Revised EU Antitrust Rules on Technology Licensing

April 30, 2014

The European Commission (the "Commission") has enacted a revised Block Exemption Regulation governing technology transfer agreements.  The revised regime has been enacted following two prior consultation phases in 2011/2012 and in 2013 (the "Consultations") (cf. our 2013 Client Alert, "European Commission Proposes Stricter EU Antitrust Rules on Technology Transfer") and consists of a new Technology Transfer Block Exemption Regulation (the "2014 TTBER") and a revised version of its Technology Transfer Guidelines (the "2014 Guidelines").[1]  The revised regime will enter into force on May 1, 2014 and replace the current Block Exemption Regulation and the accompanying guidelines stemming from 2004 (the "2004 TTBER" and the "2004 Guidelines") which are set to expire on April 30, 2014.[2]

The 2014 TTBER and 2014 Guidelines include a number of substantive changes that affect many aspects of the current "safe harbor" regime applicable to technology transfer agreements under the block exemption route.[3] These substantive changes include, inter alia: (i) a clarification of the scope of the 2014 TTBER; (ii) additional guidance on the method of calculating market shares in the context of technology licensing agreements; (iii) revisions to the catalogue of "hard-core" (i.e., virtually "per se" rules) and excluded restrictions; (iv) guidance on settlement agreements in IP disputes; and (v) more extensive guidance regarding the compatibility of technology pools with EU antitrust rules.

The 2014 TTBER provides for a rather short, 1-year transition period for existing technology transfer agreements exempted under the prior 2004 TTBER to be aligned with the changes introduced by the 2014 TTBER.  Therefore, companies with commercial and licensing relationships covered by the TTBER should bring their arrangements in compliance with the new regime.

I.                   Scope of the 2014 TTBER

The 2014 TTBER now expressly carves out from its application technology licensing in the context of R&D and specialization agreements that fall within the scope of the respective separate Block Exemption Regulations for these types of agreements, and in the context of the set-up of technology pools.

In addition, the 2014 TTBER includes an exhaustive list of the IP rights the licensing of which would be understood to be a "technology" transfer agreement subject to the application of the 2014 TTBER (e.g., know-how, patents, utility models, design rights, supplementary protection certificates, and software copyrights for their use beyond mere reproduction and distribution). Excluded from the 2014 TTBER are, however, software licensing agreements in the context of mere reproduction and distribution of software copyright protected products, since these agreements, in the view of the Commission, are more appropriately addressed by the separate regime that is found in the Vertical Block Exemption Regulation and the Guidelines on Vertical Restraints.[4]

The scope does also not include copyrights other than software copyrights, or trademarks.

Although the Commission initially considered during the Consultations the possibility of including "trademarks" among the IP rights constituting "technology rights", trademarks are left outside the scope of the 2014 TTBER.  Accordingly, the licensing of trademarks to be attached to goods produced by the licensee (without there being any licensing or assignment of other IP rights or know-how constituting "technology" for the production of such goods) will continue to be assessed under Article 101 TFEU, applying by analogy the Block Exemption regimes for vertical arrangements and technology transfer agreements.

Further, the 2014 TTBER purports to apply to the licensing of "technology rights" where this is combined with the licensing of other IP rights (e.g., trademarks, or non-software copyrights), or where it includes provisions relating to the purchase of products by the licensee (insofar as such licensing or purchase is directly and exclusively related to the production of the contract products).  This modification departs from the 2004 TTBER, which requires that such licensing constitute the "primary object" of the agreement in order for the TTBER to apply.  For example, under the new regime, the disclosure of know-how ("technology") and the licensing of a trademark to produce goods will be covered by the 2014 TTBER even if the main objective of the parties is to exploit such trademark (rather than the know-how in question).[5] 

II.                Market Share Thresholds and Calculations

A critical element of all Block Exemption Regulations is the understanding that the "safe harbor" treatment will only extend to those arrangements which do not account for more than a particular level of the market share affected by the relevant arrangements.  This does not mean that arrangements accounting for higher market shares automatically infringe Article 101(1) TFEU and are not capable of individual exemption under the pro-competitive criteria listed in Article 101(3) TFEU.  However, such arrangements do not benefit from the automatic "safe harbor" available under the Block Exemption Regulation if the market share thresholds set forth are exceeded.  As such, their enforceability may therefore be susceptible to national litigation procedures.

