First published in our Biotech Review of the Year publication (Issue 10).
Not only do the various guidance documents (which run to many hundreds of pages in aggregate) provide helpful insights as to how the authorities believe the rules should apply in particular commercial contexts, they also provide a degree of control over how the authorities are permitted to exercise their enforcement powers. In our experience as external counsel, following the available guidelines on topics such as technology transfer/licensing agreements or R&D agreements is critical, and often of greater importance than seeking to fit agreements mechanically within the scope of relevant block exemptions.
Against that backdrop, it is worth taking note of the recent and current EU and UK reviews of some of the guidance that is particularly relevant to the biopharma sector. Three sets of guidance are currently under consultation by the UK’s Competition and Markets Authority (CMA) and/or the European Commission:
Horizontal Guidelines and RDBE:
- CMA: Consultation complete and new RDBE now in force; Guidelines not yet published
- Commission: RDBE and Guidelines due to be adopted by June 2023
Technology Transfer Guidelines and TTBE:
- CMA: Consultation starting in spring 2023 to decide whether to introduce UK version
- Commission: Longer term consultation expected prior to expiry of current TTBE in April 2023
Notice on Relevant Market:
- CMA: No news on any consultation
- Commission: Draft replacement published; consultation concluded in January 2023
We comment on each of these below.
Horizontal Guidelines and R&D Block Exemption
The UK R&D Block Exemption Order was introduced in December 2022. Following feedback, the CMA sought to bring additional clarity to the definitions used in the block exemption, but has otherwise largely maintained the status quo regarding the key terms of the prior EU block exemption and the related guidance.
The 2010 EU R&D Block Exemption was also due to expire at the end of 2022. However, the EU consultation was delayed following substantial feedback raising significant concerns about the treatment of innovation markets. In its draft published for consultation, the European Commission proposed that where parties compete in innovation, three or more competing R&D efforts that are “comparable” must exist before the block exemption will apply. The proposed change was perhaps influenced by a number of merger decisions in relation to pipeline products in the pharma sector, where divestments were required where the number of independent competitors was reduced to fewer than three. However, this appears misguided in this context: requirements to divest in cases such as GSK/Novartis and Hospira/Pfizer related to pipeline products rather than early-stage R&D. In those cases the contemplated acquisitions clearly would have resulted in a reduction in the number of independent products; R&D collaborations by contrast are intended to increase innovation.
As well as the (not insignificant) practical problem of identifying such other R&D efforts, it is far from obvious that R&D intended to lead to a first-in-class product is likely to restrict competition, such that agreements leading to such R&D should be excluded from the scope of the relevant block exemption.
At the time of writing, it remains to be seen whether the EU will take account of the feedback from business and law firms on this issue.
Technology Transfer Guidelines and Block Exemption
The EU Technology Transfer Block Exemption (TTBE) and accompanying guidelines provide a framework for assessing the compliance of technology licensing agreements with EU competition law.
The CMA has brought forward a planned consultation on this issue in advance of the expiry of the EU TTBE, given the UK government’s policy of replacing EU legislation. The CMA is planning to consult on whether to retain a UK version and if so whether to diverge materially from the EU version.
Our expectation is that, as with previous consultations on UK versions of EU block exemptions, the UK will implement a UK Technology Transfer Block Exemption Order (TTBEO) with some accompanying guidance. The timing of the UK consultation in advance of the expiry of the EU TTBE means that the CMA has an opportunity to take the policy lead in this area.
The CMA is, however, well aware of the risks of divergence for the UK economy. Many licences will cover the whole of Europe, including the UK, so losing regulatory alignment would result in added complexity and increase the compliance burden. For this reason, we anticipate that the CMA will enact a TTBEO which closely resembles the EU TTBE, subject to necessary changes to make it UK-specific. However, the CMA may give itself the opportunity for a further review after the new EU TTBE has come into force (rather similarly, the new UK Verticals Block Exemption Order has a relatively short period of validity, having been introduced last year and expiring in 2028, before the EU equivalent).
That being said, there are a number of issues that may come up in both the UK and EU consultations. Below we identify three that we think are particularly interesting:
- No-challenge clauses (again)
Looking back to the consultation on the 2013-14 review of the EU TTBE, a flashpoint in the consultation concerned the EU’s plan to remove all protection for no-challenge clauses, including previously permissible ‘terminate-on-challenge’ provisions (i.e. clauses allowing a licensor to terminate the licence if the licensee challenges the validity of the licensed IP).
