If you are considering collaborating with a competitor to develop a new technology, product or process, it is vital to ensure that any agreement you put in place in relation to your collaborative efforts complies with competition law, which is (in general terms) hostile to agreements between competitors.
While anti-competitive agreements are generally prohibited, the European Commission recognises that cooperation between competitors on research and development (R&D) usually:
- helps to promote the exchange of know-how and technologies;
- facilitates technical and economic progress; and
- rationalises the manufacture and use of products that benefit consumers (among others).
R&D agreements may concern, for example, the acquisition of know-how, studies relating to new products or processes, the establishment of necessary facilities or the obtaining of the relevant intellectual property rights, or they may otherwise define and underpin relationships between collaborating entities.
The R&D block exemption
Under the Treaty on the Functioning of the European Union (TFEU), any agreement (unless it is an agreement of “minor importance” ) between competitors affecting trade between EU member states and which has as its object or effect the restriction, prevention or distortion of competition within the EU will fall within Article 101(1) of TFEU and be anti-competitive. The effect of the R&D block exemption regulation (Regulation 1217/2010, the Regulation) is to exempt from Article 101(1) not only agreements that have R&D as their primary object, but also all agreements directly related to and necessary for the implementation of cooperation in R&D (provided that the combined market share of the parties does not exceed 25% of the relevant market).
Exemption of agreements is subject to a number of conditions, including requirements that all the parties must have access to the results of the research, and that all the parties must be free to exploit the results. If the purpose of the agreement is limited to R&D, the parties must be free independently to exploit the results of such R&D. Any joint exploitation of results must be protected by intellectual property rights, or constitute know-how that is decisive for the manufacture or application of the end products.
The safe harbour’s limits
The Regulation does not apply to agreements that are unnecessary to attaining the positive effects mentioned above. Agreements that place certain serious restraints on competition (such as price fixing and limiting production) are still prohibited. Further, the Regulation lists a number of specific terms that will cause the protection offered by the Regulation to fall away, such as R&D agreements aimed directly or indirectly at:
- restricting the freedom of the participating undertakings to carry out R&D, either in a field unconnected with the field concerned or, after completion of the work provided for in the agreement, in the field to which it relates or in a connected field;
- prohibiting challenges to the validity of intellectual property rights held by the parties, whether exploited for the purposes of the R&D or arising from the R&D results; or
- preventing licences from being granted to third parties to manufacture the contract goods where exploitation of the R&D results is not provided for or does not take place.
If an agreement does not comply with Article 101(1), and does not fall within the parameters of the Regulation (or another applicable block exemption), the entire agreement is unlawful and unenforceable. In addition, the sanctions for breaching competition law are severe: the parties may be fined up to 10% of turnover, and third parties may also bring an action for damages if they have suffered loss.
For various commercial reasons, companies may decide that their collaboration should be carried out through the vehicle of a full-function joint venture company with its own identity, infrastructure and management.
However, this approach comes with its own set of challenges: parties will need to take into account the additional administrative burden and cost in running a separate commercial entity. They will need to examine whether the arrangement falls within the UK merger regime. They will also need to put the relevant paperwork in place to govern their relationships (it is usually necessary, for example, to put in place a detailed shareholders’ agreement to deal with the management and operation of the joint venture company). In addition, certain sectors, including the transport, energy and telecommunications industries, have their own rules surrounding joint venture companies which will need to be considered.