In March 2014 the European Commission (Commission) adopted a revised competition regime for technology transfer agreements.
Commission Regulation EU 316/2014 of 21 March 2014 (1) applies from 1 May 2014 to agreements by way of which companies authorise the use of patents, know-how or software by another company for the production of goods and services. The new rules update and replace the previous legal regime (2).
The provisions, which take the form of the Technology Transfer Block Exemption Regulation (TTBER) and accompanying Technology Transfer Guidelines, create an area of certainty for most licensing agreements from a competition law point of view.
The Commission’s approach is that such agreements will usually improve economic efficiency and be pro-competitive as they can reduce duplication of research and development, facilitate diffusion and generate product market competition. By creating additional revenue streams to recoup costs, licensing plays an important part in economic growth and consumer welfare.
However, the Commission is also aware that licensing agreements may also be used for anti-competitive purposes, e.g. where two competitors use a licensing agreement to divide up markets between themselves or where an important licence holder excludes competing technologies from the market.
Provisions of the TTBER
The Regulation stipulates that technology transfer agreements made in the following contexts are exempt from the restrictions laid down in Article 101(1) of the Treaty on the Functioning of the European Union (TFEU):
- agreements concluded between competing undertakings where the undertakings’ combined market share does not exceed 20 % of the relevant market;
- agreements concluded between non-competing undertakings where the undertakings’ combined market share does not exceed 30 % of the relevant market.
Market share is calculated on the basis of market sales value data relating to the preceding calendar year.
These exemptions are granted on condition that the agreements do not contain certain restrictions that are regarded as having significant anti-competitive effects. Articles 4 and 5 of the Regulation list a set of hardcore and excluded restrictions that are regarded as being severely anti-competitive restraints and are, therefore, not exempted. The hardcore list of the TTBER applicable to license agreements where licensor and licensee are competitors has been simplified but the simplification does not lead to any change in the substance of its hardcore list.
Changes introduced by the new Regulation
The Regulation introduces some important changes in the regime applicable to this type of agreement, namely:
(i) Areas covered by the TTBER
The TTBER 2014 clarifies the relationship between the TTBER and other block exemptions can cover the same or similar areas. In particular, the TTBER 2014 confirms that it does not apply to agreements that are covered by the Regulation on the Exemption of R&D Agreements (3) or the Regulation on the Exemption of Specialisation Agreements (4). Careful consideration is required in the drafting of contracts, therefore, to ensure that the desired clauses fall under the correct block exemption regulation.
(ii) Extending the scope of application of the safe harbour.
The new Regulation changes the approach to clauses in a contract which sees the licensee purchasing raw materials or equipment at the same time as licencing technology from the licensor. Under the previous regime, the technology licence had to be the main focus of the contract and so it wouldn’t be covered if the other elements, such as raw materials or machinery, accounted for a higher proportion of the value of the transaction than the technology licence. This requirement is no longer in place, so the new TTBER covers raw materials and equipment once they are directly related to the production or sale of the contract products which are produced using the licensed technology.
(iii) Passive sales between licensees.
The 2004 TTBER specifically excluded clauses whereby a licensor restricted one of its licensees from selling into another of its licensee’s territories because such restrictions may lead to partitioned markets and hinder market integration generally. However, the 2004 TTBER did grand safe harbour protection to a licensee seeking to impose such a restriction during the first two years of an agreement with a non-competitor. This two-year exception has been removed in the 2014 TTBER, meaning that all passive sales restrictions between licensees are now excluded from the safe harbour.
This type of passive sales restriction may not involve a restriction of competition in breach of Article 101 of the TFEU on a case-by-case basis pursuant to an analysis under the TTBER Guidelines and general principles of EU competition law. If the restraints are objectively necessary for the licensee to penetrate a new market, a period of protection longer than two years might be necessary for the licensee to recoup the costs incurred in entering a new market. This should however be assessed on a case-by-case basis in accordance with the Guidelines accompanying the TTBER 2014.
(iv) Licensee’s improvements to the licensed technology.
Under the previous Regulation, the safe harbour had been extended to ‘grant-back’ clauses whereby the licensee was obliged to grant an exclusive license to the licensor in respect of improvements to the licensed technology by the licensee, provided such improvements were not severable from the licensed technology.
Under the terms of the TTBER 2014, any such obligation is excluded from the safe harbour provided by the Regulation. Therefore, any such obligations must be analysed individually and could well be contrary to Article 101 of the Treaty. Even if the obligation is found to breach Article 101, however, the rest of the agreement can still qualify to benefit from the safe harbour. This is not the case for hardcore restrictions listed under Articles 4 and 5, as the presence of one such hardcore restriction would cause the entire agreement to be excluded from the safe harbour.
(v) Challenging the validity of a technology
So-called no-challenge clauses purport to deny the licensee the right to ever challenge the validity of intellectual property rights held by the licensor. A termination clause is a similar idea in that it allows the licensor to terminate the agreement if the other party challenges the validity of the licensed technology.
No-challenge clauses did not fall under the safe harbour of the TTBER 2004, and this remains the case under the TTBER 2014. This means that a no-challenge clause must be assessed individually, and may be seen as anti-competitive because they amount to a barrier against the removal of invalid intellectual property rights (IPR) that can have the effect of limiting innovation.
The Commission attempts to strike a balance between preserving incentives to innovate and ensuring that invalid IPR are removed by including termination clauses under the TTBER 2014 in exclusive agreements. An exclusive licensee will generally not have an incentive to have the IPR declared invalid, but a larger licensee may use the threat of a challenge to control a smaller licensor, rendering the licensor dependent on its exclusive licensee. Allowing termination clauses in such instances prevents smaller innovating licensors from being dominated by an exclusive licensee.
The TTBER 2004 included termination clauses in its safe harbour, so the TTBER represents a stricter approach on the part of the Commission and care should be taken in drafting non-exclusive licensing agreements in particular.
The Commission first launched its public consultation on the technology transfer regime in December 2011. The consultation revealed that the system in place was largely satisfactory, so the new TTBER and the Guidelines can be regarded as an incremental improvement to a useful and important tool for the industry.
Having a robust and secure framework allows for a flexible allocation of resources between R & D activities in the EU. For holders of IPR and their investors, the presence of this framework indicates that the Commission recognises that the exercise of IPR is essential for innovation and is pro-competitive. By eliminating unnecessary risk and uncertainty, the TTBER allows businesses to exercise these rights without an excessive regulatory overlay, provided the terms of their agreement can come within the terms of the Regulation.
From an Irish point of view, the Regulation is particularly important as IP licensing is generating substantial revenues for EU-based companies. Given the thriving SME sector in Ireland, the retention of termination clauses for innovators who fall under the market share thresholds and license out their technology on an exclusive basis could be crucial, especially in the mid- to long-term, as it allows them to develop without becoming dependent on their exclusive licensees.
Particular attention will be required, however, regarding ‘grant back’ clauses because they were permitted by the previous Regulation and are now prohibited, and became quite common under the protection of the safe harbour in the previous regime.
- Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements
- Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, Official Journal L 123 , 27/04/2004 P. 0011 – 0017, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32004R0772
- Commission Regulation (EU) No 1217/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of research and development agreements.
- Commission Regulation (EU) No 1218/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of specialisation agreements.