Thursday, October 23, 2014

The Cour d'Appel's Referral to the CJEU on Royalties

Pierre Véron and Amandine Métier recently published posts on both EPLaw and the Kluwer Patent Blog on Genentech v. Hoechst and Sanofi-Avenis Deutschland, in which the Cour d'appel de Paris on September 23, 2014 referred a question to the Court of Justice for the European Union (CJEU).  His posts also link to the Cour d'appel's judgment (in French) and to Véron & Associés' translation of it into English.  Here is the question referred to the CJEU in the original French, followed by the English translation:
Les dispositions de l'article 81 du Traité devenu l'article 101 du Traité sur le fonctionnement de l'Union européenne doivent-elles interprétées comme faisant obstacle à ce qu'il soit donné effet, en cas d'annulation des brevets, à un contrat de licence qui met à la charge du licencié des redevances pour la seule utilisation des droits attachés aux brevets sous licence?
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?
As Véron and Métier explain, Genentech and Hoechst/Sanofi's predecessor in interest were parties to an agreement under which Genentech could use for research purposes certain patents, including two U.S. patents and one European patent on enhancers for eukaryotic expression systems.  The EPO revoked the European patent in 1999 but the two U.S. patents noted above were never invalidated.  As discussed in a subsequent U.S. Federal Circuit opinion, Sanofi/Aventis Deutschland GmbH v. Genentech, Inc., 716 F.3d 586 (Fed. Cir. 2013), more about which in a moment,
The Agreement specified that in exchange for fixed annual payments, Genentech could practice the patents-in-suit for research purposes. Genentech made these payments from 1992 to 2008. In addition, the Agreement required Genentech to pay a running royalty of 0.5% on the sale of commercially marketable goods incorporating a “Licensed Product.” The Agreement defined 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.” The Agreement was governed by German law and required disputes to be settled by arbitration in accordance with the rules of the International Chamber of Commerce (“ICC”).
Genentech never paid any royalties on Licensed Products, but in June 2008 Sanofi/Hoechst notified Genentech that it believed two Genentech products, Rituxan and Avastin, infringed the licensed patents.  Genentech terminated the license, and with the agreement no longer in force the parties thereafter litigated a patent infringement suit in the U.S.  Ultimately the U.S. District Court for the Northern District of California and the U.S. Court of Appeals for the Federal Circuit concluded that Genentech was not infringing Hoechst/Sanofi's patents.  See Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., Nos. C 08–4909 SI, C 09–4919 SI, 2011 WL 839411 (N.D. Cal. 2011), aff'd, 473 Fed. Appx. 885 (Fed. Cir. 2012).  

Meanwhile, Sanofi/Hoechst commenced an arbitration proceeding against Genentech in Europe, and eventually the arbitrator concluded that Genentech had breached the agreement and ordered it to pay damages in the amount of €108,322,850, plus interest and costs.  In the 2013 opinion quoted earlier in this post, the Federal Circuit affirmed the denial of Genentech's request for an injunction against the arbitration, on the ground that "the U.S. judgment of non-infringement is not dispositive as to breach of the Agreement," noting among other things that "the arbitrator determined that a drug could be a licensed article even though it did not contain the patented enhancers, so long as those enhancers were used in its manufacture. . . .  Because it concluded that the enhancers were used in making Rituxan, the arbitrator determined that Genentech was liable for damages under the Agreement."  Genentech, however, sought to have the French court overturn the arbitration award on the ground, among others, that "the decision of the sole Arbitrator who condemns it in this respect without finding any patent infringement contravenes European competition law and especially Article 101 of the Treaty on the Functioning of the European Union [TFEU]" (quoting here from the Véron firm's translation).  According to the Cour d'appel, the parties have stipulated that German law applies to the agreement and that under that law "it is not contested that it authorises the licensor to claim royalties from the licensee until the termination of the contract, notwithstanding the subsequent invalidation for the patents to which the granted rights were attached."  The referral to the CJEU asks whether this is correct under the TFEU.

I provide a very brief discussion of TFEU article 81 (the predecessor to article 101) and its relationship to patent validity challenges in my book at pp. 281-84.  In relevant part, this article generally prohibits, and renders automatically void, agreements “which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which . . . limit or control production, markets, technical development, or investment,” though regulations such as the TTBER and RDBER can render the general prohibition inapplicable to an agreement that contributes “to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not . . . impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives [or] afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.” (For links to the TTBER as updated earlier this year, see here, and for commentary, see here.)  As discussed in my book, scholarly opinion suggests that article 101 renders unenforceable any contractual provision forbidding a licensee from challenging patent validity. On the specific question referred to the CJEU in the above case, I'm not entirely sure how the CJEU will rule--I don't claim to be an expert on the TFEU and the applicable regulations insofar as they may impact this case--but I am inclined to agree with Véron and Métier that the Cour d'appel's understanding of German law is problematic.  As I understand German law, a licensee who has paid royalties doesn't get them back if the patent is later invalidated, but it also doesn't have to keep paying them after invalidation.  Moreover, even an adjudicated infringer is entitled to get back all of the damages it paid if the patent is later invalidated (see my post here).   I therefore would tend to think that it would be incorrect to order Genentech to pay royalties on an invalidated or noninfringed patent, even if those royalties cover only the period in time while the license agreement was in force, though perhaps there is more to the matter than I comprehend at this point.

I also am somewhat confused by the Cour d'appel's phrasing of the question in two respects.  First, it specifically uses the phrase "en cas d'annulation des brevets" ("in case of invalidation of the patents"), but as noted above the two U.S. patents at issue (though not infringed) were not invalidated.  The European patent was revoked, but are the royalties based only on activities that took place in Europe?  (I think not, but maybe I'm wrong.)  Second, the question also uses the phrase "redevances pour la seule utilisation des droits attachés aux brevets sous licence" ("royalties for the sole use of the rights attached to the patents under licence"), but the agreement at issue was a nonexclusive license (as the court itself recognized earlier in the judgment).  Maybe the court meant something like "royalties solely for the use of the rights attached to the patent under license," and maybe that meaning is clear to a native French speaker; but to me the phrasing comes across as a bit curious.

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