The case is Genentech Inc. v. Hoechst GmbH, Case C-567/14 (available here). (Hat tip to Professor Sarah Burstein for calling this to my attention via Twitter.) Hoechst licensed certain U.S. and European patents to Genentech. The European patent was invalidated in 1999 but the U.S. patents remained in force. Genentech did not pay the contractual running royalties and on October 28, 2008, terminated the agreement. Litigation proceeded in the U.S., culminating in a decision that the U.S. patents were not infringed, but the Federal Circuit permitted an arbitration proceeding in France to proceed. See Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., 716 F.3d 586 (Fed. Cir. 2013). In France, the arbitrator concluded that the agreement was enforceable during the term of the license.
The question presented, as reformulated by the court, is as follows: "whether Article 101(1) TFEU must be
interpreted as precluding, under a licence agreement such as that at
issue in the main proceedings, the imposition on the licensee of an
obligation to pay a royalty for the use of a patented technology for the
entire period during which that agreement was in effect, in the event
of the revocation or non-infringement of patents protecting that
technology" (para. 35). From the judgment:
37 Genentech claims that the sole arbitrator disregarded the clear terms of the licence agreement and of Article 101 TFEU by requiring it to pay royalties on sales of a product which does not infringe the patented technology. Genentech submits that it has been exposed to additional costs of approximately EUR 169 million as compared with its competitors due to that restriction, by object and effect, of Article 101 TFEU.
38 In that regard, it must be noted, as the Advocate General observed in point 75 of his Opinion, that it is not for the Court, in the context of the preliminary ruling procedure, to review the findings of the sole arbitrator or his interpretation of the licence agreement carried out in the light of German law, according to which Genentech is required to pay the running royalty fee notwithstanding the revocation or non-infringement of the patents at issue in the main proceedings.
39 It should further be recalled that the Court has already ruled, in the context of an exclusive licence agreement, that the obligation to pay a royalty, even after the expiry of the period of validity of the licensed patent, may reflect a commercial assessment of the value to be attributed to the possibilities of exploitation granted by the licence agreement, especially when that obligation to pay was embodied in a licence agreement entered into before the patent was granted (judgment of 12 May 1989 in Ottung, 320/87, ECR, EU:C:1989:195, paragraph 11). In such circumstances, where the licensee may freely terminate the agreement by giving reasonable notice, an obligation to pay a royalty throughout the validity of the agreement cannot come within the scope of the prohibition set out in Article 101(1) TFEU (judgment of 12 May 1989 in Ottung, 320/87, EU:C:1989:195, paragraph 13).
40 It thus follows from the judgment of 12 May 1989 in Ottung (320/87, EU:C:1989:195), that Article 101(1) TFEU does not prohibit the imposition of a contractual requirement providing for payment of a royalty for the exclusive use of a technology that is no longer covered by a patent, on condition that the licensee is free to terminate the contract. That assessment is based on the finding that that royalty is the price to be paid for commercial exploitation of the licensed technology with the guarantee that the licensor will not exercise its industrial-property rights. As long as the licence agreement at issue is still valid and can be freely terminated by the licensee, the royalty payment is due, even if the industrial-property rights derived from patents which are granted exclusively cannot be used against the licensee due to the fact that the period of their validity has expired. In the light of such circumstances, in particular the fact that the licence may be freely terminated by the licensee, the contention may be rejected that the payment of a royalty undermines competition by restricting the freedom of action of the licensee or by causing market foreclosure effects.
41 That solution, stemming from the judgment of 12 May 1989 in Ottung (320/87, EU:C:1989:195), applies a fortiori in a situation such as that at issue in the main proceedings. If, during the period in which a licence agreement is in effect, the payment of the royalty is still due even after the expiration of industrial property rights, the same applies, a fortiori, before the validity of those rights has expired.
42 The fact that the courts of the State issuing the patents at issue in the main proceedings have held, following the termination of the licence agreement, that Genentech’s use of the licensed technology did not infringe the rights derived from those patents has, according to the information provided by the referring court on the German law applicable to that agreement, no effect on the enforceability of the royalty for the period prior to that termination. As a result, since Genentech was free to terminate the agreement at any time, the obligation to pay the royalty during the period in when that agreement was in effect, during which the rights derived from the licensed patents which had been granted were in force, does not constitute a restriction of competition within the meaning of Article 101(1) TFEU.
43 In the light of the foregoing considerations, the answer to the question referred is that Article 101(1) TFEU must be interpreted as not precluding the imposition on the licensee, under a licence agreement such as that at issue in the main proceedings, of a requirement to pay a royalty for the use of a patented technology for the entire period in which that agreement was in effect, in the event of the revocation or non-infringement of a licenced patent, provided that the licensee was able freely to terminate that agreement by giving reasonable notice.
I think the decision makes sense from an economic perspective, since it enables parties to structure their transactions and shift the risk of possible noninfringement/invalidity as they see fit, rather than having a nonwaivable rule against payment of royalties. I wonder (and perhaps readers know the answer to this, in which case I'd appreciate hearing from you) whether the decision implies (as it seems to, to me) that an agreement to pay royalties for a period of time following patent expiration (as in the U.S. cases of Brulotte and Kimble, see discussion here) would be enforceable in the E.U.
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