Non-challenge clauses in the TTBER and beyond: implications for litigation and settlements. Sophie Lawrance, Senior Associate Bristows LLP 8 May 2015

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1 Non-challenge clauses in the TTBER and beyond: implications for litigation and settlements Sophie Lawrance, Senior Associate Bristows LLP 8 May 2015

2 Agenda Brief review of the evolution of the law The current position under the new Technology Transfer Block Exemption Regulation ( TTBER ) and accompanying Guidelines (2014) Justifications explicit and implied for the new approach Practical considerations for licensing and settlements

3 The law a brief history Technology Transfer Block Exemption Regulation and Guidelines 2004 version Licensing: Direct or indirect non-challenge provisions were excluded restrictions But terminate-on-challenge provisions were accepted (within the block exemption) Settlement: Guidelines, 209: In the context of a settlement and non-assertion agreement, non-challenge clauses are generally considered to fall outside Article [101](1).

4 What is the position now? TTBER and Guidelines 2014 version Licensing: Non-challenge provisions remain excluded restrictions - now includes terminate-on-challenge provisions, except for: Those included in exclusive licences within market share thresholds (licensor is in position of dependency : 139) Those concerning only know-how ( 140) or challenges to ownership ( 135) Settlement: : Still generally considered to fall outside Art 101(1) (But NB Lundbeck: TT Guidelines apply only if a licence is granted) But may be anti-competitive under specific circumstances e.g., if there is inducement

5 Explanation of the new approach Main cited justifications Licensing TT Guidelines, 134 & 136: licensees normally in the best position to determine whether or not a licensed patent is invalid invalid patents stifle, rather than promote innovation termination right can have same effect as non-challenge in particular if it could cause loss to the licensee exclusive licensing: licensor in situation of (financial) dependency Settlements TT Guidelines, : inherent that parties agree not to challenge IPRs which were the centre of the dispute very purpose is to settle /avoid future disputes But restriction of right to challenge is not part of specific subject matter of IPR and may restrict competition

6 How did we get here? Under the draft TTBER (2013 consultation version) all non-challenge provisions, including termination-on-challenge, were to be treated as excluded restrictions Case law cited in new TT Guidelines: 138: Windsurfing International (1986!): public interest to eliminate obstacles to economic activity - i.e., potentially invalid patents 134: Bayer v. Süllhofer (1988!): No restriction of competition if process is technically outdated (but cf. Commission s arguments in Windsurfing: the removal of a monopoly perhaps wrongly granted to the licensor must prevail over any other consideration ) => Elimination of invalid patents is not an absolute goal cf. Bayer, above, and treatment of exclusive licences Important for both licensing and settlements

7 Other influences? US law: Lear v. Adkins (1969): non-challenge provisions muzzle licensees, who may often be the only individuals with enough economic incentive to challenge the patent s validity ; the public should not be required continually to pay tribute to would-be monopolists without need or justification Rates Technology v. Speakeasy (2012): Followed Lear concerned a settlement entered into pre-litigation FTC v. Actavis (2013): Cited Lear in context of patent settlement review Commission case load at time when 2014 TTBER/Guidelines were under preparation: Pay-for-delay settlement cases (citalopram, perindopril) Motorola seeking/enforcing of injunctive relief on SEPs

8 Motorola (with a glance at Huawei v. ZTE) Identified two anti-competitive effects of the terminate-on-challenge clause : It may lead other potential licensees of the patents (in this case SEPs) covered by the SA to pay for invalid IP (i.e., the Windsurfing principle) Limit on licensee s ability to influence the level of royalties it will have pay to the licensor for the use of the patents covered by the agreement The SEP context is relevant to both aspects (inability to design around) Settlement agreement, but principles applied more like a licence Cf. position in the Technology Transfer Guidelines on non-challenge in SEP context ( 136) Cf. Huawei v. ZTE (AG Wathelet): Licensee of SEPs must be entitled to challenge licensed patents after grant (but is this appropriate for settlements?)

9 Pay-for-delay cases General policy points: No immunity from competition law for settlements, including nonchallenge provisions (Bayer v. Süllhofer, cited in Lundbeck, 81/600) Legal assumption of validity of granted patents does not prevent court actions to challenge validity expression of potential competition Irrelevant whether any patent challenge would have been made / what the outcome would have been Key legal findings for non-challenge provisions: Non-challenge provision = restriction (even if within scope of patent) If there is any inducement, agreement likely to be viewed as anticompetitive (even if other challengers remain) Restrictions on generic obtaining declarations of non-infringement approach as for validity challenges (even though underlying policy is different)

10 Practical considerations settlement (non-challenge) Scope of the non-challenge patents central to the dispute? Treatment of patent family members? Non-central patents treat in the same way as for licences Ambit of the provision does it limit the licensee s ability to raise arguments in relation to damages / royalty assessment / future royalties? Consider providing for advance notice of challenge rather than absolute non-challenge Caution with limitations on seeking future declarations of non-infringement Risks much greater if any inducement (includes grant of certain licences ) in the pharma sector - and perhaps beyond?

11 Practical considerations licensing (termination right) Licensor s market share? Exclusive licence? Is licensor otherwise dependent on licensee? Nature of the technology how easy to design around? Portfolio licensing: Is a partial termination on challenge ever justifiable? Should licence fees be reduced if a patent is knocked out? Relevance of licensee breach Is it safe to use other forms of more indirect incentive? e.g.: Wide termination rights which could be triggered if a challenge is brought Obligation to pay licensor s costs of defending challenge, if unsuccessful?

12 Further reading Lawrance: The competition law treatment of no-challenge clauses in licence agreements: an unfortunate revolution?, Journal of IP Law and Practice 2014, Vol. 9, No. 10, pp Brenner: Slowing the Rates of innovation: How the Second Circuit s ban on no-challenge clauses in pre-litigation settlement agreements hinders business growth, 54 British Columbia Law Review (E.Supp) 57 (2013) Zafar & Lawrance: The revised technology transfer regime Is there more to patents than their validity? post of 8 May 2014, available on

13 Thank you Bristows LLP 100 Victoria Embankment London EC4Y 0DH T +44(0) F +44(0) sophie.lawrance@bristows.com