Background

Article 101 TFEU

Article 101 TFEU prohibits agreements and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. Article 101 TFEU lists specific types of agreement which have this effect, including agreements requiring the other party to accept supplementary obligations which have no connection with the contract’s subject matter.

The dispute

In 1992 a predecessor of Hoechst granted Genentech a worldwide non-exclusive licence for the use of a human cytomegalovirus enhancer (the “enhancer”). The enhancer was later used by Genentech to manufacture a drug called Rituxan. The technology was subject to one European patent and two U.S. patents. The European patent was revoked in 1999. Under the licence agreement Genentech undertook to pay, as consideration for the right to use the enhancer, a fixed fee for the issue of the licence, a fixed annual research fee and a ‘running’ royalty on sales of finished products. Genentech paid the one-off fee and research fee but never paid the running royalty. 

In 2008 Genentech responded to Hoechst and Sanofi-Aventis’s request for information regarding Genentech’s use of the enhancer by terminating the licence. Hoechst and Sanofi-Aventis commenced an arbitration against Genentech, claiming the unpaid running royalty. Hoechst and Sanofi-Aventis also brought separate actions in the U.S. for infringement of the U.S. patents but these were dismissed.

The arbitrator held that the commercial purpose of the licence agreement was to avert litigation in relation to validity of the patents. The arbitrator took the view that the subsequent revocation of the European Patent did not relieve the licensee from paying the running royalty, as the commercial purpose of the agreement had been fulfilled, and thus awarded Hoechst and Sanofi-Aventis damages amounting to the value of the royalty plus simple interest, a total of €110 million. Genentech challenged the award before the Paris Cour d’Appel under Article 101 TFEU, claiming that it put them at a competitive disadvantage against third parties who could use the technology freely and without charge in the period after patent revocation.

The AG’s opinion

The AG commented that the aim of Article 101 TFEU is not to regulate commercial relations between undertakings generally, but rather to prohibit types of agreements which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition. The AG went on to cite the judgment in Ottung (320/87, EU:C:1989:195) in which the ECJ held that a licence agreement could impose a royalty obligation for reasons unconnected with a patent, and that such a clause may instead reflect a commercial assessment of the value of exploitation granted by the licence agreement. Per Ottung, such an obligation may breach Article 101 TFEU where the licence agreement either does not grant the licensee the right to terminate the agreement by giving reasonable notice or seeks to restrict the licensee’s freedom of action after termination.

Genentech cited Windsurfing International (193/83, EU:C:1986:75), as authority for the proposition that Article 101(1) TFEU is infringed if a patent licensee is required to pay royalties calculated on the basis of the net selling price of a product which is not covered by the patent. In that judgment, the CJEU held that calculating royalties based on the net selling price of a complete sailboard could restrict competition with regard to boards which were not covered by a patent, noting that demand for rigs and for boards was separate.

However, the AG distinguished Windsurfing on the basis that in that case the patentee had required the licensee to accept supplementary obligations which had no connection with the subject matter of the agreement, which is expressly prohibited by Article 101(1)(e) TFEU. In contrast, in this dispute, the running royalty was not an obligation with no connection with the subject matter of the licence agreement. Because the commercial purpose of the licence agreement was to enable Genentech to use the technology while avoiding litigation, and Genentech was able to terminate the licence by giving short notice of two months, thus putting it in the same position as anyone else wanting to use the technology, no breach of Article 101(1) TFEU had occurred. 

The AG concluded that Article 101(1) TFEU is not breached by an obligation on a patent licensee to pay royalties for the sole use of the rights attached to the licensed patents where (i) the commercial purpose of the agreement is to enable the licensee to use the technology at issue while averting patent litigation, provided that the licensee is (ii) able to terminate the licence agreement on reasonable notice, (iii) may challenge the validity or infringement of the patents, and (iv) retains freedom of action after termination.

Comment

It should be noted that the AG’s opinion is persuasive and non-binding and a final decision by the CJEU is expected later this year. However, if followed, the opinion confirms the position in Ottung and that the specific terms of a licence agreement are central when determining whether a licence agreement imposing royalties infringes Article 101 TFEU.

If the opinion is followed, the CJEU will confirm that Article 101 does not prevent patentees from enforcing royalty payments where a licensed patent has been declared invalid. It is to be assumed that the same will apply where a patent has expired. This is significant as patent licences in the lifesciences sector often feature “backloaded” payments, given the uncertainty involved in predicting whether a new technology will succeed. A CJEU judgment which follows this opinion will therefore provide some comfort that such backloaded payments are legitimate. However, given the risk of inadvertently failing to adhere to the four conditions set out by the AG, and the fact that US courts take a different view of this matter, licensors should also nonetheless still take great care in determining the financial provisions of their licences.