Paris Court of Appeal, No. 12/21810 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Chamber. 23 September 2014, No. 12/21810

GENENTECH INC

vs.

HOECHST GmbH

SANOFI-AVENTIS DEUTSCHLAND Gmbh

Pursuant to an agreement signed on 6 August 1992, Behringwerke AG (“Behringwerke”), a German company specializing in biotechnology, to whose rights Hoescht, another German company, granted, with retroactive effect to 1 January 1991, a worldwide non-exclusive license to Genentech, a Delaware corporation (United States of America), for the use of the eukaryotic expression system activator HCMV, which was intended to increase the efficiency of the cellular process used to manufacture proteins.

This technology gave rise to the grant of several patents, including, on the one hand, a European patent No. EP 0173 177 53 (EP 177) on 22 April 1992, which was subsequently annulled on 12 January 1999 by the European Patent Office for lack of novelty and, on the other hand, an American patent No. 5,849,522 on 15 December 1998, and, lastly an American patent No. 6,218,140 on 17 April 2001.

This agreement allowed Genentech to use the HCMV activator in order to manufacture and use proteins for research purposes, in exchange for which Genentech agreed, in accordance with Article 3.1 of the Agreement, to pay Behringwerke, on the one hand, a one-time royalty of 20.000 DM as costs for emission of the license, non-refundable and, on the other hand, an annual research royalty fixed at a minimum of 20.000 DM.

In addition, this agreement also authorized Genentech in return for “current royalties of one-half percent (0.5%) of net sales of finished products by the licensee, and its affiliates and sub-licensees” to ‘manufacture, use and sell the Licensed Products, identified by the Licensee prior to manufacture, in commercial quantities’, with the Licensed Products designating under the terms of the agreement ‘materials (including organisms) whose manufacture, use or sale would, in the absence of this agreement, infringe upon the terms of the agreement, one or more unexpired claims included in the licensed patent rights’ and finished products defined as ‘commercially tradable goods incorporating a licensed product, sold in a form suitable for administration to patients for therapeutic use or for use in a diagnostic procedure and which are not intended or marketed for re-formulation, treatment, repackaging or re-labelling prior to use’.

The latter fee was never paid by Genentech.

By letter from its Board of Directors dated 30 June 2008, Sanofi-Aventis Deutschland, a subsidiary of Hoechst, invited Genentech to submit its observations, since public information on the research developed by Hoechst was such as to lead it to believe that it was marketing finished products using the patented materials and processes, entitling it to payment of the royalties provided for in the license agreement.

By letter dated 27 August 2008, Genentech notified Sanofi-Aventis Deutschland of its decision to terminate the license agreement effective 27 October 2008, in accordance with the provisions of Article 8.3 of the said agreement.

On 24 October 2008, Hoechst, considering that Genentech had used the licensed CMV activator in combined protein synthesis in order to manufacture Rituxan and other drugs, and having failed to pay the current royalties on the sale of all these drugs, had breached the license agreement, has, pursuant to the arbitration clause set forth in Article 11 of the License Agreement, filed a Request for Arbitration against Genentech before the International Court of Arbitration of the International Chamber of Commerce (“ICC”).

On 2 July 2009, the International Court of Arbitration (ICC), upon the proposal of the Swiss National Committee, appointed Mr. Pierre A. K as Sole Arbitrator.

The Terms of Reference were signed on 16 August 2009 by the two parties and the Sole Arbitrator.

On 27 October 2008, Sanofi Deutschland filed a patent infringement claim in the U.S. District Court for the Eastern District of Texas against Genentech and Biogen Idec, which had themselves filed a suit on the same day in the U.S. District Court for the Northern District of California seeking to invalidate the licensed patents. The two cases were eventually joined in the California court. Genentech applied for a stay of arbitration on the grounds that there was a lis pendens.

This request was rejected by the Arbitrator in a first partial award rendered in Paris on 26 March 2010, which also dismissed the arguments based on the non-arbitrability of the dispute and the nullity of the arbitration agreement.

