The Commission published in October 2003, for consultation, its proposed new block exemption Regulation for agreements concerning the transfer of technology. The Competition Commissioner, Mario Monti, subsequently gave a speech on 16 January 2003 at the Ecole des Mines, Paris outlining the direction to be taken in the next draft, following the consultation process.
The new Regulation will cover agreements for licensing of patents, know-how and/or software, including assignments on a royalty basis. The current block exemption Regulation 240/96 does not expire until 2006, but the Commission is replacing it early, the intended entry into force date of the new Regulation being 1 May 2004. This is in order to continue its process of modernising its block exemption regulations by moving away from a set of rigid rules concerning the types of obligations that may or may not be included in the relevant agreements, towards a more flexible system of granting more liberal block exemptions, but only below specified market share thresholds. Within these thresholds, the “black-list” of prohibited restrictions is narrower than under the current Regulation 240/96 and any restrictions which are not black-listed will be acceptable for the purposes of the block exemption, not merely those that are expressly listed in a white-list as at present.
Further, the new block exemptions Regulation will be accompanied by guidelines. These guidelines, issued in connection with the present draft Regulation, will concern not only the interpretation of the block exemption but also how agreements of the relevant type falling outside the block exemption should be individually treated under Article 81(3) EC.
The draft new block exemption Regulation distinguishes between competitors and non-competitors and applies only where the parties’ combined market shares are below 20% if they are competitors, and, if they are non-competitors where they each have a market share below 30%. As such, the new block exemption Regulation will be significantly limited in its applicability compared with the current regime which involves no market share tests (subject only to a power of withdrawal of the benefit of the block exemption by the Commission in individual cases where a 40% market share threshold is exceeded).
Conversely, where the parties come within the market share thresholds of the block exemption Regulation, the draft new Regulation can be seen in many respects to be more liberal than the present Regulation 240/96. It also applies to a wider range of agreements than the current Regulation.
The new Regulation will cover patent and know-how licences, and also assignments where the licensor shares the risk of the success of exploitation, i.e. typically where the payment is in the form of royalties. Software copyright licences will now also be covered, and also mixed patent, know-how and/or software licences. In each case, the licence must be for the production or provision of licensed products, so a licence merely to grant sub-licences would not be covered by the new block exemption. Significantly, combined licences of patents or know-how and/or software with other intellectual property, such as trade marks, will now also be capable of coming within the block exemption provided that the other intellectual property does not constitute the primary object of the agreement. The guidelines state that the other intellectual property must assist in the exploitation of the licensed technology. This means that combined licences of, for example, know-how and trade marks, which are not uncommon in the pharmaceutical sector, can be covered by the new Regulation provided only that the trade mark is not the most important element licensed as compared with the know-how. Under the present Regulation, such a licence would only be covered if the trade mark could be shown to be ancillary to the licensed know-how, whereas in fact it is often difficult to separate and evaluate the separate rights licensed.
Further, the new block exemption Regulation will permit know-how licences of longer duration, i.e. for as long as the know-how remains secret. By contrast, under the present Regulation 240/96, the block exemption only applies to know-how licences for a period of 10 years from the date of first marketing by a licensee in the EC.
The new Regulation will exempt the grant of sole licences within the market share threshold of 20% for competitors and sole and exclusive licences within the 30% threshold for non-competitors, because there is no black-listing of obligations on the licensor not to grant parallel licences to other parties.
In the published draft Regulation, there is a general black-listing of sales restrictions (on licensor or licensee) as between competitors. However, in his speech on 16 January 2003, Commissioner Monti stated that the Commission now proposes to amend this hardcore list for licensing between competitors so as to block exempt territorial restrictions and also customer restrictions agreed between the parties in a non-reciprocal agreement. This will allow the licensor and licensee to allocate exclusive territories between them and restrict active and passive sales into each others’ territories.
In the published draft, as between non-competitors, only certain limited types of sales restrictions are permitted, mainly restrictions on any sales by a licensee into a territory reserved exclusively to the licensor and restrictions on active sales only (as opposed to “passive” sales, i.e. sales in response to unsolicited orders) into a territory allocated exclusively to another licensee. As between non-competitors and within the 30% market share threshold, the new regulation will also allow territorial limitations in relation to defined groups of customers in the same way as restrictions in relation to territories. However, in his speech on 16 January 2003 Commissioner Monti indicated two proposed changes as regards agreements between non-competitors. First, territorial and customer restrictions on active and passive sales by the licensor and on all active sales by the licensee will be block exempted. Second, a restriction will be allowed under the Regulation on passive sales by the licensee into an exclusive territory or customer group allocated to another licensee, during the first two years that that licensee is on the market.
Obligations on a licensee not to deal in competing products are black-listed under the current Regulation 240/96. However, whilst they will be black-listed as between competitors under the new Regulation, they will be permitted as between non-competitors within the 30% market share threshold.
The published draft provides that as between competitors, output restrictions are black-listed, except that in non-reciprocal agreements, the inclusion of a restriction on output in respect of contract products only (as opposed to other output of the licensee, for example using his own technology) would be invalid, but would not prevent the block exemption applying to the rest of the agreement if such output restriction could (as a matter of contract law) be severed. Therefore, as between competitors, a restriction on the licensee’s output other than in respect of the contract products (i.e. products using the licensor’s technology) would be outside the block exemption and generally unacceptable on individual assessment. As between competitors, any restriction on the licensee’s ability to exploit its own technology is black-listed.
In other respects, as between non-competitors, output restrictions are generally permitted. Moreover the draft guidelines indicate that such obligations can be pro-competitive, for similar reasons to those given as to why non-compete obligations on a licensee can be pro-competitive.
