On 21 March 2014, the European Commission announced its new antitrust rules on technology transfer agreements[i]. These rules were first adopted by the European Commission in 1996 and then amended in 2004. The new amendments are believed to reflect the latest trends in antitrust enforcement in the IPR field in the EU and have thus attracted much attention. The new rules may also provide some good point of reference for China, since the drafters of China's Anti-Monopoly Law (AML) made use of certain concepts and lessons drawn from EU competition law, and it continues to be influenced by EU law to a certain extent.
In China, technology transfer agreements are also subject to antitrust law. Article 55 of the AML provides a general rule that the law can be applicable to the exercise of IPRs, if it amounts to an abuse of IPR to eliminate or restrict competition. Besides the AML, anti-competitive technology agreements can be challenged under antitrust rules scattered in other legislations. According to Article 329 of the Contract Law, technology contracts that illegally monopolise technologies and impede technological process are void. Article 343 of the Contract Law further generally prohibits technology transfer contracts from restricting technology competition and development. In addition, in terms of cross-border technology transfers, the Regulation on the Administration of Technology Import and Export in its Article 29 bans some anti-competitive clauses in technology import contracts; Article 30 of the Foreign Trade Law of 2004 provides that the foreign trade authority of the State Council can take necessary measures to three types of conduct of technology owners that hampers foreign trade competition, including prohibiting challenging, imposing forced package licensing and requiring exclusive grant-back.[ii] A judicial interpretation of the Contract Law and the Regulation on Technology Imports and Export have identified some specific types of anti-competitive technology agreements. In contrast, there is no comprehensive guideline under the AML in the technology field, neither is there any guidance on general method for analyzing anti-competitive conduct involved IPs.[iii]
To fill in the gaps, the State Administration for Industry and Commerce (SAIC), one of three AML enforcers in China, has started to draft an implementation regulation to tackle abuse of IPRs (IPR Regulation), to detailing the general rule provided by Article 55 of the AML. The scope of SAIC’s IPR Regulation is expected to be similar, though by no means identical, in content to the EU rules. As with other parts of the AML, it may also follow many principles embedded in the EU rules. Hence, the new amendment of EU antitrust rules on technology transfer agreement may have an influence on the IPR Regulation in the pipeline.
In addition, the new EU rules can be important for China because of the increase in cross-border IPR licensing. Increasingly, Chinese domestic companies may expand their licensing practices to the EU (both as licensors and licensees). It will be essential for those domestic companies to be aware of this change of rules in order to ensure compliance with the EU competition law regime.
Based on the above, this article will give a brief introduction to the new EU rules and their main changes with a close comparison to AML, the IPR regulation (still not enacted but drafts for comments are available) and other laws and regulations in China.
New block exemption rules and guidelines under EU competition law for Technology Transfer
As noted, on 21 March 2014, the European Commission adopted new rules for the assessment of technology transfer agreements under EU competition law. The package will apply from 1 May 2014.
The package involves changes to two instruments:
- the Technology Transfer Block Exemption Regulation (TTBER)[iv], which provides a safe harbour until April 2026 for certain agreements that license patents or other technology rights for production, provided that they do not contain certain blacklisted or excluded provisions and are entered into between companies with limited market power (as defined by reference to market shares); and
- the Technology Transfer Guidelines[v], which provide guidance on the application of the TTBER and on the application of EU competition law to technology transfer agreements that fall outside the safe harbour of the TTBER.
Whilst the amended package does not involve radical change for the EU regime, it does impose a stricter regime for certain contractual provisions such as exclusive grant-backs, termination for challenge clauses, and passive sales restrictions. These provisions will now not benefit from an automatic safe harbour, and will require assessment on a case-by-case basis. The package also provides more detailed and clearer guidance in certain areas, most notably with respect to settlement agreements and technology pools.
