England and Wales High Court (Patents Court) Decisions

Mr. Gerald Barling QC and Mr. Nicholas Green instructed by Hammond Suddards for the Defendants

This is the official judgment of the court and I direct that no further note or transcript be made

DATED: 13th May, 1998

1. The plaintiff, Philips Electronics N.V., is the proprietor of a number of patents relating to the design and manufacture of compact discs ("CDs"). Among the portfolio of patents owned or controlled by the plaintiff are UK Patents Nos. 2,076,569 and 2,083,322. They are the patents in suit in this action. Because of international standardisation, in practice anyone who wants to make CDs is likely to infringe one or more of the plaintiff's patents. The plaintiff offers licences on standard terms to anyone wanting to enter this market.

2. The defendants, Ingman Limited and The Video Duplicating Company Limited, are involved in the manufacture of CDs. They were offered a licence on the standard terms by the plaintiff. They asserted that the terms of that licence would be commercially unfair to them. They refused a licence but carried on making CDs. In July of last year, the plaintiff commenced the present proceedings, asserting that the defendants were infringing the patents in suit.

4. The defendants have also taken the offensive. I have been told by Mr. Barling QC, who appears on behalf of the defendants, that his clients have taken their complaints informally to the Commission where they met a "not-discouraging" reception. I was not told what the Commission said or intimated and I have not been told that the Commission has made any preliminary observations on the strengths or otherwise of the defendants' complaints. Mr. Barling tells me that his clients are in the process of drafting a formal complaint which will be lodged with the Commission within a few weeks. He says that it will cover all of the issues of fact and law raised in his clients' defence and counterclaim insofar as they relate to the Treaty issues.

5. It is against this background that the plaintiff has launched the present application. In effect, the relief sought is of two types. First the plaintiff says that the defendants' Treaty pleadings are bad on their face and should be struck out accordingly. This is, in substance, an application to strike out under the provisions of Ord. 18 r. 19. Alternatively it says that the Treaty issues are ones which ought to be tried separately pursuant to the provisions of RSC Ord. 15 r. 5. In my view it is convenient to consider the second of these issues first.

6. The court has a wide discretion to split the issues arising in an action and to order them to be tried separately. Where issues overlap, separate trials may result in some duplication of work and raise the possibility of inconsistent decisions. In most cases it will be quicker and cheaper in the long run for all issues to be tried together. I think that before the court decides to exercise its discretion to split issues it must be persuaded that some significant benefit would flow from taking that course.

7. The patent law and Treaty of Rome issues in this action are quite distinct. Under the former it will be necessary to consider whether the defendants' products or process fall within the scope of those claims of the patents in suit which are asserted by the plaintiff to have independent validity. The validity will have to be assessed in the light of the attacks pleaded in the particulars of objections served by the defendants in November of last year. Those attacks include allegations of lack of novelty, obviousness and insufficiency. They are detailed allegations which will involve consideration of issues of patent law and technical evidence relating to digital technology. On the other hand the Treaty of Rome defences and counterclaims proceed on the assumption that the patents are valid and infringed. There is no allegation that any breach of Articles 85 or 86 arises out of or is connected to any assertion of invalidity or non-infringement. If and to the extent that the Treaty of Rome issues survive, they will involve the consideration of detailed commercial evidence. The technical patent issues will be substantially irrelevant to them.

8. The difference between the two sets of issues is consistent with the legal representation chosen by the parties. For the patent issues each side has had its pleadings prepared by counsel well known as a specialist in the patent field whereas the counsel who have argued the Treaty of Rome issues are well recognised as leading specialists in that area of law but not, so far as I am aware, having any particular expertise in relation to patent law.

9. If this was an ordinary patent action, by now it would be expected to be nearing a trial. As noted above, this action was commenced in July of last year yet, as far as I am aware, little or nothing has been done to get it before the court. No attempt has been made to fix a trial date nor have directions as provided for under O. 104 been put before the court. It seems likely that the existence of the Treaty of Rome issues has slowed down the whole action. If the latter issues survive it is to be expected that they will give rise to wide ranging requests for discovery.

