Why don’t the competition authorities understand IP licensing?

consultationThe European Commission (EC) has recently started a consultation exercise on its draft Technology Transfer Block Exemption Regulation (TTBER) and draft Guidelines for Technology Transfer Agreements.  The draft TTBER is designed to replace the current TTBER when it expires in 2014.  The draft Guidelines are being updated to reflect the EC’s current thinking on the competition issues that arise in licence agreements.  The draft documents can be found here.  The consultation exercise ends on 17 May 2013.

For readers who are not familiar with these documents, here is the nutshell summary.

Agreements that affect trade between EU member states and contain anti-competitive terms may be in breach of Article 101(1) of the Treaty on the Functioning of the European Union.  Where a breach occurs, parties may be fined up to 10% of their worldwide group turnover.  The agreement, or the offending terms, may be void.  Parties may be sued by third parties who suffer loss.  However, a breach doesn’t occur if the offending terms can be justified under Article 101(3).  That is generally up to a court to decide.

Rather than run the risk of breach, parties sometimes or often try to bring their agreement within the “safe harbour” of a block exemption regulation (BER).  Agreements that fit with a BER get automatic exemption under Article 101(3).  The BER for technology licensing is the Technology Transfer BER (TTBER), which covers patent and know-how licensing and a whole lot else besides.  BERs typically remain in force for about a decade and are then replaced.  The current TTBER is due to expire in 2014.  Hence the consultation over what should replace it.

redlineRegrettably, the EC does not seem to have published a red-line version of the two drafts, showing changes over the current documents.  IP Draughts’ excellent trainee, Christopher Beck, has done so; please let us know if you would like a copy.

In the last few days, IP Draughts has been working on a draft submission to the EC in response to its consultation.  There is plenty to react to in the two documents, but two points really jumped out when he reviewed the drafts, and a third point seems to follow a trend.

  1. Still no certainty for mid-level agreements. The TTBER continues to drift away from its original purpose as a simple checklist of what terms are, or are not, acceptable in a technology licence agreement.  This really started to happen in the 2004 TTBER; the draft TTBER takes us further on this path.  The EC has expanded its thinking on new and, in some cases, rather exotic scenarios where IP licensing causes serious competition concerns.  What we don’t have, though, is a straightforward set of rules for the majority of licence agreements that are, potentially, in breach of Article 101 but are not likely to cause competition concerns.  In particular, it is unrealistic to expect managers of SMEs and general commercial lawyers to understand and interpret complex provisions in the TTBER about market shares in technology markets and whether the parties are competitors in those markets.
  2. No-challenge clauses. For decades, transactional IP lawyers in the EU have known that, if you want to fit with the TTBER, you mustn’t include in the licence agreement any provision that prohibits the licensee from challenging the validity of the licensed IP, but it is acceptable to include a provision that allows the licensor to terminate the agreement if such a challenge is made.  The draft TTBER would tighten up on no-challenge clauses by making even a “termination on challenge” clause fall outside the TTBER.  This could have the effect of locking a party into a licence agreement with its commercial enemy.  This seems, to IP Draughts, a crazy and counter-intuitive idea, which is unlikely to be acceptable to IP owners.
  3. Software distribution is not IP licensing. It is interesting to see that the EC now considers software distribution agreements to be closer to distribution agreements than IP licence agreements, and therefore to be assessed under the BER for Vertical Agreements, rather than the TTBER.  Similarly, the Guidelines state that shrink-wrap licences are not really IP licences either, and are more in the nature of the sale of goods.  This view from a competition perspective coincides with some of IP Draughts’ thoughts from a commercial law perspective, which he has previously expressed on this blog.  It is unclear to IP Draughts how much software licensing is left to be assessed under the TTBER.  It seems from the Guidelines that software licensing where software is incorporated into a licensed product is what the EC has in mind.

brainIP Draughts perceives a sharper mind behind the draft TTBER than the one that hatched the 2004 TTBER; certainly some of the drafting changes show a more incisive approach and a better command of English.  But it is still the mind of an economist who sees dangers rather than opportunities in IP licensing, and who seems to be very remote from the practical realities of technology transfer.

6 Comments

Filed under Intellectual Property, Legal policy, Licensing

6 responses to “Why don’t the competition authorities understand IP licensing?

