Patent license agreement to formulate, market and sell a product in France and other countries / Failure of the patent owner to pay annuities as required under French patent law; lapse of patent; misrepresentation by patent owner of the fact that the patent had lapsed / Scope of the Terms of Reference, Art. 16 of the ICC Rules: no new claims allowed unless by agreement of all parties / Arbitrator's jurisdiction over Defendants' conduct which tend to the lapse of the patent (yes), irrespective of whether or not questions as to the validity of a French patent are of public policy within the exclusive jurisdiction of State civil courts / Breach of contract under French law (yes) / Termination of the license agreement as a result of the lapse of the patent (yes) / Licensee's entitlement to recover lost profits (yes)

This arbitration took place in Los Angeles. The arbitrator applied French Law to the merits.

'Claimant's claim

In 1976, French patent No. XX001 (the application of which was filed in 1972) was issued to Defendant 1 [a U.S. Company] covering a compound known as XXl and disclosing the method for its production as well as therapeutic applications.

Claimant [a French Company] and Defendant 1 entered into an option agreement, in 1979, whereby, in consideration of the payment of $100.000 U.S. paid by Claimant to Defendant 1, Defendant 1 granted to Claimant an exclusive option to acquire certain license rights for the exploitation of XX1 in France and certain other countries.

Claimant and Defendant 1 entered into a license agreement, dated in 1979 whereby in consideration of the payment by Claimant to Defendant 1 of $ 100.000 U.S., Defendant 1 granted to Claimant a sole license (as defined in the License Agreement) under French patent No. XX001 to formulate product (i.e. various dosage forms) from the compound XXI in accordance with Defendant l's instructions, and to market, use and sell said product in France (referred to as Territory A) and a semiexclusive license to market, use and sell said product in certain other countries (referred to as Territory B), the whole subject to the terms and conditions of the License Agreement.

By said License Agreement, Claimant agreed to proceed with, at its own expense and cost, preclinical and clinical experiments and required clinical pharmacology studies to obtain the required registration to market the said product. In the event that Defendant 1 desired to register said product in France, Claimant agreed to help Defendant 1 in such efforts to the maximum extent permitted by law. Claimant alleged, however, that it was not obliged to file a registration dossier. In the event that a product registration dossier were not filed in France with the competent authority within 30 months of the execution of the License Agreement, Defendant 1 would have the right under certain conditions to limit the license granted to Claimant by rendering it non-exclusive for France and revoking it for Territory B.

By agreement, executed in counterparts in 1981 and 1982, Claimant, Defendant 1 and Defendant 2 [a U.S. Company] agreed to amend the License Agreement to extend the time to file the registration dossier in France until 1984.

The License Agreement provides that it shall remain in force from the date of its signature for the life of French patent No. XX001. Under French law, the term of a patent is 20 years from the date of application (i.e. in the case of French patent No. XX001 the term would run until 1992).

Claimant and Defendant 1 entered into a supply agreement, as of 1979 whereby Defendant 1 agreed to supply to Claimant and Claimant agreed to purchase from Defendant 1 XXl in accordance with certain conditions as to quality, price, payment, etc. The Supply Agreement provides that it would remain in force as long as the License Agreement remains in force.

In 1985, Claimant learned that French patent No. XX001 had irrevocably lapsed by operation of law on or about ...1980, for failure of the patent owner to pay annuities as required under French patent law. Claimant alleges that Defendant l's failure to pay the annuity payments when due and the consequent lapse of French patent No. XX001 constituted a breach by Defendant 1 of the License Agreement.

Claimant alleges that Defendant 1 and Defendant 2 intentionally misrepresented the facts to Claimant, concealed the lapse of French patent No. XX001 from Claimant, and wrongfully represented to Claimant that the patent was in full force and effect knowing that Claimant would rely and did rely on said representations of Defendant 1 and Defendant 2. Defendant 1 and Defendant 2 thus caused Claimant to undertake clinical tests, studies and work, at substantial cost and expense, in reliance upon said representations of Defendant 1 and Defendant 2.

Claimant alleges that throughout a sixyear period from 1979, it was prevented from filing a registration dossier in France due solely to the repeated acts of Defendant 1 in breach of the License Agreement such as providing Claimant with defective XX1 for use in clinical trials and failing to timely provide Claimant with nondefective XX1 and necessary information.

