Co-author: Anna Rother
In July 2023, the EU Commission will introduce new competition rules for research and development (“R&D”) agreements which will likely make it more difficult to attain legal certainty for R&D agreements. While the parties to such agreements will still have to share the foreground IP and abide by market share thresholds for the block exemption from the prohibition of cartels to apply, the introduction of a completely new innovation threshold is expected.
The current draft provides that, in case the parties compete in innovation only (and not on the product and technology / licensing markets), there need to be at least three additional competing and comparable R&D efforts in order for the block exemption to apply. This would lead to practical issues and legal uncertainty. It is unclear how undertakings are supposed to examine the existence of additional R&D efforts and their comparability to their own project, especially if confidential basic R&D is concerned. As a result, more R&D agreements will be subject to an individual and complex examination under the prohibition of cartels in Art. 101 (1), (3) Treaty on the Functioning of the European Union (“TFEU”), if the Commission does not change its plans due to the critical feedback it received in the public consultation of the draft regulation.
In the life sciences sector, R&D co-operations are a common occurrence as parties seek to combine their expertise in highly specialized areas. In the field of drug discovery and development in particular, the stimulus for a new drug may come from a smaller, research-oriented company or a university, whereas fundamental research relied on and experience with large scale production may lie with more experienced enterprises. One example is the co-operation between the German start-up Biontech and Pfizer for the development and production of the Covid vaccine. Co-operation with established pharmaceutical companies can be an option for those without the financial means to cover the immense cost of developing and obtaining approval for a new drug. Major pharmaceutical players have indicated that they see the bulk of future R&D occurring collaboratively between different companies due to the complexities of drug development.
Article 101 (1) TFEU aims to protect the internal market. It prohibits concerted practices and agreements between undertakings which restrict competition. Article 101 (3) TFEU stipulates an exception to the general rule in cases where restrictions of competition are (i) indispensable for (ii) improving the production or distribution of goods or promotion of technical or economic progress (i.e. cause efficiencies) and (iii) consumers receive a fair share of the benefits and (iv) the agreement does not afford the parties the possibility to eliminate competition in respect of a substantial part of the products in question.
Specifically for R&D agreements, the Commission has adopted the Block Exemption Regulation (EU) No 1217/2010 on the application of Article 101 (3) TFEU to certain categories of R&D agreements (“R&D BER”). It defines categories of R&D agreements which are considered to fulfill the conditions of an exemption from the prohibition of cartels in Article 101(3) TFEU and which are therefore permissible under competition law. Lack of compliance with the criteria of the R&D BER does not mean that a co-operation infringes competition law. However, an individual and complex assessment has to be made as to whether (i) the co-operation restricts competition and, if affirmative, (ii) whether it benefits from an individual exemption pursuant to Article 101(3) TFEU.
The R&D BER is currently under review. Initially, it was due to expire on 31 December 2022. In September 2019, the Commission launched a review and evaluation process on a potential extension and amendment of the R&D BER. The first public consultation was launched in November 2019. The results of the first public consultation, a summary of the National Competition Authorities contributions as well as an evaluation support study were published. A Staff Working Document from May 2021 identified possibilities for improvement regarding effectiveness and coherence of the block exemption regulation.
In June 2021, the Commission began its impact assessment, including a public consultation, targeted questionnaires as well as a questionnaire to the National Competition Authorities. Parts of the results of the consultation were published. On 1 March 2022, the Commission published drafts of the revised R&D BER for stakeholder comments. The Commission published the results of this further public consultation on its website. In September 2022, it organized an online workshop to consult stakeholders on its proposals for revising the R&D BER. A summary of the workshop was made available. With Regulation (EU) No 2022/2455, the Commission extended the period of application of Regulation (EU) No 1217/2010 until 30 June 2023. A new R&D BER is thus expected to enter into force on 1 July 2023.
The current R&D BER covers R&D agreements between two or more parties on joint R&D of contract products or contract technologies and / or on the exploitation of the joint results. Moreover, it covers “paid-for R&D agreements”, where one party finances the R&D of the other, as well as the exploitation of the results of the paid-for R&D.
In order to benefit from the exemption, the agreement needs to grant all parties full access to the final R&D results including intellectual property rights (“IP”) and know-how, so-called “foreground IP” (there are certain exceptions in the case of joint exploitation of the results and for research institutes, academic bodies, or undertakings which supply research and development as a commercial service). If the R&D agreement provides only for joint or paid-for R&D, and not for joint exploitation of the results, each party must be granted access to pre-existing know-how of the other party, if this know-how is indispensable for the purposes of the exploitation of the results (“background know-how”). Any joint exploitation may only concern IP rights or know-how indispensable for the manufacture of the contract products or the application of the contract technologies.
