ip transactions and 81&82 ec treaty - plc 2007

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Transactions and practices: EC Intellectual propertytransactions

Transactions and practices:

EC Intellectual propertytransactionsWhen drafting or reviewing an agreement, it is important to appreciate the conflict that existsbetween the rules of the EC Treaty that aim to promote competition and the free movement of goods, and national laws that protect intellectual property rights. The Practice note Intellectualproperty transactions examines the principles of EC law that apply to intellectual propertyrights generally; the application of Article 81 of the EC Treaty to licences of technology (patentsand know-how), trade marks, copyright and computer software; and the application of Article82 of the EC Treaty to the exercise of intellectual property rights.

Oliver Heinisch and Tony Woodgate, Simmons & Simmons

Reference: www.practicallaw.com/7-107-3704

When drafting or reviewing an agreement, it is important to appreciate the potential conflict that

exists between the rules of the EC Treaty that aim to promote competition and the free movement

of goods, and national laws that protect intellectual property (IP) rights.

Ownership of IP confers a legal monopoly right that enables the holder to prevent third parties

from manufacturing, selling or performing other specified acts in relation to goods or services

that make use of the IP. The courts face a difficult choice when drawing an appropriate dividing

line between IP rights and the general aim of ensuring free competition. An approach that is too

interventionist will lessen the value of IP rights, so reducing the financial incentive to innovate,

whereas if the courts were to disregard the effects that the unrestrained exercise of IP rights may

have on competition, a broad area of commercial activity would effectively be rendered immune

from competition law.

Two sets of EC Treaty provisions must be considered in relation to transactions involving IP

rights:

The rules concerning free movement of goods (Articles 28 to 30, EC Treaty); and

• The competition rules relating to restrictive agreements and abuse of market power (Articles

81 and 82, EC Treaty).

The principles of EC law that apply to IP rights generally are dealt with first in this section,

followed by consideration of the application of Article 81(1) of the EC Treaty to specific categories

of IP agreements and, finally, an analysis of the application of Article 82 to the exercise of IP

rights.

Principles applicable to IP generally

Single market and free movement of goods

www.practicallaw.com/7-107-3704 1




The policy objectives of the EC Treaty are set out in Article 3 of the Treaty (see box, IP rights and

the single market: EC Treaty provisions). They include the establishment of:

• A single internal market by abolishing obstacles to the free movement of goods and servicesbetween member states (Article 3(1)(c), EC Treaty); and

• A system to ensure that competition in the internal market is not distorted (Article 3(1)(c),

EC Treaty).

As a means of achieving this, quantitative restrictions on imports and exports (that is,

restrictions which are imposed by reference to the value or amount of imports or exports)

between member states, and measures having equivalent effect, are prohibited (Articles 28 and

29, EC Treaty). However, this is expressed not to preclude prohibitions or restrictions that are

justified on grounds of the protection of "industrial and commercial property" as long as they

do not constitute a means of arbitrary discrimination or a disguised restriction on trade betweenmember states (Article 30, EC Treaty). In addition, a further provision states that the Treaty

shall in no way prejudice the rules in member states governing the system of property ownership

(Article 295, EC Treaty).

There is a large amount of EC case law concerning the precise scope of Article 30. On the

one hand, it was recognised that the complete exclusion of IP rights from the EC rules on free

movement of goods and competition could undermine the creation of the single market, as an

IP owner could use differences in national IP protection to sub-divide the market. On the other

hand, if national differences in IP protection were always viewed as discriminatory or restrictive,

both Article 30 and Article 295 would be deprived of any effect.

Existence/exercise distinction

The European Court of Justice (ECJ) sought to resolve this apparent conflict by drawing a

distinction between the existence of an IP right, which Article 30 protects, and its exercise,

which is not protected by Article 30 and is therefore regulated by Articles 28 and 29, in addition

to Articles 81 and 82, of the EC Treaty (Cases 56 and 58/64 Consten and Grundig v Commission

[1966] ECR 299). This distinction enabled the ECJ to dismiss the argument that it lacked

jurisdiction to restrict the assertion of a trade mark right by virtue of Article 295. The ECJ

has repeatedly returned to this reasoning to emphasise that the court is only concerned with

policing the exercise of IP rights and is not seeking to interfere with their very existence.

