Revocation of patents does not necessarily mean licensees can stop royalty payments, rules EU court

The Court of Justice of the EU (CJEU) said that EU competition laws do not preclude such conditions being included in patent licensing agreements as long as those agreements allow licensees "freely to terminate that agreement by giving reasonable notice".

The CJEU was asked to rule on the issue by a French court which has been considering a patent licensing dispute between Roche-owned Genentech and Hoechst, which is part of the Sanofi-Aventis group. The CJEU was asked to determine whether EU competition laws must be "interpreted as precluding effect being given, where patents are revoked, to a licence agreement which requires the licensee to pay royalties for the sole use of the rights attached to the licensed patent".

In the underlying licensing dispute, Hoechst is seeking to rely on a licensing agreement it has in place with Genentech, as well as to enforce orders for payment made in arbitration proceedings involving the two companies, which it claims entitles it to payment of royalties by Genentech.

However, Genentech is arguing that it should not be forced to pay Hoechst any royalties. This, it claims, is because one of the patents Hoechst seeks to rely on was revoked on the grounds that it is invalid and because it did not use two other patents it was given the rights to use under the licensing agreement with Hoechst to develop its own research method for new drugs.

Genentech said that it has been unfairly "exposed" to costs totalling approximately €169 million as a result of the decisions take in arbitration and that this places it at an unfair competitive disadvantage.

However, the CJEU said the licensing agreement between Hoechst and Genentech does not breach EU competition rules, set out in Article 101 of the Treaty on the Functioning of the EU. Those rules prohibit agreements between companies that have as their object or effect the prevention, restriction or distortion of competition.

Competition law expert Robert Eriksson of Pinsent Masons, the law firm behind Out-Law.com, said: "At first glance it may seem unfair for a licensee to have to pay royalties for making and selling products with the licensed technology after the patent has been revoked, but the Court stresses that this royalty payment obligation did not infringe Article 101 of the Treaty, as the licensee, Genentech, could freely terminate the agreement by giving reasonable notice, which it could have done when the patent was revoked in 1999."

"The other reason was that the royalty, even after patent expiry, could be considered to reflect a commercial assessment of the value attributed to the exploitation possibilities granted by the licence with the guarantee that the licensor will not exercise its IP rights – had the licensee not paid any royalties, the licensee’s total payment of fees would have been less than €180,000 for 16 years of use of the technology to facilitate production and marketing in the EU and the US of a biological medicinal product" Eriksson said.

"Consequently, whilst the royalty obviously added a cost for the licensee, the payment of the royalty did not undermine competition by restricting the licensee’s freedom of action or by causing any market foreclosure effects. Whilst this judgment was further to a request for a preliminary ruling, it is worth noting that the European Commission shared the Court’s view," he said.