Paying Royalties for Technology that Competitors Can Use for Free – AG Wathelet’s Genentech Opinion
The Court of Justice of the European Union (CJEU) recently issued its opinion on a question referred to it by the Paris Court of Appeal regarding the provisions of Article 101 of the Treaty on the Functioning of the European Union (TFEU), which deal with anticompetitive agreements. The question at issue was whether Article 101 TFEU must be interpreted as precluding effect being given, where patents are revoked, to a license agreement that requires the licensee to pay royalties for the sole use of the rights attached to the licensed patent. Sanofi-Aventis v. Genentech, Case C-567/14 (CJEU, Mar. 17, 2016) (Wathelet, AG).
In 1992, Hoechst granted a license to Genentech for a human cytomegalovirus enhancer. The licensed technology was subject to one European patent and two patents issued in the United States. In 1999, the European Patent Office revoked the European patent.
Under the license agreement with Hoechst, Genentech was obliged to pay a one-off fee, a fixed annual research fee and a running royalty based on sales of finished products. Genentech never paid the running royalty, however, and in 2008 it notified Hoechst and Sanofi-Aventis (Hoechst’s parent company) that it was terminating the license. Hoechst and Sanofi-Aventis believed that Genentech had used the enhancer to manufacture its blockbuster drug Rituxan and was therefore liable to pay the running royalty on its sales of that drug.
Sanofi-Aventis initiated two separate actions. In the United States, it brought an action alleging that Genentech infringed the two US patents. The US courts ultimately decided that there was no infringement of the patents in question. Sanofi-Aventis also submitted an application for arbitration against Genentech before the International Court of Arbitration to recover the royalties.
In the arbitral award, the sole arbitrator held that Genentech had manufactured Rituxan using the enhancer and that the company was therefore required under the license to pay Sanofi-Aventis the running royalties. According to the arbitrator, the license’s commercial purpose was to avert all litigation on validity. Thus, payments already made under the license could not be reclaimed, and payments due remained due regardless of whether the patent had been revoked or was not infringed.
Genentech brought an action before the Paris Court of Appeal seeking annulment of the arbitral award. The company relied on public policy arguments, claiming that a requirement of payment for the use of technology that Genentech’s competitors could use without charge put Genentech at a competitive disadvantage and contravened Article 101 TFEU. The Paris Court of Appeal stayed the proceedings and referred the preliminary question to the CJEU.
AG Wathelet’s Opinion
Payment of Running Royalties
Genentech argued that the payment of a running royalty where the patent was revoked and where there was no infringement not only affected trade between Member States, but also constituted a restriction on competition. As noted, Genentech also argued that it was placed at a competitive disadvantage in the market since it was required to pay for the use of a technology that its competitors could take advantage of freely and without charge.
In his opinion, Advocate General (AG) Wathelet reiterated that the aim of EU competition law is not to regulate commercial relations between companies, but to prohibit anticompetitive agreements. He relied on the CJEU’s judgment in C-320/87 Ottung, which held that an obligation to pay a royalty that is unconnected with a patent may implicate Article 101(1) TFEU if the license agreement either (1) does not grant the licensee the right to terminate the agreement or (2) seeks to restrict the licensee’s freedom of action after termination.
AG Wathelet noted that Genentech’s obligation to pay royalties was stipulated to last only for the duration of the license agreement, and that Genentech could terminate the license by giving notice (thereby placing Genentech in the same position as all other users of the enhancer). He also argued that Genentech’s freedom of action was not restricted and that it was not subject to any non-challenge obligations.
The AG’s answer to the question referred to the CJEU was therefore “no.” He considered that Article 101 TFEU does not preclude effect being given, in the event of revocation or non-infringement of patents protecting a technology, to a license agreement that 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 license agreement by giving notice, even in the event of revocation or non-infringement.
Competition Law and Annulment of Arbitral Awards
During the proceedings before the Paris Court of Appeal, the French government and Sanofi-Aventis argued that because of certain limitations on the review of arbitration awards under French law, the reference for a preliminary ruling in the present case was inadmissible.
AG Wathelet considered such limitations on the scope of the review of international arbitration awards to be contrary to the principle of effectiveness of EU law. Referring to C-126/97 Eco Swiss, the AG noted that Article 101 TFEU constitutes a fundamental provision that is essential for accomplishment of the tasks entrusted to the European Union. In particular, AG Wathelet opined that a Member State court’s review of whether international arbitral awards are contrary to public policy rules could not be conditioned by whether this question was raised or debated during the arbitration proceedings, nor could it be limited by national law prohibiting the merits of the award being reconsidered (as Sanofi-Aventis and the French government had tried to argue). He concluded that parties to agreements that might be regarded as anticompetitive could not put such agreements beyond the reach of review under EU competition law by resorting to arbitration.
Practice Note: It remains to be seen whether the CJEU will follow the AG’s opinion, which, in respect of the antitrust issues, is uncontroversial and relies on settled EU case law. Should the highest court of the European Union agree with AG Wathelet’s conclusions, licensors and licensees should consider the following points:
License agreements should expressly provide for what should happen with regard to payment of royalties where and if the patents in question are revoked.
If a licensor intends to extract royalties for patents that are no longer protected, the license agreement should expressly state that the licensee is free to terminate the agreement by giving notice and to challenge the validity of the patents. Licensors should also ensure that licensees are not otherwise restricted in using the licensed technology following termination of the license agreement. In order to limit antitrust scrutiny, licensors should consider including (e.g., in the preamble of a license agreement) a brief commercial explanation of why royalties are charged for unpatented technology.
If negotiations regarding royalties for unpatented technology prove problematic (e.g., because of the licensee’s bargaining power), licensors may consider applying a lower royalty rate following expiry of patent protection. Doing so would ensure the license agreement’s continuation post-expiry of the patents.
Extra caution is advised with regard to international license agreements that have a US element, because US law does not permit licensors to collect royalties accruing after expiry of the patent.
Michal Kocon is co-author of this article.