On 11 March 2011, the U.S. District Court for the Northern District of California ruled that Rituxan did not infringe any of the patents in question, which decision was affirmed on 22 March 2012 by the U.S. Court of Appeals for the Federal Circuit and became irrevocable.

In a second partial award rendered in Paris on 9 June 2011, the sole arbitrator granted Hoescht’s request for disclosure of the financial reports relating to Rituxan, a product manufactured by Genentech that, according to Hoescht, constituted an infringement of the claims of the licensed U.S. patents referred to in the Patent License Agreement, without however ruling in its operative part on the liability of Genentech.

In a third partial award rendered in Paris on 5 September 2012, the sole arbitrator found Genentech liable for Rituxan and other products with the same properties, and ordered Genentech to pay Hoescht the sum of 391.420,36 euros plus US$ 293,565.27 in respect of its costs of representation, from 9 June 2011 until the date of the award, except for the costs relating to the quantum valuation, and reserved the decisions relating to the quantum valuation, on all costs of the arbitration, on the costs of representation already incurred for the quantum valuation up to the date of the award and on all costs of future representation of the parties.

The arbitrator considered that the commercial purpose of the contract, interpreted according to article 242 of the German Civil Code, was to avoid any lawsuit on the validity of U.S. patents during the term of the license agreement, and consequently considered that the parties had foreseen that ‘while the license agreement was in force, current royalties would be due on the basis of the manufacture of Rituxan even if, in the country of manufacture, the patent for the manufacture of Rituxan ‘subsequently proved to be invalid, and thus, if the manufacture of Rituxan proved not to have infringed the local patent within the meaning of the patent law of the country of grant and manufacture’.

An action for annulment was filed on 10 December 2012 against the third partial award of 5 June 2012. (RG n°12/21810)

By order of 3 October 2013, the pre-trial advisor granted exequatur to this last award.

Considering the submissions served on 27 March 2014 by RPVA by the Genentech, which asks the Court to:

As a main claim:

-annul the Third Partial Award rendered on 5 September 2012;

-annul the Final Award rendered on 25 February 2013;

-annul the Addendum rendered on 22 May 2013;

-if necessary, ask the European Commission the following question: “Could the European Commission clarify whether the principles set out in paragraphs 81 and 156 of the Commission’s Communication of 27 April 2004, entitled Guidelines on the application of Article 81, paragraph 3 of the EC Treaty to technology transfer agreements (OJ 2004/C 101/2), are also applicable in the event that a patent license agreement is interpreted as imposing on the licensee an obligation to pay royalties if the patented technology is not used in its products, i.e. if its products do not infringe the claims of the licensed patents, is such an interpretation in that case restrictive of competition within the meaning of Article 101 TFEU?”

As a secondary claim:

-order the partial annulment of the Final Award rendered on 25 February 2013 and of the Addendum rendered on 22 May 2013 with respect to the paragraphs relating to the payment of an interest rate that does not exist.

In any event:

-reject Hoechst GmbH’s claims as a whole, including the request that the Parties be referred back to the Sole Arbitrator in the event that the Awards are annulled;

-reject Hoechst GmbH’s request for payment of the sum of 50,000 euros pursuant to Article 700 of the Code of Civil Procedure;

-order Hoechst GmbH to pay the sum of 50,000 Euros pursuant to Article 700 of the Code of Civil Procedure and to pay all costs.

Regarding the conclusions served on 29 April 2014 by RPVA by Hoescht GmbH and Sanofi GmbH, which request the Court to:

-dismiss as inadmissible and, in any event, ill-founded the actions for annulment brought by Genentech against the third partial award dated 5 September 2012, the fourth partial award, or final award dated 22 February 2013, and the addendum to the final award dated 22 May 2013.

-as an infinitely subsidiary measure, and if by impossibility, a partial or even total annulment of one or more of these Awards is pronounced, refer the parties back to sole arbitrator Pierre K so that he may rule again on the questions remaining to be decided in the state of the first and second Awards, which are now final, and, if necessary, on the subsequent Awards as they will remain until the pronouncement of the judgment to be rendered.