Significant representations were received on this issue from the biotech industry, which had a concern about well-funded licensees using this change in the rules to increase challenges to the licensed IP before commercialisation, with potentially significant implications for the viability of licensing programmes. The European Commission subsequently backtracked, and allowed such provisions to continue to benefit from the block exemption but only where included in exclusive licences. However, the guidance made clear that the protection was dependent on market share thresholds being met. That leaves licensors potentially exposed where the product based on their technology opens up a new market, and the parties’ market shares grow beyond the thresholds in the TTBE. Considerations arising from the Notice on the Definition of the Relevant Market (also under consultation – see below) may also be relevant here. This issue may therefore come under the spotlight once again.
- Long-term licensing obligations
Not strictly a new issue, but one that seems to come up with increasing frequency in recent years. Licence agreements in the pharma sector often involve royalties being payable long after patent expiry. In many cases that can be a sensible way to structure compensation given the time it can take to commercialise a new pharma product. However, where licences go further and have no, or no effective, ability for licensees to terminate (for example, where a combined patent and know-how licence is granted and the licensee needs continued access to the know-how), licensees can be locked in to payments that bear no resemblance to the value of the licensed rights.
The current EU Guidelines take a permissive approach to post-expiry royalties, which is arguably not fully in line with recent case law of the Court of Justice (notably Case C-567/14 Genentech v Hoechst). Additional guidance on assessing the appropriateness of such post-expiry royalties and related restrictions would be welcome.
- Platform technologies
Licensing programmes for therapies based on technologies such as CAR-T or RNA are increasingly operated as a form of platform, with the core technology being made available for a multitude of potential applications. Relevant markets (and thus market shares) are often particularly difficult to assess in this context, given that licensees may retain considerable flexibility to make exploratory use of the licensed technologies, with no certainty as to the nature of final products. Tailored guidance on acceptable licensing practices in this area would likely be of benefit to the industry.
Notice on Definition of the Relevant Market
The final relevant consultation concerns the EU Notice on the Definition of the Relevant Market. The Notice serves a different purpose to the block exemptions and guidelines referenced above. Rather than providing guidance on specific types of agreement, the Notice has relevance across antitrust and merger control, providing an explanation of how the European Commission assesses relevant markets and competitive constraints.
As such, it is relevant whenever parties need to assess their market shares (as under most block exemptions), and is also critical to the assessment of whether a company is dominant and subject to a ‘special responsibility’ not to distort competition.
To a large extent, the general principles set out in the draft revised Notice are unchanged compared to the current version, which has been in place for nearly 25 years. Market definition is a “tool” for defining the boundaries of competition between firms and its main purpose is to identify “immediate competitive constraints” in a systematic way. Identifying the extent to which customers can switch easily to readily available substitute products (demand substitution) remains at the core of that process.
However, there are three important differences of emphasis in the draft revised Notice.
- First, it downplays the centrality of competition on price and, consequently, the SSNIP (small but significant non-transitory increase in price) test as the sole or main measure of competitive constraints. Other parameters of competition, such as quality, sustainability, security or privacy, are all relevant to the question of market definition.
- Second, market definition in relation to innovation and tech is a significant theme in the revised Notice. The need to take account of the “specific factors” in industries characterised by frequent and significant investments in R&D is recognised. The revised Notice emphasises that while innovation is a “key parameter of competition”, the results are inherently “largely uncertain”. As a result, it seems that the Commission will cast its net widely to factor in all potential outcomes.
- Third, and most critically for the biopharma sector, the draft Notice gives increasing recognition to the potential for markets to change over time. Where technological progress leads to “structural market transitions” that affect the general dynamics of demand and supply, the Commission may adopt a “forward-looking assessment”. In a pharma context, the Commission specifically notes that this may lead to widening the market to include pipeline products (potentially broadening the class of agreements that will be deemed to be between competitors) or narrowing the market to a single molecule where the entry of a generic alternative is imminent (in line with the CJEU’s recent ruling in Case C-307/17, Generics UK). If adopted in the final version, this latter point confirms that – particularly for patentees facing near-term loss of exclusivity – narrow market definitions are increasingly likely. That obviously has very significant implications for the risk of competition authority investigations under abuse of dominance rules – some current examples of which are discussed elsewhere in this publication.
It is notable that the initial EU request for stakeholder input on the TTBE elicited only 12 responses, none of which have a focus on the biopharma sector. While keeping on top of all of the ongoing consultations is a significant challenge, particularly for companies active in both the UK and the EU, the investment may pay off in terms of identifying potential future risks and shaping the discussion around sector-specific issues.
 Block exemptions automatically exempt particular categories of agreements from the competition rules if certain conditions are satisfied
 The Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022
 Public consultation on the draft revised Horizontal Block Exemption Regulations and Horizontal Guidelines
 See, for example, comments recently made in relation to a review of the Liner Shipping Block Exemption, paragraphs 4.18-4.19
 Competition: Commission seeks feedback on draft revised Market Definition Notice
 EU competition rules on technology transfer agreements – evaluation