The European Commission has adopted a new Technology Transfer Block Exemption Regulation, which came into effect on 1 May 2004. The Regulation provides a "safe harbour" from the effects of EU competition rules for certain types of technology licence agreements.
The original proposals for reform of the EU’s technology transfer rules, published in September 2003, were highly controversial and prompted heavy criticism from businesses involved in technology licensing. Many argued that they did not take sufficient account of the realities and benefits of licensing in high technology sectors such as pharmaceuticals and biotechnology. Following a consultation process, the new rules were revised to address a number of the criticisms raised, but the new Regulation still retains a number of the controversial features of the original proposals. The new rules will undoubtedly be of great significance for businesses entering into (and those which have already entered into) technology licence agreements with effects in Europe.
The Regulation provides a "block exemption" under which certain categories of technology licence agreements are automatically exempted from Article 81(1) of the Treaty of Rome which prohibits anti-competitive agreements which affect trade between Member States. Agreements which have anti-competitive effects may be exempted under Article 81(3) if their positive benefits for the production or distribution of goods or technical or economic progress outweigh their negative effects.
It replaces the previous technology transfer block exemption issued in 1996, with effect from 1 May 2004. This is a very significant date in the history of the EU, as it coincides with the enlargement of the EU through the admission of ten new member states (the Czech Republic, Poland, Hungary, Slovak Republic, Slovenia, Latvia, Lithuania, Estonia, Malta and Cyprus). The introduction of the new Regulation is part of a much wider reform of EU competition law designed to modernise and simplify the enforcement of competition law to cope with enlargement, including removal of the procedure for individually notifying agreements to the European Commission for assessment.
The new Regulation takes account of criticism that the previous rules were too restrictive, and imposed a "strait jacket" on drafting of technology licences, by setting out prescriptive lists of banned and permitted clauses. In drawing up the new block exemption, the Commission aimed to take an economic and effects-based approach which better reflects the real competitive effects of agreements, and is in line with other Block Exemption Regulations. However, the new rules contain a number of highly controversial features, such as the introduction of market share thresholds above which the exemption will not apply.
The Regulation is accompanied by a lengthy set of guidelines drawn up by the Commission which contain guidance both on the application of the Regulation itself and also on how certain types of agreements and clauses which fall outside it should be treated.
One of the most important points to bear in mind (and which is now further emphasised in the guidelines) is that agreements which fall outside the safe harbour of the Regulation are not automatically deemed to be restrictive of competition (and therefore prohibited). Instead, they must be considered individually on their own merits to determine whether they are anti-competitive (under Article 81(1)) and if so whether they may benefit from the exemption under Article 81(3). The guidelines recognise that technology licences are often pro-competitive and may bring new products on to existing markets or create new markets and that they may avoid unnecessary duplication of research costs.
Nevertheless, agreements which do not fall within the Regulation may be open to challenge in national courts or by competition authorities if they do have anti-competitive effects. Businesses entering into technology licence agreements will therefore generally wish to ensure their agreements fall within its scope if possible, to obtain the certainty of benefiting from the block exemption.
The Regulation applies to agreements under which technology is licensed for the production of goods or services using that technology. Both the previous and new Regulations apply to patents and know-how, but the new one will also apply to designs and software copyright. For the exemption to apply, the relevant IP rights must remain in force and not have been declared invalid, and know-how must be secret, identified and substantial (which is defined as meaning "significant and useful"). Other IP rights which may be significant in some technology licensing agreements, such as database rights, are not covered.
The Regulation also applies only to agreements between two parties or "undertakings". Agreements involving multiple parties are not covered by the Regulation, but the Guidelines provide guidance on the treatment of certain types of multi-party arrangements such as patent-pooling arrangements. The Guidelines also deal with the application of the new Regulation to settlement agreements: licences entered into to settle infringement disputes may potentially fall within its scope.
Market Share Thresholds
Under the new regime, it is necessary to determine whether or not the parties are competitors, as well as their market share. The exemption only applies to:
- agreements between competing parties whose combined market share does not exceed 20% of the relevant product and technology markets, and
- agreements between non-competing parties if each of their market shares does not exceed 30% of the relevant product and technology markets.
The definitions of competitor, product market and technology market and the method of calculation of market shares are all complex issues and may be open to differing interpretations.
The assessment of market shares must be made both on entering into the agreement and on an ongoing annual basis, since agreements which fall within the exemption at the outset may subsequently lose the benefit of the exemption if market shares exceed the thresholds for more than two years. Market analysis in advance of drafting any licensing agreement, and on an annual basis during the term, will therefore be important to ensure that the agreement falls and remains within the exemption.
Clearly, this approach presents particular difficulties for licensing of new technologies which may start off with a low (or zero) market share, but if successful may achieve a very high share or create an entirely new market. The Commission has addressed this to some degree by providing a second "safe harbour" in the Guidelines based on the number of competing technologies that are available to potential licensees at a comparable cost. Even so, in many cases there will be an unwelcome degree of uncertainty as to whether the exemption is and will remain applicable, and detailed and potentially costly assessment may be required.
A further controversial aspect is that agreements which existed before 1 May 2004 are also subject to the new rules following the expiry of a transitional period at the end of March 2006. This means that agreements which were exempted under the old rules when originally entered into may not benefit from the new block exemption once this period has ended. As a result, businesses which have entered into licence agreements will need to review them during the transitional period to ascertain whether they will still be enforceable. In some cases, renegotiation may be necessary—a potentially difficult proposition since the parties’ positions will be likely to have altered since the agreement was entered into.
