In modern economies, industrial competitiveness is increasingly determined by the ability to create new or improved products or services. Research and development (R&D) can therefore form an important part of any company's business strategy, helping it to bring new products to market. This is particularly so if a company competes in research-based or technology-driven industries, where it needs to develop innovative products in order to succeed.
Cooperation in the field of R&D is often essential to innovation, particularly in high technology sectors where the technical and financial risks are high. Such cooperation enables companies to share these risks and also allows companies with complementary technologies to avoid costly duplication of efforts and promotes economies of scale. Cooperation in R&D may also lead to significant cross-fertilisation of ideas and experience, and result in products and technologies being developed more rapidly than would otherwise be the case.
II. R&D AGREEMENTS
A company may decide to carry out all of its R&D work by itself or it may prefer to collaborate with other companies in their R&D efforts. R&D agreements may vary in form and scope. Under a joint R&D agreement, two or more parties collaborate with one another to carry out joint research work with a view to developing new products or processes. Sometimes parties to joint R&D limit their collaboration to the pre-commercialisation or "pure” R&D stage. In other cases, however, parties extend their collaboration to the way in which they commercialise or exploit the results of the R&D. This may involve joint production, and sometimes joint marketing, of products or processes developed under their joint R&D programme.
However, under certain circumstances, R&D agreements may cause competition problems. For example, where the parties to the agreement agree to fix prices or output, or to share markets. Problems may also be created if the cooperation under the agreement enables the parties to maintain, gain or increase market power.
III. R&D AGREEMENTS AND EC COMPETITION LAW
Article 81(1) of the EC Treaty prohibits agreements and other collusive behavior between undertakings which may affect trade between Member States and which have as their object or effect the restriction, prevention or distortion of competition within the EU. If an agreement falls within this prohibition, it will be automatically void under Article 81(2) EC unless it can satisfy the provisions for exemption under Article 81(3) EC.
An R&D agreement is an example of what is known as a “horizontal cooperation agreement” i.e., an agreement entered into between companies operating at the same level(s) in the market. The assessment of any horizontal cooperation agreement, including an R&D agreement, under Article 81 EC essentially involves a two-step process:
- Does the agreement fall within the Article 81(1) prohibition?
- If so, does the agreement benefit from a block exemption regulation or does it otherwise satisfy the criteria in Article 81(3)?
“Block exemptions” are exemptions from the Article 81(1) prohibition and cover categories of restrictive agreements which, taken as a whole, satisfy the criteria set out in Article 81(3) (see further, section VI below). Block exemptions currently in force cover several categories of agreements, including R&D agreements1.
When assessing the legality of an R&D agreement, it is usual to try to bring the agreement within the scope of the R&D Block Exemption, which provides a legal guarantee of validity. However, an agreement that does not satisfy the provisions of the block exemption will not necessarily be prohibited, since it may either (i) fall outside the Article 81(1) prohibition altogether or (ii), satisfy the exemption criteria in Article 81(3) on an individual assessment.
The Commission has also adopted guidelines for certain types of horizontal cooperation agreements2, including R&D agreements, which are particularly relevant for analysing those agreements that fall outside the scope of any applicable block exemption. While these guidelines do not have force of law, they provide useful information with regard to the Commission’s interpretation and practice in this area.
IV. R&D AGREEMENTS UNDER ARTICLE 81(1)
The following guidance can be used to determine whether an R&D agreement infringes Article 81(1).
1. R&D agreements that fall outside the Article 81(1) prohibition
The Commission considers that R&D agreements which are “at a rather theoretical stage, far removed from the exploitation of possible results”, fall outside Article 81(1)3. So, too, would agreements between non-competitors4, unless there is a possibility of the foreclosure of competitors and one of the parties has “significant market power with respect to key technology”. Similarly, the outsourcing of R&D to research institutes and academic bodies which are not active in the exploitation of results is not caught by Article 81(1)5. In addition, “pure” R&D agreements that do not extend to joint exploitation of the results would rarely infringe Article 81(1): they would do so only where they significantly reduce effective competition in innovation6.
In addition, if the market shares of the parties are very low, the R&D agreement may fall outside Article 81(1) by satisfying the terms of the De Minimis Notice7.
2. R&D agreements that almost always fall within the Article 81(1) prohibition
In its Horizontal Guidelines, the Commission states that if the true object of an agreement is not R&D but the creation of a disguised cartel (i.e. price-fixing, output limitation or market allocation), it falls within the Article 81(1) prohibition. However, an R&D agreement which includes the joint exploitation of results of joint R&D (covering, for example, joint distribution and therefore joint pricing) is not necessarily restrictive of competition8.
If an R&D agreement is a disguised cartel, it will not benefit from the R&D Block Exemption or satisfy the provisions for exemption under Article 81(3).
