International In-house Counsel Journal

Vol. 5, No. 18, Winter 2012, 1

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

Striking the Right Balance Between Co-Operation and Competition:

Several Antitrust Pitfalls in R&D Alliances and Other Strategic

Partnerships1

IOHANN LE FRAPPER

General Counsel Networks Group, Alcatel-Lucent,

& President Association of Corporate Counsel Europe

&

Aurélien Neret-Minet, Member of the Paris bar

ABSTRACT

The aim of this article is to provide guidance to in-house counsel on the assessment and

management of key risks associated with partnership opportunities. As such, in-house

counsel should be able to quickly identify the antitrust risks related to each type of

partnership (joint R&D, joint purchasing, joint manufacturing and/or joint marketing),

taking in account the evolution in 2010 and 2011 of the EU regulatory framework on co-

operations among firms.

The authors highlight the various criteria needed to ensure antitrust compliance (e.g.

market shares, threshold issues etc.) and the tricky practical situations that may arise

(e.g. information exchange among partners, new “safe harbour” conditions regarding

agreements in restraint of trade).

The article also addresses the cornerstone issue of discussing upfront among potential

partners the access to and allocation of background and foreground Intellectual Property

Rights (IPR), failing which the partnership may derail and lead to costly litigation and

detrimental business consequences. In this respect, the authors stress how undue IPR

restrictions may have an impact on the antitrust analysis of a partnership, this interaction

illustrating the growing tension among antitrust and IP topics in high-tech business.

KEYWORDS

STRATEGIC PARTNERSHIPS, ALLIANCES, R&D AGREEMENTS, ANTITRUST,

COMPETITION LAW, INTELLECTUAL PROPERTY RIGHTS, BACKGROUND IP,

FOREGROUND IP, STANDARDISATION AGREEMENTS, LICENSING REFUSAL,

LEGAL PRIVILEGE, TECHNOLOGY TRANSFER, JOINT VENTURE,

HORIZONTAL CO-OPERATION, VERTICAL CO-OPERATION, CO-OPETITION,

ABUSE OF DOMINANT POSITION, EUROPEAN COMMISSION, GUIDELINES,

BLOCK EXEMPTION, DEPARTEMENT OF JUSTICE, FEDERAL TRADE

COMMISSION

1 The views expressed herein are our own and do not express the position of our respective

employers.

2 Iohann Le Frapper

Preliminary Section

1. Lacklustre performance of strategic partnerships

Research & development (R&D) strategic alliances among firms can be defined as the

pooling of some companies’ resources in order to develop or upgrade products or

services that companies would not be able to develop or upgrade on a stand-alone basis

or at the same accelerated pace.

Such alliances, quite common in the hi-tech, biotech and pharmaceutical industries, may

cover a large variety of situations, depending on the partners involved (companies

operating on the same market as competitors or not, universities etc.) and the nature of

the alliance (from contractual agreements such as licensing, joint research agreements,

co-sourcing, joint marketing agreements etc. to equity mechanisms like incorporated joint

ventures2).

As for an example of successful partnership in the automotive sector, one could have a

look at TPCA, the Czech joint venture between PSA and Toyota, which seems to be a

successful collaboration among competitors for almost 10 years now3.

Even though strategic alliances allowed some major breakthroughs in the field of hi-tech

industry4, numerous cases of failed alliances have shown how unstable relationships

among firms could be5, some authors pointing out that “the corporate highway is littered

with the burnt-out shells of thousands of strategic alliances, which are supposed to be

very close business relationships between two companies for their mutual benefit6”.

2. Learn to share your intellectual property rights

Among all the possible reasons for either the last-mile collapse of deal negotiations or the

implementation of strategic alliances to fall short of the business expectations, the

ineffective management of intellectual property rights has become a prominent one,

especially in the case of horizontal co-operations, where companies might be partners and

competitors at the same time (situations referred to as “co-opetition7”).

In such cases, the success of a strategic alliance relies greatly on the partners’ ability to

overcome their understandable reluctance to share their know-how and intellectual

property rights with one another. In practice, drawing a line between partnership and

competition is complex, and “some even argue that collaboration in strategic alliances is

tantamount to competition in a different form 8.”

2 For a typology of strategic alliances, see: « Strategic Alliances, an Entrepreneurial approach to

globalization”, M. Y. YOSHINO, U. SRINIVASA RANGAN, Harvard Business School Press, 1995, quoted

in “Globalization: how strategic alliances bring production and market advantages. The case of

Renault/Nissan”, J.J. CHANARON, TII Annual Conference, 27th April 2006, available at: http://hal.grenoble-em.com/docs/00/13/73/83/PDF/Globalization-alliance-TII-Nrwcastle.pdf

3 http://www.tpca.cz/en/ 4 e.g. Sony and Philips on the compact-disk (for a rapid analysis of this case, see for instance: “Managing

Innovation: integrating technological, market and organizational change”, J. TIDD, R. BESSANT, K.

PAVITT, J. Wileys & Sons Ltd, 2005 third ed., p.287 5 For an analysis of the concept of stability in strategic alliances: “The stability of strategic alliances:

Characteristics, factors and stages”, XU LIANG, YUAN LI, SHANXING GAO, Journal of International

Management 14 (2008), p. 173 – 189, available at:

http://www.betsaonline.com/Management/StrategicAlliancesCharacteristics.pdf 6 See « Why Strategic Alliances don’t work », B. ROBINSON, 2002, available at:

http://www.forbes.com/2002/07/01/0701alliances.html 7 See “Co-Opetition : A Revolution Mindset That Combines Competition and Cooperation”, A.

BRANDENBURGER and B. NALEBUFF,1996, http://mayet.som.yale.edu/coopetition/index.html 8 See « Learning in Strategic Alliances », O. SERRAT, Asian Development Bank, September 2009,

http://www.adb.org/Documents/Information/Knowledge-Solutions/Learning-in-Strategic-Alliances.pdf

R&D Alliances and Other Strategic Partnerships 3

And not only failure to share out intellectual property rights in an effective manner may

impede a strategic alliance’s achievement, it may as well put the partners at risk of non-

compliance with antitrust principles.

