On 21 March 2014 the European Commission (Commission) adopted a revised Technology Transfer Block Exemption Regulation (TTBER), which exempts certain intellectual property (IP) licensing agreements from the EU competition law prohibition on anti-competitive agreements, together with associated Guidelines. The new TTBER will come into force on 1 May 2014.
Although the new TTBER and Guidelines do not represent a radical change from the current position, they do in a number of respects represent a narrowing of the circumstances in which the TTBER's "safe harbour" is available. For example, the benefit of the safe harbour is being removed from clauses in non-exclusive licensing agreements which allow for termination on challenge of validity, and from exclusive "grant-back" obligations in relation to non-severable improvements. Parties to licensing agreements will therefore need to examine their terms to assess whether they are compatible with the competition law rules under the new regime.
The current TTBER (adopted in 2004) provides a "safe harbour" for certain IP licensing agreements from the application of the Article 101 Treaty on the Functioning of the European Union (Article 101 TFEU) prohibition on anti-competitive agreements. If an agreement meets the conditions set out in TTBER it is presumed to be compatible with Article 101 TFEU (as either having no negative impact on competition or any negative impact being outweighed by the agreement's benefits), without any need for the parties to "self-assess" the agreement. These conditions include that: (i) the parties' market shares do not exceed the market share thresholds specified within the TTBER; and (ii) the agreement does not contain any "hard-core" restrictions.
The TTBER therefore, in principle, provides legal certainty for licensors and licensees. However, some rights-holders have criticised the current TTBER as overly complex and not providing a sufficiently broad and certain safe harbour.
The Guidelines accompanying the TTBER provide guidance on its application. They also provide guidance on the assessment of licensing agreements falling outside the scope of the TTBER; if an agreement does not benefit from the TTBER safe harbour (for example if the parties exceed the market share thresholds) this does not mean that it is problematic, only that it needs to be assessed under Article 101 TFEU.
The current TTBER expires on 30 April 2014, and in 2013 the Commission carried out a consultation on draft revisions to the TTBER and Guidelines (see our e-bulletin here).
Many respondents to the consultation, whilst supporting the Commission's proposal to retain the TTBER and Guidelines, urged it to simplify the regime and widen the protections available, reflecting the fact that the large majority of technology transfer agreements are pro-competitive (or neutral in terms of effect on competition). In particular, concerns were expressed about the dual market share thresholds and difficulties in assessing the scope of the relevant technology market and market shares (in particular in relation to evolving technologies), and the complexity of the provisions on "hard-core" restrictions. Respondents noted that where there is a lack of clarity within the regime as to whether provisions will be regarded as falling outside the scope of Article 101 TFEU, beneficial dissemination and exploitation of IP may simply not occur.
However, although there has been some streamlining of the TTBER's provisions, there has been no significant overhaul. Moreover, as explained below, the substantive changes have narrowed rather than widened the availability of the TTBER's safe harbour.
Structure of the TTBER
The current structure and operation of the TTBER remains essentially the same (with some amendments to definitions).
- The TTBER applies to agreements for the licensing of technology rights (know-how, patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates, plant breeder's certificates and software copyrights (excluding "mere reproduction and distribution of software copyright protected products")) for the purpose of the production of contract products. It also applies to agreements for the assignment of technology rights for the purpose of the production of contract products where part of the risk remains with the assignor.
- To benefit from the TTBER safe harbour the parties' combined market shares must not exceed the thresholds specified in Article 3. In relation to agreements between competitors the threshold is20%, and in relation to agreements between non-competitors the threshold is 30%. (The Commission has fortunately abandoned its previous revision proposal, which would have complicated this test further where a non-competitor licensee owns competing technology used for in-house production).
- The relevant markets for the assessment of the thresholds are the relevant technology market (the market for the licensed technology rights and their substitutes) and the relevant product market (the market for the contract products and their substitutes).
- If the agreement contains any specified "hard-core" restrictions the safe harbour of the TTBER is lost for the whole agreement. There are separate lists of hard-core restrictions for agreements between competing undertakings (actual competitors in the case of technology markets, and actual or potential competitors in the case of product markets), and for agreements between non-competitors.
- In relation to competing undertakings, the hard-core restrictions (set out within Article 4(1)) include: restrictions on a party's ability to determine its prices when selling products to third parties; the limitation of output; the allocation of markets or customers (subject to certain exceptions); and restrictions on the licensee's ability to exploit its own technology rights or on any party to carry out research and development. Some of the hard-core restrictions differ in application depending on whether the agreement is reciprocal or non-reciprocal.
- In relation to non-competing undertakings, the hard-core restrictions (set out within Article 4(2)) include: restrictions on a party's ability to determine its resale prices; the restriction of the territory into which and/or customers to whom the licensee may passively sell the contract products (subject to certain exceptions); and the restriction of active or passive sales to end-users by a licensee which is a member of a selective distribution system at the retail level.
- If the agreement contains any "excluded" restrictions (set out in Article 5), the safe harbour of the TTBER is lost for the restriction(s) in question. However, the remainder of the agreement will remain within the scope of the TTBER provided the restriction(s) is severable (which is a question for the national law governing the agreement) and the other conditions of the TTBER are met.
- The Commission or an EU Member State national competition authority may withdraw the benefit of the TTBER from a particular agreement if it considers the agreement is not on the facts compatible with Article 101 TFEU.
Key changes within the new TTBER
The key substantive changes are as follows.
- The new TTBER clarifies when certain provisions ancillary to the licensing of technology (for example provisions relating to the purchase of products by the licensee or which relate to the licensing or assignment of other IP) fall within its scope, and when they fall within the scope of other Commission block exemption regulations (such as those applying to vertical agreements and to research and development agreements).
