When do the Economic Benefits Derived from R&D Agreements Outweigh Their Restrictive Effects Pursuant to Article 101 of the TFEU?
R&D agreements constitute an important part of a company’s business strategy, since it helps to bring new products or services to the market. It can be done with firm’s sole effort or others may prefer to collaborate with our companies to improve their technology and the output. EU competition policy looks enthusiastically at pure R&D agreements as horizontal R&D agreements can lead to economic benefits in a way that to allow firms to refrain from duplication of budgets and to internalize knowledge spillovers. In parallel with that approach, at one conference, former EU Commissioner for Competition stated that: “In order to make Europe more competitive what we need to do is to promote Europe’s capacity for research and development, for innovation and for entrepreneurship.”
On the other hand the Commission wary of agreements which are enhancing subsequent joint exploitation of the results of the R&D. Due to the significance of this distinction, for the subsequent joint exploitation aspect of R&D agreements it is important to decide on in which circumstances the economic benefits derived from that agreements outweigh their impairing effects for the competitive market. In order to answer this question, Art 101(1) and 101(3) of TFEU and Regulation 1217/2010 which provides block exemptions will be discussed in that paper.
The Application of Article 101(1) to R&D Agreements
Chapter 3 of the Guidelines on Horizontal Cooperation Agreements leads the way for companies and practitioners to understand Article 101 and its application. In that regard, the guidelines apply to any form of agreement- whether in the form of joint venture or another form. As same with the other horizontal agreements, first step is to define relevant market in order to assess that particular agreement. Paragraph 112 of the Guidelines states that the key to defining markets in R&D cases is to identify those products, technologies or R&D efforts that act as competitive constraint on the parties to the agreement. In that context, both the product market, innovation market and the technology market may be hindered. Market shares are also particularly important when considering of the block exemption rules. Furthermore, R&D cooperation between non-competitors usually does not restrict competition since exploitation of the results show effect on different markets and foreclosure effect is seen less.
Paragraph 127 to 140 of the Guidelines provides the evaluation of R&D agreements under Article 101(1). The Guidelines reckons 3 main possible anti-competitive effects:
- a reduction or slowing down of innovation.
- reducing competition between the parties outside the scope of the agreement.
- foreclosure of access to the market (arise in the context of co-operation involving at least one player with a significant market power).
Restrictions by Object
If the real object of an agreement is creating a disguised cartel instead of R&D, it falls under Article 101(1). However, one should bear in mind that even if Article 101(1) applies to a particular agreement and block exemption is not applicable, it may still be individually exempted under Article 101(3).
Restrictions by Effect
Most R&D agreements do not fall under Article 101(1). Paragraph 129 to 140 deals with when R&D agreements violate Article 101(1) due to their anticompetitive effects. Some agreements which are unlikely to have anti-competitive effects and would not normally be caught by Article 101(1) as follows:
- R&D agreements pertain to cooperation at an early stage, far removed from the exploitation of possible results.
- R&D agreements between non-competitors, unless there is a possibility of a foreclosure effect and one of the parties has significant market power in point of key technology.
- In a scenario that the outsourcing of R&D to institutes and academic organizations which are not active in the exploitation of the results.
- Pure R&D agreements which do not cause competition problems with respect to appreciably reducing effective competition in innovation.
Despite the Commission calls attention to a safe haven is provided by Article 4 of Regulation 1217/2010, no market share figure is given for the application of Article 101(1) to R&D agreements. Commissions mentality is that in a situation where the parties have a market share of more than 25% it does not necessarily lead that Article 101(1) is infringed, nevertheless an infringement becomes more probable as the parties position on the market is stronger.
Taking into account different interest groups, the Commission has adopted a block exemption regulation under Article 101(3) in terms of R&D agreements. The current block exemption is enforceable until 31 December 2022. The main function of these block exemptions is that where an R&D agreement does not contain any of the hardcore restrictions (Article 5 of the BER), it is eligible for Article 101(3) through the “safe harbour” of the exemptions. On the other hand, hardcore restrictions are restrictions which are considered to have such an obvious restrictive effect on competition that they can be presumed to be caught by the Article 101(1) prohibition irrespective of market shares of concerned undertakings.
According to BER, the block exemption will apply to an R&D agreement containing provisions which relate to:
- the assignment or licensing of IPR’s 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 agreement but are directly related and necessary for their implementation.
It is important to state that conditions provided by BER are applicable only where an agreement infringes Article 101(1). If agreement is not restrictive in terms of Article 101(1), then there is no need to comply with BER.
When it comes to duration of the exemption and the market share threshold, Article 4 of the BER gives us related information. Pursuant to Article 4(1), if the parties are not competing undertakings, the exemption shall apply for the duration of the R&D; and if the results are jointly exploited the exemption shall continue to apply for seven years from the that the products or technologies first put on the internal market. Moreover, Article 4(2) deals with the circumstances in which parties are competing undertakings. Block exemption applies if when the parties concluded an agreement, their share of market for the products or technologies did not exceed 25 per cent. In case of paid for R&D the financing party’s market share is also needed to taken into account (Article 4(2)b).
Last but not least, as we have mentioned it before, in case of hardcore restrictions, BER is not applicable and the issue is going to be solved by case-by case analysis. But due to their nature, it is not easy to justify hardcore restrictions under Article 101(3). Apart from hardcore restrictions, Article 6 of the BER lists two “excluded restrictions” which can be classified as no challenge obligations and licensing restrictions. Although they are excluded, inclusion of that kind of provisions does not prevent the application of BER’s if the remaining clauses are severable.
The Application of Article 101(3) to R&D Agreements
Paragraph 141 to 146 of the Guidelines construes the assessment of R&D agreements under Article 101(3). There are 4 criteria:
- Efficiency gains
- Pass-on to consumers
- No elimination of competition
In reference to Commission, many R&D agreements provide efficiency by combining complementary skills and assets thus entail improved new products or technologies being developed and marketed expeditiously than would otherwise be the case.
Indispensability criterion is closely related to temperance. R&D agreements require a careful analysis of whether particular restrictions are indispensable, whether efficiency gains are passed on to customers and whether the agreement could enable the parties to eliminate competition in respect of substantial part of the relevant market.
 Ruble, R., & Versaevel, B. (2014). Market Shares, R&D Agreements, And the Eu Block Exemption. International Review of Law & Economics, p.2.
 Joaquin Almunia, Address at Confindustria Conference, 9 April 2010.
 The EU competition rules on horizontal agreements. (2016, June), p.10, Retrieved October 15, 2017, from https://www.slaughterandmay.com/media/64578/the-eu-competition-rules-on-horizontal-agreements.pdf.
 For the Commission’s explanation for the pros and cons of R&D cooperation see also; XVth report on Competition Policy (1985), para.282.
 Whish, R., & Bailey, D. (2015). Competition law(8th ed.). Oxford: Oxford University Press, p.628.
 Frenz, W. (2016). Handbook of EU competition law. Heidelberg: Springer, p.558.
 Guidelines on Horizontal Cooperation Agreements, para 112.
 Frenz, p.558.
 Fatur, A. (2012). EU competition law and the information and communication technology network industries: economic versus legal concepts in pursuit of (consumer) welfare. Oxford: Hart, p.213.
 Guidelines, para.128.
 Guidelines, para.129.
 Whish&Bailey, p.630.
 Whish&Bailey, p.631.
 Commission Reg. (EU) 1217/2010 (OJ 2010 L335/36, 18.12.2010).
 Whish&Bailey, p.632-633.
 Whish&Bailey, p.635.