Are my technology transfers ready for the new TTBER and the UPC?

18 May 2014

In this contribution, we highlight two developments that shall impact technology transfers:

1. On May 1, 2014, the revised EU block exemption regulation for technology transfer agreements, the so-called TTBER, entered into force, together with the new guidelines for technology transfer agreements (TT-Guidelines). They bring important changes for future and existing technology license agreements.

2. As matters stand, it may be expected that by the end of 2015, the Unitary Patent Package will take effect. This package will bring a Unitary Patent and a Unified Patent Court, with new challenges and opportunities, which one should consider when conducting technology transfers that comprise patent (application(s)), including future and existing patent license agreements.

Both developments may warrant that parties adapt their policies concerning technology transfers and that they review their existing licensing agreements.

The revised TTBER and TT-Guidelines  

Introduction

Together with Article 101 of the Treaty on the Functioning of the European Union ('TFEU'), the TTBER in combination with the TT-Guidelines provide the core competition law framework for licensing agreements relating to technology and is therefore of particular importance for companies in technology driven sectors like life sciences.

Article 101(1) TFEU prohibits as incompatible with the internal market "[..] all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market [..]". Pursuant to Article 101(2) TFEU, such agreements shall be automatically void, and also competition authorities such as the European Commission, the Dutch Authority for Consumers and Markets and the Bundeskartellamt can decide to investigate the contracts and impose fines if the contracts show a consistent violation of the TTBER without there being an objective justification.

However, Article 101(3) TFEU allows that the rule of Article 101(1) is declared inapplicable in the case of any such agreement, decision and concerted practice, or categories thereof, "which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question."

This is where, for technology licensing agreements , the TTBER and TT-Guidelines come into play. In accordance with Article 101(3) TFEU, the TTBER provides that the prohibition of Article 101(1) TFEU shall not apply to technology transfer agreements. After all, such agreements will normally improve economic efficiency and be pro-competitive as they can reduce duplication of R&D, strengthen the incentive for the initial R&D, spur incremental innovation, facilitate diffusion and generate product market competition . However, this is not a general exemption. Supplemented by the TT-Guidelines, the TTBER formulates a series of criteria for, and limitations to the 'safe harbour' that the TTBER provides.

The previous TTBER  and TT-Guidelines  have been in place since 2004, and they were due to expire on 30 April 2014. Therefore, preparations were commenced for a revision of both instruments. This comprised two public consultation rounds issues by the European Commission. The first consultation was started in 2011, and invited interested parties to communicate their experiences with the existing framework . The second was held in 2013, and served to obtain comments concerning a proposal by the Commission for a revised package comprising a new TTBER and new TT-Guidelines . On 21 March 2014, the Commission adopted the new TTBER and new TT-Guidelines, and per 1 May 2014, they have replaced the old TTBER and TT-Guidelines. 

The new TTBER and TT-Guidelines contains some important changes, deviating from the former framework. The most significant changes relate to the following:

- Passive sales restriction;
- Grant back obligations;
- Non-challenge clauses.

Passive sales restriction

Under the new TTBER, the restriction on passive sales will only be allowed when the licensor grants an exclusive license. Absent such exclusivity, each passive sales restriction is considered to be a so-called 'hard core restriction', and hence will not be allowed. Under the old TTBER, there was an exemption which allowed a licensor to restrict passive sales for a period of two years for those situations where a licensee was offered a new and exclusive territory or customer group (in license agreements concluded between non-competitors). Please note that the new TT-Guidelines provide for a further explanation to this restriction by considering the fact that a passive sales restriction can be justified if the licensee needs to do significant investments in marketing, promotion and/or production (TT-Guidelines, § 126).

"Where substantial investments by the licensee are necessary to start up and develop a new market, restrictions of passive sales by other licensees into such a territory or to such a customer group fall outside Article 101(1) for the period necessary for the licensee to recoup those investments. In most cases a period of up to two years from the date on which the contract product was first put on the market in the exclusive territory by the licensee in question or sold to its exclusive customer group would be considered sufficient for the licensee to recoup the investments made. However, in an individual case a longer period of protection for the licensee might be necessary in order for the licensee to recoup the costs incurred."

