New safe harbour for research & development agreements

On 5 December, the Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022 was laid before Parliament to take effect on 1 January 2023. The order is relevant to businesses and organisations which collaborate in relation to the research and development of products, technologies or processes, and is of particular relevance to life sciences organisations.

The order, which will have effect until 31 December 2035, provides a “safe harbour” from the competition rules, provided that the conditions set out in the order are met and the agreement does not contain any so-called “hard core” restrictions of competition.

In many respects, the order maintains the existing safe harbour exemption for research and development (R&D) agreements (such as a research collaboration or co-development agreement) in EU law that was retained in UK law after the UK withdrew from the European Union. The fact that the order carries forward many aspects of the retained block exemption regulation is welcome in terms of ensuring continuity, predictability and legal certainty for organisations engaged in R&D activities. 

The order is, however, is different in some respects from the retained block exemption regulation.  These amendments follow the final recommendation of the UK Competition and Markets Authority (CMA) to the Secretary of State for Business, Energy and Industrial Strategy (the Secretary of State) and have the objective of responding to market developments, improving the clarity of the current legal framework, and ensuring that the exemption is most effective and appropriate for the UK markets while supporting the UK Government’s Innovation Strategy. 

The most significant of these changes is a new separate test setting out when R&D agreements between firms competing in innovation (ie, competing in the development of new products or technologies) can benefit from the safe harbour. Under the retained block exemption, parties to R&D agreements of this nature were not subject to a market share threshold and were treated as if they were not competitors. In contrast, to fall within the scope of the order and have the benefit of safe harbour, parties will now need to demonstrate (in addition to satisfying the other conditions) that, at the time of entering into the agreement, there are:

  1. Three or more competing R&D efforts in addition to or comparable with those of the parties to the R&D agreement
  2. Three or more third parties able to engage independently in relevant R&D

The order contains new definitions to assist with key concepts underpinning the new test, including new definitions for “R&D cluster” and “competing R&D effort”. The definition of research and development is also amended to capture earlier stages of R&D.

The objective of the new test is to protect dynamic, future competition and to drive innovation, by ensuring that the block exemption is not available to R&D agreements that bring together the only players who could independently conduct the R&D effort that is the subject matter of the agreement.  The new test therefore narrows the availability of the safe harbour.

It remains to be seen whether the new test will result in additional complexity for parties to R&D agreements. There could be practical challenges with demonstrating that there are three or more competing R&D efforts, or three or more third parties able to engage independently in relevant R&D if, for example, existing R&D efforts are not publicly known. It could also be difficult to assess whether any given R&D effort is comparable with that of the parties. The CMA has stated that it will seek to provide further clarity in accompanying guidance.

Firms who are competing in innovation, and who are considering entering into a R&D agreement, should therefore familiarise themselves with the new test and consider, proactively, how they may be able to satisfy themselves that the conditions of the test are met and, from a practical standpoint, how they would demonstrate that this is the case. 

In parallel, the European Commission announced on 8 December 2022 that it is extending the duration of the current R&D Block Exemption Regulation whilst it continues to consult on the terms of the proposed new Block Exemption Regulation. The European Commission has stated that it is aiming to adopt the text of a new Block Exemption Regulation in the first half of 2023. 

Divergence between the EU and UK R&D block exemption frameworks in some instances could potentially lead to a compliance burden on firms engaging in R&D activities in both the EU and the UK. The CMA noted in its recommendation to the Secretary of State that it sought to be guided by what is best for UK consumers and businesses. That said, the CMA also noted that several of the European Commission’s proposals seemed to offer a sensible and proportionate basis to address issues raised by UK stakeholders and that it had been mindful of the approach proposed by the EU when making its final recommendation. While it will be necessary to await the outcome of the European Commission consultation, the approach taken by the CMA with its final recommendation should provide some comfort to businesses and organisations who undertake R&D in the UK and the EU.

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