The Technology Transfer Block Exemption

This guide is based on UK law. It was last updated in July 2006.

Introduction

Generally, agreements which restrict competition are prohibited by European law. However, the European Commission has produced a number of block exemption Regulations which set out the terms of 'safe harbours'. If an agreement falls within the terms of the Regulations, parties can be confident that their agreement is not anti-competitive. The Technology Transfer Block Exemption Regulation (7-page / 132KB PDF) describes a safe harbour which covers licensing agreements for patents, software, know-how and other intellectual property rights (IPRs).

Any company with a licensing agreement that is not compliant with the Regulation's terms risks being punished by the competition authorities. The EU Commission has the right to impose a fine of up to 10% of a business’s annual turnover where it deems that business to be utilising anti-competitive arrangements.

The first Technology Transfer Block Exemption Regulation was adopted in 1996; an updated Regulation came into force on 1st May 2004. The legislation automatically exempts from prohibition certain technology transfer agreements which would otherwise fall foul of Article 81(1) of the Treaty of Rome, the provision which bans anti-competitive agreements affecting trade between Member States.

A transitional period applied to the 2004 Regulation, protecting agreements which would have been exempt under the 1996 Regulation but not under the new regime. This gave companies extra time to update their contracts; but it expired on 31st March 2006. Accordingly, all technology transfer agreements must now comply with the new Regulation to obtain automatic exemption.

No application to multi-party agreements

The 2004 block exemption applies only to technology transfer agreements which have been entered into by two parties. A multi-party agreement will not be covered by the block exemption and would thus require individual assessment, even though it may deal with assignment and/or licensing of relevant IPR.

Wide range of IPRs

The 2004 block exemption applies to technology transfer agreements such as patent licensing agreements; know-how licensing agreements; software copyright licensing agreements and combinations of these, which may also include other IPRs such as design right or database rights.

The inclusion of software copyright may be particularly relevant to “late adopters” or companies who have not yet got around to ensuring that their portfolio is fully compliant. This is because software copyright was excluded from the previous block exemption under the 1996 regulation and companies with a significant software copyright licensing business may have been slower to realise that the new Regulation is applicable to their agreements and even to those agreements which pre-date the Regulation coming into force.

Settlement and non-assertion agreements

It is common for intellectual property disputes to be resolved by settlement agreements whereby a previously infringing party agrees to take a licence or disputing parties agree not to assert certain IPRs against one another. The terms and conditions of such settlement arrangements may be covered by the block exemption and so the Regulation is of interest to litigators as well as to non-contentious specialists and licensing executives.

Purpose of agreement

In order for the block exemption to be relevant, the technology transfer in question must be for the purpose of exploitation for the production or supply of goods or services – so pure research and development agreements are not covered by the block exemption (these are governed by a competition Regulation on research and development agreements). Patent pool arrangements are also expressly excluded from benefiting from the block exemption.

Market share thresholds

The next test of whether an agreement may benefit from the block exemption is whether the parties to the agreement fall within specified market share thresholds. The 2004 Regulation draws a distinction between those agreements which have been entered into between competitors and those which have been entered into between non-competitors. This is ascribable to a fear that two competitors may try to exploit the block exemption and enter into an agreement which on the surface appears as though it is intended to promote technology but is in fact an agreement not to compete, which would be anti-competitive and fall foul of Article 81(1).

This market share test is new to the Regulation and reflects the intended move from a prescriptive list of “good” and “bad” provisions to a wider perspective of the actual effects on the market of a particular agreement between two parties. Market shares are to be self-assessed and, despite the stated intent of the Regulation to simplify the regulatory framework, this self-assessment is likely to prove a difficult task for many businesses and one on which it would be wise to seek expert legal advice. Market share is assessed in relation to both the relevant technology market and product market and a full examination of these criteria is outside the scope of this overview, being a subject meriting separate detailed discussion.

The combined market share of competitors must not exceed 20% of the affected relevant technology and product market for the block exemption to apply. The market share of non-competitors must not exceed 30% each of the affected relevant technology and product market for the block exemption to apply.

Annual re-assessment of market share

Market shares must be re-assessed annually, which is a weighty burden given the uncertainty and ambiguity of the formulae for working out market share and the simple fact that this can be difficult for a business to work out on the limited information which may be available to it.

Since Article 81(1) can be directly invoked by any person who considers themselves to be adversely affected by a technology transfer agreement – regardless of whether they are a party to that agreement or not – it is inevitable that in some sectors, competitors will be monitoring market leaders’ activities and market shares, ready to raise objections with the competition authorities or courts if they consider that Article 81(1) is being infringed and a company previously falling within the block exemption has exceeded the threshold or changed status from non-competitor to competitor. This should be a credible motivating factor for companies using the block exemption to ensure that their monitoring remains up-to-date and that they do not open themselves to such objections and threats.

What happens if the status of the parties in relation to qualifying features of the block exemption changes over the course of time?

For example, two parties may not be competitors at the time of entering into a technology transfer agreement, but changes by acquisition, merger or restructuring or simply the development of new areas of business may mean that they later become competitors for the purposes of the Regulation.

In such a situation the Regulation is generously drafted since it allows the hardcore list for non-competitors to continue to apply for the full term of the agreement rather than the parties having to apply the longer and more stringent list of hardcore restrictions for agreements between competitors.

