Shortly before 5 pm yesterday, as IP Draughts was dreaming of the weekend ahead, an email popped into his inbox from the Law Society’s ever-helpful European Office. It alerted him to the publication of the final version of the EU Technology Transfer Block Exemption Regulation (TTBER), which will come into force on 1 May 2014. The final, substantive text, together with an updated version of the European Commission’s (EC’s) Guidelines on Technology Transfer Agreements, can be found here, though it seems they have not yet been published in the Official Journal.
In essence, the documents are changed very little from the drafts that the EC circulated over a year ago. The EC apparently received 56 responses to their consultation on the first drafts, a majority of which seemed to dislike the EC’s proposed changes to the 2004 TTBER. IP Draughts led the team that commented on the earlier drafts on behalf of both the Law Society of England and Wales and the Intellectual Property Lawyers Association. We certainly disliked the changes, and argued for a more liberal regime generally. A copy of that submission appears on the EC’s website here. This blog has discussed the drafts in brief, eg here.
For practical purposes, the main changes to the TTBER, in both the first and final drafts, are in Article 5, headed “excluded restrictions”, but which IP Draughts prefers to call the “grey list”.
First, some background. In previous TTBERs, the “hardcore restrictions” in Article 4 were known as “black-listed clauses”, and following this colour theme, Article 5 restrictions were known as the “grey-listed clauses”. Certainly, (now Emeritus) Professor Val Korah referred to them by this name when she taught competition law to IP Draughts in the 1980s. Including a hardcore/black-listed clause in your agreement brings the entire agreement outside the safe harbour of the TTBER and is very likely to result in a breach of Article 101 of the TFEU.
By contrast, including an excluded/grey-listed clause merely means that you have a clause that is not within the safe harbour, but the rest of the agreement may be within the safe harbour. The EC is suspicious of grey-listed clauses, but not to such a great extent as in the case of black-listed clauses. It is up to you to justify the inclusion of the grey-listed clause to the court, if this issue arises in litigation. In summary, it is a very high risk strategy to include a black-listed clause, and a lower risk strategy (but still risky) to include a grey-listed clause.
Two changes have been made to the grey list in the 2014 TTBER:
- Licensee improvements. Article 5 grey-lists an obligation on the licensee to assign or exclusively license back to the licensor any improvements made by the licensee to the licensed technology. Under the 2004 TTBER and its predecessors, this applied only to “severable” improvements, ie those which could be used without infringing the original, licensed technology. The EC has now abandoned the distinction between severable and non-severable improvements, and grey-lists assignments and exclusive licences of all licensee improvements.
- No-challenge clauses. Article 5 also grey-lists an obligation on the licensee not to challenge the validity of the licensed IP. Under the 2004 TTBER and all its predecessors, Article 5 went on to explain that a clause allowing the licensor to terminate the licence agreement if the licensee did mount such a challenge was not grey-listed. By implication, therefore, a clause allowing termination was within the TTBER, and in practice many, or most, licence agreements that IP Draughts has seen include such a right of termination. However, under the 2014 TTBER this “right” to terminate is limited to exclusive licence agreements.
The first draft of the 2014 TTBER would have deleted all reference to a right of termination but in the final text the EC has reinstated the right for exclusive licences only. So (if taking a “glass half full” approach) one could say that progress has been made during the consultation process. As the EC has noted in its summary of responses, some commenters (including the Law Society) objected strongly to the notion that a licensor could be prevented from terminating the licence of a party that was challenging the licensed IP. This would lock a licensor into an agreement with its enemy in litigation, and would be a disincentive to licensing. During the consultation process, IP Draughts made comments to this effect in a public meeting at which EC representatives were present, but he felt those representatives were unsympathetic in their response.
The EC has explained its change of heart in the following terms:
In light of the second consultation, the TTBER will continue to cover termination clauses in exclusive agreements when the relevant market share thresholds are not exceeded. In case of exclusive licensing the licensee generally has no incentive to have the IPR declared invalid, but may in particular use the threat of a challenge to put pressure on a smaller innovating licensor. Automatically exempting termination clauses only in cases of exclusive licensing will lead to a proper balance between, on the one hand preserving incentives to innovate and license out, and on the other ensuring that invalid IPR are removed as a barrier to innovation and economic activity. This will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees.
These comments seem to echo some points that were made in the Law Society’s comments on this issue, including:
The change would particularly prejudice SMEs who are licensors, as they are least able to defend an attack on their patent portfolio by a large licensee.
There are a few other changes in the 2014 TTBER over the 2004 TTBER, including:
- passive sales: the list of hardcore clauses previously made an exception (ie allowed) for certain restrictions on passive sales into another licensee’s [EU] territory for a limited, 2-year period. This exception has now been removed. In IP Draughts’ experience, this was rarely an issue in negotiations, so the effect of this change is probably minimal.
- software licensing: Recital (7) states that the TTBER does not apply to agreements for the “mere reproduction and distribution of software copyright protected products as such agreements …are more akin to distribution agreements”. In other words, these agreements should be considered under the block exemption regulation for vertical agreements. In IP Draughts’ view, the EC is having second thoughts about the inclusion of software licensing within the 2004 TTBER. Actually, IP Draughts has come to a similar conclusion in recent years, ie that much software supply is closer in concept to a supply of goods than it is to a licensing of technology.
The exclusion of certain software licences is further explained in the new Guidelines for Technology Transfer Agreements:
(62) The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be “production” within the meaning of the TTBER and thus is
not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by Commission Regulation (EU) No 330/201042 and the Guidelines on Vertical Restraints. Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end users. Nor do they cover the licensing of software copyright and distribution of software by means of “shrink wrap” licences, that is, a set of conditions included in the package of the hard copy which the end user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.
(63) However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.
IP Draughts is also pleased to see some improvements in the drafting of the final 2014 TTBER, compared with the first draft, including some which address points that the Law Society made on the definitions of what are now “technology rights” and “technology transfer agreement”.
Overall, IP Draughts has the sense that the EC’s Competition Directorate continues to have a deep distrust of IP rights, and of commercial parties and their lawyers who argue for a more liberal competition law regime for IP licensing. However, at the margins, and in relation to drafting issues, he feels the EC has listened to the comments of the Law Society and others, and has made intelligent revisions to the text of the TTBER (which was not always the case when previous TTBERs were drafted).