Companies involved in licensing agreements concerning patents, know-how and most types of copyrights that affect Europe have to comply with EU competition law rules on technology licensing agreements. The European Commission (the Commission) revised these rules on 27 March 2014 by publishing new versions of (i) the Technology Transfer Block Exemption Regulation (TTBER), which shields licensing agreements from challenges under Article 101 TFEU (the general EU law provision against restrictive agreements) provided certain conditions are met1 and (ii) the related Technology Transfer Guidelines (the Guidelines), which explain the TTBER and the Commission’s competition law assessment of techonology licensing agreements to which the TTBER does not apply.2
The amended TTBER and Guidelines do not fundamentally depart from their preceding versions dating from 2004. However, the key changes are:
- Some common licensing provisions are no longer protected by the TTBER. The TTBER’s safe harbour will no longer cover the following provisions that are frequently included in licensing agreements: (i) exclusive grant-back obligations regarding certain licensee improvements, (ii) licensor termination rights if a non-exclusive licensee challenges the validity of the licensed patents, and (iii) certain passive sales restrictions on licensees. In the future, these provisions have to be assessed for EU competition law compliance based on all relevant market circumstances.
- Revised guidance on patent pools. Agreements among technology owners to create patent pools as well as licences of pooled technology to third parties fall outside the scope of the TTBER. The amended Guidelines expand the guidance on how to assess patent pools under Article 101 TFEU and for the first time set out safe harbour criteria under which patent pools will be treated as non-restrictive of competition.
- Revised guidance on settlement agreements. The section on settlement agreements in the Guidelines has been amended to express the Commission’s reluctance to accept settlement agreements that include ‘pay-for-delay’ arrangements or no-challenge clauses in certain situations.
The amended rules apply from 1 May 2014. Licensing agreements in existence at this time which comply with the old TTBER are grandfathered for one year but have to comply with the new rules from 1 May 2015.
The revision comes at a time of intense debate about the interplay between EU competition law and intellectual property law. Licensing of standard-essential patents in the telecommunications and IT industries and ‘pay-for-delay’ patent settlement agreements in the pharmaceutical industry are the most prominent fields of debate. The amended rules are informed by the Commission’s recent investigations and decisions in these areas.
KEY ELEMENTS OF THE TTBER THAT DO NOT CHANGE
The structure and main content of the old TTBER remain unchanged, although clarification is provided in some respects.
- Covered technology rights. Only licensing agreements concerning patents, software copyrights, know-how and a few other rights, now collectively referred to as ‘technology rights’, can benefit from the TTBER.3 As before, trademarks and copyrights other than software copyrights cannot benefit from the TTBER, although the Commission will continue to apply the principles of the TTBER by analogy to non-software copyrights except with regard to rental rights and public performance rights.4
- Number of contracting parties. As before, the TTBER applies only to licensing agreements between two contracting parties.5 Multi-party licence agreements, such as patent pool agreements, fall outside the TTBER.
- Relevance of production activity by the licensee. The TTBER only applies if the agreement foresees the production of the contract products by the licensee on the basis of the licensed technology. Article 1(1)(c) of the amended TTBER clarifies that production by licensee-appointed subcontractors is sufficient. As before, patent settlement agreements in principle fulfil the ‘production’ requirement, as do non-assertion agreements. However, the amended Guidelines warn parties that the Commission will carefully review licences between competitors that do not exploit the licensed technology and other situations where the purpose of the licence does not appear to be production by the licensee.6
- Market shares. As before, the TTBER only applies if (i) the parties’ combined market share does not exceed 20% where the parties are competitors, or (ii) the parties’ individual market shares do not exceed 30% where the parties are not competitors. The methodology of calculating market shares has been clarified but does not fundamentally change.
- Hardcore restrictions. The TTBER does not apply if the parties’ agreement includes provisions that are defined as very serious (‘hardcore’) restrictions in Article 4 of the amended TTBER. The hardcore list has not materially changed compared to the old TTBER, with the exception of certain passive sales restrictions on licensees, explained below.7
- Excluded provisions (‘grey-list’). Certain licensing provisions are excluded from the benefit of the TTBER, but – unlike in the case of hardcore restrictions – the TTBER applies to exempt the remainder of the agreement. These provisions have to be assessed for competition law compliance based on all relevant circumstances. This ‘grey-list’ of excluded provisions has been extended in two significant respects as explained below.
Outside the TTBER, the Guidelines continue to grant safe harbour protection to licensing agreements if, in addition to the parties’ technologies, there are four or more independently controlled technologies that may be substitutable for the licensed technology at a comparable cost to the user.8
KEY CHANGES TO THE TTBER
The main change in the TTBER is that three types of contract provisions will no longer qualify for the TTBER’s safe harbour protection and therefore have to be assessed for EU competition law compliance in light of market circumstances.