But for the repeated and unexcused breaches of the License Agreement by Defendant 1 and Defendant 2 (and based upon the assertions of Defendant 1 and Defendant 2) Claimant alleges that it would have obtained a registration in France for XX1 for treatment of... by as early as six months after clinical studies of same. Moreover, if the assertions of Defendant 1 and Defendant 2 that XX1 has efficacy in the treatment of... were correct, Claimant alleges that it would have promptly obtained a registration in France for XX1 for that indication as well.

Claimant requests an award providing for the return of the $ 200.000 U.S. paid by Claimant to Defendant 1, an amount to be determined for compensation for the costs and expenses incurred by Claimant, and an amount to be determined for consequential damages including lost profits, together with interest accrued on these amounts.

Defense and Counterclaim of Defendant 1 and Defendant 2

Defendant 1 and Defendant 2 allege that the lapse of French patent No. XX001 is not a breach of the License Agreement for the reason that the License Agreement does not make reference to French patent No. XX001 but only generally refers to Defendant 1's patents in the United States and France.

Defendant 1 alleges that at all relevant times it performed all conditions and covenants required to be performed by it under the Option Agreement, the License Agreement and the Supply Agreement except as such performance was prevented or excused by Claimant.

Defendant 1 and Defendant 2 allege that by the terms of the License Agreement, Claimant agreed to conduct clinical tests, to promote the product, and take steps towards its registration in France. Defendant 1 and Defendant 2 further allege that Claimant only conducted one or two clinical tests, did little or nothing to promote the product and failed to take adequate steps towards XXl's registration in France.

(…)

The Procedure

The parties agreed that the procedural rules governing the arbitration would be those of the ICC Court of Arbitration supplemented by an agreed schedule of procedures and, to the extent that they are not inconsistent with the above, by the provisions of Sections 1282 to 1284.2 of the California Code of Civil Procedure (Chapter 3 Conduct of Arbitration Proceedings).

(…)

The document disclosure and inspection phase was not without incident. (...)

Because the parties failed to reach agreement and in order to obtain inspection of various documents on the Defendants' new list of documents, Claimant applied before me for an appropriate order.

In my order of October 1986, I directed the Defendants to produce various documents for inspection by Claimant's counsel (...)

On ..., the Defendants filed a formal "Objection to Jurisdiction of the Arbitrator" requesting that I suspend the present arbitration in order that the matter be adjudicated in a French civil court or, in the alternative, stay the present proceeding until the Defendant's claim regarding jurisdiction could be fully adjudicated before me.

In support of their Objection, the Defendants alleged essentially as follows:

(i) By ordering the production of certain documents regarding the lapse of the patent, the Arbitrator had exceeded the scope of the Terms of Reference;

(ii) The Arbitrator's ruling, by implication, meant that a new issue had been introduced in the arbitration namely Defendant 1 and Defendant 2's conduct which lead to the lapse of the patent. Such an issue directly concerns "patent validity", an issue of public policy within the exclusive jurisdiction of the French civil courts;

(iii) The Defendants maintained that they would not have agreed to the Terms of Reference had they known at the time that the issues in the arbitration were to be expanded to areas involving French public policy; and,

(iv) Since the agreement between Defendant 1 and Claimant was governed by French substantive law, the French civil courts had to resolve patent validity issues as a matter of public policy and this was a matter beyond the jurisdiction of the Arbitrator.

By way of reply to the representations made by Claimant against Defendant's Objection to Jurisdiction, the Defendants sought to introduce new grounds in support of said Objection. At this juncture, the Defendants also proposed an amendment to their written pleadings in order to introduce reference to French patent of addition No. YY002 and to deny the jurisdiction of the International Chamber of Commerce in this matter.

It seemed incongruous to me that a petitioner would be permitted at this stage of the arbitral proceedings, to introduce new grounds in support of its motion and to apply simultaneously to amend its basic pleadings. Normally all grounds in support of a motion must be urged together. For this reason alone Defendants' proposed amendments to introduce into these proceedings French patent No. YY002 were not receivable. I chose nevertheless to deal with the issue in order to prevent it being raised again later. As will be seen, my premonition subsequently turned out to be correct.

On ..., I ruled on the Objection to Jurisdiction and Defendants' application to amend their pleadings. I denied the Defendants' request for removal of the arbitral proceedings to a French civil court and ordered the Defendants to comply with my Order of October 1986, on or before December 10, 1986. I also dismissed Defendants' application to amend their pleadings to refer to French patent No. YY002.

In view of later developments in the present arbitration, I consider it important now to quote from my reasons for this incidental ruling:

"As Arbitrator I have the jurisdiction to determine my own jurisdiction (see Article 8(3) of the ICC Rules). For the reasons hereinafter explained I am satisfied that I have jurisdiction in this case.

