EU Policy Update – February 2016 re: Dutch Presidency and Brexit, Digital Single Market Policy, Energy and Environment

Dutch Presidency and Brexit

In January, the Netherlands took over the Presidency of the Council of the European Union from Luxembourg.  In line with the political intentions of the Juncker Commission to be ‘big on the big issues but small on the small issues’, the Netherlands promises to focus on the essentials during its Presidency.  In particular, the Dutch Presidency would like to focus on migration and international security.  Another priority is to strengthen the free movement of services and the free movement of workers, where the Presidency would like to strengthen the protection of workers posted abroad.

Additionally, on February 2, the President of the European Council, Donald Tusk, presented his proposals for a ‘new settlement of the United Kingdom within the European Union’.  If accepted, they would allow David Cameron to campaign in the ‘Brexit’ referendum on the continuing membership of the UK in the bloc.  The Heads of State and Government will discuss and adopt the text in a meeting on February 18.  For Covington’s analysis of the proposals presented and the referendum, please see here.

Digital Single Market Policy

The formal adoption of the EU Network and Information Security (NIS) Directive is a step closer following a vote on January 14 by the European Parliament’s internal market and consumer protection (IMCO) committee.  The committee confirmed that the minimum harmonisation requirements under the Directive do not apply to digital service providers.  This means that Member States will not be able to impose any further security or notification requirements on digital service providers beyond those contained in the Directive, when transposing it into national law.  The NIS Directive will now be put forward for a plenary vote in the European Parliament.  Once it is published in the Official Journal of the European Union and enters into force later this year, Member States will have 21 months to transpose it into national law.  Member States will then have a further 6 months to apply criteria laid down in the Directive to identify specific operators of essential services covered by national rules.  These processes are likely to be complicated, and companies that may fall within scope should participate in consultations and monitor developments across the EU over the coming months.

On January 19, the European Parliament adopted a resolution on the Digital Single Market Strategy of the European Commission.  The parliamentarians called for ambitious and targeted actions to complete Europe’s digital single market.  Among other things, the MEPs support the end of geo-blocking practices across Europe, the setting of a single set of contract rules and consumer rights for online sales and for digital content, and the modernization of the copyright framework.

On February 2, the European Commission and U.S. Government reached a political agreement on the new framework for transatlantic data flows.  The new framework – the EU-U.S. Privacy Shield – succeeds the EU-U.S. Safe Harbor framework. The EU’s College of Commissioners has also mandated Vice-President Ansip, in charge of the Digital Single Market, and Commissioner Jourová, Commissioner for Justice, Consumers and Gender Equality, to prepare the necessary steps to put in place the new arrangement.  For Covington’s full analysis of the announcement of the EU-U.S. Privacy Shield, please see here.

Energy and Environment Policy

The European Commission published a proposal to update the approval requirements and market surveillance of new passenger cars and their respective systems and components.  The Commission’s proposal aims at strengthening the credibility and enforcement of the applicable safety and environmental requirements for cars, following the controversy regarding Volkswagen last year.

In a significant departure from past EU legislation, the proposal would empower the Commission to impose administrative fines on economic operators who are found not to have complied with the approval requirements, of up to €30,000 per non-compliant vehicle.

The Commission’s proposal focuses on three elements.  First, the European Commission proposes to reinforce the credibility of the type-approval assessment of new vehicles by ensuring that the technical services testing the new vehicles are fully independent from car manufacturers.  For this purpose, the proposal would enhance the financial independence of such technical services and require Member States to create a national fee structure to cover the costs of type-approval testing and market surveillance activities for vehicles.  Moreover, in order to prevent the use of ‘defeat devices’, as in the Volkswagen controversy, the proposal would grant approval authorities and technical services access to the software and algorithms of the vehicles tested.

Second, the proposal includes measures to strengthen the market surveillance of vehicles after they are type-approved and in circulation.  Member State authorities and the Commission would be able to conduct tests and inspections on cars available on the market and would be empowered to adopt restrictive measures in case of non-compliance of vehicles.  Among other proposed measures, the Commission would establish and chair a forum to coordinate the network of national authorities responsible for type-approval and market surveillance.  Member States would also be able to inspect and take measures against vehicles type-approved in a different EU Member State.

