England and Wales High Court (Patents Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		7 February 2008

Mr. Justice Lewison:

	Paragraph
Introduction	1
The Judgments Regulation	7
The settlement agreement	8
Issues for decision	15
Burden and standard of proof	17
Is KBS UK a party to or bound by the settlement agreement?	22
The arguments based on German law	34
Challenge to the validity of the patents	40
Has KBS UK challenged the validity of the patents?	40
Is the non-challenge clause binding on KBS UK?	47
Result	52

Introduction

1. The Claimant ("KBS UK") is an English company which is part of the Knorr-Bremse Group ("KBS"), the world's largest manufacturer of brake systems. The Claimant is part of the commercial vehicles division of KBS and is a wholly owned subsidiary of Knorr-Bremse Systeme für Nutzfahrzeuge GmbH ("KBS GmbH"). The Defendant is a German company and is part of the Haldex Group ("Haldex"). Haldex is another leading manufacturer of brake systems. Together with the Wabco group of companies, the three groups dominate the manufacture and supply of commercial braking systems for the commercial vehicle industry.
2. In about 2001 KBS GmbH developed a "reset to ride" valve, (SV32), which was used to assist in the raising and lowering of the height of a truck trailer, and specifically to move the valve from the stop position to a drive position automatically in case the vehicle were to be driven with the valve placed in the stop position. The valve was pneumatically operated. KBS GmbH manufactured and offered the SV32 for sale in Germany. Haldex claimed that the SV32 infringed its German patent DE 4120824 and began proceedings in the Landgericht Düsseldorf (Regional Court of Düsseldorf) against Knorr GmbH. The Landgericht rejected Haldex's claim. Haldex appealed to the Oberlandesgereicht Düsseldorf (the Higher Regional Court of Düsseldorf). That court held that whilst the SV32 was not a literal infringement of 824, it did infringe upon a purposive construction. The operation of SV32 Valve for raising and lowering vehicle bodies was controlled by introducing additional functionality into the KBS GmbH Trailer EBS ("TEBS") which had been on the market since the 1990s. Haldex added a claim that TEBS infringed its German system patent, namely DE 4202729. Simultaneously KBS GmbH indicated that it would commence nullity proceedings in respect of both patents. These two patents are German national versions of European Patents Nos. 0 520 148 ("the 148 patent") and 0 520 147 ("the 147 patent") respectively.
3. The dispute was settled in early 2006 and the settlement was embodied in two written agreements: a settlement agreement and a licence agreement. Although Mr Mitcheson, appearing for Haldex, opened the application on the basis that he was relying both on the licence agreement and the settlement agreement, I think that he accepted in the course of his reply that it is the settlement agreement which is the one of relevance. I shall need to return to its detailed terms. At this stage it is sufficient to note that it dealt with both the 147 and 148 patents; and contained provisions prohibiting infringing the two patents or challenging their validity.
4. In 2007 Simon Craddock of KBS UK initiated the development of a new reset to ride valve which eventually became the SV3801. Mr Craddock says that this valve was designed wholly independently of KBS GmbH and will be made in (or at least assembled in) the UK for the UK market. He does not foresee that it will be made or sold in Germany. The SV3801 provides the reset to ride functionality by in essence having a rod connected to a spring which is subject to electromagnetic control. There is no pneumatic valve or control piston at all. In those circumstances KBS UK was confident that Haldex would acknowledge that it did not infringe either of the two European Patents covered by the settlement agreement. However despite seeking an acknowledgement of non-infringement during the course of the summer of 2007, none was forthcoming and thus the present proceedings were begun.
5. The Particulars of Claim accompanying the claim form pleads Haldex' ownership of the 147 and 148 patents; and alleges that the patents are in force. It then describes KBS UK's SV3801 valve and alleges that commercialisation of this valve will not infringe either patent. It then recounts the request for an acknowledgment of non-infringement and the failure by Haldex to give it. The sole relief specifically claimed is a declaration of non-infringement. There is no pleaded claim that either patent is invalid.
6. Haldex now apply for a stay of the proceedings on the ground that the parties have conferred exclusive jurisdiction on the Landgericht Düsseldorf.

The Judgments Regulation

7. Whether this court or the Landgericht Düsseldorf has jurisdiction is governed by Council Regulation EC No 44/2001 ("the Judgments Regulation"). The relevant parts of the Judgments Regulation are as follows:

i) Article 5.3 which provides that a person domiciled in a member state may be sued in another member state

"in matters relating to tort, delict or quasi delict, in the courts for the place where the harmful event occurred or may occur"

ii) Article 22 which provides that:

"The following courts shall have exclusive jurisdiction regardless of domicile:

4. in proceedings concerned with the registration or validity of patents…the courts of the Member State in which deposit or registration has been applied for has taken place or is under the terms of a Community instrument or an international convention deemed to have taken place.

