European Union: Changes To Technology Transfer Block Exemption: Licensees Win

Summary and implications

The new Technology Transfer Block Exemption Regulation (TTBE) was published on 21 March 2014. The TTBE is the European Union's main competition law instrument in the technology transfer space. The new rules will apply from 1 May 2014, when the old TTBE expires.

Some will say that not much will change, but the new TTBE contains three significant revisions that benefit licensees in the following areas:

• challenges to the validity of licensed rights;
• exclusive grant backs of improvements; and
• passive sales.

What does the TTBE do?

Article 101 of the EU Treaty prohibits agreements or practices that prevent, restrict or distort competition within the EU. But this prohibition is subject to certain exemptions.

The TTBE is one of several so-called "block" exemptions. Each block exemption is a legal instrument that identifies a category of agreements to which Article 101 will not apply provided that the agreement meets certain specified conditions.

The TTBE is the relevant block exemption for most technology licensing agreements under which the licensee uses the technology for the production of goods, including many patent licences. The outgoing TTBE has been in force for 10 years and had become a familiar part of the licensing landscape. So what are the three key changes?

No-challenge

The most important change relates to no-challenge clauses.

In the absence of any general rule of "licensee estoppel" in the EU, patent licensors concerned at the possibility that their licensees might challenge the validity of the licensed patents, often seek to impose a restriction or remedy against validity challenges through express contractual terms.

The outgoing TTBE regulated no-challenge clauses at two levels. First, a prohibition on challenges to patent validity could be included without bringing the whole agreement outside the block exemption, but it was specified that the no-challenge clause could nevertheless breach competition law. On the other hand, the licensor could reserve itself the right to terminate the licence in the event of a challenge, and this would be covered by the block exemption.

Under the new TTBE, the first of these rules won't change but the second will. The change will only affect non-exclusive licences, but it will mean that rights to terminate those licences for invalidity challenges will no longer be exempt from competition law under the TTBE.

This is not to say that such termination rights are no longer permissible per se, it simply means that it is up to licensors to make their own determinations on whether or not the termination right is compatible with competition law. The change reflects the European Commission's (the "Commission") current drive to identify and knock out invalid patent rights.

It will give ammunition to licensees looking to resist no-challenge termination rights and, in time, we may see more licensors and licensees becoming embroiled in invalidity litigation while still being parties to non-exclusive licence agreements.

Some licensors will be disgruntled by this change: no-challenge termination rights are common and well-established. The response from some may be to look for alternative termination rights in situations where, for one reason or another, parties fall out.

Exclusive grant back of improvements

The second change will affect licensors that secure exclusive rights to improvements to the licensed technology created by licensees.

The outgoing TTBE drew a distinction between two different types of improvements: those improvements that could be exploited without infringing the licensor's rights in the licensed technology ("severable improvements") and those improvements that couldn't ("non-severable improvements").

It allowed licensors to sweep up non-severable improvements by requiring licensees to grant exclusive rights to those improvements back to the licensor, while still getting the benefit of the exemption.

Severable improvements were treated differently though, and where they were to be exclusively granted back to the licensor, it was up to the licensor to assess on a case-by-case basis whether that provision had an anti-competitive effect.

To many, that distinction seemed eminently sensible: as a non-severable improvement couldn't be exploited without the licensor's background, the licensor will often be best placed to exploit it – particularly if there are multiple licensees, as with platform technologies, for example.

The new TTBE removes the distinction altogether, and says that exclusive grant backs of any improvement to the licensor will no longer be exempt from competition law. The onus will be on licensors to determine what, if any, effect the grant back has on competition in the relevant market.

This change is likely to be felt most keenly by companies that rely on their licensees to produce improvements to technologies – often for sound technological, commercial or resource reasons.

What can those companies do? Well, the guidelines that accompany the TTBE indicate that exclusive grant backs are less likely to be anti-competitive if licensees are incentivised to make improvements, and one way the guidelines suggest licensors may do this is by paying licensees for improvements that they create.

So, the practical effect of the change may be that licensees become more demanding when negotiating the terms of a grant back, and licensors who don't pay anything – or enough – to incentivise licensees may need to stump up for exclusive rights to improvements if they want peace of mind that their arrangements won't fall foul of competition law.

Passive sales

The outgoing TTBE allowed licensors to set up absolute restrictions on sales between territories within the EU in certain circumstances.

This was unusual in the EU, where the Commission has gone to great lengths to discourage restrictions on sales within the EU where the seller makes a supply outside its designated licence territory in response to an unsolicited enquiry or order (a so-called "passive" sale).

The circumstances in which an absolute restriction could be imposed within the conditions of the outgoing TTBE were limited. First, the licensor had to operate a patchwork of licensees across several territories. Second, the restriction could apply only in the first two years of a licence agreement, and only to sales into a territory reserved exclusively for another licensee.

This allowed those exclusive licensees a grace period in which they could make investments in development and marketing activities and establish a new market in their licensed territory, without the threat of being undermined by cross-border sales from licensees based elsewhere.

The right has been removed entirely in the new TTBE, in a change that brings the TTBE closer to the Commission's usual approach that restrictions on passive sales should not be automatically exempt from competition law.

Licensors are likely to be reluctant to restrict passive sales unless sure that it is objectively necessary to penetrate new markets. The guidelines accompanying the TTBE do indicate restrictions that apply for up to two years (or potentially longer) may still satisfy competition requirements, but this will depend on the circumstances.

The stakes here are potentially high. If a provision restricts passive sales within the EU, the entire agreement – not just the relevant provision – will fall outside the TTBE and be open to scrutiny under competition law.

Settlement agreements

The Commission also used the guidelines accompanying the new TTBE to reiterate its views on so-called "pay for delay" settlements of patent validity and infringement disputes. These views are currently subject to judicial challenge and the controversies in this area are likely to run for some years yet.

Finally, do remember...

The TTBE is a safe harbour. Just because an agreement falls outside the TTBE (e.g. because the market share caps are exceeded, as they easily can be in technology markets), it doesn't mean the agreement breaches competition law. Rather, it means the agreement has to be individually self-assessed under general competition principles.

For the new TTBE and guidelines, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.