3. Pro-competitive effects of strategic alliances

Even though strategic alliances entail close relationships between independent and

sometimes competing enterprises, theses alliances are usually regarded, from an antitrust

viewpoint, as contributing to technical and economic progress. For that reason, they may

enjoy positive assessment by antitrust authorities and be exempted from enforcement of

antitrust prohibitions9.

Under EU competition law, Article 101 § 3 of the Treaty on the Functioning of the

European Union (TFEU) acknowledges that certain agreements restricting competition

among firms may have an overall positive impact on the market and should be allowed.

Such agreements are allowed in the sense that they are exempted from the enforcement of

Article 101 § 1, which prohibits agreements restricting competition among firms.

Under US law and according to the US Supreme Court10

, the famous Article 1 of the

Sherman Act11

, which prohibits agreements in restraint of trade, should be applied under

the “rule of reason”, according to which an agreement among competitors, whose effects

are beneficial to the economy, is not prohibited by antitrust law.

4. No pre-notification process for strategic alliances

As there is neither in the US nor in EU a notification and clearance process to provide a

safe heaven to partners prior to completion of an alliance transaction (except for: 1)

mandatory joint ventures deemed “concentrative”12

under EU law whose parents’

turnover exceeds the relevant thresholds and 2) the US Department of Justice’s relatively

slow Request for Business Review Letter procedure13

), the respective antitrust agencies

have issued several regulations and/or guidelines to give broad or specific guidance to

enterprises whether their co-operation agreements could have pro-competitive effects.

Thus, as the assessment by antitrust regulators of the anti-competitive purpose or effect of

an alliance may occur a posteriori, in practise several years after the deal execution, the

role of the corporate counsel is even more critical in providing clear guidance to his or

her client ahead of the deal structuring and negotiations. Neither the corporate counsel

nor the management of the partners will have the comfort of securing a regulatory

approval before consummating the planned alliance.

9 The exemption scheme, as detailed in this article, implies two steps: first, an agreement must raise antitrust

concerns and fall within the scope of provisions prohibiting agreements in restraint of trade; then, such

agreement could seek exemption. Yet, it may happen that some agreements do not raise any antitrust

concerns at all in the first place, and that no exemption scheme is therefore applicable (See Infra, EU Guidelines 2011/C 11/01 on horizontal co-operation agreements, § 20).

10 National Soc’y of Prof’l. Eng’rs v. United States, 435 U.S. 679,692 (1978) 11 15 U.S.C § 1 12 Under EU law, see Council Regulation (EC) N°139/2004 of 20 January 2004 on the control of concentrations

between undertakings, Article 3 § 4:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:024:0001:0022:EN:PDF. Under US law, see Hart-Scott-Rodino Antitrust Improvement Act on pre-merger notification and related provisions (on joint

venture: 16 C.F.R. § 801.40), and National Cooperative Research Act (NCRA); cf. Infra p.10 footnote 1. 13 To get the Agencies’ assessment on planned joint ventures and other business conducts:

http://www.justice.gov/atr/public/busreview/276833.pdf

4 Iohann Le Frapper

5. Check relevant regulations and guidelines

Beforehand, corporate counsel should determine clearly which sets of rules are applicable

to their project, starting with the main jurisdictions (US, EU, China, etc.), depending on

the market impacted by the planned alliance.

Simultaneous compliance with these regulations is sometimes difficult, in particular if

both EU and US laws need to be taken into account for one project (as in global

partnerships). In case of blatant discrepancies between the US and EU conditions of

validity, companies should be advised, in our view, to seek compliance with the most

stringent requirements so as to mitigate the exposure in the future to possible antitrust

challenges in either jurisdiction.

5.1. Under EU law: a net of detailed rules

Depending on their impact on competition, co-operation agreements may be exempted

either automatically (“block exemption”) or on an individual and case-by-case basis,

following the European Commission’s block exemptions and guidelines, as renewed in

2010 and 2011.

For any agreement that does not meet the conditions of block exemption, the factors

which merit an exemption are to be invoked on an individual basis, in which case parties

do not benefit from any presumption and should be able, if required by the antitrust

agencies or a national court in which the invalidity of a clause has been alleged, to prove

compliance with the conditions set forth under aforesaid Article 101 § 314

. Except in a

case triggering merger control, the Commission does not require prior-notification of

strategic alliances. Bear in mind that joint ventures may qualify as mergers in certain

precise cases and may need to be notified accordingly before implementation.

An important distinction to make between so-called vertical and horizontal alliances:

Vertical co-operation: if the planned co-operation agreement is entered into by

companies operating at different levels of the supply chain (vertical), it may be governed

by the Commission’s regulation N°330/2010 on vertical agreements as interpreted by the

Commission’s guidelines on vertical restraints issued in same year15

; the aforesaid

regulation provides automatic “block exemption” for vertical alliances under certain

conditions.

Horizontal co-operation: If the planned co-operation agreement is entered into by

companies operating on the same level of the supply chain (horizontal), which usually

implies they are current or potential competitors, the Commission distinguishes between

the various possible horizontal co-operations: R&D agreements, specialisation

agreements, joint purchasing agreements, agreements on joint commercialisation and

standardisation agreements.

R&D and specialisation agreements: among all these types of horizontal co-operation

agreements, the Commission provides automatic “block exemptions” for R&D and

specialisation agreements16

, the European Commission assuming that, at least if the

14 Namely, the agreement should promote technical or economic progress, allow consumers a fair share of the

resulting profit, restrain from imposing unnecessary restrictions upon the partners and refrain from eliminating

competition on the relevant market. 15 For vertical co-operation, see Guidelines on vertical restraints C 130/1 (19.5.2010): http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:130:0001:0046:EN:PDF and the Commission

Regulation N°330/2010 of April 20th, 2010: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:102:0001:0007:EN:PDF

16 Commission regulations (EU) N°1217/2010 of 14 December 2010 on research and development agreements:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:335:36:0042:EN:PDF

R&D Alliances and Other Strategic Partnerships 5

parties are below a certain market share ceiling when applicable, such agreements are

unlikely to harm competition on the relevant markets and that they necessarily foster

innovation and economic progress.