-order Genentech to pay the sum of EUR 50,000 pursuant to Article 700 of the Code of Civil Procedure and to pay all the costs.

UPON WHICH,

On the ground of annulment alleging infringement of international public policy (Article 1520-5 of the Code of Civil Procedure)

Genentech argues that the License Agreement provided for the payment of royalties only in the event of infringement, so that the decision of the sole arbitrator condemning it as such without finding any patent infringement, violates European competition law, in particular article 101 of the Treaty on the Functioning of the European Union, since the resulting restriction on the manufacture of Rituximab, an active compound of Rituxan, which is marketed in the European Union (Germany, France, Italy), has a direct effect on trade between Member States.

Indeed, it is argued that since, according to the case law of the CJEU, royalties cannot be paid to a licensee for the use of an invention that does not constitute a patent infringement, the award violates European competition law by condemning Genentech to the payment of royalties without finding any patent infringement, requiring it to incur unjustified expenses for a technology that is not patented and accessible without restriction, in contravention of the principle of free competition.

Whereas it is maintained by the appellant that, by obliging it to pay royalties without finding any infringement, whereas under the terms of the license agreement itself, royalties were only due for products whose manufacture, use or sale would, in the absence of this agreement, infringe a number of unexpired claims included in the rights attached to the licensed patents, the agreement which imposes unjustified expenses on the appellant, in contravention of competition law, is contrary to international public policy;

Whereas under the terms of the license agreement concluded on 6 August 1992, the German biotechnology company Behringwerke AG (“Behringwerke”), from which the German biotech company Hoescht derives its rights granted, with retroactive effect to 1 January 1991, a worldwide non-exclusive license to Genentech for the use of the eukaryotic expression system activator HCMV;

It is expressly stated in the introductory statement to this agreement that Genentech wished to license the rights attached to the patents filed by Behringwerke, relating to an activator of Eurokaryotic expression systems of which Behringwerke was the sole and exclusive licensee;

That this agreement expressly mentions that, subject to early termination, the licenses granted will remain in force ‘until the expiry of the last rights attached to the licensed patents in each country’;

Moreover, the license agreement defines licensed products as ‘materials (including organisms) the manufacture, use or sale of which would, in the absence of this agreement, infringe one or more unexpired claims included in the rights under the licensed patents’, and finished products as ‘commercially tradable goods incorporating a licensed product.’;

Whereas the parties have agreed that the license agreement shall be interpreted and enforced in accordance with the law of the Federal Republic of Germany, and it is undisputed that the latter authorizes the licensor to claim royalties from the licensee until termination of the agreement, notwithstanding the subsequent cancellation of the patents to which the licensed rights were attached;

Whereas the arbitral award, having applied the contract and held that, during the period of its validity, the licensee was bound to pay the royalties stipulated in the agreement, even though the cancellation of the patents has retroactive effect, a question was raised as to whether such a contract contravenes the provisions of Article 81 of the Treaty, now Article 101 of the Treaty on the Functioning of the European Union, as distorting competition within the internal market, in that by subjecting the licensee to the payment of royalties without cause, by the effect of the cancellation of the patents attached to the rights granted, it inflicts on the licensee a competitive disadvantage;

It is therefore appropriate to refer the matter back to the Court of Justice of the European Union for the purpose of answering the question referred for a preliminary ruling set out in the operative part of the present judgment and to stay the proceedings until the Court of Justice has given its ruling;

FOR THESE REASONS, before giving judgment, refer the matter back to the Court of Justice of the European Union for the purpose of answering the following question:

“Are the provisions of Article 81 of the Treaty, now Article 101 of the Treaty on the Functioning of the European Union, to be interpreted as precluding the giving effect, in the event of cancellation of patents, to a license agreement which imposes royalties on the licensee for the sole use of the rights attached to the licensed patents? “;

Stays the proceedings until the Court of Justice has given its ruling;

States that the case will be withdrawn from the roll and reinstated at the request of the most diligent party as soon as the above-mentioned event occurs;

Reserves the costs.

THE CLERK THE PRESIDENT