10. I have come to the conclusion that it would be inconvenient for these issues to continue to be tried together. I can not see there being any significant saving in cost in doing that. In fact if all the issues are tried together it may well be that the costs will be increased. Those counsel who are expert in and only concerned in one area of the case will almost inevitably have to attend for those parts of the trial which are only of peripheral relevance to them. I do not think that there will be any saving in time achieved by running the issues together nor was that suggested to me by counsel. In addition to this, there is likely to be a very substantial delay in the determination of the patent issues unless there is severance now. Such delay is undesirable. If, as the defendants allege, these patents are invalid then the sooner that is determined the better, not only from the point of view of these defendants but also in the interest of all others in the trade both here and abroad who have taken or are minded to take licences under these patents or their foreign equivalents. Furthermore if the patents are invalid, the time consuming and expensive resolution of the Treaty of Rome issues may be rendered substantially unnecessary since the defendants have not allowed the plaintiff's patent claims to deter them from entering the market and using the plaintiff's logos on their CDs. Therefore, unlike others in this industry, they have not had to bear the additional cost of royalty payments to the plaintiff. It is difficult to see how they can have suffered any damage as a result of any activity of the plaintiff. It may be that, absent the patent issues, the defendants will have little reason to pursue their Treaty of Rome counterclaim.

12. For these reasons I have decided that this is a case in which it is appropriate to order the patent and any surviving Treaty of Rome issues to be tried separately. After judgment I expect counsel to address me on the directions to be made to ensure that the patent part of the case gets to trial with reasonable expedition.

14. To the extent that any competition issues survive this application, I will stay them pending the outcome of the defendants' complaint to the Commission.

15. Although I am prepared to stay the latter issues, this does not remove the need to determine the application to strike them out. If and to the extent that there is nothing in them, they should be removed from contention now. They should not be left to hang over the plaintiff's head if they are without substance. Furthermore if the Commission decides not to entertain the defendants' complaint the stay will be lifted and the Treaty of Rome issues will come back to life. Then they will have to be considered again here. A refusal by the Commission to entertain the complaint would not inevitably mean that it is without substance. For example it might not be entertained because the Commission decides it to be of insufficient priority to warrant the expenditure of the Commission's limited resources. Since I have heard the arguments, I should deal with them.

17. On this application the plaintiff served a significant quantity of evidence. The defendants responded. However since this is, in substance, an application to strike out, I indicated that I was not inclined to read any of it. I think that both sides accepted this as the correct approach with the result that, save for one or two small matters where the parties appeared to be agreed on the relevant additional facts, the application proceeded on the basis of the pleadings alone. In what is set out below, I recite only the facts as alleged in the defence and counterclaim. For the purpose of this application I shall assume that they are all accurate. In fact many of them appear to be common ground between the parties.

18. CDs are comparatively high capacity storage devices. They can be made to contain large quantities of digital information. There are a number of different formats for CDs. They are referred to as CD-A, CD-ROM, CD-I and CDV. They differ from one another in some respects but they share many common technical features. Each is designed to cater for a different type of market. For example CD-A (meaning CD-Audio) is the form of CD used for storing musical recordings whereas CD-I is a form of CD used in certain types of computer controlled games. The plaintiff and Sony Corporation each embarked on the development of the technology. In about 1980 they entered into an agreement ("The Philips/Sony agreement"). Under it the two companies were to co-operate, inter alia, in the development of industry standards for CDs. In the course of that work they would obtain further patent protection. The patents would be pooled and would be enforced by Philips alone. It was agreed that the patents would be licensed, again by Philips alone, to all-comers on standard terms which were agreed between them. Philips would pursue infringers.

19. The plaintiff started offering licences ("the Standard Licence") on the basis of terms agreed between them and Sony under the Philips/Sony agreement in about 1983. The plaintiff and Sony also set about trying to ensure that their method of producing CDs became the industry standard. In this they were successful. In particular the Philips/Sony standards for CD-A and CD-ROM, the two CD formats with which the defendants are concerned, became accepted as industry standards by CENELEC (The European Committee for Electrotechnical Standardisation) and the European Association for Standardising Information and Communication Systems.

20. Needless to say, a CD player can only play a CD which is compatible with it. The manufacturers of the players need to make their equipment capable of playing most of the CDs on the market while the manufacturers of CDs need to ensure that their products can be played on the majority of players on the market. This can be achieved if the manufacturers of CDs and players adhere to the same standards. Since the international standards involve the use of technology which is covered by various Philips or Sony patents, any person trying to enter the market has to obtain a licence from and pay royalties to Philips. It is not economically viable for a producer of CDs to enter the market without adhering to those standards.

