Source: https://www.lesi.org/les-nouvelles/les-nouvelles-article-of-the-month/les-nouvelles-article-of-the-month-archives/les-nouvelles-article-of-the-month---june-2017
Timestamp: 2019-04-19 03:07:55+00:00

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Adjacent to the glorious and delicate stained glass of Sainte-Chapelle stands the magnificent “Palace of Justice,” currently housing the Court of Appeal of Paris.1 The court encountered an enigma involving patent royalties and European competition law. A license agreement licensed three patents. One patent was subsequently revoked. The other two patents were later found not to be infringed by the licensee. Yet, the license agreement imposed an obligation on the licensee to pay running royalties throughout the contractual term. Is the imposition of this obligation permitted under Article 101 of the Treaty on the Func tioning of the European Union?
Analyzing the judgment in comparison with legal precedent in the United States evinces differing judicial approaches to interpreting license agreements and discerning the parties' commercial intent when royalty payments and patent monopoly are at issue. Similar cases in the United States, France, and Japan provide practical guidance concerning the licensees' obligation to pay royalties and whether licensees are entitled to a refund when the licensed patents are ultimately invalidated.
The European Union is based on the Treaty of the European Union and the Treaty on the Functioning of the European Union.29 These treaties are considered to be the “primary law” of the European Union.30 A court of a Member State of the European Union may refer a question to the Court of Justice to clarify an issue concerning the interpretation of European Union law.31 In Genentech v. Hoechst, the Court of Appeal of Paris sought guidance from the Court of Justice of the European Union on the royalty provision's compatibility with Article 101.
Adherence to precedent played a decisive role in both Genentech v. Hoechst and Kimble v. Marvel. The Court of Justice of the European Union reached its judgment by applying its prior judgment in Ottung. Similarly, the Supreme Court of the United States rendered its decision by following its precedent in Brulotte. Nonetheless, the judgment by the Court of Justice of the European Union differs from the decision by the Supreme Court of the United States in multiple respects.
First, in Kimble v. Marvel, the United States Supreme Court examined royalties for sales made after the patent had expired. Meanwhile, the licensed patents in Genentech v. Hoechst did not exactly expire. One of the licensed patents was revoked, and the others were held not to be infringed. The decision of non-invalidity was affirmed on appeal.
The licensee in Ottung made the same argument before the European Court of Justice. The licensee asserted that “Mr. Ottung's right to the royalty ceased upon the expiry of the patents, the factual and legal basis for the payment of royalties.”66 However, this argument was not discussed in the judgment of the Court of Justice of the European Union in Ottung.
Third, the issue before the Court of Justice of the European Union in Genentech v. Hoechst was confined to whether Article 101 of the Treaty on the Functioning of the European Union precludes the royalty clause at issue.
On the contrary, the United States Supreme Court's analysis in Kimble v. Marvel was not limited to any particular statutory provision. It determined that the royalty clause at issue was unlawful per se.
The United States Supreme Court's decision in Kimble v. Marvel was devoid of any conjecture about the parties' purpose for establishing the obligation for paying running royalties.
Fifth, there is a difference in the weight given to literal interpretations of contractual clauses. In general, courts in the United States place greater emphasis on the literal terms of a license agreement. Comparing a United States court's decision in Miotox v. Allergan69 with the European Court of Justice's judgment in Genentech v. Hoechst shows a clear distinction. Both involved an interpretation of definitions provided in the license agreement.
Miotox v. Allergan involved an invention for treat ing migraine headaches with Botox products. The parties agreed that the licensee would pay royalties on “Net Sales” defined as “[t]he actual selling price of Licensed Product sold by [the licensee].
Sixth, the Court of Justice of the European Union in Genentech v. Hoechst emphasized that a licensee must be able to terminate the license agreement in order for the royalty obligations to comply with Article 101 of the Treaty on the Functioning of the European Union. The reasoning underlying this judgment is that, as long as the licensee can terminate the license agreement, the expiration of the licensed patent would not place the licensee at a competitive disadvantage in the market79 because terminating the license agreement would relieve the licensee of the obligation to pay running royalties.
