Court of Justice 08-06-1971 ECLI:EU:C:1971:59

The second paragraph of Article 5 of the Treaty

The second paragraph of Article 5 of the Treaty is not a self-executing provision. It is a provision rendering the Member States subject to an obligation which can only be enforced through the procedure of Article 169 of the Treaty. It may be interpreted as governing or restricting national legislation on the protection of industrial property only at the risk of producing intolerable legal uncertainty. Article 36 of the Treaty in particular runs contrary to such an interpretation; in relation to the abovementioned general provision it must be considered as a ‘particular law’ which, in precisely the relevant sphere, creates an exception in favour of a particular national rule. It must furthermore be explained that the legal protection afforded to the rights of a manufacturer of sound recordings did not come into being after the entry into force of the Treaty but was in existence as long ago as 1910. DG refers to an expert opinion of Professor Philipp Möhring which accompanied its observations.

Article 85 (1) of the Treaty

The concept of an ‘agreement between undertakings’ contained in this article is not applicable to the present case since it presupposes that there is competition between the undertakings in question which is capable of being restricted. It is precisely this element of competition which is absent from the relationship between DG and its subsidiary, Polydor; the situation is rather that of the accomplishment of separate tasks within the same economic entity. Furthermore, it must always be borne in mind that DG's action against Metro is not based on the licensing agreement concluded with Polydor but is founded exclusively on the provisions of the Copyright Law.

Indeed, in the case of copyright, as in the case of rights related thereto, it is national law itself which creates barriers.

Likewise, in the present case there is no ‘concerted practice’ within the meaning of Article 85 (1) of the Treaty, since DG's proceedings against Metro are also based solely on the protection accorded by the Copyright Law. It is not founded on the concerted action of at least two undertakings but on unilateral behaviour. In other words, it is clear from the above that observance of the distribution rights for Germany is not ensured in the present case by the existence of one of the types of restrictive practice to which reference is made in Article 85 (1) of the Treaty.

Article 86 of the Treaty

Article 86 of the Treaty must first of all be interpreted in conjunction with Articles 36 and 222 of the Treaty. Article 36 lays down limitations to the free movement of goods, in derogation from Articles 30 to 34 of the Treaty, so far as they are justified on grounds derived from the protection of industrial property; it cannot be doubted that copyright comes under the system of industrial property within the meaning of that article. Article 222 expressly states that the Treaty does not affect the law of the Member States governing the system of property ownership; it is likewise certain that industrial property forms part of that law.

Furthermore, there can be no question that a dominant position could arise in this case from the exclusive agreements concluded with performers or executants. First, in this connexion Article 61 of the Copyright Law and Article 11 of the Law on the Protection of Copyright and Related Rights (Gesetz über die Wahrnehmung von Urheberrechten und verwandten Schutzrechten) should be borne in mind; these prohibit the drawing up of ‘exclusive licences’ between authors or authors' associations and record manufacturers; account should also be taken of Article 78 of the Copyright Law, which provides in this sphere for a ‘compulsory quasi-licence’. In any event, leaving aside this latter provision, although a record manufacturer is entitled on the basis of exclusive agreements to prohibit his competitors from ‘introducing’ the same product onto the market, he may not prohibit them from recording the same piece of music in a different interpretation.

The position which the manufacturer occupies on the market therefore has nothing, in common with the concept of a ‘dominant position’. Furthermore, in the present case the soloists who took part in the recordings are not, with regard to most of the records, bound by exclusive contracts. If the Court were to decide to consider DG's situation case by case in relation to each record, it would have to verify the relevant facts, which it may not do since this relates to the application and not to the interpretation of Article 86 of the Treaty.

The existence of an ‘abuse’ of a dominant position must be discounted, first, where the holder of the right relies solely on the law and that law grants the holder absolute territorial protection.

Secondly, DG cannot be required to ensure the application of identical prices so long as national tax laws are divergent.

In adition, in this case the final price of the records in France is very little lower than that prevailing in Germany since existing differences are linked principally to the revaluation and devaluation of the currencies. Nor does the final price to the consumer differ substantially in the Member States (DG gives figures showing how the importation into Germany of records purchased in France can be profitable, particularly for intermediaries).

Finally, an abuse of a dominant position within the meaning of Article 86 is precluded in this case by the fact that in Germany there is a system of controlled prices which is not found in France.

The second paragraph of Article 5 of the Treaty

The interpretation of Articles 85 and 17 of the Copyright Law, which prevent the reimportation of records marketed with the agreement of DG, conflicts with the second paragraph of Article 5 of the Treaty which is binding on both the national legislature and the national courts. Furthermore, since the German legislature adopted the Copyright Law after the ratification of the EEC Treaty it did not intend to prejudice the principle of commercial freedom as it considered that the question whether marketing occurred on the national territory or abroad does not affect the exhaustion of the right.

