In both the U.S. and the EU, it is generally acknowledged that the enforcement and commercialization of IP rights must comply with the applicable antitrust laws. This is particularly true for IP licensing. While the majority of provisions in license arrangements will not be problematic from an antitrust perspective, some restrictions may raise antitrust concerns (particularly due to a potential violation of the respective cartel bans). Both the U.S. and the EU have set up a legal framework of IP-related antitrust legislation, varying in structure and content, but featuring a common core of overall principles. It is the common view in both regimes that IP rights and antitrust laws “share the common purpose of promoting innovation and enhancing consumer welfare.” Nonetheless, where it is applicable, antitrust law poses a potential threat to void relevant clauses or even an entire agreement, and undertakings run the risk of being fined for any violation of antitrust law. Thus, it is indispensable to take into account relevant antitrust law when drafting and negotiating licensing agreements. In the following paragraphs we will discuss the key antitrust concepts that need to be borne in mind when licensing IP in transatlantic business.
Territorial Scope of U.S. and EU Antitrust Law
Both the U.S. and the EU antitrust law follow the effects doctrine. According to this doctrine, antitrust regulations apply to anticompetitive actions taken entirely outside the relevant jurisdiction (i.e., the U.S. or the EU), if these actions have an effect on the competition within that jurisdiction. Hence, both antitrust regimes claim extensive competence, resulting in the applicability of both the U.S. and the EU antitrust legislation even for licensing agreements concluded outside the two jurisdictions.
Basic Legal Framework in the U.S. and the EU
IP-related antitrust legislation, in both the U.S. and the EU, was recently subject to a series of modifications. As IP licensing is generally understood to be procompetitive, it is therefore subject to preferential legal assessment.
In order to promote predictability, EU antitrust law provides for several block exemptions which create a safe harbor by establishing exemptions for specific areas from the EU cartel ban (Article 101 TFEU)3. In the field of licensing arrangements, the Technology Transfer Block Exemption Regulation (TTBER), which was last revised in March 2014, frames the EU antitrust regime with respect to the licensing of patents, utility models, design rights and software copyrights. The TTBER covers technology transfer agreements up to certain market share thresholds (not more than 20% combined market shares in case the undertakings are competitors and individual market shares of not more than 30% of each undertaking if they are not competitors). These market share thresholds apply to the licensing market and the market where the products with the licensed technology are sold. If these market share thresholds are met, the TTBER follows the principle that every restriction is admissible if not (explicitly) prohibited by the TTBER. The TTBER, however, also contains a number of provisions with restrictions that are not exempted. The TTBER distinguishes between so-called black-listed clauses (hardcore restrictions) and grey-listed clauses. If agreements fall outside the scope of the block exemption, they are generally subject to the standard antitrust analysis, according to which it needs to be assessed – on case-by-case basis (i.e., no presumption of illegality) – whether the agreements restrict competition by object or by effect and whether the agreements are exempted from the cartel ban (Art. 101(3) TFEU). In order to give further guidance in that respect, the EU Commission issued Technology Transfer Guidelines dealing with specific problems and specifying the aspects that need to be considered in the assessment. These guidelines indicate that black-listed clauses typically violate EU antitrust law, whereas grey-listed clauses can be exempted.
The U.S.-equivalent is the Antitrust Guidelines for the Licensing of Intellectual Property (“U.S. Guidelines”), which the U.S. Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) (collectively, the U.S. agencies) revised in January 2017. The U.S. Guidelines maintain the concept of antitrust “safety zones”. Pursuant to this, the U.S. agencies will not contest a restraint if (i) it is not facially anticompetitive; and (ii) the joint market share of licensor and licensee does not exceed 20% in the affected relevant markets. When assessing admissibility, the U.S. agencies generally make use of the rule of reason or the per se rule. Whereas the former obliges the U.S. agencies to inquire whether a restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects, the latter holds that the nature of certain restraints is so plainly anticompetitive that they shall be treated as unlawful per se. To this extent, naked price-fixing, output restraints, market division among horizontal competitors and certain group boycotts have been held per se unlawful. However, the vast majority of restraints in intellectual property licensing arrangements are evaluated under the rule of reason.