21. The Standard Licence includes standard royalty and grant back provisions. Although the defendants assert that the patents in suit are invalid and have not been infringed, they plead that they have at all times been prepared and remain prepared to accept a licence on reasonable terms under the patents in suit. The problem is, of course, that terms which they would consider reasonable are not those which are provided for in the Standard Licence and which have been accepted by all the other licensees in the industry. Mr. Lasok QC, who appears for the plaintiff, puts the defendants' position rather unflatteringly. They complain in their pleadings of the highly competitive nature of the CD market and its low profit margins. He says that what they do not want is an even reduction of the royalties to be paid by all licensees. They want a preferential reduction of royalties which favours them and improves their competitiveness. It is not possible for the plaintiff to agree a more favourable royalty rate because each licensee is entitled contractually to parity with other licensees as to the royalty rate with the consequence that if the plaintiff was to give the defendants a more favourable royalty rate, all other licensees would be entitled to the same rate.

23. For the purpose of this action, it is necessary to consider three matters; first what is the dominant position allegedly held by the plaintiff, secondly what breach of the dominant position is alleged and thirdly what consequences flow from that breach if it is made out. The broad introductory paragraph to Article 86 provides that

24. The existence of a dominant position itself is not prohibited. Further, the holder of a dominant position in one market is not penalised if he abuses a non-dominant position in another market. It is only abuse of the dominant position which is prohibited and then only to the extent that "it may affect trade between Member States" - that is only to the extent that the identified abuse of the identified dominant position may affect trade.

25. In this case the defendants identify two markets (one with sub-markets) in which the plaintiff is said to be dominant as follows:

26. Although the defence pleads that the plaintiff holds a dominant position in the market for licensing technology, there is no doubt that what is meant by that is the licensing of patented technology. That is the basis on which the argument before me has proceeded. No doubt the plaintiff and Sony have generated technology in the CD field but what is complained about is the plaintiff's control over the patents which are an essential requirement for entering into the CD market defined by the international standards. Other technology is readily available to those interested in entering the market. These defendants did not need any technology from Sony or the plaintiff to commence the manufacture of the CDs which are pleaded as infringements. What they need is an appropriate patent licence. There is no suggestion by the defendants that the plaintiff holds a dominant position in the licensing of technology other than patented technology.

27. The defendants plead that the plaintiff's dominance in this market has been abused in a number of ways. Although it will be necessary to consider the details of this plea later, by far and away the most important breach alleged is the rate of royalty required. This is referred to at numerous places in the defence. The most extensive plea is as follows:

29. The same royalty objections are set out in paragraph 43.2 of the defence:

30. So, according to the defendants, those who took their licenses some time ago should continue to pay at the old rate of 3% but they, as new entrants, should pay much less. What they are not suggesting is that all rates should move down equally for all licensees.

31. In view of the alleged abuses of the plaintiff's dominant position, the defendants say that they are entitled to a licence on reasonable terms. This is expressed as follows:

and:

32. The defendants say that it falls to the court to settle the terms on which they are to be permitted to exploit the plaintiff's patents:

33. The plaintiff says that this defence and the counterclaim based on it are unarguable. The Treaty of Rome recognises the continued existence and value of intellectual property rights. It is not true to say, as the defendants do, that under Article 86 the plaintiff, by virtue of his position as a patent owner, is bound to grant licences on fair and reasonable terms. It can, if it wishes, refuse to grant licences at all. Before turning to consider the case law, it may be useful to say something about the nature of patent rights.