An issue concerning royalty obligations and the timing of terminating a license agreement is whether royalty payments may be refunded to the licensee. When a court or a tribunal declares that a licensed patent is invalid or that the licensee does not infringe the patent, the licensee might have already paid running royalties up to the termination of the agreement even though, in retrospect, the patent was invalid or not infringed. If so, are licensees entitled to a refund of the royalties? The answer varies among jurisdictions, for example, the United States, France, and Japan.
For example, in a case ultimately decided by LaCour de Cassation of France,98 the owner of a patent for agricultural technology sued an equipment manufacturer for infringing claim 52 of the patent. A court of ap peal in France found the defendant liable for patent infringement. The parties then entered into a settlement and licensing agreement on February 16, 1990. Under the agreement, the defendant was required to pay damages up to the date of the court's decision on infringement. Furthermore, to enable the defendant to manufacture the equipment in the future, the patentee granted a non-exclusive license to exploit the patent. Defendant agreed to pay royalties.
Approximately five years later, on January 24, 1995, an appeals court in France invalidated claim 52 of the patent for lack of inventiveness. The licensee demanded restitution of the payments made under the agreement.
On December 8, 1999, the Court of Appeal of Paris annulled the agreement of February 16, 1990, upheld the validity of the damages payments, and granted the licensee's request for restitution of the royalty payments made before the patent was held to be invalid. The parties appealed.
On January 28, 2003, LaCour de Cassation of France determined that it was proper to void the license agreement because Article L. 613-27 of the French Intellectual Property Code provides that the decision to invalidate a patent has an absolute effect. La Cour de Cassation also affirmed the Court of Appeal's decision that the payment of damages should remain undisturbed. The Court of Appeal's decision on the restitution of royalty payments, however, was overruled. La Cour de Cassation stated that the invalidation of the patent and the resulting annulment of the contract do not trigger the restitution of the royalties that the licensee paid for the privileges under the contract during the period before the court's judgment declaring the invalidity of the patent. Hence, the licensee was not able to obtain a refund of the royalties.
In Japan, the expiration of a Japanese patent or its invalidation extinguishes the rights granted under a license agreement based on the patent.99 The prevailing view is that when the licensee entered into the license agreement, it assumed the risk that a patent will be invalidated.100 Japanese courts examine if the license agreement explicitly provided whether the licensee is entitled to a refund of royalty payments once the licensed patent is invalidated. Courts also query whether the licensor guaranteed the validity of the patent.
For instance, in a case101 involving Japanese Utility Model No. 909305, the future licensee expressed misgivings about the validity of the utility model. In response the owner of the utility model said, “No problem. Don't worry. We won't cause you any hassle.” The license agreement contained a clause stating that royalties paid by the licensee will not be refunded for any reason. The parties signed the agreement. The licensee paid royalties from October 1974 to June 1976. However, the utility model was invalidated on July 19, 1976, and the invalidation was affirmed on January 24, 1980.
The licensee demanded a refund of the royalty payments pursuant to Article 95 of the Civil Code of Japan. The licensee argued that there was a mistake in the signing of the contract because the licensee had assumed that the utility model would remain valid.
The District Court of Tokyo rejected this argument. The district court noted that the contractual language explicitly denied any entitlement to a refund of the royalties paid by the licensee. The district court also found that the licensee accepted these terms while recognizing a reasonable possibility that the utility model might be invalidated. The district court added that the licensor's oral assurance does not override the contractual agreement that royalties are not refundable.