Third, the Commission proposes measures to ensure that non-compliant manufacturers are penalized in case of non-compliance.  Member States would be required to adopt penalties for non-compliant economic operators, including car manufacturers, importers and distributors, as well as technical services.  This may be complemented by administrative fines, imposed by the Commission, of up to €30,000 per non-compliant vehicle, as referred to above.

Finally, the European Commission hopes to ensure a more uniform application of the legislation in the EU by proposing a Regulation as opposed to the current Framework Directive 2007/46/EC.  If adopted, the Regulation would be directly applicable in national law with no requirement of transposition.

The Commission proposal is available here; it has been sent to the Council and European Parliament for consideration.

The European Commission is expected to propose a revision of the Fertilizers Regulation (EC) 2003/2003 in March 2016.  This revision comes in parallel to the Circular Economy Package announced in December 2015, which aims to create a single market for the reuse of materials and resources.

Under the current EU Regulation 2003/2003, manufacturers and importers of fertilizers may choose to comply with the laws of the Member States where they market their products, or to get their products approved and CE-labeled under the Regulation.  However, Regulation 2003/2003 only regulates a limited number of categories of fertilizer products.

According to Commission officials, the proposal aims to create a level playing field between existing, mostly inorganic categories of fertilizers, and innovative fertilizers, which often contain nutrients or organic matter recovered and recycled from biowaste or other secondary raw materials.  Therefore, the proposal will make the approval process more flexible for new categories of CE-labeled fertilizers.

The draft legislative text is structured in four parts: (i) a list of materials that could be used for the production of CE-marketed fertilizing products under the conditions included in the annexes of the proposal; (ii) a list of product function categories for fertilizers, rules for blends of different product categories, and respective safety and quality requirements for each category included in the annexes; (iii) an annex with the labelling requirements by product function; and (iv) a section with the different conformity assessment procedures.  Fertilizers that follow the harmonized EN standards will be presumed to conform with the requirements of the regulation.

Moreover, the proposal would continue to allow Member States to regulate national fertilizing products.  Products that are not in compliance with the EU Fertilizers Regulation and do not carry the CE label would be able to marketed in a particular Member State if they comply with its national legislation.

Importantly, the revised Fertilizers Regulation is also likely to include an EU-wide limit on the presence of cadmium in fertilizers.  In November 2015, the Scientific Committee on Health and Environmental Risks published an opinion concluding that new scientific information available justifies an update of the 2002 opinion on Member State Assessments of Risk to health and the Environment from Cadmium – see here.

The draft proposal is currently in inter-service consultation among the different Directorates General of the European Commission.  Fertilizer manufacturers wishing to voice their opinion regarding the future Regulation on fertilizers should reach out now to the different services of the Commission.

Internal Market and Financial Services Policies

On January 15, the European Commission launched a public consultation on non-binding guidance for reporting non-financial information by certain large companies, following Article 2 of Directive 2014/95/EU – see here.  Directive 2014/95/EU aims at improving the transparency of certain large companies related to Environmental matters, social and employee matters, human rights, and anticorruption and bribery matters.  The feedback gathered during the consultation will be used to prepare the guidelines and facilitate the disclosure of non-financial information by undertakings.  The public consultation will run until April 15, 2016.

On January 28, the European Commission presented its so-called Anti-tax Avoidance Package – see here.  The initiative includes: (i) a new communication on tax avoidance in the EU; (ii) a proposal for an Anti-Tax Avoidance Directive; (iii) a proposal for a Directive implementing the G20/OECD Country by Country Reporting (CbC Reporting); (iv) a Recommendation to the Member States on Tax Treaties, and (v) a Communication on an External Strategy regarding tax avoidance.

The Anti-Tax Avoidance Directive includes six measures, which aim at limiting the abuse of six well-established practices used to avoid taxes in various jurisdictions in Europe.  These include the mismatch in legal characterisation of financial instruments or legal entities between Member States, excessive inter-group interest charges, and a general anti-abuse rule against arrangements the essential purpose of which is to obtain a tax advantage.

