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10 key themes
Collaboration and Licensing – New Risks and Opportunities
IN BRIEF
In 2023, licensing and collaboration deal structures will continue to present significant opportunities for companies, particularly in the life sciences, digital and technology sectors, provided the possible regulatory pitfalls are successfully navigated. Collaborations should be carefully structured and assessed against any broader strategy (including future pipeline efforts or M&A activity) and throughout the lifetime of the collaboration to account for any changes to regulatory risk profiles.
Licensing and collaboration agreements remain popular for structuring R&D and innovation investment
Authorities continue to closely scrutinize M&A in innovation-driven industries, and companies should expect deals in these sectors to remain subject to potentially lengthy and unpredictable reviews (see Theme 2). However, authorities have traditionally been, and are expected to remain, more open to recognizing the long-term benefits of genuinely procompetitive and pro-customer licensing and collaboration agreements, especially for the purpose of bringing together complementary skills and resources.
Macroeconomic headwinds, geopolitical fragmentation, increased R&D costs and greater regulatory complexity present challenges as well as opportunities for industries where continued investment in innovation remains fundamental to success. Licensing and collaboration agreements, early-stage investment and option deals can provide ideal solutions to these challenges and are predicted to remain popular deal structures in 2023.
The commercial terms and structure of a collaboration and licensing deal are limited only by the creativity of the parties – especially as companies evolve toward the development of platform technologies and research teams find increasingly complex ways to combine and layer these platforms and the underlying IP. A clear understanding of the strategic rationale of any collaboration or licensing deal, and of the worldwide regulatory frameworks impacting these deals – not only at the time of signing, but over the lifetime of the agreement – is crucial for both parties as they think about the progression and commercialization of these technologies.
|
Kristen Riemenschneider |
Broad and flexible jurisdictional thresholds mean that quasi-M&A structures can still trigger filings
Certain joint ventures, strategic alliances, collaboration agreements and even pure IP licensing deals may trigger notifications under antitrust and/or foreign investment regimes globally.
Parties to strategic licensing, collaboration and option agreements should therefore carry out a full filing assessment early, bearing in mind that actions and events beyond the initial agreement also could be notifiable. For example, the exercise of an option may trigger filings and, increasingly, high milestone payments may reach HSR Act thresholds or newer deal value thresholds in European jurisdictions. In the United States, the application of HSR Act rules can be complex and the commercial terms of an agreement can impact the need for a notification (e.g., co-exclusive licenses may be exempt, whereas exclusive patent licenses can be reportable). In the UK and certain EU member states, lower control thresholds can capture minority-stake investments, especially when combined with special rights and/or board representation. Notably, the jurisdictional assessment in the context of licensing and collaboration arrangements often raises questions and can be more complex than traditional M&A.
In addition, foreign investment regimes increasingly cast a wide net, catching a broad range of transactions, including pure licensing deals. For example, this year saw the first prohibition under the UK’s new NS&I regime of a pure licensing deal involving an IP license with respect to certain dual-use technology developed by the University of Manchester to a China-based partner (see Theme 3). The exchange of information that is considered critical from an FDI perspective can also require government consent – even at the deal negotiation stage.
Information exchange remains a hot topic
Where collaboration partners are actual or potential competitors, any sharing of competitively sensitive information could breach competition rules. Companies should therefore consider at the outset, and at any key transition points in the collaboration, the need to implement safeguards. These need to include systems and controls around information exchange to mitigate against possible spillover risk between the collaboration project and their own business (noting that innovation pipelines – and therefore sensitivity levels – often evolve during the term of an agreement). The same holds true for financial investors with competing businesses in their investment portfolios. The DOJ/FTC Antitrust Guidelines for Collaborations Among Competitors specifically note that appropriate safeguards governing information sharing make it less likely that collaboration will raise antitrust concerns.
The revision of the Horizontal Block Exemption Regulations and Guidelines is an important policy project as it clarifies for businesses when they can cooperate with rivals. Horizontal cooperation may lead to substantial economic and sustainability benefits, including support for the digital and green transition.
Margrethe Vestager
Executive Vice President, European Commission
The EU’s revised block exemption regulations on R&D cooperation and specialization agreements, as well as the updated guidance for horizontal cooperation, are expected to come into force in summer 2023. On the one hand, the revisions helpfully recognize a broader range of collaboration structures, particularly in the context of R&D. However, the current drafts also appear to lower the bar for potential unlawful information exchanges “by object” – even in the context of overall procompetitive collaborations.