- Exclusive grant-back obligations regarding non-severable improvements. All clauses that force the licensee to grant exclusive licences (or assignments) to the licensor of intellectual property rights relating to the licensee’s improvements to the licensed technology are now grey-listed and therefore cannot benefit from the TTBER’s safe harbour.9 Previously, only exclusive grant-back obligations that concerned ‘severable’ improvements were grey-listed, while exclusive grant-back obligations concerning non-severable improvements were covered by the old TTBER. The concept of severable improvements has become redundant and is no longer relevant under the amended TTBER. All exclusive grant-backs are now grey-listed. Non-exclusive grant-backs continue to be exempted by the TTBER.
- Licensor termination rights in case of patent validity challenges by the licensee in non-exclusive licensing agreements. Contract provisions that prevent the licensee from challenging the validity of the licensed intellectual property rights (no-challenge clauses) have always been grey-listed. However, the old TTBER allowed contract provisions that granted the licensor the right to terminate the licence in case of challenge. In the future, such termination-for-challenge clauses can only benefit from the TTBER if the licence is exclusive. In non-exclusive licence agreements, these clauses are now grey-listed.10
- Passive sales restrictions on licensees. The only significant change to the hardcore list concerns agreements between non-competitors. In such agreements, passive sales restrictions on the licensee generally are viewed as hardcore restrictions, but the old TTBER included an exception that allowed a licensee to be prohibited from making passive sales to territories or customer groups that the licensor had exclusively allocated to another licensee for a two-year start-up period of that other licensee. This exception has been removed from the TTBER. However, paragraph 126 of the amended Guidelines acknowledges that passive sales restrictions on licensees may still fall outside of Article 101(1) TFEU to the extent and for as long as they are necessary to protect a start-up period of another exclusive licensee. In that case, such passive sales restrictions are valid under EU competition law even without benefiting from the TTBER.11 A passive sales ban on sales to territories or customer groups reserved for the licensor are still exempted by the TTBER.
The following aspects of the TTBER are subject to some clarification and arguably change:
- The competitive relationship between the parties in case of alleged blocking patents. The methodology used to assess whether or not licensing parties are competitors has not fundamentally changed. In particular, parties are not deemed to be competitors if they are in a ‘blocking position’, meaning a situation where one party’s technology rights would be infringed by the competing activity of the other party. The amended Guidelines include additional guidance on this point, showing the Commission’s reluctance to grant companies the status of non-competitors in such cases. Notably, a blocking position does not exist under the amended Guidelines if the owner of the technology rights has generally agreed to license these rights under a Licence of Right or FRAND commitment.12 Moreover, absent strong evidence to the contrary, a blocking position is unlikely to be found if (i) there is a significant financial inducement from the licensor to the licensee or where the parties have another common interests in claiming the existence of a blocking position,13 or (ii) the licensee is already active, or has made ‘advanced plans’ or ‘substantial investments’ to become active on the market.14
- The relationship between TTBER and other block exemption regulations. The new Article 9 of the amended TTBER clarifies that licensing arrangements fall outside the scope of the TTBER if they are included in agreements concerning production or research and development (R&D). These agreements, including the licensing provisions they incorporate, have to be assessed under the block exemption regulations and Commission guidelines applying to those types of agreements. However, licences between any of the parties to a production or R&D agreement and third parties in principle have to be assessed under the technology transfer rules.15 The amended Guidelines also explain the delineation between the TTBER and the block exemption regulation on vertical agreements.16
- Trademark licences and raw material/equipment supply arrangements in technology licensing agreements. Technology licences frequently allow the licensee to use the licensor’s trademark and may provide that the licensor will supply the licensee with raw material or equipment used in the production on the basis of the licensed technology. The old TTBER applied to such arrangements only if the technology licence was the ‘primary object’ of the overall agreement. The new TTBER is more permissive and only requires a ‘direct relationship’ between these arrangements and the production or sale of the products that are produced with the licensed technology.17 For example, even if the main purpose of the agreement is the exploitation of the trademark, or if the licensee’s payments for raw materials or equipment are higher than the royalty payments, the amended TTBER will apply to the full agreement if a ‘direct relationship’ to the licensed technology exists.
The Guidelines’ section on settlement agreements has been amended in two main respects. First, a new section expresses the Commission’s reluctance to accept settlement agreements that include ‘pay-for-delay’ arrangements where the licensor transfers value to the licensee in exchange for a delayed market entry by the licensee.18 The Comission may treat these arrangements as hardcore market sharing schemes if the parties are actual or potential competitors.
