Block Exemption Regulation For Research and Development Agreements
The second block exemption regulation issued by the European Commission (the “Commission”) on 14 December 2010 addresses research and development agreements (the “R&D BER”).
The R&D BER entered into force on 1 January 2011. It sets out the parameters of a “safe harbour” - an agreement falling within it is deemed to comply with EU competition law without the need to carry out an in-depth assessment of its effects on competition. The existence of the safe harbour provides companies with a measure of regulatory certainty as it allows them to implement R&D agreements safe in the knowledge that they comply with EU competition law.
There is, however, no presumption that R&D agreements that do not benefit from the safe harbour breach EU competition law. Such agreements must be individually assessed to determine whether they have anti-competitive effects. If so, it must be determined whether such effects are outweighed by any pro-competitive effects. Such assessments are undertaken by the parties themselves (i.e. there is no notification or pre-clearance process) and it is in this context that the guidance accompanying the R&D BER is particularly useful.
The safe harbour
The R&D BER covers a wide range of R&D agreements, including agreements governing joint or “paid for” R&D of products or technologies - in both cases including or excluding joint exploitation of the results of the R&D.
As is common for EU block exemption regulations issued in recent years, the primary measure used for assessing whether an R&D agreement benefits from the safe harbour is the combined market share of the parties to the agreement: an R&D agreement will fall within the safe harbour if the combined market share of the parties to the agreement does not exceed 25% in any of the relevant markets affected by the agreement. Depending on the nature of the R&D it may be necessary to assess its impact on a number of different markets:
if the R&D relates to the improvement of existing products, the product market for such products and, if the improved product is an intermediary product, potentially any relevant downstream markets for products incorporating the intermediary product;
if the R&D covers intellectual property rights (“IPRs”) that are marketed separately, any relevant technology market; and/or
in certain industry sectors (e.g. pharmaceuticals), the impact of the R&D agreement on competition in innovation (i.e. competition in the research efforts themselves).
Restrictions of competition by object
The R&D BER specifies a number of so-called “hardcore restrictions”, the inclusion of which will take the entire R&D agreement outside the safe harbour regardless of whether the combined market share exceeds the 25% threshold. “Hardcore restrictions” include provisions that have as their object:
restricting the freedom of the parties to carry out R&D (independently or with third parties) in a field unconnected with that covered by the R&D agreement or, after the completion of the joint R&D, in the field to which the R&D agreement relates;
limiting output or sales, except for: (i) setting production targets in the context of joint production; (ii) setting sales targets in the context of joint distribution or licensing; (iii) practices constituting specialisation in the context of exploiting the R&D results; and (iv) restricting the freedom of the parties to manufacture, sell, assign or license products or technologies that compete with the products or technologies that are the subject of the agreement during the period for which the parties have agreed to jointly exploit any R&D results;
fixing prices when selling the product or licensing the technologies to third parties, except vis-à-vis immediate customers or licensees, if any joint exploitation includes joint distribution or licensing;
restricting the territory in which, or the customers to whom, the parties may passively sell or license, except for any requirement to exclusively license the results of the R&D to another party;
limiting active sales of products or technologies in territories or to customers which have not been exclusively allocated to one party by way of specialisation in the context of exploitation of R&D results; and
restricting the ability of users or resellers to obtain the products from other resellers.
Once the Commission has determined that an R&D agreement constitutes an infringement by object, it is not required to analyse the actual effects of the agreement on the market. Such an agreement is also unlikely to have pro-competitive benefits that outweigh its anti-competitive effects.
Clauses and agreements falling outside of the safe harbour
In addition to the hardcore restrictions outlined above, there are two types of so-called “excluded restrictions” that will not benefit from the safe harbour:
obligations not to challenge the validity of IPRs held by the parties that are relevant to the joint R&D; or
obligations not to grant licences to third parties to manufacture the products or apply the technologies unless the R&D agreement provides for the exploitation of the results by at least one of the parties and such exploitation takes place in the EU vis-à-vis third parties.
In contrast to the hardcore restrictions, the presence of excluded restrictions does not mean that the remainder of the agreement cannot benefit from the safe harbour.
Any agreements (and excluded restrictions) that do not benefit from the safe harbour need to be individually assessed to determine whether or not they have anti-competitive effects and, if so, whether such effects are outweighed by any pro-competitive benefits the R&D agreement may have. To do so, the parties will need to be in a position to demonstrate that each of the following cumulative conditions is met:
The R&D agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress. The R&D BER recognises that R&D agreements can result in significant efficiency gains. For instance, the combination of complementary skills and assets may result in improved and/or new products and technologies which, in the absence of joint R&D efforts, may have taken much longer to be developed or may not have come to market at all. In addition, joint R&D may result in lower costs and lead to wider and faster dissemination of knowledge that, may itself result in further innovation which builds on the results of the joint R&D.
The restriction of competition giving rise to the efficiency gains must be indispensable to their attainment. In other words, restrictions must not go beyond what is absolutely necessary and the parties should always use the least restrictive means of achieving any efficiency gains. In this context, the guidance accompanying the R&D BER makes it clear that hardcore restrictions are unlikely to be considered indispensible.
Pass-on of benefits to consumers
The parties to an R&D agreement must allow consumers a fair share of the benefit resulting from the efficiency gains (e.g. by way of lower prices, superior product quality or greater variety of products). In other words, efficiency gains that only benefit the parties are insufficient to justify cooperation between competitors.
No elimination of competition
Finally, any R&D agreement that permits the parties to eliminate competition in respect of a substantial part of the products or technologies in question will not comply with EU competition law.
The new R&D BER does not differ dramatically from the rules previously applicable to R&D cooperation. The Commission clearly considered the pre-existing regime to be broadly satisfactory. Accordingly, R&D agreements continue to constitute the most favourably treated category of horizontal cooperation agreement (as demonstrated by the high 25% market share threshold used for the safe harbour).
The Commission has, however, taken the opportunity to update and modernise the applicable rules. In particular, the scope of the safe harbour for R&D agreements has been widened to expressly include “paid-for” research and the rules relating to joint exploitation of the results of R&D have been clarified. As a result, the parameters of the safe harbour are now both clearer and less rigid - a welcome development for parties attempting to assess whether or not their existing and new R&D agreements comply with EU competition law.
 The R&D BER contains two-year transitional arrangements in respect of agreements which complied with the block exemption regulation previously in force but which do not comply with R&D BER.
 It is, however, possible to provide for termination of the R&D agreement if one of the parties challenges the validity of such IPRs.