The concept of “R&D agreements” encompasses both joint R&D and joint exploitation of

the results, the exploitation being the processes of production or distribution (through

licensing of intellectual property for instance, communication of required know-how for

the manufacture of the product etc.17

)

For the other categories of horizontal co-operations: the exemption is possible on an

individual and case-by-case basis, which means that, if challenged ex-post by the antitrust

agencies, the companies will usually have to prove that their agreement bears pro-

competitive effects18

. On that point, the Commission has issued guidelines on how to

conduct this antitrust assessment, with the revised 2011 Guidelines on horizontal co-

operation agreements (“the Guidelines”).19

Technology transfers: in the case where companies have not entered into a co-operation

agreement but have merely planned licensing arrangements, the Commission has issued

an automatic “block exemption” regulation on transfers of technology20

. When horizontal

or vertical co-operation agreements imply technology transfers among the partners, an

issue is to distinguish whether the block exemption on technology transfer agreements is

relevant.

In fact, the block exemptions on horizontal or vertical agreements supersede the

regulation on transfers of technologies regulations for technology transfers arrangements

taking place among partners21

, provided that these transfers are strictly necessary for the

project to be implemented and do not constitute the primary object of such agreements.

It is to be noted that, under EU law, if the parties are competitors, the Guidelines on

horizontal co-operation prevail over other guidelines, even in the case where the

competitors operate at different levels of the supply chain (vertical agreements)22

.

Finally, strategic alliances usually imply various stages of co-operation (e.g. joint

purchasing, joint production, joint marketing, etc.) that may be governed by different sets

of exemption conditions; in case of conflicting conditions, it might be necessary to

determine the alliance’s “centre of gravity” by which the most important part of the co-

operation agreement will determine which conditions for exemption should prevail23

.

and Commission regulation (EU) N°1218/2010 of 14 December 2010 on specialisation agreements: http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:335:43:0047:EN:PDF 17 Op.cit. Regulation N°1217/2010, Article 1, (i) and (g) 18 On the basis of Article 101 § 3 TFEUs requirements 19 Guidelines on the applicability of Article 101 TFEU to horizontal co-operation agreements, 2011/C, 11/01,

January 14 2011:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:011:0001:0072:EN:PDF 20 Commission regulation N°772/2004, 27 April 2004 on the application of Article 81§ 3 of the Treaty to categories of technology transfer agreements:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:123:0011:0017:EN:PDF

and Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreement, April 27th, 2004:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2004:101:0002:0042:EN:PDF 21 Op. cit. Commission Regulation N°1217/2010, article 2 § 2. 22 Op.cit. EU guidelines on horizontal co-operation agreements, § 12: the block exemption for vertical

agreements does not apply to agreements between competitors (on the relevant market). 23 Ibid. §13 and 14. The US Guidelines have adopted a rather similar approach, although more general, stating that each agreement composing the alliance should be analysed, as well as the overall co-operation. If some

agreements composing the overall alliance are sufficiently closely related and dependent on one another, then

they should be analysed as a whole.

6 Iohann Le Frapper

Indeed, joint research and development is often the cornerstone of such strategic alliances

but rarely the sole purpose of the cooperation.

Figure 1 gives a broad - not comprehensive - overview of current EU block exemptions

on strategic alliances.

Fig.1: Overview of current block exemptions on strategic alliances:

5.2. A broader US approach

The US Department of Justice (“DoJ”) and Federal Trade Commission (“FTC”) – the US

antitrust agencies - have issued Guidelines for Collaborations among Competitors which

establish the agencies’ positive view of strategic alliances which have pro-competitive

effects24

. Licensing arrangements are governed by the Agencies’ Guidelines for the

Licensing of Intellectual Property (the “Intellectual Property Guidelines”)25

; as stated in

the Guidelines on collaboration among competitors, these Intellectual Property

Guidelines remain in effect to address issues in their special contexts26

.

To be noted, as opposed to EU law, there are no “block exemptions” as such; case-by-

case analysis is therefore necessary, based on the application of the competitive

assessment under the rule of reason and the prohibition of certain agreements illegal per

se27

. Nonetheless, several “safety zones” are provided under the current guidelines28

, and

the US antitrust agencies do not challenge competitors’ collaborations “when the market-

share of the collaboration and its participants collectively account for no more than 20%

of each relevant market in which competition may be affected”29

. More specifically,

24 US DoJ and FTC Antitrust Guidelines for collaborations among competitors (2000):

http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf); to be noted, the National Cooperative Research Act was passed in 1984 in order to give joint ventures for R&D protection against antitrust actions. Said Act

provides that the rule of reason shall govern the antitrust analysis of joint R&D; it also provides a notification

process to antitrust agencies of joint ventures for R&D, allowing companies to get damages limitations in case of antitrust infringements.

25 Antitrust Guidelines of the Licensing of Intellectual Property (1995):

http://www.justice.gov/atr/public/guidelines/0558.htm), 26 Op.cit. Antitrust Guidelines for Collaborations among Competitors, p.2: “the analytical framework set forth

in these Guidelines is consistent with the analytical frameworks in the (…) Intellectual Property Guidelines,

which remain in effect to address issues in their special context”. 27 Op.cit. Antitrust Guidelines for Collaborations among Competitors, p.8 § 3.2 28 Section 4 of the Guidelines, see http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf 29 Op.cit. Antitrust Guidelines on collaboration among competitors, 4.2 and 4.3

R&D Alliances and Other Strategic Partnerships 7

R&D agreements are not challenged when three or more research efforts being carried

out at the same time are considered to be close substitutes of the parties’.

For each type of agreement (joint-selling and marketing, joint-purchasing etc.), some

specific market-share thresholds are to be found in the guidelines.

