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The 2004 Technology Transfer Block Exemption Regulation

Graham Burnett-Hall, Associate

Introduction

The new Technology Transfer Block Exemption Regulation ("TTBER" - Commission Regulation No. 772/2004), which came into force on 1 May 2004, will require companies to change their approach to the drafting of technology licence agreements which relate to the European Union. This includes the 10 accession states which joined the EU on 1 May.

Important points regarding the TTBER, compared to the regime under the old block exemption (Commission Regulation No. 240/96), which has been repealed, are:

The effect of the TTBER applying to an agreement is that Article 81(1) of the EC Treaty will not apply to that agreement. Article 81(1) prohibits agreements between undertakings which may affect trade between the member states of the EU and which have as their object or effect the prevention, restriction or distortion of competition within the common market. Such agreements are void. The advantages of ensuring that a licence agreement receives the benefit of the TTBER "safe harbour" are therefore clear.

The old block exemption, with its "white list" of permitted clauses and "black list" of prohibited clauses, was prescriptive but at least the parties to an agreement could be confident that the block exemption would apply provided the agreement was carefully drafted. The new TTBER, with its reliance on market shares, will create uncertainty but with this comes greater flexibility.

What agreements are covered?

The exemption from the application of Article 81(1) provided by the TTBER applies to "technology transfer agreements entered into between two [ie and not more than two] undertakings permitting the production of contract products". To understand the scope of this it is necessary to explore the definitions contained in the TTBER.

"Technology transfer agreement" covers patent licensing agreements, know-how licensing agreements, software copyright licensing agreements, or agreements containing a mix of these. Ancillary terms in such agreements relating to the sale or purchase of products or the licensing of other intellectual property rights, provided these provisions do not constitute the primary object of the agreement and are directly related to the production of the contract products. Assignments of patents, know-how and software copyright will also fall within the technology transfer agreement definition, where part of the risk associated with the exploitation of the technology remains with the assignor. In this regard, the definition expressly envisages situations in which the sum payable by the assignee is dependent on the turnover obtained or the number of products produced by the assignee through using the assigned technology.

"Patent" is broadly defined - it includes, amongst other things, utility models,supplementary protection certificates and designs. To constitute "know-how", information must form a package of non-patented practical information which is secret, substantial and identified. "Contract products" means products (goods or services) that are produced with the licensed technology.

The reference in the exemption to undertakings "permitting" the production of products is intended to permit the TTBER to apply to undertakings which licence the relevant technologies to third parties without themselves using the technologies to produce the relevant products, as well as undertakings which are themselves active on the relevant market.

The exemption will continue for as long as the relevant intellectual property rightremains in force or for as long as the know-how remains secret. An exception to this is that if the know-how becomes publicly known as a result of action by the licensee, the exemption will apply for the duration of the agreement.

The safe harbour provided for by the TTBER exemption can therefore apply to a wide variety of licensing agreements. They must, however, comply with the market-share threshold requirements and the provisions relating to hardcore restrictions.

Market-share thresholds

It is vital that the parties determine:

  1. whether they are competing with each other on the relevant technology and product market; and
  2. the size of their market shares on the relevant technology and product market.

The first question is complicated by the fact that potential competitors as well as actual competitors can be considered to be competitors for the purposes of the TTBER. This requires a consideration of whether, on realistic grounds, a party would enter the relevant product and geographic market, should there be a small and permanent increase in relative prices. Furthermore, the parties may be involved in licensing or utilising different technologies but they will still be regarded as competitors, if their licensees or buyers would regard the technologies or products as interchangeable or substitutable for each other.

Having decided whether or not the parties are competitors, the next step is to calculate the parties' market shares. The TTBER adopts the (understandable) view that agreements between competing parties are more likely to have anti-competitive effects than agreements between non-competitors, Accordingly, where the parties are competitors, the TTBER exemption will only apply if the combined market share does not exceed 20% on the affected technology and product market. Where the parties do not compete, the condition is that the individual market share of each of the parties must not exceed 30% on the relevant technology and product market.

Market shares are calculated on the basis of market sales value data relating to the preceding calendar year or, if such data are not available, estimates based on other reliable market information.

