eulawandarbitration.com

By Miriam Driessen-Reilly

Case Note: Case C‑567/14: Opinion of Advocate General Wathelet delivered on 17 March 2016    Genentech Inc.v Hoechst GmbH, formerly Hoechst AG, Sanofi-Aventis Deutschland GmbH (Request for a preliminary ruling from the cour d’appel de Paris (Court of Appeal, Paris, France)

On 17 March 2016, Advocate General Wathelet delivered an opinion in the pending case of Genentech Inc v Hoechst GmbH, formerly Hoechst AG, Sanofi-Aventis Deutschland GmbH. This concerned a request for a preliminary ruling under Article 267 TFEU from the Court of Appeal, Paris, in relation to the application of Article 101 TFEU to the terms of a licence agreement governed by German law. More particularly, the question posed by the French court was whether Article 101 TFEU could be used to nullify an arbitration award which incorporated a decision to respect the terms of a licence agreement entered into under German law by which the parties agreed upon fees for the use of technology, although the respective EU patent was subsequently revoked.

The request was made in the context of an application by Genentech Inc. (a Delaware Corporation) to that court for annulment of an arbitration award delivered against it as the result of an international arbitration procedure. Genentech argued that the obligation imposed upon it by the Award to pay royalties in circumstances where the patent had been revoked (in the EU) or where there had been no infringement of the patent (in the US, as determined by a US Court), constituted a restriction on competition by both object and effect. Furthermore, Genentech argued that this effected trade between Member States, as in June 1998, the European Commission had granted EU wide marketing authorisation for one of the patented products under the terms of Council Regulation (EEC) No 2309/93.

Genentech had manufactured a certain drug (‘rituximab’) with a view to marketing it in a number of EU Member States. The royalties awarded by the arbitrator were calculated on the basis of net worldwide sales of the relevant products in that period (1998-2008). Given the high volume of sales in the EU in this timeframe, Genentech submitted that the restriction of competition which resulted from the obligation to pay the royalties in line with the arbitral award, directly affected trade between Member States.

 Genentech also argued that as it was required to pay for the use of a technology, which its competitors could make free use of, it was put at a competitive disadvantage on the market. Finally, Genentech argued that Hoechst and Sanofi-Aventis were unjustly enriched and rewarded by the receipt of running royalties in relation to discoveries to which they did not contribute. As such, the arbitral awards at issue enabled these companies to tax their competitors, imposing a financial burden on the pharmaceutical industry (and Genentech in particular), in contravention of EU competition law.

On the other hand, Hoechst and Sanofi-Aventis argued that there was in fact a very weak link between the disputed arbitral awards and the EU. The royalties in question did not relate to any European patents, but rather to patents registered in the US. Furthermore, the question ruled upon by the arbitrator was whether Genentech was contractually bound under German law to pay royalties provided for in the licence agreement. The royalties awarded to Hoechst and Sanofi-Aventis were calculated on the basis of worldwide sales of a certain product, whereas only 17% of that related to the EU.

 Opinion

Effect on Trade

As regards the assessment of the effect on trade, Advocate General Wathelet agreed with the Commission’s observations that it is for the national court to determine

“whether, in the light of the characteristics of the market at issue, it is sufficiently likely that the obligation to pay royalties, in compliance with the final award and under the licence agreement, exerts a direct or indirect, actual or potential influence on the movement of trade between the Member States, and that this influence is not insignificant.”

Restriction on Competition

In relation to the question whether there was a restriction on competition, Advocate General Wathelet found that “the aim of Article 101 TFEU is not to regulate commercial relations between undertakings in a general way.” Rather, it is “to prohibit some types of agreements between them which may affect the prevention, restriction or distortion of competition within the internal market.” As such, the question was not “whether Genentech was commercially disadvantaged by the sole arbitrator’s interpretation of the licence agreement or whether, with the (indisputable) benefit of hindsight, it would not have entered into such an agreement.”

This particular case could be compared with an earlier judgement in Ottung (320/87, EU:C:1989:195). That case also concerned the legality of a contractual obligation in light of EU Competition law, where the contract obliged the licensee to pay royalties for an indefinite period of time, notwithstanding the expiry of the relevant patent. In these circumstances, the Court found that it could not be ruled out that the reason for the inclusion in a licensing agreement of a clause imposing an obligation to pay a royalty could be unconnected with a patent. Rather, “such a clause may instead reflect a commercial assessment of the value to be attributed to the possibilities of exploitation granted by the licensing agreement …” However, there, the Court found that where the obligation to pay royalty was for an indeterminate period and therefore binding on the licensee even after the expiry of the patent concerned, then the arrangement could potentially constitute a restriction of competition. Having regard to the economic and legal context of the licensing agreement, such an arrangement could infringe Article 101(1) TFEU where the licence agreement either does not grant the licensee the right to terminate the agreement by giving reasonable notice or seeks to restrict the licensee’s freedom of action after termination.

