On 7 July 2016, the Court of Justice of the European Union (CJEU) handed down a judgment on whether Article 101 of the Treaty on the Functioning of the European Union (TFEU) must be interpreted as precluding effect being given to a licence agreement requiring the licensee to pay royalties for the use of a patent which has been revoked (Sanofi-Aventis v. Genentech, Case C-567/14).
In 1992, Hoechst granted a licence 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 licence 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 licence. 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 licence to pay Sanofi-Aventis the running royalties. According to the arbitrator, the commercial purpose of the licence was to avert all litigation on validity. Thus, payments already made under the licence could not be reclaimed, and payments due had to be made regardless of whether the patent had been revoked or was not infringed.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 to pay 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 made a preliminary reference to the CJEU.
The CJEU explained that royalties reflect the parties’ assessment of the value that is attributable to the possibility of exploiting licensed technology, and that this assessment may still apply after expiry of the period of validity of the patent. The court referred to established case law (Case 320/87 Ottung) and held that, where the licensee is free to terminate the licence agreement by giving reasonable notice, an obligation to pay a royalty throughout the validity of the agreement (i.e., not the validity of the IP rights) does not fall within the purview of the Article 101(1) TFEU prohibition.
The CJEU argued that Article 101(1) TFEU does not prohibit the imposition of a contractual requirement providing for payment of a royalty for the exclusive use of a technology that is no longer covered by a patent, on condition that the licensee remains free to terminate the contract. In this respect, the court noted that a royalty reflects (i) the price that is paid for the commercial exploitation of the licensed technology and (ii) a guarantee that the licensor will not enforce its IP rights against the licensee. As such, if the licence agreement is still valid and can be freely terminated by the licensee, the royalty payment is due even if the period of validity of the IP rights in question has expired.
This judgment by the CJEU highlights a number of practical considerations that licensors and licensees should be aware of when negotiating and concluding licence agreements.
First, licence agreements ought to expressly provide for what should happen with respect to the payment of royalties where and if the patents in question are revoked.
Second, if a licensor intends to extract royalties for patents that are no longer protected, the licence agreement should expressly state that the licensee is free to terminate the agreement by giving reasonable notice. Licensors should also ensure that licensees are not otherwise restricted in using the licensed technology following termination of the licence agreement. In order to limit antitrust scrutiny, licensors should consider including (e.g., in the preamble of a licence agreement) a brief commercial explanation of why royalties are charged for unpatented technology.
Third, if negotiations regarding royalties for unpatented technology prove difficult (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 that the licence agreement remains valid after expiry of the IP rights.
Fourth, extra caution is required when concluding international licence agreements that have a US element. This is because US law does not permit licensors to collect royalties accruing after patent expiry.