Towards a More Stringent Enforcement Regime for Technology Licensing in Europe?

March 4, 2013

Those who were expecting the European Commission (EC) to take a novel and more focused approach in applying competition law to technology licensing will be greatly disappointed.  Last week, the EC published a draft Technology Transfer Block Exemption Regulation (TTBER) and guidelines, which are intended to take effect in April 2014. Companies and stakeholders have until May 17, 2013 to provide comments on the drafts.   The EC maintains the general structure of the original TTBER with its market share caps and list of hardcore restrictions, both of which vary depending on whether the parties to the license are competitors or not.  Recognizing the breadth of the list of hardcore restrictions, these were made subject to explicit carve-outs which gave the original TTBER a formalistic feel.  The list of hardcore restrictions applicable to licensing among competitors (in particular, on cross-licensing) is almost untouched in the draft TTBER. 

Regarding licensing among non-competitors, the EC is considering raising the bar for exempting agreements in a number of ways.  First, the more generous 30% market share threshold is not available for licensing between non-competitors where the licensee produces with its own in-house technology, which is substitutable to the licensed technology.  Instead the stricter 20% threshold, applicable to agreements between competitors, comes into play.  The same outcome arises if the licensee and licensor later become competitors on the downstream product market, e.g. if the licensor enters the product market.  It means that the market share test is lowered from 30% to a combined ceiling of 20% as soon as the licensor enters the product market.  Second, regarding the territorial protection afforded to new licensees, the two-year exemption for restriction on passive sales into the exclusive territory of another licensee has been deleted from the regulation but re-inserted in the guidelines, with a resultant loss of legal certainty.  This modification signals a willingness of the EC to apply to licensing among non-competitors the same set of rules that it applies to distribution agreements.  It is part of a continuing conservatism on the part of the EC, namely equating licensing between non-competitors, with its pro-competitive dissemination of technology, with vertical arrangements relating to the distribution of physical goods.

Regarding IP settlements, the EC merely states that “pay-for-delay” arrangements may be a source of antitrust concern.  This is hardly news given the infringement decision against Intel which included a €1.06 billion fine, as well as investigations against blockbuster drug companies, including the ongoing case against Servier.  The EC again adopts a more restrictive view when it holds that non-challenge clauses may be anticompetitive in the context of a settlement.  This actually constitutes a reversal to its current guidelines.

Finally, on patent licensing pools, the EC mirrors its standardization approach by providing a list of all the conditions that have to be met in order for a pool to be safe-harbored.  However, limited guidance is provided as to how to handle non-essential technologies in a pool.  Instead, out concern that the inclusion of non-essential technologies may foreclose rival technologies outside the pool, the EC considers that non-essential technologies should be excluded from the pool.  This outcome carries the risk of rendering the package less attractive to potential licensees and pool users.  While the EC hints that there may be other ways to address this issue, it does not provide any useful tips.  It would be welcome to have guidance on the circumstances where it would be deemed acceptable to allow non-essential patents in the pool.

Apart from those substantive changes, the EC has made minor adaptations to the existing text of the TTBER and provides some useful clarifications in the guidelines.  For instance, the EC indicates more explicitly how market shares ought to be calculated.  According to the EC, revenues drawn from royalties may not be the best proxy for estimating the market strength of the technology.  The EC has a strong preference towards looking at sales in the downstream product markets that incorporate the licensed technology or substitutes of the licensed technology.  The EC, however, is suggesting that, ideally, sales by suppliers that use their own in-house technology should not be taken into account in the market share calculation, as in-house technologies do not necessarily constrain the competitive behavior of the licensor in the licensing segment of the market.  Excluding in-house technology sales from the relevant market may have the effect of inflating the market share of the licensor and, hence, may cause many licensing agreements to fall outside the safe harbor.  This means that more often than not, companies will need to self-assess the legality of their licensing arrangements under the accompanying guidelines.

In December 2011, the EC sought contributions and input from various stakeholders on their experience with the TTBER.  In embarking on this consultation and review, the EC appeared to have an open-mind towards technology licensing.  Overall, the approach outlined above indicates that the outcome of this consultation is to some extent conservative, as it narrows the scope of the safe harbor and will likely subject an increasing number of licensing arrangements to antitrust review by legal departments and external lawyers and to potentially greater legal uncertainty.

NB:  the new TTBER was published in March 2014.