Changes to the EU Horizontal Block Exemption Regulation and Guidelines and the new R&D block exemption expected to come into force in summer 2023 will likely require a careful reassessment of existing collaboration agreements to ensure continued compliance with EU competition rules. The European Commission has made it very clear that innovation-based theories of harm are front of mind for them and that they are willing to impose hefty fines where they find companies to be on the wrong side of the line.
|
Uta Itzen |
In line with vigorous scrutiny by major authorities of interlocking directorships, shared ownerships and other links between competitors (see Theme 4), dealmakers must also think carefully in the context of licensing and collaboration agreements about the individuals appointed to boards or collaboration committees in light of other roles held by those individuals (including considering information exchange in relation to proprietary products and commercial strategy).
No blanket permission for ESG-driven collaborations
For companies considering collaboration to maximize the scale and effectiveness of their environmental and sustainability efforts, authorities across the United States, APAC and Europe have been clear that – while generally supporting necessary collaboration for environmental, social and corporate governance (ESG) policy priorities – this does not provide an exemption to the application of antitrust laws. Though some European and Asian legislators have been more open to providing guidance on how to engage in genuine ESG collaborations without violating antitrust laws, there remains divergence in Europe at the national level. While in some jurisdictions policies or even existing antitrust laws have been adapted to grant companies more leeway to enter into meaningful initiatives in light of wider societal benefits, other authorities have been more reluctant to depart from the established but relatively narrow principle of consumer welfare toward wider societal benefits. Meanwhile in the United States, Republican legislators have publicly stated their intent to demand antitrust investigations of collaboration agreements focused on ESG, and several Republican state attorneys general have publicly initiated antitrust investigations into certain ESG initiatives.
While ESG objectives are high on the political agenda on both sides of the Atlantic, antitrust regulators have made clear that ESG-driven collaborations will continue to be closely scrutinized in order to avoid ‘greenwashing’ or other collusive conduct. It therefore remains key to conduct a careful antitrust risk assessment of collaborations aimed at implementing ESG objectives, which may include quantification of expected sustainability benefits.
|
Maria Dreher-Lorjé |
Living agreements should be set up to cope with evolving regulatory risk
The lifetime of a collaboration agreement can be long (10 or 20 years) and the parameters are continuously changing. The M&A activity of one party, combined with evolving innovation pipelines, means that regulatory risk profiles change over time. Parties should implement and regularly revise the necessary safeguards, such as firewalls between potentially competing programs. This involves an assessment beyond mere horizontal product and pipeline overlaps as well as a look at broader innovation and key data sets. These changes can also impact exit strategy. Although parties cannot account for all eventualities at the outset, they may want to build in contractual flexibility in the event of protracted regulatory reviews or other antitrust challenges.
Dealmakers will want to keep their eye on the extent to which the collaboration could have an impact on overall M&A strategy (e.g., leading to completion risk/delay in other deals), as antitrust authorities are increasingly analyzing collaborations and minority investments as part of the competitive capabilities of merging parties. The FTC’s expanded interpretation of “unfair methods of competition” under its November 2022 Enforcement Statement includes the potential to challenge a series of acquisitions, investments or collaborations as incipient threats to competition.
Holistic planning is needed to ensure that even small collaborations or equity stakes do not end up complicating a company’s future unrelated M&A goals. This is even more important considering the increasing skepticism of antitrust authorities toward behavioral remedies.
|
Alvaro Iza |
Looking ahead in 2023
-
Procompetitive and pro-innovation objectives do not lower the bar for scrutiny and compliance. Parties collaborating or innovating for the greater good, e.g., to bring novel or new technologies and products to market or to meet sustainability objectives, must still ensure that contractual arrangements are robust in terms of antitrust compliance and managed appropriately.
-
Anticipate future regulatory requirements when designing licensing and collaboration deal structures. Partners and investors should analyze at the outset whether meaningful overlaps, including companies’ pipeline efforts, or other competition concerns are likely to arise in the future if the project succeeds. Build in appropriate contractual mechanisms to address these points up front and be prepared to conduct regular compliance audits of antitrust obligations and risk to ensure the necessary safeguards are in place.
-
Be mindful of who sits on collaboration committees or boards, especially across multiple arrangements with different third parties and/or across different portfolio investments, as information exchange and broader concerns around reduced incentives to compete remain enforcement priorities.
With thanks to Jenny Leahy, Tom Morgan, Enrica Schaefer and Megan Yeates for their contributions to this theme.
10 key themes
Collaboration and Licensing – New Risks and Opportunities
IN BRIEF
In 2023, licensing and collaboration deal structures will continue to present significant opportunities for companies, particularly in the life sciences, digital and technology sectors, provided the possible regulatory pitfalls are successfully navigated. Collaborations should be carefully structured and assessed against any broader strategy (including future pipeline efforts or M&A activity) and throughout the lifetime of the collaboration to account for any changes to regulatory risk profiles.
