European Law Research Center

Harvard Law School

 

Cambridge February 17, 1996

 

Recent Developments in the Law of the European Union

 

 

report by

ALDO FRIGNANI

 

Professor of European Community Private Law,

University of Turin

Partner of the law firm

PESCE, FRIGNANI, PASTORE & RUBEr

Turin, Milan, Reggio Emilia and Vienna

 

 

(an early and shorter version of this lecture has been published in English in International Review of Competition Law, 1995,n.1,p.17 and in Italian in Rivista di diritto industriale, 1996,I,p.151

 

 

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1) The potential conflict between national IPR and Community law.

It seems undoubted that IPR, which, of course, grant their owner a monopoly on the market of the protected product, may give rise to a contrast with Community competition rules, aimed at ensuring that competition in the Common Market is not distorted by national rules. This does not imply that such conflict cannot be solved, or that national IPR and competition rules are totally incompatible.

IPR are instruments which undertakings can legitimately use in their competitive efforts: their essential function is to strengthen research, and to encourage undertakings to face new investments, which will be rewarded with the guaranty of the exclusive exploitation of the invention,or the exclusive use of a distinctive sign, granted by IPR.

This obvious remark, makes clear that IPR are not, by themselves, in contrast with competition rules: what is prohibited by such rules is their abuse, or, in other words, any forbidden extension of the legal monopoly which IPR grant to their owner.

The ways to sort out:

a) Art. 36: recent interpretations by the Court of Justice (Quadra and Ideal Standard cases).

A possible way to sort out the conflict between national IPR and Community law is given by the application of art. 36 of the Treaty, which states that: "The provisions of articles 30 and 34 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of [public morality, public policy or public security, the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or] the protection of industrial and commercial property.

Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States".

As can easily be observed, this article includes a specific exception to the provision of articles 30 and 34, concerning the free movement of goods, in order to assure the protection of national IPR, but only in the case that they do not hide disguised restrictions on trade between Member States.

In Keurkoop case of 1982 the Court said :"in the present state of Community law and in the absence of Community standardization or of a harmonization of laws the determination of the conditions and procedures under which protection of designs is granted is a matter for national rules". From then on the Court repeated the principle in many other instances.

A recent application of art. 36 can be found in the Quadra decision. The case can be summarized as follows: Audi had been selling four wheel drive vehicles in Germany under the registered trade mark "Quattro" since 1980. When, in 1988, Renault began to sell its four wheel drive Espace "Quadra" in Germany, Audi claimed an injunction against Renault, because it feared that the use of the name "Quadra" would lead to confusion with "Quattro".

At the outset, the Court of Justice remarked that national trade mark laws are not yet harmonized throughout the Community , therefore the question of whether there was a risk of confusion was a matter of domestic law. The provisions of German trade mark law which allowed protection for the mark "Quattro" to distinguish a four wheel drive car did not constitute a means of arbitrary discrimination or a disguised restriction on inter-state trade. There was no evidence that German trade mark rules were in breach of the Treaty of Rome, nor that German authorities had applied the rules in a discriminatory manner in favor of German producers.

Consequently, the decision of the German judges, which prevented Renault from using the mark "Quadra" in Germany, did not constitute an obstacle to the free movement of goods, because the exception stated by art. 36, in order to protect national IPR, had to be applied, notwithstanding that "Quattro" is the word for the number "4" in another Member State, and has particular significance in the field of construction and marketing of four wheel drive vehicles.

Another application of art. 36 can be found in the subsequent Ideal Standard decision (June, 22, 1994), concerning the importation into Germany of heating equipment bearing the trade mark "Ideal Standard", manufactured in France by Compagnie Internationale de Chauffage (CIC), a company having no relationship to the German owner of the Ideal Standard mark.

CIC had acquired the French trade mark rights, via a chain of assignments, from the French subsidiary of the American Standard group, of which Ideal Standard GmbH, which held the rights to the trade mark in Germany, was a subsidiary as well. The German company no longer manufactured heating equipment, but argued that its sanitary fittings bearing the same trade-mark were sufficiently close in type to heating equipment for the risk of confusion to arise.

Extending the reasoning of HAG II decision, concerning a case in which the insulation of markets was due to State sequestration, to the new case, in which it was due to voluntary assignment, the Court concluded that free movement of the goods bearing the Ideal Standard trade mark would undermine the essential function of the trade mark, because consumers would no longer be able to identify for certain the origin of the marked goods, and the proprietor of the trade mark in the Member State in which imported products were sold could be held responsible for the poor quality of these products, for which, really, he was in no way accountable (n.16). Article 36 had therefore to be applied.

