Why don’t the competition authorities understand IP licensing?

The 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.

Regrettably, 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.

IP 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.

What happens to a sub-licence when the head licence is terminated?

Photo taken by IP Draughts from London Eye during London Olympics 2012

You can wait ages for a bus, and then several arrive at the same time.  Similarly, you can wait decades for any case law on the rights of a sub-licensee when the head licence terminates, and then find several cases in short succession.

This blog has reported on a pair of recent German cases where it was decided that a sub-licence of copyright survived termination of the head licence.  The comments to that posting discuss a similar position under US laws, apparently based on the law of agency.  However, for English authority, IP Draughts has had to dredge up the 1925 case of Austin Baldwin v Magnetic Car Company (1925) 42 RPC 454, which was understood to confirm that a sub-licensee has no greater rights than the head licensee, so that when the head licence terminates, so does the sub-licence.

Now, at last, we have a modern, English case on the subject.  In VLM Holdings Limited v Ravensworth Digital Services Limited [2103] EWHC 228 (Ch), decided on 13 February 2013 and reported here, Mann J has considered the rights of a sub-licensee of software in just this situation.

In essence, Mann J considered that there was no one-size-fits-all answer to this question.  He was not prepared to follow the submission of the IP owner’s counsel, that the legal maxim nemo dat quod non habet should be followed.  (IP Draughts is surprised to see Latin in an English court judgment.  He thought Lord Woolf had banned Latin from being used in the English courts.  A rough translation of this expression would be “no-one can give what he doesn’t own”.)

In Mann J’s judgment:

The real question is …as to the scope of the authority given by the head licensor to the sub-licensor.  That depends on all the facts. If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor (copyright owner) must be taken as giving the ultimate permission himself, on normal agency principles.

The facts of this case had some distinctive features.  The IP owner and the head licensee were both in the same group of companies and had the same directors.  Mann J considered that the conduct of the IP owner was such as to grant agency authority to the head licensee to bind the IP owner to the terms of the sub-licence.  Mann J also considered various other legal principles put forward by counsel for the sub-licensee, including estoppel.

IP Draughts’ sense is that IP owners as a class should not panic as a result of this case, which turned largely on its distinctive facts.  IP owners should continue to include in their licence agreements a provision that states that sub-licences automatically terminate when the head licence terminates (obviously this is only appropriate if sub-licensing is allowed in the head licence agreement).

The key point is that English law is now less absolute than it was before, and perhaps a little closer to US law on this subject.  Parties should address the question of whether sub-licences survive in the contract, rather than make assumptions.

New draft EU TT Regulation: more tinkering at the edges

What follows is rather technical.  It may be of less general interest than, say, our recent posting about standard royalty rates.  The latter was widely re-tweeted and was even copied and pasted, with IP Draughts’ permission, into the January issue of the Journal of the (UK) Chartered Institute of Patent Attorneys.  Nevertheless, the subject of today’s posting is very important to anyone drafting an IP licence agreement for a European territory.

First, some legal context.  Article 101 of the Treaty on the Functioning of the European Union prohibits certain anti-competitive agreements.  Many exclusive IP licence agreements whose licensed territory includes all or part of the EU are, in principle, likely to be caught by Article 101.  The EU Technology Transfer Block Exemption Regulation (“TTBER”) provides a safe harbour from Article 101  for “technology transfer agreements” that come within the TTBER’s scope.  The TTBER mainly covers technology licensing agreements, as well as some assignments where part of the risk remains with the assignor (as in the case of ongoing royalty obligations).

TTBERs typically last for about 10 years and are then replaced by a new TTBER.  The current one is due to expire in 2014.  About a year ago, the European Commission began a consultation on what should replace it.  IP Draughts was one of the main authors of a response to that consultation that was made jointly by the IP Working Party of the Law Society of England and Wales and the (UK) Intellectual Property Lawyers’ Association.  That response can be found here.

The European Commission has now moved on to the next stage of its consultation by issuing a draft of a new TTBER and a draft of a new version of its Guidelines on Technology Transfer Agreements.  The European Commission’s own summary of the main changes over the current versions of these documents can be found here, and this document is recommended for anyone wanting a quick overview of the main changes.

IP Draughts’ biggest criticism of the current TTBER is the extent to which it is a document written for economists rather than for IP lawyers.  With earlier versions of the TTBER, it was a mechanical exercise (ie one that this jobbing IP lawyer could manage) to compare the terms of one’s licence agreement with the terms of the TTBER and determine whether the agreement was within the safe harbour.  Under the current TTBER, it is necessary to consider more complex issues such as the market shares of the parties (not just in product markets, where one’s client may be able to help, but also in technology markets – a concept that IP Draughts finds troublesome) and whether they would be considered to be competitors.  The European Commission seems to be very suspicous of licence agreements between competitors or where one or both parties has significant market power (which has a wider meaning that “dominant position” for the purposes of Article 102).

Regrettably, in the draft TTBER the European Commission has not taken the opportunity to make life simpler for licensing parties.  The draft is mostly identical to the current TTBER.  It does, however, including some revisions that seem to IP Draughts to be tinkering around the edges.

Some of the changes seem to be dealing with some highly specific situations, eg the reference in Article 3(2) to the situation where the licensee does not compete with the licensed technology but has a subsitutable technology that it uses for in-house production.  An impression is given that the European Commission is addressing some obscure points that have occurred to it; perhaps it has been faced with such situations in cases that have come before it.

Looked at from the perspective of mainstream, plain vanilla licence agreements, two points, in particular, jumped out on first reading the document:

1. Article 5(1)(b) continues to exclude from exemption (ie as a “grey” clause rather than a “hardcore” clause) obligations on the licensee not to challenge the validity of the licensor’s IP.  However, there is now a new part to this paragraph which states that clauses allowing a licensor to terminate the agreement if the licensee challenges the licensor’s IP are also excluded from the block exemption.  For many years, it has been a standard way for contract drafters to “get around” the prohibition on no-challenge clauses to draft instead a clause allowing termination if a challenge is made.  Now, it seems, a licensor is to be locked into an agreement with a licensee who “declares war” on it by challenging its IP.  This seems highly undesirable.
2. The IP definitions in Article 1 are in a muddle.  The chief definition is that of “technology” which is really a definition of IP rather than of the technology that is protected by the IP.  It is then unclear whether, when the word “technology” is used in other definitions, eg “technology transfer  agreement”, it has that defined meaning.  More seriously, though, a definition of “intellectual property rights” has been introduced, which IP Draughts is guessing was done for the purposes of Article 1(1)(c) which refers to “other intellectual property rights”.  However, this definition, which includes trade marks (trade mark licensing, per se,  is not within the scope of the TTBER), doesn’t work in relation to the reference to “intellectual property right” in Article 2(2).

IP Draughts expects that there will be other changes that call for comment.  Do readers have any views on this package of documents?