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The Technology Transfer Block Exemption

Anti-competitive agreements are prohibited by European and domestic competition law. This means any anti-competitive provisions in commercial agreements are void and unenforceable which could lead to the entire agreement being unenforceable. 

This guide is based on EU and UKlaw. It was last updated in October 2014.

The European Commission and the Competition and Markets Authority have the right to fine a company up to 10% of its global group turnover for breach of competition law and companies face exposure to actions for damages. Breach of the rules can also result in significant reputational damage, an individual being disqualified from being a company director and in certain cases can lead to criminal sanctions.

However, the European Commission has produced a number of so-called block exemptions which make certain 'safe harbours' available to companies. The Technology Transfer Block Exemption (TTBER) covers licensing agreements in relation to most intellectual property rights (IPRs), providing a safe harbour to companies active in this business area. If an agreement falls within the terms of this block exemption, the companies concerned can be confident that it will not be subject to scrutiny. The TTBER was revised with effect from 1 May 2014 and the scope of the block exemption narrowed in a number of respects.  There is a transitional period of a year (to 30 April 2015) for agreements that fall within the old TTBER but not the new TTBERR. Accompanying guidelines on the application of the TTBER have also been updated and replaced.

Since both UK and European competition law can be relied upon by competing companies (or third party individuals) affected by an anti-competitive agreement, it is likely some will be monitoring the activities of others, ready to raise competition law objections in order to protect their own commercial interests or gain financial recompense. As such a company relying on the TTBER, or any other exemption, should carefully monitor their market position and behaviour to make sure that they remain within the terms of the exemption.  For example, the TTBER can cease to apply if there is a material change in circumstances or a material change to the agreement, and it can also be withdrawn in limited circumstances.

Scope

The TTBER applies to licensing agreements between only two undertakings concerning a whole range of IPRs, of which the most common are patents, know-how and software copyright (save for mere reproduction and copying) and combinations of such rights. It will also apply to assignments of technology rights, provided the licensor retains part of the risk of exploitation. In order for the TTBER to apply, the technology transfer in question must be for the purpose of the production of goods or services exploiting the IPRs in question, so pure R&D or supply agreements are not covered by the TTBER (there are separate block exemptions for these and the new TTBER clarifies when each applies). However, provisions relating to the purchase of products by the licensee or to the licensing of other IPRs (such as trade marks) are also covered by the TTBER, to the extent that these provisions are directly related to the production and/or sale of the contract products. Trade mark licences are not generally covered by the TTBER save in these circumstances and provided also that the agreement is primarily concerned with the transfer of other IPRs.

Multi-party agreements are excluded from the scope of the TTBER. Consequently the TTBER will not apply to 'patent pool' arrangements but the accompanying guidelines set out guidance on when such arrangements would be acceptable.

Market share thresholds

Once it has been established that the subject matter of the agreement is covered by the TTBER, the next test is whether the parties to the agreement fall within specified market share thresholds.

The TTBER distinguishes agreements between competitors and those made between non-competitors. The reason for this is that, all other things being equal, the potential anti-competitive effects of an agreement between competitors are greater than for one made between non-competitors.

Market share is assessed in relation to both the relevant technology market and relevant product market. The combined market share of competitors must not exceed 20% on the affected relevant technology and product market for the TTBER to apply. Individual market shares of non-competitors must not exceed 30% on the affected relevant technology and product markets. These market shares are to be assessed by the parties themselves which in relation to the relevant technology market can sometimes prove difficult. The TTBER therefore requires a number of relevant market definitions to be considered and the application of the Regulation hinges on this analysis. Therefore, in circumstances where the assessment is not straightforward it would be appropriate for parties to seek expert advice.

As market shares are also likely to vary during the term of an agreement, the TTBER allows for a two year 'lag' between a party exceeding the relevant market share threshold and the agreement losing the protection of the TTBER. A company's market share may therefore “wobble” around the threshold – exceeding it one year only to fall back below it the next – without losing the benefit of exemption.

Even so, some technology companies consider that this lead time is still too short to reflect the reality of their business growth and that their business will be hampered by the need to renegotiate contracts after a relatively short time if a particular product is successful. Innovative businesses are likely to be most affected.

Hardcore restrictions

Once a technology transfer agreement has cleared the market share thresholds, it is necessary to examine the agreement to establish whether it contains any "hardcore" restrictions i.e. restrictions that are considered to be so damaging to competition that the protection afforded by the TTBER is lost from the agreement as a whole. The list of hardcore restrictions differs according to whether the agreement in question is between competitors or non-competitors. Non-competitors are given slightly more latitude reflecting a lower potential for competitive harm.

The hardcore restrictions for competitors include: restricting a party’s ability to determine prices when selling to a third party (resale price maintenance); reciprocal output/production caps; restricting the licensee’s ability to exploit its own technology or a restriction on either party from carrying out independent research and development unless in the latter case, this is indispensible to prevent the disclosure of the licensed know-how to third parties; and the allocation of markets or customers between the parties (subject to a fairly complex set of exceptions).

