Opinion of Mr Advocate General Fennelly delivered on 6 June 1996. - Merck & Co. Inc., Merck Sharp & Dohme Ltd and Merck Sharp & Dohme International Services BV v Primecrown Ltd, Ketan Himatlal Mehta, Bharat Himatlal Mehta and Necessity Supplies Ltd and Beecham Group plc v Europharm of Worthing Ltd. - References for a preliminary ruling: High Court of Justice, Chancery Division - United Kingdom. - Act of Accession of Spain and Portugal - Interpretation of Articles 47 and 209 - End of transitional period - Articles 30 and 36 of the EC Treaty - Parallel imports of unpatentable pharmaceuticals. - Joined cases C-267/95 and C-268/95.



European Court reports 1996 Page I-06285



Opinion of the Advocate-General

I - Introduction

1 These joined cases raise, in the form of three questions, two important but distinct issues concerning the free movement of pharmaceutical products between Spain and Portugal, on the one hand, and the remaining Member States, on the other. (1) The first two questions concern the date of expiry of certain transitional provisions contained in the Act of Accession of the Kingdom of Spain and the Portuguese Republic, which permit the restriction of parallel imports of pharmaceuticals from those countries to other parts of the Community. The other question is more fundamental. It concerns the legal regime applicable to parallel imports following the expiry of the relevant transitional periods. Essentially the Court is asked to renounce or, alternatively, revise its 1981 judgment in Merck v Stephar and Exler, (2) that the rules contained in the Treaty concerning the free movement of goods prevent the proprietor of a patent for a medicinal product who has voluntarily marketed the product in one Member State which does not recognize the patentability of the product from invoking his national patent rights in other Member States to prohibit parallel imports of that product from the first Member State.

II - Legal framework

2 According to Articles 42 (Spain) and 202 (Portugal), respectively, of the Act of Accession of the Kingdom of Spain (hereinafter `Spain') and the Portuguese Republic (hereinafter `Portugal') to the European Communities (hereinafter `the Act of Accession'), (3) quantitative restrictions on imports and exports and any measures having equivalent effect were to be abolished on 1 January 1986 between the Community and Spain and Portugal. (4) However, pursuant to Article 47 regarding Spain and Article 209 regarding Portugal, the entry into force of Article 30 of the EC Treaty was postponed for the patented products with which the present cases are concerned in the following terms:

`1. Notwithstanding Article 42 [Article 202], the holder, or his beneficiary, of a patent for a chemical or pharmaceutical product or a product relating to plant health, filed in a Member State at a time when a product patent could not be obtained in Spain [Portugal] for that product may rely upon the rights granted by that patent in order to prevent the import and marketing of that product in the present Member State or States where the product enjoys patent protection even if that product was put on the market in Spain [Portugal] for the first time by him or with his consent.

2. This right may be invoked for a product referred to in paragraph (1) until the end of the third year after Spain [Portugal] has made these products patentable.'

3 In Merck v Stephar the Court held that `the rules contained in the EEC Treaty concerning the free movement of goods, including the provisions of Article 36, must be interpreted as preventing the proprietor of a patent for a medicinal preparation who sells the preparation in one Member State where patent protection exists, and then markets it himself in another Member State where there is no such protection, from availing himself of the right conferred by the legislation of the first Member State to prevent the marketing in that State of the said preparation imported from the other Member State.' (5)

4 Article 379 of the Act of Accession provides that the Commission may authorize new or existing Member States to take `protective measures' in the event of serious and persistent economic difficulties. This provision was invoked by France, Belgium, Austria, Denmark, Ireland, the United Kingdom and Germany regarding the importation from Spain of pharmaceutical products protected by patents in their respective territories, but not so protected in Spain, as from 7 October 1995. (6) By decisions of 20 December 1995 (7) the Commission rejected these applications. (8)

5 The Act of Accession contained parallel provisions providing transitional provisions subject to the introduction of effective patent laws by those two Member States. Protocol No 8 concerned Spanish patents, while Protocol No 19 concerned Portuguese patents.

6 Paragraph 1 of Protocols No 8 and No 19 each provide that Spain and Portugal separately shall:

`... adjust its patent law so as to make it compatible with the principles of the free movement of goods and with the level of protection of industrial property attained in the Community ...

[and that]

To that end, close cooperation shall be instituted between the Commission services and the Spanish [Portuguese] authorities; this cooperation shall also cover the problems of transition of current Spanish [Portuguese] law towards new law.'

Each of those Protocols further required the removal of special features of Spanish and Portuguese law which have no specific bearing in the present cases.

7 Paragraph 3 of Protocol No 8 provides that:

`The Kingdom of Spain shall accede to the Munich Convention of 5 October 1973 on the European patent within the required time-limits so as to allow it to invoke the provisions of Article 167 of the said Convention solely for chemical and pharmaceutical products.

In this context and taking account of the fulfilment of the undertaking entered into by the Kingdom of Spain under paragraph 1, the Member States of the Community in their capacity as contracting States to the Munich Convention undertake to use their best endeavours to ensure, should a request be submitted by the Kingdom of Spain in accordance with that Convention, an extension - beyond 7 October 1987 and for the maximum period laid down in the Munich Convention - of the validity of the reserve laid down in the said Article 167 [...] it being understood that the Kingdom of Spain will, in any event, accede to that Convention not later than 7 October 1992.'

Under Article 167(2)(a) of the European Patent Convention (hereinafter `the EPC') each Contracting State may reserve the right to provide that European patents covering pharmaceuticals shall be ineffective or revocable. Furthermore, Article 167(3) provides that:

`Any reservation made by a Contracting State shall have effect for a period of not more than ten years from the entry into force of this Convention. However, where a Contracting State has made any of the reservations referred to in paragraph 2 (a) and (b), the Administrative Council may, in respect of such State, extend the period by not more than five years for all or part of any reservation made ... .'

8 Paragraph 3 of Protocol No 19 provided:

`The Portuguese Republic shall accede on 1 January 1992 to the Munich Convention of 5 October 1973 on the European patent and to the Luxembourg Convention of 15 December 1975 on the Community patent.'

9 The Protocols also required the two new Member States to introduce into their national legislation a provision on shifting the burden of proof corresponding to Article 75 of the Luxembourg Convention of 15 December 1975 on the Community patent. This provision was to apply, in the case of Spain, not later than 7 October 1992, and, in that of Portugal, not later than 1 January 1992, for patents filed, respectively, before those dates. (9)

10 Article 4 of the Law of 20 March 1986, which entered into force on 26 June 1986, provides for the patentability of pharmaceutical products in Spain. However, its entry into force in respect of such products was delayed in reliance on the Act of Accession by a transitional provision until 7 October 1992. In Portugal, Decree-Law No 42/92 brought the EPC into force as from 1 January 1992. Article 1(2) of the Portuguese Law provides for the inapplicability of any provisions of the Portuguese Industrial Property Code which infringe the terms of the EPC. Thus, it became possible to obtain patents for pharmaceutical products in Portugal by specifying Portugal in EPC applications on or after that date.

III - Facts and procedure

11 Two cases involving three separate causes of action have been brought before Mr Justice Jacob sitting in the Patents Court of the Chancery Division of the High Court of Justice in England and Wales (hereinafter `the national court'). In the first action (10) the plaintiffs, Merck & Co. Inc. and Others (11) (hereinafter `Merck'), claim that the defendants Primecrown Ltd and Others (hereinafter `Primecrown') have infringed their patent for a hypertension drug (known by the trade mark `Innovace' in the United Kingdom and that of `Renitec' elsewhere) and their patent for a prostate drug known by the trade mark `Proscar'. In the second action (12) Merck claims that Primecrown has infringed its patent for a glaucoma drug known by the trade mark Timoptol. The complaints concern parallel importing and sale of the products in the United Kingdom. Renitec and Proscar were imported from Spain and Timoptol from Portugal.

12 Merck filed for its British product patent covering Proscar (EP0155096) on 20 February 1985. This patent is due to expire on 20 February 2005 but, pursuant to Council Regulation (EEC) No 1768/92 of 18 June 1992 (13) concerning the creation of a supplementary protection certificate for medicinal products (hereinafter the `SPC Regulation'), effective patent protection will last until 26 May 2007. The registration papers relating to Proscar were submitted in Spain in July 1991. Marketing authorization was granted in September 1993, whereupon the product was launched in Spain. Merck filed for its British product patent covering Renitec (0012401) on 10 December 1979. It will expire on 10 December 1999. It filed for Timoptol (1524405) on 23 September 1976; that patent will expire on 23 September 1996.

13 In the second case Beecham Group plc (hereinafter `Beecham') has brought an action against Europharm of Worthing Ltd (hereinafter `Europharm') for infringing two patents covering an antibiotic product marketed under the trade mark `Augmentin' in the United Kingdom and `Augmentine' in Spain. One of these patents expired on 10 April 1995. The other was found to be invalid by the High Court in July 1995. An order that it be revoked is stayed pending the hearing of an appeal towards the end of 1996. A third, European patent will not expire until 2003, though the main proceedings appear to concern only the United Kingdom patents. According to the national court Europharm intends to import the product from Spain. (14)

14 The national court explains that the problems in the main proceedings arise firstly because the patentees do not have, and never could have obtained, patent protection in Spain or Portugal for the products concerned. In addition, it says that prices in those countries are much lower than elsewhere in the European Union so that medicines sold by the patentees to wholesalers there are, instead of going to Spanish or Portuguese patients, immediately exported to other Member States.

