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October 2016

After the dramatic summer of 2016, it can be difficult to find time to consider recent European jurisprudence. Indeed, for UK practitioners in the wake of UK's decision to leave the EU, there is considerable uncertainty as to the future effect of CJEU judgments in UK courts, only to be resolved by the final terms of the "Brexit" deal. In the meantime, however, business carries on. And one important driver of the UK economy is the development and licensing of technology.

In a recent CJEU judgment, the European court clarified when royalties can be collected under patent licences, giving rise to practical points for parties and practitioners.

The licence at issue was a non-exclusive, worldwide patent licence concluded in 1992 between Genentech and Behringwerke AG, a predecessor to Hoechst. In brief, the licence granted Genentech the right to use a human cytomegalovirus enhancer to produce biological medicinal products, in exchange for (i) a one-off fee; (ii) a fixed annual research fee; and (iii) a running royalty of 0.5% on net sales of finished products. The enhancer technology was the subject of a European patent, which was revoked in 1999, as well as two US patents, which remained in force at the time of the CJEU judgment, but were found by a California court not to have been infringed.

Genentech paid the one-off fee and the annual research fees, but never paid any royalties under the agreement. In 2008, Sanofi-Aventis (a Hoechst subsidiary) commenced arbitration proceedings against Genentech, believing that Genentech had used the licensed enhancer to develop a cancer drug, Rituxan®, without paying the royalties due. In 2013, the sole arbitrator ordered Genentech to pay damages to Hoechst, amounting to the unpaid royalties plus interest. Genentech subsequently brought an action before the Court of Appeal in Paris, to have that arbitral award annulled.

The Court of Appeal in Paris referred to the CJEU the question of whether Article 101 of the Treaty on the Functioning of the European Union ("TFEU") prevents a licensor from requiring payment of royalties under licensed technology for the full duration of the agreement, where the licensed patent has been revoked or found not to have been infringed. Genentech argued that being forced to pay royalties and related costs of approximately €169m, when its competitors were able to carry out the same activities without payment, amounted to a distortion of competition.

The CJEU Judgment

The CJEU upheld the opinion of Advocate General M. Wathelet, citing Ottung (C-320/87). In that judgment, the court found that a royalty could continue to be imposed even after expiry of a patent, as long as the licensee could freely terminate the agreement by giving reasonable notice. Applying Ottung, the CJEU held that the value to Genentech of having the licence agreement in place was that Genentech was free to use the enhancer technology without fear of costly infringement proceedings being brought by Hoechst. This freedom had commercial value to Genentech and the royalty and other payments under the licence agreement were compensation for that freedom. The royalty and fees should not be reimbursed, even though the licensed patent was revoked, as Genentech had been able freely to terminate the licence, on 2 months' notice.

In summary, the CJEU held that Article 101 TFEU does not prevent a licensee from having to pay a royalty under a licence agreement for the use of a patented technology for the full duration of such agreement, even if the licensed patent is (i) revoked or (ii) found not to have been infringed by the licensee, provided that the licensee is able freely to terminate such agreement on reasonable notice.

Commentary

In light of the Genentech decision, parties should consider carefully whether they wish to define the consequences of revocation, non-infringement or expiry of the licensed patents.

• Licensees may wish to incorporate a clause releasing them from royalty obligations if a patent is revoked or expires, together with taking practical steps to monitor the status of the licensed patents. For the licensee, it is clearly preferable that it is able to terminate the licence on a territory-by-territory basis as it may, for example, wish to terminate in respect of Europe, but retain a licence under an equivalent US patent which remains in force.
• On the other hand, for a licensor wishing to put in place a royalty for the full term of the agreement, the agreement must permit the licensee to terminate the agreement freely, on reasonable notice. In the judgment discussed above, the CJEU considered 2 months' notice to be reasonable.

Of course, the effect of Brexit on the future application of this decision in the UK remains to be determined. However, UK competition law closely mirrors EU law at present, and Article 101 TFEU will continue to apply to agreements made by UK companies that have an effect on the EU market. As many of the international licence agreements affected by this decision have a global, or at least European, reach, the UK government may find it difficult to justify moving UK competition law away from the principles outlined above.

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