Without prejudice to the jurisdiction of the European Patent Office under the Convention of the Grant of European patents signed at Munich on 5 October 1973, the courts of each Member State shall have exclusive jurisdiction, regardless of domicile, in proceedings concerned with the registration or validity of any European patent granted for that State"

iii) Article 23 which provides that:

"1. If the parties, one or more of whom is domiciled in a Member State, have agreed that a Court or the Courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. Such agreement conferring jurisdiction shall be either:

(a) in writing or evidenced in writing; or

(b) in a form which accords with practices which the parties have established between themselves; or

(c) [not relevant]"

"5. Agreements…conferring jurisdiction shall have no legal force if they are contrary to Articles 13, 17 or 21, or if the courts whose jurisdiction they purport to exclude have exclusive jurisdiction by virtue of Article 22."

The settlement agreement

8. The settlement agreement is expressed to be made between Haldex Brake Products GmbH (called "Haldex" in the agreement) and Knorr-Bremse Systeme für Nutzfahrzeuge GmbH (called "KB" in the agreement). Thus KBS UK was not expressed to be a party to the agreement. The KBS party was KBS GmbH alone. The preamble to the agreement included the following:

"Haldex are the proprietor of certain patents filed in Germany and in other countries, as listed in detail in Annexes 1 and 2 (hereinafter: PATENTS 1 and 2). PATENTS 1 and 2 are in force in Germany, where this is a German patent, and in Belgium, Spain, France, Great Britain, Italy, the Netherlands and Sweden, where this is a European patent. The countries in which PATENTS 1 and 2 are in force are defined as the "TERRITORY""

9. The listed patents include the 147 patent and the 148 patent. The preamble continues:

"The subject of PATENTS 2 is a control system for the random raising and lowering of the vehicle body of vehicles with pneumatic suspension equipped with level control. Haldex take the view that certain of KB's products, namely, among others, the products "SV 32." with "reset to ride" function and the "TEBS" indirectly infringe PATENTS 2 and for this reason have brought claims against KB before the Higher Regional Court in Düsseldorf. KB have disputed the indirect infringement and have threatened to bring a nullity suit against the German Patent DE 42 02 729 C2 before the Federal Patent Court in Munich.

This agreement is intended to settle the aforementioned legal dispute.

The intention is to avoid further legal disputes.

Against this background, the parties have agreed the following:"

10. Clause 1 of the agreement provided (so far as relevant):

"KB undertake with respect to Haldex, subject, for each case of contravention, to an appropriate contractual penalty to be set by Haldex, the appropriate nature of which will be decided on in cases of dispute by the Regional Court in Düsseldorf, from the time this agreement comes into force, to refrain from:

1. manufacturing, offering for sale, bringing onto the market or using, or importing or possessing for the above purposes, within the TERRITORY, pneumatic control valves as claimed in claim 1 of the patents named in Annex 1 (e.g. KB's raising/lowering valve of the type "SV 32." with "reset to ride" function), unless these actions are expressly permitted through any written supply agreement concluded between KB and Haldex or through § 5 of this agreement, whereby KB may, until 31 March 2006, fulfil their delivery obligations with respect to third parties entered into prior to 31.12.2005.

2. offering for sale to customers within the TERRITORY and/or supplying such customers with control valves (e.g. KB's raising/lowering valve of the type "SV 32.." with "reset to ride" function) and ABS/EBS control devices or other control devices (e.g. KB's "TEBS") which allow connection to a control valve with the settings Raise, Lower, Drive and Stop and can be used or applied making use of the PATENTS for control systems as claimed in claim 1 of the patents named in Annex 2 (e.g. KB's "reset to ride" system), if and insofar as these actions are not expressly permitted through any written licensing agreement concluded between KB and Haldex. …"

11. Clause 2 dealt with the termination of legal proceedings and said that "Both parties will bear their own costs". Clause 3 is headed "Non-challenge agreement" and provides:

"KB undertake neither to challenge PATENTS 1 and 2 or national parts of these patents themselves nor to support third parties in challenging these patents."

12. Clause 6 provided:

"The jurisdiction of the patent disputes division of the Regional Court in Düsseldorf is agreed for all disputes arising from this agreement."

13. Clause 7 stated:

"No verbal ancillary agreements to this agreement have been arrived at. Amendments and additions to the agreement must be in writing. The necessity for written form can only be waived in writing."

14. Clause 8 said that the agreement would come into effect on the date when it "is signed by the last of the two parties to the agreement".