Thus, if it is predictable that parties may become competitors during the term of an agreement then selecting a longer term (perhaps with break options) will help avoid having to enter into a more restrictive renewal contract after such a time that the parties have become competitors.

Variation of market share during the lifetime of the agreement

Market shares are also subject to variation throughout the term of an agreement and the Regulation takes a reasonable position in specifying how this affects the agreement’s protection under the block exemption.

A two year “lag” is allowed between a party or parties exceeding the relevant market share threshold and the agreement losing the protection of the block exemption. This is helpful in allowing ample time for the parties to renegotiate an agreement in order to avoid infringement of Article 81(1). It is quite conceivable that a party’s or parties’ market share may “wobble” around the threshold – perhaps exceeding it one year only to fall back below it the next. Having this two year lead time would allow a grace period to avoid the necessity of an immediate response to a short-lived rise in market share which was not sustained – thus avoiding repeated amendments to agreements.

Even so, there has been objection from technology companies with fast growth predictions 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 takes off well. Some sympathy is due to parties so affected – particularly since it is the innovative technology businesses which are more likely to be deemed to have a higher market share based on the criteria of the relevant markets – which they may more easily dominate where a particular technology or product is novel and competitors lack the IPR or technology to be able to produce competing product in the short to medium term.

Hardcore restrictions

Once a technology transfer agreement has cleared the market share test, the next stage in assessing compliance is to check whether it contains any of the hardcore restrictions, which effectively replace the “black list” of the 1996 Regulation. The list of hardcore restrictions differs according to whether the agreement in question is between competitors or non-competitors, with non-competitors being permitted more latitude since there is a lower likelihood of their contractual provisions adversely affecting competition in the market place.

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 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. Overall these set of hardcore restrictions are lighter than those imposed upon competitors.

Excluded restrictions

The Regulation lists four additional categories of restriction, together the “excluded” restrictions, which are not in themselves deemed to be anti-competitive but require individual assessment of their impact when included in a technology transfer agreement.

There is a crucial difference between the impact of inclusion of a hardcore restriction in a technology transfer agreement and the impact of inclusion of an excluded restriction. The presence of a hardcore restriction is sufficient to take the whole agreement outside of the protection of the block exemption. It may not be severed, regardless of the presence of a Severability clause in the agreement. In contrast, the inclusion of an excluded restriction is not as catastrophic since it renders unenforceable only the term to which the excluded restriction applies. In the event of such a term being subject to challenge or complaint it may be severed, leaving the remainder of the agreement able to benefit from the block exemption (assuming that this is practical and that the severance of the term in question does not render the agreement meaningless or ineffective).

Again, the responsibility for assessment of any excluded restriction for compliance with competition law falls on the parties to the agreement. In practice the party who has imposed a particular restriction or stands to benefit from it (which in most cases will be the licensor) will have the motivation to examine and assess the provision in order that a clause which looks likely to be anti-competitive in effect may be deleted or redrafted to fall more clearly within the scope of the block exemption.

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).

Falling outside the Block Exemption is not necessarily fatal

The Commission has taken pains to point out that an agreement which falls outside the block exemption will not necessarily be unlawful as it may still be covered by the Article 81(3) individual exemption http://ec.europa.eu/comm/competition/legislation/treaties/ec/art81_en.html. The compliance of an individual technology transfer agreement is able to be assessed by its parties (although no longer able to be submitted to the Commission for approval). If a technology transfer agreement is challenged in court, the court may consider Article 81(3) and whether this exemption applies. Parties can rely on Article 81(3) if the agreement:

• promotes technical and economic progress;
• gives consumers a fair share of the resulting benefit; and
• does not impose indispensable restrictions or eliminate competition.

What should affected businesses do?

Businesses will need to check their existing technology transfer agreements to ensure compliance with the 2004 Regulation. If they do not comply there is a risk that they will not be exempted from Article 81(1) and be deemed unenforceable. They could also be challenged by competitors or competition authorities and there is a risk of a fine in a worse-case scenario. If, however, an agreement is able to rely upon the protection of the Article 81(3) EC individual exemption, the agreement will still be enforceable.

The new block exemption applies to a wider range of IPR than its predecessor. For example, it now covers software copyright licences and a wider mix of combination licences. This may mean that businesses are able to bring more of their agreements within the scope of the block exemption. It is therefore vital that agreements are checked to ensure they are compliant in order both to take advantage of the block exemption and take the opportunity to expunge any infringing provisions.

In practice it will be a difficult exercise for many companies or institutions to assess the market thresholds and state with certainty that they have not been exceeded. This is an area where obtaining good legal advice is strongly recommended.

If the parties’ relevant market thresholds increase over the duration of the agreement, the exemption shall continue to apply for a period of two years from the date on which the threshold was exceeded.

There are significant benefits in all new technology transfer agreement being drafted to fall within the revised block exemption and businesses with an active licensing element should review and revise where necessary their precedent technology transfer agreements in order to permit this.

This guide is based on an article written by Louise Fullwood and Lynsey Kerr, based in the Leeds office of Pinsent Masons.

Contact: Louise.Fullwood@pinsentmasons.com / 0113 244 5000