European Union: European Court Of Justice Rules Payment Of Royalties Under Licence Agreement Where Patent Was Held Invalid May Be Compatible With Article 101 TFEU

Last Updated: 6 September 2016
Article by Thibaut D'hulst

Most Read Contributor in Belgium, March 2017

On 7 July 2016, the Court of Justice of the European Union (the "ECJ") issued its judgment on a request for a preliminary ruling from the Paris Court of Appeal, which had enquired whether Article 101 TFEU precludes a licensee from paying royalties pursuant to a licensing agreement when the patent which is the subject of that licensing agreement has been held invalid (Case C-567/14, Genentech v Hoechst).

The case concerns a long-standing patent dispute relating to a licence agreement signed in 1992 between Behringwerke, the licensor (of which Sanofi-Aventis Deutschland, a subsidiary of Hoechst, is a successor), and Genentech (a subsidiary of Roche). The licence agreement provided for running royalties in the amount of 0.5% based on the manufacture of a medicine incorporating a patented substance even if, in the country of manufacture, the patent was subsequently found to be invalid.

In 2008, Hoechst commenced ICC arbitration proceedings for the payment of royalties, subsequent to which Genentech was ordered to pay over EUR 108 million plus interest dating from 1998. Genentech then requested the Paris Court of Appeal to set aside the arbitration award arguing that ordering the payment of running royalties is contrary to Article 101 TFEU and the principle of free competition, as the licensee must bear unjustifiable costs for a technology which is no longer patented and is thus accessible without restriction.

On 9 December 2014,  the Paris Court of Appeal made a request for a preliminary ruling to the ECJ for clarification. In March 2016, Advocate General Wathelet delivered his opinion in which he opined that Article 101 TFEU is not breached if the commercial purpose of the licence agreement is to avoid patent litigation, provided the licensee is able to terminate the licence by giving reasonable notice and retains freedom of action after termination (by, for example, challenging the validity or the infringement of the patent).

In its judgment, the ECJ established that the beneficiary of a patent licence must pay the agreed royalty for the use of technology, even where such use does not give rise to an infringement, or where the technology is deemed never to have been protected following the annulment with retroactive effect of the patent.

First, the ECJ clarified that the question from the Paris Court of Appeal not only refers to the case of a revocation of patents, but also to the case of non-infringement of the licensed patents, since Genentech had argued in the main proceedings that it was required to pay the running royalty in the absence of any infringement, contrary to the terms of its licence agreement.

Second, the ECJ recalled the existence of old case-law on the issue of exclusive licence agreements (namely, case 320/87 Kai Ottung v Klee & Weilbach), which determines that the obligation to pay a royalty, even after the expiry of the period of validity of the licensed patent, may reflect a commercial assessment of the value to be attributed to the possibilities of exploitation granted by the licence agreement, especially when the obligation to pay is embodied in a licence agreement entered into before the patent was granted. In other words, royalty is the price to be paid for commercially exploiting patented technology whilst ensuring that the licensor will not bring legal proceedings for an infringement against the licensee. The ECJ crucially added that if the licensee may freely terminate the agreement by giving reasonable notice, an obligation to pay a royalty throughout the validity of the agreement cannot fall under the prohibition set out in Article 101 TFEU.

The ECJ therefore concluded that EU competition rules do not prohibit the imposition of a contractual requirement providing for payment of a royalty for the exclusive use of technology that is no longer covered by a patent, as long as the licensee is free to terminate the contract. According to the ECJ, if the licence agreement is still valid and can be freely terminated by the licensee, the royalty payment is due, even where industrial-property rights derived from patents which are granted exclusively cannot be used against the licensee due to the fact that the period of their validity has expired.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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