EU narrows exemptions to competition rules governing technology transfer agreements

Out-Law News | 26 Mar 2014 | 2:35 pm | 3 min. read

Changes to EU competition rules mean that businesses licensing patents, know-how and software within the EU may have to justify restrictions that they include within their licensing contracts more often, an expert has said.

The European Commission has announced that a new Technology Transfer Block Exemption Regulation (TTBER) (12-page / 91KB PDF), together with new guidance (75-page / 532KB PDF), will apply from 1 May this year and replace an existing framework which expires on 30 April.

Whilst EU laws prohibit anti-competitive agreements by organisations, the TTBER sets out circumstances in which contractual terms used in the licensing of patents, know-how and software are automatically exempt from those rules where they meet certain conditions. However, it also sets out a list of "hardcore" and "excluded" restrictions that influence whether and to what extent the competition law exemption can be relied upon.

Hardcore restrictions include situations where technology licensors require licensees to adhere to certain price controls or output levels, for example. If a single clause containing a hardcore restriction is contained in a licensing contract, the whole licensing contract is precluded from benefiting from the exemption under the TTBER and the competition rules apply as usual.

Examples of excluded restrictions under the new regulation include where a licensor of technology seeks to obtain control over the assignation of rights to improvements made by licensees to their technology, or where they retain the right to terminate licensing agreements if licensees challenge the validity of their intellectual property (IP).

If a clause in a technology licensing contract qualifies as an excluded restriction then, whilst the rest of the contract can continue to fall within the competition law exemption set out in the TTBER, that single clause cannot.

However, the exemption can only apply if, in cases where the licensor and licensee are direct rivals, the combined market share of the businesses "does not exceed 20% on the relevant market(s)". Similarly, the TTBER cannot be relied on if, in cases where the licensor and licensee "are not competing undertakings", those businesses do not hold more than a 30% share of each of their markets.

The changes in the new TTBER mean that businesses that previously relied on exclusive "grant back clauses" or "termination upon challenge clauses" will now be under greater pressure to justify their inclusion in those agreements, competition law specialist Natasha Pearman of Pinsent Masons, the law firm behind Out-Law.com, said.

"Under the new TTBER, businesses will not be able to claim the benefit of the competition law exemption where they rely on clauses that require licensees of their technology to assign back to them any improvements those licensees make to their technology," Pearman said. "Under the old regulation, businesses could claim the benefit of the exemption when using exclusive grant back clauses if improvements to their technology made by a licensee could not have been made without that licensee holding a licence to use the underlying IP, so called non-severable improvements."

"In contrast, the exemption previously did not apply where licensors used exclusive grant back clauses to claim ownership of improvements made to their technology by licensees in cases where it was not necessary for the licensee to have held a license to use the underlying IP in the technology to make the improvements they did, so called severable improvements," the expert added.

"By treating all exclusive grant back clause cases the same, the EU is now forcing businesses that rely on them to carefully assess whether their use is legitimate and not in breach of competition rules. However, businesses will be able to claim the competition law exemption applies if they only require a non-exclusive licence for any improvement made to their technology within their licensing contracts. The argument in favour of the new regime is that it will encourage innovation within industry, allowing licensees freedom to exploit their improvements" she said.

Pearman also identified changes in the way so-called 'termination upon challenge' clauses in technology licensing contracts are treated under the new framework. The reforms mean that licensors that rely on clauses that give them the right to terminate a technology transfer agreement if a licensee challenges the validity of their IP rights will only benefit from the competition law exemption if the clause is included in an exclusive licensing agreement.

"This changes the previous position where all termination upon challenge clauses, whether in exclusive or non-exclusive agreements, received the benefit of the block exemption," Pearman said. "However, the revision is something of a climb down for the Commission which had originally consulted on proposals for a full withdrawal of termination upon challenge clauses, citing their effects as being similar to 'no challenge' clauses which were already excluded from the exemption. The Commission, at least to some extent now appears to be recognising that the position is far more nuanced."

In a statement, the Commission said: "Automatically exempting termination clauses only in cases of exclusive licensing will lead to a proper balance between, on the one hand preserving incentives to innovate and license out, and on the other ensuring that invalid IP [rights] are removed as a barrier to innovation and economic activity. This will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees."

The new TTBER contains transitional provisions which mean that the old regulation will continue to apply to technology transfer agreements put in place before 30 April this year until 30 April 2015.