Paris Court of Appeal, No. 16-15.338

Paris Court of Appeal, Pole 1, First Chamber, 26 September 2017, No. 16-15.338

Judicial chronology:

Partial Award, 5 September 2012

Final award, 25 February 2013

Arbitral addendum, 22 May 2013

Paris Court of Appeal, 23 September 2014, 2012/21810

Paris Court of Appeal, 23 September 2014, 2013/09296

Paris Court of Appeal, 23 September 2014, 2013/17187

Court of Justice of European Union, 7 July 2016, C-567/14

Court of Cassation, First Civil Chamber, 18 November 2015, No. 14-26.480

Court of Cassation First Civil Chamber, 18 November 2015, No. 14-26.482

SOCIÉTÉ GENENTECH INC (American company)

Vs.

SOCIÉTÉ HOECHST GmbH (German company)

SOCIÉTÉ COMPANY SANOFI-AVENTIS DEUTSCHLAND GmbH

On 6 August 1992, Behringwerke AG registered under German law, whose rights are transferred to HOECHST GMBH registered under German law, granted GENENTECH INC., a company registered under US law (State of Delaware), a worldwide non-exclusive licence (hereinafter referred to as ‘the Licence Agreement’) subject to German law, for the use of an activator derived from human cytomegalovirus (hereinafter referred to as ‘CMVH’). This technology was the subject of a European patent No. EP 0173 177 53, granted on 22 April 1992 – but then revoked on 12 January 1999, as well as the subject of two US patents: US 522 and US 140 granted in the United States, respectively on 15 December 1998 and 17 April 2001.

Genentech used a CMVH activator to facilitate the transcription of a sequence of deoxyribonucleic acid (DNA) necessary to produce a biological drug whose active ingredient is rituximab. Genentech markets this drug in the United States under the trade name Rituxan and in the European Union under the trade name MabThera.

According to Article 3.1 of the Licence Agreement, Genentech undertook, in return for the right to use the CMVH activator, to pay:

• a one-off fee of DEM 20,000 (approximately EUR 10,225),
• a fixed annual fee of DEM 20,000,
• a current royalty equal to 0.5% of net sales of ‘finished products’ by the licensee and its affiliates and sub-licensees.

‘Finished products’ are defined by the license agreement as “commercially tradable goods incorporating a licensed product, sold either in a form suitable for administration to patients for therapeutic use or as part of a diagnostic procedure”. The term ‘licensed product’ is defined as “materials (including organisms) that the manufacture, use or sale of which would, in the absence of this Agreement, infringe one or more unexpired claims included in the licensed patent rights”.

Genentech paid the one-off fee as well as the annual royalty but never paid the current royalty.

On 30 June 2008, Sanofi-Aventis Deutschland, a subsidiary of Hoechst, questioned Genentech on the finished products it was marketing. On 27 August 2008, Genentech notified Sanofi-Aventis Deutschland of its decision to terminate the License Agreement as of 28 October 2008. On 24 October 2008, Hoechst, considering that Genentech used the CMVH Activator without paying the current fee, initiated arbitration proceedings on the basis of the arbitration clause contained in Article 11 of the License Agreement. On 27 October 2008, Sanofi-Aventis Deutschland filed an action for licensed patent infringement against Genentech and Biogen Idec Inc. before the United States District Court for the Eastern District of Texas. On the same day, Biogen IdecInc. filed a patent invalidity action before the US District Court for the Northern District of California. Both actions were joined before the Northern District Court, which dismissed them in a decision dated 11 March 2011, which became final following the dismissal of Sanofi-Aventis' appeal by a decision of the United States Court of Appeals for the Federal Circuit on 22 March 2012.

The arbitral proceedings took place in parallel with the US State Court proceedings.

In a first partial award issued in Paris on 9 June 2011, Mr. K, appointed as sole arbitrator under the supervision of the International Chamber of Commerce, dismissed the grounds based on the non-arbitrability of the dispute and the nullity of the arbitration agreement.

By a second partial award dated 9 June 2011, Mr. K. granted Hoechst’s request for financial reports relating to Rituxan.

By a third partial award dated 5 September 2012, Mr. K found Genentech liable regarding Rituxan and products with the same properties and ordered Genentech to pay Hoechst an amount of EUR 391,420.36, in addition to the representation costs previously incurred, and restricted the decision on the valuation of the quantum and on the final settlement of the costs of the proceedings.

In a final award issued on 25 February 2013, the sole arbitrator ordered Genentech to pay Hoechst the sum of EUR 108,322,850 in principal plus interest and representation costs.