A firm seeking to use or protect a right which constitutes the "specific subject matter" or "essentialfunction" of its IP rights will be regarded as protecting the existence of that right and therefore

as not infringing the free movement or competition rules of the EC Treaty. If, on the other hand,

a firm seeks to use or protect a right which does not constitute the specific subject matter or

essential function of its IP rights, this will be examined under the free movement and competition

rules of the Treaty.

• The specific subject matter of a patent was described by the ECJ as "the guarantee that

the patentee, to reward the creative effort of the inventor, has the exclusive right to use an

invention with a view to manufacturing industrial products or putting them into circulation

for the first time ... as well as the right to oppose infringements" (Case 15/74 Centrafarm

BV v Sterling Drug [1974] ECR 1147 ).

• The specific subject matter of a trade mark has been defined as the right, amongst other

things, to ensure the holder the exclusive right to use the mark for the first marketing of





a product, and so to protect him against competitors who would take advantage of the

position and reputation of the mark by selling goods improperly bearing that mark ( Case

16/74 Centrafarm BV v Winthrop BV [1974] ECR 1183). The owner of a mark may therefore

enforce restrictions which prevent its mark being used in such a way that the origin of theproducts on which it is used may be brought into doubt, or the reputation of the trade mark

itself be damaged.

• The specific subject matter of copyright may consist of a number of elements, including the

rights to:

• prevent reproduction of a work;

• first place a work on the market;

• require payment for public performance or transmission; or

• rent out a work.

Exhaustion of rights

A particularly important principle when establishing the impact of the free movement or EC

competition rules on an agreement is that of exhaustion of rights. Once the owner of IP rights

has received the benefit of the specific subject matter of those rights, the right is said to be

"exhausted". Therefore, the exclusive right of a holder of IP rights conferred by national law to

control the distribution of a product will expire (or is said to be exhausted) once that particular

product has been placed on the market within the EU by the holder or with his consent.

Therefore, a holder of IP rights in member state A cannot prevent the import of goods into

member state A if the goods have been marketed in member state B by the holder of such IP

rights or by another with the holder’s consent. In Deutsche Grammophon v Metro (Case 78/70

[1971] ECR 487 ), for example, the licensor of copyright in records marketed in France could

not rely on its copyright to prevent a third party from subsequently importing the records into

Germany and selling them at a price which undercut the licensor’s own distributors in Germany.

It is important to note that, for a sale to exhaust IP rights, the sale need not be made in a

jurisdiction where the rights-holder enjoys IP right protection. In Merck v Stephar (Case 187/80

[1981] ECR 2063), the holder of IP rights in the Netherlands used another member of the group

to sell a pharmaceutical product in Italy, where the product was not patented. It was held

that the firm could not invoke its Dutch patents to prevent the import of the products into theNetherlands from Italy, as it had exhausted its rights by selling the products in Italy even though

the products were not protected by an Italian patent.

This principle is a major factor in reducing an IP rights-holders’ ability to prevent such parallel

imports (see Glossary) between territories within the EU. It should, however, be noted that:

• The relevant right is only exhausted with respect to the particular products that have been

marketed: the IP rights-holder can still control distribution of individual products which

have not yet been placed on the market (Case C-173/98 Sebago Inc v GB-Unic SA [1999] 2

CMLR 1317 ; see further Free movement of goods and services, and exhaustion of rights ).

• Rights that relate to the existence of the IP, such as the right to prevent unauthorised copyingof a sound recording, will not be exhausted by the marketing of the product. In addition, the

specific subject matter of an IP right may extend beyond the element exhausted by first sale.





In the field of copyright, for example, the sale of a work, the public performance of the work

and the rental of the work have all been identified as distinct elements of the specific subject

matter. The exhaustion of, for example, the right of sale, will not necessarily exhaust the

rights of public performance or rental.

