C-15/74

In Case 15/74,

Reference to the Court under Article 177 of the EEC Treaty by the Hoge Raad of the Netherlands, for a preliminary ruling in the action pending before that court between

CENTRAFARM BV, with registered office in Rotterdam, with ADRIAAN DE PEIJPER , resident at Nieuwerkerk aan de IJssel,

and

Sterling Drug Inc ., with registered office in New York,

on the interpretation of the rules of the EEC Treaty on the free movement of goods, in conjunction with Article 42 of the Act annexed to the Treaty concerning the accession of the new Member States to the Economic Com­ munity, and on the interpretation of Article 85 of the EEC Treaty, in relation to patent rights,

Facts

The decision making the reference and trade-mark Negram, without the the written observations submitted agreement of Sterling Drug, from pursuant to Article 20 of the Protocol on England and the Federal Republic of the Statute of the Court of Justice of the Germany, where they had been put onto EEC may be summarized as follows: the market in a regular manner by subsidiaries of Sterling Drug Inc., into the Netherlands where they were offered for sale. I — Facts and procedure Bv importing the goods from Great Britain Centrafarm took advantage of a 1. Sterling Drug Inc., a company considerable price differential. It appears incorporated according to the law of the that in Great Britain the product is sold State of New York, is the titular holder for half the price at which it sells in the of national patents in several countries Netherlands. — including the Netherlands (patent No 2. On 16 June 1971 Sterling Drug 125 254) and Great Britain (patent No submitted to the president of the 1 000 892) — relating to the mode of Arrondissements-Rechtbank at Rotter­ preparation of a medicament named dam, sitting in chambers, an application acidum nalidixicum, for the treatment of for the immediate adoption of measures infections of the urinary passages. of conservation against the actions of For this product the trade-mark Centrafarm and of its director, and 'Negram' is the property, in Great requiring them to refrain from any Britain, of the company Sterling-Winth­ further infringement of the patent rop Group Ltd. and, in the Netherlands, belonging to Sterling Drug, together of a subsidiary of the latter, Winthrop with several subsidiary requests. The BV. president of the court rejected the Centrafarm, of which Mr de Peijper is a application, on the grounds of an director, imported medicinal prepara­ interpretation of the law on patents tions manufactured according to the (Octrooiwet) according to which a patent method, some of which bore the product is held to have been put into

(a) Assuming that: (d) Can the patentee successfully rely in 1. a patentee has parallel patents in justification of the exercise of the several of the countries belonging abovementioned right on the fact to the EEC, that the price differences in the relevant countries which make it 2. the products protected by those patents are lawfully marketed in profitable for third parties to market one or more of those countries by in one country products originating undertakings to whom the in another country and give the patentee has granted licences to patentee an interest in taking action manufacture and/or sell, against such practices, are the consequence of governmental meas­ 3. those products are subsequently ures whereby in the exporting exported by third parties and are country the prices of those goods are marketed and further dealt in in kept lower than would have been one of those other countries, the case in the absence of those measures? 4. the patent legislation in the lastmentioned country gives the (e) At any rate where the patent relates patentee the right to take legal to pharmaceutical products, can the action to prevent products thus patentee successfully rely in protected by patents from being justification of the exercise of his there marketed by others, even patent rights on the fact that the where these products were state of affairs described under (a) previously lawfully marketed in above prevents him from controlling another country by the patentee the distribution of his products, such or by the patentee's licencee, control being considered by him do the rules in the EEC Treaty essential so that measures for the concerning the free movement of protection of the public can be taken goods, notwithstanding what is in the event of defects appearing?