With regard to "safe harbour", China will introduce similar rules. In the draft IPR Regulation, SAIC also has a "safe harbour" clause. The SAIC's safe harbour appears to be very similar with the EU one in terms of structure: they are both based on market share thresholds, and the market share thresholds are set lower for agreements between competitors (horizontal agreements) than for agreements between non-competitors (vertical agreements). However, the scope of application of SAIC's safe harbour may be generally more limited. First, according to the draft IPR Regulation, the safe harbour does not apply to all the agreements enumerated in Article 13 of the AML (dealing with horizontal monopoly agreements), including market allocation and boycott. In contrast, the TTBER clarifies that certain licence provisions are exempted notwithstanding the black-listing of agreements to allocate markets and customers.[vi] Second, it is unlikely that the SAIC safe harbour can apply to cases brought before courts or the price-related competition authority, the National Development and Reform Commission (NDRC), given that the regulation is only binding on SAIC. In addition, the Supreme People's Court, in Article 10 of its judicial interpretation on technology contracts (Judicial Interpretation)[vii], specified six types of circumstances that could fall under Article 329 of the Contract Law. Those circumstances may continue to be challenged under the Contract Law. In contrast, some of these circumstances, such as tying and certain non-compete obligations, fall within the TTBER exemption provided that the market share limits are not exceeded. Nevertheless, the SAIC safe harbour will still be much welcomed, as it can certainly bring some certainty to the business community. On the other hand, as to practices that fall out of safe harbour, like the TTBER, it seems from the draft IPR Regulation that they still need a case-by-case assessment and may be granted individual exemption based on Article 15 of the AML.
Main changes to the TTBER
The main changes to the TTBER include the following.
- Exclusive grant-backs. An exclusive grant-back provides the licensor with the exclusive right to exploit any improvements made by the licensee to the licensed technology.
Under the new TTBER, all exclusive grant-backs (irrespective of whether they refer to severable or non-severable improvements) will now fall outside the safe harbour of the block exemption and require individual assessment. This contrasts with the position under the old TTBER where only exclusive grant-backs of severable improvements were excluded. However, in our view the European Commission's "more prudent approach" is designed to enable a specific consideration of the impact of the precise clause concerned on competition and does not indicate a general presumption against such clauses.
In China, exclusive grant-backs are also covered by the draft IPR Regulation. The draft regulation listed exclusive grant-backs as an abuse of dominance under the "unreasonable conditions" prohibition in Article 17(5) of the AML. It can be deduced from this that, unless the licensor has a dominant market position, SAIC will not find an exclusive grant-back to be a violation of the AML. That being said, it should be noted that this conduct may still fall within Article 329 of the Contract Law. According to Article 10 of the Supreme People's Court's Judicial Interpretation, technology contracts which restrict technology through unequal terms (eg, exclusive grant-back without compensation) are void. If so, exclusive grant-backs can be invalidated under the Contract Law, even where no dominant position is found.[viii] In addition, pursuant to Article 30 of the Foreign Trade Act, if exclusive grant-backs in foreign trade harm the competition order of the foreign trade, they will also be regulated by the foreign trade authority of the State Council.
- Termination for challenge clauses. Termination for challenge clauses provide the licensor with the possibility to terminate the agreement if the licensee challenges the validity of the licensed intellectual property.
The new TTBER excludes these clauses in non-exclusive licensing agreements from its safe harbour, requiring them to be assessed on a case-by-case basis. Termination for challenge clauses in exclusive licences continue to be included within the safe harbour (provided that the market share limits are not exceeded).
The draft of the new TTBER[ix], which was issued for consultation in February 2013, proposed to exclude all termination for challenge clauses from its safe harbour. This proposal was heavily criticised during the consultation process on the basis that it could serve as a disincentive for licensors to grant a licence. Indeed, termination for challenge has long been an accepted compromise between the licensor's desire actually to prohibit challenges and the licensee's desire not to pay royalties for invalid intellectual property rights. The controversy has led to the European Commission in its final text to distinguish between exclusive and non-exclusive licences. In its press release accompanying the final package, the European Commission notes that this distinction "will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees." It might also be noted that the European Commission's distinction is consistent with its insistence in the on-going Samsung case that a willing licensee on FRAND terms for standard essential patents(SEPs) should always be free to challenge the validity of the patents concerned.
In China, the draft IPR Regulation generally bans a licensor with a dominant position from prohibiting licensees from challenging the validity of its IPRs. However, the draft regulation does not go further to discuss termination clauses. At the same time, termination clauses may fall within Article 329 of the Contract Law. According to the Judicial Interpretation, agreements that prohibit licensees from challenging the licensor's IPRs or imposing conditions on challenging IPRs may fall within Article 329 of the Contract Law. A termination clause may be found as an imposition of conditions on challenging IPRs and thus void under Article 329, irrespective of whether it is in an exclusive or non-exclusive licence agreement. Based on that, Chinese law seems to adopt a more stringent approach towards termination clauses than the EU. By reference to the notes of European Commission addressing the possible pro-competitive effects of termination clauses, Chinese legislators may need to further deliberate the regulation of termination clauses based on their net competitive effects.