By an addendum dated 22 May 2013, the arbitrator rectified material errors and rejected the requests for rectification relating to the rate and the starting point of interest.

An action for annulment of the first two partial awards was declared null and void by an order of the Pre-Trial Judge dated 26 January 2012.

Actions for annulment were filed on 10 December 2012 against the third partial award, on 7 May 2013 against the final award and on 23 August 2013 against the addendum. The third partial award and the final award were declared enforceable by two orders of the Pre-Trial Judge dated 3 October 2013, which rejected Genentech’s application for a stay of enforcement.

On 15 October 2013, Genentech paid Hoechst the sum of EUR 169,521,544.80 with reservations regarding the pending appeals.

By a judgment of 23 September 2014 in the action for annulment of the third partial award dated 5 September 2012, the court referred a question to the Court of Justice of the European Union (CJEU) for a preliminary ruling on the interpretation of Article 101 of the Treaty on the Functioning of the European Union (TFEU), granting a stay of proceedings, in this case and in the other two, until the CJEU has ruled, and ordered the withdrawal of the case from the list.

On 18 November 2015, the Court of Cassation declared Hoechst’s appeal inadmissible for lack of evidence of an excess of power.

On 7 July 2016, the CJEU delivered its ruling on the preliminary question.

The files were reconducted at Hoechst’s request on 11 July 2016.

By submissions notified on 10 April 2017, Genentech requested the court, principally, to set aside the third partial award dated 5 September 2012, the final award dated 25 February 2013 and the addendum dated 22 May 2013. In the alternative, Genentech requested the court to set aside the final award and the addendum in so far as they order it to pay interest. In any event, Genentech requested the court to reject all of Hoechst’s claims, in particular its request to refer the case back to Arbitrator K if the award is set aside, and to order the defendant to pay it the sum of EUR 50,000 pursuant to Article 700 of the Code of Civil Procedure.

Genentech raises the sole arbitrator’s failure to comply with his mission (Article 1520-3 of the Code of Civil Procedure), the violation of due process (in French Principe de la contradiction) and the principle of equality of arms (Article 1520-4 and 1520-5 of the Code of Civil Procedure) and, lastly, the violation of international public policy (Article 1520-5 of the Code of Civil Procedure).

By submissions notified on 11 May 2017, Hoechst and Sanofi-Aventis Deutschland GmbH requested that the court:

1. Primarily, to dismiss the action for annulment of the third partial award, as well as the final award and the addendum,
2. Alternatively, in the event of a partial annulment, to transmit the parties back to the sole arbitrator Pierre K to rule again on the outstanding issues regarding the first and second awards, which are now final, and, if applicable, on any further awards remaining following the judgment,
3. In any event, order Genentech to pay them the sum of EUR 1,383,795 pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH,

On the consolidation:

Whereas it is in the interest of a proper administration of justice to join the files registered under the Nos. RG 16/15338, 16/15353 and 16/15372 relating to the actions for annulment of the third partial award, the final award and the addendum.

On the first ground for annulment based on the arbitrator’s failure to comply with his mission (Article 1520-3 of the Code of Civil Procedure):

Genentech claims, firstly, that Hoechst and Sanofi’s main claim in the Terms of Reference was based on its alleged use of the “subject matter claimed in the Licensed Patents”. Moreover, in its own defence, Genentech claimed that it had not infringed in any way, as it had not used the “licensed US patent rights”. Genentech criticised the arbitrator for having decided that the royalties were due solely by reason of the use of the CMVH activator without having investigated the existence of infringement - which was the core of the arbitrator’s mission - and without having followed the two-step procedure under US patent law - on the relevance of which the parties had agreed - consisting firstly, of interpreting the terms of the claims and, secondly, comparing the alleged act of infringement with the characteristics of the claim.

Genentech claims, secondly, that the sole arbitrator ruled ultra petita, holding an interest rate to which neither party had referred.

Genentech alleges, thirdly, that the arbitrator’s mission is to make an award that is enforceable, unlike in this case where the award sets an interest rate that does not exist.