15 The national court distinguishes two classes of questions of interpretation of Community law arising in the main proceedings: (i) the true meaning of the transitional provisions of the Act of Accession raised in the first two questions; (ii) whether the judgment of the Court in Merck v Stephar should be reconsidered or modified having regard to changed circumstances or further consideration. They are worded as follows:

`1. That the provisions and effect of Article 47 of the Spanish Treaty of Accession to the European Communities will continue to apply to pharmaceutical products

1.1. imported from Spain; or 1.2. first marketed in Spain

until

(a) 7 October 1995; or (b) 31 December 1995; or (c) 7 October 1996; or (d) 31 December 1996; or

(e) the end of the third year after the particular pharmaceutical, protected by a product patent in one or more Member State(s) of the European Union and which was previously unpatentable in Spain, has become patentable in Spain

stating which of such dates is applicable with regard to such acts.

2. That the provisions and effect of Article 209 of the Portuguese Treaty of Accession to the European Communities will continue to apply to pharmaceutical products

2.1. imported from Portugal; or 2.2. first marketed in Portugal;

until

(a) 1 January 1995; or (b) 31 December 1995; or (c) 1 June 1998; or (d) 31 December 1998; or

(e) the end of the third year after the particular pharmaceutical, protected by a product patent in one or more Member State(s) of the European Union and which was previously unpatentable in Portugal, has become patentable in Portugal

stating which of such dates is applicable with regard to such acts.

3. After the expiration of Article 47 (and/or Article 209, as appropriate), in a case where:

3.1. an undertaking is the proprietor (the "Proprietor") of a patent (the "Patent") in one or more Member States of the European Communities (the "Member State") for a pharmaceutical product (the "Pharmaceutical");

3.2. the pharmaceutical was first put on the market in a country by the proprietor after that country's accession to the EC but at a time when the pharmaceutical could not be protected by a product patent in that country;

3.3. a third party imports the pharmaceutical from that country into the Member State;

3.4. and the patent legislation in the Member State granted the proprietor of the patent the right to oppose by legal action the importation of the pharmaceutical from that country

do the rules set forth in the EC Treaty concerning the free movement of goods prevent the proprietor from availing himself of the right referred to in paragraph 3.4. above, in particular if:

(a) the proprietor has and continues to have a legal and/or ethical obligation to market and to continue marketing the pharmaceutical in that country; and/or

(b) that country's and/or EC legislation effectively requires that, once the pharmaceutical is put on the market in that country, the proprietor supplies and continues to supply sufficient quantities to satisfy the needs of domestic patients; and/or

(c) that country's legislation grants to its authorities, and its authorities exercise, the right to fix the sales price of the pharmaceutical in that country and legislation prohibits the sale of the pharmaceutical at any other price; and/or

(d) the price of the pharmaceutical in that country has been fixed by its authorities at a level at which substantial exports of the pharmaceutical from such country to the Member State are anticipated with the result that the economic value of the patent would be significantly eroded and research and development for future pharmaceuticals planned by the proprietor significantly undermined, contrary to the rationale underlying the recent introduction by the EC Council of the Supplementary Protection Certificate?'

16 Regarding the first two questions concerning the expiry of the relevant transitional provisions, the national court summarizes the arguments considered in detail later in this Opinion, and expresses a clear preference for the earliest date, i.e. 7 October 1995 in the case of Spain and 1 January 1995 in that of Portugal. In effect, it therefore accepted Primecrown's argument. It points out that Spain, on acceding to the EPC, was permitted by the EPC's Administrative Council under Article 167(2) of the EPC to postpone the obligation to recognize the patentability of pharmaceutical products for the maximum permissible period, namely until 6 October 1992; thus from 7 October 1992 such products were patentable in Spain. By virtue of Article 42 of the Act of Accession, the prohibition contained in Article 30 of the Treaty was, under Article 47 of the Act of Accession, to apply from `... the end of the third year after Spain has made these products patentable'.

17 The national court states that Merck argued that the three-year period should be read as referring to three years after the date when the particular pharmaceutical product at issue became patentable, because Article 47(1) of the Act of Accession speaks of `a time when a product patent could not be obtained in Spain for that product', while Article 47(2) refers to `the end of the third year after Spain has made these products patentable'. (15) The national court agrees with Primecrown that this argument is absurd; once an individual product was on the market before Spain made it patentable it would, by reason of its lack of novelty, never become patentable and, thus, the three-year period would never begin to run. Indeed, the national court states that there would be no need for a three-year period if the product was patentable. (16)

18 The national court comes to the clear conclusion that the transitional period for Spain expired on 7 October 1995. Indeed, the judge states that `were it not for the warnings often given that sometimes the Court may, when faced with a fresh question, do something unexpected, [he] would have found the matter acte clair'.

19 In so far as Portugal is concerned the national court states that the starting date is stated to be 1 January 1992 when, pursuant to paragraph 3 of Protocol No 19 to the Act of Accession, it acceded to the EPC. (17) It points out that Merck has not disputed that patents could be obtained for Portugal for pharmaceutical products under the EPC via the European Patents Office from 1 January 1992. (18) It thus articulates a strong preference for 1 January 1995 as the expiry date of the relevant transitional provision, based on the lapse of three calendar years from 1 January 1992. (19)

20 On the third question, the national court notes that, of the various arguments advanced by Merck in favour of a reconsideration of the judgment in Merck v Stephar, two in particular, which were not raised in that case, may negative the central conclusion that a free decision to market in Spain and Portugal had been made:

(i) the argument that pharmaceutical companies have an ethical obligation to supply their products in Spain and Portugal, particularly where they have already released the product there and doctors are prescribing it;

(ii) the argument that there may be a legal obligation either under national law or under Community law requiring supply to the Spanish and Portuguese markets.

21 The national court also describes Merck's arguments, regarding the need to protect research and development in Europe and to promote a healthy European pharmaceutical industry, as now stronger than they were when first advanced in Merck v Stephar. The national court suggests that the Court may need to consider limiting the retroactive effects of any qualification of Merck v Stephar, `... for it would obviously be wrong for the Court to depart from a previous decision in such a way as to turn parties into wrongdoers for past acts which were lawful under that decision - to make past lawful parallel imports into infringements'.

IV - Observations submitted to the Court

22 Written observations were submitted by Merck (plaintiffs in Case C-267/95), Beecham (plaintiffs in Case C-268/95), Primecrown (defendant in Case C-267/95), by the Governments of the United Kingdom, Belgium, Greece, Spain and Italy and by the Commission of the European Communities. Oral submissions were presented by Merck, Beecham, Primecrown, the Government of the United Kingdom, the Spanish, Greek, Italian, Danish, French and Swedish Governments and by the Commission.

A. The first and second questions

(i) Merck and Beecham

23 Merck submits that Article 47 of the Act of Accession applies to pharmaceutical products imported from Spain until 31 December 1996. It bases this contention on the wording of Article 47 (`at the end of the third year after' and not `three years after'). Merck claims that this interpretation is supported by the fact that all transitional measures contained in the Act of Accession expire at the end of a calendar year. It refers particularly to Article 379 of the Act of Accession which permits the adoption of emergency measures until 31 December 1995.

24 Merck contends alternatively that Article 47 will expire at the end of 1996 because, pursuant to Article 4C(1) of the Paris Convention for the Protection of Industrial Property of 20 March 1883 (as revised, hereinafter the `Paris Convention'), a person who has duly filed an application for a patent in one Paris Convention country enjoys, for the purpose of filing in the other Contracting States, (20) a right of priority during a 12-month period from the date of the first filing. This provision allows an applicant 12 months in which to file patent applications for the same invention in the other Paris Convention countries and to claim priority over later applicants. The novelty of an invention is determined as at the date of the first filing; i.e. the invention is considered to be novel throughout the Paris Convention countries during that 12-month period. The patentability of a product in a Paris Convention country thus includes as an essential element the right to claim the priority flowing from an application made for the same invention in the preceding 12 months in any other Paris Convention country.

25 However, Merck maintains that, at the request of the Patent Office, the Spanish Council of State held on 18 February 1993 that priority would be recognized in Spain only in respect of applications filed in other EPC countries after 7 October 1992. (21) Merck claims that the notion of patentability as employed in Article 47 of the Act of Accession should be interpreted in accordance with the Paris Convention and, thus, as including the possibility of obtaining patents in Spain after 7 October 1992, through priority based on applications filed in the preceding 12 months in other Paris Convention countries. Merck concludes that Spain's failure to recognize such claims effectively means that it permitted full patentability of pharmaceuticals only as from 7 October 1993.

26 Regarding Portugal, Merck submits that Article 209 of the Act of Accession will continue to apply to pharmaceutical products until 31 December 1998, namely at the end of the third calendar year after Portugal effectively made pharmaceutical products patentable. Effective patentability of pharmaceutical products was not available in Portugal before 1 June 1995, when the framework relating to European product patents established in the Portuguese Decree-Law No 42/92 of 31 March 1992 was completed by the enactment of a new Industrial Property Code permitting the grant of Portuguese patents for pharmaceutical products. (22)

27 Beecham submits that Article 47 of the Act of Accession will continue to apply to pharmaceutical products such as Augmentine until three years after Spain introduces legislation to make Augmentine patentable. To construe Article 47 as providing protection only until the end of the third year after Spain made a general class of products patentable, would merely result in the provision of `an arbitrary 3- to 4-year holiday' from the effect of imports of cheap pharmaceutical products flooding into other Member States from Spain, followed by a period with no protection at all.