The legislative proposal on CbC Reporting aims to strengthen the existing mandatory and automatic exchange of information between the Member States in the field of taxation.  The proposal also requires the parent entity of a multinational group to report to the competent authorities the aggregated information on the revenue, profit (or loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash equivalents, in respect of each jurisdiction in which the group operates.

Finally, because tax avoidance has a strong global dimension, the EU will also cooperate better with third countries on tax issues. The Commission therefore proposes to adopt a common EU system to screen, list and put pressure on third countries that refuse to adopt policies to limit tax avoidance. In addition, before the end of 2016, the Commission and Member States will consider whether to put in place sanctions to incentivize third countries to improve their tax systems.

Life Sciences and Healthcare Policies

At the beginning of February 2016, the Dutch presidency will resume trilogues on the legislative proposals regarding the medical devices Regulation (“MD proposal”) and the in vitro diagnostic medical devices Regulation  (“IVD proposal”).  The European Commission presented this pair of proposals in September 2012, and recently called upon the Council of Ministers and the European Parliament to reach an agreement in the first half of 2016.  The Dutch delegation therefore intends to ramp up the number of trilogues between the institutions to five political meetings and 10 to 15 technical meetings during its presidency.  Nonetheless, important differences remain between the negotiators on the reprocessing of single use devices, liability insurance for manufactures, and the classification of devices in the framework of the IVD proposal.  It is understood that the Dutch presidency hopes to achieve an agreement by the Employment, Social Policy, Health and Consumer Affairs Council of June 17, 2016.

Trade Policy and Sanctions

On January 1, the Deep and Comprehensive Free Trade Area (“DCFTA”) between the EU and Ukraine became operational.  According to the Commission, the implementation of the DCFTA will improve the Gross Domestic Product of Ukraine by circa 6% and increase economic welfare for Ukrainians by 12% over the medium term.

On January 13, the European Commission held an initial orientation debate on Market Economy Status for China in anti-dumping proceedings.  Under the current WTO rules, the EU can calculate potential anti-dumping duties on the basis of data from another market economy country rather than the domestic prices used in China, because there is a presumption that market economy conditions do not prevail in China.  However, this provision, included under Article 15(a)(ii) of China’s Protocol of Accession to the WTO, will expire on December 12, 2016.  The Commission is therefore considering its options for changing the methods used to calculate dumping margins in respect of China.  It is important for the Commission to start the process on time, because any change in the anti-dumping rules are likely to require legislation to be adopted by the Council and the European Parliament.  Given the delicate nature of such negotiations, the process is expected to take a year.

January 16, 2016, saw the Implementation Day of the Joint Comprehensive Plan of Action (“JCPOA”) – the historic deal reached among China, France, Germany, Russia, the UK, the U.S., the EU and Iran to ensure the exclusively peaceful nature of Iran’s nuclear program.  As part of that agreement, the Council of the EU lifted all nuclear-related economic and financial EU sanctions on Iran.  It did so by bringing into force the EU legislative package adopted on October 18, 2015, following the verification by the International Atomic Energy Agency (“IAEA”) that Iran had complied with the requirements laid down in the JCPOA.  As of January 16, many sectors and activities have been reactivated, including, among others: financial, banking and insurance measures; oil, gas and petrochemical; shipping and transport; gold and other metals; software; and the un-freezing of the assets of certain persons and entities.  Note that proliferation-related sanctions, including arms and missile technology sanctions, will remain in place until 2023 (subject to various conditions).  For the Council press release, see here.  For more details, see the Council Information Note here.

Life Sciences: Protecting the Crown Jewels

Sills Cummis & Gross P.C

An innovator or owner of patent rights or other technology in the life sciences arena is often unable, because of lack of financial or other resources, to develop or commercialize a pharmaceutical product covered by such intellectual property rights. In these cases, the innovator/owner (the licensor) will frequently out-license the invention to a third party (the licensee) for development and commercialization by such licensee. The resulting license agreement can be a complicated document. In this article, I will address some of the important licensing considerations that a licensor should take into account before executing a license agreement.

