EU tightens antitrust rules for licensing agreements

Key points at a glance
Compliance
Analysis
Comparison of sales and other restrictions

The European Commission's new Technology Transfer Block Exemption Regulation and Guidelines update and tighten the EU antitrust rules applicable to agreements which license intellectual property for the production of goods and services.(1)

Key points at a glance

Compliance

The new rules apply to licensing agreements from May 1 2014, with a grace period of a further year up to May 1 2015, for existing agreements compliant with its predecessor block exemption (Regulation 772/2004). It is important that companies take into account the new rules when drafting licences and check existing agreements for compliance, particularly as to passive sales restraints, grant-backs and termination-on-challenge clauses, where formerly common practice wordings will potentially become unlawful.

Analysis

The latest regulation revision significantly tightens the former regime, even if there are no fundamental changes.

Software licences out of scope
The commission has revised the regulation guidelines to expressly carve out the licensing of software copyright for the purposes of distribution (eg, licensing the copyright to a distributor to distribute via physical media or via online downloading) from the regulation.(2) The result is that this form of licensing now falls under the general distribution rules of the Vertical Agreements Block Exemption Regulation. This matters because the Technology Transfer Block Exemption Regulation's provisions are more generous in certain respects than those of the Vertical Agreements Block Exemption Regulation. For example, unlike under the Vertical Agreements Block Exemption Regulation, imposing an active sales restraint under the Technology Transfer Block Exemption Regulation does not require the licensor to exclusively reserve a territory or customer group to either itself or a single licensee. In addition, indefinite non-compete obligations (between non-competitors) are permitted under the Technology Transfer Block Exemption Regulation, but such clauses must be limited to a five-year duration under the Vertical Agreements Block Exemption Regulation. This proposal therefore limits the flexibility which pure distribution software licensors had enjoyed.

Licensee passive sales restrictions no longer permitted
Formerly, a licensor could legally prevent a licensee (in an agreement between non-competitors) from selling the contract goods into another licensee's exclusive territory. This restriction could be imposed as to both active sales (eg, active marketing and promotion cross-border) and passive sales (eg, an absolute restriction on sales, even in response to unsolicited orders). The restriction on passive sales was permitted for a two-year period only.

The Technology Transfer Block Exemption Regulation now withdraws the two-year exception for passive sales. Instead, the guidelines provide that for a short period (of up to two years, although exceptionally longer periods might be justified) passive sales restraints may exceptionally fall outside Article 101(1); where they are objectively necessary for the protected licensee to penetrate a new market.(3) In other words, if the protection from cross-border competition is needed to induce the licensee to make a success of the market launch and recoup its investments, then an exemption may be merited.(4)

Companies should consider carefully whether a two-year restraint may be justified, bearing in mind this burden of proof. Without a clear economic case, the least-risk position will be not to apply passive restraints.

Protection withdrawn from all exclusive grant backs
An exclusive grant-back clause obliges the licensee to give back to the licensor (by way of either assignment or exclusive licence) improvements which the licensee makes to the intellectual property during the term of the licence.

Formerly, the law distinguished severable and non-severable improvements. An improvement was severable if it could be exploited without the licensor's background intellectual property. The theory was that such discrete new technologies might form a source of new competition to the licensor, so an obligation to exclusively grant or assign the rights to the licensor was not protected by the exemption. Conversely, non-severable improvements were legitimately the subject of a grant-back, as they could be exploited only in conjunction with the licensor's background intellectual property.

The new rules eliminate this distinction. Exclusive grant-back or assignment clauses do not benefit from exemption, whether the improvements are severable or otherwise.

This is not to say that these clauses are immediately unlawful. Rather, they must be assessed on their individual merits. The guidelines state that where the licensor has a high market share and the licensee is a potential source of competition, the restraints may be unlawful. Conversely, if the licensor pays for the improvement, this may indicate a lack of competition concerns.(5)

For legal certainty, agreements should therefore take the default position that grant-backs should be non-exclusive.

Termination-on-challenge clauses
Formerly, the rules distinguished between different types of no-challenge clause, by which the parties agreed not to challenge the validity of licensed IP rights. Strict no-challenge clauses were not exempt. However, termination-on-challenge clauses – allowing the licensor to terminate in the event of such a challenge – were exempt.

The exemption for termination-on-challenge has now been removed. The guidelines state that this concern is to address the position where the licensor is so powerful – and the technology licensed so important to the licensee – that the clause represents a de facto obligation not to challenge. The licensee cannot risk losing the license and undergoing the risk of injunctions or a final judgment preventing it from using the technology. Such clauses must be reviewed on their merits. Where the technology is one of many available and the licensor is not in a powerful position, termination-on-challenge clauses are likely to remain legal.

The one instance in which termination-on-challenge remains permitted is where it is included in an exclusive licence – narrowly defined as one which is exclusive even as to the licensor. In such circumstances, the licensor undertakes substantial risks in entrusting its technology's exploitation to a sole licensee. It would be unlikely to license at all if it had to permit challenges without a termination right.(6)

Termination-on-challenge clauses remain very common in licence agreements, so the new rules will require companies to undertake a review of existing agreements to assure compliance. Once the grace period (up to May 1 2015) has expired, licensees will be able to claim that such clauses are invalid – if the economic context is one in which such provisions restrict competition – and so the licensor has no recourse in the event that the licensee seeks to invalidate the licensed intellectual property.