Article 85 of the Treaty

The clause in the licensing agreement prohibiting the French party from selling the records outside the territory covered by the agreement, namely France, is by no means indispensable for the protection of the right granted by the Copyright Law and is not justified by the protection afforded to the exclusive right of distribution.

A limitation of this nature can only be intended to prevent the exhaustion of the right prescribed by Article 17 (2) of the Law.

Apart from the licensing agreement, DG and Polydor are engaged in a concerted practice for the purpose of preventing records exported to France from being reimported into Germany. In both cases the objective is to enable DG to maintain its system of distribution and controlled prices and to ensure a high level of prices in Germany.

Both me abovementioned clause in me agreement and the concerted practice are contrary to Article 85 (1) of the EEC Treaty.

Article 86 of the Treaty

Few undertakings have a really dominant position in the field of sound recordings. DG is indeed one of them and it uses this position to prevent, by means of Article 85 of the Copyright Law, the reimportation of its products into Germany.

This affects trade between Member States, and DG has the power to impose excessively high selling prices in the various countries. It is quite impossible for the trade to throw off this domination because the best-known performers are bound by exclusive contracts. Metro supplies, in a schedule to its observations, information on the ‘celebrity’ of the relevant performers.

In these circumstances the exercise or the right of distribution constitutes an abuse of a dominant position which is prohibited by Article 86 of the EEC Treaty.

The second paragraph of Article 5 of the Treaty

The second paragraph of Article 5 of the Treaty is not a self-executing provision. Furthermore, in adopting Article 85 of the Copyright Law the Federal Government has not infringed that provision. It is clear in particular from Articles 36 and 222 of the Treaty that the Member States have in fact retained the power to settle independently their own systems of idustrial property and may thus within the framework of this power afford legal protection to situations which were not previously covered or which were governed in a different way.

Article 85 (1) of the Treaty

The Federal Government queries first whether an agreement concluded between a parent company and its subsidiary—which from an economic point of view is wholly dominated by the former—may be described as an ‘agreement’ within the meaning of Article 85 (1) of the Treaty. In any event, where the parent company can give mandatory instructions to its subsidiary, the very fact that there is no competition between the two undertakings excludes the application of Article 85 (1). Even assuming that the two undertakings would conclude between themselves agreements within the meaning of Article 85 (1) of the Treaty all the conditions for the application of that article would have to be investigated in concreto. Similarly, it would be necessary to check whether the exercise of the exclusive right regarding reimportations into Germany actually rests on a ‘concerted practice’, that is to say, on a harmonization of action and behaviour which is not accidental but deliberate and intentional.

The Federal Government concludes that the situation described in the first question does not conflict with the second paragraph of Article 5 of the Treaty. Nor does it conflict with Article 85 (1) of the Treaty in that the economic dominion exercised by the parent undertaking over its subsidiary is such that there is no competition between them. If this were not so, everything would depend on the wording of the licensing agreements and on the other relevant circumstances of the present case.

Article 86 of the Treaty

The Federal Government does not rule out the possibility of a dominant position in the relevant sector but considers this to exist only in exceptional cases. It is furthermore related to a number of factors such as the wording of each exclusive agreement, the type of music in question—light music or instrumental music—and so on.

Likewise, the question whether a manufacturer of sound recordings may be said to ‘abuse’ a dominant position depends on a number of factors. Differences between delivery prices in the various Member States do not by themselves prove such an abuse: it must be ascertained whether they are justified by differences in production costs, taxation, and so on. In addition it is necessary to confirm whether the final price is in fact the same in the Member States in question.

The Federal Government concludes that differences in prices and the conclusion of exclusive agreements do not in themselves constitute an abuse of a dominant position within the meaning of Articlie 86 (1) of the EEC Treaty and that evidence of an abuse requires the confirmation of other factual circumstances.

The second paragraph of Article 5 of the Treaty

The prohibition on importation or distribution of imported products conflicts in particular with the principles set out in Article 3 (a) and (f) of the Treaty, namely, free movement of goods and the institution of a system ensuring freedom of competition within the common market.

The Treaty does not intend to prohibit restrictions on competition arising from the existence of industrial property rights or literary or artistic property rights but, in Article 36, it outlines the boundary between the existence of those rights, which is recognized by the Treaty, and the exercise of those rights in a way which is contrary to one of the fundamental objectives of the Treaty. The power conferred upon the holder of the exclusive right to prohibit the distribution in one Member State of protected articles which have been lawfully marketed in another Member State involves an exercise of the said right which does not accord with those objectives since its effect is to impede the free movement of goods between Member States.