Second, the amended Guidelines identify situations where no-challenge clauses included in a settlement agreement may be restrictive of competition. The Commission notably refers to situations where the licensor’s patent was granted following the provision of incorrect or misleading information, where the licensor financially or otherwise induces the licensee to agree not to challenge the validity of the technology rights or where the technology rights are a necessary input to the licensee’s production.19
However, the amended Guidelines provide fairly little specific guidance as to how the Commission will assess the above-mentioned situations. Companies will need to wait for the outcome of currently pending Commission and Court cases concerning settlement agreements in the pharmaceutical industry to receive some additional guidance on these issues.
The amended Guidelines provide extended guidance on agreements relating to technology pools, which in practice often are linked to the creation of industry standards. Some parts of the amended Guidelines suggest a potentially stricter competition law assessment of technology pools, for example the Guidelines’ new discussion of potential anti-competitive foreclosure effects that may result if technology pools include significant complementary but non-essential patents.20
On the other hand, paragraph 261 of the amended Guidelines for the first time spells out conditions under which the creation and operation of a patent pool, including the licensing out of the pooled technology, will in principle be treated as non-restrictive of competition under Article 101(1) TFEU regardless of the pool’s market power. The conditions for this new safe harbour protection are:
- sufficient safeguards must be in place to ensure that only essential technologies (which, by definition, are technologies complementary to each other) are included in the pool;
- participation in the pool creation process should be open to all interested technology rights owners;
- safeguards should be adopted to prevent unnecessary exchange of sensitive information;
- the pooled technology must be licensed out on a non-exclusive and FRAND basis;
- technology contributors and pool licensees must be free to challenge the validity and the essentiality of the pooled technologies; and
- technology contributors and pool licensees must be free to develop competing products and technology.
Despite some clarifications brought about by the revision, EU competition law rules applicable to technology licensing agreements remain rather complex. The revision slightly shifts the balance of power away from technology owners, as most of the changes make it more difficult to include provisions in the licence agreement that restrict licensees or otherwise tend to curtail the licensors’ freedom to structure licensing agreements. The amended Guidelines reflect the Commission’s stance against pay-for-delay and similar patent settlement agreements as well as its efforts to deal with standard-essential patents that are included in a patent pool. The new safe harbour for patent pools is a useful step forward in providing legal certainty for such pools, but the conditions for granting the safe harbour may be viewed as fairly narrow and hence of limited relevance in practice.
It is important for companies to review existing licensing agreements that run beyond the end of the grace period on 1 May 2015 to make sure that either these agreements do not include the three types of provisions (termination rights in case of a technology challenge by a non-exclusive licensee; exclusive grant-backs for non-severable improvements; certain two-year passive sales restrictions on licensees) that benefitted from the old TTBER but fall outside the scope of the new TTBER, or that these provisions are likely to pass individual scrutiny in case of challenge. Otherwise, the main risk is that these provisions could be unenforceable in the future.
- 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 (OJ L 93 of 28 March 2014, page 17). In the following, footnote references to Articles are to this Regulation.
- Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements (OJ C 89 of 28 March 2014, page 3). In the following footnotes, references to paragraphs are to these Guidelines.
- Technology rights is defined to include know-how, patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates, plant breeder’s certificates and software copyrights, as well as applications for or applications for registration of those rights (Article 1(1)(b)). As before, the TTBER can apply not only to agreements that license the technology, but also to agreements by which the technology is assigned, provided that part of the risk associated with the exploitation of the technology remains with the assignor (Article 1(1)(c)).
- Paragraphs 48-50.
- See the definition in Article 1(1)(c).
- Paragraph 59.
- Previous language in Article 4(1) specifying that field of use restrictions on the licensee and obligations on the licensor not to grant other licences in a given territory (sole licence) do not constitute hardcore restrictions was deleted from the TTBER but paragraphs 109 and 113 of the amended Guidelines confirm that such contract provisions will continue to be treated as non hardcore. Accordingly, there is no change in this area.
- Paragraph 157.
- Article 5(1)(a); paragraphs 129-132.
- Article 5(1)(b); paragraphs 133-140.
- The TTBER’s other exceptions to the treatment of passive sales restrictions on licensees as hardcore restrictions have not been modified.
- Footnote 29 of the amended Guidelines. A FRAND commitment is a commitment granted by an intellectual property rights owner (typically when his rights are included in a standard) to license its rights to all third parties on fair, reasonable and non-discriminatory terms.
- Paragraph 33.
- Paragraphs 30 and 33.
- See also paragraphs 70-74.
- Paragraphs 75-78.
- Article 2(3); paragraphs 46-47.
- Paragraphs 238 and 239.
- Paragraph 243.
- Paragraphs 262-264.