By comparison, the arbitrator in this case had interpreted the contract under German law and had found that the commercial purpose of the contract was to enable Genentech to use the technology at issue without fear of litigation. Furthermore, according to the arbitrator, Genentech’s obligation to pay the royalties was due on account of entering into the licence agreement, rather than from the use of technology protected by valid patents. Therefore, the payment of royalties due under the agreement remained due, notwithstanding the fact that there was no de facto infringement (as determined by the US Courts) or that the European registered patents had been revoked. The contract included provision to terminate the arrangement at a short two-months notice. As such, the Advocate General noted that, after termination, Genentech was not restricted in any way, in particular as regards challenging the validity of the patents or the infringement of patents at issue. In these circumstances, the Advocate General considered:

 “that Article 101 TFEU does not preclude effect being given, in the event of revocation or non-infringement of patents protecting a technology, to a licence agreement which requires the licensee to pay royalties for the sole use of the rights attached to the licensed patents where, first, the commercial purpose of the agreement is to enable the licensee to use the technology at issue while averting patent litigation and, secondly, the licensee may terminate the licence agreement by giving reasonable notice, even in the event of revocation or non-infringement.”

 In line with respect for the arbitral proceedings, he found that it was not for the Court now to review or question the findings of the sole arbitrator and his interpretation of the licence agreement under German law, according to which royalties should be paid, even if the relevant patents had not been infringed and those registered within the EU revoked.

Arbitration, Review and the use of the Preliminary Reference under Article 267 TFEU

 Hoechst and Sanofi-Aventis submitted that it would be impossible for the Court to answer the question referred for a preliminary ruling without infringing French law, as this prevents the review of international arbitral awards on substance, unless there is a flagrant infringement of international public policy. In their submission, they argued that failing such flagrant infringement (such as a cartel), there is a distinction between situations where the competition issue was or was not addressed in the arbitral award. More particularly, where the competition issue was dealt with in the award, answering the preliminary reference would involve the Court in making a review of the award on substance, which would contravene French arbitration law. In this case, the competition issue involved the review of a licence agreement, which it was submitted could not constitute a flagrant infringement of Article 101 TFEU.

 For its part, the French government cited the Eco Swiss case (C-126/97), in which the Court held that the review by Member State Courts of international arbitral awards on public policy grounds (more particularly the application of EU competition law) may be ‘more or less extensive depending on the circumstances’, according to the rules adopted by the Member States within the framework of their procedural autonomy, thus reflecting the differing standards of review across the EU jurisdictions. In this regard, the French Government submitted that the French law, which enables the review of awards concerning flagrant infringements of public policy, is consistent with the principle of effectiveness laid down in EU law.

 However, the Advocate General has found that limitations in national law which restrict the review by national courts of arbitral awards involving public policy issues under EU law, such as the French law, which restricts a review to cases involving a ‘flagrant’ infringement of international public policy where the issue was already raised before an arbitral tribunal, ‘are contrary to the principle of effectiveness of EU law.’

 In this regard, Advocate General Wathelet referred back to the judgements in Eco Swiss (C-126/97), and Gazprom (C-536/13) and recalled that the Court has held that arbitral tribunals ‘constituted pursuant to an agreement’ are not courts of the Member States within the meaning of Article 267 TFEU. As such, arbitral tribunals have no right to make a preliminary reference to the ECJ under Article 267 in order to enquire whether a given arbitral award is compatible with EU law. This is left up to the courts of the Member States when dealing with an action for annulment or enforcement and recognition at national level. As the Advocate General puts it, “the system for reviewing the compatibility of international arbitral awards with substantive EU law through the public policy reservation, whether in the context of an action against recognition and enforcement or an action for annulment, shifts responsibility for the review downstream, namely to the courts of the Member States, rather than upstream, to arbitral tribunals.”

 The opinion then goes on to clarify the exact delineation of responsibilities between arbitrators and the courts with regard to ensuring the correct application of EU law. More precisely, according to the Advocate General, “[t]he task of arbitrators in international commercial arbitration is to interpret and apply the contract binding the parties correctly. In the performance of this task, arbitrators may naturally find it necessary to apply EU law, if it forms part of the law applicable to the contract (lex contractus) or the law applicable to the arbitration (lex arbitri). However, the responsibility for reviewing compliance with European public policy rules lies with the courts of the Member States and not with arbitrators, whether in the context of an action for annulment or proceedings for recognition and enforcement.”

 This could be compared with the application of Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters. In this case, the responsibility for ensuring compliance with EU law is placed on the court hearing the substance of the dispute, but not on the court dealing with recognition and enforcement.

In the particular case of the French law, the Advocate General took the view that if the review of an award on the basis of European public policy rules was limited to manifest or flagrant infringements of Article 101 TFEU, such a review would be “illusory” because many infringements in this area are not manifest, rather they are “covert”, and that would make it very difficult or even impossible for individuals to exercise their rights under EU competition law. In this regard, he referred to arguments submitted by Hoechst and Sanofi-Aventis, that only obvious infringements such as price fixing or market sharing would be caught, likely to the exclusion of restrictions by effect, which “would require more than a token examination of the substance of the arbitral award, which the French courts are unable to do.”

