European Commission Kicks Off Technology Transfer Block Exemption Consultation Process

On 6 December, the European Commission opened a consultation concerning the current competition law regime applicable to technology licensing arrangements, as currently set out in the Technology Transfer Block Exemption Regulation (TTBE) and accompanying Guidelines.

Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) (previously Article 81(1) of the EC Treaty) contains a broad prohibition of anticompetitive agreements that affect trade within the EU. Agreements that are caught by this prohibition are void and unenforceable, unless they meet the requirements for exemption under Article 101(3) TFEU. Article 101(3) applies a 'consumer-oriented' efficiencies test, under which a court or competition authority must weigh an agreement's benefits against any adverse impact on competition before reaching a final decision on its legality. In practice, this operates in a similar way to the 'rule of reason' approach under US law.

Certain categories of agreement are presumed to meet the Article 101(3) test, and any restrictions they contain to be enforceable, provided that they meet the conditions set out in a so-called 'block exemption' regulation. Block exemptions serve an important function in EU competition law, by providing a safe harbour within which agreements will be safe from antitrust challenge, as well as specifying certain 'hard core' terms that will be presumed to be unlawful. They therefore provide welcome legal certainty for some common forms of agreement.

Technology licensing agreements have been covered by a dedicated block exemption regulation since January 1996. Specifically, the 1996 regulation exempted bilateral licences for the use of patents and/or know-how for the production of goods or services from the scope of what is now Article 101(1) TFEU. That regulation was replaced in May 2004 with the current TTBE, which adopted a less formalistic and more economics-based approach than its predecessor, as well as adding software licences to the scope of the exemption. The TTBE is accompanied by explanatory Guidelines, which contain useful guidance on how Article 101 should be applied in situations falling outside the protective scope of the block exemption.

While it is beyond the scope of this advisory to describe the terms of the current TTBE in detail, it is important to note that its overall approach is more permissive, in terms of the restrictions that may be included within an agreement covered by the block exemption, compared with the regime for vertical agreements that lack an element of technology transfer. This reflects the underlying policy objective of encouraging technology transfer and the recognition that IP owners' rights must have a degree of protection to facilitate this. Thus, for example, a licensor may prevent its licensees from selling any contract products to a territory or customer group that it has reserved for itself. This contrasts with the standard position that distributors must be permitted to respond to unsolicited orders from EU customers based outside their allocated territory (so-called 'passive sales').

It should also be noted that the TTBE is available only if the parties' combined share of the relevant technology and product markets does not exceed 20% (if they are competitors) or 30%, (if they are not). The difficulty of defining relevant markets and establishing parties' market shares, particularly in areas subject to rapid technological innovation, can introduce a substantial element of uncertainty in the application of the TTBE, which arguably materially reduces its practical utility as a means of gaining legal certainty.

As with all block exemption regulations, the current TTBE applies for a limited term, in this case 10 years. Although this means that it will not expire until April 2014, the speed of the Brussels legislative process, and the complexity of the issues, means that the Commission is already seeking stakeholder comments to assist it on deciding the future shape of the regime. At this stage, the Commission is inviting views on stakeholders' experience of applying the TTBE and Guidelines in practice and has provided a thirteen question questionnaire (available here) to help with structuring responses. (The Commission has made it clear that respondents do not need to answer all of the questions or even to follow the questionnaire format in preparing their response.)

Many of the questions asked by the Commission are broad and open-ended. They include, at one extreme, a question on whether there should be a block exemption at all and, at the other, whether the block exemption should be extended to cover trade mark licensing for consumer goods. There is also a question asking for examples of practical difficulties in applying the market share thresholds. In addition, the Commission has used this opportunity to seek comments on its recent 141 page economic report on the interplay of competition policy and IPR protection (click here to view the report), notwithstanding the fact that the issues addressed in that report go well beyond the scope of the current TTBE.

As noted above, the fact that the Commission is conducting this review now is driven by the fact that the current TTBE will automatically expire in 2014, rather than any apparent pressing need to change the legal regime for technology licensing. That said, the use and misuse of patents is a particularly hot topic in US and EU competition law at the moment and, given the financial stakes, it seems likely that interested parties will use this as an opportunity to air a wide range of issues in this area.

It appears from discussions that those responsible for the review are going into it with an open mind concerning the need for change. This is an important opportunity to influence the future shape of the regime for technology licensing. Edwards Wildman intends to prepare its own response to the consultation, which must be sent to the Commission by the consultation closing date of 3 February 2012. If you have any particular issues that you would like us to address in that response, we would be very interested to hear from you before then.