EC Overhauls Horizontal Agreement Guidelines And Safe Harbor Exemptions

The European Commission has unveiled new draft rules for horizontal cooperation agreements as part of the EC’s Horizontal Guidelines and Research & Development and Specialization Agreement Block Exemption Regulations (BERs).

The new rules aim to clarify when companies’ horizontal agreements will be deemed to restrict competition and when such agreements will qualify for an exemption.  The rules include a new chapter on information exchange, and substantial revisions to the standardization chapter.  The revised rules also aim to prevent disputes over licensing fees charged by companies for their intellectual property rights once they become the standard.

Key issues addressed in the revised Horizontal Guidelines include:

• An assessment of information exchange between companies;
• Guidance on standard terms in the chapter on standardization;
• Clarification of the application of the competition rules to agreements between joint ventures and their parents; and
• Elimination of the “center of gravity test” which previously defined which parts of the guidelines were applicable to an agreement.

Key issues addressed in the revised R&D and Standardization Agreement regulations include:

• Disclosure of relevant intellectual property rights and readjustment of the “hardcore” restrictions;
• Introduction of a second market share threshold for specialization and joint production agreements pertaining to products used for internal consumption; and
• Clarifications to the notion of “potential competitor”, with the introduction of a three-year timeframe for future market entry.

The EC says that standard-setting disputes arise due to a lack of transparency during the selection process, and that one way to avoid disputes would be to require potential standard-holders to disclose at the beginning the maximum terms that a company would charge if its technology were incorporated in a standard.

In an attempt to quell future disputes that arise as to the level of FRAND (fair, reasonable and non-discriminatory) licensing terms, the draft guidelines also contain benchmarks to assess the level of FRAND licensing fees.  The EC considers a comparison of the charges prior to the adoption of the standard to be particularly relevant to FRAND terms. 

The EC is hoping that the new rules will prevent “patent ambushes” which occur when companies hide patents until the industry is locked in and then either refuse to license or request exorbitant fees for licensing.  The new rules will require clear disclosure from companies of their intellectual property rights to patents before inclusion in standards.

The current R&D and Specialization Agreement regulations grant safe harbor to agreements resulting in a market share not exceeding 25% in the case of joint R&D agreements between competitors and a market share not exceeding 20% in the case of specialization or joint production agreements.

When finalized, the revised rules will be incorporated into the existing Horizontal Guidelines and the Research & Development and Specialization Agreement BERs.  Both BERs are set to expire in December 2010.

The EC is accepting public comments on the revised rules until June 25, 2010.  Finalized rules will be adopted by the end of this year.