Settlement agreements
The guidelines take the opportunity to state the commission's policy on patent settlement agreements, following recent enforcement activity in the United States and most recently the commission's Lundbeck decision.(7) In many of those cases, the defence raised was that, given the existence of patent protection, the parties could not be considered competitors. Therefore, an agreement that restrained one of them from using the disputed intellectual property to enter the market would have no effect on competition. Since the patent position precluded competition absolutely, the settlement agreement could have no greater effect.

The guidelines acknowledge that patent rights which prevent commercially viable exploitation of a technology can present a blocking position which would make the parties non-competitors. However, the guidelines go on to note that the IP position will often be uncertain and – at least in cases where the parties are already on the market – a presumption that they are competitors will be displaced only by a final court judgment. Absent such definitive pronouncements, "for example in the form of a final court decision", the parties must assess "all the available evidence at the time".(8) Particular factors that suggest that no blocking position exists are said to be the existence of possible workarounds, or if one party has already made investments or advanced plans to enter the market.

The guidelines do not suggest that any reference should be made to the legal patent position at the time of the settlement, or the possible outcomes and their respective likelihoods of the underlying case. The guidelines suggest that the presence of an alleged blocking position will be viewed sceptically and will require "particularly convincing evidence" if it is in the parties' common interest to suggest a blocking position – for example, when the technologies are technological substitutes or "if there is a significant financial inducement from the licensor to the licensee".(9)

The guidelines make clear that settling litigation is not of itself objectionable, but the settlement agreement must comply with antitrust laws. It suggests that a settlement agreement involving a no-challenge clause may attract competition law scrutiny where:

• the licensed right was granted following the provision of incorrect or misleading information;
• a financial inducement (reverse payment) is involved; or
• the technology rights are a necessary input for the licensee's production.

In practice, this final provision is likely to cover the vast majority of settlement agreements which settle a patent infringement case. The guidelines go on to say that pay-for-delay or pay-for-restriction settlement agreements (where the alleged infringer agrees to delay market entry using the disputed intellectual property and receives a benefit from the rights holder) will be strictly reviewed by the commission.(10)

The guidelines therefore confirm that early antitrust advice is essential in settling patent disputes to ensure that the settlement agreement is compliant. Agreements that offer material benefits to the alleged infringer in return for delayed or restricted market entry will be closely reviewed. Such arrangements should remain squarely within the scope of the disputed intellectual property and any benefits flowing between the parties should be clearly justified.

Technology pools
In a technology pool, multiple licensors agree collectively to license certain IP rights (the pool) to third-party licensees. Technology pools will remain outside of the scope of the Technology Transfer Block Exemption Regulation. However, the guidelines set out the principles that the commission will apply in reviewing their legality.

The guidelines adopt a new safe harbour for pools (similar to that introduced in the 2010 Horizontal Guidelines for standard setting), which will apply regardless of the market share of the pool.(11) The conditions are as follows:

• Participation in the standard and pool creation process must be unrestricted;
• There must be sufficient safeguards against the inclusion of non-essential technologies and anti-competitive information exchange (eg, the involvement of independent experts in assessing which technologies to include);
• Technologies included in the pool must be licensed into the pool on a non-exclusive basis;
• Pooled technologies must be licensed out to third parties on fair, reasonable and non-discriminatory (FRAND) terms;
• Pool participants must be free to challenge the validity and essential nature of any patents included in the pool; and
• Pool participants must remain free to develop competing products and technology.

It remains to be seen how workable these conditions will be in practice, particularly given the inherent difficulties in identifying which technologies are essential to a particular product or standard. The commission did not use this opportunity to develop further the notion of FRAND licensing, and in particular whether or when a commitment to license on FRAND terms precludes a licensor from seeking an injunction against an (alleged) bona fide licensee. This hot topic, both in Europe (with cases against Samsung and Google under Article 102 pending before the commission) and in the United States (with the Federal Trade Commission recently accepting binding commitments from Google/Motorola Mobility that would preclude such injunctions save for after a mandatory mediation process), is left for future case law or decisional practice to decide.

Comparison of sales and other restrictions

For further information on this topic please contact Bill Batchelor at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email ([email protected]). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.

Endnotes

(1) For the new Technology Transfer Block Exemption Regulation, see http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_regulation_en.pdf. For the new guidelines, see http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.

(2) See Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, Paragraph 62, available at http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.

(3) Ibid, Paragraph 126.

(4) The logic for protecting the licensee's efforts on building a new market was sound, and it causes legal uncertainty to move this restraint into the guidelines and creates a complex and burdensome test for the parties to satisfy. The rationale for doing so – that this harmonises the Technology Transfer Block Exemption Regulation and Vertical Agreements Block Exemption Regulation – seems misplaced. Licensees typically face far greater risks and costs than distributors, as they must invest in both establishing the licensed production processes and successful marketing of contract products.

(5) See Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, Paragraphs 129 to 132, available at http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.

(6) See Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, Paragraphs 133 to 140, available at http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.

(7) Commission decision May 19 2013, press release available at http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_39226.

(8) The timing criterion is important. In Lundbeck it was alleged that it was irrelevant that the disputed patents were upheld in inter partes proceedings, because at the time of the alleged violation, the parties believed that the patents were not a bar to competition.

(9) See Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, Paragraphs 29 to 33, available at http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.

(10) Ibid, Paragraphs 238 and 239.

(11) Ibid, Paragraph 261.

(12) See Guidelines, Paragraph 126, available at http://ec.europa.eu/competition/antitrust/legislation/technology_transfer_guidelines_en.pdf.