It is important to keep in mind that legal principles that are not antitrust laws may also impose restrictions on certain licensing terms and practices in the U.S. This is particularly true for the patent misuse doctrine and public policy principles under intellectual property law. Those principles could result in the unenforceability of contractual provisions or licensing practices that are not, in and of themselves, problematic from a pure antitrust point of view.
Comparison of Dealing with Certain Restrictions
Although the general frameworks feature several similarities, it is worthwhile to compare both jurisdictions on the admissibility of particular licensing restraints which are widespread in practice.
Resale Price Maintenance (RPM)
Minimum RPM refers to clauses through which the licensee agrees to sell the product incorporating the licensed technology at or above a specified minimum price.
U.S.: Following the U.S. Supreme Court’s ruling, the U.S. Guidelines revised the U.S. agencies’ position on RPM, allowing IP license agreements to contain provisions on resale pricing which are subject to a rule of reason analysis. Agreements constituting horizontal agreements between competitors (i.e., a cartel), however, will be per se inadmissible.
EU: Under the TTBER, minimum RPM constitutes a black-listed clause and is thus generally inadmissible, regardless of whether this is achieved through direct or indirect means (such as intimidation, warning or linking the sales price to the price of a competitor). Imposing a maximum sale price or recommending a sale price is, however, admissible in cases where licensor and licensee are not competing undertakings (provided that it does not lead to a fixed or minimum selling price by other means).
License agreements can grant the exclusive right to the licensee to exploit the licensed technology. Such an exclusive license has the effect that the licensor is not able to license the licensed technology rights to third parties or practice the licensed technology rights itself.
EU: The TTBER prohibits exclusive cross-licensing between competitors (black-listed clause), but exempts non-reciprocal exclusive licenses between competitors with a combined market share of up to 20%. Exclusive licenses between non-competitors are also typically admissible, and in fact irrespective of the territorial scope of the license.
U.S.: The U.S. agencies will in general evaluate the reasonableness of an exclusive license arrangement. It is pointed out that cross-licensing by competitors who collectively possess market power may give rise to antitrust concerns. Irrespective of the formal terms, the U.S. agencies will assess the exclusiveness of an arrangement on the actual practice and its effects.
Sales Restrictions on the Licensee
In some instances, the licensor imposes restrictions on the licensee with respect to sales in other territories or to certain customer groups. These sales restrictions can have anticompetitive effects.
EU: The TTBER therefore prohibits such sales restrictions if contained in reciprocal licensing agreements between competitors (black-listed clause). However, in case of non-reciprocal licensing agreements between competitors, such restrictions are – under certain prerequisites – admissible. Sales restrictions in agreements between non-competitors are, apart from certain exemptions, typically only problematic if so-called passive sales of the licensee are restricted (black-listed clause). Passive sales “mean[s] responding to unsolicited requests from individual customers including delivery of goods or services to such customers” (for instance by general advertising in the Internet and in the press).
U.S.: The U.S. agencies do not differentiate between active and passive sales restrictions and evaluate both under the rule of reason, but tend to view sales restrictions as admissible.
License agreements frequently contain so-called non-challenge clauses. These clauses prohibit the licensee from challenging the validity of the licensor’s IP rights during the term of the license agreement.