 Referring to the wording of Article 101 TFEU itself, which prohibits agreements between undertakings ‘which have as their object or effect’ the restriction of competition, he came to the conclusion that “either there is an infringement of Article 101 TFEU, in which case the agreement between undertakings at issue is automatically void, or there is no infringement at all.” From that point of view, it makes no difference whether the infringement was flagrant or not. “No system can accept infringements of its most fundamental rules making up its public policy, irrespective of whether or not those infringements are flagrant or obvious.”

As to the limitations under French law to review an arbitral award where a public policy issue was raised before the tribunal: the Advocate General referred back to the Gazprom case (C-536/13). There the Court found that the principle of mutual trust, which binds the courts of the EU member states does not apply to arbitral tribunals. These are not courts within the meaning of Article 267 TFEU. As such, the Attorney General found that the member state courts are not bound to respect the findings of tribunals where these involve the interpretation of EU law. More particularly in the context of competition law, “if Article 101 TFEU is a provision of fundamental importance to the EU legal order, the fact that the parties may have raised and debated the question of the incompatibility of the arbitral award with this provision before the arbitral tribunal cannot be decisive.” For the reasons given, the Advocate General therefore found that “the review by a court of a Member State of whether international arbitral awards are contrary to European public policy rules cannot be conditioned by whether or not this question was raised or debated during the arbitration proceedings, nor can it be limited by the prohibition under national law preventing the substance of the award in issue from being reconsidered.” Or, as he put it succinctly, “[p]ut another way, one or more parties to agreements which might be regarded as anticompetitive cannot put these agreements beyond the reach of review under Articles 101 TFEU and 102 TFEU by resorting to arbitration.”

Comment

 Most opinions given by Advocate Generals are followed by the European Court of Justice (ECJ), although this is not always the case. This opinion is most important in the context of the application of international public policy by arbitral tribunals and more particularly the ECJ’s view on the arbitral tribunal’s responsibilities in applying EU competition law to cases entrusted to it, the role of the Member State courts in ensuring the application of EU competition law, if necessary through the preliminary procedure under Article 267 TFEU and, last but not least, the notion that national arbitral procedural and substantive laws, which heretofore have been respected as a distinct territory may not be in line with the Treaty duty of effectiveness of EU law. In other words, arbitrators can be trusted to deal with the interpretation of national contractual law and they should apply EU competition law where necessary. However, the responsibility to ensure compliance with EU public policy (including EU competition law) lies with the Member State courts – assuming that the other party will seek to have the award set aside on the basis of public policy or apply to another Member State court to ensure that the award is not recognised or enforced.

 According to this opinion, regardless of the national provisions as to the standard of review of an arbitral award, the Member State court should have full power of review going to the merits of an award where EU competition law is in question. Apparently, this review does not stop with the ECJ’s own threshold, where manifest error of assessment is at stake. According to the Advocate General, nor should it matter whether the public policy issue was dealt with in the course of the arbitration procedure. Court reviews of public policy issues cannot be tempered by whether or not these issues were argued before a tribunal and dealt with in an award. By implication, therefore, this review should be comprehensive, taking into account that an infringement is not always obvious and by object, but sometimes less obvious by way of effect. To limit such a review would be to artificially distinguish between flagrant breaches of EU competition law and less flagrant breaches of EU competition law, when in any case, any breach of EU competition law will render a contract void.

 This means that the national court would be tasked with a full review of the competition law aspect of the case, whether or not this was dealt with by the arbitrator.

 It is true that a breach of competition law is nonetheless a breach of competition law, although it is also true that even EU competition law distinguishes between ‘hard core’ infringements involving cartels and therefore meriting the non-application of Article 101 (3) and those which are not deemed to be ‘hard core’ as such and therefore deserving the potential application of Article 101(3). Furthermore, the Advocate General’s opinion goes way beyond the judgement in Eco Swiss, where the Court showed full respect for the integrity of the national law on arbitration. And whereas, for better or for worse, previous decisions of the ECJ have held that an arbitral tribunal is “not a court” in the sense of Article 267 TFEU and therefore not subject to the duty of ‘mutual trust’, the fact is that arbitrators must apply EU competition law to any given case where they wish to ensure that the resulting award will not be prone to being set aside or not recognised and enforced within the EU. This interpretation is in line with the reasoning of Eco Swiss and reinforced within this opinion.

 The main development in this opinion is the idea that regardless of whether an EU competition law point has been argued before a tribunal and dealt with in an award and regardless of the national provisions regarding the arbitral standard of review, an award should be fully reviewable by Member State courts where EU competition law is an issue in the case at hand.

 It remains to be seen whether this opinion will be followed by the ECJ.

© Miriam Driessen-Reilly 11 May 2016