Restriction of automatic grant back obligation

Another topic that has been subject to changes concerns clauses obligating the licensee to transfer to the licensor ownership or grant to him an exclusive license for any improvements to the licensed technology. Whereas the former TTBER exempted contractual obligations for grant back of rights concerning improvements that are non-severable from the licensed technology (i.e. improvements that cannot be exploited without infringing the licensed technology), under the new regulation even this exception shall be waived. The European Commission explains in the new TT Guidelines (para. 129) why this further restriction would be necessary.

"An exclusive grant back is defined as a grant back which prevents the licensee (which is the innovator and licensor of the improvement in this case) from exploiting the improvement (either for its own production or for licensing out to third parties). This is the case both where the improvement concerns the same application as the licensed technology and where the licensee develops new applications of the licensed technology. According to Article 5(1)(a) such obligations are not covered by the block exemption."

A result of this limitation on imposing automatic grant backs is that the licensor will be linked to the licensee for the duration of the licensed technology, and that he will be restricted in the possibility to exploit its own technology to the fullest. This threat may have the counter-productive adverse effect that the licensor will keep his technology to himself in order to avoid the licensee making improvements to it, as these will not be automatically transferred or exclusively licensed back to the licensor.

What remains allowed under the new TTBER is a contractual obligation for the licensee to grant back to the licensor on a non-exclusive basis.

Non-challenge clause

Another important change of approach relates to termination clauses in the event of validity attacks. Under the old TTBER it was allowed to terminate the license agreement if the licensee challenged the validity of one or more of the licensed IP-rights. The block exemption for this type of termination clause in the current TTBER will be waived and replaced by a more strict case-by-case approach for termination clauses in non-exclusive license agreements. Only termination clauses in exclusive licenses will remain under the automatic block exemption; specific rules apply to know-how licenses.

The rationale of this change has been laid down in paragraph 134 of the new TT-Guidelines:

The reason for excluding non-challenge clauses from the scope of the block exemption is the fact that licensees are normally in the best position to determine whether or not an intellectual property right is invalid. In the interest of undistorted competition and in accordance with the principles underlying the protection of intellectual property, invalid intellectual property rights should be eliminated. Invalid intellectual property stifles innovation rather than promoting it"."
 
Safe harbour for patent pools

The Commission acknowledges the pro-competitive effects of patent pools, in particular in the context of standardization, and providing “safe harbour” rules for patent pools in the revised section of the TT Guidelines. This chapter in the new TT-Guidelines is very helpful, but should be read in combination with the chapter on Standardisation in the Guidelines for horizontal cooperation agreements. 

Settlement agreements

The Commission’s experience in the effects of settlement agreements on competition is reflected in a revised chapter in the TT-Guidelines.

Effect

The new TTBER and TT-Guidelines took effect on 1 May 2014, and they will have to be applied in respect of any technology transfer agreement concluded as from that date. Further, technology transfer agreements that have been concluded up until 30 April 2014, and that are in compliance with the old TTBER, will remain exempted under that until 30 April 2015. However, this is only a one year transitional period. As from 1 May 2015, they must also comply with the new framework provided by the new TTBER and new TT-Guidelines.

It may be added hereto that the (new) framework will only apply if it concerns licensing agreements which are not intra-group, i.e., with a third party outside the group structure. This means that if a holding company licenses its technology to one of its subsidiaries in which it exercises sole control, or if subsidiaries conclude license agreements with each other, this is considered as an intra-group license agreement. The competition rules only apply on agreements or concerted practices outside the group structure and hence, if intra-group license agreements are concluded these will not be covered by the new (and old!) TTBER.