The principle of exhaustion of rights applies to all member states, including those that acceded to

the EU on 1 May 2004 and 1 January 2007. A "specific mechanism" applies, however, with regard

to parallel imports of patented pharmaceutical products in all the new member states, with the

exception of Cyprus and Malta. This will be applied on a product-by-product basis for each

member state during a period of transitional protection against parallel imports of medicinal

products. If someone wishes to import a product protected by the mechanism, then he must

notify the patent owner who has one month within which to object to the parallel import. This

provision is still valid for products where the patent or supplementary protection certificate was

granted at a time when equivalent protection was not available in what are now the newly acceded

member states. Parallel imports will be prevented until the patent or supplementary protectionexpires.

Free movement and competition rules may both apply

A detailed analysis of the case law concerning the relationship between the free movement of

goods rules and the exercise of IP rights is beyond thescope of this Practice note. It is important to

note, however, that the Treaty objectives of creating a single market and ensuring that competition

in the internal market is not distorted mean that the enforcement of IP rights may be viewed under

EC law either as an attempt to frustrate the creation of a single market or as an anti-competitive

action, or both. An agreement will, therefore, often need to be considered both in the context

of the rules on the free movement of goods and those dealing with competition (see further

Application of Article 81 to IP agreements).

Article 81(1)

The following discussion focuses on the application of Article 81(1) of the EC Treaty to IP

transactions specifically and deals with the general aspects of Article 81 in outline only. It is not,

however, essential to read the section covering Article 81 (see Competition regime, Article 81

before reading this section, since where necessary cross-references in the text direct the user to

the relevant part of that section for more detailed consideration.

Scope of prohibition

Article 81(1) of the EC Treaty prohibits all agreements between undertakings, decisions by

associations of undertakings and concerted practices which may affect trade between EU

member states and which have as their object or effect the prevention, restriction or distortion

of competition within the common market. The prohibition applies to all agreements between

unrelated undertakings which may have an appreciable effect on trade between member states

(see below).

The European Economic Area (EEA) Agreement of 1 January 1994 effectively extends the

prohibition to agreements affecting trade with Iceland, Norway and Liechtenstein.

The terms on which IP rights are assigned or licensed may in certain circumstances constitute

restrictions on competition. Any agreement by which IP rights are assigned or licensed, and

which has an appreciable effect on trade within the EEA, should therefore be reviewed for its

effect on competition in order to establish whether Article 81(1) applies.





Deciding whether a particular contractual provision is in fact a restriction on competition and, if

so, what effect it may have on competition is not a straightforward task. In principle, competition

will be restricted if a provision reduces the ability of the parties to an agreement to compete freely

with each other or with third parties, or if it reduces the ability of third parties to compete freelywith either or both parties. In practice, it may be difficult to draw the line between a legitimate

contractual provision, which necessarily restricts the freedom of action of the party to which

it applies, and a provision with an anti-competitive effect. An additional factor is the need to

take account of the broader market context of the agreement. For example, a provision which

is inoffensive when entered into by a company with a weak market position may be viewed as

anti-competitive when the company becomes stronger, so bringing it within the scope of Article

81(1) (Passmore v Morland plc [1999] EuLR 501, CA).

Provisions that may fall within the scope of Article 81(1) are considered below in the context of

agreements relating to different kinds of IP.

Appreciable effect

Faced with policing all agreements entered into across the EU, the European Courts and

Commission have developed rules to limit the application of Article 81 to those agreements

that are viewed as likely to have an appreciable effect on competition or trade between member

states. The principle was first stated in the Völk case, where the ECJ said that "an agreement

falls outside the prohibition of Article [81] where it has only an insignificant effect on the

markets, taking into account the weak position which the persons concerned have on the market

of the product in question" (Case 5/69 Völk v Vervaecke [1969] ECR 295). The ECJ ruled that

an appreciable effect was not present in this case, as the products concerned represented only

between 0.2 and 0.5% of German production. Since then, the ECJ has established in a series of cases that a business with a market share of less than 5% will not generally be capable of acting

in such a way that trade or competition are appreciably affected.

The European Commission’s current position on when it will regard an agreement as having

an appreciable effect on trade or competition is set out in its Notice on agreements of minor

importance (also known as the "de minimis notice" ) (OJ 2001 C368/07 ; see also Competition

regime, Article 81: Notice on agreements of minor importance).

