The European Commission’s view of the reform of the Technology Transfer Block Exemption (240/96).
Competition policy is in the middle of a maelstrom of change in the European Union. At every level of anti-trust policy the European Commission seems either to have implemented a change, or is in the process of examining a change that could be made. The driving force behind this is partly manpower. The Commission is swamped with work. In order to deal with this the Commission is shifting the burden of the work back to the systems users. The future is all about self-assessment. The users of the system will now have to deal with a less prescriptive system of block exemptions, limited to outlawing the most anti-competitive of activities, and in the place of a “white” or “grey” list, guidelines to help with drafting agreements.
This change started with the European Commission’s amendment to the Vertical Agreements Block Exemption and has now quickly caught up with the Technology Transfer Block Exemption (“TTBE”). The TTBE is valid until 31 March 2006 but the Commission has started the consultation process early. The reason behind this pre-emptive activity is the other major change that is going on in European competition law: the review of Regulation 17. This is regulation that gives the Commission the exclusive competence to grant exemptions from Article 81 of the Treaty of Rome. This proposed fundamental change to Regulation 17 will: (i) abandon the notification process and replace it with self-assessment and, (ii) to give the power of individual exemption to the national competition authorities and courts. All of this is designed to free resources at the Commission so that they can concentrate on what they see as the biggest threat to competition in Europe, cartels.
The purpose of this article is two fold. Firstly, to give the reader an outline of the proposed changes to the TTBE and secondly, to focus on some of the more relevant changes and the policy reasons for the change.
Outline of Changes
The current TTBE has been criticised as restrictive. In order to gain the benefit of its protection, the licence must be an exclusive licence concerning patents or know-how between two undertakings. Other types of intellectual property right that can be as economically important to industry in the European Union, in particular copyright, are only covered to the extent that they are “ancillary” to the patents or the know-how. In addition the narrow scope of the TTBE also raises a number of other problems; it does not cover non-exclusive licences and also ignores multi-party licensing which can be important when there is a development of a new industrial standard.
As it currently stands the TTBE is structured in way that is very similar to that of the two block exemptions that it replaced. Article 1 of the TTBE contains in it a list of contractual conditions one of which has to be included in the agreement before the agreement will be exempted from Article 81. This is followed in Article 2 with a “White List” of conditions that are not considered restrictive of competition and are permissible in any licence agreement. Article 3 creates a “Black List” of clauses that, if included in a licence agreement, will take the whole agreement outside the block exemption. Where a licence agreement cannot fit the straight-jacket of the TTBE, Article 4 permits parties to apply for an individual exemption using the provisions of the so-called “Opposition Procedure”. This procedure allows the parties to an agreement to submit the agreement to the Commission for clearance with an in-built time limit of four months for the Commission to respond, failing which, the agreement is deemed to be acceptable. The procedure cannot be used where the licence agreement contains provisions that are in Article 3, or the “Black List”. In this latter case the parties may only be left with the option of an individual application for an exemption.
Drawing heavily on the US as a source of inspiration the Commission is proposing a radical change in the way that it views technology licences, and in its report the Commission has given an insight in to what it has planned for the future. The changes to the TTBE come in two major parts: Firstly, changes to the actual scope of application of the proposed new block exemption. Secondly, the report discusses and invites comments on some individual clauses that may or may not be allowed in licence agreements.
In relation to the scope of application of the TTBE, which represents the more fundamental change, the Commission is considering extending the exemption to other kinds of intellectual property, including trade marks, design rights, but most importantly to copyright. Other areas where they propose to extend the block exemption include the addition of non-exclusive licences. The Commission is also proposing to extend the block exemption so that it may permit licences that are only exclusive with reference to one particular “field of use” or even in some circumstances one particular group of customers. Another proposed is to remove the time limit on the licensing of know-how. At present, there is a 10 year limit on the exemption granted by the TTBE for the exclusivity on know-how, regardless of whether during that period the know-how is improved.