28 Alternatively, if the transitional period is interpreted as running from the date when Spain made pharmaceutical products as a generic class patentable (i.e. 7 October 1992), Beecham considers that Article 47 should at least be interpreted in accordance with a rule based on the calendar year. However, its favoured expiry date (31 December 1996) is reached by combining this approach with the priority date argument based on the Paris Convention, as advanced by Merck.

(ii) Primecrown

29 Primecrown observes that the EPC came into force on 7 October 1977 independently of calendar date considerations, when, in accordance with Article 169 thereof, a sufficient number of instruments of ratification were lodged. In accordance with Article 167(5) of the EPC, the benefit of the withdrawal of a reservation under Article 167(2) applies only to patent applications filed after the expiry of the reservation. Primecrown submits that it was clear particularly from Article 3 of Protocol No 8 that Spain would accede to the EPC with effect from 7 October 1992 and would then grant patents in respect of new applications filed on or after that date. Article 47 of the Act of Accession is plainly linked with Protocol No 8, which makes reference to the EPC. By bringing the EPC into force in Spain on 7 October 1992, Spain followed the path contemplated by Protocol No 8 and, thus, the derogation of three years referred to in Article 47 expired on 7 October 1995.

30 Primecrown then refers to Protocol No 19 to the Act of Accession providing for Portuguese accession to the EPC on 1 January 1992. As there was no provision for a reservation in respect of Portugal under Article 167 of the EPC, chemical and pharmaceutical substances became patentable in Portugal on that date. The derogation provided by Article 209 of the Act of Accession is linked to Protocol No 19 which refers to the EPC. Again, a narrow interpretation of the derogation requires that it be interpreted as expiring three years after the date of entry into force of the EPC, namely 1 January 1995.

31 Primecrown argues that any person wishing to obtain a patent in Portugal for a pharmaceutical product has been able to do so by filing an application at the European Patent Office designating Portugal (whether alone or in addition to other countries) on or after 1 January 1992, despite the fact that Portugal did not permit applications for pharmaceutical products to be filed through its national patent office until 1 June 1995, when the Industrial Property Code, contained in Decree-Law No 16/95 of 24 January 1995, came into force. Neither Article 209 of the Act of Accession nor Protocol No 19 required Portugal to allow pharmaceutical product patents to be obtained by any particular procedure; there was therefore no obligation on Portugal to establish a national patent office in order to comply with its obligation to adjust its patent law `so as to make it compatible with ... the level of protection of industrial property attained in the Community'.

32 Primecrown submits that the words `these products' used respectively in Articles 47(2) (Spain) and 209(2) (Portugal) of the Act of Accession can only be interpreted as referring to the generic class of products covered by Article 47. If the intention was to refer to a specific product covered by a specific patent, then the singular would have been used so as to agree with the references to, inter alia, `a product' in Article 47(1). More fundamentally, Primecrown maintains that the reason that patents could not be obtained from 7 October 1992 for some pharmaceutical products in Spain was no longer the exclusion of pharmaceutical products as a class from the scope of national patent law, but the individual act of the inventor in making the invention public at a date before he could first have applied for a product patent in Spain. Nothing in Protocol No 8 to the Act of Accession requires Spain to give product protection to inventions which have come into the public domain before 7 October 1992. On the contrary, Protocol No 8 makes explicit reference to Article 167 of the EPC which contains its own transitional provisions (at paragraph 5), under which patents applied for after the date when Spain's reservation expires may be granted, but those applied for before that date may not.

33 Primecrown claims that attributing a calendar-year calculation to the interpretation of the three-year period would mean that the Member States intended at the time of negotiating the Act of Accession that the length of the transitional period envisaged in Article 47(2) could vary by as much as 33%, depending arbitrarily on the time of the year when pharmaceuticals were made patentable. The purpose of the derogation is to permit market conditions to adjust prior to the abolition of the restriction on parallel imports. Primecrown submits that it cannot be contemplated that the drafters of the derogation believed that market conditions might take longer to adjust if Spain introduced patentability for pharmaceutical products near to the beginning rather than to the end of a calendar year. The reason for the general pattern in Community Treaties of periods terminating with the end of calendar years is historical; the EEC Treaty entered into force on 1 January 1958 and subsequent accessions have always occurred on 1 January of a year. The obligatory date for patentability of pharmaceutical products in Spain is linked, not with the Community Treaties, but with a period of years counted from the coming into effect of the EPC, which is not a Community Treaty. The date, 7 October 1992, is explicitly named in the Act of Accession.

34 Primecrown also maintains that the use of a calendar-year method would be contrary to `the normal and universal "anniversary" rule' for the calculation of time applied generally by Member States. (23) In the United Kingdom, Primecrown contends that the normal rule is the corresponding date rule, (24) while Article 5.1 of the Spanish Civil Code indicates that Spanish law also recognizes the concept of computing time in `broken' years, rather than starting the period from the beginning of the next calendar year. Furthermore, Primecrown contends that, when Community legislation intends to achieve expiry of a term at the end of a calendar year, clear and unambiguous language is used. (25)

35 Primecrown states that Article 47(2) of the Act of Accession merely requires Spain to make pharmaceutical products patentable and imposes no obligation to operate a system of Paris Convention priority. Furthermore, even under the Paris Convention, priority depends upon the first, home country, application being recognized as an application for an invention according to the law of the country in which Convention priority is claimed. As such applications filed outside Spain before 7 October 1992 would not have been valid applications under Spanish law, no ensuing priority claim can arise.

(iii) Other observations

36 The Spanish, United Kingdom, Italian and Danish Governments submit that the expiry date of the transitional period should be 31 December 1995 for Spain and Portugal. Though variously expressed, their argument is, in essence, that the expression `the end of the third year' in Articles 47 and 209 of the Act of Accession refers to 31 December in the third calendar year to elapse after the requisite patent protection has been made available and that the reference to `the end' is linguistically inapt to signify the anniversary of an event which may take place during the course of a calendar year. The United Kingdom argues that an examination of the calendar dates stipulated in all other transitional provisions in the Act of Accession shows that these transitional periods must also have been intended to expire at the end of a calendar year.

37 The Greek Government considers that the transitional period expires once three years have elapsed since pharmaceutical products were made patentable. The Swedish, French and Belgian Governments expressed no opinion on this issue.

38 The Commission stated at the hearing that the broken-years interpretation was more in accordance with the text of the derogations; if calendar years had been intended, the texts would have expressly contained such an indication. Furthermore, since, in its view, the precise dates upon which patentability would be introduced by Spain and Portugal were unknown at the time of the negotiation of the Act of Accession, it was more reasonable to adopt the broken-years approach. This was the working hypothesis of most people involved in the sector before October 1995, and certainly the view expressed publicly by Commission officials and underlying the applications brought under Article 379 of the Act of Accession by various Member States. Finally, the Commission maintained that the Court should also have regard to the very clear view of the national court in favour of this approach.

B. The third question

(i) Merck

(a) First line of argument

39 Merck's primary argument is that the rule adopted by the Court in Merck v Stephar should be reconsidered so that a patentee will be deemed not to have exhausted his patent right in respect of a product only when he has had the opportunity of first marketing it in the Community with the protection of the patent and with the concomitant guarantee of absence of competition from unauthorized copies. It advances six principal arguments in support of this submission.

40 Firstly, at the time of Merck v Stephar, the patentability of pharmaceuticals in Europe was the exception rather than the rule, whereas it is now recognized by most industrialized nations. Pharmaceuticals are now patentable in all EEA countries except Iceland. (26)

41 The Community has in recent years emphasized the importance of patents to the pharmaceutical sector. Merck draws attention to the SPC Regulation (27) and, in particular, to recitals 1 to 4 in its preamble as well as paragraphs 1 and 5 of the preceding explanatory memorandum of the Commission. (28)

42 Moreover, the negative repercussions of the continued application of the Merck v Stephar rule will be magnified following the entry into force of association agreements with the countries of central and Eastern Europe, as a result of the permanent non-patentability - due to lack of novelty - of pharmaceuticals first put on the market in those countries before pharmaceuticals became patentable there during the early 1990s. Merck submits that, when these countries join the EC, the Merck v Stephar rule will apply to all pharmaceuticals originating or put on the market in these countries (where prices are on average up to 33% lower than in the EC).