conditions on the market in respect 1. Sterling Drug Inc. recalls that a of the goods protected by the patentee has, in general, the exclusive patent) mean that this is a case of right, over the territory of the country in agreements or concerted practices of question, to manufacture the patented the type prohibited by Article 85 of product and to put it onto the market. the EEC Treaty, and must an action However, once he has put the product for infringement as referred to under into circulation in that country his right I (a) above — to the extent that this is held to be 'exhausted' and he can no must be regarded as a result of such longer prevent resale of the product in agreements or concerted practices — that country. for that reason be held impermissi­ ble? The company claims that no national law at present in force contains a (b) Is Article 85 also applicable if, in provision under the terms of which connexion with the agreements or marketing in a foreign country involves concerted practices referred to the exhaustion of the patent right. The above, it is only undertakings Hoge Raad has again declared in this belonging to the same concern that are involved?' case that the meaning of Article 30 (2) of the 'Rijksoctrooiwet' 'is not open to 4. The interlocutory judgment of the doubt', and has confirmed its earlier case Hoge Raad of 1 March 1974 was law according to which a Dutch patent registered at the Court on 4 March 1974. is exhausted only by the act of Pursuant to Article 20 of the Protocol on marketing 'within the Kingdom'. the Statute of the Court of Justice of The Draft Convention on a European the EEC, written observations were patent for the Common Market (Article submitted on behalf of Sterling Drug Inc. 32) is also based upon the idea that only by T. Schaper, of The Hague, Advocate acts which take place within the territory with the Hoge Raad, and by A. covered by the EEC patent can exhaust Deringer, of Cologne, Advocate with the latter.

— constitutes neither a means of or 'parallel'. arbitrary discrimination, nor a Sterling Drug underlines in this respect, disguised restriction on trade inter alia, that the period for which a between Member States. patent is granted varies according to the In this connexion the company examines legislations, and that, in certain States, the Judgments of the Court of 29 patents are granted without any prior examination whereas in others the February 1968 (Case 24/67, Parke Davis, Rec. 1968, p. 81) and of 8 June 1971 request for the grant of a patent is so (Case 78/70, Deutsche Grammophon examined. Requests for the grant of a patent for the same invention submitted Gesellschaft, Rec. 1971, p. 487). in several countries may display (a) In the company's opinion distinc­ differences. tions should be drawn between the If it is supposed that a patentee may Deutsche Grammophon case and the challenge parallel imports of a product present case. Firstly, in Deutsche coming from another Member State, Grammophon, the German copyright where that product is not protected by law, which dates from 1965, must be one of its patents, these differences can considered as a 'new' measure having raise serious problems for the national equivalent effect, whereas the legal court of the importing country which provision applicable in the present case, has to determine the degree of protection which dates from 1910, constitutes an conferred by the patents in the exporting 'existing' measure. country or countries. It can happen that (b) Secondly, copyrights differ funda­ where the judge is unable satisfactorily mentally from patent rights, given the to determine this complex question of characteristics of the latter. A patent is a the extent of protection, the patent is in monopoly, granted in each case by a practice not protected. This consequence specific State, with the aim of affects the existence of the patent. promoting, in the public interest, If it is supposed, on the other hand, that research investment and the publication every time a patentee puts a product into of inventions, at the same time as giving circulation, even in a Member State the inventor a fair reward. where that product has never been Until such time as the laws on patents patented and is not patentable, or in are harmonized, the very nature of the which the patent has come to an end, he present patent right implies the existence is prevented from challenging importa-

tion, this interpretation affects the sentence, have become directly appli protection conferred by patents for that cable as from 1 January 1970. product held by the person concerned in In this connexion the company recalls other Member States. This amounts to that in the Deutsche Grammophon case saying that only the legal provision a 'new' law was involved, whereas the which is the least favourable to a present case concerns an 'existing' law. patentee, contained in one of the Article 32, second paragraph, first sen legislations, determines in each case the tence, which provides that measures hav protection attaching to all patents ing equivalent effect shall be abolished granted within the EEC. by the end of the transitional period at The company concludes that the the latest, clearly constitutes an obliga consequences of the numerous diver tion to be fulfilled, which leaves the gences between the national legislations Member States a measure of discretion cannot be avoided by the direct ary power. The mere abolition of application of Community law, but national provisions on patents allowing solely by harmonization or unification, parallel imports to be prevented would which is the objective of the Draft affect the 'existence' of the patents and Convention on a European patent for such abolition could not therefore be the Common Market. decided upon except in conjunction either with the simultaneous elimination (c) Furthermore, the company men of the very great differences existing be tions the preliminary studies for this tween patent laws by harmonizing the Draft Convention and a report by the latter or with the creation of a uniform Assembly of the Secretaries of State to EEC patent. the governments of the Member States, The company next claims that even the on fundamental problems relating to the Commission does not seem to have protection of industrial propetry — a considered it a reasonable proposition report which must be considered as an that Article 32, second paragraph, first authentic interpretation of Articles 30