3. R&D agreements that may fall within the Article 81(1) prohibition
If an R&D agreement is not covered by either point 1 or 2 above, it must be analysed in its economic context to establish whether it infringes Article 81(1). This applies in particular where either (i) the cooperation is “rather close to the market launch” of a new product or (ii) the cooperation is between competitors on either existing product/technology markets or on innovation markets9. The Commission states that R&D cooperation can restrict competition in three main ways: by restricting innovation, by resulting in the coordination of the parties’ behaviour in existing markets, and by foreclosure of competitors from the market. However, the Commission acknowledges that these effects are unlikely in the absence of significant market power10.
Note should also be taken of the Commission’s statement that, where the parties have a market share of more than 25%, it does not automatically follow that Article 81(1) is infringed but an infringement becomes more likely as the parties’ position on the market becomes stronger11.
V. R&D BLOCK EXEMPTION REGULATION
The R&D Block Exemption entered into force on 1 January 2001. The main provisions of the block exemption are as follows:
- Article 1 confers a block exemption upon certain R&D agreements;
- Article 2 defines key terms;
- Article 3 sets out conditions for application of the block exemption;
- Article 4 imposes a market share cap and covers the duration of the exemption; and
- Article 5 covers agreements that are not exempted by the block exemption because they contain “hard-core” restrictions.
Parties to an R&D agreement may benefit from the R&D Block Exemption as long as (i) they meet the conditions of exemption, together with any applicable market share threshold, and (ii) they do not include any hardcore restrictions within the agreement. The benefit of the R&D block exemption may be withdrawn by the Commission or a national competition authority in certain circumstances.
1. The scope of the block exemption
The block exemption exempts: (i) agreements for joint R&D, whether or not combined with agreements for joint exploitation of the results; and (ii) agreements for joint exploitation of the results of R&D jointly carried out pursuant to a prior agreement between the same parties. “Joint exploitation” includes joint production, distribution and/or licensing of the jointly developed product(s). In addition, restrictions that are “directly related to and necessary for” the implementation of an R&D agreement are exempted.
2. The conditions for exemption
To benefit from the R&D Block Exemption, the R&D agreement must satisfy four conditions.
a. Access to the results
Article 3(2) of the R&D Block Exemption provides that all the parties to the agreement must have access to the results of the joint R&D for the purposes of further research or exploitation. This right of access does not apply in the case of research institutes, academic bodies, or undertakings which supply R&D as a commercial service without normally being active in exploitation of the results.
b. Where the agreement consists of pure R&D, each party must be able to exploit the results
Article 3(3) provides that, in respect of agreements limited to pure R&D, each party must remain free to exploit the results of the work, as well as any pre-existing technical knowledge necessary for such independent exploitation. Where the parties were not competitors at the time the agreement was entered into, the exploitation can be limited to one or more technical fields of use.
c. Conditions where joint exploitation is intended
Article 3(4) provides that joint exploitation is permissible only where it relates to results of the R&D cooperation which: (i) are protected by intellectual property rights or which constitute know-how; (ii) “substantially contribute” to technical or economic progress; and (iii) are “decisive” for the manufacture of the contract products or the application of the contract processes.
d. Parties charged with production by way of specialisation
Article 3(5) provides that parties charged with production by way of specialization under the agreement must be required to fulfil orders for supplies from all the parties, except where the R&D agreement also provides for joint distribution.
3. The market share threshold and duration of exemption
The parties to the R&D agreement must not exceed any applicable market share threshold. The applicable threshold is dependent upon whether the parties are competitors.
Where the parties to the agreement are not competitors, the block exemption applies for the duration of the R&D phase. If the results are jointly exploited, the exemption will continue to apply for 7 years from the time the products are first placed on the market within the EU. This is the case irrespective of the parties’ market share. Further, the exemption will continue to apply beyond this 7 year period unless and until the combined market share of the parties exceeds 25%.
Where the parties are competitors, the block exemption will apply for the same duration as for non-competitors but only if, at the time the R&D agreement is entered into, the parties’ combined share of the market for products capable of being improved or replaced by the contract products does not exceed 25%.
4. Hard-core restrictions
The exemption will not apply where the agreement contains “severe anti-competitive restraints”. The inclusion of any of these provisions excludes the entire agreement from the benefit of the R&D Block Exemption. Examples include:
a. Territorial restrictions
Under Article 5(1)(f) and (g) of the R&D Block Exemption, if the parties agree to separately distribute the jointly developed product in different geographic areas, the block exemption will not apply if the agreement prohibits one party from making passive (unsolicited) sales in territories reserved for the other parties. One party may be prohibited from making active (solicited) sales in territories reserved for the other parties but only for a period of 7 years from the time when the products are first put on the market in the EU.
b. Customer restrictions
Under Article 5(1)(e), if the parties agree to separately distribute the jointly developed product to different customer groups, one party may be prohibited from making any sales (whether active or passive) to customers reserved for the other parties but only for a period of 7 years from the time the products are first put on the market in the EU.
c. Restrictions on R&D carried out independently or with third parties
Under Article 5(1)(a), the block exemption will not apply if the agreement contains a limitation on the freedom of parties to carry out R&D in (i) a field unconnected to the agreement or (ii) after the joint R&D is completed, in the field to which the agreement relates.
d. Output limitations and price fixing
Although the parties may jointly produce and/or distribute the jointly developed product, Article 5(1)(c) and (d) provides that the block exemption will not apply if the agreement (otherwise) contains a limitation on output or sales, or fixes prices charged to third parties.