  1. I mean like consumer protection laws are one example: we give consumers lots of statutory rights because they are not seen as being in a position where they could eliminate disadvantageous contract terms if they could. Also perhaps because some things are “right”. One thing which has puzzled me in the UK (I’m in Oxford now) is that it always says on ATMs that withdrawals are FREE! To my knowledge from continental Europe this is ALWAYS the case, and I thought it /had/ to be free, by law. Even if it weren’t I clearly couldn’t renegotiate the terms with my bank (or a competitor bank).

    • Some ATMs, eg those at some motorway service stations, are not run by the banks but by private organisations, and they do charge a fee. Which is better, having all ATMS free but at fewer places or allowing private enterprise to fill in a gap where the banks don’t want to tread? I would say the latter, even though I have cursed in situations where the only source of cash is a machine with a charge.
      I don’t think we should confuse ourselves by looking at consumer transactions, as I think they are a special case where one party needs to be protected. For B2B contracts, which most IP licences are, Govt regulation, including competition law, should intervene to the minimum extent.
      The basic problem with the TT Reg is that it is no longer nice and simple and giving legal certainty. Instead one must second guess how an economist might define a market.
      My Anglo-Saxon mind wants legal certainty.

  2. I received the documents and printed them(!) Will read them.

    If you have more detailed arguments, it’d be nice :-)

    I guess I don’t necessarily see the problem of a “managed economy” and restricting aspects of contracts. We clearly do for many purposes, but the codification of some contract principles in law makes it clear to everyone always what is valid and what isn’t. How would you rank Scandinavia in terms of economy management?

    • My impression of Swedish contract law (based on comments from a Swedish contributor in our looseleaf work on biotech agreements, published by OUP) is that it is not too far from English law and does not have a civil code. Outside of: (a) consumer contracts, and (b) areas at the margins, like exclusion of liability in contracts; we tend to allow parties to contract on whatever terms they want, and certainly don’t force parties to remain in contracts.

  3. Hello Amelia, thanks for your comments. I have emailed you the marked-up drafts.
    I share your sense of confusion as to what the Commission is trying to achieve. I suspect they see so many types of IP licence that they are nervous about giving official approval to any one type, except with extensive caveats that give them “wriggle room” to intervene. In principle I don’t have a problem with that, as long as the wriggle room is just to allow them to change their mind, not declare the agreement to have been non-conformant with Article 101 all along. But somehow that sense of self-restraint and respect for the sanctity of contracts seems to be lacking in Eurocrats. They seem to reflect a longstanding (but slowly disappearing) continental European tradition of “managed economies”.
    I think they should forget about licence markets, technology markets, innovation markets – call them what you will – and focus on product markets. The TTBER clearly states that it only covers licensing for the purpose of manufacturing and selling licensed products, so doesn’t this already limit the TTBER?
    Extending the Commision’s hostility to no-challenge clauses marks a shift in a gradual trend. No challenge clauses were originally blacklisted in the BERs but are nowadays downgraded to “grey” clauses which are not exempted but don’t bring the entire agreement outside the BER. We now seem to be reversing decades of the development of the Commission’s thinking, and I am not sure that this isn’t just one person’s “bright idea”. I can provide you with more detailed arguments as to why this is a terrible idea, if required.

  4. Hello IP Draughts,

    Amelia Andersdotter from the European Parliament would be happy to receive a copy of your intern’s work with the changes. If it’s not too much trouble :-) Her email is amelia.andersdotter@europarl.europa.eu

    The TTBER confuses me a bit also. It removes the concept of potential competition from the license market, and it defines a license market. I’m sure that politically we have expressed the desire for IP to create product markets, and yet here we are establishing the rules for a license market created by IP, the rules of which are different, less transparent and the effects of which on the product market are very unclear.

    From where I’m sitting, it seems reasonable to strengthen no-challenge clauses. A big problem in the registered IP system (patents, trademarks, design rights, etc) is that the registrations are of low quality and poorly defined scope. Permitting mechanisms that could remedy that problem then makes sense no?

    Personally I’m not so unhappy that software distribution falls in under vertical integration. That could potentially help us address some of the problems that arise for end-consumers in highly uncompetitive platform markets, where the consumer unwittingly makes a choice of which set of products they will have access to on a particular market (say apps) when purchasing a product on a completely different market that the consumer does not necessarily connect with the other market at all (say a particular chipset for electronics).

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