distinguish cases where Article 30 applies from those covered by Article 100 of the EEC Treaty and since, moreover, the 3. If it is supposed, on the other hand, legal provisions which are the subject of that the exception laid down at Article Article 100 remain in force until such 36 does not apply to these provisions, time as the Council issues a directive, the question arises (a question which was not postulated in the Deutsche recognition of the direct applicability of Article 30, as from 1 January 1970, Grammophon case, as the Advocate- General rightly observed) whether Ar would lead to a large measure of legal

JUDGMENT OF 31. 10. 1974 — CASE 15/74

Finally, the company refers to Article 42 from a factor which is completely of the Act of Accession, according to outside the control of Sterling Drug, that which measures having an effect is to say substantial changes in exchange equivalent to quantitative restrictions rates.

One of the decisive of automatic abrogation as from that date. reasons why it has brought an action is that the behaviour of Centrafarm makes 4. As regards question I (d), the it impossible for it to control the company states that one of the fundamental objectives of the EEC is distribution of its products. Such control is necessary above all to enable measures 'the institution of a system ensuring that competition in the common market is to be taken to protect the public in the event of a consignment of medicinal not distorted' (Article 3 (f)) and that such preparations proving defective. a system presupposes that artificial differences existing in interconnected The very existence of parallel imports fields must be jointly abolished renders any control impossible since one according to an agreed timetable. or more intermediaries, whose behaviour is beyond the control of the Measures with regard to prices adopted manufacturer, are involved in the in an exporting country for reasons of social policy, the effect of which is to

6. As regards question I (f), concerning In the present case, unlike the Deutsche Article 42 of the Act of Accession, the Grammophon case, the Dutch price is company claims that measures having governed by free market forces, whereas equivalent effect which have not been the English price is artificial. Although abrogated will in any case remain in nalidixic acid is patented in the force until 1 January 1975 at the earliest. Netherlands, its price is nevertheless It refers to the criteria for direct effect as governed by the laws of the market, defined by the Court in its Judgments of because various competing medicinal 4 February 1965 (Case 20/64, Albatros, preparations which also serve to treat Rec. 1965 — 3, p. 1) and of 19 infections of the urinary passages are to December 1968 (Salgoil, aforemen be found on the Dutch market. tioned).

CENTRAFARM v STERLING DRUG

respect of parallel imports from Great lawfully marketed within the territory of Britain. the Community. In the opinion of Centrafarm the 7. Finally, Sterling Drug claims that Judgment in Case 78/70 (Deutsche Article 85 of the EEC Treaty is not Grammophon) constitutes an important applicable in the present case, by reason precedent. The situation behind that case of the fact that Sterling-Winthrop Group displays a marked similarity with the Ltd. is a wholly-owned subsidiary of facts of the present case. The company Sterling Drug Inc. and that, as regards its concludes that the recitals of the power of decision — in particular for the operations in issue in this case — it Deutsche Grammophon Judgment, insofar as they are based upon 'the is completely dependent upon Sterling essential objective' of the EEC Treaty Drug. and upon the rules with regard to the free movement of goods which are Observations submitted by Centrafarm contained therein, are entirely applicable, mutatis mutandis, to the present case. Centrafarm first examines the premises upon which the questions of the Hoge The company emphasises that the Raad are based. The protected products exclusive right exercised pursuant to were lawfully marketed in the exporting paragraph 85 of the German copyright country, that is to say that they were law is very largely similar to the patent marketed either by the patentee itself, or right. That right is granted to manu­ with the latter's consent by a licencee. It facturers of sound recordings not emphasises that the facts as a whole because the manufacture of such record­

