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The Technology Transfer Block Exemption

This guide is based on UK law. It was last updated in April 2008. Anti-competitive agreements are prohibited by European and domestic competition law. This means any anti-competitive provisions in...

This guide is based on UK law. It was last updated in April 2008.

Introduction

Anti-competitive agreements are prohibited by European and domestic competition law. This means any anti-competitive provisions in commercial agreements are void and unenforceable. Furthermore, the European Commission and the Office of Fair Trading have the right to fine a company of up to 10% of the annual global group turnover for breach of competition law.

However, the European Commission has produced a number of so-called block exemptions which make certain 'safe harbours' available to companies. If an agreement falls within the terms of a block exemption, companies can be confident that their agreement is not anti-competitive. The Technology Transfer Block Exemption (TTBE) covers licensing agreements for various intellectual property rights (IPRs), providing a safe harbour to companies active in this business area.

Since both UK and European competition law can be relied upon by competing companies (or third party individuals) affected by an anti-competitive agreement, it is likely some will be monitoring activities of others, ready to raise competition law objections in order to protect their own commercial interests or gain financial recompense. As such a company relying on the TTBE, or any other exemption, should carefully monitor their market position and behaviour to make sure that they remain within the terms of the exemption.

Scope

The TTBE applies to licensing agreements concerning patents, know-how, software copyright and combinations of these. In order for the TTBE to apply, the technology transfer in question must be for the purpose of exploitation for the production or supply of goods or services, so pure R&D agreements are not covered by the TTBE (there is a separate block exemption for these).

Multi-party agreements are also excluded from the scope of the TTBE. Consequently the TTBE will not generally apply to 'patent pool' arrangements, although it will apply to individual licenses granted from the pool to third parties.

Market share thresholds

Once it has been established that the subject matter of the agreement is covered by the TTBE the next test is whether the parties to the agreement fall within specified market share thresholds.

The TTBE distinguishes agreements between competitors and those made between non-competitors. The reason for this is that, all other things being equal, the potential anti-competitive effects of an agreement between competitors are greater than for one made between non-competitors.

Market share is assessed in relation to both the relevant technology market and relevant product market. The combined market share of competitors must not exceed 20% on the affected relevant technology and product market for the TTBE to apply. Individual market shares of non-competitors must not exceed 30% on the affected relevant technology and product markets. These market shares are to be assessed by the parties themselves, which is likely to prove difficult for many businesses making it wise to seek expert legal advice.

As market shares are also likely to vary during the term of an agreement the TTBE allows for a two year 'lag' between a party exceeding the relevant market share threshold and the agreement losing the protection of the TTBE. A company's market share may therefore “wobble” around the threshold – exceeding it one year only to fall back below it the next – without losing the benefit of exemption.

Even so, some technology companies object that this lead time is still too short to reflect the reality of their business growth and that their business will be hampered by the need to renegotiate contracts after a relatively short time if a particular product is successful. Innovative businesses are likely to be most affected.

Hardcore restrictions

Once a technology transfer agreement has cleared the market share tests, one must examine the agreement to establish whether it contains any "hardcore" restrictions i.e. restrictions that are considered to be so damaging to competition, the protection afforded by the TTBE is lost. The list of hardcore restrictions differs according to whether the agreement in question is between competitors or non-competitors. Non-competitors are permitted slightly more latitude reflecting a lower potential for competitive harm.

The hardcore restrictions for competitors include: restricting a party’s ability to determine prices when selling to a third party (resale price maintenance); reciprocal output/production caps; restricting the licensee’s ability to exploit their own technology or carry out further research and development; and certain allocation of markets or customers between the parties (subject to a fairly complex set of exceptions).

The hardcore restrictions for non-competitors also include resale price maintenance as well as certain restrictions on passive sales (though there are a number of exceptions to this restriction) and restrictions on sales to end users via selective distribution systems.

Two parties may not be competitors at the time they enter into a technology transfer agreement but subsequent developments could mean that they become competitors for the purposes of the TTBE. In such a situation the hardcore list for non-competitors will continue to apply rather than the more stringent list applicable to competitors. With this in mind parties entering into a technology transfer agreement and currently classed as non-competitors but who can foresee becoming competitors in the near future might be wise to opt for a longer term, perhaps including break clauses.

Excluded restrictions

The TTBE also lists four additional categories of restriction, together the “excluded” restrictions. Whilst the presence of a hardcore restriction is sufficient to take the whole agreement outside of the protection of the TTBE, the inclusion of an excluded restriction only means that the excluded restriction does not benefit from this protection. As such, its impact on competition must be individually assessed. In the event of such a term being deemed anti-competitive the remainder of the agreement may still benefit from the TTBE (assuming that severance is possible).

The classes of excluded restrictions are:

  • required assignments by the licensee of severable improvements to the licensed technology or new applications thereof;
  • required exclusive grant-backs by the licensee of severable improvements to the licensed technology or new applications thereof;
  • no-challenge clauses (although a provision allowing termination on a challenge by the licensee of the validity of a licensed intellectual property right is permissible);
  • for non-competitors, limitation of the licensee’s right to carry out research and development or exploit its own technology unless doing so would disclose licensed know-how to third parties (this is already a hardcore restriction where the parties are competitors).

Agreements falling outside the Block Exemption

An agreement which falls outside the TTBE will not necessarily be unlawful as following individual assessment it may not be deemed to restrict competition in the first place or, although restrictive of competition, it could be justified on efficiency grounds provided that the agreement:

  • improves the production or distribution of goods (or services) or promotes technical or economic progress;
  • gives consumers a "fair share" of the resulting benefit;
  • does not restrict competition any further than necessary; and
  • does not allow substantial elimination of competition on the markets concerned.

It is worth noting that a technology transfer agreement is unlikely to infringe competition law where there are four or more independently controlled technologies in addition to the technologies controlled by the parties to the agreement that constitute effective substitutes for the licensed technology. The competing technologies must be available at comparable cost to users and must constitute commercially viable alternatives.

What should affected companies do?

Licensing agreements that do not comply with competition law could be void with the parties also exposed to the risk of a substantial fine from the competition authorities. Companies who are involved in technology transfers should review their agreements for compliance with the TTBE and/or any other relevant competition law provisions. Similarly, they should ensure that any future technology transfer agreements are also competition law compliant.

In practice it will be difficult for companies to conduct these assessments due to the complexity of the applicable rules. This is especially so with regard to the market share thresholds, hardcore restrictions and the assessment of efficiencies. This is therefore an area where obtaining good legal advice is strongly recommended.

Contacts

For further information, or if Pinsent Masons can assist in the review of existing technology transfer agreements or the drafting of new agreements, please get in touch.

You can find out more about our competition lawyers or contact:

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