Additionally, market share thresholds and exemption durations have to be considered.
If the parties to the R&D agreement are not competing,
If the parties are competing undertakings,
After the exploitation period of seven years has expired, the exemption continues to apply as long as the combined market share of the parties does not exceed 25 % on the relevant product and technology markets (in addition, there are transition periods of up to two years).
The block exemption does not apply to R&D agreements as a whole if they contain hardcore restrictions. This is the case if their object is – directly or indirectly – to restrict the parties’ freedom to carry out any R&D in an unconnected field or to impose restrictions in a connected field after completion of the R&D agreement. Other hardcore restrictions are the limitation of output or sales, the fixing of prices, certain territorial or customer restrictions and other sales restrictions (there are also exceptions from the hardcore restrictions).
Furthermore, the block exemption does not apply to certain obligations contained in R&D agreements. These excluded restrictions cover obligations not to challenge the validity of related IP rights after the completion of the R&D. Another excluded restriction is the obligation not to grant licences to third parties unless the R&D agreement (i) provides for the exploitation of the results of the R&D by at least one of the parties and (ii) such exploitation actually takes place in the internal market vis-à-vis third parties.
One of the main changes in the draft R&D BER is the inclusion of a new threshold for R&D agreements on innovation. It affects so-called undertakings competing in innovation. An undertaking competing in innovation is an undertaking which is not competing for an existing product and/or technology. It independently engages in or – in the absence of the R&D agreement in question – would be able to independently engage in R&D efforts which concern
In that regard, “R&D poles” mean R&D efforts directed primarily towards a specific aim or objective, but not yet specific in terms of a technology or a product (i.e. basic R&D). R&D poles can have as their object a substantially broader target than products or technologies on a specific market.
Where two or more of the parties to the R&D agreement are such undertakings competing in innovation, the exemption applies for the duration of the R&D if, at the time the R&D agreement is entered into, there are three or more additional competing and comparable R&D efforts. Hence, there must be four competing and comparable R&D efforts for the block exemption to apply.
For the purpose of applying this threshold the assessment of comparability of competing R&D efforts shall be made on the basis of elements such as
It remains unclear, however, how undertakings are supposed to assess whether there are three other existing competing and, in addition, comparable R&D efforts in case of initially confidential R&D projects. In the pharmaceutical sector, ongoing R&D in the field of drug development eventually becomes public knowledge through mandatory publication of clinical drug research conducted within the European Union. However, such publication requirements do not extend to the preceding steps of the pre-clinical phase and conclusion of R&D co-operation agreements and therefore do not provide the information necessitated by the draft R&D BER at a time the R&D agreement at issue is likely to be concluded.
The draft R&D BER also proposes to simplify the applicable transition periods if market shares increase above the threshold for exemption. Concerning the calculation of market shares, the draft considers the preceding calendar year or the average of three preceding years, depending on the respective market. The current R&D BER only refers to the preceding calendar.
Further, the draft R&D BER adds some new definitions and clarifications such as “active/passive sales” or “new product or technology”. The definition of “potential competitors” is slightly modified, removing the reference to the so-called SSNIP (small, but significant, non-transitory increase in price) test to assess competitive relations.
Last, the draft R&D BER introduces a procedure for a withdrawal of the block exemption based on the respective provision in Art. 29 Regulation (EU) 1/2003.
The requirement to share foreground IP and, if there is no joint exploitation, background know-how remains, unfortunately, unchanged in the current draft R&D BER. On the basis of public statements by the Commission, it seems unlikely that there will be changes in this regard in the final version of the new R&D BER. Thus, the existing practice of joint ownership or the granting of licenses, respectively, in order to facilitate the required access, is expected to remain largely unaffected. As for background know-how, the EU Commission has refused the often-voiced request to abolish the requirement of granting the other party access to pre-existing know-how indispensable for the purposes of its exploitation of the R&D results.
The draft revised R&D BER introduces various changes. While some are favorable, e.g. the addition of new definitions and explanations, the draft also adds on complexity and legal uncertainty.
Especially the requirement concerning undertakings competing in innovation, according to which four competing and comparable R&D efforts need to exist in order for the block exemption to apply, will cause problems. It will be very difficult, if not impossible, to assess in practice whether this condition is fulfilled. Thus, it shifts the focus to complex individual assessments under to Article 101 (1) and (3) TFEU. It remains to be seen if the Commission will stick with this requirement in spite of the public criticism.
In addition, the Commission did not change the requirements of access of all parties to the foreground IP and background know-how, in spite of the practical and commercial difficulties related to it. Unfortunately, it seems relatively unlikely that the Commission will abolish these requirements in the final version of the new R&D BER.