JUDGMENT OF 31. 10. 1974 — CASE 15/74

It is exception laid down in Article 36 of the not sufficient merely to consider the Treaty be invoked on the basis of the rights and obligations flowing from the circumstances set out in this question. provisions of the agreement. The As to question I (e), the company states economic and legal context within which that the patent can in no circumstances the agreement is situated must also be permit the patentee more effectively to considered, and it must be ascertained, control the distribution of a patent in particular, whether parallel imports medicinal preparation, with respect to from one country to another may be possible defects in that product. prevented, on the one hand, by the Unpatented medicinal preparations may existence of the agreements concluded also be defective. If it is necessary to with the various licencees and, on the exercise control over pharmaceutical other hand, by the effect of national patent legislation. products, or to improve such control, this can be done in ways other than by With reference in this connection to the means of patents. Judgment of the Court of 25 November 1971 (Case 22/71, Béguelin, Rec. 1971,

. . have as their object or effect the Observations submitted by the Danish prevention, restriction or distortion Government of competition within the common The Danish Government is of the market'. opinion that a distinction must be made Even if links exist between these legal according to whether the products entities within a single group thereby emanate from the same producer or are

manufactured in various countries of the that, in the present case, a patentee may Community. Thus Article 30 et seq. of justifiably claim that disparities between the EEC Treaty do not allow the licencee prices are the consequence of acts of the of a sales agency who himself covers the public authorities and that, where the home market by means of imports to patents concern pharmaceutical prod invoke a patent right in order to prevent ucts, the patentee has a particular other imports of products put on sale in legitimate interest in being able to another Member State by the foreign control the distribution of his products.

Judgments given by manufactured in another country of the national courts constitute measures EEC by the patentee himself, of by an having equivalent effect within the undertaking which is associated with the meaning of Article 30 where they patentee or by another licencee. prohibit the importation of goods from The exclusion of the possibility of one Member State into another. preventing imports under these In the abovementioned Judgment the circumstances alters decisively the legal Court defined the exception laid down basis for and the conditions of the by Article 36, noting that the latter industrial exploitation of patents. This is allows derogations from the principle of the underlying reason for the Draft the free movement of goods only to the Convention on a European patent for extent that they are justified in the the Common Market, which provides interest of those rights which are the that the principle of international specific subject matter of industrial and exhaustion of patent rights within the commercial property.

Where by the provisions of national legislations legal remedies before national courts at present in force with regard to make it possible to hinder imports of patents, since this problem has been products manufactured in a regular solved by Article 47 of the Convention. manner under patent and then put into The Danish Government further notes circulation this constitutes the creation

having equivalent effect consists in the upon trade between the Member States. exercise by the party concerned of It is however the task of the Community authorities to frustrate such a exclusive rights, in the Commission's view the essential element consists rather development, wherever necessary, by in the decision of the national court introducing, for example, a scheme for enabling such rights to be exercised. the harmonization of legislations. However, if the Community authorities fail in their duty the national courts are 2. Question I (b) nevertheless not entitled to bring The determining factor for the judgments which conflict with the application of the prohibition contained provisions of Article 30 by invoking a in Article 30 consists not in the efforts patent right. made to partition off national markets but in the fact that such a partition in 5. Question I (e) fact exists. Insofar as the question is also concerned to ascertain the limits to The production and marketing of Article 36, the latter may be invoked as medicinal preparations give rise to the an exception to the rule constituted by problem of the control of medicinal Article 30 where the imported products preparations which display certain have not been manufactured or put into defects. Various measures have already circulation by the patentee, by the been adopted with a view to solving this licencee or by other persons duly problem. As concerns the Netherlands, authorized to do so. the legal basis for these measures is Article 18 (2) of the Decree concerning proprietary medicinal products. It is not 3. Question I (c) necessary, for the application of these It is of little importance to know measures, that the manufacture or whether, as the national court asks, the marketing of a medicinal preparation be patentee and licencee belong to the same carried out by a single undertaking; concern; it is however important to control may also be exercised where know whether the products have been several parallel importers arc involved. put into circulation within the Common The prohibition contained in Article 30 Market by the patentee or with his is therefore still applicable to the consent. situation in question.

prevent imports of the medicinal restrict possibilities open to undertakings preparation in question. The question outside that concern of penetrating a referred should therefore be answered in given market — such agreements must the negative. be held to be covered by the provisions of Article 85 (1). In view of its remarks on Article 30 et 7. Question II (a) seq. the Commission confines itself to The Hoge Raad postulates the regulation these theoretical' observations. The of market conditions, which differ from question whether Article 85 (1) is one country to another, and appears to applicable must be answered in. relation refer thereby to the pursuit by the to each case as it arises; in view of the undertakings concerned of a policy of documents relating to the proceedings it price differentials. In order to put this would appear that the question should policy into effect the undertakings are be answered in the affirmative. invoking rights which in their belief flow Following the conclusion of the written from their industrial property. By procedure the oral procedure was behaving in this way the parties opened on 3 July 1974.

