EU court unlikely to permit demands for royalty payments based on licences for patents found to be invalid, says expert

Out-Law Analysis | 21 Jan 2016 | 2:32 pm | 3 min. read

OPINION: The EU's highest court is unlikely to rule that licensors of technology can demand royalty payments for use of patents covering that technology where those patents have been found to be invalid.

The Court of Justice of the EU (CJEU) is likely to conclude that the enforcement of licensing terms on that basis breaches EU competition laws.

The court, however, might see merit in allowing patent licensors to pursue royalty payments from licensees even where those licensees have been found not to have infringed on the licensor's patent rights when developing their own products so long as those patents are nevertheless valid.

The CJEU has been asked to rule on a case referred to it from 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.

Specifically, the CJEU has been 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 This, it claims, is because one of the patents Hoechst seeks to rely on was revoked on the grounds that it is invalid and because it did not use two other patents it was given the rights to use under the licensing agreement with Hoechst to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. According to an M-Lex report, Genentech claims that it instead relied on other technology it licensed from a US university to help it develop its new research method.

The case raises interesting questions about how EU competition rules apply in the context of patent licensing deals arranged between companies. The competition rules place a general ban on organisations putting in place agreements which may affect EU trade where those agreements "have as their object or effect the prevention, restriction or distortion of competition" within the EU.

However, the Technology Transfer Block Exemption (TTBE), a specific framework addressing the transfer of technology between businesses, co-exists alongside the main competition rules and, under certain specified circumstances,  provides a safe-harbour for restrictions which might otherwise be seen as anti-competitive. The TTBE seeks to strike a balance between the value of IP rights and competition's role insupporting innovation..

The rules underpinning the TTBE make it clear that there should be sufficient freedom for licensees of intellectual property (IP) rights to challenge the validity of those rights before the courts. Where IP licensing agreements contain 'no-challenge' clauses, those specific clauses will not benefit from an exemption from the broader competition rules relating to anti-competitive agreements. Instead the impact of such clauses on competition has to be individually assessed and can potentially be found to be anti-competitive.

In the context of those TTBE provisions, it would make little sense for the CJEU to clear the way for patent licensors to claim royalties for use of invalid patents. This is because there would be diminished incentive, as the current competition rules intends there to be, for licensees to challenge the validity of IP rights that they licence. The incentive provided for is a type of control on the potential barriers to innovation and economic activity that IP protection can confer.

Licensees are well placed to determine whether the technology they licence should benefit from IP rights protection. If they would be forced to pay royalties for use of invalid patents then there would be no, or at least a reduced, incentive for them to challenge that validity through the courts.

The argument that patent licensees should be required to pay royalties on patents that are valid but which they do not rely on when developing their own products is stronger. That is because access to patented technology under a licensing agreement can confer some benefit to product manufacturers by aiding their research and development processes, regardless of whether the patented technology is central to the finished product.

Regardless of how the CJEU rules, it is likely to provide guidance on how the EU's competition laws should be read in the context of patent licensing and royalties agreements.

Natasha Pearman is a competition law expert at Pinsent Masons, the law firm behind Out-Law.com