Should the terms of a licence agreement concerning a revoked patent be enforcable?

The long-running dispute between Hoechst and Genentech regarding the latter’s obligation to pay royalties on a revoked patent has elicited a statement from the Advocate General that has led to animated discussions regarding the potential clash between Article 101 of the treaty of the Functioning of the European Union (tFeU) and patent licences. The question is whether or not a licence agreement based on a revoked patent places the company at a competitive disadvantage vis-a-vis its competitors. According to the Advocate General, the short answer is no.

The issue at hand concerns a non-exclusive worldwide licence agreement from 1992 which allowed Genentech to use so called “enhancers”. The underlying European patent was revoked in 1999 due to lack of novelty. However, Genentech did not terminate the licence agreement until 2008 (the right to terminate the agreement on the grounds of convenience was an expressed right provided in the licence agreement, on the condition that two months’ notice was given). Up until the termination, Genentech paid the annual fees in accordance with the licence agreement.  However, the 0.5-per-cent running royalty, payable on product sales, was never paid.

The ICC arbitrator concluded that, according to the licencing agreement, Genentech was required to pay royalties for products made until the agreement was terminated. The arbitrator’s decision has been contested by Genentech in the Paris Court of Appeal. The company claims that an obligation to pay royalties on a retroactively-revoked European patent contradicts the interpretation of Article 101 TFEU, since Genentech would be placed at a disadvantage compared to its competitors, who are now able to use the enhancers without paying remuneration.

The Paris Court of Appeal referred the question below to the Court of Justice for a preliminary ruling:

‘Must the provisions of Article 101 TFEU be interpreted as precluding effect being given, where patents are revoked, to a license agreement which requires the licensee to pay royalties for the sole use of the rights attached to the licensed patent?’

As stated above, Advocate General Wathelet’s short answer to this question is no. A more detailed explanation of his opinion concluded that, if the commercial purpose of the licence agreement is to avert (patent-)litigation, and the licensee can:

• terminate the licence agreement by giving reasonable notice;
• challenge the validity or infringement of the patents; and
• retain his freedom of action after termination, an international arbitral award that obligates the licensee to pay royalties owed in accordance with the agreement and for the entire duration of the agreement, does not violate Article 101 TFEU, despite the revocation of the patent protecting the technology in question.

The Advocate General based parts of his statement on the CJEU’s judgement in Ottung (320/87, EU:C:1989:195), in which it was established that an obligation to pay royalties in accordance with a licence agreement after the patent in question had expired:

‘may infringe Article 101(1) TFEU where the license 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’.

While acknowledging the differences between Ottung and the circumstances of the case at hand, the Advocate General concluded that the approach taken in the former can be applied to the latter. Thus, since the licence agreement contained terms favourable to Genentech regarding termination and the subsequent time period, the Advocate General held that obliging Genentech to pay the royalties owed would not invoke Article 101(1) TFEU.

The statement made by the Advocate General follows the view expressed in the Technology Transfer Guidelines, Paragraph 184, which concludes that, concerning technology licence agreements, royalty arrangements are to be viewed as part of commercial negotiations, and thus, as falling outside of the scope of Article 101 TFEU.

In this context, it is interesting to note that the US Supreme Court established an opposite rule when ruling in Brulotte v Thys Co., 1964. The Court stated that a royalty payment cannot be charged beyond the life of the patent. This view has been criticized excessively in the patent sphere and  academic circles, which is why, to some degree, it came as  a surprise when the Supreme Court upheld the rule by its  ruling in Kimble v Marvel Enterprises, LLC in June 2015.

Which of these approaches is correct? The issue can be divided into two parts, based on the point in time when the patent was revoked. During the period in which the patent was valid, Genentech had access to a technology that others were excluded from, giving it a head start in that particular market. As far back as in the Nordic Committees’ statement published in NU 1963:6 p. 320, it was held that the revocation of a patent should be ex tunc (as though it never existed) with regards to infringement, and ex nunc (from this day forward) as concerns agreements. However, applicability is to be determined on a case-by-case basis and it is the terms of the licence agreement in question that will prove decisive. Since licence fees already paid can never be recovered, arguably, Genentech should not be able to avoid payment, given that it did not pay on time. Thus, it is reasonable that Genentech be obliged to pay the royalties in accordance with its agreement with Hoechst.

The complexity arises because the agreement was not terminated until nine years after the patent was revoked. In the interim, all Genentech’s competitors were able to use the technology without cost. According to the US approach, a former patent holder is not permitted to charge for the use of a technology that should never have been protected by a patent in the first place. The second approach is the one taken by Advocate General Wathelet, in which the freedom of contract is strong, and as long as it is possible for the licensee to terminate the contract easily and on reasonable terms, he is bound by its terms until such occurs.

We are still awaiting the CJEU’s preliminary ruling on the matter.