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Competition v Intellectual Property - Clarity but little substantive change

About The Author

Chris Bridges (Executive Editor)

Chris is an IT and Data Protection solicitor at a top 20 full service firm and the founder of Keep Calm Talk Law. He also contributes to Computers and Law and other sector specific publications.

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Competition Law has long played an important role within the European Union. However, the notions of preventing anti-competitive practices between member states and the protection of intellectual property are, at the basic level, entirely incompatible. Agreements relating to the licencing of technology run the risk of falling foul of EU competition law, which can have drastic consequences for businesses, including the nullification of the agreement, and fines of up to 10% of annual turnover.

Despite the weight competition law has within the EU, the importance of intellectually property has been recognised. The protection of IP is at basic level anti-competitive; yet protection of IP is vital to promote innovation, which plays a key part in fuelling competition. Accordingly, the EU has regulated to provide some degree of exemption of intellectual property protections from Competition Law through ‘technology transfer agreements’. However, it has not always been clear when this exemption applies.

Recent EU Regulation improvements (applicable from 1st May 2014) and the accompanying guidance have gone some way to clarifying in what circumstances technology transfer agreements will be compatible with existing EU treaties. However, whilst clear guidance has been given, the substantive changes made by the new regulation do not appear to be as beneficial as many would prefer.

What Are Technology Transfer Agreements?

Technology transfer agreements are a key tool in any innovative company’s intellectual property arsenal.  These agreements facilitate the transfer of a licence to use certain pieces of technology, from one party (the licensor) to another (the licensee). The generic term covers the licence of numerous forms of intellectual property, including patents, know-how, copyright or a mixture of all three. Patents in this context also cover patent applications, utility models, and designs, among other things.

The acquisition of such a licence will often facilitate the use of the technology within the licensee’s own product, manufacturing line, or service. Such agreements are commonplace across the technology industry. The products resulting from such agreements can be found everywhere, and, indeed, it is likely that such a product is nearby right now.

Telecoms companies are renowned for patenting every piece of hardware they can, before a competitor beats them to it, which has become known as the ‘patent war’. Once patented, much of this technology will sit unused, because either it has been superseded, or the patent holder wants to prevent competitors from competing (Samsung and Apple are notorious in this respect). However, some companies develop technology with the intent to make profits from licence fees. In the telecoms industry, whilst some are renowned electronics producers (E.g. LG Electronics), there are others you may not have heard of (Qualcomm).

With such widespread use, they are certainly a hot topic in the commercial world. However, the risks of improperly drafted agreements are great. These agreements run the risk of falling foul of Article 101 of the Treaty on the Functioning of the European Union (TFEU).

The introduction to Article 101 reads [emphasis added]:

The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market

Breach of this provision can result in the agreement being declared null and unenforceable, or even worse, companies can face fines of up to 10% of their annual turnover. However, an attempt has been made to balance these harsh penalties with the incentive to innovate, by the Technology Transfer Block Exemption (for more on the benefit of patents and other forms of intellectual property, see my previous article ‘A Case Study: Are patents a help or hindrance to innovation?’).

Technology transfer agreements can also fall foul of Article 102, which prevents the abuse of a dominant market position. This can be important where the intellectual property rights would essentially prevent or deter competing technology from entering the market. However, Article 102 is beyond the purview of this article, as the technology transfer block exemption, discussed below, does not apply to Article 101.

The Technology Transfer Block Exemption (TTBE)

The Technology Transfer Block Exemption is a glimmer of hope for tech companies wanting to protect their intellectual property assets in order to obtain a return on their investment. If an agreement falls within the boundaries established by this exemption, the agreement will not be incompatible with Article 101. This is known as a ‘safe-harbour’ for such agreements.