43 Secondly, Merck v Stephar significantly reduces the value of patents granted in the EC. Merck claims that the presence of unauthorized copies on the Spanish and Portuguese markets has enabled the authorities to use national price regulations to fix prices below the average level in the EC. Such copies can be launched before, at the same time as, or, in any event, within 12 months of, the launch of the original. At the hearing Merck submitted that the link between non-patentability and price levels was clearly demonstrated by the effect of the appearance of generic products once patents in Member States where patent protection is recognized have expired. A very rapid fall in price occurs both in contemplation of and in the aftermath of the end of the period of patent protection. Furthermore, Merck (supported fully by Beecham) submitted at the hearing that the presence or absence of patent protection affects the bargaining position of pharmaceutical companies when negotiating with national authorities; if a generic alternative has been or is about to be launched, the price negotiating position of those authorities is strengthened vis-à-vis the patentee. Merck also claimed that the price control systems operated in Spain and Portugal in the present case are in fact stricter than the regime operated in Italy at the time of the Merck v Stephar decision. (29)

44 Merck maintains that parallel imports from Spain and Portugal generally work to the benefit of parallel traders rather than patients or national health authorities in the importing Member States, while exposing the proprietors of pharmaceutical patents to large losses by reducing the value and, thus, effectively shortening the patent life of affected products. (30) It submits that, in the absence of common Community rules concerning the marketing of patentable products, obstacles to free movement within the Community designed to encourage research for pharmaceutical products should be accepted as necessary to satisfy a mandatory requirement as defined in `Cassis de Dijon'. (31)

45 In its third and fourth arguments, Merck submits that there can be no exhaustion of patent rights where such rights do not exist. In Merck v Stephar the Court held that the specific subject-matter of a patent right does not guarantee that the patentholder will always obtain a reward for his creative effort, while Advocate General Reischl stated that it merely presented the patentee with an opportunity to obtain a recompense for his creative effort. Merck, on the other hand, submits that a reasonable reward for the patentee's creative effort is crucial to the pharmaceutical industry, given that the average cost of researching and developing a new medicinal product is now estimated at ECU 200 million. The survival of pharmaceutical companies depends on the profitability of a small number of successful products and on the regular renewal of portfolios of patents on new medicinal products. On average, out of every 10 000 substances synthesized by the pharmaceutical industry, only one or two will become marketable medicines. The huge risks involved make individual companies very vulnerable, not least because 90% of the cost of research is financed by the industry itself. The return on research investment depends on numerous market factors, including the commercial potential of the patented product and the early presence of substitute products. Substitute products include `fast follower' products which are therapeutically similar to the initial product but sufficiently differentiated to avoid patent infringement.

46 In these circumstances, Merck submits that a patent should be deemed to be exhausted only where the patentee consents to the use of that patent's essential and constant characteristic, namely the right to put the patented product on the market for the first time with the assurance that no unauthorized copies will be put on the market for the duration of the patent. Thus, the financial value of the product is protected from the competition of unauthorized cheaper copies. (32) The mere receipt of a financial reward should not be regarded as exhausting the patent where the commercial potential of the product was limited by the absence of patentability. Merck relies upon Pharmon v Hoechst (33) where, in the context of a compulsory licence, the acceptance of royalties by the patentee was held not to have exhausted the patent, because they were not received in return for the voluntary exercise of the guaranteed property right. Merck cites the view of Advocate General Warner in his Opinion in Musik-Vertrieb Membran v GEMA (34) that `[T]here can be no exhaustion of rights where no rights exist'.

47 Fifthly, in Warner Brothers v Christiansen (copyright) (35) and IHT Internationale Heiztechnik v Ideal-Standard (trade marks), (36) Merck submits that the Court accepted that, in the absence of parallel levels of protection in both the exporting and importing Member States, Community law should not export the legislative policy of the former to the latter. Merck submits that this reasoning should apply a fortiori in respect of patents.

48 Finally, Merck submits that, contrary to the apparent assumption of Advocate General Reischl in Merck v Stephar, temporary similarities between the prices of patentable and unpatentable pharmaceuticals do not make these products comparable. The Merck v Stephar rule is, thus, not necessary to avoid discrimination between parallel trade in patentable and unpatentable products; where the rights of a patentee are recognized, it benefits from the assurance that no unauthorized copies will be marketed for the duration of the patent, which is not the case where that protection is denied.

(b) Second line of argument

49 In the alternative, Merck proposes that the consent required for the application of the Merck v Stephar rule is not satisfied in the circumstances of this case. The four suppositions appended to the third question referred by the national court are closely related to this point.

50 Firstly, pharmaceutical companies - unlike producers of other consumer products and services - are not free to decide whether or not to launch new products on a market or to interrupt existing supplies, since ethical considerations oblige them to provide pharmaceuticals where they are needed, even where patentability is not recognized. (37)

51 Merck submits that it would now be impossible on ethical grounds for a variety of health-care reasons for it to withdraw the products in question from the Spanish and Portuguese markets; nor is its obligation reduced by the presence of copies. Withdrawal of its products would, it maintains, lead to the eventual discontinuation of supplies of these copies: as the originator of a product, it is the only company that has complete information on the results of clinical trials. By reason of its expertise and resources it is perceived as having the ethical obligation to ensure continuous pharmacovigilance (i.e. the observation of unforeseen effects on patients), particularly through the maintenance of a permanent staff of scientists to advise doctors prescribing its products. By contrast, copiers are generally companies that invest only in the necessary importation or manufacturing and distribution facilities and, consequently, doctors faced with unexpected clinical problems with a copy of a Merck product will look to Merck for advice.

52 Secondly, for commercial reasons, Merck contends that it is not free to discontinue supplies. Withdrawal would require patients currently being treated with products prescribed by their doctors to switch to other products possibly perceived to be less well suited to them. Such a withdrawal would irremediably tarnish Merck's reputation as a company at the service of public health and undermine its goodwill with the Spanish and Portuguese medical community.

53 Merck also contends that it is prevented from interrupting existing supplies by obligations imposed by both national law and EC competition law. An interruption of existing supplies to the Spanish or Portuguese markets would, in its view, probably constitute a violation of the Spanish Medicines Law No 25/1990 or the Portuguese Decree-Law No 135/95 respectively. Moreover, Article 85 of the Treaty prevents it from interrupting existing supplies to Spanish and Portuguese purchasers. Merck claims that the Commission, in a view which has been confirmed by the Court, has qualified as agreements or concerted practices within the meaning of Article 85(1) apparently unilateral acts, such as a manufacturer's instructions to its distributors not to export to other EC Member States in the context of an existing contractual relationship.

(ii) Beecham

54 Beecham submits that the purpose of patent protection is the provision of incentives for innovation; the inventor must be afforded the opportunity to earn a reward for its inventive effort through exclusive market access rights. It relies upon the Court's judgment in Centrafarm v Sterling Drug (38) as the basis of the doctrine of exhaustion in the context of parallel patents. In holding in Merck v Stephar that the patentee's right could be exhausted by consenting to marketing in a country where he enjoyed no patent protection, Beecham submits that the Court incorrectly extended the exhaustion doctrine. Beecham criticizes Merck v Stephar because its reasoning is flawed and cannot be reconciled with either subsequent case-law of the Court or Community legislative developments.

55 According to Beecham, Merck v Stephar cannot be reconciled with the decision of the Court in Warner Brothers. It also refers to Pharmon v Hoechst and particularly to the fact that the Court rejected the view of Advocate General Mancini that a patentee, by voluntarily exposing himself to the possibility of being deprived of his exclusive right through compulsory licensing, must accept the consequences of his choice.

56 Beecham submits that the judgment in Merck v Stephar is wrong in principle because it undermines the ability of the patentee to obtain a reward for his creative effort. In particular, the Court did not address the effects of imports from countries where no patent protection exists on the ability of the patentee to maintain prices at a level sufficient to guarantee such a reward in countries where such patentability is recognized. (39) Moreover, it argues that Advocate General Reischl mistakenly advised the Court that there was no causal connection between patentability and price levels: Beecham submits that, if he had carried out a general price comparison between patented and unpatented products within each Member State, rather than between different Member States, he would have found that the pricing of unpatented products, which are subject to competition from generic copies, differs from the pricing of patented products, which are not subject to such competition.

57 Beecham submits in reliance on Warner Brothers that, in the absence of harmonizing Community measures, it falls to the Member States to make the necessary legislative choices regarding the patenting of products. It also submits that Merck v Stephar is irreconcilable with the new objectives of the EC Treaty concerning both research and development and health protection (40) and particularly with the current difficult circumstances of the pharmaceutical industry. (41)

58 Beecham, like Merck, argues, in the alternative, that the circumstances of the present case can be distinguished from those of Merck v Stephar; it is not free to `consent' or withdraw `consent' to the marketing of Augmentine in Spain, for legal and ethical reasons. An ethical obligation is not an entirely subjective notion; it can arise from objectively verifiable consumer demand. Furthermore, a pharmaceutical supplier should not be dissuaded from meeting demand in a particular Member State for fear that such supplies might result in parallel imports jeopardizing its profitability on other markets. If it had to establish the existence of an ethical obligation before national courts, it would not be confined to drawing inferences based on the therapeutic qualities of the product, but could also offer direct evidence, such as that of physicians or pharmacists from the Member State of exportation.

59 Beecham contends that a withdrawal from the Spanish market, by refusal to supply existing customers and by instructing its customers elsewhere not to supply to Spain, might be prohibited not only by Article 85(1) but also by Article 86 of the Treaty. Although any possible infringement of Article 86 would depend on those affected being able to show that it enjoyed a dominant position in a relevant market in Spain, or some other part of the Community, Beecham contends that the possible success of such an action would leave it open to being ordered by a Spanish court either to pay damages or to continue supplies.

60 At the hearing Beecham insisted that neither the requirement of legal certainty nor the entrenchment by the Act of Accession of the Merck v Stephar decision should prevent the Court reconsidering its previous decision, and that subsequent developments in the Court's case-law had cast doubt on the authority of that decision. The mere fact that the Act of Accession was negotiated in the light of Merck v Stephar cannot curtail the freedom of the Court to reassess its merits, particularly as the effects of Merck v Stephar would, if upheld, continue to apply to patented products marketed in Spain prior to the introduction of patentability for about ten years. On the other hand, reversing Merck v Stephar would not affect parallel trade in newer products first marketed in Spain after its introduction of patent protection. Beecham conceded that the Court might consider limiting the retroactivity of its judgment.