Issues for decision

15. It is common ground that although Haldex is not domiciled in the UK KBS UK is entitled to sue in this court for a declaration of non-infringement, in the absence of any contractual impediment. Jurisdiction is conferred on this court by article 5.3 of the Judgments Regulation.
16. Accordingly, the issues I have to decide are:

i) Is there any contractual impediment to KBS UK bringing its action in this court? KBS UK says "No". Haldex says "Yes": the settlement agreement.

ii) Is KBS UK a party to or bound by the settlement agreement? KBS says "No". Haldex says "Yes". It is common ground that if the answer to this question is "No" then the application for a stay fails.

iii) If KBS UK is a party to or bound by the settlement agreement, it is common ground that a stay must be granted, unless this court has exclusive jurisdiction under article 22 of the Judgments Regulation. If this court has exclusive jurisdiction under article 22, it is common ground that any agreement to confer jurisdiction on the Landgericht Düsseldorf is ineffective so far as this application is concerned. The answer to this question depends upon whether KBS UK has challenged or is entitled to challenge the validity of the patents.

iv) KBS UK says that even if it is party to or bound by the settlement agreement, the "no challenge" clause is anti-competitive and therefore void.

v) Haldex says that whatever the status of the "no challenge" clause, KBS UK has not in fact challenged the validity of the patents in its pleaded case, and the outcome of this application must be decided on the pleadings as they stand.

Burden and standard of proof

17. The question whether this court has jurisdiction is an issue which arises only on this application. It does not go to the underlying merits of the dispute. In Canada Trust Co v Stolzenberg [1998] 1 WLR 547 Waller LJ held that:

i) There is no different standard of proof depending on whether or not a point will only arise at the jurisdiction stage;

ii) The relevant standard is that of "good arguable case";

iii) It reflects the fact that that the question before the court is one which should be decided on witness statements from both sides and without full disclosure and/or cross-examination, and in relation to which therefore to apply the language of the civil burden of proof applicable to issues after full trial is inapposite;

iv) It is the concept which the phrase reflects on which it is important to concentrate, i.e. of the court being satisfied or as satisfied as it can be having regard to the limitations which an interlocutory process imposes that factors exist which allow the court to take jurisdiction.

18. The decision of the Court of Appeal on this point was upheld by the House of Lords: [2002] 1 AC 1.
19. In Konkola Copper Mines plc v. Coromin Ltd [2006] 1 Lloyd's Rep 410 the Court of Appeal reaffirmed that the test is that of "good arguable case". Commenting on the Canada Trust case Rix LJ said:

"Waller LJ then went on to speak of the flexibility of the "good arguable case" test. Thus he contrasted the case where the jurisdictional factor, viz. breach of contract within the jurisdiction, could raise an issue whether there was a contract at all, with the different case, where the jurisdictional factor, viz domicile of the defendant, does not enter into the merits of the parties' dispute and so will not arise at trial at all. In the former case the court, although needing to be satisfied as to the existence of the contract, will not wish to give "even the appearance of pre-trying the central issue" while scrutinising "most jealously" the factor which provides jurisdiction, whereas in the latter case that scrutiny will be affected only by the limitations of an interlocutory process rather than by any inhibitions as to trespassing on to the merits of an ultimate trial."

20. Rix LJ also said that where the English court has jurisdiction, but it is alleged that that jurisdiction has been displaced or excluded by a foreign jurisdiction agreement, the burden lies on the party relying on the agreement.
21. In Bols Distilleries BV v. Superior Yacht Services Ltd [2007] 1 WLR 12 the claimant alleged that jurisdiction had been conferred by agreement on the courts of Gibraltar. The Privy Council also approved the "good arguable case" test as explained by Waller LJ in the following terms:

"Despite the submissions of counsel for the defendants to the contrary, it appears to the Board that, if the standard of "a good arguable case" is properly understood and applied, there is no risk that the effectiveness of the Regulation will be impaired. The rule is that the court must be satisfied, or as satisfied as it can be having regard to the limitations which an interlocutory process imposes, that factors exist which allow the court to take jurisdiction. In practice, what amounts to a "good arguable case" depends on what requires to be shown in any particular situation in order to establish jurisdiction. In the present case, as the case law of the Court of Justice emphasises, in order to establish that the usual rule in article 2(1) is ousted by article 23(1), the claimants must demonstrate "clearly and precisely" that the clause conferring jurisdiction on the court was in fact the subject of consensus between the parties. So, applying the "good arguable case" standard, the claimants must show that they have a much better argument than the defendants that, on the material available at present, the requirements of form in article 23(1) are met and that it can be established, clearly and precisely, that the clause conferring jurisdiction on the court was the subject of consensus between the parties."

Is KBS UK a party to or bound by the settlement agreement?

