Technology companies oppose plans to withdraw 'termination upon challenge' clauses from technology transfer block exemption

The TTBER deals with licensing agreements where one party, the licensor, authorises another party, the licensee, to use its technology, authorising the use of its intellectual property (IP) in the form of patents, know-how and software copyright, for the production of goods and services. The TTBER automatically exempts such agreements from the EU prohibition on anti-competitive agreements where a number of criteria are met.

The TTBER is due to expire on 30 April 2014 and the European Commission has consulted on a replacement framework.

In particular, the Commission's proposes to remove the protection of the TTBER from clauses that allow the licensor to terminate the agreement if the licensee challenges the legal validity of the licensed technology.

Currently, such 'termination upon challenge' clauses benefit from the automatic exemption. However, the European Commission considers that in the future such clauses will need to be self-assessed on a case-by-case basis, as is already the case with 'no-challenges' clauses, which prohibit the licensee from challenging the legal validity of the licensed technology.  

The Commission proposes to treat prohibitions on challenge to the validity of the IP by the licensee and provisions which provide the licensor with the right to terminate the licence in the event of such a challenge by the licensee in the same way. The Commission has explained that "this is because in particular in cases where the licensee has made substantial investments, the two types of clauses have very similar effects."

The Commission's intention to remove 'termination upon challenge' clauses from the automatic exemption of the TTBER has been met with opposition from a number of major companies, including Microsoft and France Telecom-Orange.

Microsoft said that licensors should be able to make use of termination clauses and still benefit from the TTBER exemptions (13-page / 438KB PDF) unless the licensing agreements specifically relate to standard-essential patents (SEPs).

SEPs are patents awarded to technology that is essential to the working of a particular system. SEP holders are generally required to ensure that they license SEPs on fair, reasonable and non-discriminatory (FRAND) terms.

"Microsoft submits that this proposed change is unwarranted in all cases that do not involve SEPs and is likely to have unintended adverse consequences," Microsoft said in its consultation response. "In the case of SEPs, the FRAND commitment in itself entails a promise to license that should not be broken even if the licensee challenges the validity of a licensed SEP. Thus we agree that specifically with respect to licenses for SEPs no-challenge termination clauses should not benefit from the block exemption."

Microsoft said that termination upon challenge clauses in licensing contracts are "very common" and help promote "stable commercial relations" between contracting parties. It said the focus should be on incentivising licensees into raising IP validity challenges prior to entering into licensing deals.

"It is highly disruptive when a commercial bargain that has been struck can be reopened by one of the parties," Microsoft said. "When a licensee challenges the validity of the licensed intellectual property, it strikes at the very subject matter of the agreement and potentially depriving the licensor of the right to respond by terminating the license has serious consequences for both existing and future license agreements."

"While licensees may be well-placed to determine whether or not an intellectual property right is invalid, they should be incentivised to make that assessment before the license agreement is concluded. Licensees should not be encouraged to wait by changes to the TTBER that make it difficult for the licensor to respond to a challenge by severing the commercial relations with the challenger," it added.

In its consultation response France Telecom-Orange said that plans to exclude termination clauses from the TTBER 'safe harbour' will reduce the incentives for patent owners to license their technology. (5-page / 276KB PDF) It said that the "balance of bargaining power" in licensing arrangements will favour licensees if the Commission's proposals are backed.

Qualcomm and Shell International were among the other organisations to raise concerns about the Commission's draft plans.

Shell said (1-page / 213KB PDF) that there is a "significant risk" that the exclusion of licensors' right to terminate licenses under the TTBER will encourage licensees into "raising spurious challenges to the validity of IP in the attempt to negotiate 'a better deal' from the licensor".

"This has the potential both to undermine trust in licensor/licensee relationships, and to lead to more litigation and related cost," Shell said. "In certain circumstances this could reduce the appetite of technology owners to licence their technology in the EU or markets where there is an EU impact, thereby having the unintended effect of hindering, rather than stimulating, business activity in the EU."

The consultation is now closed and it is envisaged that, once finalised, the new rules will enter into force on 1 May 2014 with a one year transitional period.