Running royalties present multiple levels of intricacies. Principles of patent and antitrust laws are intertwined. Running royalties may be viewed as being premised on the validity of the licensed patents, while they can also be viewed as consideration for the licensee's rights, paid under the assumption that the patents might be invalidated. Case law from various jurisdictions provides clarity to issues involving running royalties. Genentech v. Hoechst indicates that running royalties are due under Article 101(1) of the Treaty on the Functioning of the European Union as long as the license agreement is effective and the licensee can terminate the agreement with reasonable notice. Kimble v. Marvel teaches that patent-related royalties cannot be charged for use occurring after the patent's expiration. These judgments provide a helpful guidance for future negotiations and the drafting of cross-border license agreements.
See Cour d’appel de Paris, Présentation de la Cour d’appel, http://www.ca-paris.justice.fr/index.php?rubrique=10977.
See Case C-567/14, Genentech Inc. v. Hoechst GmbH, ECLI:EU:C:2016:526, Opinion of Advocate General Wathelet at paras. 28-29 (Mar. 17, 2016). The original language of the case is French.
See C-567/14, Genentech Inc. v. Hoechst GmbH, ECLI:EU:C:2016:526, Judgment of the Court at para. 43.
See id. at para. 3.
Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., 716 F.3d 586, 588 (Fed. Cir. 2013).
Id. at para. 6; Sanofi-Aventis, 716 F.3d at 588-89.
Case C-567/14, Judgment of the Court at para. 4.
Sanofi-Aventis, 716 F.3d at 589.
Case C-567/14, Judgment of the Court at para. 8; Sanofi- Aventis, 716 F.3d at 589.
Case C-567/14, Opinion of Advocate General Wathelet at para. 6.
Case C-567/14, Judgment of the Court at para. 9.
See Case C-567/14, Opinion of Advocate General Wathelet at n. 4.
Case C-567/14, Judgment of the Court at para. 10.
Id. at para. 11; Sanofi-Aventis, 716 F.3d at 589.
Case C-567/14, Judgment of the Court at para. 11.
Id. at para. 12; Sanofi-Aventis, 716 F.3d at 589.
Case C-567/14, Judgment of the Court at para. 12; Sanofi- Aventis, 716 F.3d at 589.
Id.; Sanofi-Aventis Deutschland GMBH v. Genentech, Inc., Nos. C 08–4909 SI, C 09–4919 SI, 2011 WL 839411, at *4-*7, *10-*11, *13-*14 (N.D. Cal. Mar. 7, 2011).
The United States Patent No. 5,849,522 was issued on December 15, 1998. The United States Patent No. 6,218,140 was issued on April 17, 2001.
Case C-567/14, Judgment of the Court at para. 14; Case C-567/14, Opinion of Advocate General Wathelet at para. 20.
Id. at paras. 4-5; See C. CIV., art. 1518; C. CIV., art. 1520.
Case C-567/14, Judgment of the Court at para. 15; Case C-567/14, Opinion of Advocate General Wathelet at para. 26.
Case C-567/14, Judgment of the Court at para. 18.
Dubowski, Tomasz. Constitutional Law Of The European Union 76 (Temida 2 2011).
Court of Justice of the European Union, References for preliminary rulings, http://curia.europa.eu/jcms/jcms/Jo2_7024/en/; JEFF KENNER, EUROPEAN UNION LEGISLATION 2011- 2012 254 (Routledge 2012).
See Case C-567/14, Judgment of the Court at para. 35.
The Treaty on the Functioning of the European Union art. 101(1), May 9, 2008, 2008/C 115/01.
Case C-567/14, Judgment of the Court at para. 37.
Case C-567/14, Opinion of Advocate General Wathelet at para. 82.
See Case C-567/14, Opinion of Advocate General Wathelet at para. 89.
Case320/87,Ottungv.Klee&WeilbachA/S,ECLI:EU:C:1989:195, Judgment of the Court atpara. 1 (May 12, 1989).
See Case C-567/14, Judgment of the Court at para. 39 (citing Case 320/87, Judgment of the Court at para. 11); See also Case 320/87, Judgment of the Court at para. 13.
Id. at paras. 40, 43.
Legal Information Institute, per se, https://www.law.cornell.edu/wex/per_se.
See Kimble v. Marvel Entm’t, LLC, 135 S.Ct. 2401, 2405 (2015).