34. A patent does not entitle the proprietor to exploit his invention. His patented invention may infringe an earlier patent belonging to someone else. But a patent entitles the proprietor to the exclusive right to prevent others from exploiting his invention. This exclusive right is the central defining characteristic of a patent. It is what gives it its legal and commercial value. The function of patents is to promote research and development. To do this our legal system, and the legal systems of most countries, provide a mechanism for rewarding those who put time, effort and skill into research and development. The reward takes the form of a right to exclude competitors from using or exploiting any inventive product of such research and development. The purpose and effect of that right of exclusivity is to enable the owner of the patent to take advantage of the absence of competition so as to increase his prices and thereby increase his profits or market or both. It is the hope and promise of that financial reward which is designed to justify the risk involved in investing in research and development. Alternatively the proprietor of the right may choose to obtain his financial reward by charging whatever price the market will bear to third parties who wish to be given the right to exploit the invention. In either case it is the power and ability to reap financial rewards from the right to exclude or control competition which underpins the patent system and is its perceived justification. If, as the defendants suggest, the Treaty of Rome obliges a patentee to grant licences on fair and reasonable terms, it will have a serious impact on the patent system. Not only would the patentee not be able to decline licences at all but his ability to benefit financially from having taken the research and development risk would be seriously compromised. A licence negotiated between a patentee and a potential licensee in circumstances where the patentee can decline to grant a licence at all is likely to be on very different terms to one negotiated in circumstances where the licensee knows that he is entitled to a licence and the court or some other third party can be called on to settle reasonable terms if the patentee asks for too much.

35. The plaintiff argues that the Treaty of Rome does not have the effect for which the defendants contend. Article 222 safeguards the existence and ownership of property rights, and the exclusivity arising under patents is such a right. Even though the provisions of Articles 85 and 86 create restrictions on anti-competitive practices they have to live side by side with the continued existence and promotion of intellectual property rights which, as part of their very nature, are deliberately anti-competitive. Although under community law the occupier of a dominant position in relation to the market in, say, a particular product may be prohibited from refusing to supply that product to a customer, prima facie he is entitled to refuse to licence his exclusive patent rights. Were that not so, the patent rights would be emasculated. The plaintiff argues that this view of the effect of the Treaty of Rome is supported by authority and draws my attention to two cases. Although they are concerned with design rights, the same principles must apply to patents.

37. These paragraphs are illuminating. First the ECJ is saying that it is permissible to exploit the exclusive rights so as to maintain exclusivity. In other words to prevent someone putting infringing goods on the market. Although that eliminates competition, in the context of the Treaty of Rome and, in particular, the acceptance of the continued existence of intellectual property rights, it is not a form of elimination which is abusive. Secondly when one considers how Article 86 comes into play, all the examples given by the ECJ are of cases where the proprietor of the right uses the right to effect some anti-competitive effect in relation to a market in products. For example it is the arbitrary refusal to supply independent repairers. The existence of the intellectual property rights may facilitate anti-competitive behaviour, but such behaviour consists of abusive interference with the market for a product. The abusive conduct can be prohibited, i.e. the proprietor may be forced to supply spares and he may be forced to reduce the price of his goods. In prohibiting the conduct the court may have the power to intervene in the manner in which intellectual property rights are exploited by the proprietor. This is to ensure that the proprietor does not continue the abusive conduct in relation to the products by the back door route of using his intellectual property rights.

39. The ECJ only answered the second question. It said:

41. The plaintiff also says that paragraph 9 draws a distinction between the exclusive right owned by the proprietor of a registered design and a "dominant position" within the meaning of Article 86. It does not say that mere existence of the intellectual property constitutes a dominant position in the market. The intellectual property right may be instrumental in creating a dominant position but, as the plaintiff puts it, the market must be defined by reference to products (or services), not to legal rights.

42. The importance of recognising the difference between the exclusivity created by an intellectual property right and the market for the goods - i.e. identifying the relevant market for the purpose of Article 86, is alluded to in the opinion of the Advocate General:

44. The Commission made an order in the following terms:

47. So here, the owner of an intellectual property right owns an "essential facility", namely the right to licence, without which its competitors are unable to offer infringing goods to customers. Refusal to grant competitors "access" to that right, i.e. refusal to licence, is an abuse of the dominant position.

and:

and:

52. Even if Irish copyright law did not protect the type of low-level information which Magill wanted to publish, the television companies were the only source of it. If they chose not to distribute the information at all, it was not obtainable elsewhere. Similarly, if they chose to distribute the information in small packages and only at the last possible moment, it might have crippled Magill's nascent business. The information was the raw material from which television guides were made. The television companies therefore held a dominant position both in the information itself and in the guides made from it quite independently of any copyright they might own. It was that dominant position which was being abused. The copyright was merely the tool used to effect the abuse. None of this supports the suggestion that an intellectual property right gives rise to a per se dominant position in the area of technology covered by the right.

