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Revised technology transfer block exemption adopted by the European Commission

    • Competition, EU and Trade - Export controls and sanctions
    • Technology
    • Diversified industrials
    • Health and life sciences
    • Technology, Media and Telecoms

    16-04-2014

    On 21 March 2014, the European Commission (the “Commission”) adopted a revised Technology Transfer Block Exemption (“TTBE”), which applies to bilateral licences of technology rights, by which the licensee is permitted to exploit the rights to produce goods or services.  The Commission has also issued new guidelines setting out how the TTBE will be applied (the “Guidelines”). 

    The new TTBE, adopted by the Commission following a lengthy consultation process, does not represent a significant departure from the previous approach to technology licensing.  The underlying architecture of the exemption remains the same: namely agreements complying with the requirements of the block exemption will benefit from a “safe harbour” from the competition rules. There are, however, some important changes to the conditions which must be met for the “safe harbour” to apply. 

    The new TTBE and accompanying Guidelines will come into force on 1 May 2014 and will remain in force until 30 April 2026.  Under the transitional provisions, businesses have until 1 May 2015 to ensure that any existing agreements that currently benefit from the current “safe harbour” comply with the new TTBE.  

    Background

    The current TTBE, adopted in 2004, exempts certain agreements which involve the licensing of intellectual property rights (including patents, know-how and/or software copyright) for the production of goods or services from the application of the rules prohibiting anti-competitive agreements (Article 101 of the Treaty on the Functioning of the European Union (“Article 101”)). 

    Provided the conditions set out in the TTBE are met, the parties to the agreement can  proceed safe in the knowledge that the TTBE “safe harbour” applies and the validity of the agreement is unlikely to be challenged on competition law grounds.  

    The TTBE currently requires that:

    • the market shares of the parties to the agreement must be below certain specified thresholds (a 20% combined market share for competitors and individual market shares of 30% for non-competitors);
    • the agreement does not contain any so called “hardcore” restrictions (essentially price fixing, market sharing or output restrictions).

    The Commission’s consultation on the new TTBE

    The Commission consulted on proposed changes between February and May 2013.  The changes proposed by the Commission included changes to the extent of the territorial restrictions on licensees permitted by the current TTBE; adopting a less permissive approach to “grant-backs” of non-severable improvements and no-challenge clauses; revisiting the market share thresholds for agreements between non-competitors; and legislating specifically for settlement agreements and patent pools.

    The new Technology Transfer Block Exemption

    Following consultation the Commission has decided to retain the existing market share thresholds, and substantially the same list of “hardcore” restrictions.

    The main changes introduced are as follows:

    (a)             Exclusive grant-back obligations

    Under the current TTBE, licensors may require that licensees grant them an exclusive right to exploit non-severable improvements (i.e. those that cannot be exploited without infringing the underlying licensed technology) – subject to the other requirements of the TTBE being applicable. The exclusive grant-back of severable improvements is not covered by the current TTBE and these provisions have to be assessed on a case-by-case basis to establish whether they are compatible with competition law. 

    The new TTBE will remove the distinction between severable and non-severable improvements.  From 1 May 2014 all exclusive grant-back obligations will be outside the “safe harbour” provided for by the new Regulation. 

    The Guidelines state that “an obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee’s incentive to innovate since it hinders the licensee in exploiting the improvements”.

    As such, all exclusive grant-back obligations will need to be assessed in order to establish whether they are compliant with competition law.  A key factor in this analysis is whether the licensee is to be paid for the grant-back of improvements. The Guidelines state “when grant backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate.”  Other issues to consider are the market position of the licensor and whether similar licence agreements already exist in the market.

    Alternatively, in order to benefit from the TTBE “safe harbour”, licensors may choose to draft or amend grant-back provisions so that they are non-exclusive.