The Notice (which is not binding on the Commission and, as with other Commission notices, is

subject to EC law as interpreted by the European Courts), provides that an agreement does not

fall under Article 81(1) if the parties’ combined shares of any relevant market do not exceed:

• 10%, where the agreement is between parties who are actual or potential competitors; or

• 15% where the agreement is between parties who are not actual or potential competitors.

In cases where it is difficult to classify the agreements as either an agreement between competitors

or an agreement between non-competitors, the 10% threshold applies.

The Notice refers to the Commission’s Guidelines on the applicability of Article 81 of the EC

Treaty to horizontal co-operation agreements for determining whether or not the parties involved

may be regarded as actual or potential competitors (see OJ 2001 C3/2).

Where an agreement forms part of a network of similar agreements which have a cumulative

effect, the above market share thresholds are reduced to 5% in respect of individual agreements.





A cumulative foreclosure effect is considered to be unlikely to exist if less than 30% of the relevant

market is affected by a network of parallel agreements.

Normal principles apply to determining the relevant product and geographical markets withinwhich parties’ shares should be assessed (see further Competition regime, Market definition).

The Notice provides that agreements between firms with market shares below these thresholds

may still fall within Article 81(1) if:

• In the case of horizontal agreements, the parties attempt to fix prices, limit production or

sales or share markets or sources of supply; or

• In the case of agreements between non-competitors, they attempt to restrict the ability

of the buyer to determine its minimum sale price, the maintenance of absolute territorial

protection, various restrictions relating to the operation of selective distribution systems,

and restrictions on the ability of a supplier of components to a manufacturer that would

limit the ability of the supplier to make those components available as spare parts.

The Notice also confirms that the Commission will generally not take action in respect of

agreements between small and medium-sized enterprises (SMEs), on the basis that they are

presumed not to be capable of significantly affecting trade and competition. The Commission

defines an SME as an independent enterprise with fewer than 250 employees and either an

annual turnover of EUR40 million or less, or a total balance sheet of EUR27 million or

less (Commission Recommendation concerning the definition of small and medium-sized

enterprises, OJ 1996 L107/4). An enterprise will not be independent if one or more large firms

own 25% or more of its capital or voting rights.

Exemption under Article 81(3)

Even if an agreement does fall within Article 81(1), the prohibition may be declared inapplicable

under Article 81(3) if it can be shown that the agreement contributes to improving the

production or distribution of goods or to promoting technical or economic progress, while

allowing consumers a fair share of the resulting benefit, provided that the restrictions on

competition are essential for the attainment of these objectives and do not allow competition

to be substantially eliminated (these conditions are considered in detail in Competition regime,

Article 81: Exemption under Article 81(3)).

Consequences of infringementArticle 81(2) provides that an agreement which contravenes the prohibition in Article 81(1) is

automatically void (this must now be read as subject to the Modernisation Regulation (see

The modernisation Regulation). If, however, the provision by virtue of which an agreement

infringes Article 81(1) can be severed from the remainder of the agreement without affecting its

underlying character, only that provision itself will be void and unenforceable (Case 56/65 La

Société Technique Minière v Maschinenbau Ulm [1966] ECR 235).

In addition to unenforceability, an intentional or negligent breach of Article 81(1) renders the

parties liable to fines of up to 10% of their turnover. Although fines will not generally be imposed

in the case of IP agreements, they will be imposed for serious infringements: the Commission has

shown itself to be increasingly prepared to impose heavy fines for clear breaches of Article 81(1).





Infringement of Article 81(1) also exposes the parties to possible third party actions in national

courts for damages or an injunction requiring the parties to cease the infringement. Following

the judgment of the ECJ in Courage v Crehan (ruling on a reference from the UK High Court),

a party to an anti-competitive agreement may also be allowed to sue the other contracting partyfor damages and other relief before a national court, provided that he does not bear more than

negligible responsibility for the distortion of competition (Case C-453/99 [2001] 5 CMLR 28)

(see further box, Crehan). In assessing the degree of a party’s responsibility, the national court

should take into account matters such as:

• The economic and legal context in which the parties found themselves, and

• The parties respective bargaining power and conduct, in particular whether the party

claiming to have suffered loss was in a markedly weaker position than the other party, so

that his freedom to negotiate the terms of the contract and his capacity to avoid or reduce

the loss were seriously compromised or even eliminated.

