Changes afoot

European antitrust law (often referred to as competition law) has tried for several decades to balance patent rights (which, until EU-wide patent rights are implemented, remain inherently country-specific) against the fundamental EU goal of having all member states function as a single market without internal barriers based on national boundaries. New draft legislation from the EU indicates that the patent rights/antitrust scales are being rebalanced in significant ways — largely to the detriment of licensors.

Who needs to be concerned?

European competition law affects virtually all companies that do business in Europe or even simply grant licenses under European IP rights, regardless of whether the company is based in Europe. The fundamental competition law is set out in Article 101 of the Treaty on the Functioning of the European Union (Art. 101), which prohibits agreements and arrangements that restrict competition within the EU internal market, except in certain cases where the benefits to consumers outweigh the negative effects of the restriction. Art. 101 implicates most license agreements that involve licenses under European patent rights, database rights, know-how or similar IP.

Current safe harbor

Since 1984, the EU has attempted to provide a safe harbor with respect to certain common technology license arrangements that restrict competition (at least facially) but ultimately have pro-competitive effects. The safe harbor is established by the Technology Transfer Block Exemption Regulation (TTBER) and accompanying guidelines (Guidelines). Only companies that do not exceed designated market shares can rely on the TTBER. The current market share thresholds are a combined share of 20% for competitors and individual shares of 30% for non-competitors. However, companies that exceed the market share caps nonetheless should take the TTBER and Guidelines into account when reviewing their business arrangements because the TTBER and Guidelines shed light on how regulators are likely to apply EU antitrust law to specific arrangements.

Proposal for a new TTBER

Like all EU block exemption regulations, the TTBER runs for a certain number of years and then needs to be renewed. The current TTBER and Guidelines expire on April 30, 2014, and the EU is in the midst of reviewing and revising them. The European Commission has held two public consultations on a proposed revised TTBER(New TTBER) and guidelines (New Guidelines), with the most recent consultation closing on May 17, 2013. Industry stakeholders have been paying close attention to the draft legislation. Both the Licensing Executives Society International (LES) and the Intellectual Property Owners Association (IPO) have submitted comments to the Commission. It remains to be seen whether the Commission will modify the New TTBER in light of the comments from industry and other stakeholders.

Key changes

The most contentious changes in the New TTBER include the following:

1. Challenges to validity.

As in the US, contractual terms prohibiting a licensee from challenging the validity of the licensed patents are generally understood in the EU to be unenforceable and potentially a violation of EU antitrust law (unless in a settlement agreement). However, in Europe, many licensing professionals consider it standard practice to provide that the licensor can terminate the license agreement if the licensee challenges the validity of the licensed patents. In fact, that precise scenario is contemplated by — and implicitly endorsed by — the current Guidelines (para. 113). The Commission is proposing to completely reverse its position on termination-for-challenge provision in Art. 5(1)(b) of the New TTBER, as further explained in para. 125 of the New Guidelines.

Even more surprisingly, non-challenge provisions in settlement agreements also have been put into doubt by paragraphs 226 and 227 of the New Guidelines, which state that the TTBER may not apply if there is doubt as to the validity of the patents in question or if the licensor makes a payment to the licensee. If the Commission’s current position is made law in the final New TTBER, the balance of power between licensors and licensees will be fundamentally changed. Settlement agreements, in particular, will be far trickier propositions — and the legislation only has a temporary grandfathering period, which means that you may need to re-open existing settlement agreements

2. Grant-back provisions.

The current TTBER permits licensors to require that licensees license back, on an exclusive basis, new inventions made using the licensed technology that cannot be practiced without infringing the original licensed technology (known as “severable improvements”). The New TTBER does not cover such grant-backs. This change is clearly to the detriment of licensors and the benefit of licensees.

3. Pay-for-delay.

The New Guidelines warn that settlement agreements between competitors that contain a payment from the licensor to the licensee are likely to fall foul of Art. 101. It appears that the Commission’s view on such “reverse payments” was heavily influenced by its investigation of agreements in the pharmaceutical sector in recent years. Certainly pharma companies will be very concerned by this aspect of the New Guidelines. (It remains to be seen whether the Commission will be influenced by the US Supreme Court's recent holding inFTC v. Actavis that pay-for-delay provisions are not presumptively illegal.)

4. Passive sales window.

Currently, it is generally permissible under the TTBER to prohibit exclusive licensees in one territory within the EU to make passive sales (that is, sales initiated by the customer) into the territory of another exclusive licensee for the first two years after the launch of the product in that territory. The New TTBER would eliminate the current two-year grace period on bans on passive sales. This change is to the detriment of the later-established licensees in any given set of exclusive licensees, and also licensees in higher-priced countries within the EU (EU customers generally being savvy about cross-border comparison shopping).

Retroactive application to existing agreements

Once the final New TTBER is issued, companies will have until April 30, 2015 to bring existing agreements into line with the New TTBER. There is no specific exemption for settlement agreements, so companies could find themselves needing to re-open contentious discussions.

Steps companies can take now

We don’t know precisely when the definitive New TTBER and Guidelines will be issued, but we don’t expect them to be finalized for at least several months while the Commission sieves through the various comments from the recently-closed second consultation period. (At latest, the New TTBER will need to be published prior to the April 2014 expiration of the current TTBER.) For the time being, we suggest that companies review their existing agreements to determine which ones have an impact on the European market and will need to be analyzed once the final new TTBER and Guidelines are published.