New Block Exemption for R&D Agreements

Introduction

Beginning on 1 July 2023, a new block exemption regulation for research and development (“R&D”) agreements will come into force following its publication by the European Commission at the start of June this year. This replaces a previous block exemption regulation due to expire on 30 June, which provided a safe harbour for both the conduct of R&D and the joint exploitation of results from the prohibition on anti-competitive arrangements in article 101(1) of the Treaty on the Functioning of the European Union (“TFEU") since 2010. These block exemptions, as article 101(1) TFEU would restrict R&D agreements, by their nature, are collaborative endeavours involving competitors and potential competitors which might fall foul of article 101(1) TFEU and the block exemptions have proven useful in providing parties the certainty of a safe harbour from competition law whilst laying down certain conditions to ensure competition and innovation is not hampered.

The new 2023 R&D Block Exemption is largely the same in structure to the previous 2010 regulations and carries forward the same conditions for application, these being market share thresholds, access rights to results and background for collaborating parties and prohibition hardcore restrictions. However, it also includes some additional changes around excluded restrictions and protections to prevent innovation chilling.

Conditions for Application

As noted above, the general conditions for application of the 2023 R&D Block Exemption are largely similar to the 2010 R&D Block Exemption but it is helpful to recall these as well as the changes brought about by the 2023 R&D Block Exemption.

Market Share

The safe harbour created by the 2023 R&D Block Exemption will apply for the duration of the R&D project and, where the collaboration involves joint exploitation of the results, a further period of seven years from when the contract products or technologies arising from the joint or paid-for research development are first placed on the market. This exemption, however, is subject to certain market thresholds being met where the parties are competing undertakings.

Where the parties to the R&D collaboration are competing undertakings, the combined market share of the parties must not exceed 25% on the relevant product and technology markets. Competing undertakings are defined as competitors which are, or could within three years be supplying a product, technology or process which would be able to replace the contract product or contract technology on the relevant geographic market. In the case of paid for R&D that is financed by a party not carrying out the R&D itself, the market share of the financing party and all parties with whom it has entered into R&D agreement with regard to the same contract products or technologies must not exceed 25%.

In the case of an R&D agreement providing for joint exploitation of the results the safe harbour will continue to apply after the initial seven-year period so long as the combined market share of the parties does not exceed 25% on the relevant product and technology markets. If after the seven years the combined market share exceeds 25%, the exemption will continue for a further two-year period. This is a change from the 2010 R&D Block Exemption which provided for an extension of two calendar years only where the market share was above 25% but below 30% and one calendar year if above 30% following the year the threshold was exceeded.

In calculating market shares, the 2023 R&D Block Exemption provides that these are to be calculated on the basis of market sales value or volumes but if such data is not available, other market information (such as expenditure on R&D or R&D capabilities can be used). Market shares are normally calculated on the basis of previous calendar year’s data, but the 2023 R&D Block Exemption now provides that if the previous calendar year is not representative of the parties’ positions, the average market shares for the three preceding calendar years may be used.

Access Rights

A key competition concern that can arise from R&D collaboration is the ability of the parties to partition markets or access to technology and thus eliminate competition between themselves in that respect. The 2023 R&D Block Exemption works to prevent this by stipulating that each party must have full access to the know-how and results of their joint R&D for the purposes of commercial exploitation. In addition, parties must be given access to pre-existing know-how which is indispensable for exploitation of contract products or application of contract technologies. In each case, access can be subject to compensation, but it must not be so high as to effectively impede such access. The 2023 R&D Block Exemption allows two exemptions to this principle.

1. The first is where the collaboration agreement provides a plan of joint exploitation (which can include specialisation by way of exploitation where the parties allocate different tasks between each other or impose restrictions including field and territorial restrictions upon each other regarding the exploitation of results) in which case access can be restricted in accordance with that plan subject to certain conditions.
2. The second is that research performing organisations not ordinarily involved in commercial exploitation, such as research institutes or academic bodies, can limit their rights to access their research for the purposes of further development.

Joint Exploitation

Where the R&D agreement provides for joint exploitation, the results that are the subject of that joint exploitation must:

• be indispensable for the production of the contract products or application of contract technologies;
• be protected by intellectual property rights or constitute know-how.

