The Maize seeds doctrine: a discussion of the rulings of the Court of Justice of the European Union.
Introduction
The Maize Seeds doctrine was developed from the decision of the Court of Justice of the European Union (‘CJEU’) in the case of Nungesser KG v Commission of the European Communities[1] (hereafter, Maize Seeds case). It addressed the issues of exclusive licenses and territorial protection grants to licensees. The doctrine distinguished between open exclusive licences, which are necessary for the protection of patents, and absolute territorial licenses that prohibit parallel imports. The latter infringes competition rules[2] while the former does not. The rationale for the doctrine is two pronged. On the one hand is the need to achieve integration of the Internal Market[3] and prevent artificial separation of national markets; on the other hand is the need to promote innovation and new technology. The scope of the doctrine is ambiguous and limited. Prior to the formulation of the doctrine, the European Commission (‘Commission’) regarded exclusivity as contrary to competition rules but thereafter, embraced the doctrine.[4] However, the impact of the doctrine has been diminished by the current Regulation 772/2004 (‘TTBER’). It is wider in scope and allows territorial protection, provided certain conditions are met.[5] This essay shall examine the scope, rationale and practical implications of the doctrine concurrently and discuss the effect of TTBER on Intellectual Property Rights (‘IPR’) licensing. The current provisions in the TFEU will be used throughout this essay and substituted where necessary.
The Maize Seeds Doctrine
The facts are as follows: Institut National de la Recherche Agronomique (‘INRA’), a French agricultural research institute, developed a special hybrid maize seed (‘INRA seeds’) and granted Mr Kurt Eisele (‘Eisele’), a supplier of seeds and the majority shareholder of L.C. Nungesser KG (‘Nungesser’), the right to register the INRA seeds in his own name in Germany and the right to cultivate and sell the seeds within the German territory to the exclusion of all others, including itself. This latter right was later transferred by Eisele to Nungesser. INRA, under the agreement, was obliged not to sell or permit any person to sell the seeds in Germany. Eisele prevented German traders from selling, in Germany, INRA seeds imported from France, on the basis that he had an exclusive territorial licence to market the seeds in Germany. The Commission decided that the licensing agreements between INRA and Eisele infringed Article 101 because they imposed on INRA an obligation to prevent other licensees from producing and selling the seeds in Germany and prevented third parties from importing the seed into Germany, or exporting the seed from Germany. The Commission concluded that this led to market sharing and deprived ‘German farmers of any real room for negotiation since seed is supplied by one supplier and one supplier only.’[6] The Commission also held that the Agreements did not qualify for exemption under Article 101(3) because they allowed the licensee to eliminate all competition in INRA seeds in the German market, which led to higher prices for those seeds in Germany, compared with France.
The Appeal to the CJEU was partly allowed. The Court distinguished between an exclusive licence that is open and an exclusive licence with absolute territorial protection, i.e., closed. The CJEU stated that in the former case, the licensor merely ‘undertakes not to grant other licences in respect of the same territory and not to compete himself with the licensee on that territory.’[7] It held that open licences were necessary for the dissemination of new technologies[8] and to encourage acquisition of licences. Open licences emanate from the contractual relationship between the parties. As long as they do not affect the position of third parties, they do not infringe Article 101(1). On the other hand, exclusive licences with absolute territorial protection infringe Article 101(1) because they extend the provisions of exclusivity to third parties who are not bound by the contract, thereby preventing parallel imports,[9] resulting in an artificial maintenance of separate national markets.[10] The Court also considered the Commission’s refusal to grant an exemption under Article 101(3) and upheld the same on the basis that the absolute territorial protection conferred on the licensee with the objective of restricting competition, disqualified it from exemption and consequently, there was no need to examine the merits of the agreement.[11]
The rationale for the doctrine can be broadly classified into two: the need to achieve integration of the internal market; and the promotion of innovation. The case law settled that any agreement that prohibits or limits parallel trade infringes Article 101(1).[12] The classic case in this regard was the decision of the CJEU in Consten and Grundig v Commission.[13] The decision formed the foundation for the Exhaustion of Rights doctrine.[14] The Exhaustion of Rights doctrine is applicable throughout the EU and plays a significant role in protecting the free movement of goods.[15] However, member states may derogate from these provisions if the measure is justified and proportional.[16] Justification relates to the existence of the specific subject matter of the right as guaranteed by Article 345 of TFEU[17] whilst the exercise of a right refers to exploitation, subject to the prohibitions in the TFEU.