Patent royalties and competition law: the recent Genentech judgment of the Court of Justice of the European Union

On 7 July 2016, the Court of Justice of the European Union (CJEU) held a requirement to pay royalties for the licensed use of a patented technology for the entire duration of the licence not to be contrary to article 101 TFEU in the event of the revocation or non-infringement of the patent at issue (Case C-567/14, Genentech v. Hoechst and Sanofi-Aventis). This ruling shifts the balance back in favour of the licensors, while recent case law as well as the Commission had emphasised that licensees must remain free to challenge licenced IP rights.

In 1992, Behringwerke, now part of the Sanofi-Aventis pharmaceuticals group, granted Genentech a worldwide non-exclusive licence to use a certain human cytomegalovirus enhancer. Genentech used the virus enhancer to facilitate the transcription of a DNA sequence for the production of a biological medicinal product. 

In the licence agreement, Genentech i.a. undertook to pay a running royalty of 0,5 % on the net sales of the finished product, an obligation which it failed to fulfil. In 2008, the licensor enquired about the finished products Genentech had marketed without payment of the running royalty. Following this enquiry, Genentech terminated the agreement unilaterally. The licensor then filed arbitration proceedings against Genentech, which resulted in a decision forcing Genentech to pay the running royalty. 

In the context of proceedings for annulment of the arbitral award, the Paris Court of Appeal referred a number of questions to the CJEU regarding the compatibility of the agreement with competition law. More specifically, insofar as the licence agreement required the licensee to pay royalties which no longer served any purpose because the patents at issue had been revoked, the licensee was confronted with a competitive disadvantage. This motivated the court to call into question the agreement’s compatibility with article 101 TFEU.

According to the CJEU, this type of licence agreements is not necessarily problematic in view of EU competition law. In reaching this decision, the CJEU referred to the Ottung judgment (Case C-320/87), where the CJEU decided that an obligation to pay royalties after the expiry of the period of validity of a licenced patent could be compatible with 101 TFEU, provided that the licensee is at liberty to terminate the agreement by giving reasonable notice. The CJEU considered that such an obligation could reflect a commercial assessment of the value attributed to the exploitation of the licenced patent and that it was not per se anticompetitive. 

In the Genentech decision, the CJEU applied the Ottung judgment a fortiori, ruling that if an obligation to pay royalties may be compatible with 101 TFEU after the expiry of a patent (Ottung), the same applies before the expiry of the rights at issue. The CJEU concluded that the obligation to pay royalties for technologies that are no longer covered by a patent is not incompatible with article 101 TFEU, provided that the licensee is free to terminate the contract with reasonable notice. 

The reasoning of the CJEU is based on the idea that the royalty payment is the price to be paid for the right to exploit the licensed technology commercially, with the guarantee that the licensor will not enforce its industrial property rights. As long as the licence agreement at issue is still valid and may be terminated freely by the licensee, the royalty payment is due and the agreement is acceptable under article 101 TFEU.

One might wonder whether this new ruling from the CJEU is compatible with the Court’s previous holdings in the Huawei / ZTE judgment of 16 July 2015 (Case C-170/13), in which the Court emphasised that (potential) licensees of standards-essential patents should always have the option to challenge the validity and infringement of the patents they are licensing in. What good does this option do the licensee if – under the recent Genentech judgment – he may be required to keep paying royalties in the event of revocation or non-infringement of the patent anyway? 

In fact, the two judgments are not as incompatible as a first reading would suggest. In the Genentech judgment, the Court stressed that the obligation to continue paying royalties complies with competition law only if the licensee is at liberty to terminate the agreement by giving reasonable notice. This liberty generally does not exist for a truly standards-essential patent, where the licensee has no choice but to continue the licence agreement if he is to keep commercialising a standard-compliant product. In that case, obtaining a finding of invalidity or non-infringement is the licensee’s only option to discontinue the royalty payments. This aspect of dominance under Article 102 TFEU, so crucial in the standardisation context, is absent in the Genentech case, which was decided under Article 101 TFEU. This explains the apparent discrepancy between the two judgments.

Please contact us at CAPE IP Law if you have any questions about these judgments.