The TTBE has been dealt with up until now be the present Technology Transfer Block Exemption Regulation (TTBER), which expires on the 31st April 2014. Under this regulation, the agreement will not be incompatible if a number of conditions are satisfied and if the so-called ‘hardcore restrictions’ do not apply (the exemption itself is Article 2 of the regulation). The conditions, and hardcore restrictions, vary depending on whether the parties are competitors or not:

Competitors

  • Parties combined market share must not exceed 20% for the relevant technology / product market.
  • Hardcore restrictions defeat the exemption where the object of the agreement is:
    • The restriction of a party’s ability to determine its prices when selling products to third parties
    • The limitation of output
    • The allocation of markets or customers (see regulation for exceptions)
    • The restriction of the licensee’s ability to exploit its own technology or the restriction of the ability of any of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent disclosure of the licenced know-how to third parties

Non-Competitors

  • Parties combined market share must not exceed 30% for the relevant technology / product market
  • Hardcore restrictions defeat the exemption where the object of the agreement is:
    • The restriction of a party’s ability to determine its prices when selling products to third parties, without prejudice to the possibility of imposing a maximum sale price or recommending a sale price, provided that it does not amount to a fixed or minimum sale prices as a result of pressure from, or incentives offer by, any of the parties
    • The restriction of the territory into which, or of the customers to whom the licensee may passively sell the contract products (see regulation for exceptions)
    • The restriction of active or passive sales to end-users by a licensee which is a member of a selective distribution system and which operates at the retail level, without prejudice to the possibility of prohibiting a member of the system from operation out of an unauthorised place of establishment.

The TTBER also contains a number of ‘Excluded Restrictions’, which removes the exemption for certain types of obligations within transfer agreements, namely:

  • Any direct or indirect obligations on the licensee to grant an exclusive licence, or to assign rights, to the licensor or to a third party designated by the licensor in respect of its own severable improvements to or its own new applications of the licenced technology
  • any direct or indirect obligation on the licensee not to challenge the validity of intellectual property rights which the licensor holds in the common market, without prejudice to the possibility of providing for termination of the agreement in the event that the licensee challenges the validity of one or more of the licenced intellectual property rights.

The motive of these restrictions is clear: they prevent the discouragement of further innovation by the licensee. However, unlike hardcore restrictions, exclusive restrictions will bring only the specific obligation outside of the exemption, not the entire agreement.

Regulatory Changes

The new regulation benefits from a substantial ‘clean-up’ of the complicated wording found in the previous regulation. It also introduces a number of minor changes, which are not of particular note-worthiness (see EC Press Release for further information). Interestingly, there have been some changes to excluded restrictions.

Excluded Restrictions

Two significant changes have been made to the types of obligation that would not automatically be covered by the exemption.

  1. The first type of obligation listed above now covers both severable and non-severable improvements to technology, a move in favour of licensees.
  2. A minor change in wording in the second type of obligation above means that clauses permitting the licensor to terminate a licence if the licensee challenges the validity of the IP are no longer allowed in the clause of non-exclusive agreements (but are still possible under exclusive agreements).

The first of these changes has been largely hailed as a step in the right direction, and I concur. Why should severable improvements be included, and non-severable not? For the sake of innovation, such clauses should be disallowed in both cases.

However, the second has been criticised as not going far enough. The Law Society made a submission that freedom of contract should be permitted, as not allowing the licensor to terminate a licence with its litigation opponent will discourage licensors from licencing out their technology in the first place, which is anti-competitive and therefore counter-productive to the purpose of the rules. The first draft of the new TTBER removed the ability to terminate altogether, however the Commission were happy to reinstate the possibility of a termination clause for exclusive licences,  otherwise a licensee could bully a small licensor in litigation, due to the dependence on their exclusive licensee (see EC Press Release).

I am inclined to side with the Law Society on this matter. Whilst not being able to include a termination clause is less significant for non-exclusive licences, the inability to terminate is a significant deterrent to potential and existing licensors, which may induce them to licence their technology exclusively, which in terms of a pro-competitive ethos is a bad thing. According to IP Draughts, most existing licences include such termination clauses, so this is sure to be an unpopular move for licensors. Perhaps, here, the EC is veering back towards its extremely pro-competitive roots, and giving excessive protection to licensees?