It does not appear that such a prohibition follows from a legislative measure directly infringing Article 30 et seq. of the Treaty. Article 85 of the Copyright Law does not directly govern the question and at all events it merely opens an option in favour of holders of the right, leaving them to avail themselves of it and enforce their wishes. Although in this connexion there is no reason to apply Article 30 et seq. of the Treaty, in that the German law does not contain a prohibition on imports which is not covered by Article 36 of the Treaty, the disputed interpretation nevertheless conflicts with the obligation on the States to abstain from any measure which could jeopardize the attainment of the objectives of the Treaty.

The problem is thereby raised as to whether the second paragraph of Article 5 has been observed or infringed. The Commission emphasizes the scope and objectives of that article and recalls that all national authorities, including the courts, are obliged to observe it. An interpretation of Article 85 of the copyright Law conferring the power in question on the proprietor of the copyright would furthermore fail to take account of the fact that that provision was adopted after the entry into force of the Treaty.

Article 85 (1) of the Treaty

1. With regard to the licensing agreements the Commission considers that according to their wording they do not exceed the limits of DG's rights and that the facts of the case do not allow a finding to be made as to whether restrictions on competition were agreed or form the subject-matter of a concerted practice.

   since they were concluded between a parent undertaking and its subsidiaries, whose capital is almost entirely owned by the parent undertaking, these agreements do not fall under Article 85 (1) of the Treaty. Article 85 (1) might be relevant if it were found that those agreements contain clauses restricting competition which would of necessity form the subject-matter of agreements drawn up between the subsidiaries and their customers, but this cannot be deduced with certainty from the licensing agreements.

2. with regard to the agreements on price fixing (Revers), the Commission points to a clause (Clause II (2)) which in its view is equivalent to a prohibition on imports capable of affecting trade between Member States and restricting competition within the common market. In this case the proceedings initiated by DG against Metro are not based on a clause of this nature but are founded directly on Article 85 of the Copyright Law. Taking account of the fact that DG has fixed the level of final prices in Germany, has in practice prohibited its customers from importing DG records into Germany without its authorization and is itself actively engaged in enforcing observance of the imposed prices and promptly taking action against any infringement which comes to its notice, the conclusion must be that in this case it is relying upon Article 85 of the Copyright Law merely to enforce an agreement falling within Article 85 (1) of the Treaty.

Article 86 of the Treaty

The Commission expresses its opinion on the concept of a ‘dominant position’ and then sets out the criteria according to which the court making the reference must determine the position of DG on the German market. It considers the position of that undertaking on the said market and the special nature of the market in sound recordings and concludes that DG, together with another undertaking (the Phonogram Ton GmbH), occupies a dominant position on that market.

With regard to the problem of an ‘abuse’ of its position on the market, the Commission draws attention to the provisions of Article 86 (a) and (d). It emphasizes, with regard to paragraph (a), the importance of a marked difference between prices (in the present case, production prices) which cannot be explained by reference to objective criteria and, with regard to paragraph (d), the disadvantage to which trading partners are subjected because the much higher selling price prevailing in Germany prevents German dealers, especially those having their place of business near to the French frontier, from selling DG records in France. In short, the abuse of a dominant position may in this case affect trade between Member States.

On the basis of these observations the Commission proposes the following answers to the questions referred to the Court:

1. The legislative provisions of a Member State, or their interpretation by the courts, which confer upon the holder of an exclusive right to a sound recording the power to prohibit importation or distribution within a country of copies which the holder of the right or its dependent undertaking has distributed in another Member State jeopardize the attainment of the objectives of the Treaty. Such a right is not inherent in the industrial and commercial property safeguarded by Article 36 of the Treaty. Decisions of the courts in favour of the exercise of such a right are contrary to the obligation imposed upon the Member States by the second paragraph of Article 5 of the Treaty.

2. Article 85 of the Treaty is applicable where, in pursuance of an exclusive right to reproduce and distribute sound recordings, the reimportation from one Member State of sound recordings distributed by the holder of the right or its dependent undertaking in another Member State is prohibited, and where the holder of the right has concluded with dealers in the importing country agreements requiring the latter to refrain from distributing the imported products except with the consent of the former and at the imposed price.

3. A manufacturer of sound recordings who holds a right related to copyright does not occupy a dominant position within the meaning of Articles 86 of the Treaty merely because it may prohibit third parties from manufacturing copies and distributing them within a Member State.

A dominant position exists where the holder of the right has, in a substantial part of the common market, alone or jointly with an undertaking belonging to the same group, an important share of the market and where the position on the market of other distributors of similar products is appreciably weaker. With regard to a dominant position it may be important that the principal performers are bound to the record manufacturer by exclusive contracts.

Abuse of a dominant position may be said to occur where the holder of the right maintains prices in the Member State in which it occupies such a position which are appreciably higher than those charged in other Member States and where this difference is not explicable on objective grounds (transport costs, taxation etc.). In those circumstances the prohibition on the reimportation of original products from other Member States also constitutes an abuse.