Commissioner Monti stated in his recent speech that the Commission intends (in the final version) to block exempt non-reciprocal output restrictions, as this type of restriction is less likely to lead to a collusive outcome and may be required as an incentive to the licensor to grant the licence.
However, the new block exemption Regulation will not cover obligations on the licensee not to carry out research and development, unless such a restriction is indispensable to prevent the disclosure of the licensed know-how to third parties. Such obligations are black-listed in agreements as between competitors, and, in agreements between non-competitors, will be outside the new block exemption but will not prevent the block exemption from applying to the rest of the agreement provided that such a restriction can (as a matter of contract law) be severed from the rest of the agreement.
However, even as between competitors, it is acceptable under the draft block exemption for a licensee to be limited to manufacturing or providing contract products only for its own use.
Under the current Regulation 240/96, the tying of other products to the manufacturer or sale of licensed products is only acceptable where the tied products are necessary for a technically proper exploitation of the licensed technology (or for ensuring that the licensee’s product conforms to minimum quality specifications applied to all licensees). However, the approach taken in the draft new block exemption is that tying restrictions are only a competition problem where there is market power, and are accordingly block exempted below the relevant thresholds whether or not the parties are competitors.
Field of use restrictions
Field of use restrictions on the licensee are permitted under the draft block exemption Regulation as between non-competitors. However, under the published draft, as between competitors, field of use restrictions on a licensee are only permitted in a non-reciprocal agreement. Field of use restrictions on a licensor will not be permitted where the parties are competitors. However, Commissioner Monti’s recent speech indicated that the Commission now proposes to block exempt field of use restrictions in cross-licensing between competitors.
Field of use restrictions are obligations to exploit the licensed technology only within one or more technical fields or one or more product markets. In the case of reciprocal agreements between competitors, they are generally prohibited as being an “allocation of markets or customers”.
Restrictions on either party in determining its prices will always be black-listed, whether as between competitors or as between non-competitors.
Provisions concerning recommended prices can be acceptable provided they do not amount to a form of collusion on actual prices. Maximum price obligations are, in theory, acceptable though they will not be if, as is often the case in practice, they give effect to absolute prices.
Obligations concerning improvements or new applications of the licensed technology
As under the present block exemption Regulation 240/96, the new Regulation will not cover obligations on a licensee to grant an exclusive licence in respect of its own severable improvements or new applications of the licensed technology, or to assign rights to any new improvements or applications made by the licensee. However, where such provisions can be severed as a matter of contract law, they will not prevent the block exemption applying to the rest of the agreement.
As regards any obligation on the licensee to grant licences of its improvements to the licensor (which licences must be non-exclusive as regards severable improvements), the block exemption will no longer require a reciprocal obligation on the licensor to grant licences in respect of his new improvements or new applications on the licensed technology.
No challenge, settlement and non-assertion agreements
The draft block exemption Regulation will not cover obligations not to challenge the validity or to contest the secrecy or substantiality of intellectual property rights of the licensor, although such an obligation would not prevent the block exemption applying to the rest of the agreement where the obligation can be severed. Also the draft Regulation allows the reservation of rights to terminate the agreement in the event that the licensee challenges the validity or contests the secrecy or substantiality of the licensed intellectual property rights.
Cross-licences are covered by the block exemption whether between competitors or non-competitors, up to the respective market share thresholds, subject to no black-listed or prohibited restrictions being included as explained above. Moreover, as already mentioned, the draft guidelines indicate that cross-licensing between competitors within the same field of use is acceptable. However, the draft guidelines also draw attention to the risk that royalty provisions in cross-licences can be used for price co-ordination, which of course is a hardcore restriction. The draft guidelines also set out the European Commission’s current thinking on the extent to which cross-licensing can be acceptable as a means of intellectual property dispute settlement, as summarised above.
Withdrawal and non-application of the block exemption Regulation
The Commission will be able to withdraw the benefit of the new Regulation where:
access of third parties’ technology to the market is restricted, for instance by the cumulative effect of parallel networks of similar restrictive agreements containing non-compete obligations preventing the use by licensees of third parties’ technologies;
access of potential licensees to the market is restricted, for instance by the cumulative effect of parallel networks of similar restrictive agreements prohibiting licensors from licensing to other licensees;
the parties fail to exploit the licensed technology without any objectively valid reason.
Member States are given the power to withdraw the benefit of the block exemption Regulation in respect of their national territory or a part thereof, where it constitutes a distinct geographic market, and where in a particular case a technology transfer agreement has effects incompatible with the conditions of Article 81(3).
Where agreements fall outside the new block exemption Regulation, there will nonetheless be the advantage that under the Modernisation Regulation, Regulation 1/2003, as from 1st May 2004, Article 81(3) can be directly applied by national courts and authorities. At the same time, the procedure for individual notification of agreements to the European Commission for individual exemption (under the current system) under Article 81(3) will no longer exist. Accordingly, parties whose agreements are outside the scope of the new block exemption will, if challenged, be able to argue that Article 81 (3) EC applies, without having to make any prior notification. However, parties will be in a much stronger position to do so if their agreement conforms to the types of restrictions that would generally be acceptable under the block exemption.
The new Regulation is intended to come into effect on 1 May 2004, from which date the current block exemption Regulation 240/96 will be repealed. However, for a transitional period ending on 31 October 2005, agreements already in force before 1 May 2004 which satisfy the conditions of Regulation 240/96 but not those of the new Regulation will continue to be block-exempted for that eighteen month period.
It is expected that a revised, post-consultation draft of the new Regulation will be issued shortly by the European Commission. Based on the recent speech by Commissioner Monti, the new version is likely to be more permissive in certain important respects (within the market share thresholds) than the originally published draft.
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. The law may have changed since first publication and the reader is cautioned accordingly.