EU: As the licensee is usually in the best position to determine whether an IP right is invalid or not, these non-challenge clauses are not exempted by the TTBER and thus can be problematic from an EU perspective (grey-listed clause), regardless of whether the license agreement is exclusive or non-exclusive. Such non-challenge clauses typically violate the cartel ban where the licensed technology is valuable and therefore creates a competitive disadvantage for undertakings that are prevented from using it or are only able to use it against payment of royalties. On the other hand, non-challenge clauses do not generally violate the cartel ban if the licensed technology is related to a technically outdated process or if parties agree on these in settlement agreements. In the context of non-exclusive licenses, the same principles apply to clauses granting the right to the licensor to terminate the agreement (grey-listed clause) if the licensee challenges the validity of the IP right. The EU Commission has therefore decided in the Motorola case that a termination right in cases where the licensee challenges the validity of the IP right violates the cartel ban. The EU Commission identified two anticompetitive effects, namely the limitation of the licensee’s ability to influence the level of royalties it will have pay to the licensor, and the fact that it may lead other potential licensees of the IP right to also pay royalties for an invalid IP right.
U.S.: The U.S. Guidelines do not address non-challenge clauses. While these licensing restraints generally do not give rise to antitrust concerns in the U.S., courts generally consider prohibitions on challenging the validity of licensed intellectual property rights to be unenforceable under other legal principles, except under very narrow circumstances.
Oftentimes a licensee agrees to extend to the licensor the right to use the developed improvements to the licensed technology. These arrangements, usually referred to as grant-backs, may hinder the licensee from further engaging in research and development, as the outcome falls back to the licensor.
U.S.: U.S. agencies evaluate grant-back provisions under the rule of reason. In this regard, it is of particular significance if the licensor has market power in a relevant technology or research and development market.
EU: Under EU law, exclusive grant-backs are not exempted by the block exemption and are therefore problematic from an EU perspective (grey-listed clause). They typically violate the cartel ban if there is no consideration for the exclusive grant-back and/or the licensor has a strong market position on the relevant technology market because it is important in these situations that the licensee remains an important source of innovation. Non-exclusive grant-back clauses, in contrast, are exempted by the TTBER and thus admissible.
Through technology pools, a package of technology of two or more parties can be licensed not only to a contributor but also to third parties. This allows for one-stop licensing and can reduce transaction costs. However, the creation of a technology pool also implies joint selling of pooled technologies. Competition is reduced among the parties and innovation diminished if the technology pool supports an industry standard and forecloses on alternative technologies.
EU: Although not addressed in the TTBER, the accompanying guidelines establish a safe harbor for technology pools, if (i) the participation is open to all interested rights owners; (ii) only essential technologies are pooled; (iii) exchange of sensitive information is restricted to a minimum; (iv) technologies are licensed non-exclusively on FRAND terms; (v) the licensees are free to challenge the validity of an IP right; and (vi) all participants are free to develop competing products.
U.S.: U.S. agencies apply the rule of reason and tend to be a bit more flexible in that respect, stating that pooling arrangements among competing technologies are unlikely to have an anticompetitive effect unless (i) excluded competitors cannot effectively compete in the relevant market and (ii) the pool participants collectively possess market power. Furthermore, the U.S. agencies point out that if pool members are required to grant licenses to each other for current and future technology at a minimal cost, participants may be discouraged from engaging in further research and development. Per the U.S. agencies, this arrangement may be anticompetitive when it includes a large fraction of the potential research and development in a research and development market.
Conclusion and Outlook
It becomes apparent that across the Atlantic competition authorities endeavor to bear in mind the procompetitive nature of licensing agreements and their importance to innovation and technological developments. By applying the rule of reason, U.S. agencies choose a more flexible approach and allow special characteristics of a case to determine the outcome of the respective analysis. EU legislation, in turn, provides for a solid legal framework of block exemptions which allow greater legal certainty and enhance predictability. Yet, when engaging in multilateral business activities, both antitrust regimes should be considered and complied with, as the same agreement can affect both jurisdictions.
In addition to the boundaries set by antitrust laws, in the U.S. the doctrine of patent misuse puts additional limits on licensing arrangements. The misuse doctrine and the corresponding EU law concepts will be the subject of a separate publication.