A 100 Million Euro question referred to the CJEU: can a licensee be forced to pay royalties when the patent is held invalid?, by Pierre Véron and Amandine Métier, Véron & Associés
Genentech v. Hoechst and Sanofi‑Aventis Deutschland, cour d’appel de Paris, 23 September 2014, Docket № 12/21810
On 23 September 2014, the cour d’appel de Paris decided to refer to the Court of Justice of the European Union the following question:
“Should the provisions of Article 81 of the Treaty, now Article 101 of the Treaty on the Functioning of the European Union, be interpreted as an obstacle to giving effect, in case of invalidation of the patents, to a licence agreement which imposes on the licensee royalties for the sole use of the rights attached to the patents under licence?”
Through this referral the court questions the compatibility with European Union competition law of an arbitral award which ordered Genentech, the licensee, to pay €100,000,000 royalties to Hoechst, the licensor, for a patent held invalid in Europe.
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Background
The origin of the dispute lies in a licence agreement signed on 6 August 1992 (with retroactive effect on 1st January 1991) between the German company Behringwerke, the licensor (of which Sanofi‑Aventis Deutschland, a subsidiary of Hoechst, is a successor), and Genentech, the licensee.
The licence agreement was governed by German law and required that disputes be settled by arbitration in accordance with the rules of the International Chamber of Commerce (“ICC”).
The 1992 licence agreement concerns notably:
– European patent № 0 173 177 entitled « Enhancer for eukaryotic expression systems », filed on 16 August 1985 claiming priority of the German patent application № 3431140 of 24 August 1984 and which was eventually revoked by the Technical Board of Appeal of the EPO on 12 January 1999 ‑ T 0070/95 ;
– US patent № 5,849,522 entitled « Enhancer for eukaryotic expression systems », filed on 6 June 1995 claiming the same priority of the German patent application № 3431140 of 24 August 1984 ;
– US patent № 6,218,140 entitled « Enhancer for eukaryotic expression systems », filed on 9 November 1994, claiming the same priority of the German patent application № 3431140 of 24 August 1984.
The technology is about the use of certain DNA sequences, known as enhancers, which had been identified in human cytomegalovirus (an enhancer is a DNA sequence that, when introduced into a cell that produces a drug, enables the cell to produce the drug at a much higher rate than would ordinarily be possible).
The 1992 licence agreement specified that in exchange for fixed annual payments, Genentech could practice the patents for research purposes; Genentech made corresponding payments from 1992 to 2008.
In addition, the 1992 license agreement required that Genentech pay a 0.5% running royalty on the sale of commercially marketable goods incorporating a “Licensed Product”; the agreement defined the licensed products as “materials (including organisms), the manufacture, use or sale of which would, in the absence of this Agreement, infringe one or more unexpired issued claims of the Licensed Patent Rights.”
Genentech (which became a member of the Swiss group Roche in March 2009) developed rituximab, which was eventually marketed, under the brand Rituxan® (known in Europe under the name MabThera®), by Roche, the world’s biggest seller of cancer drugs; the drug is approved for use in rheumatoid arthritis, chronic lymphocytic leukaemia and non‑Hodgkin’s lymphoma; it became Roche’s top‑selling drug, with yearly sales around €5,000,000,000.
However, Genentech did not identify Rituxan as a licensed product, nor did it pay the 0.5% royalty on it.
In letters dated 30 June 2008 and 15 July 2008, Sanofi said that this product infringed the licensed patents.
Shortly thereafter, on 27 August 2008, Genentech notified Sanofi of its intent to terminate the Agreement on 27 October 2008.
Proceedings
On 24 October 2008, Hoechst commenced arbitration proceedings for the payment of royalties, pursuant to the Agreement, before the ICC.
Three days later, Genentech filed a complaint for a declaratory judgment of invalidity and non‑infringement in the United States District Court for the Northern District of California.
On the same day, Sanofi filed an infringement complaint in the United States District Court for the Eastern District of Texas.
Infringement and non-infringement proceedings in the U.S. courts
The two U.S. court actions were consolidated in the Northern District of California, which granted a summary judgment of non‑infringement.
The finding of non‑infringement was affirmed by the Court of Appeal for the Federal Circuit (Sanofi‑Aventis Deutschland GmbH v. Genentech, Inc., No. 2011-1397 (Fed. Cir. Mar. 22, 2012)
First award
On 2 July 2009, the International Court of Arbitration of the ICC, following the proposal of the Swiss national committee, appointed Mr Pierre A. Karrer as sole arbitrator.
Alleging lis alibi pendens, Genentech requested the suspension of the arbitration.
This was rejected by the arbitrator according to a first partial award made in Paris on 26 March 2010, which also rejected the defences of non-arbitrability of the case and invalidity of the arbitration agreement.
Second award
In a second partial award made in Paris on 9 June 2011, the arbitrator stated that Rituxan “is produced with the help of the [patents‑in‑suit]” and granted the request by Hoechst for communication of the financial reports relating to Rituxan, a product manufactured by Genentech and alleged by Hoechst to infringe the claims of the U.S. patents under licence.
The arbitrator did not, however, decide the issue of liability at that time.
Anti-suit injunction proceedings brought by Genentech in the U.S.
Genentech moved the district court to enjoin Sanofi from continuing with the foreign arbitration.
The district court denied the motion and the Federal Circuit affirmed.
It found that the U.S. judgment of non-infringement was not dispositive as to the breach of the agreement, which was the issue in the foreign arbitration.
The Federal Circuit noted that because the arbitrator determined that a drug could be a licensed article under the agreement even if it did not contain the patented enhancers, the meaning of an infringing product in the U.S. case was different than a licensed product under the agreement.
