tech transfer

12 February 2004

Shirley Lewis

The final phase of the process which began in December 2001 to replace the current Technology Transfer Block Exemption Regulation[1] is under way. Once finalised, the new legislation is scheduled to come into force on 1st May 2004. Following the publication of the European Commission’s proposed draft Regulation and accompanying guidelines[2] on 1st October 2003, comments were invited from interested parties. Over 75 submissions were received from trade associations, law firms, national authorities, universities and individuals[3]. The European Commission has considered these and, as a result, has made some important amendments to its draft legislation and guidelines, which it will discuss with the EU Member States on 18th February 2004. The European Commission has not yet published these new drafts, but Mario Monti, the European European Commissioner for Competition Policy, pre-viewed the amendments in his speech at the Ecole des Mines in Paris on 16th January 2004.

Firstly, Mr Monti re-iterated that most licensing of technology even where some competition restrictions are imposed on one of the parties will, in general, be pro-competitive. This view is based on the premise that sufficient competing technologies will exist so that neither party’s intellectual property rights will confer market dominance. Licensing will therefore allow assets to be integrated, help to disseminate the technology, speed up entry into the market and provide a reward for risky investments, all of which facilitate competition. However, where one of the parties dominates the market, such agreements may be used to restrict competition and this must be prevented.

It will be recalled that the published draft legislation aims to prevent such abuse by adopting an economic analysis of the market, similar in concept to the rules on distribution and horizontal co-operation agreements. Below certain market share thresholds (20% for parties which are competitors and 30% for non-competitors), technology licensing agreements can benefit from the block exemption so long as the relevant listed hardcore restrictions are avoided. There are two different sets of hardcore restrictions, a more restrictive one for competitors and a less restrictive one for non-competitors. This difference exists because the European Commission perceives that there is a greater risk of collusion, market sharing and cartel behaviour between competitors than non-competitors and, in general, agreements between competitors have a greater market impact than agreements between non-competitors[4].

Mr Monti then went on to outline the revisions to the European Commission’s draft Regulation and guidelines. The general policy of the first drafts remains, with amendments only in those areas where the European Commission considered that the concerns raised in the submitted comments needed to be remedied.

Scope of the block exemption

Most submissions were in favour of widening the ambit of Regulation 240/96 (the current regime), which covers only patents and know-how, to cover design rights and software copyright as well. Mr Monti explained that the new Regulation would not be further extended to cover copyright licensing generally or pure trade mark licensing because the enabling legislation[5] only allows block exemption of industrial property rights. Copyright other than on software does not fall into this category and, similarly, trade marks are not directly related to technology transfer as their function is to differentiate products on the market. Database rights will not be covered in the new legislation for the same reasons, but Mr Monti noted that copyright often serves to protect such assets.

Competitors and Non-Competitors

Most of the submitted opinions agreed that the distinction between competitors and non-competitors is sensible because the different relationships between the parties to the licence create different competition problems. Many commentators pointed out the difficulties inherent in agreements between parties whose relationship changes during the lifetime of the licence. Under the Regulation as currently drafted, parties which were not competitors when the licence was entered into, but who subsequently develop their own, competing technologies, would, from that time onwards, be subject to the different set of hardcore restrictions relevant to competitors.

Mr Monti clarified that the competitive status of the parties to a technology licence should be determined before the licence is entered into and this status will be carried through for the life of the agreement. The new draft Regulation will be revised to make this explicit. In other words, where parties to a licence are non-competitors at the time the agreement is entered into, the original hardcore list for non-competitors will apply for the full term of the licence, even if they subsequently become competitors. This amendment will increase legal certainty for parties during the drafting stage.

The Regulation as currently drafted states that potential competitors on a product market are those who may enter the market in response to a small and permanent increase in price. The new draft guidelines will narrow this concept and restrict it to parties who may enter the product market as a result of such a price increase within one to two years.

In general, the European Commission will assume that parties are competitors if they own substitutable technologies. However, if the parties can prove that they have blocking technologies (one technology cannot be exploited without infringing the other), they will be treated as non-competitors. Some commentators were concerned that the burden of proof was set too high, as only court decisions and third party expert opinions could be submitted. Mr Monti stated that the new draft of the guidelines has been amended to allow other evidence to be submitted as proof also.

Hardcore list for competitors

The commentators generally accepted that there is a greater risk of anti-competitive effects resulting from licensing between competitors compared to non-competitors. Similarly, a greater risk exists in reciprocal licensing agreements compared to non-reciprocal agreements. The hardcore lists therefore distinguish between these different situations.

The consensus of the comments was that price fixing, output restrictions and allocation of markets or customers should be prevented between competitors. However, there was criticism of the description in the guidelines of some of the activities which would fall under these headings.

