In the first of a series of WSGR Alerts, the firm's Brussels attorneys outline the European Commission's proposed changes to the antitrust rules on licensing patents, software, know-how, and other intellectual property. Future alerts in the series will address other European competition law topics that are important to U.S. corporations doing business in Europe, including pricing, distribution channels, and customer or territorial allocation.

European Commission Consults on Revisions to Rules on Technology Transfer Agreements

The consultation period for comments on the European Commission's proposed changes to competition rules on licensing agreements expires this week. The proposed reform includes amendments to the Technology Transfer Block Exemption Regulation (TTBER) and to the commission's guidelines—the two instruments that currently govern how competition law applies to licensing agreements. (See Appendices 1 and 2 for details.) Subject to fine-tuning, the new rules likely will be in effect by the end of April 2014.

Promoting Dissemination of New Technologies

The purpose of the regime is to encourage licensing as a driver of innovation and allow companies to integrate and use complementary technologies, while prohibiting agreements that have a chilling effect on competition. In a nutshell, the TTBER creates a safe harbor—designed to offer legal certainty to licensors and licensees—for technology transfer agreements between companies that do not contain so-called "hardcore restrictions" and that have limited combined market share (20 percent for agreements between competitors and 30 percent for agreements between non-competitors). The guidelines, which complement the TTBER, help licensors and licensees self-assess whether their agreements are likely to infringe Article 101 of the Treaty on the Functioning of the European Union (which prohibits anticompetitive agreements) or would, if challenged, be likely to be upheld.

Proposed Changes to the Scope of the Safe Harbor

The first challenge facing a business self-assessing its commercial agreements is to determine whether the TTBER and the associated guidelines apply or whether other rules (e.g., those governing the distribution of goods or services) are relevant. Failing to identify the rules that regulate a given agreement may lead companies to unwittingly enter into illegal agreements and thereby increase their exposure to litigation or regulatory agency scrutiny.

The exercise is particularly taxing when a contract contains provisions surrounding the licensed technology—e.g., terms regulating the purchase of inputs by the licensee to manufacture products using the licensed technology. Deciding which rules apply also may be difficult in cases where the nature of the parties' relationship changes over time (e.g., from pure distribution to licensing and manufacture).

At present, contractual terms that are not the primary object of the agreement but are "directly related" to the products made using the licensed technology are covered by the TTBER. In its revised draft, the commission proposes to introduce a stricter test and to exempt only those provisions that are "directly and exclusively related" to the products made using the licensed technology.

New Guidance on Treatment of Technology Pools and Settlement Agreements

In addition to proposing amendments to the TTBER itself, the commission has suggested that new language be added to the guidelines on various matters not addressed in the TTBER. Although non-binding, the guidelines provide practical guidance to companies, judges, and national competition agencies examining such agreements. Two important areas tackled for the first time in the commission's proposal are technology pools and settlement agreements.

In regards to technology pools, the proposed guidelines first make it clear that licensing agreements between a technology pool and third parties cannot benefit from the TTBER (because they are typically multiparty agreements and the TTBER only applies to agreements between two firms). However, the commission goes on to espouse a de facto safe harbor for such agreements that covers both the creation of the pool and licensing out from the pool, provided that certain conditions are met.

The proposal also singles out as "potentially problematic" settlements between competitors that include a license for the technology but that then lead to delayed entry or otherwise limit the ability of the licensee to launch the product. Such "pay-for-restriction" agreements (as they are called in the proposed guidelines) will require scrutiny if the licensor has provided an inducement (whether financial or not) to persuade the licensee to accept more restrictive terms than the merits would justify. This is the first time that the commission has sought to address pay-for-delay in a formal legal instrument, but the relevance of the proposed amendment needs to be nuanced, particularly in light of a number of ongoing investigations in the pharmaceutical industry in which formal decisions are expected in the next few months.

Attorneys in Wilson Sonsini Goodrich & Rosati's Brussels office are currently acting in two of the commission's pay-for-delay cases and have extensive experience counseling on the application of the European competition rules to U.S. firms doing business in Europe. For more information on the firm's European competition law practice, please click here.

If you have any questions about this WSGR Alert, please contact Paul McGeown (+32 2 274 5703 or pmcgeown@wsgr.com) or Benjamin Record (+32 2 274 5708 or brecord@wsgr.com).

Appendix 1: Key Proposed Amendments to the TTBER

• New test for cases that involve purchases by a licensee of materials or equipment. Provisions in an agreement that are "directly and exclusively related" to the product that a licensee manufactures with the licensed technology are valid and enforceable, as long as the agreement benefits from the block exemption.
• Market-share thresholds. The current market-share threshold of 20 percent for licensing agreements between competitors also will be applied to licensing agreements between non-competitors where the licensee owns a technology that it uses only for in-house production and that is substitutable for the licensed technology.
• Removal of automatic exemption of restrictions relating to passive sales. The commission proposes to remove the exception in the existing rules under which a licensee could be protected from passive sales by other licensees into its exclusive territory during the first two years of its license.
• Excluded restrictions:
  • All exclusive grant-backs will fall outside the scope of the TTBER and need to be self-assessed on a case-by-case basis.
  • Termination clauses, which allow the licensor to terminate the agreement if the other party challenges the validity of the licensor's intellectual property rights, will no longer be covered by the exemption and may be unenforceable.

Appendix 2: Key Proposed Amendments to the Guidelines

• Changes to the TTBER outlined above will be reflected in the guidelines
• Technology pools:
  • Because licensing agreements between a technology pool and third parties are generally multiparty agreements, they fall outside the scope of the TTBER.
  • The guidelines will create a de facto safe harbor for agreements covering the creation of the pool and licensing out if a number of cumulative conditions are met, including:
    • participation in the standard pool and pool creation is open to everyone;
    • only essential (and therefore complementary) patents are pooled;
    • licenses into the pool are non-exclusive and licenses out are on fair, reasonable, and non-discriminatory (FRAND) terms; and
    • firms contributing or taking licenses of a technology can challenge validity and essentiality.
  • Definitions of the concept of "essentiality":
    • In relation to production, a technology will be considered essential when there are no "commercially or technically viable substitutes" for a product or a process to which the pooled technologies relate.
    • In relation to standard implementation, a technology will be essential when it constitutes "a necessary part" of the technologies needed to implement the relevant standard.
• Settlement agreements:
  • "Pay-for-restriction" agreements, where a licensor provides an inducement to encourage a licensee to accept more restrictive terms than it would normally have agreed to, may infringe Article 101 and therefore be illegal.
  • No-challenge clauses: Clauses in settlement agreements not to challenge the validity of the patent in the future will be problematic if the patent holder knows or should have known that the patent does not meet the patentability criteria.