53. It can be said that the defendants' pleading does not assert directly that the plaintiff's patents give rise to a per se dominant position. Instead it alleges that the plaintiff owns a dominant position in the market for licensing the patented technology. But it seems to me that this is a matter of semantics only. Whenever an intellectual property right exists there is a correlative potential market in licences to exploit it. It is the ability to grant or refuse such licences which constitutes the right in the first place. This is only an alternative way of saying that the proprietor owns exclusive rights which he can exploit, if he wishes, by licensing.

54. For these reasons I have come to the conclusion that the first type of dominant position pleaded in the defence is not arguable. The Article 86 plea based on this assertion fails accordingly.

56. There are one or two specific allegations of abuse which go beyond complaints about royalty rates and deserve special mention.

57. Paragraph 42.3 alleges;

58. This is expanded in paragraph 43.4(4). It is said that the plaintiff should have adopted a technique known as "track wobble" but did not do so because of the terms of the international standards set. Similarly it is said that the plaintiff failed to adopt a copyright protection system developed by a Greek company.

59. It appears to me that these allegations have nothing to do with the plaintiff's alleged dominant position in relation to the patents. It is a complaint about the contents of the international standards set for the industry. Even assuming, as I do for the purpose of this application, that these techniques were commercially viable and technically beneficial, the failure to adopt them is not said to flow from the existence or exercise of the plaintiff's patent rights. It is not suggested, and as far as I am aware could not be suggested, that any of the plaintiff's patent rights have been used to prevent or could prevent either of these techniques being adopted. There is no discernible or pleaded nexus between the non-adoption of these techniques and the plaintiff's patent rights and there is no nexus between that non-adoption and the plaintiff's enforcement of its patents in these proceedings. I cannot see how these alleged abuses could give rise to a defence in this action. Breach of a provision of the Treaty does not turn the offender into a pariah all of whose rights and privileges in law are suspended. Although the defendants plead that the court should not grant the plaintiff relief which condones, permits or requires the plaintiff to infringe Article 86, it has not been explained to me, nor can I see, how refusing to allow the plaintiff to enforce its patent rights could have any impact at all on the contents of the international standards and, in particular, on the question whether these allegedly significant techniques should be included within them (assuming for that purpose that inclusion now would be possible). For this additional reason, this plea seems to me to be without any substance.

60. In paragraph 43.4(1) the defence says that the plaintiff has abused its dominant position by "tying". This is expanded as follows:

61. Once again, it appears to me that this plea is really a more elaborate way of complaining about the royalty rate. The plaintiff has decided on a price of entry into the CD market. The price of entry entitles the licensee to become involved in whatever part of the market he pleases. He can choose to make some or all CD formats as he wishes. But he is not forced to make things he has no interest in. He only pays a royalty on CDs which he makes. Even if the plaintiff had a dominant position, I do not see how this could be an abuse.

62. Finally, in paragraph 43.4(2) of the defence objection is taken to the fact that the Standard Licence requires all licensees to cross-licence all other licensees, Sony and the plaintiff under any present or future patent rights they might own or acquire which may be pertinent to the manufacture of products licensed under the Standard Licence agreement. It is said that the plaintiff is abusing its dominant position by forcing third parties into a licence which requires them to enter into this patent pooling arrangement. The relevant clause in the Standard Licence is set out at paragraph 35 of the Defence. Although it requires the grant of cross-licences, the owner of the cross-licensed patent is entitled to set such "reasonable, non-discriminatory" terms as he likes. Again, I can not see how this could be said to be an abuse of the plaintiff's patent ownership. Even if it is, I do not see how a court could refuse to grant the plaintiff the relief sought in this action. The defendants do not suggest that they are in any way interested in carrying out research and development or in acquiring any patented technology from any third party. These provisions are, as far as one can see from the pleadings, irrelevant to the defendants. To refuse to enforce the plaintiff's patents on the basis of this clause would be disproportionate.

67. For all of these reasons, I have come to the conclusion that the plea of abuse of a dominant position in the Licence Market is without substance. There is neither a relevant dominant position nor is there any abuse.