Licensing and collaboration agreements remain popular for structuring R&D and innovation investment
Authorities continue to closely scrutinize M&A in innovation-driven industries, and companies should expect deals in these sectors to remain subject to potentially lengthy and unpredictable reviews (see Theme 2). However, authorities have traditionally been, and are expected to remain, more open to recognizing the long-term benefits of genuinely procompetitive and pro-customer licensing and collaboration agreements, especially for the purpose of bringing together complementary skills and resources.
Macroeconomic headwinds, geopolitical fragmentation, increased R&D costs and greater regulatory complexity present challenges as well as opportunities for industries where continued investment in innovation remains fundamental to success. Licensing and collaboration agreements, early-stage investment and option deals can provide ideal solutions to these challenges and are predicted to remain popular deal structures in 2023.
The commercial terms and structure of a collaboration and licensing deal are limited only by the creativity of the parties – especially as companies evolve toward the development of platform technologies and research teams find increasingly complex ways to combine and layer these platforms and the underlying IP. A clear understanding of the strategic rationale of any collaboration or licensing deal, and of the worldwide regulatory frameworks impacting these deals – not only at the time of signing, but over the lifetime of the agreement – is crucial for both parties as they think about the progression and commercialization of these technologies.
|
Kristen Riemenschneider |
Broad and flexible jurisdictional thresholds mean that quasi-M&A structures can still trigger filings
Certain joint ventures, strategic alliances, collaboration agreements and even pure IP licensing deals may trigger notifications under antitrust and/or foreign investment regimes globally.
Parties to strategic licensing, collaboration and option agreements should therefore carry out a full filing assessment early, bearing in mind that actions and events beyond the initial agreement also could be notifiable. For example, the exercise of an option may trigger filings and, increasingly, high milestone payments may reach HSR Act thresholds or newer deal value thresholds in European jurisdictions. In the United States, the application of HSR Act rules can be complex and the commercial terms of an agreement can impact the need for a notification (e.g., co-exclusive licenses may be exempt, whereas exclusive patent licenses can be reportable). In the UK and certain EU member states, lower control thresholds can capture minority-stake investments, especially when combined with special rights and/or board representation. Notably, the jurisdictional assessment in the context of licensing and collaboration arrangements often raises questions and can be more complex than traditional M&A.
In addition, foreign investment regimes increasingly cast a wide net, catching a broad range of transactions, including pure licensing deals. For example, this year saw the first prohibition under the UK’s new NS&I regime of a pure licensing deal involving an IP license with respect to certain dual-use technology developed by the University of Manchester to a China-based partner (see Theme 3). The exchange of information that is considered critical from an FDI perspective can also require government consent – even at the deal negotiation stage.
Information exchange remains a hot topic
Where collaboration partners are actual or potential competitors, any sharing of competitively sensitive information could breach competition rules. Companies should therefore consider at the outset, and at any key transition points in the collaboration, the need to implement safeguards. These need to include systems and controls around information exchange to mitigate against possible spillover risk between the collaboration project and their own business (noting that innovation pipelines – and therefore sensitivity levels – often evolve during the term of an agreement). The same holds true for financial investors with competing businesses in their investment portfolios. The DOJ/FTC Antitrust Guidelines for Collaborations Among Competitors specifically note that appropriate safeguards governing information sharing make it less likely that collaboration will raise antitrust concerns.
The revision of the Horizontal Block Exemption Regulations and Guidelines is an important policy project as it clarifies for businesses when they can cooperate with rivals. Horizontal cooperation may lead to substantial economic and sustainability benefits, including support for the digital and green transition.
Margrethe Vestager
Executive Vice President, European Commission
The EU’s revised block exemption regulations on R&D cooperation and specialization agreements, as well as the updated guidance for horizontal cooperation, are expected to come into force in summer 2023. On the one hand, the revisions helpfully recognize a broader range of collaboration structures, particularly in the context of R&D. However, the current drafts also appear to lower the bar for potential unlawful information exchanges “by object” – even in the context of overall procompetitive collaborations.
Changes to the EU Horizontal Block Exemption Regulation and Guidelines and the new R&D block exemption expected to come into force in summer 2023 will likely require a careful reassessment of existing collaboration agreements to ensure continued compliance with EU competition rules. The European Commission has made it very clear that innovation-based theories of harm are front of mind for them and that they are willing to impose hefty fines where they find companies to be on the wrong side of the line.
|
Uta Itzen |
In line with vigorous scrutiny by major authorities of interlocking directorships, shared ownerships and other links between competitors (see Theme 4), dealmakers must also think carefully in the context of licensing and collaboration agreements about the individuals appointed to boards or collaboration committees in light of other roles held by those individuals (including considering information exchange in relation to proprietary products and commercial strategy).
