Parties to commercial contracts that can potentially affect trade in the European Union (the “EU”), or any of the markets in one of the EU member states, should ensure that their commercial relationships and contracts comply with EU competition law. This would include any contacts to be performed, wholly or partially, in the EU, all those where at least one party is established in the EU, and all contracts governed by the laws of an EU member state or that may need to be enforced by a court or tribunal in the EU.
The effect of an infringement of EU competition law can range from the unenforceability of the agreement as a whole, or the unenforceability of specific anti-competitive obligations, through to regulatory investigations and criminal charges and the potential issuing of injunctions against the parties and imposition of heavy fines.
On 1 January 2011 a new block exemption regulation came into force relating to research and development agreements (Commission Regulation (EU) No. 1217/2010, “the R&D Block Exemption”). This new regulation replaces a previous block exemption regulation applying to this category of agreements (Regulation (EC) No. 2659/2000) which expired on 31 December 2010.
The new block exemption regulation provides for a two year transitional period for agreements entered into before 1 January 2011. These agreements will continue to have the benefit of the previous block exemption until 31 December 2012, even if they do not meet the requirements of the new regulation. The new R&D Block Exemption will apply to all agreements entered after 1 January 2011, as well as to older R&D agreements after the expiry of the transitional period. It will expire on 31 December 2022.
Background on block exemptions
Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) (formerly Article 81(1) of the EC Treaty) prohibits agreements and arrangements having as their object or effect the restriction of competition in the EU. Article 101(2) provides that such restrictive agreements are void. The prohibition under Article 101(1) is broadly stated but it is qualified under Article 101(3). This provision, together with implementing legislation, authorises the EU Commission (the executive arm of the EU) to exempt certain agreements on the basis that the restrictive provisions they contain are outweighed by the economic benefits they create. Since 2003, the Commission no longer exercises its former powers to grant individual exemptions, but it continues to issue so called ‘block exemptions’ which lay down criteria under which defined categories of agreements are exempt from the application of Article 101(1), provided they comply with the conditions and requirements set out in the block exemption regulation.
National laws across the EU apply the same rules at the national level (including, typically, the protection of the block exemptions issued by the Commission). Therefore, the block exemptions are relevant even in relation to agreements that do not have a pan-European effect but only concern one or several EU member state.
The potential anti-competitive effect of R&D agreements and the purpose of the block exemption
From the point of view of the EU Commission, research and development agreements can be anti-competitive in a number of respects.
At the most basic level, any agreement which has the objective of restricting competition - i.e., creating a cartel - is unlawful, whether it is framed as an R&D collaboration agreement or as any other type of contract.
Secondly, as horizontal agreements, often between potentially competing companies operating at the same level of the market, genuine R&D collaboration agreements can also be anti-competitive because they can have the effect of limiting the number of competing technologies in development, thereby limiting technology development, reducing competition in the technology market as well as in the product market and tending to increase prices.
Finally, some agreements may be anti-competitive (and therefore unlawful) because they contain excessive or unjustified restrictions or other anti-competitive terms which are not justified by the legitimate purpose of the agreement.
On the other hand, in many circumstances, the Commission recognises that R&D agreements can be highly beneficial to the market and to consumers’ interest. R&D agreements enable companies to collaborate by pooling their collective expertise and resources, enabling the development of new technologies, often in circumstances where each of the collaborators does not have the means or technical expertise to develop the technology on its own.
The purpose of the block exemption regulation is to draw a line between those R&D collaboration agreements that should be welcome from a regulatory perspective and those that should be discouraged. Accordingly, the R&D Block Exemption provides a safe harbour from the application of the rule against anti-competitive agreements to those agreements that are unlikely to manifest any of the potential anti-competitive effects mentioned above.
The R&D Block Exemption seeks to achieve this in three principal ways:
(i) it only exempts agreements up to defined market share threshold, below which the anti-competitive effect is assumed to be unlikely or negligible;
(ii) it sets out a number of conditions that an R&D agreement must satisfy in order to be eligible for the exemption; and
(iii) it defines a number of “hardcore restrictions” the presence of which in a contract would remove the benefit of the block exemption from the entire contract, and a number of non-exempt or “excluded” restrictions, which are not covered by the exemption, and therefore can be held by a court to be unlawful (although their presence does not affect the rest of the contract that may continue to shelter from the application of Article 101).
If an agreement does not have the benefit of the block exemption, it is down to the parties and their legal advisors to decide whether it infringes Article 101. This assessment is carried out on the general principles laid down in Articles 101(1) and 101(3) TFEU, taking into consideration the parties’ position and the competitive circumstances in the market, the nature and purpose of the agreement and the scope, purpose and effect of any specific anti-competitive provisions it may contain (if any).