68. As noted above, the defendants say that the plaintiff has a dominant position in the market for the production of CDs. Although it also alleges that there are separate sub-markets, the Replicator Market and the Content Market, it does not plead that any considerations apply to them which do not apply equally to the Production Market as a whole. Indeed it is not clear from the defence whether it is even alleged that the plaintiff has a dominant position in either the Replicator Market or the Content Market. In any event, during the course of oral argument Mr Barling addressed only the Production Market as a whole.

70. It appears that the only fact pleaded by the defendants in support of the allegation that the plaintiff has a dominant position in the Production Market is contained in paragraph 40.2 of the defence. Mr. Barling does not rely on any other material. That paragraph reads as follows:

72. Although in my view Mr. Lasok is right on this, it may be that a 40% share of the market would represent or evidence the existence of a dominant position if, say, all other competitors are very weak. If this was the only objection to this plea I would order the defendants to give further particulars rather than strike it out at this stage. However it is not the only objection.

73. It is necessary to look closely at what is and is not asserted remembering always that the inquiry is whether, at this stage, the defendants have pleaded an arguable case that the plaintiff is able to hinder the maintenance of effective competition on the pleaded market by allowing it to behave to an appreciable extent independently of its competitors. First it should be noted that the pleading is that the plaintiff and Sony together produce about 40% of the "total output of compact discs in the EU". This is not saying that they account for 40% of the total market for CDs in the EU. It may be, and the pleading is silent on the point, that much of the market for CDs in Europe is met by importation from outside. Absent a credible plea to the contrary, a producer in Europe must compete not just with CDs of European manufacture but with those from other countries. When considering the plaintiff's ability to act independently of its competitors, absent any credible plea from the defendants to the contrary, it is not legitimate to ignore those competitors who produce outside the EU. It follows that the 40% figure relied on by the defendants is not pleaded as representing 40% of the market occupied by the plaintiff and all its relevant competitors. The percentage of that market may be much smaller, but the defence makes no relevant plea in this respect.

75. The defence pleads that the plaintiff and Sony have co-operated in the development of CD technology, the establishment of the international standards and the pooling of patents. In relation to these activities it may well be that the two companies' activities have been closely intertwined. But the defence does not assert that the plaintiff and Sony co-operate at all in the production of CDs. No link is pleaded. It is not suggested that they adopt the same conduct in the production market. When the defence refers to the plaintiff and Sony "jointly" producing 40% of the total output of compact discs, this does not mean that such production is in any sense a joint or co-operative exercise. Again, Mr. Barling does not suggest otherwise. What the defence means is that between them the plaintiff and Sony produce 40% of the total output of CDs. The pleading does not allege or suggest that in the Production Market the plaintiff and Sony are anything other than full blooded and independent competitors, each trying to secure a larger slice of the market at, inter alia, the other's expense. This is not an arguable plea of joint dominance.

77. In my view all of these matters must be taken together. I have come to the conclusion that the defendants have come nowhere near pleading an arguable case that the plaintiff holds a dominant position in the Production Market. For these reasons it appears to me that these defences based on Article 86 are bound to fail.

79. The allegation in so far as it relates to Article 86 is dependent on there being a relevant and arguable pleaded dominant position. I have dealt with that issue above and do not need to repeat it here. Instead I will concentrate on the Article 85 allegations directed at the two contracts.

80. Insofar as relevant to this application, Article 85 of the Treaty provides:

81. Before turning to the specific pleas made in relation to Article 85, it is worth bearing in mind a significant difference between that Article and Article 86. Article 85 is concerned with consensual activities involving two or more participants. An agreement between two or more parties is subject to different considerations to actions of a single enterprise. Anti-competitive actions of an enterprise acting alone can only be caught by Article 86 and then only when the enterprise occupies a relevant dominant position. In other words a single enterprise which does not hold a relevant dominant position can carry out anti-competitive actions which, if done by agreement with another, would be outlawed under Article 85. In a sense this is similar to our parochial law of conspiracy. For example a trader holding a non-dominant position in the market may chose to sell to one customer but may decide either to cut off or sell at a significantly higher price to another. In so doing he breaches no provision of the Treaty of Rome. But if he agrees with another to discriminate against customers in this way he may well offend against Article 85. Therefore activities which are unimpeachable under Article 86 because the actor does not hold a dominant position may still be anti-competitive. When carried out in co-operation with another enterprise they may fall within the scope of Article 85.