22. It is common ground that the substantive provisions of the settlement agreement, made in Germany between two German corporations, is governed by German law. However, Mr Vanhegan, appearing for KBS UK, says that the existence and scope of the jurisdiction agreement, and in particular the question whether it binds KBS UK, must be determined as a matter of the autonomous law of the Judgments Regulation. Mr Mitcheson, on the other hand says that once the existence of a jurisdiction clause is established as a matter of the autonomous law of the Judgments Regulation, its scope, and in particular the question who is bound by it, it to be determined by the national law applicable to its substantive provisions.
23. In Powell Duffryn plc v Petereit [1992] ECR I-1745 Powell Duffryn was a shareholder in a German company. The company's constitutional documents contained a choice of jurisdiction clause. The first question was whether the jurisdiction clause in the company's constitutional documents was an agreement between the company and its shareholders for the purposes of the Brussels Convention (which was in similar terms to the Judgments Regulation). The ECJ held:

"The concept of "agreement conferring jurisdiction" is decisive for the assignment, in derogation from the general rules on jurisdiction, of exclusive jurisdiction to the court of the Contracting State designated by the parties. Having regard to the objectives and general scheme of the Brussels Convention, and in order to ensure as far as possible the equality and uniformity of the rights and obligations arising out of the Convention for the Contracting States and persons concerned, therefore, it is important that the concept of "agreement conferring jurisdiction" should not be interpreted simply as referring to the national law of one or other of the States concerned."

24. Accordingly the court held that "the concept of "agreement conferring jurisdiction" in Article 17 must be regarded as an independent concept." It also said that the purpose of the formality requirements was to ensure that the consensus between the parties is in fact established. It held that the jurisdiction clause in the company's constitutional documents amounted to an agreement for the purposes of the Convention. As the court explained:

"By becoming and by remaining a shareholder in a company, the shareholder agrees to be subject to all the provisions appearing in the statutes of the company and to the decisions adopted by the organs of the company, in accordance with the provisions of the applicable national law and the statutes, even if he does not agree with some of those provisions or decisions."

25. It will be noted in particular that the question whether the jurisdiction clause bound a shareholder was answered as a matter of the law of the Convention rather than as a matter of national law. The second question was whether the jurisdiction clause satisfied the formal requirements of the Convention. The court pointed to the contrast between a shareholder and a party to a contract of sale. It held that the formal requirements were satisfied. This too was decided according the law of the Convention. The third question was whether the dispute that had arisen fell within the scope of the jurisdiction clause. The court said:

"Consequently, the reply to the third part of the national court's … question must be that it is for the national court to interpret the clause conferring jurisdiction invoked before it in order to determine which disputes fall within its scope"

26. In Benincasa v. Dentalkit Srl [1997] ETMR 447 the ECJ said that a clear distinction must be drawn between a jurisdiction clause and the substantive provisions of the contract in which it is incorporated. It added:

"A jurisdiction clause, which serves a procedural purpose, is governed by the provisions of the Convention, whose aim is to establish uniform rules of international jurisdiction. In contrast, the substantive provisions of the main contract in which that clause is incorporated, and likewise any dispute as to the validity of that contract, are governed by the lex causae determined by the private international law of the State of the court having jurisdiction."

27. The court continued:

"26. Next, as the Court has consistently held, the objectives of the Convention include unification of the rules on jurisdiction of the Contracting States's courts, so as to avoid as far as possible the multiplication of the bases of jurisdiction in relation to one and the same legal relationship and to reinforce the legal protection available to persons established in the Community by, at the same time, allowing the plaintiff easily to identify the court before which he may bring an action and the defendant reasonably to foresee the court before which he may be sued (Case 38/81 Effer v. Kantner [1982] ECR 825, paragraph 6, and Case C-125/92 Mulox IBC [1993] ECR I-4075, paragraph 11).

27. It is also consonant with that aim of legal certainty that the court seised should be able readily to decide whether it has jurisdiction on the basis of the rules of the Convention, without having to consider the substance of the case.

28. The aim of securing legal certainty by making it possible reliably to foresee which court will have jurisdiction has been interpreted in connection with Article 17 of the Convention, which accords with the intentions of the parties to the contract and provides for exclusive jurisdiction by dispensing with any objective connection between the relationship in dispute and the court designated, by fixing strict conditions as to form (see, in this regard, Case C-106/95 MSG, Judgment of February 20, 1977, unreported BAILII: 1997] EUECJ C-106/95, paragraph 34).

29. Article 17 of the Convention sets out to designate, clearly and precisely, a court in a Contracting State which is to have exclusive jurisdiction in accordance with the consensus formed between the parties, which is to be expressed in accordance with the strict requirements as to form laid down therein. The legal certainty which that provision seeks to secure could easily be jeopardised if one party to the contract could frustrate that rule of the Convention simply by claiming that the whole of the contract was void on grounds derived from the applicable substantive law."