(See further Competition regime, Article 81: Consequences of infringement.)

The modernisation Regulation

Regulation 1/2003 (OJ 2003 L1/1) (the modernisation Regulation) replaced Regulation 17/62 on

1 May 2004. Regulation 1/2003 abolished the system of authorisation under which agreements

could be notified to the Commission to gain exemption, when only the Commission could make

exemption decisions. The notification system was replaced by a system of "legal exemption".

Parties to agreements are required to assess their own behaviour and establish whether an

agreement that falls within Article 81(1) satisfies the criteria in Article 81(3) and is valid. Article

81(3) is now directly applicable to allow joint enforcement of the competition rules by theCommission, the national authorities and the national courts.

Two additional goals of modernisation are the harmonisation of substantive competition

rules and the decentralised application of European competition law. Regulation 1/2003

obliges member states´ competition authorities and courts to apply EC competition law to

all cases where trade between member states may be affected and established Article 81 as

the common standard for the assessment of agreements by all enforcers within the EU. In

2002, the Commission set up a network of European Competition Authorities (ECN) to allow

systematic co-operation and to provide for an allocation of cases according to the principle of

the best-placed authority. The competition authorities in the ECN now co-operate closely with

each other and the European Commission. For further details see box, Modernisation.

Block exemptions and Commission Guidelines

The Commission has power to enact regulations, known as block exemptions, which disapply

Article 81(1) from certain categories of agreement, including agreements relating to industrial

property rights, and in particular patents and patent-related rights, designs, trade marks, and

know-how concerning manufacturing methods or the use or application of industrial processes.

If an agreement meets the conditions set out in the relevant block exemption, it is automatically

exempt from Article 81(1) without the need to notify it to the Commission. It is therefore

preferable to bring an agreement within the scope of a block exemption where possible.

The technology transfer block exemption (TTBE) (Regulation 772/2004 OJ 2004 L123/11),

which applies to licences of patents, know-how, designs and/or software copyright (or both)

is considered under Technology transfer block exemption. Licences of copyright (except in





software) and trade marks are not covered by any specific block exemption although, insofar as

licences of those IP rights are merely ancillary to a licence of those rights covered by the TTBE,

or to certain other types of agreement, they may also benefit from a block exemption (this is

considered further below in relation to each category of IP).

The vertical agreements block exemption (Regulation 2790/1999 OJ 1999 L336/21), which took

effect on 1 June 2000, removes vertical agreements from the scope of Article 81(1) (the block

exemption is considered in detail in Vertical agreements). The block exemption regulation defines

vertical agreements as those "between two or more undertakings each operating, for the purposes

of the agreement, at a different level of the production or distribution chain and relating to the

conditions under which the parties may purchase, sell or resell certain goods or services". Broadly,

the block exemption excludes all vertical agreements from the scope of Article 81(1) unless the

supplier’s market share exceeds 30% or unless the agreement contains hardcore restrictions such

as partitioning of territory. In the case of exclusive supply obligations, it is the market share of

the buyer which is relevant.

The vertical agreements block exemption applies to provisions relating to the licensing or

assignment of IP rights if the licence or assignment of IP rights is not the primary object of

the particular agreement, but is nonetheless directly related to the agreement. The exemption

applies on condition that the provisions do not contain restrictions of competition which have

the same object or effect as vertical restrictions that are not exempted under the block exemption

(for example, restrictions on the ability of the buyer to determine its sale price, or which confer

absolute territorial protection). Examples of IP-related provisions which will generally fall

within the scope of the block exemption on this basis are:

• A provision in a distribution agreement permitting the distributor to use the manufacturer’strade mark to sell the goods which are the subject of the agreement; and

• A licence of know-how and trade marks from the franchisor under a franchise agreement

to assist the franchisee in marketing goods or services under the franchise.