(iii) Primecrown

61 Primecrown submits that the principle laid down in Merck v Stephar, whereby exhaustion is based on consent to marketing, is still correct. At the time of this judgment, the Court was aware that it would apply to imports from Spain and Portugal as potential new members of the Community. (42) The principle was assumed to be correct during the negotiations concerning the conditions of accession of Spain and Portugal and, accordingly, a series of provisions designed both to strengthen the Spanish and Portuguese patent systems and to permit the adjustment of pharmaceutical industries in existing Member States prior to the full application of the free movement rules to Spain and Portugal was expressly adopted. Since the Act of Accession is an instrument of equivalent status to the founding Treaties, Primecrown contends that it was the clear intention of the negotiators that only the specific and limited derogations from the principle of free movement set out in the Act of Accession and its Protocols should, henceforth, restrict free trade between the new and existing Member States. In its judgment in Generics v Smith Kline & French Laboratories (43) the limited nature of the derogations contained in Articles 47 and 209 and the applicability after their expiry of the principle contained in Merck v Stephar to imports from Spain and Portugal was expressly reaffirmed by the Court.

62 The Merck v Stephar rule provides legal certainty to traders, the public and holders of industrial property rights because, according to Primecrown, national courts can normally readily assess whether the necessary consent exists. To accept Merck's argument, which is based on the need for the exhaustion of a parallel patent, would require national courts to determine whether the patent rights in the country of first marketing were equivalent to the patent rights in the country of importation. This could lead to fragmentation of the Common Market caused by major pharmaceutical companies, backed by their considerable financial resources, pursuing litigation against smaller parallel importers.

63 On the existence of consent, Primecrown denies that Merck has demonstrated that either Spain or Portugal placed a legal obligation on pharmaceutical companies to introduce medicinal products on to their markets; Merck thus chose freely to place the drugs in issue on the market when it was aware both of the decision of the Court in Merck v Stephar and the terms of Article 47 of the Act of Accession. (44) An obligation to continue supplies can arise, Primecrown submits, only if Merck is in a dominant market position, which cannot be the case regarding the products concerned. (45) Furthermore, at the hearing, Primecrown disputed the plaintiff pharmaceutical companies' allegation that they were obliged to continue supplying products for which marketing authorizations have been obtained in Spain. (46) Primecrown submits that the combined effect of Merck v Stephar and Pharmon v Hoechst is that Articles 30 to 36 of the Treaty must be interpreted so that the rule of free movement applies to goods placed on the market in one Member State, unless they were placed on the market wholly without the patentee's consent, of which there is no evidence in the present case.

64 Primecrown also submits that a claimed ethical obligation to supply cannot form the basis of an exception to Community rules regarding free movement of goods. Ethical obligations are self-defined and, thus, inherently subjective. Moreover, referring to a report, relied upon by Merck before the national court, Primecrown contends that the existence of such an ethical obligation has not been established. (47) Furthermore, the position in Spain in respect of ethical obligations has not been shown to be different from that of Italy described in Merck v Stephar. The claimed ethical obligations were inconsistent with the complaint that the absence of patent protection deprives the companies of the monopoly bargaining position in price negotiations, which implies a willingness to withdraw or curtail supplies.

65 According to Primecrown, the argument that price control measures in a Member State can justify the use of an intellectual property right to prevent the import of a product placed on the market by the proprietor in that Member State or with his consent must be rejected. (48) The imposition of a barrier to trade has never been acceptable as a response to perceived market distortion. (49) A similar approach has been applied to the exercise of intellectual property rights. (50) Spanish prices are fixed independently of the availability in Spain of product patent protection and are based on comparisons with other Member States, in which patent protection exists for pharmaceutical products. The Spanish price control system serves the same social purpose as those operated in other Member States and, furthermore, as it is applied equally to imported and domestic products, does not infringe Article 30 of the Treaty. The high consumption of pharmaceutical products per head of population compensates for the slightly reduced price levels in Spain. Thus, the total return to the pharmaceutical industry from this high-volume market is favourable even if price levels have in the past been lower than in other markets. (51)

66 Primecrown submits that Merck has exaggerated the alleged adverse effects of parallel imports from Spain. It points out that there are very considerable barriers against parallel importation, some of which are inherent and others the result of deliberate strategies adopted by pharmaceutical companies to suppress the parallel trade. (52) A very significant price difference must exist between national markets before parallel importation will be worthwhile for traders or pharmacists. (53) Primecrown claims that parallel importation is a temporary phenomenon affecting a limited number of products for a limited period. Since the Act of Accession, the prospect of free movement of goods and the introduction of patentability has resulted in a general upward trend in Spanish drug prices with a reduction in differentials. Merck, Primecrown says, ignores the large benefits accruing to it and the pharmaceutical industry generally from Spanish and Portuguese accession.

67 Finally, Primecrown claims that losses caused by parallel imports will not damage future research and development in the pharmaceutical industry. Firstly, it would be irrational to reduce prospective research on future patentable drugs by reason of losses on earlier unpatentable ones. Secondly, research is a worldwide activity; a product, once developed, can then be marketed worldwide in a climate which is increasingly favourable to pharmaceutical companies as a result of the progressive extension of patent protection flowing, inter alia, from Annex 19 to the Agreement on Trade-Related Aspects of Intellectual Property (hereinafter `TRIPS') concluded as part of the Uruguay Round of GATT negotiations. (54)

(iv) The intervening governments

68 I shall not recount in detail the submissions of the eight Member States who have made written or oral observations. All of the points they make appear in one form or another in the pleadings of the main parties. They all take as their starting point the need to balance the objective of free movement of goods in the Community with appropriate protection for the rights of patentees. However, they take differing views about the issue of reversing or modifying the rule laid down in Merck v Stephar. Only the Belgian Government joins the plaintiffs in explicit support of the rejection of that decision, but it links its arguments with the existence of price control in Spain. The Spanish and, to a lesser extent, the Greek Governments support the retention of Merck v Stephar. The Governments of Denmark, France, Italy, Sweden and the United Kingdom propose a qualification of the type of consent to marketing which should be taken as leading to the exhaustion of patent rights. These Member States, joined by Belgium, consider that the existence of price controls in Spain and Portugal either alone or combined with legal or ethical obligations to supply or continue to supply these markets should be considered as potentially undermining the conclusion that the plaintiffs had freely decided to market their respective products in those markets. I should emphasize the breadth of different positions adopted by these Member States. The United Kingdom, for example, considers in principle that apparently voluntary acts may be shown, in reality, to have been undertaken under compulsion but is unimpressed by any of the factors advanced by Merck in the instant case as sufficient to establish lack of consent.

(v) The Commission

69 The Commission submits that although the Merck v Stephar rule can be criticized, (55) it should not be abandoned because: firstly, of the need to respect the principle of legal certainty; secondly, of the potentially important consequences of such a decision for trade in pharmaceutical products between Spain and Portugal and the rest of the Community for the next ten years, and; thirdly, because the rule served implicitly as the basis for accession negotiations with those countries.

70 The Commission, in its written observations, advanced three arguments in favour of excluding from the scope of the Merck v Stephar rule cases where there is a legal or ethical obligation to market. (56) At the hearing it endorsed the observations of the Government of the United Kingdom regarding the difficulties inherent in attempting to develop a clear legal notion of an ethical obligation, and said that Merck v Stephar should be qualified only in circumstances where a legal obligation to market exists. (57) Such a legal obligation could derive either from Community or national law. Accordingly, the Commission contends that a refusal to supply a market where a product is not patentable could amount to an abuse of a dominant position contrary to Article 86 of the Treaty. (58) In respect of Spanish law, the Commission observes that, under Article 33 of Real Decreto 767/1993 of 21 May 1993 and Article 71(c) of Ley 25/1990 of 20 December 1990, the holder of a marketing authorization is obliged to market medicinal products for which he has received an authorization. (59)

71 The Commission submits, finally, that the right of the authorities to fix the sale prices of pharmaceutical products in the country of export should not be given any decisive importance with regard to the exhaustion of the rights of a patentee. While the fixing of prices at lower levels in an exporting than in an importing country gives impetus to the parallel importer, the same is equally true where patent protection exists in the exporting country.

72 The Commission accepted at the hearing that there was a link between patentability and pharmaceutical prices but said that there were many other factors which also affected prices. For example, the prices of some generic products in Denmark were higher than patented pharmaceuticals in France. In its opinion, the effects of national price control mechanisms represent a more significant factor in the pricing of pharmaceuticals in the Community than differences between national patent laws. However, it conceded that it was unlikely that there would be any harmonization of such controls at Community level in the foreseeable future. (60)

V - Schema for remaining sections of this Opinion

73 Question (3) poses the fundamental question of reassessing the balance to be struck between the Community objective of the free movement of goods, on the one hand, and the protection of national patent rights, on the other, or, in other words, whether Merck v Stephar should be followed. It is clear that the answer given to this question will greatly affect the significance of the first two questions referred which concern the expiry of the relevant transitional provisions in the Act of Accession. If Merck v Stephar is no longer to be applied, these questions become largely irrelevant. I propose therefore initially to deal in Section VI with this third question, the general considerations governing the abandonment by the Court of the reasoning underlying an earlier judgment and the alternatives to departing from Merck v Stephar. I will then address in Section VII the need, should the Court follow my principal recommendation regarding the rejection of the reasoning underlying Merck v Stephar, temporally to limit the effect of the judgment. Penultimately, I will deal in Section VIII with Questions (1) and (2) before, finally, stating my general conclusions in Section IX.