Consider the Exclusivity v. Non-exclusivity of the License Grant

An initial consideration in a license agreement is whether the license grant will be exclusive or non-exclusive to the licensee. If the license grant is exclusive, then the licensor typically agrees not to grant a license to any third party. If the license grant is non-exclusive, then the licensor typically is permitted to grant further licenses to third parties. Even in an exclusive license, however, the licensor may want to retain certain rights for itself. For instance, the licensor may want to preserve for itself the right to enter into certain geographical markets or fields of use. The parties should be very clear in the license agreement as to whether or not the licensor is permitted to exercise any R&D, commercialization or other rights during the term of the license agreement.

Whether a license is exclusive or nonexclusive will set the tone for the associated rights and obligations of the parties set forth in the remainder of the license agreement. For example, an exclusive licensee is usually subject to “diligence” obligations, requiring it to exploit the licensed technology in order to maintain the license grant; a non-exclusive licensee is usually subject to limited or no such obligations. Also, an exclusive licensee usually has more rights than a non-exclusive licensee with respect to the prosecution, maintenance, defense and enforcement of patent rights.

Also Consider the Scope of the “Field of Use” and “Territory”

Other important initial considerations in the license agreement are the scope of the licensed field of use and the scope of the licensed territory. A “field of use” defines the field in which the licensee may exercise the licensed rights and may take one of many forms. For example, the field of use may be all encompassing (“any and all fields and applications”), may be limited to only therapeutic or only diagnostic products, may be limited to only biologics or only small molecule products, or may be limited to a specific medical indication (e.g., cardiac indications). Especially in the case of an exclusive license (and based on the nature of the licensee), it is sometimes better for the licensor to limit the field of use. Then the licensor would be permitted to grant subsequent rights to other parties in the non-licensed fields. Alternatively, if the field of use is broad, the licensor should require that the licensee actually exercise its rights in certain specified fields in order to maintain such rights. If the licensee fails to exercise its rights in a specified field of use within a certain period of time, the licensor’s remedies could include the right to terminate the license agreement in its entirety, the right to terminate the license agreement with respect to one or more specific fields and/or the right to convert an exclusive license grant in such field to a non-exclusive grant.

Considerations regarding the “territory” are very similar to the considerations regarding the field of use. Often, in order to maintain an exclusive worldwide territory grant, the licensee is required to exploit the licensed technology in specified countries. For example, the licensee may be required to develop and commercialize a product covered by the licensed technology (licensed products) in the United States and at least one other “major market country” (e.g., Japan, France, Germany, Italy, Spain and the United Kingdom). Again, the licensor’s remedies for the licensee’s failure to satisfy this obligation could be similar to the remedies set forth above for field of use.

Maximize the Royalty Payments

Pursuant to the terms of the license agreement, the licensee will most likely be required to pay to the licensor a royalty based on sales of licensed products. Although the determination of the amount of royalty is in large part a business decision and takes into consideration, among other things, the scope and strength of the licensed patent and other intellectual property rights, the breadth of the field of use and territory, whether the licensed product is a therapeutic product (typically a higher royalty rate) or a diagnostic product, and whether the license grant is exclusive or non-exclusive, there are many important legal nuances that the licensee could and should consider. One such nuance is the calculation of “net sales.”

The amount of royalty owed by the licensee is normally calculated by multiplying the royalty rate by the amount of sales of the licensed products. The royalty rate does not need to be a flat rate and could be graduated, for example, with a rate change as sales increase. In determining the “sales” portion of the royalty calculation, it is more advantageous to the licensor that sales be based on amounts invoiced (as opposed to amounts received) by the licensee, thus keeping the risk of bad debt (i.e., a sales amount is invoiced but not actually received by the licensee) with the licensee. Also, although “net sales” (as opposed to “gross sales”) is the usual royalty base, the licensor should restrict the deductions taken into account to determine such net sales. For example, although the “net sales” calculation frequently includes deductions from gross sales for governmental taxes and charges, customer credits and rebates, and transportation, storage and insurance expenses, the licensor should avoid less typical deductions such as sales commissions owed by the licensee or a catch-all deduction for “other reasonable deductions.”