In contrast, an agreement for the licensing of patents and know-how to enable a licensee to

produce certain goods will not be covered by the block exemption, since the licence of patents

and know-how would be the primary object of the agreement. Such an agreement may, of

course, benefit from the technology transfer block exemption, which will continue to apply ( see

Technology transfer block exemption).

Other block exemptions that might apply to IP-related provisions include the research and

development block exemption, which applies to certain collaborative agreements for the

purpose of conducting research and development (Regulation 2659/2000 OJ L304/7 ) and a block

exemption that deals with specialisation agreements (Regulation 2658/2000 OJ 2000 L304/3).

These block exemptions also exempt certain ancillary provisions relating to IP rights. They are

covered in detail in Collaborative agreements.

With Article 81(3) being directly applicable, it is often helpful to look at Commission Guidelines

(such as the Guidelines on the application of Article 81 of the EC Treaty to technology transfer

agreements) (2004/C 101/02)) not only for a description of the relevant block exemptions, but

particularly in order to help self-assess the agreement under Article 81(3).

Article 82





The possibility of infringing the prohibition on abuse of a dominant position in Article 82 of the

EC Treaty is of particular concern in relation to the exercise of IP rights. This is considered in

Application of Article 82 to the exercise of IP rights.

Application of Article 81 to IP agreements

Technology licensing

It is common for owners of a new technology to license the technology to other companies for

them to exploit. An owner may not, for example, have the resources to exploit its technology

in a particular foreign country, or it may lack the knowledge of a particular market to which its

technology may apply. If it possesses few resources other than the technology itself, it may simply

wish to enable a better-equipped contractual partner to produce goods using the new technology.

Whatever the reasons for entering into such a licence, the basis of the agreement is the grant by

the technology owner to the licensee of the right to use its IP. This will generally take the form of a licence of the owner’s patents, combined with a right to use its know-how to exploit the patents

most effectively. In a commercial sense, this is sometimes described as a transfer of technology,

although there is no outright assignment of rights in the technology, as the terms of the licence

enable the licensor to retain control over it.

In return, the licensee will generally pay the licensor a royalty, based on its sales of products

or services produced using the licensed technology. The licensor’s commercial goal will be to

maximise royalties by ensuring that the licensee can sell as many of these products as possible at

the highest possible price. In turn, this requires adequate protection of the owner’s technology,

in order to maintain its value, as well as protection of the licensee’s position, typically by

granting it the sole right to exploit the technology in a given territory. A licensor wishing to

exploit its rights over a large area may therefore create a network of licensed territories, in each

of which only one licensee may use its technology. Although the owner clearly has the right to

impose such restrictions on the licensee as may be necessary to protect its technology (in other

words, to protect the "specific subject matter" of its rights), competition issues may arise from

the imposition of additional restrictions on the licensees’ right to use the licensed technology,

since these may confer on both the licensor and licensee a level of protection from competition

which goes beyond that which is required for the licence to be effective.

It might be imagined that the Commission would take a relatively benign view of patent and

know-how licensing, on the basis that it generally reduces monopoly power and increasescompetition by allowing more companies to have access to the means by which patented

processes may be exploited. In fact, the Commission has since the 1970s taken a fairly strict line

when applying Article 81 to such agreements. Generally speaking, the Commission took the

view that any patent or know-how licensing agreement which in any way restricts the exercise

by the licensee of the patent or know-how would be potentially subject to Article 81 whereas a

licence which only imposes restrictions which are necessary to protect the existence of the rights

concerned would not.

Open licences

Although elements of this strict approach remain in place, it was relaxed slightly as a result of

the ECJ’s judgment in the Nungesser case (Case 258/78 LC Nungesser KG and Kurt Eisele vCommission [1982] ECR 2015). The French national agricultural institute (INRA) had granted a

German company the exclusive right to propagate and sell within the then West Germany certain

varieties of hybrid maize seed developed by INRA. The Commission decided that the licence





infringed Article 81(1), and the decision was appealed. The ECJ granted the appeal in part, on

the basis that the obligation on INRA not to license similar rights to any other plant breeder

in the licensed territory, or itself to sell or produce seeds in the licensed territory, was justifiable

given the specific nature of the products in question. In other words, the exclusivity obligationwas essential to the rights being acquired by the licensee and, without it, the licence would have

been deprived of its commercial substance.