- In relation to "excluded" restrictions, the new TTBER removes the benefit of the safe harbour from all exclusive "grant-back" obligations (obliging a licensee to exclusively license back to the licensor all improvements it has made to the licensed technology). The Commission's stated intention for this change is to ensure that there are sufficient incentives for follow-on inventions.
- Under the current regime only exclusive grant-back obligations concerning severable improvements are excluded from the safe-harbour.
- The change does not mean that exclusive grant-backs of non-severable improvements necessarily infringe Article 101 TFEU, but this will now need to be assessed on an individual case-by-case basis.
- Non-exclusive grant-backs will still remain within the scope of the TTBER.
- The new TTBER also excludes from the safe harbour "termination clauses" (which allow the licensor to terminate the license agreement if the licensee challenges the validity of the licensed technology) in non-exclusive licensing agreements.
- It now treats these in the same way as "no-challenge" clauses (which are currently excluded). The Commission considers that the two types of clause may have similar effects, in particular where this concerns standard essential patents, or where the licensor's technology otherwise has a very significant market position, where there would be particular incentives on the licensee not to challenge. It is concerned that such clauses are a barrier to the removal of invalid IP from the market.
- The change does not mean that such termination clauses in non-exclusive agreements will necessarily infringe Article 101 TFEU, but this will now need to be assessed on an individual case-by-case basis.
- However, the Commission has conceded since its consultation that termination clauses in exclusive agreements (which meet the remainder of the TTBER conditions) will continue to benefit from the safe harbour.
- In relation to "hard-core" restrictions within agreements between competitors, the new TTBER retains as a hard-core restriction any allocation of markets or customers (subject to certain exceptions). It removes the previous carve-out which had explicitly excepted obligations on the licensee to produce with the licensed technology only within one or more technical fields of use or one or more product markets. However, within the Guidelines the Commission states that this does not actually involve a substantive change; it states that such restrictions are not considered to have the object of allocating markets or customers (and therefore will not constitute a hard-core restriction).
- In relation to hard-core restrictions within agreements between non-competitors, the new TTBER retains as a hard-core restriction any restriction on the territory into which/the customers to whom the licensee may passively sell the contract products (subject to certain exceptions). It removes the previous carve-out which had enabled such restrictions on passive sales to territories or customers allocated by the licensor to another licensee to be exempted during the first two years of an agreement. The Guidelines note that this type of restriction may be possible if objectively necessary for the licensee to penetrate a new market, but that this should be assessed on a case-by-case basis.
In addition, the Commission has made some minor changes to the TTBER, including some adjustments to the definition of technology transfer agreements, some streamlining of the lists of hard-core restrictions, and the inclusion of additional guidance on the calculation of the market share of a licensor on the relevant technology market.
Key changes within the new Guidelines
In addition to the new Guidelines being updated to reflect the changes to the TTBER, and being generally restructured, some key substantive changes have been made.
- The Guidelines contain updated guidance on technology pools. The TTBER applies only to bilateral agreements and therefore does not apply to, for example, patent pools. The Guidelines do, however, provide guidance on when the Commission considers that the creation of a technology pool and the licensing of technology by the pool to third parties do not cause any problems under Article 101 TFEU. Parties can therefore structure their arrangements to comply with the conditions set out in the Guidelines.
- These conditions include: open participation; inclusion of only essential complementary technologies in the pool; safeguards against the sharing of sensitive information; and non-exclusive licensing of the pooled technologies.
- The Guidelines also contain guidance on the assessment of technology pools where these safe harbour conditions are not met.
- The revised Guidelines include updated guidance on the assessment of settlement agreements involving the licensing of technology rights.
- The new guidance states that settlement agreements which lead to a delayed or otherwise limited ability for the licensee to launch a product may be prohibited under Article 101 TFEU.
- The Commission states that if the parties are actual or potential competitors and there was a "significant value transfer" from the licensor to the licensee the Commission will be particularly attentive to the risk of market allocation or market sharing (although there is no further comment on what the Commission would consider to constitute "significant value transfer", nor on how such agreements will actually be assessed). This type of "pay for delay" or "reverse payment" settlement agreement in the context of patent disputes more generally is currently under the scrutiny of the Commission in the pharmaceutical sector (see our bulletin here).
- The guidance also states that no-challenge clauses in the context of settlement agreements can be caught in specific circumstances by Article 101 TFEU, for example where an IP right was granted following the provision of incorrect or misleading information.
Impact of the changes
Although the new TTBER and Guidelines do not represent a radical change from the current position, they do in a number of respects represent a tightening of the regime and a narrowing of the circumstances in which the TTBER's safe harbour is available. This will increase uncertainty for businesses, arguably without any compelling evidence that the provisions which the Commission has removed from the scope of the safe harbour have in practice caused a negative impact on competition such as to justify the changes.
Parties to technology transfer agreements will now need to review their agreements and assess in particular whether any exclusive grant-back arrangements in relation to non-severable improvements and any termination clauses in non-exclusive agreements are compatible with Article 101 TFEU on an individual basis. There is a short transitional exemption under Article 10 of the new TTBER under which agreements in force on 30 April 2014 which met the conditions for exemption under the old TTBER, but which do not meet the conditions for exemption under the new TTBER, will nevertheless remain exempt until 30 April 2015.
Any settlement agreements will need to be assessed carefully both in light of the revised (albeit limited) provisions of the Guidelines, and the Commission's developing practice in this area, which is currently subject to challenge before the EU General Court by Lundbeck and a number of generic pharmaceutical companies following the Commission's June 2013 decision to impose fines for entering into "pay for delay" agreements.