AG Opinion in Genentech v Hoechst / Sanofi case concludes that license agreement does not violate Article 101 TFEU and objects to certain restrictions to the scope of review of international arbitration awards.

On 17 March 2016, Advocate General Wathelet published his opinion in the matter opposing Genentech Inc. to Hoechst GmbH and Sanofi-Aventis Deutschland GmbH (C-567/14).[1]

According to the Advocate General (‘AG’), an arbitral award giving effect to a license agreement that obliges the licensee to pay royalties for the entire duration of the license agreement does not violate Article 101 TFEU in case the patents protecting the technology are revoked or non-infringed, provided that:

(1)   The commercial purpose of the license agreement is to avert (patent)litigation;

(2)  The licensee can terminate the license agreement by giving reasonable notice;

(3)  The licensee can challenge the validity or infringement of the patents; and

(4)  The licensee retains his freedom of action after termination.

In addition, the AG considers that national courts have the power to review whether arbitral awards comply with European competition law regardless of whether or not a violation of European competition law was raised before the arbitral tribunal, and that such review should not be limited to flagrant or manifest violations.

Background

On 6 August 1992, Hoechst granted a worldwide non-exclusive license to Genentech for the use of a human cytomegalovirus (‘HCMV’) enhancer, with effect as of 1 January 1991.  The technology was the subject of a European patent, issued in April 1992, and two United States patents issued in December 1998 and April 2001 respectively.  In 1999, the European patent was revoked by the European Patent Office.

Pursuant to the license agreement, Genentech undertook to pay, as consideration for the right to use the enhancer, a fixed fee for the issuance of the license; an annual research fee; and a ‘running royalty’ on the sales of finished products.  Genentech paid the license issuance fee and the annual fee, but never paid the running royalty.

In June 2008, Hoechst requested Genentech to provide information regarding its commercial use of the enhancer.  In response Genentech terminated the license providing the contractually required two months’ notice.

Hoechst subsequently commenced arbitral proceedings before the International Court of Arbitration of the ICC, claiming running royalties for past use.  Sanofi-Aventis Deutschland, Hoechst’s parent company, commenced an action before the courts in the United States claiming infringement as far as the use of the technology after the termination of the license agreement was concerned.  Genentech also commenced proceedings before the United States courts, asserting the invalidity of the United States patents.  The actions in the United States were subsequently joined.  The United States court decided that there was no infringement, and dismissed Genentech’s invalidity action for failure to meet the relevant standard of proof.

In the Third Partial Award, the Sole Arbitrator held that Genentech had manufactured one of its blockbuster drugs, Rituxan®, using the enhancer, ‘rightly or wrongly patented for some time in [EP 177] and later in [US patents 522 and 140]’ and concluded that Genentech was required to pay Hoechst running royalties on the sale of Rituxan®.  According to the Sole Arbitrator, Genentech entered into the license agreement to avert litigation as long as the agreement was in place.  Payments made under the license agreement could therefore not be reclaimed, and payments due thereunder remained due, regardless of whether the patent was later revoked or found to be non-infringed.

Genentech then brought an annulment action before the Paris Court of Appeal, seeking annulment of the Third Partial Award, invoking, among others, that the Sole Arbitrator’s interpretation of the license agreement violated French international public policy, more in particular Article 101 TFEU.  The Paris Court of Appeal subsequently submitted the following request for a preliminary ruling:

‘Should the provisions of Article 101 be interpreted as depriving of any effect a licence agreement requiring the licensee to pay royalties for the mere use of the rights attached to the licensed patents, in case said patents are annulled?’

According to the AG, the answer to the above question should be ‘no’. 

As determined by the CJEU in the Ottung case (320/87, EU:C:1989:195), it is possible that license agreements may include clauses imposing a royalty obligation for reasons that are unconnected with a patent.  Such clauses may instead reflect a commercial assessment of the value to be attributed to the possibilities of exploitation granted by the license agreement.  These clauses may violate Article 101(1) TFEU where the licensee does not have the right to terminate the agreement by giving reasonable notice, or where it seeks to restrict the licensee’s freedom of action after termination.

Although the judgment in the Ottung case covers slightly different economic and legal circumstances, according to the AG, it can be applied by analogy to the present case.

Regarding the power of national courts to review arbitral awards, the AG considers that the courts of the Member States should not be obliged to limit their review to flagrant violations of Article 101 TFEU, as required pursuant to French law.[2]  Article 101 TFEU does not establish a scale of infringements and is therefore an ‘all or nothing’ provision.

As the principle of mutual trust does not apply to arbitrators (Gazprom case, Case C-536/13, ECLI:EU:C:2015:316), the courts of the Member States are not bound to comply with the findings of arbitral tribunals with respect to EU competition law. According to the AG ‘the responsibility for reviewing compliance with European public policy rules lies with the courts of the Member States and not with arbitrators, whether in the context of an action for annulment or proceedings for recognition and enforcement.’ 

The AG concludes that ‘the review by a court of a Member State of whether international arbitral awards are contrary to European public policy rules cannot be conditioned by whether or not this question was raised or debated during the arbitration proceedings, nor can it be limited by the prohibition under national law preventing the substance of the award in issue from being reconsidered.’

Conclusion

From a competition law perspective, the opinion of AG Wathelet simply confirms and clarifies the ruling in the Ottung case (320/87, EU:C1989:195).

From an international arbitration perspective, the opinion implies that the French courts will indeed have to abandon the line established in the Thalès case which determined that only flagrant violations of French international public policy (including European competition law) could lead to the annulment of awards.[3] 

It also makes a case for allowing national courts to review questions of European competition law within the framework of both annulment and exequatur proceedings, even if these questions had already been debated before and decided by arbitral tribunals.  In particular this last feature would not enhance the finality of arbitral awards.

The decision of the CJEU is expected this summer.