Article 81 therefore did not apply at all to an open licence of this kind, where despite the grant

of exclusivity the licensee remained free to respond to orders from outside the licensed territory,

but a licence which conferred absolute territorial protection on the licensee by placing a complete

ban on imports from other licensed territories would infringe Article 81 (although the technology

transfer block exemption does allow for some limited absolute territorial protection (see below)).

Although the Nungesser case concerned plant breeders’ rights, the ECJ indicated that other

"commercial or industrial property rights" were to be treated in the same way, so the caseprovides authority for regarding all "open" exclusive licences of IP rights as outside the scope of

Article 81. This is, however, subject to two important qualifications:

• The need for an exclusivity provision must be objectively justified; for example, by the level

of investment required by the licensor and licensee, the nature of the products concerned,

the degree of novelty and the need to ensure a sufficient return for the licensee; and

• The exclusivity provision must not appreciably restrict the exercise of the licensed rights

(see box, Windsurfing International Inc.). Many IP licence agreements contain appreciable

restrictions on the exercise of the licensed rights, and so will fall within the scope of Article

81(1).

If Article 81 does apply, the parties will generally wish to bring their agreement within the scope

of the technology transfer block exemption. Their other options will be to notify the agreement

to the Commission, which is a lengthy and time-consuming procedure (see Competition regime,

Article 81: Making a notification), or to decide not to notify, with the consequent risk of

unenforceabilty, fines and court actions for damages or other relief.

Technology transfer block exemption

The current Technology Transfer Block Exemption (TTBE) for patent, design right, know-how

and software copyright licensing and Guidelines on technology licensing came into force on 1

May 2004, replacing Regulation 240/96 (OJ 1996 L31/2). With the TTBE, the Commission alsoissued a Notice Guidelines on the application of Article 81 of the EC Treaty to technology transfer

agreements (the Guidelines) (OJ 2004 C101/2), which are not binding on the Community courts.

The scope and application of the TTBE and its guidelines are considered below.

Agreements to license technology commonly contain terms such as exclusivity, field of use,

tying and non-compete obligations that may, depending upon all the circumstances, restrict

competition and fall within the prohibition in Article 81(1). This will affect the enforceability

of the agreements and may lead to private legal action or enforcement action by competition

authorities.

The TTBE provides a relatively narrow safe harbour for technology licensing agreementscontaining clauses that are potentially anti-competitive.





Outside the safe harbour, the Guidelines will therefore be as important as the TTBE itself, as

they will be given high regard by any court or NCA assessing a technology licence. They outline

circumstances in which either the prohibition of Article 81(1) of the EC Treaty would not apply

at all, or the exemption in Article 81(3) of the EC Treaty might be applied on an individual basisso as to exempt the agreement.

The TTBE will apply to fewer agreements than the previous block exemption and represents

a very significant change to the EC rules (see box, Differences between the old technology

transfer block exemption and the TTBE). The TTBE is similar in approach to the US analysis

of intellectual property rights in introducing a clear distinction between licensing agreements

made between competitors and those made between non-competitors. The TTBE exempts

only agreements that will in the circumstances set out clearly not amount to an unwarranted

restriction of competition. A noteworthy consequence of this is that the TTBE will only apply

where the parties have rather low market shares.

Highlights of the TTBE

• Market share thresholds are calculated by reference to both the relevant technology market

and the relevant product market.

• There is a distinction between competitors and non-competitors: actual or potential

competitors cannot rely on the block exemption in respect of certain clauses if they have a

combined market share above 20%, while there is a 30% threshold for non-competitors.

• The distinction between the treatment of competitors and non-competitors is carried

through into separate blacklists of "hardcore restrictions" for competitors andnon-competitors: inclusion of any blacklisted clause will take an agreement outside

the block exemption.

• The TTBE makes a further distinction between "reciprocal" and "non-reciprocal"

agreements. The former is treated more strictly under the hardcore restriction list than the

latter.