VI - Consideration of Question (3)

74 The primary contention of the pharmaceutical companies is that they should be permitted to invoke their rights under the patent law of the United Kingdom to oppose parallel imports from Spain and Portugal of the pharmaceutical products at issue for which they hold patents in the United Kingdom. (61) They rely above all on the absence of patent protection for pharmaceutical products in Spain and Portugal which deprived them of the opportunity, when first marketing the products in those Member States, of the exclusivity which would have flowed from such protection.

A. Patents and pharmaceutical products

(i) Background to the pharmaceutical industry

75 Many companies in the pharmaceutical industry operate on a world-wide basis. They are concentrated principally in the United States, the European Community and Japan.

76 While the fact-finding function is the preserve of the national judge, there are large areas of agreement on the facts, particularly those concerning the essential role and soaring cost of research and development as they affect the industry. This has been recognized by Community institutions, and has influenced legislation.

77 On 2 March 1994, the Commission communicated to the Council and to the European Parliament a report `on the Outlines of an Industrial Policy for the Pharmaceutical Sector in the European Community' (hereinafter `the 1994 Report'). (62) Although not concerned per se with the issue of patenting, the 1994 Report repeats some of the points made in the explanatory memorandum attached to the Commission's proposal of 11 April 1990 for what subsequently became the SPC Regulation. In the 1994 Report the Commission highlighted certain features of the cost of research and its influence world-wide on the pharmaceutical industry which have already been cited from the arguments of Merck. It states that the rapid increase in cost of research was `generally attributed to progress in molecular biology and especially in knowledge of the pathogenesis of diseases, to technical improvements in tools for therapy or prevention and to increasingly stringent technical requirements designed to ensure the quality, safety and efficacy of medicinal products'. (63)

78 The 1994 Report supports the plaintiffs' claim that the industry in practice finances research and development from its own resources and only occasionally resorts to borrowing. Consequently, the cost incurred in research must be recovered in the form of the price of the extremely small number of successful products. In effect, only large multi-national firms have the resources and the ability to spread these costs. This combination of very high research costs and very low frequency of successful product development provides the crucial argument in favour of patent protection for pharmaceutical products.

79 Until quite recent times, the patentability of pharmaceutical products was the exception rather than the rule in many European States. According to Primecrown, the courts in the United Kingdom recognized such patents in the early years of this century. (64) First explicit recognition was given in statute law in the United Kingdom by Section 4(7) of the Patents Act 1949 and in Ireland by Section 2 of the Patents Act 1964. Pharmaceutical products were thus, for example, made patentable in Germany on 4 September 1967; (65) in Denmark on 1 December 1983; (66) in Norway on 1 January 1992; (67) in Finland on 1 January 1995. (68) Greece, like Spain, initially operated a reservation pursuant to the EPC which expired on 7 October 1992; Portugal acceded to the EPC as from 1 January 1992.

80 The case of Italy is of more than passing interest, since it provided the background to the decision in Merck v Stephar. Both pharmaceutical products and processes for their manufacture were excluded from patentability by Article 14(1) of the Italian patent law. (69) That article was subsequently declared unconstitutional and therefore inapplicable by a judgment of the Italian Constitutional Court of 20 March 1978. However, the drug at issue in that case, `Moduretic', encountered problems similar to those involved in the present case; it could not be patented in Italy even after Italian law had made such pharmaceutical product patenting possible, because of lack of novelty. (70)

81 The EPC constituted an important step on the road to the creation of a general, unified system of patent laws and more particularly for the patenting of chemical and pharmaceutical products. It provided, as seen earlier, for a maximum permissible period of 15 years of reservation from the obligation to provide patenting of such products so as to terminate on 7 October 1992. Merck's written observations provide a wealth of detail, into which I will not enter, on the obligation to introduce patentability imposed on a number of Central and Eastern European States from the beginning of the 1990s by agreement with the European Community. Primecrown referred to TRIPS concluded as part of the Uruguay Round of GATT negotiations. (71)

82 This all amounts to a convincing body of evidence of a world-wide trend in favour of recognizing the patentability of chemical and pharmaceutical products as such, and not merely of the processes for making them. In particular, once the periods of reservation permitted by the EPC have been exhausted, there will be a common 20-year period for patents for pharmaceutical products in all signatory countries to that Convention and, therefore, in effect, in all EC Member States. Consistently with that trend, the other Member States, by the Act of Accession, required Spain and Portugal, subject to transitional provisions, `to provide the level of protection of industrial property attained in the Community' subject to a limited power to postpone that effect in the case of chemical and pharmaceutical products. Whether or not this obligation implies a reciprocal obligation for other Member States, it seems to me that patent protection, without losing its national and territorial character, has become something more than a mere permissive derogation pursuant to Article 36 of the EC Treaty and has attained Community recognition.

(ii) The role of marketing authorization

83 The 20-year basic protection given by a European patent through the EPC has been, however, eroded through the effect of Member States' marketing authorization procedures. The Commission has acknowledged that `by the time a medicinal product has been developed and a marketing authorization obtained, only eight to ten years' protection remained'. (72) Upon the discovery of a new pharmaceutical substance, the inventor, usually in effect a pharmaceutical company, will file for patent protection, in order to protect the invention and to establish novelty. However, the necessarily very stringent stipulations of the authorities of Member States requiring that the quality, safety and efficacy of the product be established by means of evidence of clinical trials and other experimental information postpones the grant of authorization to market. (73)

84 Council Directive 65/65/EEC of 26 January 1965 (74) sought to harmonize certain disparities between these national provisions. In Council Directive 87/21/EEC of 22 December 1986 amending Directive 65/65/EEC (on the approximation of provisions laid down by law, regulation or administrative action relating to proprietary medicinal products), (75) the Council noted the need to ensure `that innovative firms are not placed at a disadvantage' and provided that, without prejudice to existing patent protection, a minimum period must elapse between the grant of the first marketing authorization for a new medicinal product, which requires comprehensive trials to prove quality, safety and efficacy, and the filing of a second, abridged application for the authorization of a generic copy of the product. It was left to Member States to decide whether to extend this period beyond the date of expiry of the original patent. (76)

85 The Commission was ultimately persuaded on 11 April 1990 to submit to the Council its proposal for the SPC Regulation. (77) In the explanatory memorandum to the proposal the Commission spoke of the need, as part of the Community health policy, to guarantee therapeutic, scientific, economic and social progress and stated that the aim of its proposal was `to improve the protection of innovation in the pharmaceutical sector'. (78) It considered that the patent protection system was `... essential to this innovating sector, in that investment in research is financed by means of returns obtained during a period of exclusive exploitation'. (79)

86 The fruit of this proposal was the SPC regulation. (80) The first four recitals in the preamble to that Regulation state:

`Whereas pharmaceutical research plays a decisive role in the continuing improvement in public health;

Whereas medicinal products, especially those that are the result of long, costly research will not continue to be developed in the Community and in Europe unless they are covered by favourable rules that provide for sufficient protection to encourage such research;

Whereas at the moment the period that elapses between the filing of an application for a patent for a new medicinal product and authorization to place the medicinal product on the market makes the period of effective protection under the patent insufficient to cover the investment put into the research;

Whereas this situation leads to a lack of protection which penalizes pharmaceutical research.'

Article 13 provides, in effect, that the lapse between the filing of the original patent application and the grant of the first marketing authorization is to be added to the period of protection given by the patent, but subject to a maximum of five years.

87 Thus the Community as an integral part of a new industrial policy is committed to promoting the protection of industrial property rights, the most important of which in relation to the pharmaceutical sector is patent protection.