No blanket permission for ESG-driven collaborations
For companies considering collaboration to maximize the scale and effectiveness of their environmental and sustainability efforts, authorities across the United States, APAC and Europe have been clear that – while generally supporting necessary collaboration for environmental, social and corporate governance (ESG) policy priorities – this does not provide an exemption to the application of antitrust laws. Though some European and Asian legislators have been more open to providing guidance on how to engage in genuine ESG collaborations without violating antitrust laws, there remains divergence in Europe at the national level. While in some jurisdictions policies or even existing antitrust laws have been adapted to grant companies more leeway to enter into meaningful initiatives in light of wider societal benefits, other authorities have been more reluctant to depart from the established but relatively narrow principle of consumer welfare toward wider societal benefits. Meanwhile in the United States, Republican legislators have publicly stated their intent to demand antitrust investigations of collaboration agreements focused on ESG, and several Republican state attorneys general have publicly initiated antitrust investigations into certain ESG initiatives.
While ESG objectives are high on the political agenda on both sides of the Atlantic, antitrust regulators have made clear that ESG-driven collaborations will continue to be closely scrutinized in order to avoid ‘greenwashing’ or other collusive conduct. It therefore remains key to conduct a careful antitrust risk assessment of collaborations aimed at implementing ESG objectives, which may include quantification of expected sustainability benefits.
|
Maria Dreher-Lorjé |
Living agreements should be set up to cope with evolving regulatory risk
The lifetime of a collaboration agreement can be long (10 or 20 years) and the parameters are continuously changing. The M&A activity of one party, combined with evolving innovation pipelines, means that regulatory risk profiles change over time. Parties should implement and regularly revise the necessary safeguards, such as firewalls between potentially competing programs. This involves an assessment beyond mere horizontal product and pipeline overlaps as well as a look at broader innovation and key data sets. These changes can also impact exit strategy. Although parties cannot account for all eventualities at the outset, they may want to build in contractual flexibility in the event of protracted regulatory reviews or other antitrust challenges.
Dealmakers will want to keep their eye on the extent to which the collaboration could have an impact on overall M&A strategy (e.g., leading to completion risk/delay in other deals), as antitrust authorities are increasingly analyzing collaborations and minority investments as part of the competitive capabilities of merging parties. The FTC’s expanded interpretation of “unfair methods of competition” under its November 2022 Enforcement Statement includes the potential to challenge a series of acquisitions, investments or collaborations as incipient threats to competition.
Holistic planning is needed to ensure that even small collaborations or equity stakes do not end up complicating a company’s future unrelated M&A goals. This is even more important considering the increasing skepticism of antitrust authorities toward behavioral remedies.
|
Alvaro Iza |
Looking ahead in 2023
-
Procompetitive and pro-innovation objectives do not lower the bar for scrutiny and compliance. Parties collaborating or innovating for the greater good, e.g., to bring novel or new technologies and products to market or to meet sustainability objectives, must still ensure that contractual arrangements are robust in terms of antitrust compliance and managed appropriately.
-
Anticipate future regulatory requirements when designing licensing and collaboration deal structures. Partners and investors should analyze at the outset whether meaningful overlaps, including companies’ pipeline efforts, or other competition concerns are likely to arise in the future if the project succeeds. Build in appropriate contractual mechanisms to address these points up front and be prepared to conduct regular compliance audits of antitrust obligations and risk to ensure the necessary safeguards are in place.
-
Be mindful of who sits on collaboration committees or boards, especially across multiple arrangements with different third parties and/or across different portfolio investments, as information exchange and broader concerns around reduced incentives to compete remain enforcement priorities.
With thanks to Jenny Leahy, Tom Morgan, Enrica Schaefer and Megan Yeates for their contributions to this theme.
10 key themes
- Introduction
- 01. The Changing Face of Antitrust
- 02. Is Merger Control Fit for Purpose – Evolution or Revolution?
- 03. Foreign Direct Investment – Record Year for Prohibitions and New Developments
- 04. Financial Investors – In The Regulatory Spotlight
- 05. Collaboration and Licensing – New Risks and Opportunities
- 06. A Vertical Revival – Expanding The Enforcement Toolkit
- 07. A New Age For Investigations – Prepare for Agencies to Come Knocking
- 08. Digital Regulation – Contagion of New Rules
- 09. Mass Claims and Antitrust Litigation
- 10. Trade and Subsidy Control
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