[18] This distinction has been criticised as being artificial and inconsistent.[19] In Centrafarm BV v Sterling Drug Inc[20], the Court held that the specific subject matter of a patent is the exclusive right to use an invention; it does not include the right to control the sale of product after its initial sale. This can be linked to the Court’s decision in the Maize Seeds case when it held that absolute territorial protection, which affects the position of third parties and other licensees, is contrary to the provisions of the Treaty. Professor Korah criticises the Court’s decision on the grounds that permitting direct imports from other licensees will defeat the purpose of granting licences within a specific territory as such licences will be applicable throughout the internal market, thereby, leading to a reduction in IPR licensing. He suggests that the rule of reason applied in the US should also be utilised in determining the competitive nature of the agreement.[21]
Parallel importers usually benefit as free riders, as they have not made a considerable investment in the development of the patent, to the detriment of IPR holders and licensees. Axster has criticised the CJEU for protecting parallel imports as if they were a sacred cow.[22] The Commission’s view, however, is that parallel imports open up the market. The refusal of an exemption solely on the basis of absolute territorial protection has also been criticised for ignoring the amount of protection required to induce the necessary investments.[23] Korah maintains that both the Commission and the Court are misguided in holding that prohibition of parallel imports or exports always frustrates the integration of the internal market.[24] The Court tried to encourage IPR licensing and promote innovation by declaring that territorial restrictions imposed on the licensor that do not affect the position of third parties will escape Article 101(1). Based on the Commission’s interpretation, this doctrine is limited to patent rights. However, Professor Korah argues that its scope extends to other exclusive licences.[25]
There is agreement among writers that the open licence principle established by the Court is quite ambiguous.[26] The Court’s definition[27] is too simplistic and leaves a lot of questions unanswered. It has also been criticised for being vague and unclear.[28] For instance, the court did not address the issue of whether open licences would still be permissible if they included restrictions other than territorial restrictions.[29] Neither did it consider into what category[30] territorial restrictions that do not impair parallel imports would fall.[31] Furthermore, subsequent decisions of the Court have shown that restrictions apart from exclusivity are equally important.[32] An attempt to develop a criterion for open licences was addressed by the Court in paragraph 57 of its decision.[33] It stated that given the risk of cultivating and marketing a new product, a licensee requires territorial protection to ensure that he/she does not encounter competition from other licensees. This protection is also necessary to promote the dissemination of new technology and boost competition between the new product and similar existing products. The Court mentions four factors that may be regarded as determinants for ascertaining the nature of open licences.[34]
- The specific nature of the products in question;
- The importance of the technology and years of research;
- The newness of the product; and
- The risks for the licensee.[35]
Opi[36] argues that novelty is not the most significant part of the judgment[37] nor is it a requirement for an open exclusive licence to escape the prohibition of Article 101(1). He argues that the Court’s emphasis was on the benefit of territorial protection for licensees and consequently, the approach of the Commission should be whether an open licence is necessary to encourage investment, not whether the product is new.[38]
The Court’s subsequent decision in Louis Erauw-Jacquery Sprl v. La Hesbignonne,[39] however, supports the Commission’s view. In this case, the CJEU held that a prohibition on basic seeds did not infringe Article 101(1) of the TFEU as the breeder must be entitled to restrict propagation to the growers that he/she has selected as licensees.[40] The Court regarded basic seeds as newly developed seeds requiring IPR protection since considerable financial commitment was required at the time of production.[41] Subsequent cases have further confounded the position of exclusive licensing due to the uncertainty. In Coditel v Cine Vog Film[42] the Court held that absolute territorial protection granted to a sole licensee to exhibit a film in the licensed territory for a specified period was not contrary to Article 101(1). The court based its decision on the fact that the right of the owner of the film’s copyright and his/her assigns, to require fees for any showing of that film is part of the essential function of copyright.[43] Similarly in Pronuptia de Paris v Pronuptia de Paris Irmgard Schillgallis[44] the Court held that the grant of exclusive territorial rights to a franchisee for a specific territory does not infringe Article 101(1), particularly where the business name or franchise symbol is unknown. This suggests that the doctrine does not have universal application but will be applied on a case-by-case basis. This in itself creates ambiguity.
