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Licensing technology: EU relaxes competition rules

The European Commission yesterday adopted new rules for applying competition policy to the licensing of patents, know-how and software copyright. More licensing agreements will benefit from a regulatory safe harbour, saving them from individual scrutiny.08 Apr 2004

The new policy is part of a wider reform of the enforcement rules for antitrust which will come into force in the EU on 1st May.

Mario Monti, the Commissioner in charge of competition policy, said:

"The reform of our rules on technology transfer agreements will facilitate wide dissemination of innovation and give companies greater scope and design freedom."

Licensing is important for economic development and consumer welfare as it helps disseminate innovation and allows companies to integrate and use complementary technologies and capabilities. However, licensing agreements can also be used for anti-competitive purposes.

For instance, when two competitors use a license agreement to divide markets between them, or when an important licensor excludes competing technologies from the market. As competition is one of the main driving forces of innovation and dissemination, it is important to find the right balance between protecting competition and protecting intellectual property rights.

Licensing agreements that restrict competition are prohibited by the EU competition rules, in particular Article 81 of the Treaty. However, licensing agreements in most cases also produce positive effects which outweigh their restrictive effects.

The new rules consist of a 'block exemption' Regulation and Guidelines. The block exemption Regulation creates a safe harbour for most licensing agreements. The Guidelines explain the application of Article 81 for agreements not covered by the safe harbour.

The new rules replace a 1996 block exemption Regulation, which was narrower in scope and created too much of a "strait-jacket" because of its formalistic approach. The new rules leave companies more freedom to devise their licensing agreements according to their commercial needs.
However, the new Regulation provides the safe harbour only below certain market share thresholds: 20% for licensing agreements between competitors and 30% for agreements between non-competitors.

The new block exemption Regulation will have a black list of hardcore antitrust violations. In other words, what is not explicitly excluded from the block exemption is now exempted. This contrasts and eliminates the strait jacket created by the white and grey lists contained in the 1996 Regulation.

To the extent that enterprises do not surpass the market share thresholds they do not have to worry about the compatibility of their agreements with EU competition law. At the same time, clearly defined "hardcore restrictions" which produce negative effects on the market are normally prohibited.

In the absence of hardcore restrictions there is no presumption that agreements falling outside the safe harbour are prohibited, whether existing or new agreements. Individual assessment of the likely effects of the agreement is required.

This is very different from the old form-based approach, where restrictive clauses were often considered illegal outside of the scope of the block exemption. The Guidelines set out the principles for individual assessment outside of the safe harbour.

The new rules also become broader in scope since they will now cover design right and software copyright licensing, as requested by many who commented on the texts, and not just patent and know-how licensing.

Where the Commission does not have the powers to adopt a block exemption regulation, as for patent pools and for copyright licensing in general, the Guidelines give clear guidance as to future enforcement policy.

The scope of the new rules is also extended by setting a more lenient policy for a number of important restrictions, in particular output restrictions, customer restrictions and field of use restrictions. These and other changes mean that the new regulation will allow for effective dissemination of innovation and give companies greater scope and design freedom.

According to the Commission, the rules are aligned on its new generation of block exemption regulations and guidelines for distribution agreements and horizontal co-operation agreements "while not ignoring the differences that obviously exist between licensing and distribution or licensing and R&D agreements."