This case gives more weight to intellectual property rights, emphatically confirming the value of national trade mark rights. Their continuing effect as an obstacle to the free movement of goods is justified by the function of the mark as a guarantee of origin and quality. National trade marks and their assignment to different owners in different Members States can therefore have the effect of dividing markets within the Community. It must be emphasized, however, that any trade mark assignment following a market sharing agreement remains subject to the Treaty competition rules, and therefore assignments which give effect to an anti-competitive agreement are automatically void under art. 85. Anyway, where intellectual property rights are assigned in the course of a normal commercial transaction, such as the sale of a business, the risk of such a challenge should be substantially reduced.

b)Harmonization of laws and creation of Community IPR

Various efforts have been made by EC in order to harmonize national laws concerning IPR, and in order to create Community-wide IPR. Of particular significance are the new regulation concerning trade marks and the recently issued proposals and drafts for a regulation on Community designs.Inasmuch as the title to a IPR is a Unionwide one, many (if not all) of the problems raised under Arts 30 and 36 concerning the potential conflict between domestic and Community rules will be avoided.

Trade Marks

On June 16, 1994 the European Trade Marks Office located at Alicante (Spain), has started operating. Regulation n.40/94, adopted on December 20, 1993, which creates a Community-wide trade mark, was published on the Official Journal on January 14, 1994. The Community mark has a unitary character and confers the same effects over the whole E.U.(art. 1.2). The corresponding right accrues from a unique registration procedure, which is expected to be cheaper and shorter than individual applications in each of the 15 Member States.

Designs

On January 31,1994 the final proposals for a regulation on the Community design, and a directive to harmonize the existing domestic laws on the protection of designs was published.

The regulation will set up a Community-wide design protection system, which, however, will not supersede existing national systems overnight. In most of cases, anyway, national laws will have to be amended, in order to comply with the harmonization provisions of the directive, which is aimed at abolishing the obstacles to the free movement of goods, due to differences in national laws, and to ensure that competition in the common market is not distorted.

Art. 1.3 states that a community design shall have a unitary character and equal effect throughout the Community.

According to art. 3, "design" means the appearance of the whole or a part of a product resulting from the specific features of the lines, contours, colors, shape and/or materials of the product itself and /or its ornamentation. A design shall be protected to the extent that it is new and has an individual character (art. 4.1). As we can see, the "aesthetic value" of the product is not required for protection to be allowed.

A design has an individual character if the overall impression it gives to an informed user differs significantly from the overall impression produced on such a user by any previous design. In a word, it must not be commonplace.

To obtain a community design registration, an application will have to be made to a central community design office (which is likely to be established in the same location as the trade mark office: Alicante). There will be no examination or search procedures to determine validity and the procedure is intended to be simple, quick and inexpensive (apart from the problem of languages, still unresolved). Concerning the duration, a valid registered design will confer exclusive rights on its owner, including the right to apply the design to a product. This will last for an initial five years, renewable for additional periods of five years up to a maximum of 25 years (arts. 13 and 53).

Community design rights can also be acquired through simple use: the unregistered design right will last a maximum of three years from the design first being made available to the public (art. 7 a). This will give protection against deliberate copying of the design and marketing of the resultant product. During its first 12 months an unregistered design may be transformed into a registered one, so that there will be time to ascertain the potential success of a product before spending money on the registration procedure.

Copyright

On October 29, 1993 the Council issued the directive n.93/98, on the harmonization of the term of copyright protection allowed by national laws, which will be 70 years after the death of the author for most copyright works, including films, and 50 years from the date of the first public execution for other copyright works and performers’ rights, including sound recordings. The duration of the rights concerning radio and TV broadcasting is fifty years from the first broadcasting.

2) The use of IPR and the competition rules

a) Transfer of technology regulation

After two drafts having being presented, the Commission finally approved, on February, 1996, the Regulation on the application of art. 85.3 of the Treaty (block-exemption) to certain categories of technology transfer agreements.

The aims of the new regulation, as set forth in recital n. 3, are namely to combine into a single regulation the previously existing rules on patent licensing and on know-how licensing, and to harmonize and simplify them as far as possible, "in order to encourage the dissemination of technical knowledge in the Community and to promote the manufacture of technically more sophisticated products".

The need for equal treatment of the two similar contracts was since long felt among legal scholars, and pursued by various business circles.

According to art. 1.1, the exemption will apply to "pure patent licensing or know-how licensing agreements and to mixed patent and know-how licensing agreements, including those agreements containing ancillary provisions relating to intellectual property rights other than patents (i.e. trade marks, copyright and designs ), to which only two undertakings are party ...".

According to art.1.2, concerning pure patent licenses, the territorial protection of the licensor and the licensee from one another "is granted only to the extent that and for as long as the licensed product is protected by parallel patents", while the protection of each licensee from each other is granted for a maximum period of five years, since the product has been first put on the market by one of the licensees, but only if, and as long as, the licensed product is protected by a parallel patent in each of the territories.

