Royalty payments for invalid patents: Opinion of the Advocate General in Genentech v Hoechst

Is a royalty payment clause in a licence agreement enforceable even after the patent had been deemed invalid? Yes, says the Advocate General (AG) in his opinion of 17 March 2016 in Genentech v Hoechst. The European Court of Justice’s answer to this question is pending.

Background to the case

Genentech and Hoechst are in dispute over royalty payments under a license agreement concerning one European and two US patents. Under the agreement, Genentech is permitted to use Hoechst’s technology in return for a 0.5% royalty fee on sales of any product incorporating the licensed technology. To date, Genentech has not made any royalty payments under the agreement. A French court ordered Genentech to pay royalties to Hoechst, despite finding that the licensed European patent was invalid. The question of whether this obligation violates EU competition law has been referred to the ECJ for preliminary ruling.

The ECJ has already held, in 1989, in the Ottung case (ECJ, case 320/87) that an obligation to pay royalties even after a patent had expired would not violate EU competition law in a situation where the licensee is entitled to terminate the agreement and discharge the royalty payment obligation. In this context, the ECJ also held that an obligation to pay royalties need not necessarily be connected to the existence of a patent, but rather may be founded in the mere commercial interest attributed to the possibility of exploitation granted by the licence agreement.

The Advocate General’s opinion

The AG in the present case emphasised that Genentech’s obligation to pay royalties under the agreement was not conditional on the licensed technology being or remaining protected by patent, but on the mere use of the licensed technology.

As Genentech was able to terminate the agreement on short notice, it was not at a competitive disadvantage on the market compared to its competitors, according to the AG. As competitors could take advantage of the technology freely and without charge, Genentech, by terminating the agreement, would be in exactly the same position as all other users of the technology at issue. The obligation to pay royalties would therefore not amount to a restriction of competition in these circumstances. The AG stressed that the aim of the relevant competition law (Article 101 TFEU) was not to regulate commercial relations between undertakings in a general way, but rather to prohibit anti-competitive agreements.

Genentech claims it is unable to terminate the agreement because it is dependent on using the (still valid) US patents licensed under the agreement in the future. The royalty payment clause would therefore violate European competition law, as it forces the licensee to pay royalty fees for use of an invalid patent.

Impact on license agreements

Given the very case-specific facts underlying the dispute, the decision of the ECJ is difficult to predict. The proceedings confirm, however, the general importance of competition law for structuring the payment conditions in license agreements. If a license is granted only for one protective right which is invalidated, the obligation to pay licence fees might be considered as a prohibited restriction of the licensee. This applies at least if the license agreement cannot be terminated on short notice.

By contrast, if the license grants “freedom to operate” for a bundle of patents, it is less likely that the invalidation of one of those patents will have a substantial impact on the license agreement as a whole. It could therefore make a difference whether all patents are included into one license agreement as in the case at hand, or whether separate license agreements or at least differentiated payment terms exist for each patent. Alternatively, in suitable cases, the licensor might also shift the risk of a future invalidation onto the licensee by agreeing an upfront lump sum payments rather than adopting a royalty payment structure.