The Commission is proposing to build upon the distinction between competitors who want to enter into a licence agreement with one another, that may be a concern for competition, and licences between non-competitors, that should not pose the same risks. The Commission is proposing to redefine the definition of “competitors”. Under the new proposals, not only will the term “non-competitors” include situations where the licensor does not exploit the technology, or the licensee is active in a different area, but also unusually the Commission is proposing to add to this list situations where the technology is so new that without the licence there would be no competition or where each party has intellectual property that blocks the other from going forward.
Where licences are between competitors, the Commission regards these as more likely to be a source of concern. Therefore there will be a market share threshold for the application of the block exemption and a short list of prohibited clauses (for instance any clause that purports to fix prices, limit output or allocate territories or customers). After this market share cap, the Commission proposes to draft and issue guidelines to assist parties with a self-assessment of the licence.
As far as licence agreements between non-competitors are concerned, the Commission will treat those provisions that do not relate to the intellectual property rights itself differently to those provisions that do relate to the intellectual property. With respect to those provisions that do not relate to the intellectual property itself (for instance tying in clauses, or non-compete clauses) the Commission will apply the same market share threshold that it presently does in the Vertical Agreements Block Exemption, i.e. so long as the parties do not have more than a 30% of the market even some hard-core (or black listed) restrictions may be permitted in licence agreements. Where the provisions relate to the intellectual property right itself (for instance field of use or territorial restraints), then non-competitors may only be bound by a test that would be based on the dominance of the company.
The Commission is intending to retain the right to withdraw the block exemption even if the parties are below the limits specified, and above the limits the parties will be left to decide for themselves whether there is a competition problem.
Changing the Scope of the TTBE
The Commission has approached the subject of changing TTBE by tackling some fundamental issues about the scope of application of the TTBE. The areas that raise the most tantalising prospects are the change to the scope of the types of intellectual property right that the TTBE applies to and also the type of agreement that the TTBE may try and cover.
Types of Intellectual Property Right
The Commission is proposing that in the future the TTBE will be extended to cover other intellectual property rights (IPR) that include copyright, trade marks and design rights.
At the moment copyright is not within the remit of the TTBE and it has been traditional to advise on the competition aspects of copyright licences by mirroring the provisions of the TTBE as far as possible. In this way it is generally thought that licence concerned should be safe from the effects of Article 81 and, although the Commission has never expressly said so, it is inclined to treat copyright licences the same way as patent licences.
The Commission states that around 22% of the cases (out of a total of 2020 cases between 1996 to 2000) on intellectual property matters that where referred it, the primary object of the referral was a licensing of copyright. These consisted of a mixed bag of content licences (mechanical recording), performing rights (broadcasting agreements etc) and copyright-based transfers of technologies (software and computer related inventions). Given this the Commission sees some justification for extending the definition of IPR in any future block exemption to include copyright.
One would assume that the legal certainty that would accompany any broadening of the definition would be welcomed by the software industry. Certainly those added value software agreements where the licensee is more than a distributor (in which case they would fall under the ambit of the Vertical Agreements Block Exemption) could potentially then fall under the ambit of the revised block exemption. Although criticism of the exclusion of copyright was one of the reasons that the Commission has sought to bring copyright into the new TTBE, this change is not universally welcome.
Some commentators have suggested that pure software copyright licences do not fall within the scope of competition law and therefore should not be part of any revised TTBE. The reason may be that the economics of software are such that they do not need the same level of investment as a patent licence. In the latter case, the licensee under a patent may also require territorial protection in order to safeguard their investment. There may be something in this, and there may be an argument that copyright may need to be treated differently and subject to its own block exemption. This is not a distinction that is drawn in the US, where copyright is subject to the same anti-trust guidelines as other intellectual property rights. For the most part one would tend to take the view that the added certainty that would be gained by copyright owners by its inclusion in any revised TTBE would be welcomed.
Types of Agreement.
At present the TTBE exempts only one type of exclusivity, that is territorial exclusivity. The TTBE does not allow a method of exclusivity that is either related to the field of use (which will only be allowed if the agreement already has a territorial exclusivity in it) or customer exclusivity (that is blacklisted). This may also be up for change.
