Changes in the Limits on Technology Licensing in the European Union

When technology owners commercialize their technology by licensing their patents, know-how or software to third parties, they often want to place restrictions on each licensee’s use of the licensed technology. Common restrictions include territorial or field of use limitations, limits on patent challenges, and an obligation to grant back rights to improvements made by the licensee. Some of these restrictions are permissible ways to maximize the value of technology, while others may be legally viewed as an unacceptable restraint of trade. In the United States, these issues are generally resolved under the antitrust laws, which rarely limit what parties to technology licenses can do. In the European Union, similar issues are resolved by reference to “competition law,” which can be far more restrictive. EU competition law consists of statutes and detailed regulations that try to balance the rights of technology owners with the broader goal of maximizing the free flow of commerce in a single market of twenty-eight European counties.

Article 101 of the Treaty on the Functioning of the EU broadly prohibits anticompetitive agreements and practices in the EU. However, Article 101(3) provides that the EU Commission (the EU’s executive branch) may declare the broad prohibition in Article 101 to be inapplicable to agreements or provisions in agreements that contribute “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.” To satisfy this standard, restrictive provisions in agreements must be indispensable to the attainment of the stated objectives and must not threaten to substantially eliminate competition.

In applying this standard, the EU Commission recognizes that technology licensing agreements are usually pro-competitive, but that they can sometimes be used to allocate markets or otherwise restrain competition. Accordingly, the EU Commission has long been willing to consider on a case-by-case basis whether particular license restrictions are permissible. Unfortunately, this can be an expensive and time-consuming process that is often impractical for licensors and licensees.

To provide a more workable approach, the EU adopted a Technology Transfer Block Exemption Regulation (the “Regulation”) in 2004. The Regulation provides a higher degree of certainly by approving any technology license agreement that enables the licensee to produce licensed products, unless the agreement includes any of a list of forbidden limitations and restrictions. Under the terminology used in the Regulation, such approved agreements are “exempted” from the coverage of Article 101. On March 21, 2014, the EU adopted a new modified version of that Regulation.

Most of the Regulation remains unchanged. The Regulation still applies only to two-party agreements, and not to multi-party agreements such as patent pools. The Regulation is still available only for technology licenses between competitors with a combined market share of less than 20%, and between non-competitors with a combined market share of less than 30%. The Regulation still does not exempt agreements that have certain “hardcore” restrictions, such as resale price maintenance, reciprocal output limitations between competitors, unnecessary restrictions on a licensee’s development and commercialization of its own technology, or the allocation of markets or customers by competitors in cross-license agreements covering competing products.

However, in an attempt to achieve more clarity and more consistency with other EU laws, the new Regulation makes several significant changes in the permissible scope of some well-established practices:

• The original Regulation was not clear about whether it would exempt a provision that required that a licensee buy raw material or equipment from the licensor in order to use a licensed trademark. That type of provision is now expressly exempted (that is, approved) under the revised Regulation so long as the raw material or equipment is directly related to the production of the licensed products.
• The Regulation has always limited the territorial restrictions that can be imposed on licensees, and has detailed rules that apply separately to competitors and non-competitors. The Regulation has been somewhat more tolerant of such limitations between non-competitors, and has permitted license agreements between non-competitors that limit the territories in which each licensee can actively sell licensed products. However, the Regulation has forbidden most agreements between non-competitors that impose limits on the right of a licensee to “passively” market products, which is defined as accepting unsolicited orders from non-licensed territories. To address the potential need for a licensee to have at least some protection while it develops a new territory, the Regulation had allowed an exception to that general rule, permitting a new licensee to be protected from competitive passive marketing during the first two years of a license. That two-year exception has been eliminated from the revised Regulation.
• The Regulation has always permitted the licensor to require the licensee to grant back a nonexclusive license to improvements to the licensed technology that the licensee develops. But the Regulation has generally forbidden exclusive license-back requirements, which have the effect of preventing the licensee from commercializing its own improvements. In the past, the Regulation allowed an exception for terms that barred a licensee only from commercializing “non-severable” improvements directly related to the licensed product. That exception has been eliminated, and now any kind of exclusive grant-back obligation is forbidden.
• The Regulation has never permitted provisions that bar a licensee from challenging the validity of patents or other intellectual property rights in the licensed technology, since the EU Commission views the elimination of invalid IP rights as pro-competitive. The revised Regulation now also disallows the increasingly common practice of reserving the right to terminate a non-exclusive license if the licensee challenges the validity of the IP rights in the licensed technology. The Regulation does not mention, and may still permit, the even more common practice of a licensor reserving the right to increase the royalty rate if there is an unsuccessful challenge by the licensee.

It is important to remember that the failure of any license agreement to qualify for the protection of the Regulation does not necessarily mean that the agreement, or any questionable term, is illegal. But it does mean that the parties would be at risk in using any potentially anticompetitive terms unless they were approved by the EU Commission on a case-by-case basis. Many U.S. technology owners have viewed the use of the Regulation as a tedious exercise, but one that had the saving benefits of avoiding such expensive case-by-case analysis and providing more certainty about what licensing limitations would be permitted in the EU. Despite the EU’s claim that the new Regulation is “more user friendly,” few companies are likely to find the process significantly less tedious. However, the EU has been responsive to concerns about ambiguity, so the revised Regulation does provide the benefit of more certainty.