The Paris Court of Appeal requests a preliminary ruling from the European Court of Justice to decide whether arbitral awards should be annulled

Paris Court of appeal, 23 September 2014, Nos. 12/21810, 13/09296, 13/17187

On 23 September 2014, the Paris Court of Appeal decided that a preliminary ruling from the European Court of Justice (“ECJ”) was necessary to determine whether the awards challenged in the present case should be annulled under Article 1520 para. 5 of the French Code of Civil Procedure for breach of international public policy.

By a contract dated 6 August 1992, the German company Behringwerke AG (“Behringwerke”), specialized in biotechnologies, conceded to the American company Genentech a global non-exclusive license for a protein increasing technology called “enhancers”, in exchange, notably, for a minimum annual royalty of 20.000DM (the “License Agreement”). The company Hoechst, a German company specialized in pharmaceuticals, subsequently replaced Behringwerke in the latter’s rights and obligations under the License Agreement.

In 2008, Genentech notified to Sanofi-Aventis Deutschland, one of Hoechst’s subsidiaries, its wish to terminate the License Agreement.

Considering that Genentech had breached its obligations under the License Agreement by (i) failing to pay royalties and (ii) infringed its patents, Hoechst and Sanofi-Aventis Deutschland then initiated ICC arbitration proceedings before a sole arbitrator.

In parallel, the parties commenced proceedings against each other in the United States in relation to (i) infringement of American patents and (ii) annulment of these patents, respectively.  The American courts ruled that Genentech had not infringed the patents.  This decision was ultimately confirmed by the United States Court of Appeal for the Federal Circuit in 2012.  The three decisions of the Paris Court of appeal in this case do not clarify whether they decided the issue of the patents’ validity but, as explained below, the Sole Arbitrator’s decision suggests the American courts annulled them.

In a partial award on the sole liability rendered in 2012, the Sole Arbitrator held that Genentech had breached the License Agreement on the basis that Genentech refused to pay the contractual royalties, considering that as long as the License Agreement was into force between the parties, the royalties were due irrespective of whether the related patents were valid or not.

This partial award was challenged by Genentech before the Paris Court of Appeal on the basis of Article 1520 para. 5 of the French Code of Civil Procedure.

However, the arbitral procedure continued and in a final award rendered in 2013, the Sole Arbitrator decided the sums Genentech was to pay Hoechst in accordance with the partial award on the sole liability.

Genentech also challenged this final award before the Paris Court of Appeal on the same basis, as well as subsequent Addendum thereto.

In the three challenge procedures, Genentech argued that the awards should be annulled as contrary to international public policy for breaching EU competition law, notably for violating Article 101 of the Treaty on the Functioning of the European Union (the “EU Treaty”), because, in essence, imposing to Genentech the payment of royalties for patents which do not exist (and consequently, without finding that there is a patent infringement) constitutes a violation of the principle of free competition.

The Paris Court of appeal noted in the three challenge procedures that (i) the parties had agreed that the License Agreement would be interpreted and performed in accordance with German law and (ii) it was not disputed between the parties that German law authorises the licensor to request payment of royalties from the licensee, notwithstanding the subsequent annulment of the patents to which the licensed rights were attached.

However, the Court of appeal also noted that, in the matter at hand, the patents had been retroactively annulled and, consequently, the royalties already paid were devoid of cause, which could be contrary to Article 101 of the EU Treaty for limitation of free competition.

Therefore, it decided to refer the issue to the ECJ in a preliminary ruling and ask whether “(…) the provisions of [Article 101 of the EU Treaty] should be interpreted as prohibiting that be given effect to a licence agreement requiring the licensee to pay royalties for the sole use of the rights attached to the licensed patents, when these patents are annulled?

To our knowledge, this is the first time that a French court applies for a preliminary ruling of the ECJ in an arbitration matter and it remains to be seen whether the Paris Court of Appeal will use this procedure more often, notably when examining whether the award has for effect of violating international public policy.

This decision shows, once more, France’s pro-arbitration stance.  Indeed, by deciding to refer the issue to the ECJ for a preliminary ruling, the Paris Court of Appeal pays more and more attention to the quality of the awards brought before it.

However, to date, challenges of awards for violation of international public policy were only admitted when the violation was effective, concrete and flagrante (Paris, 18 November 2004, Thalès Air Défense c/ GIE Euromissile, JCP G 2005, II, 10038, note G. CHABOT; ibid., I, 134, no 8, obs. Ch. SERAGLINI ; JDI 2005, p. 357, note A. MOURRE; D. 2005, pan. 3058, obs. Th. CLAY; RTD com. 2005, p. 263, obs. E. LOQUIN ; Rev. arb. 2005, p. 529, note L. G. RADICATI DI BROZOLO; RCDIP 2006, p. 104, note S. BOLLÉE ; Ch. SERAGLINI, «L’affaire Thalès et le non-usage immodéré de l’exception d’ordre public (ou les dérèglements de la dérèglementation) », Cah. arb., vol. III, Gaz. Pal. éd., 2006, p. 87).  Obviously, in the case at hand, the violation was not flagrant since the Court of Appeal decided to refer the issue to the ECJ.  Does that mean that the criterion of flagrance is no longer required?  It could be recalled that in a decision of 11 september 2013, the French Cour de cassation already seemed to come back on the requirement of flagrancy of the violation (Cour de cassation, First Civil Chamber, No. 11-17201): indeed, in spite of one of the parties’ express reference to these criteria, the Cour de cassation annulled the award on the sole basis of the violation of mandatory provisions without any reference to the usual requirements of efficiency, concreteness and flagrancy.

In the decisions at hand, the Paris Court of Appeal seems to confirm this tendency that flagrance is no longer required.

The risk of this trend is that in most matters interesting international public policy, the Court of Appeal may apply more and more for preliminary rulings, which will have for consequence to extend the duration of challenge proceedings.  However, one may note that, even though the awards were challenged, their enforcement was ordered.

The decisions are available here.

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