Not only is the Commission considering bringing non-exclusive licences under the remit of the new TTBE (in order to prevent the administrative burden of notification), but it is also considering allowing exclusivity in fields of use and even customer groups. This radical change is based on the recognition that IPR owners may not be in a position to exploit their technology (or perhaps not even interested in that area of exploitation). To permit licensing on an exclusive basis on the basis of a field of use or even a customer group may lead to efficiencies and also facilitate the transmission of key knowledge.
In reviewing the potentially negative effects of extending the type of exclusivity that may be allowed, the Commission attempts to grapple with three fundamental concepts:
(1) First, is the distinction between those licences where the parties involved are non-competitors (or involved in a vertical relationship) and those that involve competitors (or those in a horizontal relationship);
(2) Second, is the present definition of “competing undertakings” which at the moment is defined widely,
(3) Lastly, those contractual provisions that relates to exploitation of the IPR itself and those that do not relate to the exploitation of the IPR referred to above.
Non-Competitors vs. Competitors
Between non-competitors (i.e. when there is a vertical relationship between the parties) there are two situations when an exclusive licence may cause competition concerns:
(1) Firstly, when there is a knock-on effect between a number of similar licensees and in particular the effect that it could have on third parties. For instance the concern here would be if there were the classic situation of a passive sales ban that would have the effect of partitioning the market.
(2) Secondly, there would be a concern that where a licensee already has a significant market power, the addition of an exclusive licence to a technology may create a risk of “foreclosure”, i.e. inhibit access to technology to third parties.
Where the parties are competitors (or in a horizontal relationship) the risks are slightly different. In this situation the Commission fears that a horizontal licence of technology could cause competition concerns where:
(1) There is a risk that they may allocate customer groups or markets, this would be a real risk where there was reciprocal exclusive licensing,
(2) In one or two particular situations, such as the licensing of a joint venture or even a non-reciprocal licence of technology there is the risk that there would be a loss of inter-brand competition or a restriction on innovation.
At present the definition of competing undertakes is defined as those undertakings who:
“Sell products which, in view of their characteristics, price and intended use are considered by users to be interchangeable or substitutable for the licensed products”
This is considered to be a very wide definition and is considered to catch many licensed products. In particular what the Commission seems to have been alerted to are two situations that do not fit under the present TTBE: (i) where the parties who are competitors under this definition wish to licence a product that represents a break through in technology, are still considered competitors even though this product represents a breakthrough (although no definition of this is proffered in the report) and (ii) where there are two parties with mutually blocking patents that need to cross licence one another.
In order to deal with this the Commission is considering adopting a narrower interpretation of the meaning of competitors in order that the above two situations are considered as vertical relationships and therefore prima facie subject not subject to the more intense scrutiny of horizontal relationships. In doing so it hopes that many more agreements will fit into the new block exemption.
“Marrying these concepts”
In bringing these elements together the Commission is proposing a more nuanced approach to the issue of exclusivity.
With respect to exclusive agreements between non-competitors the proposals are as follows:
(1) Where they do not relate to the exploitation of the IPR itself (for instance tying in or non-compete clauses) such clauses are proposed to be treated in the same way that they are treated under the vertical agreements block exemption, i.e. where the parties do not have a combined market share of more than 30%, then the clause will be exempt (this will include clauses that are at present back-listed)
(2) Where on the other hand the clause relates to restraints that do relate to the IPR itself (for instance a territorial restriction, customer or field of use) then these are proposed to be dealt with by using a dominance test. In other words any future block exemption would be looking to see whether a particular licensee had a dominant position, and whether obtaining an exclusive licence may compound its position.
In both instances the Commission is proposing to retain its right to withdraw the exemption if it decides that the anti-competitive effects are outweighing the pro-competitive advantage.
With respect to the differences that do not relate to the IPR itself, this would create a situation that was consistent with vertical agreements block exemption. The proposals would also create a more liberal regime where some clauses that are black listed could become exempted below a certain threshold. The big downside to this arrangement is passing the “market share test”, which is at best an uncertain science. The plus side is that the market share hold that is suggested is more generous than the guideline used by the US anti-trust authorities (20%).
For those clauses that relate to the licensed IPR the changes do herald some kind of dominance test which is designed to deal with the risk of foreclosure (preventing access to technology by third parties). Whilst the assessment of dominance is again an uncertain science, the Commission is attempting to lighten the burden by drafting a short hard core black list, and guidelines to assist on the drafting of exclusive licences.