The hardcore restrictions for non-competitors also include resale price maintenance as well as certain restrictions on passive sales on the part of the licensee (though there are a number of exceptions to this restriction) and restrictions on sales to end users by a licensee within a selective distribution system which operates at the retail level.

One of the main changes in the new TTBER relates to this list of hardcore restrictions in agreements between non-competitors. Previously this contained a carve-out permitting a restriction on passive sales by the licensee into an exclusive territory or to an exclusive customer group allocated to another licensee during the first two years to protect the other licensee. Now all passive sales restrictions between licensees are outside the safe harbour of the TTBER.

Two parties may not be competitors at the time they enter into a technology transfer agreement but subsequent developments could mean that they become competitors for the purposes of the TTBER. In such a situation the hardcore list for non-competitors will continue to apply rather than the more stringent list applicable to competitors unless there is a material amendment to the agreement. With this in mind parties entering into a technology transfer agreement and currently classed as non-competitors but who can foresee becoming competitors in the near future might be wise to opt for a longer term, perhaps including break clauses.

Excluded restrictions

The TTBER also lists additional categories of restriction, which are described as “excluded” restrictions. Whilst the presence of a hardcore restriction is sufficient to take the whole agreement outside the protection of the TTBER, the presence of an excluded restriction only means that the excluded restriction itself does not benefit from this protection. As such, its impact on competition must be individually assessed. In the event of such a term being deemed anti-competitive the remainder of the agreement may still benefit from the TTBER (assuming that severance is possible).

The classes of excluded restrictions are:

  • required assignments or exclusive grant-backs by the licensee of its own improvements (in whole or part) to the licensed technology or new applications, whether or not these are severable from the underlying licensed technology (only non-exclusive grant-backs are within the block exemption from 1 May 2014);
  • no-challenge clauses agreed by either party in relation to rights held in the EU as well as, from 1 May 2014, provisions in a non-exclusive licence entitling the licensor to terminate the agreement in the event of such a challenge (in an exclusive licence, a provision allowing termination in the event of a challenge by the licensee to  the validity of a licensed IPR remains permissible);
  • where the parties are not competitors, a limitation of the licensee’s right to exploit its own technology or a limitation on either party's ability to carry out research and development unless this latter restriction is indispensible to prevent licensed know-how being disclosed to third parties. As noted above, this type of restriction remains a hardcore restriction where the parties are competitors. .

Agreements falling outside the Block Exemption

An agreement which falls outside the TTBER will not necessarily be unlawful as following individual assessment it may not be deemed to restrict competition in the first place or, although restrictive of competition, it could be justified (having regard to the guidelines) on the basis that it:

  • improves the production or distribution of goods (or services) or promotes technical or economic progress;
  • provides consumers a "fair share" of the resulting benefit;
  • the restrictions it contains are indispensible to the achievement of the above benefits; and
  • does not allow substantial elimination of competition on the markets concerned.

It is worth noting that a technology transfer agreement is unlikely to infringe competition law where there are four or more independently controlled technologies in addition to the technologies controlled by the parties to the agreement that constitute effective substitutes for the licensed technology. The competing technologies must be available at comparable cost to users and must constitute commercially viable alternatives.

Settlement agreements

New text on settlement agreements has been added to the guidelines. The Commission's considers that so-called "pay-for-delay" type settlement agreements often do not involve the transfer of technology rights, but are based on a value transfer from one party in return for a limitation on the entry and/or expansion on the market of the other party and therefore may be caught by Article 101(1). The guidelines also note that, if the parties to such a settlement agreement are actual or potential competitors and there was a significant value transfer from the licensor to the licensee, the Commission will be particularly attentive to the risk of market allocation/market sharing.

The inclusion of guidance on patent settlements reflects the Commission's view which has evolved in light of recent cases involving Lundbeck, Servier, Johnson & Johnson and Novartis which have all concerned "pay-for-delay". The outcome of these cases is still uncertain as many are under appeal and the law on 'by object' restrictions on competition is also developing. As such, the inclusion of this guidance remains questionable and is arguably premature until these cases have been resolved. The guidelines also refer in this section to the a 2012 ruling in a case involving AstraZeneca , noting that "non-challenge" clauses in settlement agreements can be problematic where the IPR is granted following the provision of incorrect or misleading information.

What should affected companies do?

Licensing agreements that do not comply with competition law could be void and the parties may also be exposed to the risk of a substantial fine from the competition authorities, as well as the risk of damages actions and injunction proceedings. Companies who are involved in technology transfer should review their existing agreements for compliance with the TTBER and/or any other relevant competition law provisions. Similarly, they should ensure that any future technology transfer agreements are also competition law compliant.

In practice it can be difficult for companies to conduct these assessments due to the complexity of the applicable rules. This is especially so with regard to the market share definition exercise, the interpretation of some of the hardcore restrictions and the assessment of efficiencies. This is therefore an area where obtaining good legal advice can provide a greater degree of commercial certainty with regard to competition law compliance.