The New EU Rules on Technology Licensing Are Out: A Pro-licensee Bias with Potential Chilling Effect on Innovation

March 28, 2014

On March 21, 2014, the European Commission adopted the new competition rules that will govern technology licensing in the EU for the next 12 years.  Those rules take the form of a so-called Technology Transfer Block Exemption Regulation (TTBER), complemented by a set of detailed Guidelines.  Technology transfer agreements that comply with the rules set forth in the TTBER are safe-harbored, meaning that they are automatically exempted from the application of Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits restrictive agreements or concerted practices among undertakings.

No Revolution

A fair comparison with the existing TTBER and guidelines suggests that the European Commission (EC) has not embarked on a Copernician Revolution.  As the EC’s press release indicates, few changes – discussed below – have been introduced to the existing regime.  Consequently, the conditions for exemption continue to be based on the licensor’s and licensee’s market shares being below relatively low thresholds with a list of restrictive covenants that should not find their way into the licensing agreement, as they are considered to be hardcore restraints of competition.  At the start of the EC review more than two years ago, we commented in a submission to the EC that there was arguably little knowledge about whether and how the TTBER has been used by those engaged in technology licensing and that the architecture of the TTBER was, in a number of respects, unworkable.

The final work product of the EC also shows the regulator is willing to align the treatment of intellectual property with that of tangible goods and, by the same token, to converge the rules governing technology licensing with those applying to distribution agreements.  This convergence effort fails to recognize the dynamic nature of innovation and the need to provide a robust level of IP protection to those who invest in the future.

In the context of the EU’s efforts to revive its industry and create jobs making the technology licensing rules less practical and user-friendly is potentially damaging.  The staunch reliance on market share thresholds provides a good illustration.  Many innovative companies in the EU, mostly SMEs, do not have internal resources to invest in complex market definition and market share assessments.  Using market share thresholds beyond which the safe-harbor is not available creates uncertainty, particularly given that market shares evolve over time.  While a licensing scheme may be below the 20% (among competitors) or 30% (among non-competitors) thresholds for exemption in the initial days following the launch of a new technology, successful licensors may see their licensing agreement lose the benefit of the safe harbor over time.  Paragraph 157 of the new Guidelines refers to the safe harbor being nevertheless available in the presence of four or more competing technologies; however this is dependent on those technologies being substitutable at comparable cost.  They must also represent “commercially viable alternative” technologies.  All of this may be very difficult to ascertain.  Paragraph 81 of the Guidelines also makes it clear that the market share evaluation must be undertaken in respect of each separate product market to which the licensed technology relates.

Pro-Licensee Bias with a Chilling Effect on Innovation

The EC is keen to transpose into the TTBER and the Guidelines its recent, not-yet-settled, approach to: (i) the “pay-for-delay” practices that it uncovered in the context of the sector inquiry into pharmaceuticals (see e.g. the EC decisions in the Lundbeck and Johnson & Johnson cases); and (ii) the ongoing antitrust probes into the smartphone markets, where the EC has found it to be potentially abusive for holders of standard essential patents (SEP) to seek court-ordered injunctive relief against willing licensees.

As to the “pay-for-delay” cases, paragraphs 238-239 of the Guidelines reproduces the EC’s decisional practice in settlements agreements involving IP rights (including non-asserts), which implicate a substantial payment from the IP holder to the other party in return for a delayed or limited entry in the relevant market.  Under the EC’s decisional practice and now the technology transfer guidelines, they are likely to be considered equivalent to harmful market allocation/sharing.  Regarding the SEP disputes that have crippled the smartphone markets, the EC advocated  that a licensee is deemed bona fide and hence should be entitled to an SEP license (under Fair Reasonable and Non-Discriminatory  or FRAND terms) even if it continues to challenge the validity or scope of the SEP patent.  This idea has found its way in Article 5(1)(b) of the TTBER, which now limits the licensor’s right to terminate a licensee who challenges the validity of its patent to exclusive licenses.  Thus, in all situations where a license is not exclusive, the licensor may be obliged to continue to deal with a licensee seeking to challenge the licensor’s IP.  The extension of the EC thinking, which has been developed in the context of SEP licenses granted under FRAND terms, to all kinds of non-exclusive licensing arrangements seems odd.  It ignores that IP does not necessarily equate to market power, much less dominance and, hence, would not require licensors to deal even when challenged by their licensees. 

In doing so, not only does the EC generalize this recent, limited and fact-sensitive case-law to the myriad of technology licensing agreements that are entered into every year in the EU, but it also shows a strong pro-licensee bias.

This is further exemplified by the fact that, under the new rules, exclusive grant backs to the licensor of any improvements to the licensed technology are now vulnerable restrictions under Article 5(1)(a) of the TTBER, with no distinction being made between severable and non-severable improvements.  Not only does this raise the question of whether improvements can be defined with precision, but also why the reference to severability was dropped.  It is possible that such exclusive grant backs might merit individual exemption, but this would depend whether the licensee’s incentive to innovate is factually diminished or enhanced by such a covenant.  In that regard, the Guidelines hint such incentives would be dependent on how much the licensor is remunerating the licensee for the incremental innovation.  However, the Guidelines also say that the stronger the licensor, the more likely exclusive grant backs will be held restrictive of competition.

The above illustrates how, through little touches, the EC has shifted the balance in favor of licensees away from the original innovator.  This raises the question that runs through the reformed TTBER, namely, will the more hostile attitude to innovators chill their licensing activities?  We have 12 years to observe and compare the situation with other innovative markets, in particular the US.