The new Technology Transfer Block Exemption – a review of the main changes

Technology businesses should be aware that the European Commission has revised the rules on how EU competition law affects technology licensing agreements. The new Technology Transfer Block Exemption (the TTBER) with its accompanying Guidelines replaces the 2004 version as of 1 May 2014. The TTBER is important for technology companies so that they can avoid falling foul of competition law restrictions. It applies to licences of patents and SPCs, know-how, semiconductor topographies, software and designs for the production of goods or services. The Guidelines give important guidance for patent pools and standards, and for settlement agreements.

Technology licences commonly contain restrictions: an exclusive licence, for example, gives the licensee the right to use the technology in the specified field and location to the exclusion of all others, including the licensor. Restrictive agreements may contravene EU competition law (primarily Article 101 of the Treaty on the Functioning of the EU). But the EU Commission acknowledges that these agreements can be beneficial. For example, technology licences spread innovation and provide incentives for research and development. So it has set up a series of safe harbours (the block exemption regulations) to give permission to certain types of restrictions in agreements.

Licensing of technology-related rights between two organisations is controlled by the TTBER. This law comes up for renewal every ten years or so – the last one was settled in 2004. A tussle has played out since 2011 between users of the system and the EU Commission, the Commission seeking to tighten restrictions on licensing with users arguing for liberalisation of the rules.

The market share assessment

Initial qualification for access to the safe harbour requires a market share assessment; a notoriously difficult exercise particularly in fast-moving technology markets. This has not changed despite a proposed tightening up by the EU Commission, and arguments for a more liberal regime by users. The new rules still say that the licensor and licensee must between them have no more than 20 per cent of market share (if competitors) or 30 per cent of their respective market shares (if non-competitors) if the TTBER is to apply. Exceeding these thresholds does not automatically mean that the agreement is anti-competitive, but it would need to be analysed in detail.

Changes to the “hardcore” and “excluded” restrictions lists

The TTBER includes lists of clauses that are regarded as anti-competitive. The list of “hardcore restrictions” in Article 4 include restrictions on pricing, for example. Inclusion of these clauses take the agreement outside the safe harbour altogether. A second list of “excluded restrictions” in Article 5 are treated as suspicious, and would have to be justified if the parties ended up in court, but they do not take the agreement outside the safe harbour.

Passive sales

The hardcore list for non-competitors has been changed to rule out all bans on passive sales into the territory of other licensees. Passive sales are sales made in response to an unsolicited enquiry from a customer. Under the old rules these were allowed for an initial two-year period but they are no longer permitted.

Two important changes have been made to the excluded list:

1. Licensee improvements
   The first change is to clauses requiring a licensee to assign or exclusively license back to the licensor any improvements to the technology. This restriction used to apply only to “severable” improvements, that is, improvements to the technology that could be used without infringing the original technology. This distinction is now gone, and so any assignment or exclusive licensing-back of improvements falls within the risky category.
2. No-challenge clauses
   The second change concerns no-challenge clauses. Licensors often wish to prohibit challenge to the validity of the licensed IP by their licensees. The EU Commission treats this with caution as it could leave invalid IP unchallenged and so distort markets. The Commission had wanted to put all such clauses into the excluded list. In a compromise, however, the safe harbour will cover a right to terminate the licence if the licensee mounts a challenge, but only in an exclusive licence. The justification for this is that an exclusive licensee could put pressure on a smaller innovative company by threatening to challenge the licensed IP.
   
   The Guidelines make clear that a no-challenge clause in a settlement agreement is still usually allowed, the whole purpose of a settlement agreement being to end or prevent disputes.

Software

Although software is covered in the definition of “technology rights” the TTBER will not apply to agreements that simply deal with the reproduction and distribution of software, such as shrink wrap licences. These, say the Guidelines, are more like distribution agreements than true technology licenses. So they will fall to be considered under a different block exemption (Regulation 330/2010 and the Guidelines on Vertical Restraints). But licensed software that is incorporated into a device will fall within the TTBER.

Patent pools

The EU Commission has developed its guidance on patent or technology pools. These are arrangements between a group of companies who assemble a package of technology and license it not only to the contributors but also to others outside the group. They are often linked to industry standards. The Commission now recognises that these arrangements can be pro-competitive and the new rules give extensive guidance on their analysis. They can now benefit from a safe harbour detailed in the Guidelines (rather than in the TTBER itself) if they comply with a series of requirements, such as licensing out on FRAND terms.

Transitional period

Existing agreements that comply with the 2004 TTBER will benefit from a transitional period of a year – they will not be caught by the new rules until 1 May 2015.

New agreements, however, will need to comply from 1 May this year in order to benefit from the protection of the safe harbour.