The 2014 TTBER maintain the same market share thresholds below which parties to a technology transfer agreement may be covered by the exemption as under the 2004 TTBER (i.e., 20% market share where the licensing occurs between actual or potential competitors; 30% market share between non-competing firms).  In particular, the 2014 TTBER did not incorporate a proposal introduced by the Commission during the Consultation phase that would have made the market share tests even more complex and would have led to the application of the lower threshold also in cases where the licensee owns a technology which it uses only for in-house production and which is substitutable for the licensed technology.[6]

In addition, the 2014 TTBER and the 2014 Guidelines address in detail market share calculations at the technology licensing level.  In this regard, the Commission clarifies that the market share of both licensors and licensees should be calculated on the basis of the combined sales of the products integrating the licensed technology (i.e., their "footprint" sales at the product market level).  The licensor’s and licensees’ respective sales should be calculated as part of a market which should encompass competing products, irrespective of whether or not they have been manufactured under a technology license.[7]  New technologies which have not yet been applied to the production of products, and therefore have not generated sales in the preceding calendar year, will benefit from the assignment of a zero market share.  

III.             "Hard-core" and Excluded Restrictions

The benefits of the "safe harbor" are lost where the arrangements in question contain particular types of arrangements which are considered to be "hard-core" restrictions of EU competition law. Where such a serious restriction of competition exists, it is assumed that it is almost always anti-competitive, unless particular circumstances are identified which suggest that such a presumption should be overridden.  Block Exemption regimes such as the 2014 TTBER also define specific obligations that are "excluded" from the safe harbor, without prejudice to the assessment of the overall agreement.  In addition, there are certain changes which need to be assessed on their particular terms in light of prevailing economic circumstances; such changes might need to be excluded from the scope of the automatic exemption provided under the "safe harbor" regime.

a)      Licensees’ protection from sales by other licensees as "hard-core" restrictions

In the context of technology license agreements between non-competing firms, the 2014 TTBER retains the protection conferred on a licensor in its exclusively allocated territory against "passive" sales made from its licensees.[8]  However, in contrast with the 2004 TTBER regime, the "safe harbor" no longer protects licensees from passive sales by other licensees made into their exclusive allocated territories or designated exclusive customer groups during the first two years in which licensees sell products manufactured under license.[9]  This revision aligns the TTBER with the path set under the Vertical Block Exemption Regulation and the Guidelines on Vertical Restraints applicable to distribution arrangements (i.e., in principle, an exclusive distributor cannot be protected against passive sales from other distributors into its exclusive territory).[10]

While refusing the exemption for these passive sale restrictions, the 2014 Guidelines indicate that "restrictions on passive sales by licensees into an exclusive territory or customer group allocated to another licensee [. . .] may fall outside Article 101(1) of the Treaty for a certain duration [of up to two years] if the restraints are objectively necessary for the protected licensee to penetrate the new market." [11]  This limited exception will, however, be difficult to manage in practice, as it transfers the risk and burden of the self-assessment process under Article 101 TFEU entirely to the licensing parties.  The 2014 TTBER and the 2014 Guidelines applying to these scenarios therefore create significantly less, rather than greater, legal certainty.

b)     Exclusion from "safe harbor" of exclusive "grant-back" obligations regarding all kinds of improvements

Under the 2004 TTBER regime, a licensor may benefit from the safe harbor even if it imposes on its licensee an obligation to grant back an exclusive license or to assign it rights with respect to the licensees’ own non-severable improvements on the licensed technology.  However, in the 2014 TTBER, the Commission removed the benefit as regards the exclusive licensing or assignment obligations of any improvements made by the licensee to the licensed technology (i.e., whether severable or non-severable).  Thus, the safe harbor will now cover only non-exclusive grant-back obligations, regardless of whether they: relate to severable or non-severable improvements; are non-reciprocal; envisage the payment of consideration; or entitle the licensor to feed-on these improvements to other licensees.[12]  Exclusive grant-back obligations must be assessed individually, but the remainder of the agreement may still benefit from the safe harbor.

