EU opens public consultation on revised Technology Transfer Block Exemption Regulation

A few days ago, the European Commission launched a public consultation, running from 20 February 2013 to 17 May 2013, on draft proposals for a revised Technology Transfer Block Exemption Regulation (TTBER) and revised Guidelines for the application of Article 101(3) TFEU to technology transfer agreements. The new rules are going to replace Commission Regulation 772/2004, which entered into force on 1 May 2004 [Merpel: you are wondering whether the IPKat was there, at the time, aren't you? The answer, of course, is yes!] and is scheduled to expire on 30 April 2014. A preliminary public consultation had previously been launched in December 2011.

Merpel's thought of the day: if
 Technology Transfer Block Exemption is
TTBE, why can't Intellectual Property
Kills Anti-Trust be IPKat?

For those not familiar with the topic, block exemption regulations are adopted by the Commission (and, rarely, by the Council), to identify categories of agreements which, albeit liable to alter competition within a certain market, are still allowed under Article 101(3) of the TFEU. This provisions states that Article 101(1), which provides a list of agreements, decisions and concerted practices that are prohibited due to their negative impact on competition, may be declared inapplicable in relation to individual agreements or categories of agreements (or decisions or concerted practices) that fulfill all the following requisites:

(1) they contribute to improving the production or distribution of goods or to promoting technical or economic progress;
(2) they let consumers have a fair share of the resulting benefit;
(3) they do not impose on the undertakings concerned any restrictions which are not indispensable to the attainment of those objectives;
(4) they do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

The TTBER concerns bilateral technology licensing agreements, where the licensor allows the licensee to employ the licensed technology (patents, utility models, know how, etc.) to produce goods or services. The agreements may include the licensing or assignment of other intellectual property rights, if directly (and, according to the draft proposal, exclusively) related to the production of contract products. Agreements concerning the pooling of technologies or the subcontracting of research and development, instead, are expressly excluded from the subject-matter (the Guidelines, however, provide specific rules to be applied to these cases). The Regulation aims to reconcile the need of providing adequate protection for IP, and the rights conferred to its owner, with that of ensuring effective competition. As the Commission explained in Recital 6 of Regulation 772/2004:

The likelihood that such efficiency-enhancing and pro-competitive effects will outweigh any anti-competitive effects due to restrictions contained in technology transfer agreements depends on the degree of market power of the undertakings concerned and, therefore, on the extent to which those undertakings face competition from undertakings owning substitute technologies or undertakings producing substitute products.

Hey, I'm the IPKat, not the
CompetitionKat... give me a break!

(c) Inessa Akhmedova

Following these considerations, both the current Regulation and the draft proposal adopt a market share threshold, beyond which the exemption does not apply, and provide a list of two categories of restrictions (hardcore and excluded), whose presence bears different effects on the applicability of the block exemption. The threshold, as stated in Article 3, is 20% of the combined share of the relevant markets, if the agreement involves two competing undertakings, or 30% of the individual share of the relevant markets, if the undertakings are non-competitors (proposed changes are examined below). Agreements that fulfil this condition fall within the scope of the block exemption only if they do not contain any of the ‘hardcore restrictions’ listed in Article 4 (e.g. restriction of a party's ability to determine its prices when selling products to third parties or of a licensee's ability to exploit its own technology). If [not a hardcore but] an ‘excluded restriction’ is present, this falls outside the scope of the TTBER and is subject to individual assessment, but the rest of the agreement continues benefiting from the exemption, as stated by Article 5.

The Commission, however, retains the power to withdraw the benefit of the exemption if it finds that a technology transfer agreement falling within the scope of the Regulation has effects that are incompatible with Article 101(3). Agreements that are not subject to the Regulation (e.g. where the market share of the undertakings involved is higher than the established threshold) are to be individually assessed by the Commission for compatibility with Article 101(3), but are not subject to a presumption of non-conformity.

The new draft TTBER proposal, and the Guidelines on the application of Article 101(3) to technology transfer agreement, retain the same mechanisms and principles forged in the previous law (which, instead, had introduced important changes to the rules enshrined in its precursor, Regulation 240/1996). However, the Commission is seeking to implement some fine-tuning, in relation to several of the existing provisions. Here is a brief, non-exhaustive, recap of some of the proposed changes:

• Technology. Article 1(1)(b) introduces a new comprehensive definition of 'technology', stating that the notion refers to know-how as well as patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates for medicinal products or other products for which such supplementary protection certificates may be obtained, plant breeder's certificates and software copyright. 


• Technology transfer agreements. Article 1(1)(c) provides a broader definition of these agreement, which may also contain provisions related to the purchase of products by the licensee or to the licensing or assignment of other intellectual property rights or know-how to the licensee, if these provisions are directly and exclusively related to the production of the contract products. The revised Guidelines explain that ‘[p]rovided these other intellectual property rights enable the licensee to better exploit the licensed technology, the TTBER covers technology transfer agreements even if the principal interest of the parties lies in the exploitation of the former rather than the latter’ (paragraph 51). The previous Regulation, instead, expressly stated that such provisions could not constitute the primary object of the agreement. 