Court. The Commission refers to the The company Sterling Drug Inc. points Judgments of 13 July 1966 and 18 out that the product 'Negram' was put February 1971 (Case 56 and 58/64, onto the European market in 1963. The Consten, Rec. 1966, p. 429, and Case company claims that the price difference 40/70, Sirena, Rec. 1971, p. 69). can be imputed to the following factors: As to whether, in the circumstances 1. changes in exchange rates (accounting under consideration, an action for for about 60 % of the difference), infringement based upon a patent right must be held impermissible, it seems 2. freight, import duties, importer's evident that the prohibition contained in profit margin (accounting for about Article 85 (1) cannot be avoided by such 15 % of the difference) and

JUDGMENT OF 31. 10. 1974 — CASE 15/74

comparable size, due to the current also claims that since price formation is system of regulation of prices. In this far from free in most countries an report, produced by a semi-official body, affirmative answer to the question put it is stated that international companies by the Hoge Raad would leave the pursuing research projects are dependent present situation within the Community upon profit margins which are unchanged. It is to be expected that, in sufficiently high to enable them to most cases, patentees could claim that absorb the rise in the cost of research, price differentials are the consequence of whereas the British system merely allows measures adopted by the public current research costs to he covered. authorities.

CENTRAFARM v STERLING DRUG

Law

1 By interim decision of 1 March 1974, registered at the Court on 4 March, the Hoge Raad der Nederlanden (Dutch Supreme Court) referred certain questions, by virtue of Article 177 of the EEC Treaty, on patent rights in relation to the provisions of the Treaty and of the Act concerning the Accession of the three new Member States.

2 In the decision making the reference the Hoge Raad set out as follows the elements of fact and of national law in issue in relation to the questions referred:

— a patentee holds parallel patents in several of the States belonging to the EEC,

— the products protected by those patents are lawfully marketed in one or more of those Member States by undertakings to which the patentee has granted licences to manufacture and/or sell,

5 As a result of the provisions in the Treaty relating to the free movement of goods and in particular of Article 30, quantitative restrictions on imports and all measures having equivalent effect are prohibited between Member States.

6 By Article 36 these provisions shall nevertheless not include prohibitions or restrictions on imports justified on grounds of the protection of industrial or commercial property.

7 Nevertheless, it is clear from this same Article, in particular its second sentence, as well as from the context, that whilst the Treaty does not affect the existence of rights recognized by the legislation of a Member State in matters of industrial and commercial property, yet the exercise of these rights may nevertheless, depending on the circumstances, be affected by the prohibitions in the Treaty.

8 Inasmuch as it provides an exception to one of the fundamental principles of the Common Market, Article 36 in fact only admits of derogations from the free movement of goods where such derogations are justified for the purpose of safeguarding rights which constitute the specific subject matter of this property.

9 In relation to patents, the specific subject matter of the industrial property is the guarantee that the patentee, to reward the creative effort of the inventor, has the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time, either directly or by the grant of licences to third parties, as well as the right to oppose infringements.

10 An obstacle to the free movement of goods may arise out of the existence, within a national legislation concerning industrial and commercial property, of provisions laying down that a patentee's right is not exhausted when the product protected by the patent is marketed in another Member State, with the result that the patentee can prevent importation of the product into his own Member State when it has been marketed in another State.

15 The question referred should therefore be answered to the effect that the exercise, by a patentee, of the right which he enjoys under the legislation of a Member State to prohibit the sale, in that State, of a product protected by the patent which has been marketed in another Member State by the patentee or with his consent is incompatible with the rules of the EEC Treaty concerning the free movement of goods within the Common Market.

