On 21st March 2014, the European Commission adopted new safe harbour rules together with an accompanying set of Guidelines which automatically exempt certain categories of technology transfer agreements from the EU competition rules (see Article 101(i) TFEU).
The new safe harbour rules known as the Technology Transfer Block Exemption (the “TTBE”) apply to technology transfer agreements between parties with limited market power and which satisfy the other conditions set out in that legislation. The Commission takes the view that, in light of their experience of the market and technology transfer agreements generally, qualifying agreements are unlikely to cause competition problems.
The new TTBE rules replace an earlier block exemption, Commission Regulation No. 772/2004/EC and applies from May 1 2014. There are also certain transitional provisions. Parties with existing technology transfer agreements which comply with the earlier rules have one year’s grace to ensure that their agreements conform to the requirements of the new TTBE.
So what technology transfer agreements are covered under the TTBE?
The TTBE covers agreements between two parties under which one party licences, or assigns the right to use its technology for the production of goods and services. This technology could take many forms such as patents, know-how or software licenses.
The legislation applies to both agreements between competitors (“horizontal agreements”) and those between parties at different stages of the distribution chain (“vertical agreements”).
The TTBE only exempts licensing agreements concluded between parties with limited market power (i.e. market share not exceeding 20% for agreements between competitors and 30% for agreements between non-competitors), and that fulfil certain conditions set out in the TTBE. The accompanying Guidelines to the legislation also provide guidance on the competition law assessment of agreements which do not qualify for safe harbour.
What are the main substantive changes?
Which Block Exemption applies:- The Commission has passed a number of other block exemption regulations other than the TTBE exempting different common types of commercial agreement. Of particular relevance to technology transfer agreements are block exemption regulations in relation to R&D (Commission Regulation No. 1217/2010) and Specialisation (Commission Regulation No. 1218/2010). Under the earlier TTBE block exemption there had been uncertainty about which of the above block exemption regulations would apply. Licensing sometimes occurs in the context of other categories of agreements such as R&D agreements. The new TTBE now clarifies that its provisions will only apply if the block exemption regulations on R&D and specialisation agreements are not applicable.
Scope of the TTBE:- The revised TTBE introduces a new test to determine when provisions in a technology transfer agreement which extend beyond the licensing of the technology itself will be exempted under the provisions of the block exemption. Clauses concerning the purchase of raw material or equipment from a licensor or the use of the licensor’s trademark are often contained in the technology transfer agreement itself. The previous test had been based on whether non-technology transfer provisions were less important than the actual licensing of technology. This was a difficult test to apply in practice.
Therefore, the new TTBE introduces a new test. The new TTBE will only apply if, and to the extent that, the non-technology transfer provisions are directly related to the production or sale of the contract products which are produced with the licensed technology. The effect of this amendment is to move away from financial based assessment to an objective assessment as to whether the non-technology transfer provisions are directly related and ancillary to the licensed technology. For example, even if the raw material 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 TTBE.
Passive sales restrictions can never be exempted under the TTBE:- In the earlier TTBE, a restriction on passive sales had been allowed to protect a licensee during the first two years of an agreement between non-competitors. The new TTBE has now removed that provision which means that all passive sales restrictions between licensees are excluded from the safe harbour legislation. This change aligns the TTBE with the block exemption legislation for vertical restraints. However, the Guidelines make clear that these types of passive sales restrictions may still be allowed if the restraints are objectively necessary for the licensee to penetrate a new market. They will need to be assessed outside the TTBE however, on a case by case basis.
Hardcore Restrictions and market share thresholds:- There has been a simplification of the list of hardcore restrictions in relation to licensing agreements between competitors but the substance has not changed. Despite the Commission’s earlier proposals to lower the relevant market share thresholds for non-competitors where the licensee owns a competing technology used for in-house production, this was deemed too complicated a test to implement in practice. Therefore the market share thresholds in the new TTBE have not changed. They remain 20% for agreements between competitors and 30% for agreements between non-competitors.
Exclusive grant-back obligations:- All exclusive grant-back obligations will now fall outside the block exemption irrespective of whether the improvements made by the licensee can be exploited independently or not of the licensed technology. They will require an individual assessment. However, the rest of the agreement can still benefit from the safe harbour of the TTBE. Previously only exclusive grant back clauses concerning improvements which could be independently exploited by the licensee were excluded from the safe harbour. This change is designed to ensure that there are sufficient incentives for follow-on inventions. All non-exclusive grant-back obligations are still covered by the TTBER.
Termination clauses:- No-challenge clauses, which prevent a licensee from challenging the validity of the licensed technology, fall outside the provisions of both the earlier and the new block exemption regulations. These types of clauses will need to have their effect on competition individually assessed as they constitute a significant barrier to the removal of invalid intellectual property rights from the market. In a permissible variation to a no-challenge clause it was common to see in technology transfer agreements provisions which permitted a licensor to terminate the licence if a challenge to the validity of the licensed technology was made. However, the new TTBE is clamping down on these types of clauses. The new legislation will now remove the protection of the safe harbour from termination clauses in non-exclusive licensing agreements.
The Commission takes the view that these types of termination and no-challenge clauses have similar effects especially in situations where a licensee has made substantial investments or where a technology is an essential input. Nevertheless, introducing such a provision in an agreement does not prevent the rest of the agreement from benefiting from the safe harbour of the TTBE. Termination clauses in exclusive agreements when the relevant market share thresholds are not exceeded will still be covered by the block exemption.
Settlement agreements:- Settlement agreements are recognised as a legitimate way to solve technology disputes revolving around whether a patent is valid or being infringed. In many cases it makes sense for the parties to come to a mutually acceptable settlement to save time and costs litigating the dispute. The Guidelines now contain a special section on settlement agreements which makes clear that settlement agreements which lead to a delayed or otherwise limited ability for the licensee to launch a product, may be prohibited by Article 101(1) TFEU.
Technology pools:- Technology pools are where two or more companies agree to cross-license patents relating to a particular technology. The object of this pool is to make production associated with those particular technologies easier when companies don’t have to obtain multiple patents relating to a single area. It can create a one-stop shop for licensing. The TTBE now provides that these pools will be granted safe harbour from Article 101(1) if certain conditions are met including:
- the pool being open to all;
- that the pool contains essential technologies only;
- that the technologies licensed on a non-exclusive basis; and
- that the technologies are licensed on fair terms.
Thus by structuring their pool and the subsequent licensing agreements from the pool in such a way that the safe harbour conditions are fulfilled, the pool contributors can be certain that the pool is considered to be pro-competitive, regardless of the market share the pool could obtain. This is expected to further incentivise the creation of pro-competitive pools.