    (b)             Restrictions on passive sales between licensees

    The original TTBE contains hardcore restrictions (practices which would remove the benefit of the “safe harbour” from an agreement in its entirety).  In the context of an agreement between non-competitors, the hardcore list includes any provisions which restrict the licensor from passively selling (i.e. from responding to requests for sales from outside the licensee’s designated territory) into a territory or customer group except where a territory or customer group has been exclusively reserved to another licensee.  Under the current TTBE, these restrictions on passive sales are permitted for the first two years of the exclusivity  and are intended to give the ‘protected’ licensee an incentive to innovate.  

    Under the new TTBE all restrictions on passive sales between licensees are considered to be “hardcore” restrictions of competition.  This change brings the position on restrictions on passive sales in technology transfer agreements in line with the treatment of restrictions on resale of goods and services under the Vertical Agreements Block Exemption. 

    The Guidelines indicate that, exceptionally, it may be possible for such restrictions to be compatible with competition law requirements if they are objectively necessary for a licensee to penetrate a new market. 

    The Guidelines state that “where substantial investments by the licensee are necessary to start up and develop a new market, restrictions of passive sales by other licensees into such a territory fall outside Article 101(1) for the period necessary for the licensee to recoup those investments”.  The Guidelines state that a period of 2 years would usually be enough for the licensee to recoup such investment, whilst also leaving the door open for the possibility of a longer protection period if it can be justified.

    This is a significant change to the TTBE.  Licensors may now be reluctant to offer licensees protection from passive sales, unless they are confident that such protection is objectively necessary for the licensee to penetrate a new market and, if challenged, that this justification can be backed up by objective evidence. 

    This could be a high hurdle to overcome in practice because if such a restriction is found not to be objectively necessary, then the entire agreement – not just the relevant provision – will fall outside the “safe harbour” provided by the TTBE and be open to scrutiny under competition law.

     (c)     Termination clauses

    The current TTBE permits a licensor to terminate a licence in the event of a challenge of validity by the licensee.  However, the new TTBE removes the protection of the “safe harbour” from these provisions in non-exclusive licences.  The Guidelines state that “the licensee may be deterred from challenging the validity of the intellectual property right if it would risk the termination of the licensing agreement and thus face significant risks which go far beyond its royalty obligations”.

    As a result, clauses that terminate non-exclusive licences in the event of a challenge of validity by the licensee will now fall outside the TTBE and require individual assessment. 

    Where a licensor has granted an exclusive licence, it will still be permissible to include clauses that provide for termination upon challenge by the licensee (provided the other requirements of the TTBE are met).

    (d)             Pay for Delay

    The Guidelines accompanying the new TTBE provide that Article 101 may prohibit settlement agreements that cause a delay or limit the ability of a licensee to launch a product on the concerned market.  This includes “pay for delay” settlement agreements that involve a licensor transferring “value” to the licensee in return for the licensee limiting its entry and/or expansion on the market in question.

    The Commission will pay particular attention to settlement agreements between actual or potential competitors and which involve a significant value transfer from the licensor to the licensee. The rationale is that these agreements could lead to market allocation or market sharing, by limiting the ability of the licensee to compete against the licensor (e.g. by launching a new product).  

    The Guidelines are consistent with the Commission’s recent decisions concerning “pay for delay” settlement agreements.  In June 2013, the Commission fined the Danish pharmaceutical company, Lundbeck, and a number of generic producers for agreeing to delay the market entry of generic products competing with Lundbeck’s citalopram medicine.  According to the Commission, without these agreements, Lundbeck would have faced competition from generic producers, which would have driven prices down significantly to the benefit of patients.

    Comment

    The changes to the TTBE that the Commission has introduced are very important as they potentially withdraw the benefit of the “safe harbour” from certain agreements which may currently be exempt from Article 101.  In some cases the benefit of the “safe harbour” will be removed in its entirety and this may lead to significant uncertainty for businesses. 

    All businesses, whether licensors or licensees, should be mindful of the changes introduced by the new TTBE.  Businesses wishing to ensure that any existing licensing agreements that currently benefit from the TTBE continue to do so going forward should review these now and seek to make any changes necessary, so that they are brought into line with the new rules inside of the 1 year transitional period. 

     

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