Fig. 2: Overview of current thresholds under EU and US laws – B.SICALIDES and

B.SHER30

:

NB: Note that this chart takes into account the specific “DoJ and FTC Statements of

Antitrust Enforcement Policy in Health Care”’s thresholds on information exchange and

joint purchasing

6. Striking the right balance

Corporate counsel advising their clients are well aware of the difficulty of striking a

balance between the managers’ tendency to impose restrictions upon their partners

concerning access to their intellectual property, and the corporate objective to fully

comply with the antitrust provisions that strictly limit such restrictive conducts. Below

are some pitfalls to bear in mind at the various stages of the co-operation.

***

30 Source: B. SICALIDES, B. SHER, “Competitor Collaborations: new EU Guidelines

and US law compared”, Cross-Border Competition Handbook 2011, Practical Law

Company, p.3,

http://www.pepperlaw.com/pdfs/Sicalides_CompetitorCollaborations_02_2011.pdf

8 Iohann Le Frapper

1. Setting up alliance agreements: antitrust pre-requisites for a successful

partnership

1.1 Conditions for block exemption under EU law in R&D and specialisation

agreements

1.1.1. First step: beware of market-share thresholds

At first, in-house counsel need to check the market-share thresholds below which the

automatic exemption mechanism may be available. For R&D agreements among

competitors, their combined market-share should not exceed 25% - for specialisation

agreements, 20%. Otherwise, the block exemption does not apply to the foreseen co-

operation; yet, the benefit of possible individual exemption remains available.

For other types of co-operation (joint purchasing, etc.), even though there are no specific

block exemptions provided, some “safety zones” exist where, below certain market-share

thresholds, agreements are deemed unlikely to threaten competition on their relevant

market31

.

As to the determination of relevant markets, this could be all the more difficult since

R&D may imply the development of new products, with no obvious substitutable

equivalents. Both the EU and US guidelines provide indications on that question, which

should be addressed with great care.

1.1.2. Second step: include what needs to be shared

Companies should be careful regarding the access of their intellectual property rights,

since one of the major inputs of the latest EU regulations and guidelines on horizontal co-

operation (2010 and 2011) has been to require, in the case of joint R&D and

specialisation agreements, a fair management of the intellectual property rights, that may

request full access for partners to intellectual property rights resulting from the co-

operation (“Foreground IP”), as well as access by either partner to the necessary know-

how (or licence to patent) owned by (or licensed to) the other partner prior to the alliance

(“Background IP”).

1.1.2.1. Grant full access to partners to resulting intellectual property of a

joint R&D agreement

Under the EU regulations, the exemption of joint R&D agreements is subject to the

following condition: “The research and development agreement must stipulate that all

the parties have full access to the final results of the joint research and development or

paid-for research and development, including any resulting intellectual property rights

and know-how, for the purposes of further research and development and exploitation, as

soon as they become available32

”.

But the access to such results may be limited according to the objective nature of the

partnership (e.g. partnership with a university that does not plan to get involved in the

joint exploitation phase of the R&D), as well as in the case of production agreements

among partners, where one company agrees not to get involved in “joint exploitation”,

i.e., the production phase, or to specialise its production process33

.

31 E.g. for joint selling, marketing or purchasing arrangements, the EU relevant market-share thresholds is

15% 32 Op.cit. Commission Regulation (EU) N°1217/2010, Article 3 33 Ibid. “Where the parties limit their rights of exploitation in accordance with this Regulation, in particular

where they specialise in the context of exploitation, access to the results for the purposes of exploitation may

R&D Alliances and Other Strategic Partnerships 9

This access to the resulting intellectual property rights may give rise to compensation34

. It

is clear that the requested amount of such compensation should not lead to the exclusion

of the other partner from access to the intellectual property.

When R&D agreements provide restrictions on the partner’s access to the results of the

co-operation, and there is no provision for “joint exploitation”, they cannot benefit from

the automatic exemption35

. An undue restriction, in the absence of joint exploitation,

could be for example an exclusive license back by partner A of the Foreground IP to

partner B, where partner A would be deprived of the right to use the Foreground IP or be

prohibited from further innovation by making improvements to the Foreground IP.

1.1.2.2. Grant access to your partner to the know-how necessary for the

R&D project

As for the access among partners to pre-existing intellectual property rights such as

patents and know-how (“Background IP”), the EU regulation provides that “where the

R&D agreement provides only for joint research and development (…) the research and

development agreement must stipulate that each party must be granted access to any pre-

existing know-how of the other parties, if this know-how is indispensable for the purposes

of its exploitation of the results36

”.

This provision is of significant importance for companies considering strategic alliances,

but they should remain cautious as to disclosure of secret know-how which may

constitute one of their major intangible assets. Corporate counsel need to consider how to

determine in the relevant agreements among the partners which confidential information

will be shared for the purpose of the cooperation among two or more teams of engineers,

by which means said information will be shared among partners and remain protected,

failing which a broad and vague flow of data is likely to fall into the scope of

Background IP.

Yet, the Guidelines do not provide further guidance on that matter. Thus, it seems that

intellectual property sharing out mainly pertains to contractual freedom and that

companies should rather rely on sound contractual provisions to protect their interests.

1.1.3. Third step: avoid hardcore and excluded restrictions37

Hardcore restrictions are those provisions which, if included in the R&D or specialisation

agreements, impede exemption of the whole alliance as it will be deemed

anticompetitive. Such restrictions usually relate to price-fixing, allocation of markets and

customers, limitations of output and restrictions as to the right of the other party to carry

out other R&D projects in different fields of study38

.

As for excluded restrictions, those being less likely to threaten competition than hardcore

restrictions, they are to be considered not benefiting from the exemption if existing,

casting doubt on their validity, but do not preclude the application of the exemption for

the rest of the agreement. Considered as excluded restrictions, are such obligations as

those aimed at limiting the other party’s right to challenge the validity of the intellectual

be limited accordingly. Moreover, research institutes, academic bodies, or undertakings which supply research and development as a commercial service without normally being active in the exploitation of results may agree to confine their

use of the results for the purposes of further research.” 34 Ibid. 35 Op. cit. EU Guidelines on horizontal co-operation, § 140 36 Op.cit. Commission Regulation (EU) N°1217/2010 Article 3 37 Ibid. Article 5, Article 6 in the Commission Regulation (EU) N°1217/2010 and Article 4 in the Commission Regulation (EU)

N°1218/2010 38 Ibid. Articles 5 and 4 of Commission Regulations N°1217 and 1218

10 Iohann Le Frapper

property rights resulting from the project, or aimed at limiting the potential licensing to

third parties, except in certain precise conditions.