B. Patents and the free movement of goods

88 The relationship between the Treaty provisions concerning the free movement of goods and its competition rules, on the one hand, and national rules on the protection of intellectual property rights, on the other, has always created difficulties which require the development of fine distinctions by the Court. (81)

(i) The territoriality of national intellectual property rights

89 Article 222 of the Treaty provides that the Member States' `system of property ownership' is unaffected by the Treaty. In so far as the status of industrial and commercial property (hereinafter `industrial property') is concerned, the Treaty does not lay down any exhaustive code of rules; `[i]t merely provides a skeleton. The task of putting flesh on the bones falls to the Community legislature and to the Court of Justice'. (82) The rules on the free movement of goods, however, `articulate a conflict between two competing interests', (83) namely the fundamental objective of free trade in the establishment of the common market and the need to safeguard the national interest in respect of industrial property rights. Whereas the common market is concerned with the fusion of national markets into one single market, the Member States' industrial property laws are inherently territorial. In order to identify national laws which contravene the principle of freedom of movement of goods expressed, in particular, in Article 30, the Court developed the doctrine of the exhaustion of the specific subject-matter, object or substance of such rights. (84)

90 Copinger and Skone James on Copyright, for example, referring to the Opinion of Advocate General Roemer in Deutsche Grammophon, explain the territoriality principle as follows: (85)

`The fact that an industrial property right is the creature of the national laws of the State granting the right necessarily places limits on the territory within which such right is effective. This has been referred to as the "territoriality principle" of industrial property rights, ... but it is really no more than a necessary reflection of the territorial limit to the sovereignty of the State concerned. In the present context no English court can entertain an action under the Copyright Act 1956 by a plaintiff who is the author of a work entitled to copyright under that Act in respect of acts complained of as being committed in France, even if being committed by a defendant who is within the jurisdiction of the English Court ... .' (86)

While the precise policies underlying national patent laws may vary, there is a reasonable level of agreement that patents are intended to `... make it worthwhile for inventors and their capitalist backers to make their efforts and risk their money [...]. The simplest, cheapest and most effective way for society to hold out these incentives is to grant temporary monopolies in the form of exclusive patent rights in inventions'. (87)

91 At the time of the entry into force of the Treaty between the original Member States, it appears that virtually all of the national patent laws limited the patentee's monopoly to the first sale of the patented product (88) whether as a result of the statutory definition of patent infringements or as a result of an express exhaustion doctrine. (89) The accession of the common law Member States to the Community altered somewhat the underlying national positions; United Kingdom and Irish patent laws are different because purchasers of patent-protected products are allowed to use such products under the fiction that an implied licence is granted on their sale by the patentee. This implied licence may, however, be restricted by contract. (90) More significantly, all of the original Member States' laws recognized generally that the effect of the territorial nature of patents was that the marketing abroad of the patented product, even with the patentee's consent, did not negate the patentee's right to oppose imports of such products as infringements of its national patent; (91) the patentee's monopoly thus continued until it had marketed or consented to the marketing of the protected product on the national territory. The attendant conflict between `the national monopoly of the holder of the patent, derived from national patent law, and the aims pursued by the EEC, in particular in creating a free market within which goods can be sold from one country to another without any obstacle' was brought to the attention of the Court particularly through the observations of the Dutch Government in the seminal industrial property rights case of Parke, Davis. (92) In the event of the Court's now departing from Merck v Stephar, it will naturally be for the national court to decide whether a similar approach ought to be adopted in relation to the products at issue in the instant cases, namely those manufactured under licence (we are told by local subsidiaries of the patentees) in circumstances where no patent protection was available in either Spain or Portugal.

(ii) The genesis of the exhaustion doctrine in Community law

92 In Parke, Davis the pharmaceutical company invoked its Dutch patent for chloramphenicol in the Dutch courts to prevent imports by Centrafarm and Others of products manufactured in Italy, allegedly in breach of its patent, at a time when no patent could be obtained there for pharmaceutical products or their processes. (93) The Court noted that `variations between the different legislative systems are capable of creating obstacles ... to the free movement of patented products ... within the Common Market', and ruled that `prohibitions and restrictions on imports may be justified under Article 36 on grounds of the protection of industrial property, but subject to the expressly stated reservation that these "shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States"'. (94)

93 The `watershed' in respect of the conflict between the Community objective of the free movement of goods and the generally territorial nature of national industrial property rights `was marked by the Deutsche Grammophon case'. (95) The Court was asked essentially `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'. (96) The Court drew a distinction between the `existence of rights' and `the exercise of such rights'; the free movement rules would only permit industrial property rights to be exercised which were `justified for the purpose of safeguarding rights which constitute the specific subject-matter of such property'. (97) The distinction between the `existence' and the `exercise' of rights can, at times, be quite unreal; it has not been referred to in recent case-law, such as HAG II, and may now, at least in so far as the interpretation of Articles 30 to 36 of the Treaty is concerned, be discarded. (98) However, the identification of the rights which constitute the specific subject-matter of the national intellectual property is central to the Community notion of `exhaustion', though not under that name, developed by the Court in Deutsche Grammophon - admittedly in respect of a form of copyright, but one which bore all the usual features inherent in a patent. (99) In the crucial paragraph of the judgment, the Court stated: (100)

`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 prohibition, 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.'

Thus even before the Court expressly used the term `exhaustion', it attached importance to whether the marketing of the relevant products had taken place with the consent of the owner of the industrial property right. (101)

(iii) The specific subject-matter of a patent

94 The Court defined the specific subject-matter of a patent for the first time in Centrafarm v Sterling Drug. A New York company (Sterling Drug Inc.) owned parallel (process) pharmaceutical patents in both the United Kingdom and the Netherlands. In the United Kingdom the patent was owned and the product was manufactured by a British subsidiary (Sterling-Winthrop Group Ltd), whereas in the Netherlands it was distributed through a subsidiary of the British company. Centrafarm imported into the Netherlands consignments of the patented product, which had been lawfully put on the market by Sterling Drug's subsidiaries in the United Kingdom and Germany; Centrafarm v Sterling Drug was thus clearly a case where parallel patents existed in the United Kingdom and the Netherlands.

95 On the basis of Dutch law, Sterling Drug's Dutch subsidiary was entitled to block the marketing of these products as the patentee's Dutch patent was not exhausted by the sale in the exporting countries, but the national court asked whether the Treaty's free movement of goods rules would prevent this. The Court in reliance on Deutsche Grammophon held that Article 36 of the Treaty `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 the property'. (102) No doubt influenced by Advocate General Trabucchi, (103) the Court defined the specific subject-matter of the patent as `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'. (104)

96 The Court proceeded to rule that the application of a principle of national law whereby `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' would constitute an obstacle to the free movement of goods. It recognized that such a right might be invoked subject to the dual conditions of absence both of patentability and of consent to marketing in the exporting Member State. (105) Invoking such a right would not, on the other hand, be justified `where the product ha[d] been put on to the market in a legal manner, by the patentee himself or with his consent, in the Member State from which it ha[d] been imported, in particular in the case of a proprietor of parallel patents'. (106) Acceptance of such a right would enable the patentee to partition off national markets, thus restricting trade where `no such restriction was necessary to guarantee the essence of the exclusive rights flowing from the parallel patents'. (107)

97 It follows in my view that once the patentee has enjoyed guaranteed exclusivity at the point of first marketing, which is not a guarantee of any monopoly profits, the specific subject-matter of its patent is exhausted. Unlike national patent laws which (to varying degrees) permit a patentee to oppose imports of the patented product marketed outside the national territory, the Community-law version of the exhaustion doctrine now developed permits the patentee merely to choose the place where he wishes first to market the relevant products in the Community; once that choice is made the marketed units must, in accordance with the Community exhaustion principle, thereafter be allowed to circulate freely throughout the Common Market.

98 Does the guarantee of exclusivity recognized in Centrafarm v Sterling Drug consist, as Beecham claims, of the right of first marketing the product with the benefit of patent protection? In view of the pivotal place of this decision in the developing case-law of the Court, it is important to address this question. The explicit basis of the question referred was that the patented product had been marketed in the exporting Member State both with the benefit of patent protection and the consent of the patentee. This was the question answered. On the other hand, the language used applies to a wider set of circumstances. At paragraph 11 of its judgment the Court acknowledged one situation in which an obstacle would be permissible, where both the conditions of patentability and consent were absent and referred cumulatively to an import `coming from a Member State where it is not patentable and has been manufactured by third parties without the consent of the patentee' (emphasis added), which of course was the actual situation in Parke, Davis. It did not deal with a situation where only one of those conditions is satisfied. Further ambiguity arises from the phrase `in particular in the case of a proprietor of parallel patents', as implying that this is only one situation in which the prevention of parallel imports is not justifiable. Strictly speaking, Centrafarm v Sterling Drug decided that issue only for such a case. However, the Court attached great importance to consent to first marketing and in that respect the decision is consistent with Deutsche Grammophon. The converse problem of interpretation arises in that case, where there was (at least at the material time) no parallel equivalent protection in France to that conferred on the producers of sound recordings by the pertinent German copyright law. However, no such distinction was adverted to either by the Advocate General or by the Court and it does not appear to have formed part of the reasoning of the decision.

99 The strongest argument in favour of the pharmaceutical companies' interpretation of Centrafarm v Sterling Drug is that, since the specific subject-matter consists of the exclusive right of first marketing the patented product, a rule permitting parallel imports of such products marketed by the patentee in a Member State where no patent protection exists and where, consequently, the patentee was subject to potential competition at the first marketing stage, would empty that exclusive right of much of its significance, i.e. the patentee must at least have had the opportunity of obtaining monopoly profits in the exporting Member State before its national rights in the importing Member State can be said to have been exhausted. (108) This, of course, was the principal submission of Merck and the intervening Member States which was rejected by the Court in Merck v Stephar.

(iv) Merck v Stephar

100 The factual circumstances of Merck v Stephar correspond in all but one important respect with those of Parke, Davis. Merck owned parallel patents in most Member States for Moduretic, a pharmaceutical product used in the treatment of hypertension. It marketed the patented product in Italy at a time when patent protection was expressly excluded for pharmaceutical products and their manufacturing processes. Stephar purchased batches of the product sold in Italy by Merck and imported them into the Netherlands where, due to the prevailing high Dutch prices, it was able to undercut the prices charged by Merck. Merck argued that its rights under Dutch patent law could not be exhausted by the marketing in Italy in the absence of patent protection.