28. However, the court also added:

"31. It must be added that, as the Court has held, it is for the national court to interpret the clause conferring jurisdiction invoked before it in order to determine which disputes fall within its scope (Case C-214/89 Powell Duffryn [1992] ECR I-1745, paragraph 37). Consequently, in the instant case it is for the national court to determine whether the clause invoked before it, which refers to "any dispute" relating to the interpretation, performance or "other aspects" of the contract, also covers any dispute relating to the validity of the contract."

29. In Coreck Maritime GmbH v. Handelsveem BV [2001] CLC 550 the third question posed to the ECJ was whether a jurisdiction clause agreed between a carrier and a shipper and embodied in a bill of lading was valid as against a third party bearer of the bill of lading who succeeded by virtue of the applicable national law to the shipper's rights and obligations when he acquired the bill of lading. The ECJ answered that question as follows:

"23 It is sufficient to note that the court has held that, in so far as the jurisdiction clause incorporated in a bill of lading is valid under art. 17 of the Convention as between the shipper and the carrier, it can be pleaded against the third party holding the bill of lading so long as, under the relevant national law, the holder of the bill of lading succeeds to the shipper's rights and obligations (Tilly Russ, para. 24, and Castelletti, para. 41).

24 It follows that the question whether a party not privy to the original contract against whom a jurisdiction clause is relied on has succeeded to the rights and obligations of one of the original parties must be determined according to the applicable national law.

25 If he did, there is no need to ascertain whether he accepted the jurisdiction clause in the original contract. In such circumstances, acquisition of the bill of lading could not confer upon the third party more rights than those attaching to the shipper under it. The third party holding the bill of lading thus becomes vested with all the rights, and at the same time becomes subject to all the obligations, mentioned in the bill of lading, including those relating to the agreement on jurisdiction (Tilly Russ, para. 25).

26 On the other hand, if, under the applicable national law, the party not privy to the original contract did not succeed to the rights and obligations of one of the original parties, the court seised must ascertain, having regard to the requirements laid down in the first paragraph of art. 17 of the Convention, whether he actually accepted the jurisdiction clause relied on against him."

30. In my judgment these authorities lead to the following conclusions:

i) Among the objectives of the Judgments Regulation are:

a) allowing the claimant easily to identify the court before which he may bring an action and the defendant reasonably to foresee the court before which he may be sued;

b) enabling the court seised to be able readily to decide whether it has jurisdiction on the basis of the law of the Regulation, without having to consider the substance of the case;

ii) In order to further those objectives a jurisdiction clause, which serves a procedural purpose, is governed by the provisions of the Judgments Regulation, whose aim is to establish uniform rules of international jurisdiction. It is not governed by the national law that applies to the substantive provision of the contract;

iii) The concept of an agreement is an autonomous concept of the law of the Judgments Regulation;

iv) If under the law of the Judgment Regulation a valid agreed jurisdiction clause is found to exist as between the original contracting parties, it will bind a successor to the rights and obligations of one of those parties;

v) The principle that a successor is bound is part of the law of the Regulation; but whether there has been such a succession in any particular case is a question for the national law governing the substantive contract;

vi) If there has been no succession, the court seised must ascertain whether the person against whom the jurisdiction clause is invoked actually accepted the jurisdiction clause relied on against him;

vii) The court must decide this question by reference to the requirements laid down in the first paragraph of article 23 of the Judgments Regulation, which is also a matter of the law of the Regulation, rather than the national law applicable to the substantive provisions of the contract;

viii) The formal requirements of that paragraph are strict;

ix) It is for the party relying on the jurisdiction clause to demonstrate clearly and precisely that the formal requirements are met;

x) The scope of a valid jurisdiction clause, in the sense of delimiting the disputes that fall within it, is a question of the national law governing the contract.

31. I therefore conclude that the question whether KBS UK is bound by the jurisdiction clause in the settlement agreement is governed by the law of the Judgments Regulation rather than by German law. Mr Mitcheson did not suggest that KBS UK was a successor to the right and obligations of KBS GmbH. His argument was that KBS UK was bound by the jurisdiction clause in addition to KBS GmbH which was and remained also bound by it. That submission was, as I understood it, based entirely on principles of German law. In my judgment the principles of German law are not the applicable principles for deciding this question. Where a succession is not in question, the formal requirements of article 23 require the court to be satisfied (or as satisfied as it can be on an interlocutory application) that the person against whom the jurisdiction agreement is invoked actually consented to it.
32. Article 23 of the Judgments Regulation applies where "the parties" have agreed that a particular court is to have jurisdiction. The agreement must be in writing or evidenced in writing. The purpose of the formal requirements is that of legal certainty. One of the fundamental parts of any agreement is who is a party to it. In my judgment therefore, the formal requirements of article 23 require that there is a written record of who is party to the agreement. On the face of it, in the context of the Judgments Regulation, "the parties" appears to mean the parties to the dispute. If that is right, then there is no agreement between KBS UK and Haldex; and certainly no written agreement. The only agreement is between KBS GmbH and Haldex. But even if "the parties" means the parties to the contract, then again there is no written contract between KBS UK and Haldex. Clauses 2 and 8 are drafted on the basis that there are only two parties to the agreement. It is also noteworthy that KBS GmbH and Haldex agreed by clause 7 of the settlement agreement that there were no verbal ancillary agreements to the written agreement. For Haldex now to submit that KBS UK were a party to or bound by the written agreement would necessarily impugn this clause.
33. I conclude therefore that there is no valid jurisdiction clause binding on KBS UK. It follows that the application must be dismissed. However, in deference to the arguments that I heard, and in case this application goes further, I will express my views briefly on the other issues argued.