The Unitary Patent Package

As matters stand, it may be expected that by the end of 2015, the Unitary Patent Package will take effect. This will be the biggest change in the last 40 years of patent law in Europe, i.e. since the introduction of the European patent. Briefly put, the Unitary Patent Package consists of:

a. the creation of a European patent with unitary effect ('Unitary Patent') by way of an enhanced cooperation of all EU Member States except for Spain, Italy and Croatia . For this, two EU regulations have been adopted on 17 December 2012: EU Regulation No. 1257/2012, which serves to create the unitary patent protection system as such, and Council Regulation No. 1260/2012, which sets out the legal framework for the applicable translation arrangement.

b. the creation of a Unified Patent Court ('UPC'). For this, an intergovernmental Agreement on a Unified Patent Court ('UPC Agreement'), which also sets out the (basic) rules for the UPC, has been signed by 25 EU Member States (i.e. all EU Member States except for Spain, Poland and Croatia).

The above mentioned date of entry into effect of the Unitary Patent Package is not carved in stone, if only because many practical preparations still need to be completed, but there is little doubt that the new system will become a reality in the not too distant future. In this context, it is noted that the system will come into force as soon as thirteen Contracting EU Member States, including the United Kingdom, Germany and France, have ratified the UPC Agreement . So far, Austria and France have ratified, and Belgium and Malta have completed the ratification procedure.

The Unitary Patent

The Unitary Patent will come as an alternative to already existing forms of patent protection, i.e. the traditional European patent, which is (argued to form) a bundle of national patent rights, and national patents . Note, however, that the Unitary Patent will only be available in part of the jurisdictions where one can obtain a traditional European patent. For the other jurisdictions protection through a traditional European patent (or national patents) will still be necessary.

The Unitary Patent will undergo the same examination procedure as traditional European patents, be it that ultimo one month after the date of publication of the mention of the grant of the patent, the patentee can 'upgrade' the European patent to a Unitary Patent by requesting the unitary effect to be registered in the register for unitary patent protection. As a consequence, the patent will – with retroactive effect – have unitary effect in all participating EU Member States where it has unitary effect, i.e. in those which have at the date of registration ratified the UPC Agreement. This means that in those EU Member States it shall provide uniform protection and that it shall have equal effect . It shall confer on the patentee the right to prevent any third party from infringing his exclusive rights throughout the territories of these EU Member States , and the scope of that right and its limitations shall therefore be uniform . Further, in these EU Member States the patent may only be limited, transferred or revoked, or lapse, in respect of all of them . (Licenses may of course be concluded in respect of the whole or part of the territories of the participating Member States.)

The maintenance fees of a Unitary Patent are still to be determined, but it is expected that they will be as high as the fees of a traditional European patent designating 4-5 contracting states.

The Unified Patent Court

The UPC will be a specialized patent court, composed of specialized patent judges. It will consist of a court in the first instance, made up of three types of divisions (Central, Regional and Local), hosted by a variety of contracting EU Member States , and a court of appeal with seat in Luxembourg. It will serve as the exclusive 'one stop shop' for a variety of actions concerning Unitary Patents, including infringement, declaration of non-infringement, and revocation actions. Given the UPC's exclusive jurisdiction, such actions cannot be instituted with national courts.

It is noted that the UPC's exclusive jurisdiction is not limited to Unitary Patents: in as far as it concerns the territories of the contracting EU Member States, this will also count for any traditional European patent, unless it is opted-out from the UPC's jurisdiction, as well as for any Supplementary Protection Certificate (SPC) that is based on a Unitary Patent or on a European patent that has not been opted out. Unitary Patents (and SPCs based thereon) cannot be opted out.

Traditional European patents and European patent applications can – at least for a transitional period of 7 years - be opted out from the jurisdiction of the UPC, unless an action concerning the patent has already been brought before the UPC . The opt out shall be for the life of the European patent or application, including the time after expiry, lapse or withdrawal, and it shall cover all designations owned by the proprietor(s) in question . Interestingly, an opt-out can also be withdrawn by the patentee, unless an action has already been brought before a national court.

Judgments of the UPC will have effect in all contracting EU Member States, and shall have effect regarding the patent as a whole. The advantage hereof is obvious: one will only need a single decision from the UPC, to put an end to pan-European infringements, contrary to the current situation where patentees have to seek injunctive relief before a multitude of national courts. However, the flipside of the coin is that the patentee can lose big: he may also lose its infringement case, or even its patent for all contracting EU Member States.

