Commission adopts stricter approach to technology transfer agreements
The European Commission adopted new competition rules on technology transfer agreements at the end of March 2014. The new rules will be applicable from 1 May 2014. The package includes a new Technology Transfer Block Exemption Regulation (TTBER) and Guidelines for the interpretation of the TTBER. The existing technology transfer rules from 2004 will expire in the end of April, but will apply to all previously concluded agreements until 30 April 2015.
Which agreements are relevant?
The purpose of the TTBER is to create a so-called safe harbour for technology transfer agreements when it comes to competition rules. The safe harbour essentially means that under certain circumstances, competition rules on agreements and arrangements between companies do not apply to technology transfer agreements. This is because licensing of technology is often necessary to enable production. Therefore, licensing agreements often have more beneficial than harmful effects on competition.
The objective of a technology transfer agreement is to allow a licensee to exploit the licensor’s technology rights or know-how for the production of goods and services. Technology rights include patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates for medicinal or other products, plant breeder’s certificates and software copyrights. The new TTBER explicitly covers the licensee’s subcontractors in addition to the licensee itself.
The TTBER only applies to licence agreements. This does not mean that a licence agreement may not include clauses on, e.g., the licensee’s distribution system for the licensed product. In such cases, the distribution clauses must comply with regular competition rules regarding supply and distribution agreements. Rules on licensing agreements and distribution agreements may thus be applied simultaneously.
The scope of the TTBER has been clarified so as to exclude all agreements that fall under the block exemptions regarding research and development (R&D) and specialisation agreements. As a result, the rules regarding competition law exemptions for specialisation agreements and R&D agreements take precedence over the TTBER. Specialisation agreements are concluded between companies to optimise production capacity through joint production between companies or by agreeing that one company ceases production of a certain product in order to purchase it from the other company instead.
What changes and what does not?
Many key issues remain unchanged in the revised TTBER, such as the market share thresholds for the application of the regulation. For instance, the TTBER continues to provide for an automatic safe harbour to agreements between competitor companies as long as their combined market share does not exceed 20%, and to agreements between non-competitors provided that neither party’s individual market share exceeds 30%.
Furthermore, the prohibited so-called ‘hard-core’ restrictions set out in the regulation remain essentially the same as before. The only substantive exception is that now all restrictions on passive sales (i.e., sales initiated by the customer without active measures by the seller) into exclusive territories or customer groups allocated to other licensees amount to a hardcore restriction. Until now, such passive sales restrictions between non-competing undertakings have benefited from the safe harbour for the first two years of a licensee’s exclusive sales. However, it remains possible to restrict the licensee’s passive sales to territories or customers reserved for the licensor.
Should a licensing agreement include any hard-core restrictions, it cannot benefit from the TTBER at all. Hard-core restrictions are separately defined for agreements between non-competitors and competitors, and include price fixing, output limitations, market allocation and restrictions on R&D under certain circumstances. Some – but not all – of the hard-core restrictions may potentially be considered acceptable under competition rules under an in-depth assessment of the entire agreement.
The new TTBER introduces a new test for determining whether certain provisions in a technology transfer agreement, in particular, concerning purchases of raw material or equipment from a licensor or the use of the licensor’s trademark, are exempt from competition rules on arrangements between companies together with the technology transfer agreement itself.
TTBER now covers such provisions if, and to the extent, they are directly related to the production or sale of the contract products that are produced with the licensed technology. This means, for example, 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 exemption of the TTBER. The previous test, which stipulated that such provisions should be less important than the actual licensing of technology in order for the exemption to apply, was found difficult to apply in practice.
Despite many requirements and limitations remaining unchanged, the new TTBER does introduce a stricter interpretation of certain clauses. This particularly the case for excluded restrictions set out in Article 5 of the TTBER. Excluded restrictions are clauses that do not benefit from the TTBER even if the rest of the agreement falls under its scope. Therefore, excluded restrictions must be assessed and justified more carefully than previously.
Firstly, exclusive grant back clauses requiring that improvements of the licensed technology be licenced back to the licensor, no longer benefit from the safe harbour of the TTBER. Such clauses could previously benefit from the safe harbour, unless the improvement was severable from the originally licensed technology. Now, any obligation to grant an exclusive licence to the original licensor must be assessed and justified individually.
Secondly, the new TTBER prescribes that any clause allowing termination of a non-exclusive license agreement upon challenge of an intellectual property right amounts to an excluded restriction. This approach is stricter than the previous regime, under which the safe harbour extended to termination-upon-challenge clauses. The purpose of the stricter approach is to prevent situations where invalid IPRs clog up the market.
Since termination clauses are common in licence agreements in many fields of business, such as pharmaceuticals, many licensors have reason to amend their agreements. In practice, licensors must weigh the benefit of the TTBER safe harbour against the potential harm caused by litigations brought on by the licensee. Nevertheless, termination-upon-challenge clauses or any other excluded restrictions are not presumed to have anti-competitive effects. Instead, they must be assessed case-by-case in accordance with the Guidelines. For instance, termination clauses that concern free-of-charge, outdated or unexploited technology do not have anti-competitive effects.
It is recommendable that companies take a second look at their license agreements and bring them in line with the new rules if necessary.
The new Guidelines on technology transfer agreements reflect the main changes of the TTBER. Relevant factors for case-by-case assessment are explained in detail. The Guidelines also provide further guidance on assessing multilateral patent licensing agreements (‘patent pools’) and potentially problematic settlements of intellectual property disputes, a topic that has gained much attention lately.
Settlement agreements are largely used in intellectual property disputes and do not include technology transfer by default. However, settlement agreements may become relevant under the TTBER where the licensee agrees, against payment by the licensor, to a more restrictive settlement than it would otherwise have accepted. In practice, such clauses may result in the delay or restriction of the launch of the product that relies on the disputed technology. In this case, the agreement should be assessed in accordance the TTBER and its Guidelines. The same applies to cross-licensing and no-challenge clauses included in settlement agreements.
The Guidelines specify a number of factors to be taken into account when weighing the clauses’ potential harmful effects. These include, among other things, the parties’ market shares, whether they are competitors, and what effect the clause may have on innovativeness.
Similarly, technology pools often have pro-competitive effects, as they allow for one-stop licensing of several technologies, often necessary for obtaining an industry standard. However, co-operation within the pool can also amount to price fixing cartels or foreclose alternative technologies. Therefore, the Guidelines contain specific safe harbour rules for technology pools. In order to benefit from the safe harbour, entry into the pool must, for instance, be open at its creation. The pool must also include only essential technologies which are licenced on a non-exclusive basis.
On a final note, the market status of the licensor and licensee is bound to change over the course of the agreement. Therefore, it is wise to agree on reviewing agreement on a regular basis. The market shares of the parties may change, as may their position on the market as competitors or non-competitors. Such changes may call for a re-evaluation of the key clauses in the agreement.