On March 21, 2014 the European Commission, pan-European enforcer of antitrust rules, adopted a new version of its Technology Transfer Block Exemption Regulation and accompanying Guidelines. The new Regulation, which will take effect on May 1, 2014 once the Regulation currently in force expires on April 30 (the “old Regulation”), continues along the same lines and exempts certain categories of licensing agreements from the prohibition against anti-competitive agreements envisaged in Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). If a certain agreement falls under the Regulation, the agreement will be “deemed to have no anticompetitive effects or, if they do, the positive effects outweigh the negative ones”. The most radical changes relate to termination and grant-back clauses (which will never be exempted), passive sales (which can never be hindered in accordance with other EU legislation) and IP settlements and pools (for which additional guidance is provided).
While the new Regulation and Guidelines will start applying in a few days, a one-year transitional period (until April 30, 2015) is contemplated in Article 10 of the new Regulation. This transitional period grants the benefits of the Block Exemption to all those agreements which were compliant with the old Regulation yet non-compliant with the new Regulation.
The concept of Block Exemption
Although European antitrust rules rely on the same foundations as the Sherman Act rules (first, a prohibition of agreements restraining competition, to be found in Article 101 TFEU and corresponding roughly to Section 1 of the Sherman Act; and second, a prohibition of abuses of dominant position, codified in Article 102 TFEU and slightly broader than Section 2 of the Sherman Act), there exist two important differences between European and U.S. law: (i) under European law, there are no per se infringements and, in theory, even the most egregious price-fixing agreement could have efficiencies that could outweigh its anticompetitive effects; and (ii) the existence of an overarching goal to achieve European integration. This mantra-like concept of integration means that, as it will be explained, on occasions licensing rules seem to bow to the overarching concept of Internal Market in order to avoid the partitioning of the market along national borders.
The open door to exemptions mentioned in (ii) above constitutes the legal basis for the adoption of the so-called Block Exemption Regulations (“BERs”). The BERs are pieces of legislation that apply directly in the 28 Member States and which elaborate upon a certain category of agreements that the European Commission (“Commission”) believes are worth exempting from the application of Competition rules.
One of the best examples of these BERs is the Technology Transfer Block Exemption Regulation (“TTBER” or “Commission Regulation (EU) 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”). BERs are self-assessment tools to increase legal certainty and are usually adopted for a limited time period in order to allow the Commission to reassess the need for amendment or readoption. As the Regulation states in Paragraph 3, “[t]his Regulation should meet the two requirements of ensuring effective protection of competition and providing adequate legal security for undertakings.”
The new TTBER and Guidelines
The new TTBER and Guidelines are to a great extent a readoption of the old rules. In particular, the following aspects remain unchanged:
- The nature of the agreements exempted: The Regulation keeps the exemption limited to bilateral agreements. This means that, in spite of the high expectations of change that stakeholders voiced during the consultation leading to this Regulation, the European Commission has upheld its long-standing belief that multilateral agreements, including non-bilateral patent pools, belong outside the protection granted by the Regulation. A new section containing guidance on how to asses patent pools under non-Block Exemption rules is, however, included in the Guidelines. Moreover, the exemption only applies to certain types of IPRs and while patents are included, trademarks and non-copyright software licenses fall outside the scope of the exemption.
- Market share thresholds (Art.3 TTBER): market shares remain as one of the bright-lines determining which agreements fall within the protection of the Regulation. As such, the TTBER establishes thresholds (20% for agreements between competitors and 30% for agreements between non-competitors) below which there is a presumption that the agreement leads to an “improvement in production or distribution and allow consumers a fair share of the resulting benefits”. These market shares are to be calculated on (i) the technology market, which consists of the licensed technology and its substitutes; and (ii) the product or service market, which consists of the market for the product or service incorporating the licensed technology. Although in its draft Regulation, the European Commission proposed lowering the non-competitor threshold to 20%, the final text discarded such proposal.
- Hardcore restrictions (Art.4 TTBER): the Regulation is drafted as a white-list and therefore any agreement that meets the conditions therein specified will be exempted. There is, however, a black-list of “severely anti-competitive restraints [that] should be excluded from the benefit of the [TTBER] irrespective of the market shares of the undertakings concerned.” The presence of one of these so-called “hardcore restrictions” in an agreement will bring the whole agreement outside the scope of the block exemption, even if the market share thresholds are not exceeded. The general 101(3) TFEU case-by-case exemption remains available, although the Guidelines make it clear that when applying 101(3) TFEU, there will be a presumption of illegality on the whole agreement. Hardcore restrictions involve price-fixing, output limitation, and most types of allocations of customers and, in particular, those which could directly or indirectly limit the licensee’s ability to use its own technology.
- Excluded restrictions (Art.5 TTBER): in addition to the hardcore restrictions, there exists another category of restrictions that should be excluded from the TTBER “[i]n order to protect incentives to innovate and the appropriate application of intellectual property rights”. These restrictions (the so-called “excluded restrictions” are regarded by the Commission as less egregious and its presence in a license agreement will only exclude the restriction in question from the benefit of the TTBER, with the rest of the agreement remaining valid.
Finally, even if most of the rules remain unchanged, the following changes are particularly noteworthy:
- Passive sales: limitations of ‘passive’ sales (i.e., responding to unsolicited requests from individual customers outside the seller’s territory), with the exception of exclusive non-reciprocal licensing agreements (“non-reciprocal agreements whereby the parties agree not to sell actively or passively into an exclusive territory or to an exclusive customer group reserved for the other party”), become a no-no under the new Regulation. This hardcore restriction, which underlies the idea of fostering parallel imports to achieve Internal Market integration, is fully in line with Article 4(b) of the Block Exemption Regulation on Vertical Agreements (Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices) which establishes that generally distributors must be free to make passive sales into the territories of other exclusive distributors of the licensee.
- Termination clauses: termination clauses (clauses whereby the licensor can terminate the license where the licensee challenges the validity of the licensed IPR) become an excluded restriction and those clauses will therefore no longer benefit from the presumption of legality of the Regulation. This was a predictable change given that under the previous regime termination clauses were block-exempted but no-challenge provisions were not. This led to a paradoxical situation where a licensor could not force a licensee to waive its ability to challenge a certain agreement yet it could unilaterally terminate the agreement where the licensee decided to challenge it.
- Grant-back clauses: all grant-back clauses (“provisions where the licensee is obliged to license back to the licensor on an exclusive basis, and not even use its own improvements to the licensed technology itself”) become excluded restrictions. Under the old Regulation, only severable grant-back clauses were non-exempted and a licensor could limit the way in which the licensee used non-severable improvements.
- Increased guidance on settlements and patent pools: probably in line with its ongoing investigations in the markets for pharmaceutics and smartphones, the European Commission has respectively included detailed guidance on settlements and patent pools. In relation to the latter, while non-bilateral agreements involving patent pools fall outside the Regulation, the Commission has included detailed guidance indicating that in principle patent pools will not be a problem under EU competition rules. The Guidelines suggest the parties will escape the risks of antitrust enforcement if “all the following conditions are fulfilled:” (a) participation is open to all interested technology rights owners; (b) sufficient safeguards are adopted to ensure that only essential technologies (which therefore necessarily are also complements) are pooled and that exchange of sensitive information is restricted to what is strictly necessary; (c) the pooled technologies are licensed on a non-exclusive basis and on FRAND terms; (d) the parties remain free to challenge the validity and essentiality of the technologies and to develop competing products and technology. In relation to settlements, the approach is more aggressive and the Commission opens its explanation by explaining that settlements may violate 101 TFEU. The Commission especially warns against pay-for-delay settlements.