Ensuring continual compliance with the TTBER terms is therefore going to require companies to spend a considerable amount of time analysing their markets and those of their licensees and/or licensors. Market share can vary considerably from year to year, particularly after the introduction of new products or technologies. The TTBER anticipates this: if the market share does not exceed the relevant 20% or 30% threshold to begin with but subsequently rises above that level, the agreement will continue to have the benefit of the TTBER exemption for two years following the year in which the relevant threshold was exceeded. This will give the parties time to negotiate any necessary amendments to ensure compliance with Article 81(1).

Hardcore restrictions

The TTBER will not apply to any agreement that contains a hardcore restriction.

For agreements between competing undertakings the hardcore restrictions are:

  1. the restriction of a party's ability to determine prices when selling products to third parties (ie price fixing);
  2. the limitation of output, unless it is a limitation imposed on the licensee in a non-reciprocal agreement or a limitation imposed on only one party in a reciprocal agreement;
  3. the allocation of markets or customers, except:
    1. the obligation on the licensee(s) to produce with the licensed technology only within one or more technical fields of use or one or more product markets;
    2. the obligation on the licensor and/or the licensee, in a non-reciprocal agreement, not to produce with the licensed technology within one or more technical fields of use or one or more product markets or one or more exclusive territories reserved for the other party;
    3. the obligation on the licensor not to license the technology to another licensee in a particular territory;
    4. the restriction, in a non-reciprocal agreement, of active and/or passive sales by the licensee and/or licensor into the exclusive territory or exclusive customer group reserved for the other party;
    5. the restriction, in a non-reciprocal agreement, of active sales by the licensee into the territory/customer group exclusively allocated to another licensee (who was not a competitor of the licensor at the time its own licence was concluded);
    6. the obligation on the licensee to produce the contract products only for its own use (active and passive sales of products as spare-parts for the licensee's own products must, however, be permitted);
    7. the obligation on the licensee, in a non-reciprocal agreement, to produce the contract products only for a particular customer, where the licence was granted in order to create an alternative source of supply for that customer;
  4. the restriction of the licensee's ability to exploit its own technology; and
  5. the restriction of either party's ability to carry out research and development, unless this is indispensable to prevent the disclosure of licensed know-how to third parties.

Some of the above restrictions make a distinction between reciprocal and non-reciprocal agreements. A technology transfer agreement will be reciprocal if each party grants the other a patent, know-how or software copyright licence (including grants contained in separate contracts) and the licences concern competing technologies or can be used for the production of competing products.

For agreements between non-competing undertakings the hardcore restrictions are less severe. They cover:

  1. price fixing, save that maximum sale prices or recommended sale prices are permitted as long as they do not in effect amount to fixed or minimum prices;
  2. the restriction of the territory into which, or customers to whom, the licensee may passively sell the contract products, except:
    1. the restriction of passive sales into an exclusive territory or to an exclusive customer group reserved for the licensor;
    2. the restriction of passive sales into the exclusive territory or to an exclusive customer group allocated to another licensee during the first two years that this other licensee is selling the products in that territory or to that customer group;
    3. the obligation to produce the contract products only for its own use provided that sales of the products as spare-parts for the licensee's own products are permitted;
    4. the obligation to produce the products only for a particular customer, where the licence was granted to create an alternative source of supply for that customer;
    5. the restriction of sales to end-users by a licensee operating at the wholesale level;
    6. the restriction of sales to unauthorised distributors by the members of a selective distribution system;
  3. the restriction of active or passive sales to end-users by a licensee which is a member of a selective distribution system and which operates at the retail level (though a prohibition of a member from operating out of an unauthorised establishment is permitted).

It follows that where the parties are non-competitors, more restrictions are permissible in a licence, including maximum and recommended sale prices, limitations on output, restrictions on active sales and even certain restrictions on passive sales.

Usefully, the hardcore restrictions which apply to an agreement do not change if the parties are not competing undertakings when the agreement is concluded but subsequently do become competing undertakings. Provided there is no material amendment to the agreement, the hardcore restrictions applicable to non-competing undertakings continue to apply for the full life of the agreement. Note, however, that this does not prevent the applicable market share threshold changing. If the 20% market share threshold applicable to competing undertakings is exceeded material amendments to the agreement may be unavoidable.

