In its 7 July 2016 judgment in Genentech, the Court of Justice of the European Union (“CJEU”) ruled that competition law is no bar to the enforcement of a royalty obligation in a licence agreement even if the licensed right is declared invalid.

The case concerned a patent licence dispute about the payment of back royalties. The issue was originally determined by an arbitrator (who held that the back royalties were payable), and ultimately found its way to the CJEU for a ruling on the application of EU competition law.

The arbitration concerned a dispute under a non-exclusive patent licence for a human cytomegalovirus (“HCMV”) enhancer, originally entered into in 1992 between Behringwerke and Genentech, which required the payment of running royalties. In 1999, the licensed European patent was revoked by the European Patent Office, but two US patents remained in force.

In 2008, Hoechst (the successor to Behringwerke) asked Genentech about the number of products it had sold, as no running royalties had ever been paid. Genentech terminated the agreement and Hoechst responded by launching arbitration proceedings against Genentech for breach of the agreement, on the grounds that Genentech had been using the HCMV enhancer in its products.

In September 2012, the arbitrator found that Genentech should be liable for royalties throughout the period of the licence, despite the invalidity of the European Patent, on the basis that the licence had been granted to enable Genentech to use the relevant technology without the risk of litigation.

Genentech subsequently appealed this decision to the Paris Court of Appeal, seeking annulment of the award on the basis that the arbitrator’s interpretation of the licence agreement put Genentech at a competitive disadvantage to competitors who had not been required to pay for the HCMV enhancer. The agreement was therefore said to violate Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and to be unenforceable. The Paris Court of Appeal in turn asked the CJEU for a preliminary ruling on whether Article 101 TFEU prevents a licence agreement from requiring royalty payments when the underlying IP right has been revoked.

The CJEU held that Article 101(1) TFEU does not prohibit contractual obligations of this type, provided the licensee remains free to terminate the contract on reasonable notice. The CJEU considered that the payment of royalties was the price for the right to exploit the licensed technology without risk of litigation. Going beyond the case in hand, it also noted that as an obligation to continue to pay royalties post-expiry of the licensed intellectual property is not contrary to Article 101(1), the same is also true of the payment of back royalties relating to a period during which the validity and infringement of the relevant intellectual property rights (“IPRs”) was not resolved.

While recent case law and European Commission policy has emphasised that licensees must remain free to challenge licensed IPRs, this ruling shifts the balance back in favour of licensors, by making clear that they can insist on payment of royalties until termination of any licence. The ability for licensors to structure licences in a way that requires the licensee to pay royalties after expiry or in the event that the patent is found to be invalid may have commercial benefits, in particular where licensed products require a significant lead-in period to become profitable. However, competition law is unlikely to look favourably on onerous termination provisions, as they run the risk of being regarded as disadvantaging licensees in relation to their competitors. This may mean that there is no guarantee that such expected financial rewards will materialise in practice. Licensees should equally be aware that such royalty provisions are enforceable in the EU (and, for now, in the UK), but should consider carefully before exercising any termination rights, in particular if the licence also covers related know-how, or other patents which have not yet expired. While the position in the EU is now relatively clear, both licensors and licensees should note that US law takes a contrary approach, at least where post-expiry royalty obligations are concerned, as was affirmed just last year in Kimble v. Marvel.