1.2. Focus: practical guidance on contractual drafting and management of

potential restrictions

Beforehand, given that parties to a co-operation are likely to exchange sensitive

information, sound confidentiality agreements are a prerequisite before planning further

collaboration.

Then, clauses related to intellectual property rights in the alliance-related agreements

should at least address the following topics.

1.2.1. Which technologies and related intellectual property are needed in

order to achieve the objective of the alliance?

This process requires:

A careful assessment and identification of intellectual property

rights owned by or licensed to each party;

Clear determination of the technology needed to carry out the

partnership with clear representations, warranties and indemnity

provisions regarding the Background IP information made

available by each party to the other.

1.2.2. How should the access to intellectual property rights be organized

among the partners?

Contract provisions should include clearly the scope and length of the co-operation, with

potential limitations as to the purpose of the license: territory restrictions, compensating

fees, inclusion of a sub-licensing possibility to licensees such as the respective customers

or contract manufacturers, right to use for joint design, right to manufacture or have

manufactured, right to sell related products, right to provide related services, right to

improve Background IP (against any compensation?) or Foreground IP, etc.

1.2.2.1. Background IP

Obviously, the agreement will often state that each party’s licensing rights with respect to

the Background IP of the other party will be strictly limited to the purpose of the alliance.

Thus, the licensee is prohibited from making any unauthorized use of the Background IP

for any other purpose, failing which it may be exposed to a legal action from the licensor

on the ground of infringement of the latter’s rights.

The allocation of IP rights among the parties will depend upon different factors such as

the equal or fair balance or not in the contribution by each partner of:

Access to its Background IP falling into the scope of the alliance ;

Financing of its share of joint R&D efforts;

Resources (teams and facilities) made available to team up (via the joint

venture, if any).

The nature of the co-operation, either by way of contractual arrangement

through licensing or assignment arrangements separate or incorporated into

co-operation agreements, or by way of equity co-operation, with the

incorporation of a joint venture vehicle that will receive cash and/or in-kind

contributions from both shareholders and that will assign certain

intellectual property rights to the joint-venture with license-back

arrangements.

R&D Alliances and Other Strategic Partnerships 11

Accordingly, the financial terms of the licensing of Background IP may be free of charge

(one-way or two-way) or describe flows of royalty fees payable upfront and/or on a

yearly basis by the licensee based, for example, on net sales of products put onto the

market (as contractually defined) by the licensee or its affiliates.

1.2.2.2. Foreground IP

Counsel should also address issues relating to the scope of rights related to the

Foreground IP resulting from joint R&D efforts:

Freedom of either partner to sell or support resulting products to any

customer or any market with or without restriction (is it on a royalty-

free basis, depending on the respective contributions?)

Right of each party to improve or customize related products

independently from the other party or subject to a prior joint decision

not to co-fund resources for that purpose?

To be compliant with antitrust requirements, these limitations should not be justified by

the mere licensor’s willingness to protect its market power against competitors.

1.2.3. Other topics in-house counsel should address

1.2.3.1. Beware: the co-operation will end one day

Potential partners often have lengthy discussions about their respective freedoms during

the term of the co-operation but cannot or should not avoid dealing with the likely future

circumstances when the co-operation expires or is subject to an early termination event.

Thus, counsel should define which rights will or should survive upon the end of the co-

operation to avoid a lethal risk of technology dependency by one partner towards its

former partner.

1.2.3.2. “No-poaching” undertakings

Also, counsel should consider including non-solicitation provisions in the agreement with

respect to the teams that will cooperate, since strategic partnerships offer the opportunity

for competitors to get a good insight of each company’s key human assets. Obviously, the

scope of the “no-poaching” undertakings should be carefully drafted to ensure

compliance with the applicable laws.

***

2. Steering the partnership in a manner compliant with antitrust regulations

2.1. Beware not to exchange too much information with your partner

Competitors planning to set up a strategic partnership have obviously to disclose sensitive

information about each other; but, depending on the nature of the information shared,

such exchanges may lead to anticompetitive coordination of the competitors’ commercial

conduct39

.

Since drawing a line between prohibited and lawful information exchanges requires a

cautious antitrust analysis, in-house counsel should be well aware of the antitrust

agencies’ position on that topic. Corporate counsel should address these two issues in

39 Op. cit. EU Guidelines on horizontal co-operation agreements, §65, « By artificially increasing transparency

in the market, the exchange of strategic information can facilitate coordination (that is to say, alignment) of

companies’ competitive behaviour and result in restrictive effects on competition. »

12 Iohann Le Frapper

priority: which information is considered strategic? When is the exchange of information

considered as being made?

On the whole, the guidelines endorse roughly similar arrangements40

, according to which

some exchanges of information are considered anticompetitive by nature (per se) - this

information being, for instance, individualised data on prices, quantities or customers;

some others may have anticompetitive effects, depending on their characteristics and on

the nature of the relevant markets, but could be allowed if deemed necessary for an

overall pro-competitive partnership to be carried out41

.

Besides the uncertainty surrounding the concept of “strategic” information, lies the

agencies’ broad interpretation of what constitutes an exchange. Indeed, for instance, the

European Commission has stated very clearly that “when a company receives strategic

data from a competitor (be it in a meeting, by mail or electronically), it will be presumed

to have accepted the information and adapted its market conduct accordingly42

”.

Especially under EU rules, in effect the mere exchange of strategic information can be

considered and sanctioned as a cartel; since such exchange could occur easily, for

instance through mere e-mails, in-house counsel should monitor constantly which

information is being shared in the course of the alliance and give relevant training and

advice to employees on conduct to adopt.