Price Fixing

In particular, it was felt that classing reciprocal running royalties (eg royalties calculated on the basis of individual product sales) as a form of price-fixing was too harsh. Mr Monti said that the guidelines had been altered so that the European Commission will regard such terms as a legitimate method of valuing the licence and sharing the risk unless used in cartels which are merely disguised as licences.

Output Restrictions

Mr Monti made it clear that there is no difference in principle between cross-licences between competitors which restrict each other’s output only from the technology which each party licenses-in and agreements which also restrict use of the parties’ own technologies. In either case, this would be an unacceptable restriction of competition. However, non-reciprocal output restrictions will be block-exempted, because they would be less likely to be anti-competitive and would act as an incentive to the licensor to licence its technology.

Allocation of markets and customers

Mr Monti stated that the block exemption on field of use restrictions imposed on a licensee in a non-reciprocal agreement between competitors will be expanded to cover cross-licensing agreements between competitors also (ie each party to the agreement is restricted in the use of the other party’s technology). Although the European Commission feels that there is a risk of market sharing, it perceives that this is less of a concern in field of use restrictions than in reciprocal customer or territorial restrictions because the competitors are less likely to withdraw completely from a particular product market. Mr Monti also explained that cross-licensing with field of use restrictions may allow design freedom for both parties by avoiding infringement claims. Field of use restrictions also prevent use of the technology in areas where the value of such a licence has yet to be determined.

A very valuable revision which will be introduced in the new draft of the block exemption is that competitors will be able to impose customer and territory restrictions in non-reciprocal agreements. Competitors will therefore be able to allocate exclusive territories or customers and restrict active or passive sales into that territory or to that customer by the other party. However, the block exemption will not extend to reciprocal licensing, where dividing up markets in this way would be more likely to be anti-competitive. Mr Monti explained that the expanded block exemption for non-reciprocal agreements should provide protection for the licensor and so encourage it to license its technology.

Allocation of markets and customers by non-competitors

For non-competitors, the hardcore restrictions on active and passive sales by either party into the exclusive territory or customer group of the other party have been greatly simplified.

All active and passive sales restrictions on the licensor are now intended to be block exempted, not just those sales into exclusive territories or to exclusive customer groups reserved for the licensee. The licensee may be similarly restricted from all such active sales.

Regarding passive sales by a licensee, Mr Monti outlined a further proposed revision which will cover passive sales into another licensee’s exclusive territory or customer group during the first two years in which the latter licensee is active on that market. The European Commission hopes that these changes will simplify the regulation and increase the level of legal certainty for the parties.

Second source exemption

A block exemption for licences entered into specifically to create a second source of supply to a customer will be introduced in the new legislation and this will apply to both competitors and non-competitors. The licensor will be able to restrict the licensee to supply the product only to that particular customer, so long as the licence was granted especially to create a second source of supply.

Market Share Thresholds

Some of the parties who submitted comments wanted the market share thresholds to be abolished, either because they are of no relevance to high technology sectors, or because the product and geographic markets are too difficult to define.

Mario Monti rejected these assertions and emphasised that the legislation will apply to all sectors, not just high technology ones which may be in a state of flux. Even these will only be in such a dynamic state for a limited time. However, for use in dynamic sectors, where the market share does not correlate to market dominance, the new draft guidelines will contain an alternative mechanism for evaluating market share based upon the number of competing technologies available to potential licensees at a comparable cost.

Mr Monti was also at pains to point out that there is no presumption of illegality in licensing agreements where the parties exceed the market share threshold and the draft Regulation and guidelines make this quite clear. The function of the block exemption is merely to create a safe harbour for restrictions which the European Commission assumes fulfil the requirements of Article 81(3) EC Treaty and the proposed market share thresholds are in line with the other block exemption regulations and the 20% threshold in USA guidelines for IP licensing.

Finally, Mr Monti concluded that the proposed legislation will bring the EU and USA competition policies closer, particularly for licensing agreements between competitors.


The new draft Regulation and guidelines outlined by Mr Monti will expand the block exemption to cover the following terms for competitors:

  • Non-reciprocal output restrictions;
  • Field of use restrictions in cross-licences; and
  • Customer and territory restrictions between the parties in non-reciprocal licences between competitors.

In addition, for non-competitors, the block exemption has been broadened and simplified as regards restrictions on active and passive sales by each party.

For both competitors and non-competitors, a new exemption for second sources of supply has been included.

To assist in calculating market shares in highly dynamic sectors, a new mechanism based upon the number of competing technologies available to licensees has been added to the draft legislation.

Although Mr Monti’s comments give us a very good idea of what the final form of the new Regulation and guidelines will be, these are still subject to some change during the consultation process with the Member States.

[1] EC Regulation 240/96

[4] For a review of the draft Regulation and guidelines, see ‘A new approach to technology transfer’, The CIPA Journal, 426-430, August 2003.

[5] Council Regulation 19/65

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.