The arguments based on German law

34. Haldex commissioned a report from Dr Marcus Grosch, the head of German patent litigation at Allen & Overy. He is a German lawyer based in Mannheim. Dr Grosch's report proceeds on the basis that under the Judgments Regulation "it is settled that the issues of validity and interpretation of the jurisdiction clause had to be based on the proper law of the contract i.e. German law" (para 4.1 (b) (v)). For the reasons I have given I disagree with this, and in any event which system of law applies is not a matter of German law (on which Dr Grosch's evidence is admissible) but is a matter of the law of the Judgments Regulation which applies equally in our courts. The next section of his report deals with the scope of the "cease and desist" obligation as a matter of German law. There is no need for me to examine this question as it does not go to the question whether KBS UK is bound by the agreement.
35. Dr Grosch turns to the question of the parties to the agreement in section 4.4 of his report. He points out that only KBS GmbH and Haldex are signatories to the settlement agreement. He says that, under German law, the two companies are separate legal entities and that, as a rule affiliates of such a separate legal entity are not bound by agreements entered into by that entity. However, he refers to an exception to this rule based on para 242 of the German Code on Private Law. Apart from labelling this the "General Principle of Good Faith" and making some (unspecified) link between this principle and that of estoppel in the common law, Dr Grosch does not elucidate the general principle any further. Moreover the furthest that Dr Grosch goes is to say that if KBS UK acted against the jurisdiction clause this "could qualify as bad faith in violation of" para 242. He does, it is true, quote a precedent in the shape of a decision of the German Supreme Court. But that precedent concerned a case of an ex-employee who was the sole shareholder in a company which challenged the validity of a patent held by his former employer. The foundation for the decision was that the sole shareholder and the company were in a commercial sense, one and the same person. Quite how this doctrine squares with the general principle that an agreement by a company does not bind its subsidiary as a matter of German law was not explained. Dr Grosch does not say that the doctrine of good faith actually makes a person falling within its scope a party to the agreement in question. Later in his report (para 4.4. (d) last sentence) he seems to suggest that it does not. Moreover, the application of this doctrine to the present case is a question of fact. Mr Vanhegan submits, and I agree, that if it were appropriate to inquire into the facts, they point to the conclusion that KBS UK was not a party to the settlement agreement. In particular:

i) KBS UK was not involved in the litigation in Germany;

ii) KBS UK was not involved in the negotiations or signing of the settlement agreement;

iii) Although KBS UK is a wholly owned subsidiary of KBS GmbH, it is not under the actual day to day control of KBS GmbH;

iv) KBS GmbH and KBS UK have a common director (Mr Flach) but Mr Flach was not directly involved in the negotiations leading to the settlement agreement, nor did he represent that KBS UK was consenting to the terms of the Settlement Agreement or that it should be bound by it. There is no evidence that anything said or done by him reached or was relied on by Haldex or its advisers;

v) KBS UK did not know of the terms of the settlement agreement until after it was concluded;

vi) The settlement agreement was left to the lawyers to document, and they documented it in terms which included clause 7.

36. Dr Grosch does not refer to clause 7 at all, or explain how it might impact on a decision of a German court to prevent KBS UK from acting contrary to the agreement.
37. Dr Grosch also says that under German law "a party can be bound by an agreement even if such party is not specifically mentioned in the Agreement and is [not] signatory to such Agreement (provided that there is no form requirement)." However, in the present case there is a form requirement; so this principle does not appear to apply.
38. Finally Dr Grosch considers the question whether KBS GmbH had authority to bind KBS UK. He refers to a principle which "applies in case there is no explicit authorisation (Power of Representation) but the impression/trust was caused at the counterpart that the acting person would be authorized." The only person from Haldex present at any of the meetings that led to the settlement agreement who made a witness statement was Mr Seglö. However, his witness statement does not say that he had the impression or trust that KBS GmbH was authorised to act on behalf of its subsidiaries. What he does say, however, is that it was left to the lawyers to implement the agreement. And they implemented it with clause 7.
39. Accordingly, even on the assumption that German law is the correct law for determining whether KBS UK is bound by the settlement agreement, I do not consider that Haldex has the better of the argument.

