In this case, the CJEU (on referral from the Court of Appeal in Paris) has ruled that Article 101 of the Treaty on the Functioning of the European Union (TFEU) does not prevent the licensor of a patent licence agreement from requiring a licensee to pay royalties for the entire duration of the agreement, notwithstanding the revocation of the licensed patent(s) or the absence of patent infringement.
In 1992, Genentech entered into a non-exclusive worldwide patent licence with Hoescht's predecessor for the use of a human cytomegalovirus enhancer which made it possible to improve the effectiveness of the cellular process used for the production of proteins. The licence had provisions in it obliging the parties to refer any dispute arising under the licence to arbitration. The technology was the subject of a European Patent and two US patents. The European patent was subsequently revoked in 1999, whereas the US patents were the subject of infringement and revocation actions after termination of the licence, both of which failed.
Under the licence agreement, Genentech undertook to pay consideration comprising three elements: a one-off fee; a fixed annual research fee; and 'running' royalties of 0.5% levied on the sales of finished products. Genentech paid the first two elements, but never paid any royalties. In 2008, Hoescht and Sanofi-Aventis (Hoescht's parent company) requested information regarding the finished products which gave rise to their entitlement to receive royalties. Genentech then terminated the licence agreement.
Hoescht and Sanofi-Aventis believed that Genentech had used the enhancer in the manufacture of Rituxan (a cancer drug) and other medicinal products, and launched arbitration proceedings for the payment of royalties. The arbitrator in those proceedings held that Genentech was required to pay royalties on the sales of Rituxan, notwithstanding that the European patent had been revoked. It was also held that Genentech could not recover the up-front and annual fees previously paid. The reasoning was that Genentech had agreed to make payments to the licensors in return for the certainty of avoiding patent litigation, and Genentech had received the benefit of that certainty.
Genentech subsequently brought an action before the Court of Appeal in Paris, seeking annulment of the arbitral award. In those proceedings, the Court referred to the CJEU the question of whether Article 101 TFEU prevents the licensor from requiring a licensee to pay royalties for the entire duration of the agreement, notwithstanding the revocation of the licensed patent or the absence of patent infringement. Article 101 TFEU prohibits, amongst other things, agreements between undertakings which may affect trade between EU Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. Genentech argued that because it was obliged to pay royalties, but its non-licensed competitors were not, this distorted competition.
Advocate General Wathelet's Opinion
Arguments were submitted by the licensors and the French Government that this question was inadmissible and could not be answered by the CJEU, because by agreeing to arbitration the parties had agreed that the dispute should be contained within the arbitration process. However Advocate General Wathelet rejected these arguments and ruled that EU competition law takes pre-eminence, and the question was admissible.
Wathelet considered that the question to be asked was not whether Genentech was commercially disadvantaged by the arbitrator's interpretation of the licence agreement, or whether with the benefit of hindsight it would not have entered into the agreement - the aim of Article 101 TFEU is not to regulate commercial relations between undertakings in a general way.
In the Opinion, Wathelet cited Ottung (C-320/87), where it was held that licence agreements may include clauses imposing a royalty obligation for reasons that are unconnected with a patent.
Wathelet was of the opinion that the arbitral award confirmed that Genentech's obligation to pay royalties flowed not from the use of the technology protected by the patents, but from the licence agreement alone. The commercial purpose of the agreement was to enable Genentech to use the technology while averting patent litigation and the associated risks. Genentech had benefitted from this 'temporary truce', and payments owed under the agreement were not reimbursable, notwithstanding the absence of infringement or revocation of the patents at issue.
Wathelet also considered it relevant that the obligation to pay royalties lasted only for the duration of the validity of the licence agreement, and that Genentech was freely able to terminate it with a short notice period of two months. Once the licence agreement was terminated, Genentech was in the same position as all other users of the technology at issue. It was also relevant that Genentech was not prevented from challenging the validity or infringement of the patents after termination of the agreement, which indeed they did.
The Advocate General concluded that Article 101 TFEU does not preclude effect being given, in the event of revocation or non-infringement of the patents at issue, to a licence agreement which requires the licensee to pay royalties for the sole use of the rights attached to the licensed patents where: 1) the commercial purpose of the agreement is to enable the licensee to use the technology at issue while averting patent litigation, and 2) the licensee may terminate the licence agreement by giving reasonable notice, even in the event of revocation or non-infringement.
The Advocate General's Opinion has today (7 July 2016) been upheld by the CJEU.
This case underlines the benefits of setting out in patent licence agreements the consequences of revocation of the licensed patent.
It also serves as a reminder that the purpose of Article 101 TFEU is not to regulate commercial relations between undertakings in a general way, but to prohibit anti-competitive agreements. However, it is still important to bear Article 101 in mind when drafting licence agreements: long notice periods, or onerous post-termination provisions (such as an obligation not to bring revocation proceedings which continue long after termination of the licence) may well offend against Article 101.