Anewapproachtotechnologytransfer

08 September 2003

Shirley Lewis

The current transfer of technology block exemption under EC Regulation 240/96 is to be repealed and replaced with a radically different approach from 1st May 2004. The European Commission has just released its first draft of the proposed new Regulation (‘TTBER’) and accompanying Guidelines for the Member States to consider.

Although not yet in its final form, it is clear that the new block exemption will reflect the more modern approach of the vertical and horizontal block exemptions. The new TTBER will assess the likely impact of agreements on the relevant market in place of the existing rigid and formulaic list-based approach. Out goes the white list of allowable terms, the grey list of notifiable terms and the black list of proscribed terms. In comes a new economic framework whereby certain categories of agreement will be block exempted, so long as the undertakings which are party to it command less than a threshold level of market share. The current approach will not be completely abolished however, because inclusion of a listed ‘hardcore’ term will render the entire agreement non-exemptable, rather like the function of the current black list. In addition to this, there will be four types of restrictive terms which will be neither hardcore nor block-exemptable, but which will not prevent the rest of the agreement benefiting from the block exemption, providing they can be severed individually. These terms could only be declared exempt based on an individual assessment of their pro- and anti-competitive effects.

The European Commission is keen to promote the dissemination of technology and know-how in such a manner that competition and economic efficiency are improved. To this end, the draft TTBER differentiates between undertakings which are competitors on the relevant market and those which are not, by setting different market share thresholds beyond which the block exemption will not apply. The market share threshold for competitors will be lower than for non-competitors (20% versus 30%) because the European Commission perceives that there is a greater risk of collusion, market sharing and cartel behaviour between competitors and because agreements between competitors generally have a greater market impact than agreements between non-competitors.

Agreements to which the new TTBER may apply

The TTBER will only apply to agreements between two undertakings for the transfer of technology where the primary objective of the agreement is the manufacture of goods, or the provision of services, using the licensed technology. Such goods and services have been defined as ‘contract products’ in the draft Regulation and this terminology will be used throughout this article. The agreement may only subsist for as long as the licensed property right subsists or the know-how remains secret (unless divulged by the licensee). Like the current regime, the TTBER will not apply to R&D agreements, nor to patent pools.

As is currently the case, the TTBER will cover individual and mixed licensing of patents, and know-how. The difference under the new regime is that software copyright will also be covered. Terms in the technology transfer agreement which have effects other than licensing patents, know-how or copyright will be tolerated only so long as the primary objective of the agreement is to transfer technology. For example, terms which license other IPR, such as trade marks, will be allowed if directly related to the licensed manufacture or provision of contract products so long as this is not the agreement’s primary objective. Likewise, some limited terms relating to the sale and purchase of the contract products would be allowed if they satisfied these criteria. This is different to the current regime whereby licenses of IP rights other than patents or know-how are only allowed if they are ‘ancillary’ to that licence.

It is important to remember that the technology transfer block exemption does not exist in isolation and so, in some cases, the block exemptions for vertical or horizontal agreements may be relevant.

Assignments of patents, know-how or software copyright, or a combination thereof will be treated as technology transfer agreements, so long as the economic risk of exploiting that technology remains with the assignor. For example, the risk is on the assignor where the sum payable by the licensee is dependent upon the quantity of products manufactured, or the turnover obtained, by using the licensed technology. This is the same as the position under the current regime.

Relevant Markets

Both the ‘relevant product market’ and the ‘relevant technology market’ may be considered in determining whether the undertakings qualify for the block exemption. The existing EU case law on market definitions and market shares will form the scaffold for the new regime.

The ‘relevant product market’ is the market for final and intermediate products incorporating the licensed technology and products which compete with them, i.e. their substitutes. One technology may lead to several products on several different product markets and each will be assessed individually.

According to the draft Guidelines, a licensee’s share of a particular product market will be evaluated from its total sales of the relevant type of products on that market. The licensee’s combined sales of those products which incorporate the licensed technology as well as its sales of competing products, which do not incorporate that technology, will be considered. Each product market will be considered separately.

The ‘relevant technology market’ comprises the licensed technology and any substitutable technology. Shares of the relevant technology market will be calculated from sales on downstream product markets of products incorporating the licensed technology. Each product market will be considered separately.