Defendants take the position that I have ordered that an issue in this arbitration concerns Defendants' conduct giving rise to the lapse of the patent and that such an issue directly concerns patent validity. In this I do not agree. The fact that the patent has irrevocably lapsed and is no longer of any force and effect has been established under French law and there is no disagreement among the parties on this point.

Irrespective of whether or not questions as to the validity of a French patent is or is not within the exclusive jurisdiction of the French courts, such an issue is not before me. Nor do I consider the interest of Claimant in gaining access to documents (and ultimately to question witnesses of Defendant 1 and Defendant 2 on deposition) pertaining to the conduct of Defendant 1 and Defendant 2 prior to the lapse of the patent as in any way suggesting that Claimant considers that the validity of the patent is an issue in this arbitration.

In Claimant's Request for Arbitration, Claimant alleges fraudulent conduct on behalf of Defendant 1 and Defendant 2 in that Defendant 1 and Defendant 2 intentionally misrepresented the facts to Claimant, concealed the lapse of the patent from Claimant and wrongfully represented to Claimant that the patent was in full force and effect. I am of the view that documents and other evidence which go to the issue of whether Defendants deliberately caused the lapse of the patent or whether the lapse occurred through inadvertence, negligence or as a result of acts beyond the control of Defendants may be relevant to the issue of fraud raised by Claimant. Certainly the discovery of such documents and other evidence may be seen as being calculated to lead to the discovery of admissible evidence.

Irrespective of the merit of the objection raised by Defendants, said objection only goes to a matter of admissibility of evidence and, indeed, only to one particular category of evidence in this case. In fact, it may be that at the hearing such documents and other evidence as may relate to said category may not be relevant to the decision which I will be required to make at that time. It may be, as suggested by Defendants, that under French law such evidence may not be relevant to the question of damages. I presume that the parties will make appropriate representations and provide me with authority to support their respective points of view at that time.

It may be that Defendants may have to go to some trouble to comply with their obligation to produce documents and ultimately answer questions in respect of this category of evidence. Certainly this can be no objection to the production of documents and information.

In the circumstances, I see no reason whatsoever to suspend this arbitration in order that the matter be adjudicated in the French civil courts.

…

Proposed Amendments to Answer to Claimant's Request for Arbitration and Counterclaim

By way of reply to the representations made by Claimant against Defendants' Objection to Jurisdiction, Defendants seek to introduce new grounds in support of said objection. Further, Defendants also propose an amendment to their pleadings in order to introduce reference to French patent No. YY002 and to deny the jurisdiction of the International Chamber of Commerce over this proceeding.

It seems irregular that by way of reply, a petitioner would be permitted to introduce new grounds in support of his motion and to simultaneously apply to amend his pleadings at this stage to introduce such grounds and other allegations. Normally all grounds in support of a motion must be urged together. For this reason alone Defendants' proposed amendments to introduce into these proceedings French patent No. YY002 are not sustainable. Nevertheless, I propose to deal with this issue in order to prevent it being raised in a subsequent motion.

Defendants admit that French patent No. XX001 was declared by the French government to have irrevocably lapsed. Defendants allege that Defendant 1 is owner of French patent No. YY002, that this patent relates to the XX1 compound and that this patent is in force in France. Defendants allege therefore that patent protection does exist in France for XX1. Defendants state that this dispute is over the compound XX1 and that because a patent, not mentioned heretofore in these proceedings, may relate to XX1 that the issue of the validity of this patent arises and that issues as to validity of French patents are matters of public policy which may only be adjudicated before the French courts.

These arguments are to my mind specious. Firstly, these proceedings do not concern the compound XX1 per se. They relate to an alleged breach of contractual arrangements. Secondly, whether XX1 is covered by patents other than the one referred to heretofore in these proceedings is completely immaterial to the issues as defined in the pleadings and the Terms of Reference.

As I see it I have to make decisions on two issues. Firstly, may the Defendants amend their pleadings as requested.

Secondly, would any of the amendments permitted give rise to a question of jurisdiction which I would then have to decide.

Article 16 of the ICC Rules provides that parties to an arbitration may make new claims or counterclaims before the Arbitrator only if one of two conditions are satisfied. The first being that these remain within the limits fixed by the Terms of Reference. In the alternative they must be agreed to by all parties and communicated to the Court. The Claimant does not agree to Defendants' proposed amendments. The question then before me is whether or not these proposed amendments would be permitted under the first condition.

