On this Ropes & Gray podcast, licensing and collaboration partner Hannah England and antitrust partner Lisa Kaltenbrunner discuss how EU antitrust rules impact non-competes and other exclusivity provisions in collaboration agreements, license agreements, and asset acquisitions. They explain why these rules apply even to U.S. companies, outline the key differences between collaboration and license agreements, and highlight the risks of non-compliance, such as unenforceability and regulatory scrutiny. The conversation offers practical guidance on structuring non-compete clauses to align with EU competition law.
Transcript:
Hannah England: Hello, everyone. My name is Hannah England—I’m a partner in the Ropes & Gray strategic transactions practice.
Lisa Kaltenbrunner: My name is Lisa Kaltenbrunner, and I am a partner in the European and U.K. antitrust team.
Hannah England: Today, we’re planning to provide an understanding and an overview of how the European antitrust rules treat non-compete provisions in collaboration agreements and licenses and relevant asset acquisitions. This is a topic that we spend a lot of time with our clients on in various transactions. In particular, we’re going to explore how non-compete restrictions may impact countries in the EU differently than in the rest of the world. And at the outset, we would like to caveat that this podcast does not provide legal advice and does not replace individual review.
Let’s start with the basics: Why do we even need to assess non-compete provisions under EU antitrust laws, in particular when the parties to the agreement are U.S. companies?
Lisa Kaltenbrunner: I’m glad we do Hannah, actually, because otherwise we wouldn’t be working together. But to be more on the technical side, EU antitrust rules apply to any practices, activities, agreements, conduct, behavior—anything, you name it—that could affect competition in the EU internal market. So, this can also be the case in relation to license agreements between U.S. companies that concern the EU.
Hannah England: And does it matter where the contract is governed if it’s under U.S. law?
Lisa Kaltenbrunner: Unfortunately, that’s not a way to escape European antitrust scrutiny. The relevant assessment is whether the contract—governed by U.S. law or not—impacts trade between member states in the EU.
Hannah England: How does such an agreement concern the EU?
Lisa Kaltenbrunner: For example, the territory—as you define it in the license agreement—could cover the EU, could be an out-license for the EU, or everything ex-China, for example. Or there could be clinical trials in the EU in relation to licensed products. There could be IP rights that may be registered in EU member states or multiple. So, there could be very different reasons to create such a local nexus to the EU.
Hannah England: What if the licensed product under the agreement, or the assets that are being acquired, are not yet being commercialized? Could the agreement still affect competition?
Lisa Kaltenbrunner: Yes, it could. It could affect innovation competition, for example, competition for research and development, pipeline competition, and so on.
Hannah England: How does the non-compete in a license agreement or an asset acquisition negatively affect competition?
Lisa Kaltenbrunner: An agreement with an actual competitor or a potential competitor, not to compete, could restrict competition in the EU. Such restriction can be justified, for example, to incentivize one party’s investment or R&D, by providing certainty that the party will experience the benefit of its work. But other times, non-competes may restrict competition and harm innovation, consumers and patients, and are categorized as anti-competitive. Therefore, parties must assess non-compete provisions on a case-by-case basis, including the parties’ activities, their respective pipelines, the type of agreement, the extent of their collaboration activities, and their market shares.
Hannah England: Sorry to interrupt, but can you explain to me what you mean by the actual and potential competitors?
Lisa Kaltenbrunner: Yes, of course. So, actual competitors are already active on the same relevant product market, so competing with your licensed product. Potential competitors, on the other hand, are about to enter the market, or plan to enter to do so, in the next few years.
Hannah England: Got it, thanks. Going back to my previous question, when you say that these provisions can be anti-competitive, do you just mean that they’re unenforceable, or something broader?
Lisa Kaltenbrunner: Correct. If a non-compete infringes competition law, it is void and unenforceable. However, it also carries the risk of the parties being investigated by antitrust agencies, for example, for delaying market entry of a competing drug or for market-sharing. This can be considerably more harmful to business than just an unenforceable contract. It can lead to a multi-year investigation by antitrust agencies, with intrusive requests for information, taking up business resources, and incurring legal spend.
Hannah England: Yes, certainly not something that we want our transactional clients to encounter. You mentioned that we were focusing on agreements with actual potential competitors. Before you continue, can you explain to me a little more about what we mean by this?