Aside from these changes, I would have liked to see some increase in the market share criteria, particularly for competitors. Whilst monopolies cannot be praised as a good thing, many technology sectors, such as telecoms, are oligopolistic (several larger players that together dominate the market). Oligopolies need to be permitted in certain sectors, as otherwise innovation could be hampered, which is particularly true of industries which require huge amounts of investment in research and development. Therefore, these oligopolies are likely to exist no matter what, so why prevent them from licencing technology to one-another? This is preventing otherwise non-competitive companies from acting in a pro-competitive manner.

Therefore, I would like to see a flat market share criteria of 30% for both competitors and non-competitors, as opposed to 20% for competitors, and 30% for non-competitors. This has the additional benefit of reducing complication.

Guidance Improvements

Whilst I do not find the substantive changes to the regulation by any means sufficient, the EC has excelled when it came to producing clearer guidance to accompany the regulation. Many improvements have been made, some more significant than others, but here I shall focus on just one improvement I see as extremely significant: a clear, safe harbour for technology pools, which was entirely absent in the previous regulation and accompanying guidance.

Technology pools are exactly what they sound like. A few, or many, intellectual property proprietors put together their patents, copyright, know-how etc. Each contributor will usually have a licence to use everything within, and often the pool licences everything within the pool to third parties by means of one licence.

Feelings about the competitive effects of such pools are mixed, and the guidelines do a good job at demonstrating the key arguments on each side.

A key argument in favour of such pools concerns industries where many patents must be obtained to enter the market. An example could again be telecoms, where a producer must obtain many licences to use various bits of technology. By putting all the required technology into the pool, the licensee only need purchase one licence, instead of hundreds, which will save a great deal of time, and consequently expense, at least in theory.

However, with several large companies operating a pool together, this could act like a price fixing cartel, artificially inflating the price. As the guidance also notes, such a pool can create a de facto industry standard, which prevents further innovation.

For various complex reasons, pools are not covered by the TTBER (which is made far clearer in this newer version of the guidance). Nevertheless, the guidance provides some alternate protection. The guidance provides a safe harbour if all of the following conditions are fulfilled:

  1. Participation in the pool creation process is open to all interested technology rights owners;
  2. Sufficient safeguards are adopted to ensure that only essential technologies (which therefore necessarily are also complements are pooled;
  3. Sufficient safeguards are adopted to ensure that exchange of sensitive information (such as pricing and output data) is restricted to what is necessary for creation and operation of the pool;
  4. The pooled technologies are licenced into the pool on a non-exclusive basis;
  5. The pooled technologies are licenced out to all potential licences on FRAND terms. (See EU Horizontal Guidelines for info on FRAND)
  6. The parties contributing technology to the pool and the licensees are free to challenge the validity and the essentiality of the pooled technologies, and;
  7. The parties contributing technology to the pool and the licensee remain free to develop competing products and technology.

The reasoning behind these conditions needs no further commentary, as they speak for themselves. These conditions deal neatly and concisely with the problems technology pools can create, and if these problems are crossed off the list, as it were, protection is provided, which allows technology pools to fulfil their beneficial role in a pro-competitive market.

Whilst this may seem like a simple improvement, it is one that has the potential to do a great deal of good.

Therefore, whilst the latest TTBER itself is somewhat disappointing in substantive change, it does provide some clarity through tidier drafting, and stronger accompanying guidance. My personal view is that there is still some significant work to be done to promote innovation through intellectual property protection. Nevertheless, this depends on your political view on how important a role IP plays in a pro-competitive market, which will dictate the balance that you see as ideal.

My discussion above has been extremely focused on a few key changes, so if you are interested I strongly recommend doing some further research, as these agreements are of extreme commercial significance. Below I have included the key resources needed in order to do your research.

Further Reading

The New TTBER

The Accompanying Guidelines to the New TTBER

The EC Press Release

The Law Society’s 2013 Consultation Response

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Tagged: Commercial Law, Competition, European Union, Intellectual Property, Technology

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