Block exemptions now play a critical role in assessing IPR licenses.[45] The current Regulation in force (TTBER) represents a more efficient and economics-based approach, similar to the rule of reason[46] used in the American jurisdiction. Its scope is wider; it covers transfer technology agreements such as licences of patents, know-how, software, copyright, design and model rights.[47] The requirement for the introduction of new technology no longer exists and the question of whether an agreement infringes Article 101(1) only comes into play when the block exemption does not apply. Exemption is available for agreements between competing undertakings whose market share[48] does not exceed 20 per cent and for agreements between non-competing undertakings, whose market share does not exceed 30 per cent. This indicates a more liberal view of non-competing undertakings. Exemption is denied for agreements that contain severely anti-competitive restrictions. The Commission categorises these anti-competitive restraints into hard core restrictions[49] and excluded restrictions[50]. This has brought legal certainty into IP licensing and is a welcome development. Undertakings and licensees can thereby determine the measure of protection afforded to them, if their venture is successful.[51] The benefits of exclusivity would otherwise be negligible if its legality could not be ascertained in advance.[52]
Conclusion
A balance has to be struck between promoting market integration and encouraging innovation. The Maize Seeds doctrine created a category of open licences which allowed licensees to exploit inventions without risking the loss of their financial commitments. The special role played by IPR licensing in the improvement of innovation and technology is now being taken into consideration by the Commission and he same is reflected in the TTBER. A category of restrictions that will infringe Article 101(1) and those that do not are provided therein. Clarity and legal certainty has been provided for undertakings entering into agreements in respect of provisions which will be regarded as offending. Both the Commission and the Court now examine the terms and provisions in a licensing agreement within their economic context to ascertain whether the exercise of the IP right is competition restrictive. Emphasis is placed on the effect of an agreement rather than its object. This is in line with the international approach which is flexible and economics based. The distinction between open and closed licenses has become blurred. However a discussion on licensing of IPR would not be complete without an examination of this doctrine. The doctrine formed the foundation for the block exemption regulations and initiated the change from the approach previously held by the Commission, to its present economics-based approach. Therefore, it is an important doctrine in discussing licensing agreements. The doctrine has served its purpose and is now on the backseat of IPR licensing.
[1] Case 258/78 Nungesser KG v Commission of the European Communities [1982] ECR 2015.
[2] Articles 101 and 102 of the Consolidated Treaty on the Functioning of the European Union (hereafter TFEU) are the relevant provision on competition rules within the European Union (EU).
[3] This term refers to the European Economic Area and is a fundamental principle of the EU. See arts 26, 34 and 36 of the TFEU.
[4] See Recital 11 and Article 1 of Commission Regulation 2349/84 (EEC) of 23 July 1984 on the Application of Article 85(3) of the Treaty to Certain Categories of Patent Licensing Agreements [1984] OJ L219/15 (Reg 2349/84).
[5] See Commission Regulation (EC) 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements [2004] OJ L123/11 (Reg 772/2004).
[6] Nungesser (n 1) 2068, para 51.
[7] ibid, para 53.
[8] ibid 2069, para 57.
[9] ibid 2070, para 60.
[10] ibid para 61.