See U.S. Patent No. 5,072,856 (filed May 25, 1990).
Kimble, 135 S.Ct. at 2406.
Kimble v. Marvel Entm’t, 727 F.3d 856, 857 (9th Cir. 2013).
See Trevor W. Morrison, Stare Decisis in the Office of Legal Counsel, 110 COLUM. L. REV. 1488, 1499 (2010); Martin Shapiro, Toward a Theory of Stare Decisis, 1 J. LEGAL STUD. 125 (1972); Jack Knight & Lee Epstein, The Norm of Stare Decisis, 40 AM. J. POL. SCI. 1018, (1996).
Kimble, 135 S.Ct. at 2410.
Kimble, 135 S.Ct. at 2408.
Kimble, 135 S.Ct. at 2407.
Kimble, 135 S.Ct. at 2407 (quoting Brulotte v. Thys Co., 379 U.S. 29, 31 (1969) (quoting Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249, 256 (1945))).
Kimble, 135 S.Ct. at 2407, 2411.
This may explain why the Court of Justice of the European Union applied Ottung in Genentech v. Hoechst. Unlike the patents in Genentech v. Hoechst, the patents in Ottung had expired, and post-expiration royalties were at issue. Case 320/87, Report for the Hearing, Ottung v. Weilbach A/S, 1989 E.C.R. 1177 at 1179.
Case 320/87, Report for the Hearing at 1179.
Case 320/87, Judgment of the Court at para. 11.
Case C-567/14, Opinion of Advocate General Wathelet at n. 11.
Miotox LLC v. Allergan, Inc., No. 2:14-cv-08723- ODW(PJWx) (C.D. Cal. Oct. 5, 2015).
Case C-567/14, Judgment of the Court at para. 7.
C-567/14, Judgment of the Court at para. 32.
See Kimble, 135 S.Ct. at 2413.
Esoterix Genetic Labs. LLC v. Qiagen Inc., 133 F.Supp.3d 349, 361 (D. Mass. 2015) (citing Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1567-68 (Fed.Cir.1997)). See also Go Medical Indus. v. Inmed Corp., 471 F.3d 1264, 1273 (2006).
See, e.g., St. Regis Paper Co. v. Royal Indus., 552 F.2d 309, 314 (2d Cir. 1977); Troxel Mfg. Co. v. Schwinn Bicycle Co., 465 F.2d 1253 (6th Cir.1972); Transitron Elec. Corp. v. Hughes Aircraft Co., 649 F.2d 871 (1st Cir. 1981).
St. Regis Paper Co., 552 F.2d at 310.
Laure Marino, Droit De La Propriété Intellectuelle 89 (Presses Universitaires de France 2013).
See Id. (citing Cass. com. 28 janv. 2003, n° 00-12149: Propr. industr. 2003, comm. 36, note J. Raynard).
Cass. com. Jan. 28, 2003, Bull. civ. IV N° 11, p. 12.
NOBUHIRO NAKAYAMA, TOKKYO-Hō 498, 508 (Kōbundō 2016) (1993).
See, e.g., Nihon Sōgō Kikaku Kabushiki Gaisha v. M.F.I. Net (S) Pte Ltd., 2168 HANREI JIHŌ 74 (Tokyo D. Ct., July 18, 2012) (finding that there was no deception on the part of the patentee during the formation of a contract with the licensee when the licensed patent was later invalidated).
Toyo Suisan Kabushiki Gaisha v. Nissin Food Products Co., Ltd., 1070 HANREI JIHŌ 94 (Tokyo D. Ct., Nov. 29, 1982).
Kazuhiko Yoshida, 100 Kenri Mukō no Baai no Kibarai Jittshiryō Henkan no Yōhi (100 Whether Royalties Already Paid Must Be Refunded When Rights Are Invalidated), JURIST NO. 170 TOKKYO HANREI HYAKU SEN 206, 207 (Yūhikaku 3d Ed. 2004).

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