Ensure That the Inventions Are Fully Exploited

Once a licensor licenses its invention to a third party in an exclusive license arrangement, the licensor will lose much control over the day-to-day use of the technology. It is imperative that the licensor requires the licensee to actually exploit the technology in a timely manner and devote sufficient time, money and resource to such exploitation. Almost all exclusive patent or technology license agreements contain a “diligence” provision requiring the licensee to employ certain efforts with respect to the research, development and commercialization of licensed products. Generally, the diligence requirement provides that the licensee must use “commercially reasonable efforts” to advance the product through the pipeline and sale process. However, the meaning of “commercially reasonable efforts” is not precise and the two parties to the contract could interpret the phrase, and the corresponding diligence requirement, quite differently.

A prudent licensor defines the diligence requirement more exactly. Ideally, the diligence requirement would be accompanied by diligence milestones, contractually obligating the licensee to reach certain developmental, regulatory or sales milestones by certain target dates or to spend a certain dollar amount on the licensed product in a given time period. Additionally, different diligence standards could apply with respect to different jurisdictions. If the licensee fails to meet its target, the licensor would be entitled to one or more remedies such as a financial payment from the licensee or a right of termination.

Maintain Control over Patent Prosecution

In an exclusive patent license arrangement, the licensee usually pays for the costs associated with patent prosecution and maintenance. Even in a non-exclusive arrangement, the licensee could be required to pay for a portion of such amounts. Though the licensor bears some or all of the patent prosecution and maintenance expenses, the licensor should ensure that it ultimately has control. Ideally, the license agreement should provide that the licensor controls the prosecution and maintenance, perhaps with counsel reasonably acceptable to the licensee. The licensor could allow the licensee to provide input into where (which jurisdictions) the licensor will prosecute and maintain the patents. However, the licensor should have the final say as to the scope and jurisdiction of the patent filings. In order to address a licensee’s concern that it would be required to pay for expenses in jurisdictions where the licensee does not deem patent coverage to be necessary or desirable, the license agreement could provide that the licensee may notify the licensor that the licensee will not pay the patent costs in a particular jurisdiction – in which case the licensee would probably lose its license rights (or at least its exclusivity, in the case of an exclusive license grant) with respect to such jurisdiction.

Carefully Consider Termination Provisions

A license agreement includes customary termination provisions. For example, each party usually has the right to terminate the agreement in the case of an uncured material breach by the other party. Additionally, the licensee typically has the right to terminate the license agreement for convenience (without cause) following some notice period (e.g., 90 days). Following termination of the license agreement, the licensor may want to either resume R&D or commercialization efforts on its own or re-license the technology to another suitable third party. In order to avoid the need to duplicate efforts (and expenditures) of the first licensee, the licensor should give careful consideration to the termination provisions in the license agreement. Ideally, if the licensee terminates the license agreement for convenience (i.e., the licensee walks away from the technology) or the licensor terminates the license agreement because of an uncured material breach by the licensee, the licensee would be required to automatically assign to the licensor, for no additional consideration or for some agreed upon payment, all of the results, know-how and intellectual property generated by or on behalf of the licensee under the license agreement and all regulatory files, regulatory approvals and other rights related to the licensed product. Thus, the licensor or its new licensee would be able to capitalize on the past work performed by the licensee, expedite timelines and reduce expense.

All or some of the points described above could be very important to a licensor. Although the interrelation of these and various other provisions in a license agreement are complex, by understanding the unique issues and concerns that arise when analyzing and negotiating a license agreement, the licensor is better able to protect its invention and ultimately increase its profit.

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This article appeared in the February 2015 issue of The Metropolitan Corporate Counsel.  The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect those of Sills Cummis & Gross P.C.   Copyright © 2015 Sills Cummis & Gross P.C.  All rights reserved.”