As the current block exemption regulations (“BER”) applicable to research and development (“R&D”) and specialisation agreements will expire on 31 December 2010, the Commission has proposed and consulted on revised and replacement regulations, BERs for research and development and specialisation agreements, and also draft new Guidelines (“Guidelines”) for the assessment of co-operation agreements between competitors, so-called ‘horizontal agreements’.
The Commission is expected to adopt the final texts of the Guidelines and BERs at the end of this year. While the draft revised BERs and Guidelines will not fundamentally differ from those currently in force, they introduce some new elements and clarify the application of competition rules to horizontal agreements.
Draft R&D block exemption regulation
Cooperation in research and development and in the exploitation of the results is considered by the Commission as likely to promote technical and economic progress. As such, agreements on the joint execution of research work or the joint development of the results of the research, up to but not including the stage of industrial application, generally do not fall foul of competition rules.
There are no fundamental changes to the draft R&D BER. The few changes ensure that one party to an R&D agreement cannot impair the exploitation of results by other parties which could in turn limit the objective benefits of the joint R&D for consumers. It is now specified that to benefit from an exemption under the draft R&D BER, the parties must agree prior to starting the joint R&D that they will disclose in an open and transparent manner their existing and pending IPRs that are relevant for the exploitation of the results by the other parties. Moreover, the R&D agreement must provide all parties with equal access to the results of the joint R&D for the purposes of further research or exploitation.
Similarly, where the R&D agreement provides only for joint R&D (i.e. not subsequent exploitation of the results) the parties should grant each other access to their pre-existing know-how where it is indispensible for the purposes of the exploitation of the results by the other parties.
The draft BER also provides that two restrictions which were previously regarded as “hardcore” will now be considered “excluded restrictions”. These are a prohibition to challenge the validity of intellectual property rights (“IPRs”) protecting the R&D after completion of the R&D (without prejudice to a possible clause providing for termination of the R&D agreement in the event of such challenge by one of the parties), and a requirement not to grant licences to third parties unless the exploitation of the results by at least one of the parties is provided for in the agreement and takes place in the internal market. Consequently, an agreement which contains such restrictions can still benefit under the draft BER, although these restrictions would individually be invalid but would for EU competition law purposes be severable from the R&D agreement.
Finally, the definition of ‘potential competitor’ has been clarified. A party would need to be realistically likely to enter a market within three years (in response to a small but permanent increase in relative prices) to be considered a ‘potential competitor’. It is important to know when an undertaking will be considered a potential competitor, as co-operation agreements between competitors (including potential competitors) can only benefit from the R&D BER if the combined market share of the undertakings concerned (including potential competitors) is less than 25%.
If adopted, the proposed draft BER will apply from 1 January 2011 until 31 December 2022. However a one year grace period (ending 31 December 2011) will apply for agreements which at 31 December 2010 qualified for exemption under the previous regulation but which do not satisfy the conditions for exemption under the new regulation.
Draft specialisation block exemption regulation
A specialisation agreement is a unilateral or reciprocal agreement where one or both parties agree to cease production of certain products and agree instead to purchase them from another party. The Commission considers that such agreements are most likely to contribute to improving the production or distribution of goods if the parties have complementary skills, assets or activities, because they can concentrate on the manufacture of certain products and operate more efficiently and supply the products more cheaply.
The draft Specialisation BER is largely unchanged from the current BER. However, there are several new definitions covering “preparation of services”, “specialisation products”, “downstream products”, “competing undertaking” and “distribution”.
In addition, the definition of “relevant market” has been amended, where the specialisation products are intermediate products which one or more of the parties use captively for the production of downstream products, to include the relevant product and geographic market(s) to which the downstream products belong. The draft BER provides that where the products the subject of a specialisation agreement are intermediate products which one or more of the parties use captively for the production of downstream products which they also sell, the exemption provided by the BER is conditional upon a 20% market share threshold downstream. The Commission considers that assessing the parties’ market position only at the level of the intermediate product would ignore the potential risk of foreclosing the market downstream.
The draft Specialisation BER also clarifies that co-operating companies which only partly cease production can also benefit from the safe harbour of the BER. This would mean, for example, that if a company closes just one of its two production plants for the product and outsources the output of the closed plant, it can still benefit from the BER.
The draft specialisation BER includes a similar one year transitional period to that included in the draft R&D BER.
The draft Horizontal Guidelines
The draft Guidelines cover agreements on R&D, joint production, joint commercialisation, and standardisation. However, the main changes that have been introduced by the revised Guidelines are a new chapter on information exchanges between competitors, and an update of the standardisation chapter. There is also no longer a separate chapter on environmental agreements in the draft Guidelines. Instead, environmental agreements are to be assessed under the relevant chapter of the draft Guidelines.