Lisa Kaltenbrunner: Yes, good point. So, when we talk about competitors in the context of collaboration agreements or out-license agreements, it has slightly different meaning than we might expect:
- Actual competitors are parties who already have a product in development on the market that is competitive with the product to which the activities under the collaboration or license agreement relate to.
- Potential competitors, on the other hand, are parties who could feasibly supply a product that is competitive with the product to which the activities under the collaboration or license agreement relate, but don’t yet have such product in the development or on the market.
Hannah England: Now that we have that covered, can we discuss how the EU competition rules differentiate between what you call a “collaboration agreement” and a “license agreement,” because these are two common types of agreements that we work with our clients on? To ensure that we are all on the same page, let me summarize what I mean when I say “collaboration agreement” and a “license agreement” first. A collaboration agreement—for purposes of competition law—would be an agreement between two or more parties to pursue research and development of products or technologies in a collaborative manner. And what we mean by that is where both parties are performing collaboration activities for a certain period. Is that right?
Lisa Kaltenbrunner: Yes, absolutely.
Hannah England: Okay. Contrast that to a license agreement, on the other hand, which is an agreement between a licensor and a licensee in which one party licenses products or technologies to the other and there is no material collaboration or joint development efforts, and that’s what you refer to as an in-license or an out-license.
Lisa Kaltenbrunner: Absolutely correct, Hannah. And there is also—just to make it a little bit more complicated—a third category, namely an asset acquisition, if the acquisition structure of your deal is more akin to an out-license/in-license than a typical out-license agreement.
Hannah England: Let’s start with the first category, the collaboration agreement. How do EU antitrust laws treat non-compete restrictions in a collaboration agreement where the parties are truly working together to research and develop products?
Lisa Kaltenbrunner: First, the agreement must feature collaboration between the parties, as you mentioned, such as joint R&D. Second, where the parties are actual potential competitors, we need to assess their market shares on the relevant market of the licensed product. Their combined market share must not exceed 25%—this is the market to which the licensed product relates, not any other market where the targets over the companies are active. And then, finally, if the non-competes restrict a party’s R&D, it can only last for the duration of the collaboration. So, you need to match the duration of the collaboration with the non-compete duration, and then there can be no post-collaboration R&D non-compete—that’s quite an important one to note.
Hannah England: Okay. So, no development non-compete after the parties are done working together in the collaboration. But what about restrictions on commercialization in a commercialization non-compete? Does this also have to be limited to the period where the parties are actually working together during the collaboration phase?
Lisa Kaltenbrunner: Fortunately for the parties, the EU rules are more liberal on that front. The commercialization non-compete can last for seven years from the joint launch of a collaboratively developed product. After these seven years, the non-compete may remain in force—so you don’t have to terminate it—but only for as long as the combined share of the parties do not exceed 25%.
Hannah England: Are there other requirements that our clients should be aware of in relation to the commercialization non-compete?
Lisa Kaltenbrunner: Yes, of course. It would be too easy otherwise, wouldn’t it? We’ve got a few, including that all parties must be able to perform further R&D on the results of the jointly developed IP, which means that the parties must have full access to the results of the collaboration IP as soon as they become available—that’s really one important one to note.
Hannah England: Thank you—that’s really helpful context on non-competes in collaboration agreements. Are there any other restrictions that the parties need to consider carefully before including any type of a non-compete in a collaboration agreement?
Lisa Kaltenbrunner: Every restriction imposed on the other party to the agreement should be assessed very carefully—and please, always call me, Hannah, whenever you have got a question. For example, restrictions, which prevent either party from undertaking unrelated R&D, or related R&D after completion of the collaboration activities, should be avoided. Separately, parties should also not include any restrictions in their agreement that constitute pricing control or controls in manufacturing, supply, or sales relating to the jointly developed end product. And finally, you should also not impose any obligations on the other party not to challenge the validity of your IP rights after completion of the collaboration, or any obligation not to grant licenses to third parties, as that would also negatively affect competition.
Hannah England: Okay, that is clear. Transitioning from collaboration agreements to license agreements, do the rules applicable to non-competes in collaboration agreements also apply to license agreements, or do we have yet another set of rules?
Lisa Kaltenbrunner: You do have another set of rules, because they are different. For example, if the parties to the license compete and there is no collaboration, as you mentioned, then the license may not include an R&D non-compete. However, the parties can include a non-compete restriction on the other party from carrying out R&D with third parties where such a restriction is necessary to protect the licensor’s IP from disclosure.