82. The pleas under Article 85 are to be found at paragraphs 51 to 55 of the defence. The Philips/Sony agreement and the Standard Licence were anticipated to have effects throughout the international CD market. Mr. Barling points out that any doubts about the legitimacy of the Standard Licence and the Philips/Sony agreement could have been eliminated if the plaintiff or Sony had obtained negative clearance or exemption under Article 85(3). That would have been the appropriate and safe course to follow. They did not.

83. The plea that the Standard Licence is void appears at first a little odd. The defendants have not entered into such a licence. Therefore in respect of the Standard Licence there is at present no relevant agreement between undertakings as required by Article 85. Mr. Barling says that this does not matter because it cannot be right for the court to give relief in this action which will force the defendants to enter into an agreement which, once executed, will offend against the Article. Furthermore, as noted above, one of the pleas advanced by the defendants is that a purpose of these proceedings is to force prospective licensees - not just these defendants - to accept a licence of the patents on the terms of the Standard Licence.

84. In its reply the plaintiff pleads:

85. Insofar as the threat not to offer the defendants a Standard Licence in the future, notwithstanding the fact that it is available to everyone else, is to be taken seriously rather than as a show of petulance, it does not answer the defendants' allegation that these proceedings have been brought to force prospective licensees to accept such a licence. On the contrary, it seems to me that it reinforces the point. What is being said is that because these defendants have "elected" to challenge the validity of the patent they can no longer expect to be granted a licence in the future. If the plaintiff succeeds in this action on the issues of patent validity and infringement and thereafter refuses a Standard Licence to the defendants, the message conveyed to any other licensee who objects to the terms of that licence is clear; either sign up on the only terms on offer or be excluded completely from the market by patent proceedings. It seems to me that it is at least arguable that these proceedings have been brought, inter alia, to force prospective licensees to accept a Standard Licence.

87. Mr. Barling says that the same principles apply here. If the Standard Licence would offend against Article 85, the court should not help to create that offence by forcing this defendant or other potential licensees into accepting its terms.

89. Mr. Barling argues that the same principles apply to a case in which a patentee or, more precisely, someone who has acquired rights in or over patents, seeks to enforce them so as to force competitors into offensive contracts.

93. As I have said, it seems to me that it is at least arguable that the purpose of these proceedings is to force the defendant or others to enter into Standard Licences. If such licences offend against the Treaty of Rome, then it is at least arguable that the court may decline to give the plaintiff all the relief it seeks in its writ.

95. In the light of these considerations the defence must be allowed to proceed to trial if the Standard Licence or the Philips/Sony agreement offend against Article 85.

96. As I have already noted, the major objection is to the alleged unfairness of the royalty rate. It is said to be too high or discriminatory or both. The potential breach of Article 85(1) can be formulated in the following way with respect to the Philips/Sony agreement. That agreement takes away from each of the signatories the ability to compete with each other in relation to CD patents. Each agrees to impose on the licensees for its patents the royalty which the other party accepts as reasonable. If the royalties are excessive, it is the agreement between the plaintiff and Sony which is the direct cause of their imposition and the present proceedings are the mechanism used by the plaintiff and Sony to ensure that all comers abide by that rate.

97. Unless the court can be convinced at this stage that there is no hope of the defendants making out these allegations, then it must be at least arguable that the plaintiff has breached Article 85 in the Philips/Sony agreement and is trying to force the defendants into signing an offensive agreement which also offends against that Article. It seems to me that that would give rise to an arguable defence.

100. The truth may be that the agreements offend against the letter of Article 85(1) but are sufficiently for the general public good to qualify for exemption under Art. 85(3). But that is of no assistance to the plaintiff here because only the Commission has power to grant exemption and, as noted, the plaintiff has not applied for it.

101. The defendants' argument in relation to royalties has a rather unreal air about it. They say that the royalty rates were acceptable when the licences were first granted but are too high now. They have become an abuse. They ask for them to be reduced. But if that was to be done, no doubt those licensees who originally paid the high royalty will be able to argue that the reduction in favour of the defendants is the application of dissimilar conditions to equivalent transactions, contrary to Article 85(1). Whichever way the plaintiff goes it is exposed to an Article 85 challenge. But the fact that both cannot be right does not mean that one or other of them is necessarily not arguable. At this stage the court is only concerned with whether the defendants' pleading is unarguable. With regard to all of the royalty related allegations, with considerable misgiving, I have come to the conclusion that they are arguable.

