The new Technology Transfer Block Exemption ("the TTBE"),1 which entered into force on May 1, presents the final step in the Commission’s program to overhaul Article 81 EC. Compared to its predecessor, generally referred to as "the last dinosaur," the TTBE introduces a considerable degree of flexibility into the framework underlying the competition law analysis of technology licensing agreements. The TTBE reserves a central role for the economic analysis of market effects of a given license, rather than focusing on the inclusion or exclusion of a number of provisions (which was the approach followed under the old technology transfer regulation). Together with the TTBE, the Commission has also adopted Guidelines on the application of Article 81 EC to technology transfer agreements ("the Technology Transfer Guidelines").2

Scope of Application

The TTBE applies to technology transfer agreements between two parties where the licensor permits the licensee "to exploit the licensed technology … for the production of goods or services,"3 including sublicensing.4 It covers patent licensing agreements, know how licensing agreements, software copyright licensing agreements and mixed agreements. The TTBE does not cover technology pools – the latter are discussed in detail in the Technology Transfer Guidelines.5

Analytical Framework

The basic assumption underlying the TTBE is that licensing agreements between competitors pose a greater risk to competition than agreements between non-competitors.6 Whether two companies are competitors or not is determined at the outset and applies for the duration of the agreement.7 The test is whether these companies are active, or could be active within a one to two year time period, on the same product/ services market or technology market.8 If the parties own technologies that are in a one-way or two-way blocking position, they are deemed to be non-competitors on the technology market.9

As a general rule, the automatic exemption provided by the TTBE will apply if the parties’ combined market share is below certain thresholds and if the agreement does not contain any hardcore restrictions. The TTBE applies different safe harbor thresholds and a different list of hardcore restrictions, depending on whether or not the parties are competitors.

Safe Harbor Thresholds

As regards agreements between competitors, the block exemption applies on condition that the parties’ combined market share does not exceed 20% on the relevant product/ services or technology market. 10 As regards agreements between non-competitors, the block exemption applies on condition that each of the parties’ individual market share does not exceed 30% on the relevant product/services or technology market.11

Market shares on the technology market are calculated on the basis of sales incorporating the licensed technology; all sales on the relevant product market are taken into account, irrespective of whether the product incorporates the licensed technology.12 If, during the term of the agreement, market shares increase above the thresholds, the benefit of the block exemption will not be immediately lost. The exemption continues to apply for a period of two consecutive calendar years following the year in which the threshold was first exceeded.13

In addition to the market share thresholds mentioned above, the Technology Transfer Guidelines contain an additional safe harbor. Article 81 EC is unlikely to be infringed where there are four or more independently controlled technologies in addition to the technologies controlled by the parties that may be substitutable for the licensed technology at a comparable cost to the user.14

Hardcore Restrictions

An agreement containing a hardcore restriction is automatically void and unenforceable.15 Hardcore restrictions are not severable, and bring the entire agreement outside the scope of the TTBE.16 Moreover, it is very unlikely that a license containing a hardcore restriction will qualify for individual exemption.17 The list of hardcore restrictions differs depending on whether the agreement is concluded between competitors or non-competitors.

  • As regards agreements between competitors, the following restrictions are listed as hardcore:18 price fixing, reciprocal output restrictions, market and customer allocations (subject to a number of important exceptions19), and the restriction of the licensee’s ability to exploit its own technology or to carry out R&D.
  • As regards agreements between non-competitors, the following restrictions are listed as hardcore:20 resale price maintenance, passive sales restrictions on licensees (subject to a number of important exceptions21), and the restriction of active or passive sales to end users by a licensee which is a member of a selective distribution and which operates at the retail level.

Excluded Restrictions

In addition to the hardcore restrictions listed above, the TTBE contains a number of so-called excluded restrictions. Their main purpose is to avoid block exempting agreements that may reduce the licensee’s incentive to innovate.22 These restrictions are the following: exclusive grant backs or assignments with respect to severable improvements, and no-challenge clauses.23 The inclusion in a license agreement of any of these restrictions does not prevent the application of the block exemption to the agreement as a whole; it is only the specific restriction that is not block exempted and that requires individual assessment under Article 81(3) EC.24

Agreements that fall outside the scope of the TTBE, for example because the market share thresholds are exceeded or the agreement involves more than two parties, are subject to individual assessment. The Commission will apply by analogy the principles set forth in the TTBE.25 Importantly, there is no presumption that Article 81(1) EC applies merely because the market share thresholds are exceeded – a market effects analysis is required in order to establish whether the agreement restricts competition.26 Agreements that do not infringe Article 81(1) EC, or that fulfill the conditions of Article 81(3) EC, are valid and enforceable.

Footnotes

1:Commission Regulation no. 77/2004, [2004] OJ L 123/11.

2:[2004] OJ C 101/2.

3:TTBE, recital 7.

4:Technology Transfer Guidelines, para. 42. Note that sublicensing is only covered to the extent that the production of the contract products constitutes the primary object of the agreement.

5:Technology Transfer Guidelines, para. 42 and paras. 210 – 235.

6:Technology Transfer Guidelines, para. 26.

7:Article 4 (3) TTBE.

8:Note however that for the application of the TTBR potential competition on the technology market is not taken into account. See Technology Transfer Guidelines, para. 30.

9:Technology Transfer Guidelines, para. 32.

10:Article 3(1) TTBE.

11:Article 3(2) TTBE.

12:Article 3(3) TTBE and Technology Transfer Guidelines, para. 70. Note that in case of new technologies that have not yet generated any product sales, a zero market share will be assigned.

13:Article 8(2) TTBE.

14:Technology Transfer Guidelines, para. 131.

15:TTBE, recital 13.

16:Technology Transfer Guidelines, para. 75.

17:Idem.

18:Article 4(1) TTBE.

19:Exceptions include : field of use restrictions (except in reciprocal agreements); territorial licensing exclusivity for licensees; restrictions on both active and passive sales to territories or customer groups reserved to the licensor or the licensee (except in reciprocal agreements); restrictions on active (but not passive) sales into territories or customer groups reserved to other licensees (except in reciprocal agreements, and provided that the protected licensee is not a competitor of the licensor); limitations on the licensee to producing for its own use (subject to an exception for sales of spare parts); and limitations on the licensee to selling only to a particular customer (but not in reciprocal agreements).

20:Article 4(2) TTBE.

21:Exceptions include: restrictions on passive sales to a territory or customer group reserved to the licensor; restrictions on passive sales to a territory or customer group reserved to another licensee, but only for two years; the obligation on the licensee to produce only for its own use (subject to the right to sell spare parts); the obligation on the licensee to produce only for a particular customer; restriction on sales to end users by a licensee which is a wholesaler; and sales to unauthorized distributors by members of a selective distribution system.

22: Technology Transfer Guidelines, para. 108.

23:Article 5(1) TTBE.

24:Technology Transfer Guidelines, para. 107.

25:Technology Transfer Guidelines, para. 40.

26:Technology Transfer Guidelines, para. 130.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved