New Competition Rules
New EU competition rules improve clarity and comprehensive-ness of the competition rules on technology licensing.
On 21 March 2014, the European Commission adopted new competition rules for the assessment of technology transfer agreements in the EU. These rules apply to license agreements between companies through which a licensor permits a licensee to exploit patents, know-how, software copyright and certain other intellectual property rights for the production of goods and services.
The EU competition rules on technology licensing are comprised of the so-called technology transfer block exemption regulation (TTBER) and related technology transfer guidelines (Guidelines). The key features of the TTBER are its so-called safe harbor, black list and grey list.
The safe harbor means that technology license agreements that fulfill the conditions set out in the TTBER are practically exempt from scrutiny under EU competition law. In contrast, clauses which are defined in the TTBER as hardcore restrictions (i.e. are “black-listed”) are very likely contrary to EU competition law. Black-listed clauses include, among others, certain restrictions concerning the pricing of products produced with the licensed technology, output limitations and allocation of markets and customers between the licensor and licensee.
If a technology license agreement includes a black listed clause, the entire agreement is excluded from the application of the safe harbor and in practice it is generally very difficult to defend the en-forceability of such an agreement. The grey list (so-called excluded restrictions) sets out clauses in technology license agreements that always require a case-by-case assessment. Technically grey-listed clauses are not presumed to be anticompetitive, but in practice they do often lead to a need for more detailed competition law scrutiny.
The new rules entered into force and replaced the existing framework from 1 May 2014 onwards. However, the TTBER includes a one year transitional period for agreements already in force on 30 April 2014, so the new regulation will start to apply to these existing agreements on 1 May 2015. The TTBER will be in force for the next 12 years, i.e. until 30 April 2026.
Prior to the adoption of the new rules, the Commission held a thorough consultation on the existing regime and a draft of the proposed new regulation and Guidelines. The industry feedback largely supported the continuation of the existing regime.
Whilst the new set of rules largely follow the existing technology transfer regime and the Commission continues its policy of viewing technology licensing as being in most cases pro-competitive, the new rules nonetheless include certain issues which companies active in in- or out-licensing of patents, know-how or software must be aware of. Indeed, the Commission has taken a more stringent approach to certain types of clauses which are not uncommon in technology licensing agreements today.
Key Changes in the Licensing Rules
The new TTBER and Guidelines include numerous changes which improve clarity and comprehensiveness of the competition rules on technology licensing. Particularly noteworthy issues are changes in the TTBER concerning non-challenge clauses, grant-back-clauses, passive sales restrictions and field-of-use clauses. As regards the Guidelines, we draw attention to the increased clarity concerning the assessment of licensing in the context of settlement agreements and technology pools.
Non-challenge Clauses. The new TTBER includes a more strict approach to non-challenge clauses. Non-challenge clauses, i.e. clauses where parties to a license agreement agree not to challenge each other’s IP rights, are already currently excluded from the TTBER’s safe harbor. However, the current TTBER provides a safe harbor for a clause under which the parties may terminate the license agreement upon a challenge by the other party. Under the new TTBER, the scope of this termination right has been reduced. A termination right in case of a challenge by the other party is only within the safe harbor in case of an exclusive license and the termination right limited to a situation where the licensee challenges the validity of the licensed technology rights.
Grant-back Clauses. The new TTBER also includes a more strict approach on exclusive grant-back clauses. An exclusive grant back is a clause which prevents the licensee from exploiting its improvement of, or its new application of, the licensed technology. Under the expiring TTBER, exclusive grant-back clauses benefit from the safe harbor to the extent they concern so-called non-severable improvements i.e. improvements which cannot be exploited without infringing upon the licensed technology. Under the new rules, only non-exclusive grant-back clauses may benefit from the TTBER’s safe harbor.
Passive Sales Restrictions. The new TTBER tightens the approach to certain passive sales restrictions. Passive sales restrictions mean, in short, clauses included in technology transfer agreements which limit the possibilities to respond to unsolicited requests from individual customers. In general, passive sales restrictions are black-listed in the TTBER. Some exceptions are however included. In the new TTBER, this list of exceptions is shorter than in the expiring TTBER. However, in our experience, the passive sales restrictions that were exempted under the expiring TTBER but are considered as hardcore restrictions under the new TTBER have not been particularly commonly used in practice.
Field-of-use Clauses. Field-of-use clauses between competitors are now no longer men-tioned as exempted from the black listed restrictions concerning market and customer sharing. However, the new Guidelines confirm that field-of-use clauses are no longer considered to be market and customer sharing. This implies a more lenient approach to field-of-use clauses.
Settlement Agreements. The new Guidelines include further guidance on settlement agreements. The Commission notes that licensing in the context of settlement agreements is not as such restrictive, since it allows the parties to exploit their technologies. However, settlement agreements may include individual terms and conditions that are not compatible with EU competition rules (of these, the Commission draws particular attention to so-called pay-for-restrictions as well as certain cross-licensing and non-challenge clauses). The new guidance is in part based on the EU Commission’s recent practice in the pharmaceutical sector, where the Commission has imposed tens of millions of fines on companies that had entered into anticompetitive settlement agreements.
Technology Pools. The new Guidelines include a new safe harbor for technology pools. The creation and operation of the pool as well as licensing out from the pool benefit from the new safe harbor provided that seven conditions, as set out in the Guidelines, are fulfilled.
New Rules Bring Clarity
Overall, we welcome the new set of rules. With the adoption of the new TTBER, companies are provided with further legal certainty concerning their technology licensing agreements throughout the EU for the next twelve years. The improvements in the TTBER and Guidelines bring additional clarity to the assessment under competition law of a variety of technology licensing scenarios.
However, at the same time, companies will need to adapt to the new rules in a relatively short period of time. All licensing agreements entered into on 1 May 2014 or later will be assessed under the new rules, and existing contracts that continue to be in force after the end of the transition period, i.e. 30 April 2015, must be re-assessed.
We consider the most important change brought about by the rules the loss of the safe harbor currently provided by the TTBER for certain types of non-challenge and exclusive grant-back clauses. In our experience, such clauses are not uncommon and have been found to be useful in a variety of situations. Companies will now need to more carefully assess whether it is appropriate to continue to include such clauses in their technology licensing agreements.
A review of existing agreements including such clauses is encouraged. Furthermore, we con-sider that the new guidance on settlement agreements will also mean added emphasis in ensuring that settlement arrangements between right holders and alleged infringers are in accordance with EU competition rules.
Castrén & Snellman Attorneys Ltd.
The new competition rules on technology licensing are available at: http://ec.europa.eu/competition/antitrust/legislation/transfer.html