In addition, where one or more parties are charged with production of the contract products, they must be required to fulfil the orders for supplies of the contract products from the other parties. This condition, however, does not apply if the agreement provides for joint distribution or where the parties have agreed that only one of the parties will distribute the contract products.

Hardcore Restrictions

As is common with other Commission block exemptions, the R&D agreement must not contain so-called “hardcore” restrictions on competition. For the purpose of the 2023 R&D Block Exemption these comprise:

• any restriction of the freedom of the parties to carry out research and development independently or in cooperation with third parties, in both a field unconnected to their agreement and in a connected field after the completion of their agreement;

• any limitation of output or sales, save for certain permitted restrictions in the context of joint exploitation or specialisations;

• fixing of prices when selling the contract products or licensing the contract technologies to third parties, excluding only in the context of a joint exploitation involving joint distribution, the fixing of prices charged to immediate customers, or the fixing of license fees charged to immediate licensees;

• restrictions on passively selling the contract products or license the contract technology based on territory;

• restrictions on active sales of the contract product or contract technologies in territories or to customers which have not been exclusively allocated to one of the parties by way of specialisation in the context of exploitation;

• restrictions on meeting orders of customer who may sell into other parties’ territories allocated between the parties by way of specialisation in the context of exploitation; and

• any requirement making it difficult for users or resellers to obtain the contract products from other resellers within the internal market.

Excluded Restrictions

The 2023 R&D Block Regulation, like its predecessor, lists two provisions in R&D agreements that do not benefit from the safe harbour created by the regulation:

• a prohibition on challenging the validity of intellectual property rights of the other party in the EU relating to the R&D or protecting the results of the R&D both during and after the R&D agreement (but without prejudice to the right to terminate in event of such a challenge); and
• a restriction on granting licenses to third parties to produce contract products or apply contract technologies other than in cases where the agreement provides for joint exploitation in the EU.

These provisions are identical to the 2010 R&D Block Exemption, but the main change of the 2023 R&D Block Exemption is the clarification that if an R&D agreement includes any of these exclusions, but they can be severed from the remaining body, the R&D Block Exemption will continue to apply to the remaining parts of the agreement if it is feasible and the other conditions of the regulation are still met.

Withdrawal of Safe harbour in individual cases

The 2023 R&D Block Exemption now expressly incorporates the general power of the Commission and national competition authorities to withdraw the benefit of the exemption in accordance with article 29 of Council Regulation EC No. 1/2003. That article gives the Commission (and a national competition authority where the territory of the member state in question or part of it has the characteristics of a distinct geographic market) the power to withdraw the application of a block exemption where the effects of the agreement are incompatible with article 101(3) TFEU.

In addition, the 2023 R&D Block Exemption provides some specific circumstances in which the Commission is able to withdraw and exemption pursuant to article 29, such as:

• if the existence of the R&D agreement substantially restricts the scope of third parties to carry-out R&D in relate fields;
• if the existence of the R&D agreement substantially restricts access of third parties to the relevant market for the contract products or contract technologies;
• if the parties do not exploit their results without an objectively valid reason;
• if the contract products or contract technologies are not subject in the whole or substantial part of the internal market to effective competition; and
• if the existence of the R&D agreement would restrict innovation competition in a particular field.

Conclusion

The 2023 R&D Block Exemption maintains in force an important safe harbour for R&D agreements largely following the structure of its predecessor. The additional changes to the 2023 R&D Block Exemption are representative of a continuing understanding of the importance of innovation. The ability of the Commission (and national competition authorities) to disapply the safe harbour in individual cases is an important feature that will act as an important safeguard in protecting innovation from a range of circumstances which would have not been caught under the regulation previously and will require parties to consider the broader impacts of their collaboration as opposed simply conducting a tick-box exercise on meeting the conditions for application of the safe harbour as well as keeping the impact of the R&D under review and documenting any reasons for not exploiting results. Modifications to the calculation and application of market share thresholds will be of assistance to companies and practitioners alike in applying the 2023 R&D Block Exemption (though accurate market share calculation will nonetheless prove challenging for nascent and emerging technologies in practice).