[11] ibid 2074, Para 78. See also Valentine Korah, ‘Exclusive Licenses of Patent and Plant Breeders’ Rights under EEC Law after Maize Seed’ (1983) 28 Antitrust Bulletin 699 for a detailed analysis of the decisions of the Commission and the CJEU.
[12] Consten (n 13); Joined Cases 96-102, 104, 105, 108 and 110/82 NV IAZ International Belgium v. Commission [1983] ECR 3369.
[13] n 13.
[14] This doctrine prevents a right holder from stopping the resale of products which he puts on the market and which are lawfully acquired by a third party. See also C-10/89 SA CNL-SUCAL NV v HAG GF AG [1990] ECR 1-03711 (HAG II).
[15] See art 34 TFEU. For a critique of this doctrine, see Guido Westkamp ‘Intellectual Property, Competition Rules, and the Emerging Internal Market: Some Thoughts on the European Exhaustion Doctrine’ (2007) 11 Marquette Intellectual Property Law Review 292, 292-296.
[16] See art 36 TFEU.
[17] Consten (n 13).
[18] See Case 24/67 Parke Davis v Probel [1968] ECR 55; Case 78-70 Deutsche Grammophon v Metro [1971] ECR 487 – where the court held that allowing a prohibition of parallel imports would legitimise the isolation of national markets. See also Case 15/74, Centrafarm BV v Sterling Drug Inc [1974] ECR 1147; Case 16/74 Centrafarm BV v Winthrop BV [1974] ECR 1183; Case 238/87 Volvo v Erik Veng [1988] ECR 6211; Joined Cases 92 and 326/92 Phil Collins v Imtrant [1993] ECR I-5145.
[19] See Guliano Marenco and Karen Banks, ‘Intellectual Property and the Community Rules on Free Movement: Discrimination Unearthed’ [1990] EL Rev 224. See also Westkamp (n 25).
[20] n 28.
[21] Korah (n 21) 735-736.
[22] Axster (n 11) 172.
[23] Korah (n 21) 740.
[24] ibid 746.
[25] Prof Korah bases his argument on the similarity drawn by the Court between plant breeders’ rights and other Industrial and Commercial Property Rights. See Korah (n 21) 727-728.
[26] ibid 731. See also Brenda Sufrin, ‘Negotiating Licences of Intellectual Property Rights – The EC Law Aspects’ [1992] ICCLR 73, 74; Axster (n 11) 172.
[27] Nungesser (n 1) para 53.
[28] n 35.
[29] Korah (n 21) 731. For examples of typical terms in licensing agreements that amount to restrictions, see Whish (n 6).
[30] The categories are “open license” and “absolute territorial protection”.
[31] Axster (n 11) 171.
[32] See Case 193/83 Windsurfing International Inc v Commission [1986] ECR 611.
[33] Nungesser (n 1).
[34] ibid 732.
[35] See Korah (n 21) for a full criticism of this doctrine.
[36] Opi (n 45) 103.
[37] Referring to the CJEU’s decision in Nungesser (n 1).
[38] Opi (n 45) 104.
[39] Case 27/87 [1988] ECR 1919.
[40] ibid para 11.
[41] Nungesser (n 1) para 33.
[42] Case 262/81 [1982] ECR 3381.
[43] ibid para 12.
[44] Case 161/84 [1986] ECR 353.
[45] See Butterworth’s Competition Law Service (1994) Division V, Chap 3 for a discussion on technology transfer agreements.
[46] Korah for an exposition on this doctrine.
[47] It does not however, cover agreements on technology pools or subcontracting of research and development. The Commission Guidelines deal with these. See Commission Notice, Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C11/1 (Guidelines on Horizontal Cooperation Agreements); Commission Notice, Guidelines on Vertical Restraints [2000] OJ C291/1.
[48] Market share is calculated on the basis of market sales value data relating to the preceding calendar year. See art 8 of Reg 772/2004.
[49] Reg 772/2004, art 4.
[50] ibid art 5.
[51] Korah (n 21) 746.
[52] ibid.