101 Beecham argues that, by holding in Merck v Stephar that a patentee can exhaust the specific subject-matter of its right through marketing in a Member State where no patent protection exists, the Court incorrectly extended the scope of the doctrine laid down in Centrafarm v Sterling Drug. In Merck v Stephar, the Commission and Stephar argued that the absence of a parallel patent was irrelevant because the crucial factor was the consent of Merck to the marketing in Italy. Merck, supported by the Governments of France and the United Kingdom, while agreeing with the definition of the specific subject-matter of a patent laid down in Centrafarm v Sterling Drug, maintained that a patentee must have the opportunity to earn a monopoly profit at least once.

102 I believe that it is appropriate to set out the reasoning employed by the Court and Advocate General Reischl in some detail.

103 In his Opinion, having stated that the circumstances of Deutsche Grammophon (absence of equivalent French right not precluding exhaustion of German copyright) were akin to those raised by Merck v Stephar, (109) Advocate General Reischl stated that paragraph 11 of the Court's judgment in Centrafarm v Sterling Drug `plainly refers to the case of a territory where there is no patent protection'. (110) He enumerated three principal reasons for rejecting the view that exhaustion can only occur if the patented product has been put on the market of a Member State where patent protection existed:

(i) the rights recognized as forming part of the specific subject-matter of a patent cannot be regarded as an end in themselves; but they are designed to provide the patentee with `the possibility of obtaining a recompense for his creative effort of invention ... [which although being] one of the objectives of a patent right [...] is not ... inherent in that right ... the realization of which depends on numerous market factors such as the presence of substitute products, commercial exploitability and similar conditions'; (111)

(ii) the inability to obtain patent protection is irrelevant because Merck `was in a position to decide freely in which Member State it wished to place on the market the product patented in the Netherlands', this choice was guided by its own interests and, in Italy, it `held, moreover, a de facto monopoly for the product in question'; (112)

(iii) the operation of the exhaustion doctrine cannot be affected by the fact that parallel traders, rather than consumers, are likely to be the principal beneficiaries because one of the essential aspects of the common market was that products should be manufactured or placed on the market where this can be done as cheaply as possible.

104 The Court's judgment is equally categoric. It states that the specific purpose of a patent `lies essentially in according the inventor an exclusive right of first placing the product on the market'. It is this right which `enables the inventor, by allowing him a monopoly in exploiting his product, to obtain the reward for his creative effort without, however, guaranteeing that he will obtain such a reward in all circumstances'. (113) The patentee must make the decision `in the light of all the circumstances ... including the possibility of marketing it in a Member State where the law does not provide patent protection'. If he decides to market in such a country `he must then accept the consequences of his choice as regards the free movement of the product within the Common Market, which is a fundamental principle forming part of the legal and economic circumstances which must be taken into account by the proprietor of the patent in determining the manner in which his exclusive right will be exercised'. (114) The Court continued: `[T]o permit an inventor, or one claiming under him, to invoke [a patent right in those circumstances] would bring about a partitioning of the national markets which would be contrary to the aims of the Treaty'. (115)

105 The lengthy arguments now advanced for the express abandonment of Merck v Stephar may essentially be summarized in two principal but interdependent contentions: (i) that the specific subject-matter of a national patent cannot in logic be exhausted in Community law unless the protected product is first marketed with the benefit of patent protection; (ii) that the Merck v Stephar judgment is incompatible with the subsequent case-law of the Court.

C. Reconsideration of Merck v Stephar

106 Advocate General Jacobs, in his Opinion in HAG II, considered that there was no rational basis for the doctrine of common origin of trade marks propounded in Van Zuylen v HAG. (116) The decision in Merck v Stephar represents, at least in so far as patents are concerned, the high point of the adoption of consent to marketing as the basis for the exhaustion of industrial property rights. Once a patentee has consented to the first marketing of a consignment of its products in any Member State, then, whether or not patent protection exists in that State, parallel patent rights in respect of that consignment are exhausted throughout the Community. I am satisfied, however, that Merck v Stephar should no longer be applied. The Court's rationale in Merck v Stephar was flawed and based, at most, on what was an implicit statement in Centrafarm v Sterling Drug - where the issue had not been raised by the facts of the referred case - concerning the appropriate balance between the free movement of goods and the protection of national patent rights in circumstances where there were no parallel patents. In my view Merck v Stephar went too far in ensuring that industrial property rights are not used to compartmentalize national markets to the detriment of the common market and thus undermined what should have been recognized as the fundamental core of a patent, namely the right of a patentee to market each particular unit of its patented product for the first time in a Member State with the benefit of the absence of competition from unauthorized copies for the duration of the patent.

(i) The flawed basis of the judgment

107 It is clear from Article 36 of the Treaty that national industrial property rights are not inherently incompatible with the freedom of movement of goods within the Common Market. In the absence of harmonized Community rules, they remain unaffected by Community law. Community law is, however, legitimately concerned with the activities of owners of parallel patents which have the effect of partitioning national markets. (117) National industrial property laws have traditionally discriminated between domestic and foreign marketing by the proprietor of the right. Thus, whereas marketing on the national territory would generally preclude the proprietor of a patent from further controlling the domestic marketing of the protected product, this would not usually follow in the case of units marketed abroad. This difference permitted the proprietors of parallel patents to compartmentalize national markets in the hope of extracting monopoly profits from each controlled marketplace. It is self-evident that such discriminatory treatment can no longer be tolerated in a Community whose fundamental aims include the establishment of a single market without internal frontiers. (118) However, Merck v Stephar goes further by applying the same treatment to imports not so controlled. The sole rationale for this is the supposedly voluntary act of marketing.

108 I am not convinced that an import restriction granted in favour of a patentee constitutes an arbitrary restriction on intra-Community trade simply because the products concerned were marketed voluntarily in another Member State without the benefit of patent protection. (119) The effect of Merck v Stephar is to export not merely the product but also the commercial consequences of the legislative choice made by the exporting State to the importing State because the patentee has made a commercial choice to sell the product even in a less protected environment. The effect of the rule would be that, in order to avoid damage to the value of its national patent rights in those Member States which protect them, the patentee is encouraged to partition the Common Market in a different way, i.e. through refusing to supply units of its products to the markets of those Member States where his rights are not recognized: the product will therefore not be available for parallel traders and the patentee may in any event rely on his patent rights in other Member States to oppose any parallel imports of unauthorized copies manufactured in unprotected markets. (120) In other words, it would favour commercially irrational decisions to withhold products from the markets of such States, where sales of the product would hold out some prospect of profit. (121)

109 One undesirable result that would flow from the exercise by the plaintiffs of the `choice' recognized by paragraph 11 of the Court's judgment in Merck v Stephar would be that Spanish and Portuguese patients would be restricted to using unauthorized locally-produced copies of medicinal products patented in other Member States. I do not think this approach tends to contribute either to achieving an internal market in pharmaceutical products or to `ensuring a high level of human health protection'. (122)

110 In my view the reliance on the notion of free consent to marketing in Merck v Stephar unacceptably glosses over the logical fallacy that a patentee can be said to have exhausted his rights by choosing to market units of the protected product in Member States where no patent protection exists. Accepting, as I do, the Court's definition of the specific subject-matter of a patent, (123) I do not consider that commercially rational marketing of a protected product in a Member State where no protection exists is accompanied by the crucial element guaranteed by that specific subject-matter. In Merck v Stephar the Court described the `substance of a patent right' as lying `essentially in according the inventor an exclusive right of first placing the product on the market' which `enables the inventor, by allowing him a monopoly in exploiting his product, to obtain the reward for his creative effort without, however, guaranteeing that he will obtain such a reward in all circumstances'. (124)

111 While I believe that the Court has correctly been concerned about the potential partitioning of national markets flowing from the exploitation by the owners of industrial property of their inherently territorial (and thus protective) rights, I consider that such concern is misplaced in cases where no parallel rights exist. The diverging policies of Member States regarding the patentability of pharmaceutical products was the real cause of the non-uniformity in the common market. (125) In such circumstances, to impose a form of `venire contra factum proprium' (as suggested by Advocate General Reischl in his Opinion in Merck v Stephar) (126) on patentees attempting to exercise their national patent rights, on the sole basis that they have already sought to profit from another national market despite being denied patent protection there, effectively imposes on patentees the discipline of the Common Market where it does not in fact exist. Advocate General Reischl stated that patentees do not always make a monopoly profit and identified various extraneous factors which can seriously undermine profitability, such as the presence of substitute products. (127) The Court's view that the patentee in such circumstances must accept the consequences of its marketing decision `is not a reason but a conclusion'. (128)

112 If the plaintiffs were to withdraw, for example, their products from the Spanish and Portuguese markets and, at least as far as the Community is concerned, seek exclusively to recover their research investment in those products from other national markets where their patents are recognized, they claim that they would suffer significant adverse commercial damage, particularly in Spain and Portugal, to their goodwill and reputation. I was impressed by these arguments, particularly as such damage would flow from the withdrawal of or refusal to supply medicinal products in respect of an entire market. Potential commercial damage is not, of course, a reason for refusing to give effect to free trade between Member States. However, this type of damage is clearly linked with the potential loss of incentive to investors. I would reject arguments to the effect that loss of the right to recover research costs on one or two markets should be ignored unless it can be shown that this will probably lead to reduced research investment in future. A balanced and fair approach should be adopted. This requires that the Spanish and Portuguese markets, even if they cannot be made to contribute to the recovery of research expenditure, should, at least, not be used to undermine that proce