c)      Exclusion of no-challenge termination clauses in non-exclusive licenses

The Commission has expanded the scope of the exclusion from the safe harbor of no-challenge clauses regarding licensed IP rights.  Under the 2014 TTBER, as under the previous 2004 TTBER, no-challenge clauses do not benefit from the exemption, regardless of whether the ultimate beneficiary of such a provision is the licensor or the licensee.  However, contrary to the 2004 TTBER (which exempted termination arrangements for any kind of technology transfer agreements), the 2014 TTBER now excludes from the exemption regime clauses that allow for the termination of the technology license agreement in the event of a challenge to the validity of the IP rights concerned in the case of non-exclusive licenses.  According to the Commission, such clauses can have the same deterring effect as no-challenge clauses, which do not benefit from the exemption, and would not be justified on the basis of any "exclusive" character of the license in question.  Further, the possible anti-competitive effects deriving from any such termination clause could be exacerbated in the context of so-called patent thickets.[13]

IV.             Settlement Agreements

Further to the Commission’s 2009 Sector Inquiry on the Pharmaceutical Sector,[14] which has been followed by several monitoring reports of patent settlements, the Commission has deemed it necessary to extend its assessment to settlement agreements in the context of technology licensing.  While the Commission indicates that settlement agreements constitute a legitimate way of putting an end to lengthy and costly court proceedings, it is also the case that invalid IP rights should not prevail at the expense of innovation and competition.

The 2014 Guidelines clarify that settlement agreements may have anti-competitive outcomes where the licensee agrees, upon being induced by the licensor (e.g., financially, or by providing it with a license), to more restrictive settlement terms than would otherwise have been accepted solely on the basis of the strength of the licensor’s technology (so-called "pay-for-delay" or "reverse payment" settlement agreements).  Further, the Commission indicates that no-challenge clauses in the context of settlement agreements are likely to be anti-competitive if the licensor knows or could reasonably be expected to have known that the licensed technology was obtained unfairly (e.g., it did not meet the appropriate legal conditions to justify being conferred IP law protection). 

V.                Technology Pools

Following an increased demand from industry in the Consultations, the 2014 Guidelines expand the guidance regarding the Commission’s competitive assessment of technology pools.  Agreements which establish technology pools and set out the terms and conditions for their operation, as well as agreements for the licensing of the pooled technology, are not covered by the 2014 TTBER but are subject to the parties’ self-assess reference to the principles contained in the 2014 Guidelines in order to comply with EU competition rules.  The self-assessment needs to include: (a) the formation and operation of technology pools (including the possibility of being covered by the "(soft) safe harbor"); and (b) an analysis of the restraints stemming from agreements between technology pools and their licensees.

a)      Formation and operation of technology pools / Standard-essential patents

The formation and operation of technology pools has to be assessed on a case-by-case basis in order to detect any possible anti-competitive risks and efficiencies.  For these purposes, several factors have to be taken into consideration, such as the transparency of the pool-creation process (e.g., the extent to which independent experts are involved in the creation and operation of the pool) and the selection and nature of the pooled technologies (including whether or not these are an essential part of the pooled technologies needed to produce the contract products or to comply with the standard supported by a patent pool).  Other important factors are whether or not safeguards against the exchange of sensitive information and independent dispute resolution mechanisms have been established by the parties to the pool arrangement.

The 2014 Guidelines formalize the creation of a "(soft) safe harbor" that is likely to become the cornerstone for the assessment of technology pools.[15] Subject to the observance of certain conditions, such as the open character of the standard and pool creation process, the establishment of safeguards to ensure limits on the exchange of sensitive information, or the possibility of parties and licensees to challenge the validity or essential nature of the pooled technologies, a pool agreement and also its license-in agreements will generally be considered to fall outside the scope of Article 101 TFEU irrespective of the market position of the parties.  Outside of this "(soft) safe harbor", the likelihood of anti-competitive effects, as well as resulting efficiencies, must be assessed on a case-by-case basis.  It should be noted that the Commission seems to be inclined to consider that efficiencies are likely to outweigh the non-observance of certain less sensitive "(soft) safe harbor" conditions, such as the inclusion of non-essential technologies in the pool (i.e., technologies which do not constitute a necessary part of the pooled technologies needed to produce the contract products or to comply with the standard supported by the pool in question).