2.2. Be careful not to gain decisive influence over your partner

Companies planning to set up an alliance have to define ways to conduct and control the

implementation of their project without jeopardizing the need for flexibility in adjusting

the resources, timeline, and goals, as may be required; as such, they should set up

governance mechanisms such as steering committees which enable quick resolution of

deadlocks among the partners. These mechanisms should preserve the partners’

respective independence and should not allow one entity to take, in practice, informal

control of the other (i.e. exercising such influence as to determine in practice the other

party’s strategy).

Indeed, such control of one company by another might lead to the triggering of the

merger control regulations43

. Even though joint ventures in strategic partnerships are

usually not intended to last as independent and economically viable entities, partners

should bear in mind that creations of joint ventures which have a “concentrative” nature,

i.e., long-term entities, economically independent from their parent companies and

viable, are usually subject to premerger review (above certain turnover or other threshold

requirements)44

. Failure to comply with premerger notification and waiting period

requirements (“gun jumping”) violates both US and EU antitrust regulations when they

are applicable and lead to significant fines.

40 Both EU and US Guidelines provide guidance to define which information exchanges are

allowed in horizontal co-operations. 41 Op. cit. EU Guidelines on horizontal co-operation agreements, § 102 « Similarly, information

exchanges that form part of horizontal co-operation agreements are also more likely to fulfil the

conditions of Article 101(3) if they do not go beyond what is indispensable for the

implementation of the economic purpose of the agreement (for example, sharing technology

necessary for an R&D agreement or cost data in the context of a production agreement). » 42 Op.cit. EU Guidelines on horizontal co-operation agreements, § 62 43 See Clayton Act, Article 7A, and Council regulation (EC) N°139/2004 (EC merger regulation):

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:024:0001:0022:EN:PDF 44 See for instance, EC merger regulation, Article 3 (4)

R&D Alliances and Other Strategic Partnerships 13

2.3. Focus: Standardisation agreements and RAND licensing

Both the EU and US antitrust analysis consider that standardisation agreements may have

pro-competitive effects and should consequently be allowed. Yet, when certain

technologies protected under intellectual property rights (e.g. patents) are necessary to set

the standards of the industry, the owner of such technology could easily gain decisive

control over the other participants and the companies willing to join the initiative, by

imposing upon them abusive restrictions on access to its technology (through excessive

royalty demands for instance45

).

To make sure standardisation agreements bear pro-competitive effects, antitrust agencies

require fair and non-discriminatory access to the resulting standards and related

intellectual property rights, as well as disclosure of such intellectual property rights prior

to the standard-setting46

. In-house counsel should remain attentive to the potential

implementation of “FRAND” and “RAND” licensing schemes relating to their industry47

.

***

3. Managing the results of the partnership: strategic alliance and third parties

3.1. Licensing arrangements between partners and third parties

Licensing arrangements among firms may be subjected to antitrust analysis and often are

considered pro-competitive. As such, they are governed by specific exemption

regulations and guidelines48

, except when these transfers and licensing arrangements take

place within the scope of certain strategic alliances (R&D and specialisation

agreements)49

.

Outside of these particular partners’ relationship – e.g. between the partners’ joint venture

and a third party - licensing arrangements fall within the scope of common transfers of

technology which might be “block exempted” as such under EU law, if compliant with

the specific conditions of Commission Regulation (EC) N°772/200450

. The licensing

arrangements should not include hardcore restrictions, aimed at limiting the other party’s

45 See cases involving Rambus and Qualcomm companies, (FTC v Rambus (2009),

http://www.ftc.gov/os/caselist/0110017/index.shtm, Qualcomm v Broadcom). For an analysis of these cases,

see “Deterring “Patent Ambush” in Standard Setting: Lessons form Rambus and Qualcomm”, M. S.

ROYALL, A. TESSAR, A. DI VINCENZO, Antitrust, Vol. 23, N°3, 2009, American Bar Association,

available at: http://www.gibsondunn.com/publications/Documents/Royal-Tessar-DiVincenzo-

DeterringPatantAmbush.pdf 46 Op. cit. EU Guidelines on horizontal co-operation agreements, § 257 et seq. (namely § 269) 47 Reasonable and Non-discriminatory licensing (RAND) and Fair, Reasonable and Non-discriminatory

licensing (FRAND) are types of licensing schemes used by standards setting organizations (SSO) in order to promote in an fair and effective manner the implementation of industry standards. See, for instance,

http://en.wikipedia.org/wiki/Reasonable_and_non-discriminatory_licensing 48 See Antitrust Guidelines for the Licensing of Intellectual Property issued by the US DoJ and FTC (1995), and

European Commission regulation N°772/2004 on block exemption for transfers of technology, April 2004

and relevant Guidelines 2004/C 101/02 49 Op. cit. EC regulation N°1217/2010, Article 2, § 2: “The exemption provided for in paragraph 1 shall apply to research and development agreements containing provisions which relate to the assignment or licensing of

intellectual property rights to one or more of the parties or to an entity the parties establish to carry out the

joint research and development, paid-for research and development or joint exploitation, provided that those provisions do not constitute the primary object of such agreements, but are directly related to and necessary for

their implementation.” 50 Op.cit. EU Guidelines on transfers of technology, § 60

14 Iohann Le Frapper

ability to determine its prices when selling products, sharing markets and customers or

restricting its ability to exploit its own technology or to carry out R&D projects51

.

Under US law, licensing arrangements are governed by the Antitrust Guidelines for the

Licensing of Intellectual Property (1995). As a reminder, the Guidelines provide an

antitrust “safety zone” for licensing arrangements made by companies whose combined

market shares do not exceed a 20% threshold. Otherwise, safe harbour could be also

granted to licensing arrangements regarding a technology which has three or more

substitutable equivalents on the market52

. Given that the Guidelines have not been

officially updated, one might question their relevance; counsel should thus remain

particularly aware of the potential new agencies’ stance on that matter.

3.2. Partners’ refusal to grant licences to third parties

Parties to a strategic alliance should bear in mind that antitrust provisions related to the

abuse of monopoly power are still applicable, regardless of their potential exemption

under rules governing anti-competitive agreements.

Also, when partners collectively refuse to grant a licence to a third party, such behaviour

may fall within the scope of provisions prohibiting agreements in restraint of trade.

