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28 March 2014

Antitrust shake-up jeopardises IP licence arrangements

New rules on the licensing of intellectual property are due to come into effect on 30 April 2014, replacing the existing Technology Transfer Block Exemption Regulation (TTBER).

This EU Regulation provides essential guidance on how to structure technology transfer arrangements in a way which is compliant with competition law.

The new rules will have the effect of narrowing the protection from competition law and so parties to technology transfer agreements will need to take action to ensure that they remain compliant.

What are Technology Transfer Agreements?

For the purposes of the TTBER, technology transfer agreements include patent licences, software licences, know-how licences or mixed patent and know-how licences where the licence is given in order for the licensee to produce and sell a product and service.

The following are examples of technology transfer covered by the TTBER:

  • the owner of a famous vacuum cleaner brand licenses its patented processes to an overseas company to manufacture its own products in return for royalties on sales (patent licence)
  • a branded soft drink manufacturer licenses its secret recipe to a supermarket to produce an own-brand version of its famous beverage (know-how licence)
  • the owner of a type of a game played on PCs licenses its program to a producer of mobile phone games in order for it to create and market an app-based, derivative game for mobile users (software copyright licence).

What does the TTBER do?

There is a tension between intellectual property and competition law. IP law rewards inventors with a degree of protection from unlawful copying of their innovations and a degree of protection from competition.

Competition law, on the other hand, looks to stimulate rivalry between businesses for the benefit of consumers (in the form of better products, greater choice and lower prices).

The TTBER provides a safe harbour from competition law for technology transfer agreements where:

  • the parties' market shares are below a certain threshold (20% market share for agreements between competitors and 30% share for non-competitors), and
  • the agreement does not contain certain prohibited types of clause (so-called 'hardcore' restrictions).

There are two lists setting out prohibited 'hardcore' restrictions: one applying where the parties are competitors and the other applying where they are not.

The hardcore restrictions for agreements between competitors include: curtailing a party's ability to determine prices when selling to a third party (resale price maintenance); reciprocal output/production limits; restricting the licensee's ability to exploit its own technology or carrying out further research and development; and certain allocation of markets or customers between the parties (subject to a fairly complex set of exceptions).

For non-competitors, the list also includes resale price maintenance as well as certain prohibitions on passive sales by the licensee (subject to a number of exceptions) and prohibitions on sales to end users via selective distribution systems.

Where an agreement falls outside the TTBER, there is no presumption of illegality. There is, however, a risk that its provisions may be found to infringe competition law.

The parties will need to self-assess whether the agreement is eligible for an 'individual exemption' (and therefore compliant), examining the particular legal and economic circumstances.

Unfortunately, this is a difficult, complex and controversial exercise and one whose accuracy often depends on information which the parties may not have at their disposal.

What are the main changes?

The EU Commission consulted on reform of the TTBER, looking at ways to apply competition law more freely to licence agreements. Although it decided not to take this path, the scope of the safe harbour has certainly become more limited.

For example, it is currently possible for a licensor to provide absolute territorial protection from competition to a licensee in one designated area from its other licensees based elsewhere, provided this protection does not last longer than two years.

The new safe harbour will not include clauses which prevent licensees from making unsolicited sales to customers outside their territory. These will need to be self-assessed at the outset.

There is also restricted scope for licensors to prevent licensees from challenging the validity of their licensed IP (eg if a patent has expired or lacks originality or software infringes third party copyright).

Invalid IP rights are a barrier to competition without any countervailing benefits and licensees are better placed than most to know if they are legally void. Although the current rules do not countenance clauses which prohibit any such challenge, they do permit licensors to terminate the licence when their IP is called into question.

The new TTBER does not protect such termination rights.

There is also a curtailment of a licensor's freedom to require licensees to provide an exclusive licence back of any improvements they make to its technology. These clauses effectively deprive the licensee of any right to exploit improvements for their own ends.

Until now, it has been acceptable to impose such obligations in respect of 'non-severable' improvements to licensed technology (ie improvements which cannot stand-alone from the original innovation).

The new TTBER makes no distinction between severable and non-severable improvements and will not give exemption to any exclusive grant-back provisions at all, making their inclusion a much riskier decision.

What does all this mean for you?

The EU Commission is to be praised for retaining the TTBER, but has gone too far in restricting its applicability. The new rules make it much harder for licensors to control the movement and use of their technology once it has been licensed.

Meanwhile, the further assault on territorial exclusivity may chill the desire for licensees to invest in technology transfer. The changes to grant-back provisions also raise the risk for licensors that their technology will be turned into a competing product, which could cannibalise their own sales.

As advisors, we foresee a real risk that innovators will view technology transfer (and the increased loss of control) as something of a Pandora's box.

The changes to the rules on licensing arrangements will not immediately apply to technology transfer agreements already in force.

Those which comply with the current TTBER as at 30 April 2014 will continue to enjoy protection for a further twelve months, even if their provisions do not qualify for exemption under the new rules.

This transition period allows parties to amend their agreements as necessary, in order to ensure that, after April 2015, they continue to benefit from the safe harbour and from legal plain sailing!

This article was written by Paul Henty.

For more information please contact Paul on +44 (0)20 7427 6506 or