• Market definition and share. Article 1 contains definitions for product, geographical and technology market. Article 8(d) and the revised Guidelines (paragraph 25) explain that the market share in the technology market should be calculated ‘on the basis of the presence of the licensed technology on the relevant market(s) where the contract products are sold, that is on the basis of the sales data of the contract products produced by the licensor and its licensees combined’ (taking into account relevant geographical limitations). This approach is favoured over the use of royalty income to calculate the licensor’s market share because of the difficulty of obtaining reliable royalty income data and of the risk of underestimating a technology’s strength in situations of cross licensing or tying (paragraph 77). In relation to agreements falling outside the safe harbor of the TTBER, however, the Commission retains the power to use the royalty-based methodology, or a combination of both, in order to evaluate the market strength of the licensor and the relative strength of the available technologies. 


• Market share threshold. Article 3(2) extends the 20% threshold to the case of agreements concluded between non-competitors, when the licensee owns a substitute technology, which it uses only for in-house production and which is substitutable for the licensed technology. 


• Passive sales. The exception contained in Article 4(2)(b)(ii) of the current Regulation is not reproduced in the draft proposal. Accordingly, ‘the restriction of passive sales into an exclusive territory or to an exclusive customer group allocated by the licensor to another licensee during the first two years that this other licensee is selling the contract products in that territory or to that customer group’ now triggers the application of the discipline concerning hardcore constraints, as per the general provisions of Article 4 (unless it is demonstrated that such restrictions are objectively necessary to penetrate a new market, pursuant to paragraph 116 of the revised Guidelines - e.g. to allow the licensee to recoup substantial initial investments made to enter the new market). 


• Subcontracting. In the revised Guidelines, paragraph 45 states that subcontracting agreements ‘whereby the contractor determines the transfer price of the intermediate contract product between subcontractors in a value chain of subcontracting generally also fall outside Article 101(1) provided the contract products are exclusively produced for the contractor’. 


• Exclusive grant backs. The final part of paragraph 109 of the current Guidelines, which recognizes that ‘[e]xclusive grant backs and obligations to assign non-severable improvements are not restrictive of competition within the meaning of Article 81(1) since non-severable improvements cannot be exploited by the licensee without the licensor's permission’, and the distinction between severable and non-severable improvements is set to disappear. Accordingly, all exclusive grant backs agreements are now treated equally, as excluded restrictions ex Article 5, and are subject to individual assessment. 


• Challenges to the validity of IP rights. Article 5(1)(b) of the draft proposal excludes from the safe harbor of the TTBER the right for the licensor to terminate the agreement in the event that the licensee challenges the validity of any of the IP rights that the licensor holds in the EU. According to the Commission, ‘[s]uch a termination right can have the same effect as a non-challenge clause, in particular where the licensee has already incurred significant sunk costs for the production of the contract products or is already producing the contract products’. In this case, the public interest to ensure that IP rights are correctly granted and validly held prevails on the licensor’s interest to terminate the deal, provided that the licensee fulfils all its other contractual obligations (paragraph 125 of the revised Guidelines). Non-challenge and termination clauses, thus, fall outside the scope of the TTBER and require individual assessment, while the exemption remains applicable to the rest of the agreement. Pursuant to paragraph 126, however, non-challenge and termination clauses solely concerning the licensing of know-how fall within the scope of the exemption.


• Settlement agreements. The revised Guidelines contain a more detailed set of provisions dealing with settlement agreements (paragraphs 219 – 227). In particular, the Commission seems wary of pay-for-restriction and pay-for-delay clauses, whose compatibility with Article 101(1) TFEU should be assessed in depth, and of non-challenge clauses, which can have anti-competitive effects under specific circumstances (e.g when the licensor induces, financially or otherwise, the licensee to agree to the non-challenge clause, or when the former is aware of the licensed IP rights’ invalidity). 


• Technology pools. Although pool licensing and technology licensing, by the pool to third parties, fall outside the scope of the Regulation, the Guidelines offer some guidance on the issue. The revised Guidelines reorganize the matter and, among other changes, call for the assessment of the presence of ‘hardcore restrictions’, as defined in Article 4 of the draft TTBER proposal, when evaluating the compatibility of the pool licensing agreement with Article 101 TFEU.

This Kat welcomes the Commission’s commitment to improving its guidance on key technical aspects of the TTBER, such as the evaluation of technology market share. The impact of some of the most controversial changes proposed in the draft, which include the exclusion of termination clauses from the exemption and the elimination of the exception related to passive sales, appears difficult to predict. As is frequently the case, conjugating IP and competition law is not merely an exercise of legal ability, but a prodigious alchemy. To make sure that the former prevails on the latter, why not head here to share your views and help the Commission become the next Merlin?

An in-depth analysis of Regulation 772/2004 can be found here.
For historians, Regulation 240/96 is examined here.
Those who got a headache while reading this post can take a short, well-deserved break here.