3.2.1. Refusal to grant a licence under EU rules on abuse of dominance

Under EU law, the famous case Tetra Pak53

expressly held that exemption under former

Article 85 (art.101 TFEU) did not preclude application of Article 86 (art. 102 TFEU)

prohibiting abuses of dominant market power.

One major issue is to distinguish whether a partner’s refusal to grant a licence or to give

access to relevant intellectual property may constitute abuse of a dominant position.

In fact, the European Court of Justice (“ECJ”) has decided in few cases that the refusal to

license intellectual property rights may constitute an abuse of a dominant position. In the

famous RTE –ITP “Magill” case54

, the ECJ observed that, although the mere ownership

of an intellectual property right cannot in itself confer a dominant position, “the exercise

of an exclusive right by the proprietor may, in exceptional circumstances, involve abusive

conduct” (§ 50). Some stringent conditions were nonetheless necessary for the refusal to

qualify as an abuse of dominant position55

.

On that aspect, the Commission has specified that a dominant company’s “refusal to

supply” may constitute abusive conduct, including the “refusal to license intellectual

51 See EC regulation N°772/2004, Article 4 for a full range of hardcore restrictions, depending on several

factors to closely consider. 52 Intellectual Property Guidelines, 4.3 53 ECJ, Case T-51/89, 1990, see § 23;

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61989TJ0051:EN:PDF; the EU Guidelines on horizontal co-operations refer to that case, stating that “the assessment under Article 101

as described in these guidelines is without prejudice to the possible parallel application of Article 102 of the

Treaty to horizontal co-operation agreements” (§ 16). 54 ECJ, C-241/91 and C-242/91 RTE – ITP v. Commission (1995) – “Magill” case 55 Op.cit. “Magill” case § 319/ the Court decided that the refusal to grant a licence can constitute an abuse of

dominant position in some exceptional circumstances, these being, in particular: “in the first place, the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighbouring

market; in the second place, the refusal is of such a kind as to exclude any effective competition on that

neighbouring market; in the third place, the refusal prevents the appearance of a new product for which there is potential consumer demand. Once it is established that such circumstances are present, the refusal by the

holder of a dominant position to grant a licence may infringe Article 82 EC unless the refusal is objectively

justified.”

R&D Alliances and Other Strategic Partnerships 15

property rights, including when the licence is necessary to provide interface

information”56

.

The most prominent example of abuse of a dominant position in the case of “refusal to

supply” is to be found in the case Microsoft v Commission (2007) on interoperability

information.57

As for strategic alliances, may the collective refusal, expressed by a group of licensors, to

grant a licence to a third party, fall within the concept of collective abuse of dominant

position?

In the case Tiercé Ladbroke58

(1997), the ECJ denied the application of Article 102

TFEU to a collective refusal to grant licences expressed by a group of licensors, on the

ground that the criteria developed in the “Magill” case were not fulfilled; as a

consequence, the ECJ did not formally exclude such application in general and

theoretically may allow enforcement of Article 102 TFEU to a collective refusal if the

“Magill” case’s criteria were fulfilled.

As a general matter, these hypotheses appear quite unlikely to set a precedent for

members of a strategic alliance, given the stringent conditions set forth in the “Magill”

case, and the very scarce and particular applications that have followed for the time

being.

3.2.2. Refusal to grant a licence under US monopolization law: a more

restrictive approach

Under US law, alliances and licensing of intellectual property are usually governed by the

“rule of reason” assessment of the competitive effects of the intended alliance.

Generally, it is acknowledged that the mere refusal to grant a licence is unlikely to be

sufficient to constitute, in itself, abuse of monopoly power59

, for it has long been

established that antitrust laws impose no duty upon a firm to deal with rivals. Thus, as

opposed to the results of EU antitrust analysis from time to time, under US law,

companies’ refusals to grant a licence have not typically been qualified as abuses of

monopoly power.

Yet, one should be careful since this issue remains unsettled: in some cases, companies

with tangible properties and equipment might be compelled to share them with others60

,

under the “essential facility” doctrine. This doctrine “imposes liability when one firm,

which controls an essential facility, denies a second firm reasonable access to a product

or service that the second firm must obtain in order to compete with the first”61

and has

been enforced several times by the US Supreme Court62

, though with strict limitations.

3.2.3. Concerted refusal to license the results of a partnership to third

parties

56 See Communication from the Commission (2009/C 45/02, 24.02.2009) – Guidance on the Commission’s

enforcement priorities in applying Article 82 on the EC Treaty to abusive exclusionary conduct by dominant undertakings, § 78:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:045:0007:0020:EN:PDF 57 ECJ, 17 september 2007, T-201/04 ; see also case IMS Health, 24 April 2004, C-418/01 58 12 june 1997, Tiercé Ladbroke SA v. Commission, T-504-93 59 Report “Competition and Monopoly: Single Firm Conduct under Section 2 of the Sherman Act”, US Department of Justice,

2008, p.124, see: http://www.justice.gov/atr/public/reports/236681.pdf 60 For instance, US Supreme Court, Aspen Skiing Co. v. Aspen Highlands Skiing Corp (1985) 61 See Alaska Airlines Inc. v. United Airlines Inc., 9th cir., 1991, cited in “The Essential Facilities Doctrine Under US Antitrust

law”, R. PITOFSKY, 2002 http://www.ftc.gov/os/comments/intelpropertycomments/pitofskyrobert.pdf 62 United States v. Terminal Railroad Ass’, 224 U.S. 383 (1912)

16 Iohann Le Frapper

It seems acknowledged under EU and US laws that the concerted refusal to grant a

licence may constitute a particular type of anticompetitive agreement called a “group

boycott”, insofar as such refusal is intended or has the effect solely of restricting

competition on the relevant market. In the case of what appears to be a hardcore cartel-

type restriction of competition agreed among competitors, a negative effect on

competition will likely be presumed, and the arrangement may be deemed to be illegal

regardless of assertions of positive intent.

Under EU law, in the aforementioned case Tiercé Ladbroke63

(1997), the Court found

that the concerted refusal to license may indeed fall within the scope of Article 101

TFEU on anticompetitive agreements64

and be challenged as such.

