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International In-house Counsel Journal
Vol. 5, No. 18, Winter 2012, 1




    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.

International In-house Counsel Journal                      ISSN 1754-0607 print/ISSN 1754-0607 online
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 now 3.
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, 27 th 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 Court 10, 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 procedure 13), 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 year 15; 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 technology 20. 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 prevail 23.


 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 27 th,
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 contexts 26.
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 guidelines 28, 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 process 33.


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 compensation 34. 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 restrictions 37
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 arrangements 40, 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 accordingly 42”.
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 instance 45).
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 projects 51.
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 power 59, 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 others 60,
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

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Co-Operation and Competition: Antitrust Pitfalls in R&D Alliances and Other Strategic Partnerships

  • 1. International In-house Counsel Journal Vol. 5, No. 18, Winter 2012, 1 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. International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online
  • 2. 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 now 3. 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, 27 th 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
  • 3. 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 Court 10, 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 procedure 13), 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. 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 year 15; 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
  • 5. 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 technology 20. 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 prevail 23. 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 27 th, 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. 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 contexts 26. 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 guidelines 28, 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
  • 7. 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. 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 process 33. 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
  • 9. R&D Alliances and Other Strategic Partnerships 9 This access to the resulting intellectual property rights may give rise to compensation 34. 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 restrictions 37 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. 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.
  • 11. 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. 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 arrangements 40, 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 accordingly 42”. 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)
  • 13. 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 instance 45). 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. 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 projects 51. 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.”
  • 15. 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 power 59, 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 others 60, 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. 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).
  • 17. 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. 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