The European Commission has recently announced its adoption of a revised Technology Transfer Block Exemption Regulation and new accompanying Guidelines, which will come into force on 1 May 2014 and apply for twelve years. This will impact on the risk of including certain clauses in technology transfer agreements and may require parties to amend existing agreements to remain covered by the exemption.
On 21 March 2014, the European Commission (the Commission) adopted a new Technology Transfer Block Exemption Regulation (theTTBER) and accompanying Guidelines to replace the regime currently in place.
What is it and when does it apply?
The TTBER applies to licensing agreements where the licensor authorises the licensee to use its technology for the production of goods and provision of services. Technology for these purposes includes know-how, patents, design rights or software copyright.
The current TTBER provides an exemption from the rule prohibiting anti-competitive agreements (Article 101 of the Treaty on the Functioning of the EU) for licensing agreements that meet its terms. Such agreements are deemed to have no anti-competitive effects or, if they do, it is assumed that the positive effects of the agreement outweigh the negative ones. If an agreement is not covered by the TTBER it is not automatically anti-competitive, but will require self-assessment for compliance by the parties and their advisers. As a result, it is often preferable for an agreement to be covered by the TTBER if possible, because this gives certainty about its competition assessment.
The TTBER works by setting a maximum market share threshold and listing certain prohibited “hardcore restrictions” (such as, for example, resale price maintenance). To qualify for the exemption provided by the TTBER, the parties to the agreement must meet the market share threshold and the agreement must not contain any of the “hardcore restrictions” – i.e. be within the “safe harbour”. In order for the TTBER to apply, the combined market share for the parties if they are competitors on the relevant market(s) must not exceed 20 per cent, and if they are not competitors the market share for each of the parties must not exceed 30 per cent.
The accompanying Guidelines provide guidance on the application of the TTBER, as well as on the application of EU competition law to technology transfer agreements that fall outside the TTBER’s safe harbour. In particular, the Guidance covers patent pools and settlement/non-assertion agreements which may contain potential restrictions on competition that could fall within the scope of Article 101 but neither of which are covered by the TTBER.
There are other pieces of EU legislation and guidance that may apply to agreements that involve technology in certain contexts, such as the vertical restraints block exemption which mainly applies to distribution arrangements. However, the new TTBER confirms that it will only apply if the EU’s block exemptions on research and development agreements and on specialisation agreements do not apply to an agreement.
The revision process
The Commission launched a public consultation on the TTBER regime in December 2011. Feedback was mostly positive, with respondents considering the TTBER and Guidelines to be important tools for the industry and proposing incremental improvements to the texts. A revised draft was released for consultation in early 2013 and, following considerable stakeholder input, the final substantive text was published on 21 March 2014, to take effect on 1 May 2014.
Transitional arrangements will apply to technology transfer agreements already in place on 30 April 2014 and which fulfil the conditions in the current TTBER. There is a one-year grace period to amend the terms of these existing agreements and the new TTBER will enter into force for them from 1 May 2015.
What are the key changes to the TTBER?
The structure and general content of the TTBER remains unchanged in the new version. In particular, the market share thresholds remain the same but the new TTBER takes a stricter approach in certain areas.
The changes to the “hardcore restrictions” (which bring the entire agreement outside the safe harbour of the TTBER) are:
- The scope of exempted restrictions on “passive” (i.e. unsolicited) sales has been narrowed. In general, restrictions on passive sales are a hardcore restriction, but the old TTBER allowed a limited exception to this – a restriction of passive sales between non-competitors was acceptable for the first two years of an agreement. The new TTBER removes this exception, meaning that all restrictions on passive sales are considered hardcore restrictions (this is in line with the approach taken in the vertical restraints block exemption). Restrictions on passive sales will therefore need to be individually assessed, but may be acceptable in competition terms if they are objectively necessary for the licensee to penetrate a new market – further guidance on this is given in the Guidelines.
The changes to the “excluded restrictions” (which bring only the relevant clause outside the safe harbour of the new TTBER) are:
- All forms of exclusive grant-back obligations – those which involve the licensee being required to assign or license back to the licensor on an exclusive basis any improvements made to the technology – have been excluded by the revised TTBER. The old TTBER drew a distinction between severable and non-severable improvements which has not been retained in the new TTBER. The Commission believes this change will promote innovation.
- No-challenge clauses (which preclude a licensee from challenging the validity of a technology) did not benefit from the safe harbour under the old TTBER and this will continue under the new TTBER. However, the Commission has chosen to take a stricter approach in the new TTBER to clauses that allow the licensor to terminate the licence in the event of the licensee challenging the validity of the intellectual property right. Under the new regime, the use of such clauses in exclusive agreements will be covered by the TTBER (where the Commission says that the exclusive licensee usually has no incentive to have the intellectual property rights declared invalid, other than to try and put pressure on a smaller licensor), but such clauses in non-exclusive agreements will not benefit from the safe harbour under the new TTBER.
The recitals of the new TTBER also include the following changes:
- The new TTBER should not apply to agreements, the purpose of which is the mere reproduction and distribution of software copyright protected products. It is considered that such agreements do not concern the licensing of a technology to produce but are instead covered by analogy by the vertical restraints block exemption.
- It is no longer a requirement that provisions in the context of a technology licence concerning thepurchase of inputs (raw materials or equipment) or the use of the licensor’s trademark must be less important than the technology licensing in order for the TTBER to apply to them. The new TTBER will cover those provisions provided they are directly related to the production or sale of the contract products which are produced using the licensed technology.
What are the key changes to the Guidelines?
The Guidelines reflect the changes to the TTBER set out above, providing a description of the substantive provisions and the approach the Commission will take in its analysis. In addition, significant changes have been introduced in two areas: patent pools and reverse payment settlements.
In relation to patent pools, the Guidelines now set out a clear safe harbour covering the creation of the pool and its subsequent licensing out. The intention is that by structuring a pool in compliance with the conditions in the Guidelines, the parties can be certain of the competition law assessment of the pool – this is intended to encourage the creation of pro-competitive patent pools.
The Commission recognises that settlement agreements are in principle a legitimate way to resolve a technology dispute. However, the Guidelines now clarify that so-called “pay-for-delay” arrangements, which may lead to a delay in the licensee launching a product, may create competition problems. In addition, the Commission has concerns about non-challenge clauses in settlement agreements, particularly in cases where the patent may have been granted based on inaccurate or misleading information or the licensee has been induced to agree to the clause.