Hannah England: So, a non-compete is possible in a license agreement if the parties are competitors, if the restriction is necessary to protect the licensor’s IP from disclosure. What if the parties do not compete?
Lisa Kaltenbrunner: If the parties don’t compete, your antitrust lawyers will need to assess whether the clause has a negative effect on the market, as there may be justifications for such restrictions. However, where the parties do not compete, their market share must still not exceed 30%.
Hannah England: Can the parties include commercialization non-competes in the license agreement?
Lisa Kaltenbrunner: Yes, they can, but again, only in limited circumstances. For example, you can use a non-compete to restrict a licensee from commercializing third-party technologies that compete with the licensed product. The parties—that is, both the licensee and the licensor—can also use non-competes on commercialization to limit the production or sale of the licensed product to territorize or group reserve for the other party by the agreement.
Hannah England: And how long can this last?
Lisa Kaltenbrunner: These can last until the licensed technology rights expire, lapse, or are declared invalid, so pretty much as long as you want as long as you’ve got a valid right.
Hannah England: So, that can last for the duration of the term of the agreement. What about an exclusive license versus a non-compete?
Lisa Kaltenbrunner: Do you mean, for example, that you have one licensee limited to, let’s say, the EU exclusively, and one limited to the territory outside the EU? And you can restrict the EU licensee from commercializing outside the EU?
Hannah England: Yes. In that context, would that be possible?
Lisa Kaltenbrunner: Yes, that’s possible, provided you have instructed one licensee to supply outside the EU, and no licensee is restricted from selling passively. So, that means you can only restrict active sales, not passive sales.
Hannah England: Anything else to bear in mind with respect to non-competes and license agreements?
Lisa Kaltenbrunner: Yes. As with collaboration agreements, competing parties should avoid restrictions on the other party’s ability to determine its prices or limitation on sales, manufacturing, or supply. And non-competing parties should similarly avoid restricting the other party’s ability to determine its prices and limitations on sales, manufacturing, or supply. However, non-competing parties can impose certain pricing instructions, such as a maximum or recommended sales price on the other party. In addition, as for collaboration agreements, parties should not agree to grant backs that oblige the licensee to exclusively license improvements or new applications of the licensed technology back to the licensor. Parties should also not impose direct or indirect obligations on each other not to challenge the validity of IP rights that the other party holds in the EU.
Hannah England: Now, if we consider the third type of agreement that we mentioned in the asset acquisition structure, what else do the parties have to bear in mind? Can an asset acquisition include an exclusive license?
Lisa Kaltenbrunner: Yes, provided the exclusive license is necessary and proportionate—also referred to as “ancillary” in EU terms speak—to the implementation of the asset acquisition.
Hannah England: Can you translate that into layman’s terms so that I can understand?
Lisa Kaltenbrunner: Yes, it means that the parties would not enter into the transaction without the restriction. For example, if it meant that the value of the license wouldn’t transfer, or there is a risk of disclosure of trade secrets absent the restriction, such restriction would be ancillary. However, it’s also important to bear in mind that should an asset acquisition have many features of a license agreement, then it is better to assess the deal as a license agreement.
Hannah England: Understood. And that’s a common feature in many of our asset acquisitions, that they are similar to licensing structures. What about non-compete restrictions on development and commercialization, as compared to the exclusive license we just discussed?
Lisa Kaltenbrunner: Yes, so an asset acquisition may include such non-competes, provided the restriction is directly related, necessary, and proportionate for the transaction, for the deal to be implemented and protect the buyer against competition from the seller post deal.
Hannah England: And how long can that last?
Lisa Kaltenbrunner: In an asset deal, non-competes can be imposed for a duration of up to three years.
Hannah England: Any concluding remarks that we should bear in mind?
Lisa Kaltenbrunner: As mentioned earlier, every restriction imposed on the other party in an agreement should be assessed carefully. What we’ve here discussed, Hannah, is probably a non-exhaustive introduction to a very complex topic. I appreciate if you would call me or consult me anytime you have a question on this matter, and then we can together assess the legality of the contemplated restriction.
Hannah England: Absolutely. Thanks Lisa, and thank you to our listeners for tuning in. If you’d like to learn more about any of these topics that we discussed today or if we can help you navigate any of the laws discussed in a more tailored way, please do not hesitate to contact us. You can subscribe and listen to any Ropes & Gray podcast wherever your regularly listen to podcasts, including on Apple and Spotify. Thank you again for listening.