In addition the draft Guidelines now clarify when a joint venture and its parent companies will be considered to form one undertaking for the purposes of Article 101 TFEU. The Commission notes that the assessment of horizontal co-operation agreements is similar to that of horizontal mergers in respect of the potential restrictive effects, in particular as regards joint ventures. The effects of full function joint ventures that fall under the Merger Regulation can be quite similar to non-full function joint ventures (which are subject to Article 101 TFEU), and there is often very little to differentiate the two.
The draft Guidelines also clearly explain they should be applied to agreements covering more than one type of co-operation (e.g. joint R&D, production and distribution). Under the current Guidelines, the “centre of gravity” test determines which sections of the Guidelines are applicable to such agreements. The draft Guidelines have replaced this test and propose that all the chapters pertaining to the different parts of an integrated agreement will be relevant to its assessment. However where these chapters contain graduated messages, for example whether certain conduct will be considered a restriction by object or effect, what is set out in the chapter pertaining to that part of the agreement which can be considered “the most indispensable building block” of the agreement will prevail.
Information exchange can take various forms, such as direct sharing of data between competitors, through a common agency such as a trade association or third party, or by means of publishing. The Commission acknowledges that in some circumstances information exchanges can be pro-competitive, as it can lead to intensified competition or efficiency gains. However, where the exchange of market information enables companies to gain an awareness of their competitors’ market strategies, it may restrict competition. In short, whether an exchange of information is anti-competitive will depend on the characteristics of the market (e.g. concentration, stability and transparency) and the type of information that is exchanged.
The draft Guidelines clearly state, however, that certain types of information exchanges between competitors will be considered a restriction on competition by object (i.e. without the need for the commission to show an actual effect on competition). These include in particular the exchange of individualised information regarding intended future prices or quantities. These types of information exchanges run the risk of being investigated and, ultimately, fined as cartels.
The Commission also sets out guidance on the relevant factors to be considered when assessing the effects of exchanges of information. The relevant factors include market coverage, market characteristics and the characteristics of the information exchange (e.g. commercial sensitivity, public nature or exchange, aggregation or individualisation of data, data age and frequency of exchange). Any assessment for individual exemption under Article 101(3) must involve an examination of efficiency gains, and whether these are passed on to consumers.
Standardisation agreements define the technical or quality requirements with which current or future products, production processes, services or methods may comply.
Standardisation agreements can cover various issues, such as standardisation of different grades or sizes of a particular product or technical specifications in product or services markets where compatibility and interoperability with other products or systems is essential. While standardisation agreements generally have a positive economic effect, for example by encouraging the development of new markets and improved supply conditions, standard-setting can also give rise to restrictive effects on competition by potentially restricting price competition and limiting or controlling production, markets, innovation or technical development.
The Commission provides guidance on how to ensure that standard setting is competitive and considers that participation in standard setting should be transparent and unrestricted and must seek to avoid the misuse of the standardisation process through hold-ups and the charging of abusive royalty rates by holders of IPRs. There must be good faith disclosure of IPRs, and once standards are adopted, IPR holders should be obliged to license their IPR to all third parties on fair, reasonable and non-discriminatory terms and not to impede the implementation of a standard by refusing to license or by requesting excessive royalty fees. To ensure that the fees charged for the use of a patent in a standard are fair and reasonable, the Commission will consider whether they bear a reasonable relationship to the economic value of the patents. Any abuses of the market power gained by the inclusion of an IPR in a standard will be likely to infringe Article 102 TFEU.
In relation to the use of standard terms, the draft Guidelines suggest that so long as participation in the setting of the terms is unrestricted and transparent, and parties remain free to use other terms when selling their product to the consumer, they will not in general give rise to restrictive effects on competition.
Companies which are party to R&D or specialisation agreements in the EU or EEA will want to consider the effect of the new BERs on their existing agreements, for example in specialisation agreements, the effect of the new threshold applicable to the market at the level of the downstream product.
It is important to bear in mind that agreements which do not fall within the ‘safe harbour’ of the BERs are not automatically illegal but must be individually assessed to determine whether they contain restrictive clauses and whether they can be justified.
The draft Guidelines which accompany the BERs are likely to be influential on questions of interpretation. The purpose of the Guidelines is to provide an analytical framework for the most common types of horizontal co-operation agreements in order to assist businesses in assessing the compatibility of an individual co-operation agreement with the competition rules.
The enhanced level of detail in relation to information exchange in the Guidelines will prove helpful to stakeholders, particularly because until now there was only limited guidance on how the competition rules would be applied to this area. In addition, the increased levels of transparency required in standardisation will be welcomed and this should address concerns as to IPRs being misused in the standards selection process.