Competitors and Non-competitors

Under Article 3, competing undertakings will be able to benefit from the TTBER only if their combined market share is 20% or less of the relevant technology and product markets. Non-competing undertakings will each be able to have a market share of 30% or less of the relevant technology and product markets. Exceeding the relevant threshold means the block exemption will not apply to the agreement for that market. Market shares will be calculated from the previous calendar year’s market sales data. If such data is not available, estimates will be made based on market sales volumes. A geographical assessment may also be required in order to determine the size of each product market.

Undertakings will compete on a relevant product market if they are both already active on that product market (actual competitors) or if they are ‘potential’ competitors. A potential competitor, according to the draft Guidelines, is an undertaking which, ‘on realistic grounds’, would incur the necessary costs in order to enter the relevant market in response to a small and permanent increase in relative prices. The current draft of the Guidelines does not offer any further insight into what might constitute ‘realistic grounds’.

On a relevant technology market, a licensor’s market share will be calculated from its own sales of products which incorporate the licensed technology plus sales of such products by all its licensees. As discussed above, calculation of the licensee’s share of the technology market would need to take into account sales of products which incorporate the licensee’s own, competing technology.

Hardcore restrictions

Even if the undertakings are below the market share thresholds described above, the agreement will not benefit from the TTBER if it contains any of the following ‘hardcore’ terms, or terms which have an equivalent aim. There are two different sets of hardcore terms, one for competing undertakings and one for non-competing undertakings.

Hardcore restrictions between competing undertakings (Art 4(1))

The European Commission’s aim is to prevent competing undertakings colluding to push up prices, divide markets or customers or prevent the licensee from exploiting its own technology. The following are the four hardcore restrictions between competing undertakings:

1. As is the case under the current regime, the agreement will not be allowed to restrict the ability of either party to determine the sale price of the contract products to third parties.

2. Reciprocal agreements between competitors which limit output or sales will be hardcore terms. Reciprocal means that each party licenses its own technology to the other party (cross-licensing).

Non-reciprocal agreements between competitors, whereby an undertaking licenses a competitor’s technology but does grant a licence of its own technology back to that competitor, are treated differently. In these situations, the licensee’s output or sales could be limited by the agreement and this would not be a hardcore term, nor an exempted one, but a ‘conditional’ term. This means that the term must be individually assessed under Article 5(2) to determine whether it is pro- or anti- competitive overall.

The reason for this distinction between reciprocal and non-reciprocal agreements is that the European Commission believes that non-reciprocal restrictions are less likely to be cartel based than reciprocal limits and are also likely to enhance efficiency by integrating the licensed technology into the licensee’s production methods. The European Commission is also keen to ensure that licensors have an incentive to disseminate their technology, and such a non-reciprocal quantity restriction may do that.

3. The parties to the agreement will not be allowed to allocate markets or customers under the TTBER.

However, the licensor may impose a ‘captive use restriction’ whereby the licensee can exploit the licensed technology only for its own use. For example, the licensee could be restricted to using the technology to make products only for its own use and for spare parts for its own products.

4. The licensor will not be able to restrict the licensee’s ability to exploit or license its own technology. Nor will the parties be able to restrict the other’s ability to carry out research and development unless the term is indispensable to prevent licensed know-how from being disclosed to third parties.

Hardcore restrictions between non-competitors (Art 4(2))

The following terms are hardcore in agreements between undertakings which do not compete with each other on a relevant market:

1. The rule on price restrictions is the same as for competing undertakings. Price restrictions may not be imposed on either party when selling contract products. Recommended and maximum prices may be allowed, so long as fixed or minimum sale prices are not set.

2. The parties to the agreement will generally not be able to restrict the customers to whom, or territories in which, the licensee can sell. However, the situation will be more generous than for competing undertakings and the following list of such terms will be allowed by exception because the European Commission is keen to encourage dissemination of technology:

a) The licensor will be able to restrict sales into a territory, or to a group of customers, which the licensor has reserved for itself.

b) The licensor will be able to prevent active sales by the licensee into territories which, or to customers whom, the licensor has allocated exclusively to another licensee. Exclusive territories or exclusive customer groups must have been set up to qualify for this exemption.

Although the restriction of passive sales between licensees is also a hardcore term, the draft Guidelines suggest that this may be allowed for a limited period of up to two years. The European Commission allows this time so that the licensee can recoup its setting up costs.

c) As will be the case for competing undertakings, the licensor will be able to restrict manufacture of the contract products to own use by the licensee, including sales of spare parts for the licensee’s own products.

d) The licensor will be able to prevent a wholesale licensee from selling to end users.

e) The licensor will be permitted to set up selective distribution systems and to prevent licensees from selling ‘contract products’ to unauthorised distributors.