On the ground taken in its first part:

Whereas Genentech does not claim that the arbitrator would have ruled ultra petita in deciding that the royalties were due for the sole use of the CMVH activator irrespective of any infringement, but only that Hoescht, which invoked in support of its initial claims only the infringement of the licensed US patents, recognising that it had to be assessed by the arbitrator in accordance with US law, introduced a new basis for its claim only after more than three years of arbitration proceedings, two days before the liability hearing held on 27 and 28 June 2012;

Whereas, however, the arbitrator’s mission is delimited by the subject-matter of the dispute, as determined by the parties' claims, without it being necessary to focus solely on the statement of the issues in dispute in the Terms of Reference; that even supposing that Hoechst modified its arguments during the proceedings, the arbitrator did not fail to comply with its mission by taking into account potential developments in the dispute, as set out in the parties' statements of case, and by taking into account, in order to condemn the licensee, a ground, invoked by Hoechst, making it pointless to look for a possible infringement;

On the ground taken in its second and third parts:

Whereas Genentech alleges that Hoechst requested in the arbitration proceedings the application of a prime rate, in order to obtain a rate higher than the rate of the Central Bank of the licensee’s country, stipulated in the licence agreement, and that Hoechst itself requested the application of the Federal Funds Rate. The arbitrator ordered Genentech to pay interest at 3 percentage points above the ‘Federal Reserve Prime Rate’ or 3 points above the Prime Rate of the Bundesbank or the ECB, whichever is higher, while the Federal Reserve Prime Rate that the arbitrator referred to, which neither party mentioned, does not exist;

Whereas, however, in setting the interest rate, the sole arbitrator relied on Article 3.4 of the License Agreement, according to which: The Licensee shall pay interest on overdue payments at the rate of three (3) percentage points above the central bank rate of the Deutsche Bundesbank or the central bank rate of the Licensee’s country, whichever is higher. If in the country of the Licensee a central bank rate is not available or is not the basis for calculating the interest rate that the Banks apply to borrowers, such interest rate shall be applied as is the market rate recommended for this purpose;

Whereas the arbitrator noted that the application of this stipulation required an interpretation of the term “Central Bank Rate for the United States”;

Whereas Hoechst claimed that the contractual definition referred to a rate applicable to commercial borrowers from banks, i.e., either the rate which would have been charged to it if, having not received the royalties due, it had been obliged to borrow from German banks at a rate which would necessarily have been indexed to the ECB base rate, or the rate which Genentech would have had to pay if it had borrowed from American banks the funds necessary to pay the royalties and had saved by not paying them; that this rate in the United States was the US Prime Rate (Award, §§ 328 and 329); that Genentech claimed that the relevant rate was the Federal Funds Rate (Award, § 331); that Hoechst responded that this was the rate at which banks exchanged their Federal Reserve balances with each other, not the rate charged to their commercial borrowers (Award, § 332);

Whereas the award concludes the debate in the following terms: ‘The sole arbitrator finds this argument convincing. He is of the opinion that the contract rate attempts to determine a commercial rate that could have been paid by Genentech or Hoechst, as the case may be, in their respective countries’ (Award, § 333);

Whereas although the arbitrator used the improper expression ‘Federal Reserve Prime Rate’, it is clear both from the operative part of the award, which expressly refers to the schedule drawn up by Hoechst’s expert, Mr. T, and from his aforementioned reasons, which are consistent with the terms of the award, that the arbitrator used the rate suggested by Hoechst, i.e. the ‘US Prime Rate’ published by the US Federal Reserve;

Whereas the first ground, in its three parts, must be set aside;

On the second ground for annulment based on the violation of due process and the principle of equality of arms (Article 1520-4 and 1520-5 of the Code of Civil Procedure):

Genentech claims that the arbitrator violated these principles by, on the one hand, awarding interest at a rate that neither party had requested and, on the other hand, by holding its liability on a new basis, raised belatedly by Hoechst on 25 June 2012, only two days before the liability hearing on 27 and 28 June, without being able to respond usefully.

On the second ground taken in its first part:

Whereas, as stated above, the interest rate used by the arbitrator is the one suggested by Hoechst and debated between the parties, so that, the ground is actually lacking;

On the second ground taken in its second part:

Whereas, contrary to what Genentech maintains, Hoechst did not avail itself for the first time in June 2012 of a royalty right based solely on the use of the HCMV activator, regardless of the demonstration of infringement;

Whereas, in its statement of case of 1 April 2010, Hoechst clarified its position on the interpretation of the Licence Agreement in the following terms:

46. With respect to the interpretation of the License Agreement, the main point of disagreement between the parties is the interpretation of the term ‘infrige’ [infringe] in accordance with Section 1.6.

(a) The term ‘infrige’ is to be interpreted under German law.