Excluded restrictions

The inclusion of a hardcore restriction in an agreement will result in the entire agreement no longer having the benefit of the TTBER. The TTBER lists a number of other restrictions which also cannot be covered by the TTBER exemption. However, with these it is only the particular restrictions that are excluded; the remainder of the agreement will continue to have available the TTBER safe harbour. These restrictions are accordingly known as "excluded restrictions". They cover:

  1. an obligation on the licensee to grant an assignment or exclusive licence to the licensor (or its nominee) of severable improvements to, or new applications for, the licensed technology;
  2. an obligation on the licensee not to challenge the validity of the licensor's intellectual property rights in the common market (though the licence can contain a term allowing the licensor to terminate the licence in the event that the licensee does challenge the validity of the licensed IPRs);
  3. where the parties are non-competitors, an obligation limiting a licensee's ability to exploit its own technology;
  4. where the parties are non-competitors, an obligation limiting either party's ability to carry out research and development, unless this is indispensable to prevent the disclosure of licensed know-how to third parties.

The exclusion of the applicability of the TTBER to these clauses means that individual assessment of any such provision in an agreement will be required.

Withdrawal procedure and non-application of the TTBER

It should be noted that the Commission has the power to withdraw the benefit of the block exemption in respect of individual agreements if they are found to fall within the scope of Article 81(1) of the EC Treaty - ie by having an anti-competitive effect - but do not fulfil the conditions of Article 81(3). The latter Article, broadly speaking, allows Article 81(1) to be declared inapplicable if the agreement's pro-competitive effects outweigh the agreement's anti-competitive nature.

Consideration should therefore be had to the actual effect of a particular agreement on competition in a particular market, not just to whether or not it falls within the terms of the TTBER.

The TTBER also contains provisions allowing the Commission to declare that the TTBER will not apply to technology transfer agreements containing specific restraints and which relate to a particular market, if more that 50% of the relevant market is covered by parallel networks of similar technology transfer agreements.

Action points

Companies, if they have not done so already, need to review their licence agreements and determine whether any amendments are necessary to bring the agreements within the scope of the new TTBER.

Key questions to address are:

A further question for existing agreements is whether they satisfy the conditions for exemption of the old block exemption. Only if they do will the agreements have the benefit of the transitional period, which effectively gives the parties until 31 March 2006 to make any amendments they consider necessary or desirable to take into account the effects of the TTBER. For all other agreements, the provisions of the new TTBER will apply from 1 May 2004.

Provided the market-share threshold applicable to a particular agreement is not exceeded and the agreement contains none of the relevant hardcore restrictions, it should benefit from the TTBER's safe harbour exemption. The potential pro- and anti-competitive effects of any "excluded restrictions" will, however, have to be individually assessed by the parties to the agreement.

Secondly, companies need to ensure that they have in place systems that will enable them to monitor their markets and calculate the relevant market share information year on year, in order to know whether their licence agreements will continue to benefit from the TTBER. As the market shares of both the licensor and the licensee are relevant to the market-share thresholds, the parties will need to share information. Any new licences should contain appropriate provisions to ensure that the parties will have access to this data.

Agreements that fall outside the TTBER, for example because they involve more than two parties or because the relevant market-share threshold has been exceeded, should be individually assessed to determine whether they infringe Article 81(1). There is no presumption that an agreement is illegal just because the TTBER does not apply. On the contrary, the vast majority of licence agreements are pro-competitive. Relevant questions are, does the licence agreement restrict actual or potential competition that would have existed without the contemplated agreement and does the agreement restrict actual or potential competition that would have existed in the absence of the contractual restraints? If either question can be answered in the affirmative, the agreement may be caught by Article 81(1). On the other hand, a restraint contained in the agreement may be objectively necessary for the existence of the agreement, given its type and nature. Conducting such an assessment is often difficult and specialist advice is likely to be required. To assist with this the Commission has issued guidelines regarding the application of Article 81 to technology transfer agreements. For example, the Commission takes the view that, hardcore restrictions aside, Article 81 is unlikely to be infringed where there are four or more independently controlled technologies that may be substitutable for the licensed technology at a comparable cost, in addition to the technologies controlled by the parties to the relevant agreement.

Finally, no new licence agreement should be prepared without regard to the application of the TTBER. Given the uncertainties and difficulties involved in conducting an individual assessment, it will in most cases be preferable to ensure that the agreement falls within the TTBER's scope.

Published in Remarks - Summer Edition 2004

Should you have any queries on this article, please do not hesitate to contact Graham Burnett-Hall on gburnett-hall@marks-clerk.com

This article Copyright © Marks & Clerk 2005. All Rights Reserved. The information in this article is intended as a summary. Readers should not act or rely on information contained in this article without first obtaining specialist professional advice.
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