On 14 December 2010, the European Commission (the “Commission”) adopted a new suite of rules governing co-operation between actual or potential competitors, consisting of (i) guidelines on the applicability of EU competition law to horizontal co-operation agreements (the “Guidelines”) and (ii) two new block exemption regulations covering: (1) specialisation and joint production agreements; and (2) research and development agreements (the “R&D BER”).

The Guidelines and block exemption regulations replace existing rules which had been in place for a decade and cover a large number of different types of horizontal co-operation agreements. In an effort to break down the myriad new rules to manageable proportions and in a user-friendly style, GTM has prepared a series of alerts which have examined the rules by types of agreement. This, the final alert in the series, focuses on research and development agreements.1

Background

The R&D BER entered into force on 1 January 2011.2 It sets out the parameters of a “safe harbour” - an agreement falling within it is deemed to comply with EU competition law without the need to carry out an in-depth assessment of its effects on competition. The existence of the safe harbour provides companies with a measure of regulatory certainty as it allows them to implement R&D agreements safe in the knowledge that they comply with EU competition law.

There is, however, no presumption that R&D agreements which do not benefit from the safe harbour breach EU competition law. Such agreements must be individually assessed to determine whether they have anti-competitive effects. If so, it must be determined whether such effects are outweighed by any procompetitive effects. Such assessments nowadays are undertaken by the parties themselves (i.e. there is no notification or pre-clearance process) and it is in this context that the R&D chapter contained in the Guidelines is particularly useful.

The safe harbour

The R&D BER covers a wide range of R&D agreements, including agreements governing joint or “paid for” R&D of products or technologies - in both cases including or excluding joint exploitation of the results of the R&D.

As is common for EU block exemption regulations issued in recent years, the primary measure used for assessing whether an R&D agreement benefits from the safe harbour is the combined market share of the parties to the agreement: an R&D agreement will fall within the safe harbour if the combined market share of the parties to the agreement does not exceed 25% in any of the relevant markets affected by the agreement.

Depending on the nature of the R&D it may be necessary to assess its impact on a number of different markets:

  • if the R&D relates to the improvement of existing products, the product market for such products and, if the improved product is an intermediary product, potentially any relevant downstream markets for products incorporating the intermediary product;
  • if the R&D covers intellectual property rights (“IPRs”) which are marketed separately, any relevant technology market; and/or
  • in certain industry sectors (e.g. pharmaceuticals), the impact of the R&D agreement on competition in innovation (i.e. competition in the research efforts themselves).

Restrictions of competition by object

The R&D BER specifies a number of so-called “hardcore restrictions”, the inclusion of which will take the entire R&D agreement outside the safe harbour regardless of whether the combined market share exceeds the 25% threshold. “Hardcore restrictions” include provisions which have as their object:

  • restricting the freedom of the parties to carry out R&D (independently or with third parties) in a field unconnected with that covered by the R&D agreement or, after the completion of the joint R&D, in the field to which the R&D agreement relates;
  • limiting output or sales, except for: (i) setting production targets in the context of joint production; (ii) setting sales targets in the context of joint distribution or licensing; (iii) practices constituting specialisation in the context of exploiting the R&D results; and (iv) restricting the freedom of the parties to manufacture, sell, assign or license products or technologies which compete with the products or technologies that are the subject of the agreement during the period for which the parties have agreed to jointly exploit any R&D results;
  • fixing prices when selling the product or licensing the technologies to third parties, except vis-à-vis immediate customers or licensees if any joint exploitation includes joint distribution or licensing;
  • restricting the territory in which, or the customers to whom, the parties may passively sell or license, except for any requirement to exclusively license the results of the R&D to another party;
  • limiting active sales of products or technologies in territories or to customers which have not been exclusively allocated to one party by way of specialisation in the context of exploitation of R&D results; and
  • restricting the ability of users or resellers to obtain the products from other resellers.

Once the Commission has determined that an R&D agreement constitutes an infringement by object, it is not required to analyse the actual effects of the agreement on the market. Such an agreement is also unlikely to have pro-competitive benefits which outweigh its anti-competitive effects.

Clauses and agreements falling outside of the safe harbour

In addition to the hardcore restrictions outlined above, there are two types of so-called “excluded restrictions” which will not benefit from the safe harbour:

  • obligations not to challenge the validity of IPRs held by the parties which are relevant to the joint R&D;3 or
  • obligations not to grant licences to third parties to manufacture the products or apply the technologies unless the R&D agreement provides for the exploitation of the results by at least one of the parties and such exploitation takes place in the EU vis-à-vis third parties.

In contrast to the hardcore restrictions, the presence of excluded restrictions does not mean that the remainder of the agreement cannot benefit from the safe harbour.

Any agreements (and excluded restrictions) which do not benefit from the safe harbour need to be individually assessed to determine whether or not they have anti-competitive effects and, if so, whether such effects are outweighed by any pro-competitive benefits the R&D agreement may have. To do so, the parties will need to be in a position to demonstrate that each of the following cumulative conditions is met:

Efficiency gains

The R&D agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress. The Guidelines and R&D BER recognise that R&D agreements can result in significant efficiency gains. For instance, the combination of complementary skills and assets may result in improved and/or new products and technologies which, in the absence of joint R&D efforts, may have taken much longer to be developed or may not have come to market at all. In addition, joint R&D may result in lower costs and lead to wider and faster dissemination of knowledge which may itself result in further innovation which builds on the results of the joint R&D.

Indispensability

The restriction of competition giving rise to the efficiency gains must be indispensable to their attainment. In other words, restrictions must not go beyond what is absolutely necessary and the parties should always use the least restrictive means of achieving any efficiency gains. In this context, the Guidelines make it clear that hardcore restrictions are unlikely to be considered indispensible.

Pass-on of benefits to consumers

The parties to an R&D agreement must allow consumers a fair share of the benefit resulting from the efficiency gains (e.g. by way of lower prices, superior product quality or greater variety of products). In other words, efficiency gains which only benefit the parties are insufficient to justify co-operation between competitors.

No elimination of competition

Lastly, any R&D agreement which permits the parties to eliminate competition in respect of a substantial part of the products or technologies in question will not comply with EU competition law.

Conclusion

The chapter on R&D agreements contained in the Guidelines and new R&D BER do not differ dramatically from the rules previously applicable to co-operation in the R&D arena. The Commission clearly considered the preexisting regime to be broadly satisfactory. Accordingly, R&D agreements continue to constitute the most favourably treated category of horizontal co-operation agreement (as demonstrated by the high 25% market share threshold used for the safe harbour).

The Commission has, however, taken the opportunity to update and modernise the applicable rules. In particular, the scope of the safe harbour for R&D agreements has been widened to expressly include “paid-for” research and the rules relating to joint exploitation of the results of R&D have been clarified. As a result, the parameters of the safe harbour are now both clearer and less rigid - a welcome development for parties attempting to assess whether or not their existing and new R&D agreements comply with EU competition law.