In the US, in the case Primetime 24 JV v. NBC (2000), the US Court of Appeal for the

2nd

Circuit held clearly that “a concerted refusal to license copyrighted programming to

PrimeTime in order to prevent competition from it is a boycott that, if proven, violates the

Sherman Act”.65

The aforesaid rulings show classic implementation of antitrust rules on agreements in

restraint of trade. In-house counsel should provide clear guidance to their management on

the fact that collaboration among partners is limited to their mutual relations for the sole

purpose of the project carried out, and potential exemptions do not grant them protection

against the enforcement of antitrust rules to their relationships with third parties.

Concluding remarks

In the global economy of today, strategic alliances are very likely to have an international

dimension and may as such entail relationships between companies sharing very similar

or to the contrary different corporate and legal cultures. Therefore, in-house lawyers

should be able to anticipate the risks linked to these differences, in the same manner as

they are able to comprehend a variety of laws applying to a single matter.

This variety of applicable legal and cultural frameworks and related risks for counsel has

been recently illustrated by the Akzo Nobel decision rendered in 2010 by the ECJ, which

triggered the resurgence of the old debate on the lack of legal privilege for in-house

lawyers dealing with the EU Commission (likewise for in-house counsel in countries like

France) 66

. The side effect of the EU case-law is in effect to put European in-house

counsel at a competitive disadvantage compared to their US legal peers in order to be

recognized as “trusted legal advisers”. Such a stance can also be detrimental to the small

and medium enterprises in Europe as they may not always understand the opportunity or

afford to seek the benefit of seeking advice from a law firm to ensure that the content of

the legal opinion (subject to legal privilege) can not be relied upon by antitrust agencies

against the interests of the outside counsel’s client.

***

Alcatel-Lucent is a global communications solutions provider, a leader in mobile, fixed,

IP and optics technologies, and a pioneer in applications and services; Alcatel-Lucent

63 12 june 1997, Tiercé Ladbroke SA v. Commission, T-504-93 64 Op.cit. Tiercé Ladbroke, § 146: “it is conceivable that some aspects of the manner in which intellectual

property right is exercised may prove to be incompatible with Article 85 [101 TFEU] where they serve to give effect to an agreement which may have as its object or effect the prevention, restriction or distortion of

competition within the common market.” 65 US Court of Appeal, 2nd Circuit, Primetime 24 JV v. NBC, point b), available at:

http://caselaw.findlaw.com/us-2nd-circuit/1431019.html 66 ECJ, Akzo Nobel Chemicals Ltd/Commission, 14 September 2010, C-550/07 P; this case upheld a previous

ECJ Court decision (AM & S Europe v Commission, 155/79, 1982 ECR 1575).

R&D Alliances and Other Strategic Partnerships 17

operates in more than 130 countries and achieved revenues of Euro 16 billion in 2010. It

is incorporated in France and headquartered in Paris.

18 Iohann Le Frapper

ACKNOWLEDGEMENTS

We are grateful to Alan Hoffman and Eva Bender, both corporate counsel at Alcatel-

Lucent, for their useful comments and suggestions.

REFERENCES

BURROWS Euan, CUNINGHAME Neil, VANDENCASTEELE Alexandre, “Co-operation agreements

between competitors”, Ashurst Quickguide, 2011

GOMES-CASSERES Ben, “Managing Beyond the Alliance”, www.criticaleye.net, June – August 2004

KOVAVIC E. William, “Intellectual Property Policy and Competition Policy”, 66 N.Y.U. Ann. Surv. Am. L. 421 2010-2011

LUGARD Paul, “The EC Commission’s Review of the EU Competition Rules on Horizontal Agreements”, CPI Antitrust Journal, Competition Policy International, 2010

MOORE H. Gary, “Joint venture and Strategic Alliances: ownership of developed intellectual property – Issues and Approaches”, The Computer & Internet Lawyer, Vol. 24, N°9, September 2007

PEUGEOT Valerie et al. « La Coopération au cœur des modèles d’affaires », Vision Croisées - Usages, Technologies et marchés en mouvement N°2, Bearing Point - Sofrecom, 2009

REIMANN Carsten, “Essential Function vs. Essential Facility: Defining the amount of R&D protection in high-tech industries after IMS and Microsoft”, The Competition Law Review, Vol.1 Issue 2, December 2004

ROBINSON Bill, “Why Strategic Alliances Don’t Work”, Forbes.com, 07.01.2002

ROYALL Sean, TESSAR Amanda, DI VINCENZO Adam, “Deterring “Patent Ambush” in Standard Setting:

Lessons from Rambus and Qualcomm”, American Bar Association, Antitrust, Vol.23, N°3, Summer 2009

SERRAT Olivier, “Learning in Strategic Alliances”, Asian Development Bank – Knowledge Solutions, 62,

September 2009

B. SICALIDES, B. SHER, “Competitor Collaborations: new EU Guidelines and US law compared”, Cross-

Border Competition Handbook 2011, Practical Law Company

US Department of Justice and Federal Trade Commission, « Antitrust Enforcement and Intellectual Property

Rights : Promoting Innovation and Competition », 2007

US Department of Justice, “Competition and Monopoly: Single Firm Conduct under Section 2 of the Sherman

Act”, 2008

VILMART Christian, VILMART Christine, “Les lignes directrices sur les restrictions horizontales: l’enfer

pave de bonnes intentions”, La Semaine Juridique Entreprise et Affaires N°7, 17 Février 2011, 1134

VOGELAAR O.W. Floris, “The Compulsory Licence of Intellectual Property Rights under the EC Competition

Rules: an analysis of the exception to the general rule of ownership immunity form competition rules”, The Competition Law Review, Vol.6 Issue 1 pp.117-137, December 2009

WILLIAMSON V. Dean, “Antitrust, Innovation, and Uncertain Property Rights: Some Practical Considerations”, 2010 Duke L. & Tech. Rev. 2010

XU JIANG, YUAN LI, SHANXING GAO, “The stability of strategic alliances: Characteristics, factors and

stages”, Journal of International Management 14 (2008), p.173-189