As regards question I (b)

16 This question was referred to cover the possibility that Community rules do not under all circumstances prevent the patentee from exercising the right, under his national law, to prohibit imports of the protected product.

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17 It follows from the answer given to question I (a) above that question I (b) has become devoid of object.

As regards question I (c)

23 It is part of the Community authorities' task to eliminate factors likely to distort competition between Member States, in particular by the

CENTRAFARM v STERLING DRUG

harmonization of national measures for the control of prices and by the prohibition of aids which are incompatible with the Common Market, in addition to the exercise of their powers in the field of competition.

24 The existence of factors such as these in a Member State, however, cannot justify the maintenance or introduction by another Member State of measures which are incompatible with the rules concerning the free movement of goods, in particular in the field of industrial and commercial property.

25 The question referred should therefore be answered in the negative.

As regards question I (e)

As regards question I (f)

31 This question requires the Court to state whether Article 42 of the Act concerning the Conditions of Accession of the three new Member States implies that the rules of the Treaty concerning the free movement of goods cannot be invoked in the Netherlands until 1 January 1975, insofar as the goods in question originate in the United Kingdom.

32 Paragraph 1 of Article 42 of the Act of Accession provides that quantitative restrictions on imports and exports shall, from the date of accession, be abolished between the Community as originally constituted and the new Member States.

33 Under paragraph 2 of the same Article, which is more directly relevant to the question, 'measures having equivalent effect to such restrictions shall be abolished by 1 January 1975 at the latest'.

34 In the context, this provision can refer only to those measures haying an effect equivalent to quantitative restrictions which, as between the original Member States, had to be abolished at the end of the transitional period, pursuant to Articles 30 and 32 to 35 of the EEC Treaty.

35 It therefore appears that Article 42 of the Act of Accession has no effect upon prohibitions on importation arising from national legislation concerning industrial and commercial property.

39 Although the existence of rights recognized under the industrial property legislation of a Member State is not affected by Article 85 of the Treaty, the conditions under which those rights may be exercised may nevertheless fall within the prohibitions contained in that Article.

40 This may be the case whenever the exercise of such a right appears to be the object, the means or the consequence of an agreement.

41 Article 85, however, is not concerned with agreements or concerted practices between undertakings belonging to the same concern and having the status of parent company and subsidiary, if the undertakings form an economic unit within which the subsidiary has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings.

Costs

42 The costs incurred by the Government of the Kingdom of Denmark and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable.

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3. It is also a matter of no significance that there exist, as between the exporting and importing Member States, price differences resulting from governmental measures adopted in the exporting State with a view to controlling the price of the product.

4. The proprietor of a patent relating to a pharmaceutical product cannot avoid the incidence of Community rules concerning the free movement of goods for the purpose of controlling the distribution of the product with a view to protecting the public against defects therein.

5. Article 42 of the Act concerning the Conditions of Accession and the Adjustments to the Treaties cannot be invoked to prevent importation into the Netherlands, even before 1 January 1975, of goods put onto the market in the United Kingdom by the patentee or with his consent.

6. Article 85 is not concerned with agreements or concerted practices between undertakings belonging to the same concern and having the

CENTRAFARM v STERLING DRUG

status of parent company and subsidiary, if the undertakings form an economic unit within which the subsidiary has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings.

Mr President, (a) an American company, which owns Members of the Court, parallel patent rights in several Member States, has, in each of them, 1. The Joined Cases 15 and 16/74 on granted a licence for manufacture or which the Hoge Raad of the Netherlands merely for sale to its subsidiary has referred for a preliminary ruling are companies, which are entirely under concerned with similar subjects. The first its control; case deals with patent rights, the second (b) the product, which is regularly sold with the right to a trade mark. in one State by the manufacturer The questions from the Dutch court who is the patent owner and holder concern the relationship between these of the trade mark in that country, is two rights and, against the background exported and resold by third-party of a complicated situation, whose salient purchasers in another Member State features are described below, Com­ where the parent company also munity rules governing the free owns the patent but does not make movement of products between the use of it for production, whereas a Member States and those prohibiting local company under its control, conduct in restraint of competition. which owns the right to the same These features may be summarized as trade mark which the product bears follows: in the country where it is

1 — Translated from the Italian.