I propose to deal seriatim with the specific amendments proposed.

(…)

For the reason that I am of the view that French patent No. YY002 is irrelevant to these proceedings and that the proposed amendments are not permitted I need not consider the question of the jurisdiction of the French civil courts.

Request for Removal to French Courts

For all of the reasons set out above I am not prepared to order removal to the French civil courts even if I had the authority to do so which I doubt."

(…)

REASONS FOR DECISION

I) Lapse of Patent No. XX001 (the "XXl patent")

The parties were in agreement that the XXl patent lapsed as 1980. The Defendants admitted that the XXl patent irrevocably lapsed as a result of Defendant l's failure to pay a $90 annuity fee.

II) Defendant l's conduct leading to the lapse of the XXl patent

Claimant alleged that Defendant l's failure to respond to six (6) communications from Defendant l's French patent agent over a fourteen (14) month period which culminated in the lapse of the XXl patent amounted to gross misconduct. (...)

After reviewing all the evidence on this question, I conclude without any hesitation that Defendants received all annuity invoices and neglected through their fault to deal with them. Defendants' negligence in this regard caused the lapse of the XXl patent.

III) Consequence of the lapse of the XXl patent

Article 17 of the License Agreement reads as follows:

"This Agreement shall be in force from the date of its signature and shall continue in force for the life of the patent."

(…)

Claimant claims that the License Agreement terminated with the lapse of the XX1 patent. Claimant additionally claimed that the License Agreement terminated as a result of a material breach on the part of Defendants, i.e. allowing the XX1 patent to expire prior to its term.

In support of its argument, counsel for Claimant referred the Arbitrator to the decision of the Court of Appeals of Paris in Fridor vs. Exhenry (Paris, March 3, 1953) where a patent owner allowed the licensed patent to lapse for failure to pay an annuity payment. I have found that decision very helpful. In that case, the Court held that the payment of annuities was the responsibility of the patent owner and that if he failed to do so he had an obligation to repair the prejudice suffered by the licensee as a result thereof.

Defendants argued that the lapse of the XXl patent did not materially affect Claimant's rights under the License Agreement. Defendants' argument was that Claimant continued to enjoy substantial benefit under the License Agreement, particularly in view of the existence of patent of addition No. YY002. On the basis of certain authorities, Defendants maintained that a licensor is obliged to disclose to the licensee and provide the latter with improvements discovered and protected prior to the signing of the License Agreement. I have read all of these authorities.

Before dealing with this issue, I remind the parties that, during the discovery phase of this arbitration, I had ruled, inter alia, that French patent No. YY002 could not be introduced into the Defendants' pleadings because of clear ICC Rules. However, in their written submission, counsel for Defendants introduced an argument which rests on the existence of this patent of addition. The existence of this patent is a fact which requires that I deal with the argument which Defendants presented and I will now do so.

In the Fridor case, the Court rejected the submission of the licensor that the licensee nevertheless continued to enjoy a de facto monopoly after the lapse of the licensed patent. The Court concluded that the licensor's obligation to provide the licensee with the benefit of the licensor's experience and related technology was accessory to the grant of the license but could not be viewed as constituting a separate ground to maintain the license after its principal and essential object had disappeared. The Court did state, however, that any factual situation continuing after the lapse of the licensed patent could be taken into account in considering the prejudice suffered by the licensee.

Thus, even if Defendants were obliged to give Claimant the benefit of accessory technology and technical advice after the lapse of the licensed patent, it does not answer Claimant's main submission on this point.

The clear weight of the French authorities I have been referred to is to the effect that once the principal object being licensed is lost then the license terminates. It matters not that the licensee may have had an accessory right to improvements which, in this case, may have been covered by the patent of addition.

I conclude that the License Agreement ceased to be in force with the lapse of the XX1 patent. Since Defendants are responsible for the premature lapse of the patent they are else responsible for the premature termination of the License Agreement, as amended, which they breached.

(…)

CONCLUSIONS

For the reasons set above, I find that Defendants are responsible for the lapse of the XX001 patent. I find that the License Agreement has terminated for the reasons referred above imputable to Defendants, I also find that their conduct in respect of the lapse and their failure to advise the licensee, the Claimant, of this material fact for almost five years constitutes "faute lourde", thus entitling Claimant to recover the lost profits which it could have anticipated would flow to it under the License Agreement through the expiration of the patent in 1992. I find that the amount of Claimant's lost profits is 37,365,173 FF (including interest), which the Defendants are hereby ordered to pay to the Claimant.'