Technology transfers that comprise patent (application(s))

European patent portfolio management and enforcement strategies will have to be reviewed in the wake of the new system. However, also in technology transfers involving patents, patent applications or SPCs, whether by assignment, acquisition or licensing, one will have to take due account hereof, for instance when doing the due diligence.

Particularly in sectors like the life sciences, the value of a transaction is dependent on the value of the know-how and IP that goes with it. For the value of the IP, it is not only important that the patent portfolio covers the (to be) exploited technology and potential competitive technologies, and so for a sufficiently remaining period to recoup the investments and make a decent profit, but also that it is suitably strong to deter, and if necessary to successfully litigate against competitors. Having a Unitary Patent, or the prospect thereof, may well have an effect on the value. In principle, this could be an upward effect, because of the unitary character and the fact that it can be enforced on a pan-European basis through a single specialized patent court (the UPC). However, having all eggs in one basket also poses the aforementioned risk of losing big, and certainly in respect of patents with a weaker validity or scope, having a Unitary Patent may not impact positively on IP value. The same goes for SPCs based thereon, for European patents that are not opted-out (unless an opt-out is still possible), and for SPCs based on such not opted out European patents. Also, there are various parties in the Life Sciences who at least for the first years of the UPC want to opt-out their European 'crown-jewel' patents and SPCs, if only because they first want to see how the UPC will assess patent and SPC cases.

Therefore, also in view of technology transfers involving patents, patent applications or SPCs, proprietors should carefully consider how they should protect their inventions in Europe, through Unitary Patents, traditional European patents (and opt them out) or through national patents. Ideally, this assessment is done on a case-by-case basis, and timely before the system goes live, be it of course whilst taking account of the costs of such an exercise (and those of the Unitary Patent). Those who are interested in obtaining rights through such technology transfers may want to consider all of this when conducting their due diligence.

Another issue to be taken into account is that under Article 47(2) UPC Agreement, the holder of an exclusive licence in respect of a patent shall be entitled  to bring actions before the UPC under the same circumstances as the patent proprietor, provided that the patent proprietor is given prior notice. Only in cases where the licensing agreement provides otherwise, will this not be the case. Indeed, this corresponds to statutory rules in certain European jurisdictions, but in other European jurisdictions, such as for instance the Netherlands, only the patentee is in principle entitled to seek relief.

Further, pursuant to Article 47(3) UPC Agreement the holder of a non-exclusive licence shall not be entitled to bring actions before the Court, unless the patent proprietor is given prior notice and in so far as expressly permitted by the licence agreement.

For the patentee, who wants to be in control of the institution of court proceedings with the UPC, this is something to be taken into account when negotiating future agreements. Also, he may need to review his existing exclusive licensing agreements, and re-negotiate a provision stipulating that only he shall be entitled to bring actions before the UPC.

Also, in view of maintaining a certain degree of control over the institution by third parties of declaration of non-infringement proceedings, he may want to take similar steps in respect of the entitlement to respond to third party applications in writing for a written acknowledgment of non-infringement. After all, a refusal or failure to respond, by the patentee or the licensee, is a requirement for the third party to institute a declaration of non-infringement action with the UPC. 

The non-exclusive licensee should, on the other hand, be aware that under the UPC Agreement, he shall only be entitled to bring actions before the UPC, if – apart from giving prior notice to the patentee – he is expressly permitted to do so in the licensing agreement.

Moreover in general, professionals who advise their clients in respect of licensing agreements, should always take due account of the above when Unitary Patents or traditional European patents are potentially involved.

In this respect, it is added that in such licensing agreements, whether to be concluded or already in place, parties may also wish to make clear arrangements in respect of decisions concerning the filing of a request for unitary effect (see above), and the filing of opt-out requests and the withdrawal thereof.

Conclusion

Both the new TTBER and the upcoming Unitary Patent Package give good reason to review existing technology transfer policies, and the criteria that are formulated in the relevant agreements; however not only in respect of future deals, but also in respect of existing agreements. Certainly if there is a need to review existing patent licensing agreements on compliance with the new TTBER, and even re-negotiating them, then this would seem a sensible moment to also review (and if necessary re-negotiate) the terms that potentially impact on the position of, and control over court proceedings before the UPC.

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