- Purchase of raw material or equipment. The new TTBER introduces a revised test for determining whether provisions in a technology transfer agreement that relate to the sale and purchase of raw material or equipment are also covered by the TTBER. The test under the old TTBER was whether such provisions were "less important" than the actual licensing of technology, which was difficult to apply. The test is now whether the provisions are "directly related" to the production or sale of the contract products which are produced with the licensed technology. This means that even if the input bought from the licensor (and to be used with the licensed technology) is more expensive than the royalties to be paid for the licensed technology, the provisions relating to the purchase are still covered by the TTBER. This change will potentially be very reassuring to licensors.
In China, it is unclear under the current draft IPR Regulation how provisions in a technology transfer agreement that relate to the sale and purchase of raw material or equipment will be treated. However, the draft IPR Regulation does prohibit abusive conduct of dominant players in relation to purchase and sale of products and services, such as tying and exclusive dealing, during the enforcement of IP rights. Furthermore, tying of unnecessary raw materials, products, equipment or services and unreasonable restriction on licensee's channel of purchasing of such input in technology contracts are also covered by the the Judicial Interpretation and the Regulation on Technology Import and Export.[x] According to these provisions, clauses of this kind may be outlawed absent dominant position.
- Passive sales restrictions. Under the old TTBER, a licensor could restrict not only active sales but also passive sales (responding to unsolicited orders) to a territory or customer group reserved exclusively to a single licensee for an initial two year period after the protected licensee began sales. The European Commission, with the aim of aligning the TTBER with the block exemption regulation on vertical restraints, has now removed passive sales restrictions from the automatic exemption of the TTBER. This type of restriction now needs to be assessed on a case-by-case basis. The Guidelines, however, state that this type of passive sale restrictions can still be allowed if the restraints are objectively necessary for the licensee to penetrate a new market. They also state that "in an individual case a longer period of protection for the licensee might be necessary in order for the licensee to recoup the costs incurred." Realistically, this change is not expected to have much impact. The old possibility for a block-exempted two year passive sales restriction was of little commercial usefulness, because of the short time period involved and the difficulty of administering a system where the restriction did not depend on a single date known to the restricted licensee (such as when it obtained its license or when it began sales) but rather on the multitude of possibly uncertain dates on which other licensees began sales in their respective territories across Europe.
In China, according to the current draft IPR Regulation, the restrictions of sales in horizontal agreements and vertical agreements are to be treated differently. If a licensor restricts a licensee that is a competitor from selling to a territory or customer group reserved exclusively to a single licensee, this could be assessed as market allocation among competitors prohibited by Article 13(2) of the AML. This means that the safe harbour would not apply. But, if the licensor and licensee are not competitors, the same restriction will be assessed as a vertical agreement. As it is not one of the vertical agreements that are explicitly identified by the AML, it may not be challenged under the AML. Nevertheless, sales restrictions are also exposed to risks under Article 329 of the Contract Law. Yet, neither the draft IPR Regulation nor the Contract Law make a distinction between restrictions on passive sales and on active sales.
- No new treatment of in-house production. The draft new TTBER, which was circulated for consultation in February 2013, included a new market share threshold of 20% for agreements between non-competing undertakings when the licensee owns a technology for in-house production similar to that of the licensor. The reason for the change was allegedly to avoid a situation in which the licensee could foreclose entrants to the downstream market by entering into an exclusive license with the only company licensing out a competing technology whilst benefiting from the higher market share threshold for non-competitors (30%). The European Commission has abandoned this additional threshold in the new TTBER. In its press release, the European Commission states that "this was seen by stakeholders as adding too much complexity to deal with a scenario which is rare".
In China, this issue is not mentioned in any of the previous drafts of the IPR Regulation.
Guidelines for technology transfer agreements
The main changes to the guidelines include the following.
- Settlement agreements. A settlement agreement is a contractual resolution between the parties to end disputes regarding the infringement or validity of IPR. The new guidelines clarify that settlement agreements which lead to a delayed or otherwise limited ability for the licensee to launch the product on any of the markets concerned may be prohibited by Article 101(1) TFEU (governing horizontal agreements). The guidelines note that "pay-for-restriction" or "pay-for-delay" type settlement agreements often do not involve the transfer of technology rights, but are based on a value transfer from one party in return for a limitation on the entry and/or expansion on the market of the other party and may be caught by Article 101(1). The European Commission notes that it will be "particularly attentive to the risk of market allocation/market sharing." The clarification reflects the position that the European Commission has taken with respect to patent dispute settlements in the pharmaceutical sector.[xi]
The guidelines state that non-challenge clauses in settlement agreements are generally considered to fall outside Article 101(1) TFEU. However, a non-challenge clause in a settlement agreement may infringe Article 101 (1) "where an intellectual property right was granted following the provision of incorrect or misleading information." Scrutiny of such clauses may also be necessary "if the licensor, besides licensing the technology rights, induces, financially or otherwise, the licensee to agree not to challenge the validity of the technology rights".
