The Technology Transfer Block Exemption
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.
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