Instead of the so-called "black", "grey" and "white" lists set out in of the previous block exemption, there are now lists of "hardcore restrictions" and "excluded restrictions". If any hardcore restrictions are included, the agreement as a whole will fall outside the scope of the Regulation. Excluded restrictions are clauses which themselves fall outside the scope of the exemption, but which may be severed from the agreement so that the remaining provisions can be within its scope.
The distinction between competitors and non-competitors is also important in this context, as there are separate lists of hardcore restrictions for agreements between competitors and those between non-competitors; the Commission takes the view that agreements between competitors are more likely to raise competition concerns, and so tighter control of their provisions is required. One concern raised during the consultation period was that parties who were not competitors at the start of a licence agreement could become so during the course of the licence agreement, and would suddenly have to take into account a new set of hardcore restrictions. The final rules provide that, where the parties start off as non-competitors, the hardcore list for non-competitors will remain applicable throughout the life-time of the agreement even if the parties subsequently become competitors, so long as the agreement is not subsequently amended in a material way.
Hardcore Restrictions in Agreements Between Competitors
The list of hardcore restrictions for agreements between competitors includes:
- Price fixing.
- Reciprocal limitations on output.
- Restrictions on exploitation of a licensee’s own technology, and restrictions on research and development by either party (except where this is indispensable to prevent disclosure of the licensed know-how).
- Allocation of markets or customers between the parties—although this is subject to a number of significant exceptions, which mean that the following types of clauses will generally be permitted:
- Field of use restrictions are now permitted in both cross-licensing and one-way agreements (the original draft would have permitted field of use restrictions in one-way agreements only).
- The licensor may be restricted from granting further licences of the same technology in a particular territory.
- In a non-reciprocal (one-way) agreement, the parties are able to allocate exclusive territories and customer groups between themselves, and to restrict active and passive sales into each other’s exclusive territories or customer groups. The licensee may also be restricted from making active (but not passive) sales into a territory or customer group exclusively allocated to another licensee, so long as the agreement is non-reciprocal and the second licensee was not a competitor of the licensor when it was appointed. Again, this represents a significant relaxation from the Commission’s original proposals.
- Captive use (i.e., limiting the licence to the licensee’s use only).
- Restriction of supply by the licensee to a single customer, so that a licensor can create a second source of supply for a named customer.
Hardcore Restrictions in Agreements Between Non-competitors
The list of hardcore restrictions for agreements between non-competitors includes:
- Price fixing (except that in this case, the agreement may include a maximum or recommended sale price so long as this does not amount to a fixed or minimum sale price, for example, as a result of incentives offered by the licensor).
- Restriction of the territory into which, or the customers to whom, the licensee may make passive sales of the licensed products. This is more generous than for agreements between competitors, as restrictions on active sales are generally permitted, as are restrictions on passive sales by the licensor. There are also significant exceptions which mean that:
- Restrictions on passive sales by the licensee into a territory or customer group reserved exclusively for the licensor will be permitted.
- Licensees can be restricted from making passive sales into an exclusive territory or customer group allocated to another licensee for the first two years of sales by the other licensee, in order to enable the second licensee to become established.
- Licensees may also be restricted to making sales at wholesale level only, or to producing as a second source of supply for a particular customer.
- In a selective distribution system, a licensee which operates at retail level may not be prevented from making active or passive sales to end-users, but all licensees may be restricted from selling (actively or passively) to unauthorised distributors.
The list of excluded restrictions includes:
- Obligations on the licensee to assign or grant an exclusive licence of its improvements to the licensor where these are "severable". (A severable improvement is one which may be exploited without infringing the licensed IPR or know-how). Under the new rules, it is now possible for a licensor to request a non-exclusive grant-back of severable improvements from the licensee without the licensor having to offer to license its own improvements to the licensee.
- Obligations on the licensee not to challenge the validity of the licensed IPR, although one can include provisions that the agreement may be terminated in the event of a challenge by the licensee, and prohibitions on challenges to the secrecy or substantiality of licensed know-how are permitted. In addition, the Guidelines recognise that "no challenge" clauses may generally be included in settlement agreements without contravening Article 81(1).
- Restrictions in an agreement between non-competitors on exploitation of the licensee’s own technology, and restrictions on research and development by either party (except where this is indispensable to prevent disclosure of the licensed know-how). As noted above, this type of clause is classified as a hardcore restriction when included in an agreement between competitors.
Withdrawal of the Benefit of the Regulation
Even where the block exemption does apply, the Commission may withdraw its benefit in circumstances where a third party's technology or potential licensees are prevented from accessing the market by a network of similar restrictive agreements, or where the parties fail to exploit the licensed technology without any valid reason.
Despite significant improvements in the Regulation from the original proposals, many businesses remain concerned by the uncertainty caused by the introduction of the market share thresholds, and there has been criticism that the new rules may act as a disincentive to exploitation and development of technology by licensing in Europe. Whatever the advantages and disadvantages of the new rules, it is clear that businesses entering into licence agreements in order to exploit technology within the European Union will need to have regard to them and to the Guidelines. They will need to assess their market share both on entering into the agreement and regularly during the term, and take care in drafting agreements to avoid the identified types of prohibited clauses. To deal with future challenges, it may well help parties to keep careful records of the data and reasoning on which assessments of proposed agreements are based. Businesses with a portfolio of existing licences will need to review them and undertake any necessary renegotiation during the transitional period.
A copy of the final Commission Regulation on the application of Article 81(3) of the Treaty to categories of technology transfer agreements plus the guidelines can be found at http://www.europa.eu.int/comm/competition/antitrust/legislation/entente3_en.html#licensing.
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