With regard to exclusivity provisions between competitors the Commission is proposing a different regime:
(1) There will be a hard core of clauses that are not allowed, e.g. price fixing, limiting output, allocation of territories,
(2) A market share threshold of 25%.
The effect of this would be to bring this portion of any future TTBE in line with the Research and Development Agreement Block Exemption . This is hoped to deal with some of the problems that such licences have faced in the past and allow cross-licensing, and licensing to joint ventures. Above these thresholds the Commission has proposed guidelines to users to show what kinds of restrictions to avoid.
Under the present TTBE multiparty licensing is not exempt. The reason for this is that under the underlying regulation that permits the Commission to give exemptions under Article 81(3), is limited to those agreements that involved two undertakings. The Commission recognises that in order to bring multiparty licensing within the remit of the block exemption, there would have to be a change to the underlying regulation, but given that Regulation 17 may be up for amendment in any event this may not be as great an impediment as it may otherwise be.
Multiparty licensing raises its own concerns. It does raise the possibility that a number of IPR owners may “club together” to deter any other potential entrant or even collude on the fixing of prices. However, the Commission has rightly recognised that this also presents an opportunity for parties to bring together complementary technology, clear blocking positions (which can themselves cause a reduction in innovation) and avoid infringement actions. Unfortunately, the Commission has not ventured a suggestion has to how it intends to handle the issue.
The road ahead
The consultation period on the proposals has ended and we are awaiting the results of that. On the whole the proposals for reform and the tone of the Commissions report are to be welcomed. The Commission has recognised the fundamental point that a licence can be good for competition and can facilitate the exchange of information. The proposals do have their down side. The shift to self-assessment, whilst reducing the administration associated with notification, also removes the comfort blanket of knowing that your agreements are safe from investigation and possibly fines.
One possible change that has been suggested is that aside from a hard core of restrictions, all licensing should be permitted and be considered prima facie pro-competitive. This approach does have some merit, as it is also the approach favoured by the US and may have the effect of encouraging the same level of technological exchange that has been seen in the US. There has also been a suggestion that the burden of proof be changed so that it is always the Commission that has to demonstrate that the agreement is anti-competitive rather than the parties to the agreement demonstrating the contrary. Once again such a change may well be welcome. However given the Commission’s quasi-judicial role, this is not a problem that is unique to the TTBE.
Due to be published in the August 2002 edition of Computer Law and Security Review.
 Regulation No 2790/99/EC (Block Exemption for Vertical Restraints)
 Regulation No 240/96 (Application of Article 85(3) of the Treaty to certain categories of technology transfer agreements).
 See Article 13 of the TTBE
 Council Regulation First Regulation implementing Article 85 and 86 of the Treaty.
 For further information see COMM(2000)582 Final, reference 2000/0243(CNS)
 See Article 1, that requires at least one of permitted clauses from that article to be included in order to gain the benefit of the exemption from Article 81.
 Article 1 of the TTBE.
 Regulation 2349/84 and Regulation 556/89
 Commission Evaluation Report on the Transfer of Technology Block Exemption Regulation No 240/96 (at http://europa.eu.int/comm/competition/antitrust/technology_transfer/).
 Paragraph 88, page 73 of the Twelfth Report on Competition Policy by the Commission of the European Communities.
 Submissions of LESI European Committee of the Licensing Executives Society International to the Commission on its proposals to the revision of the TTBE dated 26 April 2002
 US Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property Rights (6 April 1995) at http://www.usdoj.gov/atr/public/guidelines/ipguide.htm
 Article 10(17) of the TTBE.
 See Article 2(1), and 3(1) of Council Regulation 2790/99/EC (Block Exemption for Vertical Restraints)
 Paragraph 4.3, the “Safety Zone”of 20%; US Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property Rights (6 April 1995)
 Commission Regulation (EC) No of 21 November 2000 on the application of Article 81(3) to certain Categories of Research and Development Agreements.
 See Article 1 of Council Regulation 19/65/EEC on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices.
 See endnote 10 above.