. It may however extract from the wording of the questions formulated by the national court those matters only which pertain to the interpretation of the Treaty, taking into account the facts communicated by the said court.

4 It is clear from the facts recorded by the Hanseatisches Oberlandesgericht, Hamburg, that what it asks may be reduced in essentials to the question whether the exclusive right of distributing the protected articles which is conferred by a national law on the manufacturer of sound recordings may, without infringing Community provisions, prevent the marketing on national territory of products lawfully distributed by such manufacturer or with his consent on the territory of another Member State. The Court of Justice is asked to define the tenor and the scope of the relevant Community provisions, with particular reference to the second paragraph of Article 5 or Article 85 (1).

9 Moreover, where certain prohibitions or restrictions on trade between Member States are conceded in Article 36, the Treaty makes express refer­ ence to them, providing that such derogations shall not constitute 'a means of arbitrary discrimination or a disguised restriction on trade between Member States'.

10 It is thus in the light of those provisions, especially of Articles 36, 85 and 86, that an appraisal should be made as to how far the exercise of a national right related to copyright may impede the marketing of products from another Member State.

11 Amongst the prohibitions or restrictions on the free movement of goods which it concedes Article 36 refers to industrial and commercial property. On the assumption that those provisions may be relevant to a right related to copyright, it is nevertheless clear from that article that, although the Treaty

JUDGMENT OF 8. 6. 1971 — CASE 78/70

does not affect the existence of rights recognized by the legislation of a Member State with regard to industrial and commercial property, the exer­ cise of such rights may nevertheless fall within the prohibitions laid down by the Treaty. Although it permits prohibitions or restrictions on the free move­ ment of products, which are justified for the purpose of protecting industrial and commercial property, Article 36 only admits derogations from that free­ dom to the extent to which they are justified for the purpose of safeguarding rights which constitute the specific subject-matter of such property.

12 If a right related to copyright is relied upon to prevent the marketing in a Member State of products distributed by the holder of the right or with his consent on the territory of another Member State on the sole ground that such distribution did not take place on the national territory, such a pro­ hibition, which would legitimize the isolation of national markets, would be repugnant to the essential purpose of the Treaty, which is to unite national markets into a single market.

DEUTSCHE GRAMMOPHON v METRO

16 It is clear from this provision that the action prohibited by it presupposes the existence of a dominant position within the common market or in a sub­ stantial part of it. A manufacturer of sound recordings who holds a right related to copyright does not occupy a dominant position within the meaning of Article 86 of the Treaty merely by exercising his exclusive right to dis­ tribute the protected articles.

17 Since that article requires that the position to which it refers should extend to a 'substantial part' of the common market this further requires that the manufacturer, alone or jointly with other undertakings in the same group, should have the power to impede the maintenance of effective competition over a considerable part of the relevant market, having regard in particular to the existence of any producers marketing similar products and to their position on the market.

18 If recording artists are tied to the manufacturer by exclusive contracts con­ sideration should be given, inter alia, to their popularity on the market, to the duration and extent of the obligations undertaken and to the opportunities available to other manufacturers of sound recordings to obtain the services of comparable performers.

19 For it to fall within Article 86 a dominant position must further be abused. The difference between the controlled price and the price of the product reimported from another Member State does not necessarily suffice to disclose such an abuse; it may however, if unjustified by any objective criteria and if it is particularly marked, be a determining factor in such abuse.

THE COURT

in answer to the question referred to it by the Hanseatisches Oberlandes­ gericht, Hamburg, pursuant to an order of that court of 8 October 1970, hereby rules:

I. It is in conflict with the provisions prescribing the free movement of products within the common market for a manufacturer of sound recordings to exercise the exclusive right to distribute the protected articles, conferred upon him by the legislation of a Member State, in such a way as to prohibit the sale in that State of products placed on the market by him or with his consent in another Member State solely because such distribution did not occur within the territory of the first Member State.

2. (a) A manufacturer of sound recordings who holds an exclusive right of distribution under national legislation does not occupy a dominant position within the meaning of Article 86 of the Treaty merely by exercising that right. The position is different when having regard to the circumstances of the case he has the power to impede the maintenance of effective competition over a con­ siderable part of the relevant market.

(b) The difference between the controlled price and the price of the product reimported from another Member State does not necessarily suffice to disclose an abuse of a dominant position; it may, however, if unjustified by any objective criteria and if it is particularly marked, be a determining factor in such abuse.

Lecourt Donner Trabucchi