3. However, the licensor cannot set up a selective distribution system and restrict licensees which operate at the retail level of trade from active or passive sales to end-users.

4. As is the case under the current regime, competing undertakings will not be able to restrict each other’s ability to carry out research and development, unless this restriction is indispensable to prevent the licensed know-how being disclosed to third parties.

Conditions (Art 5)

There are four types of restrictions which will be neither hardcore restrictions nor block-exempted. Unlike hardcore terms, which render the whole agreement illegal and unenforceable, where these terms can be severed, the block exemption could still apply to the rest of the agreement. Individual assessment of the terms, taking all the relevant facts into account, will be required to decide whether their overall effect is pro- or anti- competitive. If judged to be anti-competitive, the terms will be severed from the agreement. The rationale for this differentiation from hardcore terms is that terms which may reduce the licensee’s incentive to innovate are excluded from block exemption.

However, severability will be judged under national law. In the UK it is extremely difficult to ‘blue pencil’ a contract and sever terms, so the best advice is to avoid this situation arising. It will therefore be very important to consider this issue when drafting such agreements.

1. Obligations on the licensee to license exclusively any severable improvements to the licensed technology back to the licensor will have to be individually assessed. Severable improvements are those which can be exploited without infringing the licensed technology or making use of the licensed know-how.

In contrast, a non-exclusive grant-back obligation, such as one whereby the licensor and licensee will both be able to exploit or license the improvement, will be block-exempted. This is different to the current white list provision whereby such non-exclusive grant back obligations are allowed so long as the licensor also undertakes to license its own improvements back to the licensee.

2. Similarly, obligations on the licensee to assign improvements or new applications of the licensed technology to the licensor will require individual assessment.

However, according to the draft Guidelines, for obligations of the type mentioned in 1 and 2 above, the payment of a purchase price or royalty by the licensor would perhaps tip the outcome of the individual assessment towards it being pro-competitive because the licensee still has an incentive to innovate.

3. Obligations on the licensee not to challenge the validity of the IPR or contest the secrecy or substantiality of the know-how will need to be assessed individually. However, the same does not apply to terms whereby the licensor can terminate the agreement if the licensee does any of those things. This is the same as the current position. The risk of continuing to use the licensed technology thereafter will then lie on the former licensee.

4. Terms in non-reciprocal agreements between competing undertakings which limit the quantity of the licensee’s output of contract products will also require individual assessment. Non-reciprocal means that an undertaking licenses a competitor’s technology but does not itself grant a licence of its own technology back to the licensor.

Withdrawal of the benefit of the TTBER (Art 6)

The European Commission will be able to deny individual technology transfer agreements the benefit of the block exemption, should it find that the agreement is incompatible with Art 81(3) of the EC Treaty.

Some examples are given where this might be the case. One is where third parties’ technologies are not be able to access the market due to the cumulative effect of parallel networks of similar restrictive agreements which prevent licensees from using third parties’ technologies. Another example is where potential licensees are prevented from accessing the market by a parallel network of similar agreements. A third example is where the parties do not exploit the licensed technology and have no objectively justifiable reason for not doing so.

In contrast to the current regime, the TTBER will give the same power to withdraw the benefit of the block exemption to the competent authorities in each Member State. This power will be limited to cases where the market has a distinct geographical area which falls within, or encompasses solely, that Member State.

Transitional period (Art 9)

Agreements which complied with Regulation 240/96 and came into force before 30 April 2004 will have the benefit of a transitional period lasting until 31 October 2005 before they will have to comply with the new regime.

Summary

Although the current version of the TTBER is still in draft form and so subject to alteration, it is unlikely that the overall structure will change:

  • Market analysis will become a pre-requisite to drafting technology transfer agreements. The parties to the proposed agreement will need to know whether they fall below the market share threshold for the block exemption and this will require analysis of both the technology and the product markets.
  • The parties will also need to be aware of whether they will be classified as competitors or potential competitors because this affects which types of terms will be hardcore.

The parties will also need to draft the Article 5 ‘conditional’ terms in such a fashion that, should they be assessed as anti-competitive on balance, severing them will not adversely affect the operation of the remainder of the agreement.

First published in the August 2003 edition of the CIPA.


Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.