102. However even on this part of the case I can not see how the allegation of suppression of technology can survive. It is not said that the establishment of the international standards forces anyone to make CDs to those standards. All the standards do is establish an accepted technical specification so that manufacturers of players and discs can choose to make sure that their respective products recognise and interface with each other to the benefit of both. It is the establishment of protocols and specifications which enable the greatest numbers of manufacturers to share in and develop the market. No doubt the success of the standards makes it less attractive to develop an alternative set of protocols and specifications but this is a reflection of the success of the standards in attracting enough voluntary adherents. Neither the Philips/Sony agreement nor the Standard Licence are pleaded as forcing or encouraging licensees to adopt the standard. The standards would constitute the same commercial incentive to conformity whether or not the Philips/Sony agreement and Standard Licence exist. Furthermore the encouragement of competitors to accept standards is not anti-competitive simply because the defendants have chosen to refer to it as a suppression of technology. Notwithstanding the pejorative labels the defendants have used in their pleadings, it is not arguably anti-competitive for the plaintiff and Sony to have tried to encourage the establishment of such standards.

103. Similarly even at this stage it does not appear to me that the defendant's plea of "tying", i.e. that licensees are forced to take a licence under all the patents, is arguably anti-competitive. Taken by itself it alleges no more than that competitors who sign up are given complete freedom to make whichever types of CDs they wish. Absent special considerations, which are not pleaded here, charging a uniform price for entry to the market cannot be anti-competitive particularly when it is apparent and not disputed that the resultant market is highly competitive so that no-one is alleged to be able to control the price of goods on it. This plea should be struck out in relation to Article 85 also.

104. Finally, I have come to the conclusion that the pleaded case under Article 85 relating to the grant back clause is also unarguable. The defence does not set out clearly in what way the clause is said to be anti-competitive. It appears that there are two core allegations. The first is that the grant back is unfair to the licensee because it lasts too long and is too wide in scope. However this plea has to be read in the context of the rest of the defence. As noted above, the grant back provision entitles the granting party to impose "reasonable, non-discriminatory conditions" on the recipients. Absent any or any credible pleading that this is a sham, it completely undermines the defendants' complaint.

105. The second core allegation is expressed as follows:

107. This does not support the allegation made. Rights in non-club patents only have to be passed on to club members to the extent that the licensee has been given the right by the non-club party to grant licences. In other words it only applies to those patents where the third party is content for the technology to be licensed on to other people. There is no material in the defence which supports the assertion that this clause will suppress patent licensing by third parties or will deter Standard Licence licensees from seeking out licenses from third parties.

108. From what has been said above, all relief sought in the counterclaim is unarguable to the extent that it is dependent on the Article 86 allegations. Mr. Lasok has also argued that the prayer for relief by way of damages based on the alleged breaches of Article 85 is unarguable. Since the defendants have not taken a Standard Licence, have not paid royalties and have not held back from making CDs it is impossible for them to say that they have suffered any loss by reason of the plaintiff's activities. Indeed, at the moment they are benefiting by not having to bear a royalty burden while all their competitors do. Although I think this argument has much to commend it, I can see no inconvenience or adverse cost consequences of leaving the prayers for relief, insofar as still pursued, in the counterclaim. It will be for the judge who hears this dispute to determine what relief is appropriate if any of the Article 85 pleas are made out on the facts.

109. For the reasons set out above, I have come to the conclusion that only that part of the Treaty of Rome pleading relating to Article 85 and the unfair royalty rates is arguable. The other paragraphs should be struck out. Similarly the prayers for relief relating to Article 86 should be struck out. Since I have held that one part of the pleading can survive, it might be said that the simpler course would be to allow all of the pleas to continue so that they can be determined at the full trial. However I do not think that is the right approach. Each discrete plea under the Treaty of Rome is likely to involve extensive discovery and evidence. If a plea is not arguable it should be struck out now rather than be left to generate extra and unnecessary costs.

110. For the reasons set out above, the surviving Treaty of Rome pleas should be tried separately from the patent issues and should be stayed pending the outcome of the defendants' complaint to the Commission.