VI. ROLE OF ARTICLE 81(3)
An agreement which falls within the Article 81(1) prohibition and outside the R&D Block Exemption is not necessarily automatically void under Article 81(2). Article 81(3) provides that Article 81(1) will not apply in respect of agreements which satisfy four conditions. To satisfy Article 81(3), an R&D agreement: (i) must contribute to improving the production or distribution of goods or to promoting technical or economic progress; (ii) must allow customers a fair share of the resulting benefit; (iii) must only impose restrictions which are “indispensable” to the attainment of those objectives; and (iv) must not give the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
The Horizontal Guidelines provide some guidance as to how these requirements will be considered by the Commission when reviewing R&D agreements. In particular, the Guidelines state that the hard-core restrictions that are listed in the R&D Block Exemption and which prevent the application of the exemption, would be unlikely to be regarded as “indispensable” in the case of the individual assessment of an agreement under Article 81(3). Joint production and/or distribution of the results may be exempted to the extent it is necessary to guarantee an “adequate return” on investment.
It is useful to look at some previous examples of cases where agreements have fallen within the Article 81(1) prohibition but have then been able to benefit from Article 81(3) on an individual assessment. In Canon/Kodak12, Kodak, Fuji, Canon, Minolta and Nikon entered into two agreements for the development and licensing of the advanced photographic system (“APS”). The agreements were notified to the Commission. Although the parties had very high combined market shares, the Commission agreed that the agreements were suitable for exemption under Article 81(3). The parties demonstrated that the agreements would not eliminate competition, in that the parties would make the jointly developed technology available to third parties through licensing agreements. Furthermore, cooperation between the parties was quite narrow and only covered the development of the system, as opposed to the know-how necessary for the actual manufacturing of the products.
In Continental/Michelin13, the parties entered into a cooperation agreement for the development of a new type of tyre/wheel system for passenger car tyres. Again, the combined market share of the parties was very high. The parties argued that the cooperation was necessary (i) for further technical development of their respective prototypes to the manufacturing stage and (ii) because an individual tyre manufacturer could not, on its own, introduce a new system on the market.
The Commission decided to exempt the parties’ cooperation agreement because among other reasons, (i) both parties would remain in competition with each other in conventional tyres, (ii) competition continued to exist with all the other tyre manufacturers and (iii) the parties would offer licences to all interested competitors on reasonable terms.
Similarly, in General Electric Aircraft Engines/Pratt & Whitney14, the two companies formed an alliance to develop, manufacture, sell and support a new aircraft engine which was intended for future, very large commercial aircraft.
The Commission was concerned that the parties’ cooperation on the market for jet engines intended to be used in new, larger aircraft would spill-over into the neighbouring market for engines to be used in existing commercial wide-body aircraft, where they competed. These concerns were resolved through a number of organisational commitments offered by the parties and the Commission found that the notified arrangement fulfilled the conditions of Article 81(3). In making this finding, the Commission took account of the fact that the cooperation concerned the development of a new aircraft engine for envisaged aircraft which had not yet been launched, and for which the demand was uncertain. Further, the cooperation involved high financial investments which were not likely to be recovered for at least 15 years. Moreover, while the cooperation reduced the number of potential competitors, it offered a realistic alternative to the one remaining engine supplier (Rolls-Royce), who would be able to offer a derivative of an existing engine for the same use.
VII. AREAS OF DEBATE
1. Regarding the conditions for exemption
As mentioned above, one of the four threshold conditions listed in the R&D Block Exemption is that, in respect of agreements limited to “pure” R&D (i.e. agreements that do not provide for exploitation), each party must remain free to exploit the results of the work, as well as any pre-existing technical knowledge necessary for such independent exploitation. This provision may cause concern where one party to the agreement has carried out the bulk of the pre-agreement research and therefore owns the bulk of the pre-existing technical knowledge. As a result of the threshold condition, this party is required to hand over its knowledge to the other party. The block exemption is silent on the issue of whether or not the owner of the pre-existing know-how (or, similarly, the owner of results of the joint work) can charge royalties for its use.
2. Regarding the market share threshold
As mentioned above, where the parties to the agreement are competitors, their combined market share must not exceed 25% of the market for such products at the time the agreement is entered into in order for the block exemption to apply. The R&D Block Exemption defines the relevant market for these purposes as that of “products capable of being improved or replaced” by those arising out of the joint R&D. This definition poses numerous practical problems as it assumes that the parties are able to accurately predict at the outset of the R&D the nature of the products that will result from the project.
3. Regarding certain hardcore restrictions
Whereas a party may never be prevented from making passive sales into territories reserved for other parties, a party may be prohibited from making any sales (whether active or passive) to customers reserved for the other parties for a period of 7 years from the time the products are first put on the market in the EU
However, this difference in treatment between territorial and customer restrictions appears to be contrary to the Commission’s general practice and could even be the result of a drafting mistake.