In addition to the above, the 2014 Guidelines maintain certain elements for the assessment of technology pools that were present in the previous regime.  For example, the Commission continues to emphasize that anti-competitive effects are more likely to derive from those pools which include substitutable (as opposed to complementary/essential) technologies, due to the absence of rivalry between the technologies in question.  Further, the 2014 Guidelines continue to recommend putting in place safeguards, such as independent experts or licensing bodies, in order to ensure that sensitive information which may be necessary for the functioning of the patent pool (e.g., for the calculation of royalty payments) is not exchanged between the parties to the technology pool. 

b)     Analysis of restraints stemming from agreements between the technology pool and its licensees

Beside the formation of the technology pool itself, license-out agreements between a pool and its licensees may also be a source for competition concerns and, because of their multi-party nature, fall outside the scope of the 2014 TTBER.[16]  In this regard, the 2014 Guidelines slightly modify the parameters that can be used to assess the possible anti-competitive effects that might derive from the agreed conditions in a technology pool licensing agreement.  As such, the Commission has indicated that banning licensing to certain licensees, or licensing pooled technology based on discriminatory terms, might lead to an infringement of EU competition rules where the market position of the technology pool is strong.  Further, technology transfer agreements between technology pools and licensees should not contain any of the hard-core and excluded restrictions found in the 2014 TTBER.

Special attention must be paid where the technology pool has a dominant position on the relevant market.  In those situations, the 2014 Guidelines require that royalties and license terms be set on fair reasonable and non-discriminatory (FRAND) terms, and that the relevant licenses be non-exclusive.  However, the Commission indicates that the mere establishment of different royalties for different product markets or different uses is in general not liable to constitute an infringement of EU competition rules insofar as no discrimination is occurring within the affected product markets. 

VI.             Conclusions and Transition Periods

The changes introduced by the 2014 TTBER and the 2014 Guidelines concerning the licensing of technology are likely to bring both benefits as well as additional hurdles especially for companies that derive significant business from technology licensing-out arrangements.

On the one hand, a number of important changes have been introduced which create greater clarity for fundamental concepts such as, the types of IP rights that will not be covered under this specific "safe harbor" regime (e.g., trademarks, non-software copyrights, and IP right licensing in the context of agreements covered by other Block Exemptions), and the clarification of market share calculations.

On the other hand, the Commission’s approach to exclude certain provisions from the safe harbor provided by the 2014 TTBER in comparison to that under the 2004 TTBER will cause some concern to both new as well as existing licensing arrangements.  As the newly adopted 2014 TTBER will also apply to any already existing technology transfer agreements that were entered into in compliance with the 2004 TTBER after a one-year grace period, practitioners will need to analyze their existing licensing portfolio to identify clauses that will no longer be exempted after 1 May 2015 — in particular termination clauses in non-exclusive licenses that allow for a termination by the licensor in case of challenges to the licensed IP by the licensee or exclusive grant-back obligations for improvements may need to be assessed on a case-by-case basis.

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   [1]   See Commission Regulation (EC) 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, 28.3.2014, pp. 17-23.

   [2]   See Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, OJ L 123, 27.4.2004, pp. 11-17.

   [3]   In the EU, Article 101(1) TFEU (i.e., the equivalent of Section 1 of the Sherman Act) prohibits agreements and concerted practices which may affect trade between EU Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.  However, the Commission has the power to adopt so-called Block Exemption Regulations which apply to specific categories of agreements (e.g., technology transfer agreements, distribution agreements, etc.), by virtue of which it establishes a presumption that certain agreements do not affect competition adversely within the EU (and are therefore covered by a "safe harbor") insofar as the conditions of the applicable Block Exemption Regulation are satisfied (these conditions generally reflect the application of the specific limbs of Article 101(3) TFEU to the sector or category in question).

   [4]   See 2014 TTBER, at Article 9.

   [5]   See 2014 Guidelines, at para. 47.

   [6]   See 2013 Commission drafts of the TTBER, at Article 3(2); and the 2013 Commission draft of the Guidelines, at paras. 72 and 73.

   [7]   See 2014 Guidelines, at para. 86.

   [8]   See 2014 TTBER, at Article 4(2)(b)(i).  A "passive" sale is one which is made without the seller having solicited the business of the purchaser.

   [9]   See TTBER, at Article 4(2)(b)(ii).

  [10]   See Vertical Block Exemption Regulation, at Article 4(b)(i); the 2014 Guidelines refer themselves to the definition of "active" and "passive" sales provided in the Guidelines on Vertical Restraints (see 2014 Guidelines, at para. 108).

  [11]   See 2014 Guidelines, at para. 125; the language is similar to that used in para. 61 of the Guidelines on Vertical Restraints.

  [12]   See 2014 Guidelines, at paras. 129 to 132.

  [13]   Namely, those situations where there exists an overlapping set of patent rights.

  [14]   Available at: http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_en.pdf.

  [15]   See 2014 Guidelines, at para. 261.

  [16]   As is also the case under the current TTBER.