The licensor's right to terminate on challenge to validity no longer assumed to be in the public interest

The existing technology transfer block exemption ("TTBE") is to expire on 30 April 2014, having entered into force 10 years previously. It will be replaced by a new regulation, the period of consultation for which ended on 17 May 2013. The new draft TTBE should be read together with the new draft Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to Technology Transfer agreements, which will replace the existing guidelines (2004/C 101/02). The drafts can be viewed here.

Article 101

Article 101(1) prohibits agreements which have as their object or effect the restriction or distortion of competition. As an exception, Article 101(3) provides that the prohibition contained in Article 101(1) may be declared inapplicable in the circumstances there described.

TTBE

Categories of technology transfer agreements that fulfil the conditions set out in the TTBE are "block exempted" from the prohibition contained in Article 101(1) and are thus legally valid and enforceable.

The structure of the new TTBE, according to the draft at least, is very similar to the 2004 version. Conditions that combined market share of the parties does not exceed given thresholds (20% for competing and 30% for non-competing undertakings) are retained, albeit with some wording change. Article 4 contains a list of "hardcore restrictions", which are regarded as almost always anti-competitive. If a technology transfer agreement contains a hardcore restriction the agreement as a whole falls outside the scope of the block exemption.

Article 5 identifies three so-called "Excluded restrictions", such that the exemption does not apply to those obligations, rather than necessarily the entire agreement. Individual assessment is then required. If an agreement contains an excluded restriction, the remainder can still benefit from the block exemption if it is severable from the excluded restriction.

Right to terminate on challenge to validity to be sanctioned no longer

It is in the excluded obligations, that perhaps the greatest proposed change from the previous TTBE can be seen. Although bans on the licensee challenging validity have long been considered objectionable on competition grounds (the licensee being considered to be in the best position to determine validity of the licensed right), it has until now generally been accepted practice to provide the licensor with the right to terminate the licence in the event of a challenge to validity of the licensed rights by the licensee. Indeed, Art 5(1)(c) of the 2004 TTBE carved the right to terminate out from the general exclusion from exemption of no-challenge clauses. Many licences have such a termination right.

Now, in the proposed draft, the carve out is omitted. To the contrary, paragraph (125) of the draft Guidelines explains that also excluded from the safe harbour of the TTBE is the right to terminate on challenge to validity of the licensed rights because "Such a termination right can have the same effect as a non-challenge clause, in particular where the licensee has already incurred significant sunk costs for the production of the contract products. In these cases the licensee may be deterred from challenging the validity of the …right as it would risk the termination of the licensing arrangement and thus face significant risks which go far beyond its royalty obligations." It should be noted that, in paragraph (155) of the draft Guidelines, non-challenge and termination clauses solely concerning know-how are not excluded from the scope of the new TTBE.

Thus, in the future, we can expect prospective licensees will use the proposed new Art. 5(1)(c) and paragraph (125) as a basis to resist attempts by a licensor to include in a licence a termination right in the event of challenge to validity, a provision that hitherto has been very common.

No challenge claims in bona fide settlement agreements, however, are generally considered not to offend competition law (see paragraphs (226) and (227) of the draft Guidelines).

There is a transitional provision included in Art 10 of the draft of the proposed new TTBE, which provides that the prohibition of Art 101(1) should not apply before 30 April 2015 to agreements that satisfied the existing TTBE, but not the new one. Thus licensees considering challenging validity of licensed rights under an existing licence, which provides a right of termination in such event, may, depending on the previous circumstances, decide they will be better placed if they wait until 1 May 2015 before doing so.

Another change to note concerns improvements. Whereas in the existing TTBE, an obligation on a licensee to assign to the licensor rights in so called "severable" improvements was an excluded restriction, the distinction between "severable" and "non-severable" improvements is to go. An obligation to assign rights in any improvement is to be an excluded restriction (see Art.5(1)(a) of the draft TTBE and paragraphs (119) to (122) of the draft Guidelines).

Of course, all the above is based on the drafts as they currently stand. The final versions of the new TTBE and the new Guidelines will need to be checked carefully when they are available to see if any last minute changes have been made.