Settlement agreements are neither mentioned in the AML nor the draft IPR Regulation.
- Technology pools. Following the European Commission's most recent experience in the field of standards, the European Commission clarifies that its guidance on pools of essential patents includes both pools relating to patents needed to produce a particular product but also pools of patents needed to comply with a particular standard. The European Commission proposes a comprehensive safe harbour expected to provide further incentives to the creation of pro-competitive pools. Furthermore, the European Commission clarifies that licensing agreements between the pool and third parties continue to fall outside the scope of the TTBER.
In China, the draft IPR Regulation proposes in detailed rules on technology pools and standard setting and implementation of patents. The misuse of SEPs has also come up in Huawei v. InterDigital[xii]. In that case, InterDigital was found to be abusing its dominance by charging excessive licensing fees for its SEPs in the telecommunications area and bundling SEPs with non-SEPs.
The new EU regime for technology transfers comes into force at a time when competition authorities globally are increasing antitrust enforcement at the interface between IPR and competition law. The European Commission has taken recent enforcement action in the fields of pharmaceuticals and mobile communications devices. The US competition authorities are similarly focused on these industries, particularly following the recent Supreme Court decision in FTC v. Actavis[xiii] that “pay for delay” settlements have “the potential for genuine adverse effects on competition“ and “are subject to scrutiny under the rule of reason.” In China, as noted, anti-monopoly issues have arisen in relation to SEPs, both in the merger and conduct contexts, for example in the Huawei v. InterDigital litigation. For instance, as well, the Ministry of Commerce has imposed specific remedies on licensing and enforcement of SEPs in its conditional approved decision on Microsoft's acquisition of Nokia's devices and services business on 8 April 2014.[xiv] The new TTBER and guidelines may impact the drafting of the IPR regulation in China and even the practices of Chinese authorities and courts.
However, it will remain to be seen how much the impact would be, given that the Chinese regulators may have adopted different criteria from the European Commission on some of the issues. Taking that into consideration, EU companies engaging licensing practices in China or with Chinese companies should be aware of the distinctions between competition laws in China and in Europe, and ensure that their licensing practices comply not only with the EU competition law (if applicable), but also with the AML and other relevant laws and regulations in China. At the same time, businesses in China should also take careful note of the amended EU antitrust regime, and ensure that their licensing practices in the EU reflect the new rules.
[i] For the European Commission's press release related to the new rules, please refer to: http://europa.eu/rapid/press-release_IP-14-299_en.htm.
[ii] Moreover, there are also antitrust rules in the Anti Unfair Competition Law ("AUCL") that are related to, for example, tying and imposing unreasonable conditions. Although such rules do not specify technology area, they can also be applied to technology transfer agreements.
[iii] "Wang Xiaoye on the Antitrust Law" written by Wang Xiaoye, published by the Social Sciences Academic Press, 2010 edition, page 266.
[iv] "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".
[v] "Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements ( 2014/C 89/03)".
[vi] See Article 4.1(c) of the TTBER.
[vii] "Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in Trying Cases Involving Technology Contract Disputes" (Fa Shi  No. 20).
[viii] "Analysis on the antitrust regulation of IP grant-back", written by Du Zhongxia, published at "Legal Institution and Economy (mid-month edition)", 6th issue, 2010.
[ix] For the European Commission's press release on the draft TTBER, please refer to: http://ec.europa.eu/competition/consultations/2013_technology_transfer/index_en.html.
[x] Such provisions may also be covered by Article 12 of the AUCL, which is a general stipulation against tying.
[xi] For example, European Commission published on 10 December 2013 a decision to fine Johnson & Johnson and Novartis for concluding an anti-competitive agreement to delay a generic drug's entry into Dutch market. The European Commission's press release on this decision is available at: http://europa.eu/rapid/press-release_IP-13-1233_en.htm.
[xii] The appeal case (abuse of dominance dispute) of Huawei v. InterDigital, Guangdong High Court, (2013) Yue High Court Civil Three Final Case No. 306.
[xiii] Federal Trade Commission v. Actavis, 570 U.S. 756 (2013).
[xiv] Please refer to "The Ministry of Commerce Notice 2014 No. 24 Notice regarding the anti-monopoly review decision of concentration between business operators pertaining to the conditional approval of Microsoft’s acquisition of Nokia’s device and services business", which is available at: http://fldj.mofcom.gov.cn/article/ztxx/201404/20140400542415.shtml.