Challenge to the validity of the patents

Has KBS UK challenged the validity of the patents?

40. As I have mentioned the pleaded case contained in the Particulars of Claim claims only a declaration of non-infringement. It does not assert that either patent is invalid. In his first witness statement Mr Craddock says that as far as he can see, if Haldex maintains the position that the SV3801 valve infringes either of the two patents, then Haldex' construction of the patents must be so wide that KBS UK "will have no option but to put the validity of the patents in issue". He said that he had given instructions to his patent attorneys to do that. In his second witness statement he confirmed that he had instructed his patent attorneys to apply to invalidate the patents, but that he had been advised that the correct procedural route was to file a counterclaim for invalidity once Haldex had served its defence. At the hearing of the application Mr Vanhegan offered an undertaking by KBS UK either to counterclaim in this manner or to amend its claim form to claim that the patents were invalid.
41. Mr Mitcheson's response was a simple one. There was no pleaded claim of invalidity; and the clock stopped when the application for a stay was issued. It would be quite wrong either for the court to base a decision on what might be brought into a claim may amendment: that would just be guessing. It would also be quite wrong for KBS UK to be allowed to improve its prospects of resisting a stay by altering its case in the light of the application.
42. The starting point is the decision of the ECJ in Gesellschaft für Antriebstechnik mbH & Co KG v. Lamellen und Kupplungsbau Beteiligungs KG [2006] FSR 45. In that case the court held:

"In the light of the position of Art. 16(4) within the scheme of the Convention and the objective pursued, the view must be taken that the exclusive jurisdiction provided for by that provision should apply whatever the form of proceedings in which the issue of a patent's validity is raised, be it by way of an action or a plea in objection, at the time the case is brought or at a later stage in the proceedings."

43. Thus the fact that validity of a patent is called into question at a stage later than the commencement of the proceedings does not affect the rule that exclusive jurisdiction is conferred on the court of the member state in which the patent is registered. However, that still leaves the question: how is the issue of the validity of a patent to be raised?
44. Mr Mitcheson relied on a passage from the judgment of Laddie J in Coin Controls Ltd v Suzo International (UK) Ltd [1997] FSR 660, subsequently approved by the Court of Appeal in Fort Dodge Animal Health Ltd v Akzo Nobel NV [1998] FSR 222. The approved passage reads:

"As I have said, validity is frequently in issue, and sometimes the most important issue, in English patent infringement proceedings. This is now enshrined in section 74(1)(a) of the Patents Act 1977. We have always taken the view that you cannot infringe an invalid patent. This was restated by Aldous J. in the passage from the Plastus case [1995] R.P.C. 438, 447, quoted above. However the fact that the defendant can challenge validity does not mean that he will. In the Plastus case, he did not. Until he does, only infringement is in issue and the approach in the Pearce case [1977] Ch. 293 applies. The court cannot decline jurisdiction on the basis of mere suspicions as to what defence may be run. But once the defendant raises validity the court must hand the proceedings over to the court having exclusive jurisdiction over that issue. Furthermore, since article 19 obliges the court to decline jurisdiction in relation to claims which are "principally" concerned with article 16 issues, it seems to follow that jurisdiction over all of the claim, including that part which is not within article 16, must be declined. It may well be that if there are multiple discrete issues before a court it will be possible to sever one or more claims from another and to decline to accept jurisdiction only over those covered by article 16, but I do not believe that that approach applies where infringement and validity of an intellectual property right are concerned. They are so closely interrelated that they should be treated for jurisdiction purposes as one issue or claim."

45. It is true that Laddie J said that the court cannot decline jurisdiction on the basis of "mere suspicion" about what defence might be run. But he also said that once a defendant "raises validity" the court having exclusive jurisdiction must decide the issue. In later passage in the same judgment Laddie J elucidated what he meant by raising the issue. He said:

"The result is that since I have been told and it is apparent that the validity of the German and Spanish patents is being challenged by the defendants, the claims of infringement are caught by article 19. I must decline to accept jurisdiction. The plaintiff may have anticipated this possible outcome. I was told that the day after the arguments before me finished, the plaintiff's solicitors wrote to the defendants' solicitors saying that invalidity "is not a matter which can be pleaded here in respect of the German and Spanish patents." The defendants are entitled to plead the invalidity of the patents put against them and the plaintiff cannot avoid the effect of article 19 by telling them that they cannot. However, rather than waste the costs of requiring the defendants to plead invalidity here as a precursor to the claims being struck out, where, as here, it is plain that validity is to be put in issue, the court should take the course of striking out the relevant claims forthwith."