Art. 1.3, concerning pure know-how licensees, states that the protection of the licensor will last ten years since the product is first put on the market by one of the licensees, while the protection of the licensee against other licensees will last only five years from the same date.

Worth to note, the exemption will apply to pure and mixed know-how licences only if, and as long as, the know-how is identified, secret and substantial, and if the improvements of the know-how itself are communicated by each party to the other, pursuant to the terms and the purpose of the agreement.

Art. 4.1. states that "The exemptions provided for in arts. 1 and 2 shall apply to agreements containing obligations restrictive of competition which are not covered by those articles and do not fall within the scope of art. 3, on condition that the agreements in question are notified to the Commission ... and that the Commission does not oppose such exemption within a period of four months".

The new regulation has adopted then the s.c "all or nothing" approach, thus confirming the provisions of the old regulations on IPR licenses. Worth to note, the introduction of the s.c. "partial exemption" had been proposed, on the contrary, by the draft regulations presented by the Commission in 1994 and 1995.

The new regulation does not include the s.c. "market share test", which had been proposed in the 1994-1995 drafts, in order to grant the exemption of the obligation of the licensor not to license other undertakings in the licensed territory. According to art 5.2 the market shares held by the parties will be relevant in the case when the licensor and the licensee are parties in a joint venture, and the licensing agreements relate to the activity of the joint venture.

The market share, on the other hand, is be considered as a clue showing that a licensing agreement, though covered by the exemption provided for by art. 1, nevertheless "has certain effects which are incompatible with the conditions laid down in art. 85.3 of the Treaty". According to art. 7.1.1., "the Commission may withdraw the benefit of this Regulation ...where the effect of the agreement is to prevent the licensed products from being exposed to effective competition in the licensed territory from identical goods or services or from goods or services considered by users as interchangeable or substitutable in view of their characteristics, price and intended use, which may in particular occur where the licensee’s market share exceeds 40%". The controversial problems which arise from the application of the market share test, then, are not resolved by the new regulation.

b) IPR and art. 86 (abuse of dominant position): the Magill case.

The long-awaited decision of the Magill case was finally issued by the Court on April, 6th, 1995. In its decision, the Court affirmed that, in exceptional circumstances, the Commission has the power to order the granting of a compulsory copyright license, and the supply of new clients: worth to note, this is the first decision which imposes the supply of new clients, and not the carrying on of the supply of old clients.

The Magill decision is, of course, a fundamental statement, concerning the relationships between EC competition law and national copyright laws, also if, in its reasoning, the Court clearly expresses its intention not to extend the application of the new rule beyond the specific subject-matter of the case.

Concerning the dominant position, for example, the Court stated that the owner of the national copyright is not in a dominant position because of the mere ownership of the copyright. In the specific subject-matter, the TV broadcasters were in a position of monopoly on the relevant market, because they only knew the weekly television listings, without whom the Magill TV Guide could not have been published. This statement is an application of the "essential facilities" theory.

Moreover, the Court stated that the mere refusal to grant licenses cannot be considered as an abuse of dominant position (thus confirming the statement of the Volvo decision): on the other hand the exercise of the national copyright may represent an abuse, under specific circumstances, as those of the Magill case.

i) First of all, the refusal by the TV broadcasters to grant licenses had the effect of stopping product innovation, being weekly TV guides completely absent from the market, with the consequential damage for the consumer, which was forced to buy the guides published by any single broadcaster in order to know the weekly programs of all the three broadcasters. The refusal to grant licenses, then, is not justified by the fact that the licenced products may compete with a new product that the owner of the copyright could put on the market, as long as the existing products do not fulfill a specific consumers’ demand.

ii) Moreover, the refusal to grant licenses, in this case, had no economic justification, considered that the weekly listings were by-products of the TV broadcasting itself: the broadcaster had to face no additional costs, in order to edit the listings, than those faced in order to carry out the broadcasting activity. The copyright granted by national rules on the weekly listings, then, had no economic justification at all.

As a consequence, in our opinion the Magill rule cannot be applied to those cases in which the copyright,is granted for new works, for the development of which the owner of the exclusive right had to face investments.

The Court, in the Ideal Standard and Quattro judgments mentioned above, had stated that the EC competition rules cannot prevail over national laws granting exclusive intellectual property rights: in the newly issued decision, the Court states for the first time, on the contrary, that, under exceptional circumstances, national laws granting intellectual property rights, which are in conflict with the provision of art. 86 of the Treaty, may have to be disapplied.

As we have already said, the Court was aware that the specific subject-matter of the Magill case was rather exceptional: anyway, it cannot absolutely be excluded that the new rule set forth in the Magill decision may find further applications in future cases of refusal to grant licenses.

Turin February 16, 1996

 

 

(Prof. Avv. Aldo Frignani)

 

f/universi/relazion/harvard.doc (15.2.96)