Thus, the issues were not functionally the same.
Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., No. 12-1454 (Fed. Cir. May 10, 2013) see “Sanofi-Aventis Deutschland GmbH v. Genentech, Inc.: Freedom to Choose” by Alejandro I. Garcia.
Third award
In a third partial award made in Paris on 5 September 2012, the arbitrator held Genentech liable with regard to Rituxan and the other products having the same properties and reserved the decisions relating to the evaluation of the quantum.
According to the judgment of the cour d’appel de Paris, the arbitrator considered the commercial object of the agreement, interpreted according to Article 242 of the German Civil Code, which was to avoid any lawsuit on the validity of the U.S. patents during the period of validity of the licence agreement, and considered, consequently, that the parties had foreseen that “while the licence agreement is in force, running royalties are due based on the manufacture of Rituxan even if, in the country of manufacture, the patent for manufacture of Rituxan were subsequently found to be invalid, and therefore if the manufacture of Rituxan were found not to have infringed the local patent in the sense of the right to patents in the country of grant and of manufacture”.
The judgment handed down on 23 September 2014 by the cour d’appel de Paris, which decides to refer a question to the Court of Justice of the European Union, deals with a recourse against this third arbitral award.
Fourth and final award
In a final award made in Paris on 25 February 2013, the arbitrator ordered Genentech to pay to Hoescht €108,322,850 plus interests from 1998.
It further ordered Genentech to pay to Hoescht €634,649.88 plus $555,907.23 for costs (in addition to €391,420036 plus $293,565.27 granted in the third award).
Action to set aside the awards
As the awards were made in Paris, French courts have jurisdiction to deal with recourses over them.
Genentech moved to have all the four awards set aside.
According to Article 1520 of the French Civil Procedure Code, an award may only be set aside where:
1. the arbitral tribunal wrongly accepted or declined jurisdiction; or
2. the arbitral tribunal was not properly constituted; or
3. the arbitral tribunal ruled without complying with the mandate conferred upon it; or
4. due process was violated; or
5. recognition or enforcement of the award is contrary to international public policy.
The recourse, therefore, is in no way an appeal against the award: it is strictly limited to these narrow grounds. The last grounds of recourse set forth in Article 1520 of the French Civil Procedure Code ― whether recognition or enforcement of the award is contrary to international public policy ― was at issue in the judgment of the cour d’appel de Paris, which decides on the recourse against the third award made on 5 September 2012 and refers the case to the CJEU.
Position of the cour d’appel about EU competition law
Genentech reminded the cour d’appel that the licence agreement provided for the payment of royalties only for “materials (including organisms), the manufacture, use or sale of which would, in the absence of this Agreement, infringe one or more unexpired issued claims of the Licensed Patent Rights.”
It, therefore, submitted that the decision of the arbitrator, who finds a breach of the licence agreement without finding any patent infringement, conflicts with European competition law and especially Article 101 of the Treaty on the Functioning of the European Union, because Genentech manufactures rituximab, an active compound of Rituxan, sold in the territory of the European Union (Germany, France, Italy), so that the resulting restriction has a direct effect on the flow of trade between the Member States.
Genentech further argued that since, according to the case-law of the CJEU, royalties cannot be paid to a licensee for the use of an invention that does not constitute a patent infringement, the award violates European competition law by ordering Genentech to pay royalties while no patent infringement was found, “requiring it to bear, for a technology which is not patented and is accessible without restriction, costs which are unjustified”, in contravention of the principle of free competition.
The cour d’appel notes that the parties agreed that the licence agreement would be interpreted and executed in accordance with the law of the Federal Republic of Germany and says that it “is not contested that it authorises the licensor to claim royalties from the licensee until the termination of the agreement, notwithstanding the subsequent invalidation of the patents to which the granted rights were attached”;
This summary of German law on the consequences of the invalidity of the licensed patent on the licensee’s obligation to pay royalties for the time period after a judgment finding a patent invalid may appear surprising.
It is true indeed that, according to German law, a licensor may claim the payment of royalties that the licensee did not pay until the moment the decision on invalidity is final and binding because, up to that moment, the patent was in force.
However, it appears that, after a final and binding decision holding a patent invalid, there is no room for a claim to collect running royalties for the use of the patent.
This will be probably further discussed in this case.
Referral to the Court of Justice of the European Union
In view of this analysis, the cour d’appel concludes as follows:
“the arbitration award made the agreement applicable and considered that during the period of validity thereof the licensee was required to pay the royalties stipulated by the agreement even though the invalidation of the patents has a retroactive effect; the question therefore arises of knowing whether such agreement infringes the provisions of Article 81 of the Treaty, now Article 101 of the Treaty on the Functioning of the European Union as distorting competition within the internal market in that, by forcing the licensee to payment of royalties without cause by the effect of the invalidation of the patents attached to the granted rights, it inflicts a disadvantage in competition on the licensee;
consequently it is appropriate to refer to the Court of Justice of the European Union for the purpose of responding to the preliminary question set out in the operative part of the present judgement and postponing a ruling until the Court of Justice makes a decision;
These are the reasons why the cour d’appel de Paris decided, on 23 September 2014, to refer to the Court of Justice of the European Union the following question:
“Should the provisions of Article 81 of the Treaty, now Article 101 of the Treaty on the Functioning of the European Union, be interpreted as an obstacle to giving effect, in case of invalidation of the patents, to a licence agreement which imposes on the licensee royalties for the sole use of the rights attached to the patents under licence?”
Read the decision (in French) here.
Read the decision (in English) here.