46. It is clear in my judgment that Laddie J held that where it is clear that validity "is to be" put in issue (i.e. in the future) the court should decide the application on the basis that validity is one of the issues in the case. It is not necessary for the allegation of invalidity to be formally pleaded. I respectfully agree. If the current action were to be stayed, what would prevent KBS UK starting a new action tomorrow alleging invalidity as well as non-infringement? Even if Haldex rushed off to the Landgericht, that court would have to decline jurisdiction once the allegation of invalidity of the UK designations of the European patents had been raised here. I cannot see the point of that. In my judgment the challenge to validity of the patents has been raised, with the consequence that, unless KBS is bound by the non-challenge clause, this court has exclusive jurisdiction.

Is the non-challenge clause binding on KBS UK?

47. I have already decided that the settlement agreement (which contains the non-challenge clause) is not binding on KBS UK. It follows, therefore, that it is not bound by the non-challenge clause. There is no non-challenge clause in the licence agreement, which is why Mr Mitcheson accepted that the settlement agreement was the relevant one for the purposes of this application.
48. Mr Vanhegan submitted that in any event the non-challenge clause is void as being a contravention of article 81 EC. In Windsurfing International Inc v European Commission [1988] FSR 139 the ECJ considered the effect of a non-challenge clause in a patent licensing agreement. It said:

"[89] The seventh of the clauses which the Commission regards as incompatible with Article 85(1) relates to the obligation on the licensees not to challenge the validity of the licensed patents.

[90] On that point, Windsurfing International argues that the interest of the public in an essentially free system of competition, an interest which in any event was protected by the thorough and extensive patent application procedure provided for by the German legislation, was better served by a no-challenge clause making it easier to be granted a licence by the patentee.

[91] The Commission, however, takes the view that even where a licensee is only able to challenge a patent because of the information which has become available to him as a result of his privileged relationship with the licensor, the public interest in ensuring an essentially free system of competition and therefore in the removal of a monopoly perhaps wrongly granted to the licensor must prevail over any other consideration.

[92] It must be stated that such a clause clearly does not fall within the specific subject-matter of the patent, which cannot be interpreted as also affording protection against actions brought in order to challenge the patent's validity, in view of the fact that it is in the public interest to eliminate any obstacle to economic activity which may arise where a patent was granted in error.

[93] It must therefore be held that the obligation referred to in paragraph (3) of Article 1 of the decision constitutes an unlawful restriction on competition between manufacturers."

49. In Bayer AG and Maschinenfabrik Hennecke GmbH v. Süllhöfer [1990] F.S.R. 300 the ECJ held that it made no difference that the non-challenge clause was contained in an agreement settling litigation. The court said:

"[14] In the Commission's view, an undertaking not to challenge an industrial property right included in a licensing agreement should, in principle, be considered to be a restriction of competition. Such a clause is, however, compatible with Article 85(1) of the EEC Treaty when it is included in an agreement whose purpose is to put an end to proceedings pending before a court, provided that the existence of the industrial property right which is the subject-matter of the dispute is genuinely in doubt, that the agreement includes no other clauses restricting competition, and that the no-challenge clause relates to the right in issue.

[15] The point of view put forward by the Commission cannot be accepted. In its prohibition of certain agreements between undertakings, Article 85(1) makes no distinction between agreements whose purpose is to put an end to litigation and those concluded with other aims in mind. It should also be noted that this assessment of such a settlement is without prejudice to the question whether, and to what extent, a judicial settlement reached before a national court which constitutes a judicial act may be invalid for breach of Community competition rules.

[16] A no-challenge clause included in a patent licensing agreement may, in the light of the legal and economic context, restrict competition within the meaning of Article 85(1) of the EEC Treaty.

[17] In regard to that context, it should be pointed out that there is no restriction on competition when the licence granted is a free licence in as much as, in those circumstances, the licensee does not suffer from the competitive disadvantage involved in the payment of royalties.

[18] Nor does a no-challenge clause contained in a licence granted subject to payment of royalties restrict competition when the licence relates to a technically outdated process which the licensee undertaking did not use."

50. In the present case it is common ground that both KBS and Haldex are part of an oligopoly in the field of braking systems for commercial vehicles and that their trade is conducted throughout the EU. On the face of it, therefore, a non-challenge clause is likely to distort competition and affect trade between member states. There is no question in the present case of a free licence. Nor is it possible to say that the technology in question is outdated, since Haldex relies on the two patents as preventing the commercialisation of the SV3801 valve.
51. I do not have to decide whether KBS UK are right in their contentions, but I do consider that they have the better of the argument. There is at the least a good arguable case that, even if KBS UK are bound by the non-challenge clause (which in my judgment they are not) that clause is void because it contravenes article 81 EC.

Result

52. I dismiss the application.