47. The term ‘infrige’ is a contractual term used in the License Agreement, therefore, pursuant to Section 10 of this Agreement, it shall be construed under German law. This is because by using the term ‘infrige’, the parties to the License Agreement have determined the conditions under which the current royalties are payable under the Agreement. The parties have used a fiction, namely that the licensee ‘would infringe’ a licensed patent right by using the said patent in the absence of a licence agreement. It is a fiction because the use of a patent by a licensee is by definition not a patent infringement since the licensee is entitled to use the patent, (…)

48. By choosing the term infrige according to its meaning under the Agreement, the parties intended to define the Product according to the characteristics defined in the patent application. On the other hand, the parties did not intend to require any other preconditions to characterise an ‘infringement’. In particular, the parties did not agree that the question of the validity of the patent would be determinative, as the Defendant now claims for the purposes of its defence! (Exhibit Hoechst No. 16);

Whereas it appears, therefore, that contrary to Genentech’s contention, the issue which has always been at the centre of the proceedings was not infringement within the meaning of patent law but the interpretation of an autonomous notion of use of the CMVH activator within the meaning of a licence agreement governed by German law;

That Hoechst’s statement of case of 25 June 2012 has no other scope than to repeat that “under German law, ‘to counterfeit’ means to notify ‘to use the activator’ ” (Genentech, No. 69);

That the basis of the condemnation against Genentech was therefore known even before the first partial award was handed down, so that Genentech was perfectly able to discuss it;

Whereas the second ground for annulment must be dismissed in its two parts;

On the third ground for annulment based on the violation of international public policy (Article 1520-5 of the Code of Civil Procedure):

Genentech argues that the enforcement of awards requiring it to pay royalties to Hoechst for an activator that it does not infringe, as held by US courts, does not use, and which its competitors are free to use, effectively and concretely violates European competition law, as it results from European Commission decisions, European Union regulations, guidelines on the application of Article 81 of the EC Treaty (now Article 101 TFEU) on technology transfer agreements, as well as the case law of the CJEU.

Whereas, firstly, contrary to Genentech’s contention, the award ordered it to pay the current royalties for the actual use of the CMVH activator in the production of Rituxan, and not for a mere ‘option to use’ this technology;

Whereas, secondly, the CJEU, having received a reference for a preliminary ruling from the court in the present case, ruled in its judgment of 7 July 2016 the following:

‘Article 101 TFEU must be interpreted as it does not preclude, under a licence agreement such as that at issue in the main proceedings, that the licensee is required to pay a royalty for the use of patented technology throughout the period during which that agreement is in force, in the event of cancellation or non-infringement of the licensed patent, provided that the licensee was free to terminate that agreement by giving reasonable notice’.

Whereas in the present case, on the one hand, the licensee had complete freedom to challenge the rights attached to the licensed patents, as evidenced by the actions brought in the United States. On the other hand, under Article 8.3 of the licence agreement, the licensee could terminate the contractual relationship at any time with two months' notice, which he did as soon as Hoechst questioned him about the use of the licensed technologies;

Whereas, contrary to Genentech’s claim, the fact that Hoechst did not call Rituxan to account until eleven years after the product was launched and that the licensee was not able to obtain a ‘retroactive termination’ of the contract does not mean that the freedom to terminate the contract at any time is restricted;

Whereas Genentech’s interest in keeping the CMVH activator available to it either to produce drugs other than Rituxan or to conduct research does not further characterise an impediment to its freedom to terminate;

Whereas it has therefore not been shown that recognition or enforcement of the awards would manifestly, effectively and concretely violate international public policy; whereas the third ground for annulment must be dismissed;

Whereas it follows from the foregoing that the actions to set aside the awards and the addendum must be dismissed;

On Article 700 of the Code of Civil Procedure:

Whereas Genentech, who is unsuccessful, cannot benefit from the provisions of Article 700 of the Code of Civil Procedure; whereas it will be ordered to pay Hoechst and Sanofi-Aventis Deutschland the sum of EUR 600,000;

FOR THESE REASONS

Orders the consolidation of the files registered under RG 16/15338, 16/15353 and 16/15372.

Rejects the claimants' requests to set aside the third partial award dated 5 September 2012, the final award dated 25 February 2013 and the addendum dated 22 May 2013.

Rejects the application filed by Genentech Inc. pursuant to article 700 of the Code of Civil Procedure.

On this basis, orders Genentech Inc. to pay Hoechst GmbH and Sanofi-Aventis Deutscland GmbH the total sum of EUR 600,000.

Orders Genentech Inc. to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure.