Blog Post

The new competition rules for technology transfer agreements

On 18 April, Bruegel hosted a Competition Policy Lab. Competition Policy Labs offer an independent ‘hands-on’ platform for practitioners and academics to meet and discuss hot topics on the competition policy agenda. This time we had Anna Vernet and Luc Peeperkorn for the Commission, and Jacques Crémer from the Toulouse School of Economics.

By: and Date: May 7, 2013 Topic: Digital economy and innovation

The European Commission has started a public discussion on the new competition rules for technology transfer agreements, ie contracts in which a licensor permits a licensee to exploit its patents, know-how or software for the production of goods and services. Common licensing practices include cross-licensing and patent pools. The current rules are set to expire in April 2014. The Commission has drafted a proposal for a revised framework and has opened a consultation on it (more info here). The deadline for submission is 17.5.2013.

On 18 April, Bruegel hosted a Competition Policy Lab. Competition Policy Labs offer an independent ‘hands-on’ platform for practitioners and academics to meet and discuss hot topics on the competition policy agenda. This time we had Anna Vernet and Luc Peeperkorn for the Commission, and Jacques Crémer from the Toulouse School of Economics.

The Commission’s main proposed changes

Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits anticompetitive agreements. Companies are required to self-assess if the agreements they enter into infringe Art. 101 TFEU. The criteria laid down by the Commission in the Technology Transfer Block Exemption Regulation (TTBER) and the Guidelines are meant to help companies in performing this task, particularly by indicating the boundaries of so-called ‘safe harbours’ ie conditions that, if respected, would normally guarantee conformity with Art. 101 TFEU.

The underlying philosophy of the Commission’s approach is that technology transfer agreements are generally good for society, because they foster innovation and normally bring about short and long-term benefits for consumers. Nonetheless, these agreements may entail anti-competitive effects: for example, exclusive agreements may restrict competition; or grant-back clauses – under which the licensee has to disclose and transfer all improvements to the licensor – may reduce the incentive for innovation by reducing the expected reward for risky investments. Under certain conditions, agreements between competitors can also foster collusion or generally determine an increase in the price paid by end consumers.

During the workshop, Anna Vernet and Luc Peeperkorn explained the main proposed changes to the framework. In particular:

  • Market share thresholds in TTBER. To benefit from the safe harbour, the undertakings’ market share cannot exceed 20 percent when they are competitors and 30 percent in each market in which they are non-competitors. It is now proposed that the 20 percent threshold shall also apply when the licensee owns a technology that it only uses for in-house production, and which is substitutable for the licensed technology.
  • Hardcore restrictions in TTBER. A provision on passive sales is proposed to be removed from the hardcore restrictions’ list, ie those provisions for which exemptions can never be automatically granted. The Commission acknowledges that this restriction is sometimes necessary and plans to align TTBER with its general approach to vertical agreements by giving this message in the Guidelines.
  • Settlements in the Guidelines. It is proposed to be clarified that certain specific type of settlements may breach Article 101, in particular when a licensee accepts more restrictive terms than what it would have accepted solely on the basis of the value of a licensor’s technology. This practice is often referred to as ‘pay-for-delay’ or ‘reverse payment patent settlement’.
  • Patent pools in the Guidelines. The version of the Guidelines in public consultation provides a safe harbour that covers both the creation of a patent pool and its subsequent licensing out.
  • Grant-backs and termination clauses. The proposed TTBER does not anymore distinguish between different types of exclusive grant-backs. Moreover, clauses that allow termination of the agreement if the licensee challenges the validity of a technology cannot anymore benefit from the safe harbour of the TTBER.

The discussion

Professor Jacques Crémer commented mostly on market shares and patent pools.

His first concern was that the TTBER and the Guidelines could alter the relative cost of licensing in favour of small undertakings because of the market share thresholds: an agreement with a small company ensures legal certainty whereas an agreement with a big company could breach Article 101. Prof. Crémer pointed out that it might be more efficient to grant licenses to bigger companies, or even to all companies on the market, through a broad non-discriminatory license, because this would make the innovation available to a wider audience. In his view, the Commission should promote broad licensing at least in the Guidelines, and should provide clear explanations about why exceeding the market share thresholds is potentially anticompetitive.

In their answer to Prof. Crémer, Ms Vernet and Mr Peeperkorn suggested that any regulation would entail a form of distortion of the incentive to comply with it. Regulation is however needed for at least two reasons: first, companies whose agreements are covered by the safe harbour enjoy legal certainty because they can be reasonably sure that the Commission will not contest their agreements; second, it is good to have harmonisation of competition enforcement by national courts,  national competition authorities and the Commission and this is partly achieved by having a block exemption regulation and guidelines. A different question is: given that we have a block exemption regulation, are current market share thresholds low? According to Mr Peeperkorn, if anything, the 20 and 30 percent thresholds are high, in particular when taking into account possible cumulative effect scenarios: even agreements falling below the current thresholds can raise anticompetitive issues such as potential market foreclosure (ie a limit to competition achieved through privileged access to an input) or incentives to collude. Mr Peeperkorn also stressed that no rule in the current regulation prevents broad non-discriminatory licensing; in principle non-exclusive agreements without further restrictions are likely to be pro-competitive.

On patent pools, Prof. Crémer said that two conditions in the proposed guidelines are particularly relevant: that (a) sufficient safeguards are adopted to ensure that only essential technologies are pooled and (b) each IPR holder can still license out outside the pool. Prof. Crémer commented that independent licensing is crucial and could be enough to guarantee that every technology-transfer agreement created voluntarily is beneficial, meaning that the condition on essentiality is potentially negative because it discourages beneficial pools. This argument was first introduced by Lerner and Tirole (2004): the economic logic is based on the double marginalisation effect for which the profit maximising price of a pool of complementary patents is lower than the sum of the profit-maximising prices of the patents taken singularly. For this reason a patent pool of complementary patents would be pro-competitive and socially desirable. However, whereas essentiality is a technical condition, substitutability is an economic one: patents can be complements at low prices and substitutes at high prices. According to Lerner and Tirole, the independent licensing clause solves the issue: only socially-desirable pools become strongly stable once you include this provision. Hence, there is no need to have a condition on the essentiality of patents.

Ms Vernet and Mr Peeperkorn explained that economic theory clearly suggests that patent pools are more likely to have anti-competitive effects if substitutable technologies are included in the pool. To be provocative, one could say that Lerner and Tirole could justify a cartel agreement in which the undertakings can still sell independently from the pool.

The Regibeau and Rockett study (2011) describes the literature and finds contradictory views: while they recognise the generality of the Lerner-Tirole result, they also find several special cases in which it is not possible to determine if a patent pool is beneficial. For example, the case of patent pools offering different menus of patents to outsiders and the case of incomplete pools, ie pools not gathering all relevant patents in the field, cannot be assessed on the basis of Lerner and Tirole. These points ultimately suggest that the Commission should not exclude the ‘essentiality condition’ from the Guidelines, and it should also assess on a per-case basis pools involving non-essential patents.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

Buy now, pay later: the age of digital credit

A relatively new fintech market, BNPL is currently not regulated in the EU, meaning that consumers do not have the same protection level as they do for other credit products.

By: Maria Demertzis Topic: Digital economy and innovation Date: May 17, 2022
Read about event More on this topic
 

Upcoming Event

May
18
09:30

Adapting to European technology regulation: A conversation with Brad Smith, President of Microsoft

Invitation-only event featuring Brad Smith, President and Vice Chair of Microsoft who will discuss regulating big tech in the context of Europe's digital transformation

Speakers: Maria Demertzis and Brad Smith Topic: Digital economy and innovation Location: Bibliothéque Solvay, Rue Belliard 137A, 1000 Bruxelles
Read about event
 

Upcoming Event

May
19
15:00

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read article More on this topic
 

Blog Post

Insights for successful enforcement of Europe’s Digital Markets Act

The European Commission will enforce digital competition rules against big tech; internally, it should ensure a dedicated process and teams; externally, it should ensure cooperation with other jurisdictions and coherence with other digital policies.

By: Christophe Carugati and Catarina Martins Topic: Digital economy and innovation Date: May 11, 2022
Read about event More on this topic
 

Upcoming Event

Jun
7
10:30

Future of Work and Inclusive Growth Annual Conference

Annual Conference of the Future of Work and Inclusive Growth project

Speakers: Erik Brynjolfsson, Francis Green, Ivailo Kalfin, Laura Nurski, J. Scott Marcus, Anoush Margaryan, Julia Nania, Poon King Wang and Fabian Stephany Topic: Digital economy and innovation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article
 

External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
Read article
 

Blog Post

How a European Union tariff on Russian oil can be designed

The European Union should apply a tariff on imports of Russian oil; it can be accompanied by a quota for a gradual, conditional phase-out of all Russian oil imports.

By: David Kleimann, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: April 29, 2022
Read article
 

Opinion

EU risks letting Putin’s gas divide-and-rule strategy win

The 2 May meeting of EU energy ministers should deliver strong and common EU action. Failing to do so would undermine Europe’s unity, energy security and foreign policy.

By: Agata Łoskot-Strachota, Simone Tagliapietra and Georg Zachmann Topic: Global economy and trade, Green economy Date: April 29, 2022
Read article More by this author
 

Opinion

Europe must get serious about cutting oil and gas use

As energy security risks increase, European governments must stop subsidising oil and gas, and ask people to consume less.

By: Simone Tagliapietra Topic: Global economy and trade, Green economy Date: April 29, 2022
Load more posts