Article 2(1) of the R&D Block Exemption exempts R&D collaboration agreements from the general prohibition under Article 101(1) of TFEU. The exemption encompasses:
- agreements for the carrying out of joint R&D (whether through joint teams or by allocation of tasks between the parties);
- agreements for joint R&D combined with an agreement for the joint commercialisation of joint R&D results (including agreements for the joint commercialisation of R&D conducted under a previous R&D agreement);
- agreements that provide for commercialisation by one party under an exclusive licence granted by the other party;
- agreements by which one party is hired to carry out R&D work for the other party for payment.
Accordingly, the exemption applies to a fairly wide range of R&D agreements. The scope of the exemption is broader than the exemption provided under the previous block exemption regulation, which did not apply to paid-for R&D services and did not clearly extend to agreements providing for the commercialisation of the results by one party only, subject to an exclusive licence granted by the other. The new R&D Block Exemption is, therefore, more practical and useful than the previous one.
Market share threshold and the duration of the exemption
In terms of the parties’ market share, the new block exemption draws a distinction between agreements entered into between competitors and those between non-competitors, and where the parties are deemed to be competitors, it also distinguishes between agreements for paid R&D services and collaborative R&D agreements. The thresholds are summarised below:
Click here for table.
Conditions for the exemption
In order for the R&D agreement to benefit from the R&D Block Exemption certain conditions set out in Article 3 must be met. These conditions, in essence, are that:
- all participants must have access to the final results for the purpose of further (not joint) R&D activities (except research organisations whose business is to provide research services, which can be restricted as to the use of the results for further R&D work);
- unless the parties agree that only one will commercialise the results (subject to an exclusive licence granted by the others), they must all have access to each others’ background know-how where it is essential for exploitation of the results (but this may be subject to reasonable payments); and
- where one party is charged with manufacturing the relevant products (resulting from the R&D work), unless it is agreed that it should also have the exclusive distribution right, it must fulfil orders for the products from the other parties.
Hardcore and excluded restrictions
The block exemption sets out a list of hardcore restrictions which should not be included in any R&D agreement save in exceptional circumstances. The list of hardcore restrictions covers contractual restrictions that the Commission considers will nearly always fall within the scope of Article 101 of TFEU. If any hardcore restriction is found in an agreement, the agreement as a whole will not have the benefit of the block exemption and would have to be independently assessed on general principles.
The hardcore restrictions include provisions such as price fixing, output and sale limitations (i.e., restrictions on the manufacture and distribution of products) and the prohibition on a party’s right to carry out independent R&D activities (alone or in collaboration with third parties). Certain exceptions apply to these defined hardcore restrictions. For example, the R&D Block Exemption allows the parties to agree that only one of them will commercialise the products resulting from the R&D work subject to an exclusive licence granted by the others. However, careful examination and drafting is required in case the parties wish to include any restrictive terms in order to ensure they are within these exceptions.
In addition to the hardcore restrictions, the R&D Block Exemption defines certain ‘excluded (non-exempt) restrictions’, which may be held to infringe Article 101 (but which do not taint the entire agreement with illegality).
Excluded restrictions include the limitation of a party’s right to grant licences to third parties to manufacture the contract products or to apply the contract technologies (except where the agreement provides for one of the parties to exploit the R&D results and the exploitation takes place in the EU vis-à-vis third parties). Non-challenge clauses (that is, restrictions on a party’s freedom to challenge the validity of another’s intellectual property rights) are also excluded from the exemption.
Agreements that do not meet the criteria of the R&D Block Exemption must be independently assessed by the parties against the general principles laid down in Articles 101(1) and 101(3). Article 101(3) defines the circumstances in which an agreement that has a certain anti-competitive effect may nevertheless be lawful. These are, in summary, that:
- overall, the agreement must lead to efficiency gains;
- the restrictions contained in the agreement (if any) must be indispensable to the attainment of those efficiency gains;
- a sufficient share of those efficiency gains must be passed on to consumers so that they are at least compensated for the restrictive effects of the agreement; hence, efficiencies only accruing (or likely to accrue only) to the parties to the agreement will not suffice; and
- the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
These four criteria are interlinked and a key consideration in any self assessment of R&D collaboration agreements will be the assessment of competition in the relevant technology and product markets and the parties’ market shares within these markets. Where the parties dominate the markets, the efficiency gains are less likely to be found and the two last conditions are less likely to be met. By contrast, if the collaboration between the relevant parties is essential in order to develop the technology or product in question, there is a clear efficiency gain that may be sufficient to justify some restrictive terms, provided they are not excessive given the basic commercial interests of the parties as well as the interests of consumers.