• The scope of the TTBE covers software copyright licensing for the purpose of producing

copies for resale.

• Only agreements between two parties are covered. Multiparty agreements and technology

pools are excluded (though these are dealt with in the Guidelines).

• Ancillary trade mark and copyright licensing other than software copyright licensing is

covered if it is necessary to exploit the licensed technology.

• There is a list of "excluded restrictions" relating to certain obligations to license

improvements or non-challenge obligations which need to be analysed for competition

effects, but will not take the whole agreement outside the block exemption.

Agreements which fall within the scope of the TTBE

The first thing to consider is whether the agreement is deemed to be a technology transferagreement under the TTBE. The TTBE covers two-party technology transfer agreements

allowing the production of contract products, which includes goods and services produced with

the licensed technology (Article 2, TTBER; Guideline 43). It also covers subcontracting.





The types of agreement covered by the TTBE include pure patent, pure know-how and mixed

patent and know-how licences, software copyright and design licences (Article 1(1)(b) and

1(1)(h)). In relation to the pure patent licences, the TTBE covers more specifically the licensing

of patent applications, utility models, semiconductor topography rights, supplementaryprotection certificates for medicinal or other products and plant breeders’ rights (Article

1(1)(h)). Other types of IP rights such as trade marks and copyright have not been included in

the TTBE, although agreements that fall within the TTBE may contain trade mark licences

provided that the licence does not constitute the primary object of the agreement, and the licence

is directly related to the application of the licensed technology (Article 1(1)(b), Guideline 53).

In addition, agreements concerning the purchase and sale of products and agreements concerning

joint research and development or specialisation in production will only be covered to the extent

that the agreement does not constitute the primary object of the agreement and is directly related

to the application of the licensed technology (Guidelines 49 and 45).

Multi-party licensing agreements (that is, between more than two undertakings) fall outside the

scope of the TTBE but guidance for assessment is provided in the Guidelines (in particular on

technology pools, that is, arrangements whereby two or more parties assemble a package of

technology which is licensed not only to contributors to the pool but also to third parties). The

TTBE principles will be applied by analogy if the multi-party agreement would be covered by the

TTBE if there were only two parties to the agreement (Guideline 40). Agreements allowing the

sub-licence of technology to third parties will be covered by the TTBE, as long as the production

of contract products constitutes the primary object of the agreement (Guideline 42).

The market share thresholds

To benefit from the block exemption the combined market share for competitors, whether

actual or potential, must not exceed 20% of the relevant product or technology market, and for

non-competitors must not exceed 30%. Calculating market shares will be crucial for companies

which license technology, but the basis for calculation may not be straightforward. Market

shares for both relevant product markets (the final and intermediate products incorporating

the technology and their substitutes), and relevant technology markets (the technology and its

substitutes) must be used. Data on market sales value should be used but, if this is not available,

other "reliable market information" (including, for example, sales volumes) may be used.

Importantly, the TTBE provides that data for the preceding calendar year should always be

used, which is likely to have particular impact for new products and new technologies. Beyondthe market share thresholds, the block exemption is not available. This requires the parties to

monitor the developments of the market shares carefully over the duration of their agreements.

Before markets shares can be calculated, the relevant markets need to be defined.

Relevant market for assessment of parties´ market shares

The next aspect to consider is the relevant market for assessment of parties’ market shares.

Guideline 19 states that market definition is assessed in the same way that the Commission

approaches any question of market definition, although there are special considerations to take

into account when dealing with technology licensing: both the relevant product market and the

relevant technology market must be defined. The reason for defining both the product marketand the technology market is that the input of technology into a product may affect competition

both at the input stage (that is, in direct relation to the use of the technology) and at the output

stage (that is, in direct relation to the finished product).





The relevant product market includes products that are regarded by buyers as interchangeable

with or substitutable for the contract products incorporating the licensed technology, by reason

of the products´ characteristics, price and intended use (Guideline 21). In defining the product

market, both the product and the geographic dimensions are considered (Guideline 20). Indetermining market share, sales from the entire product market are added together in order to

work out the particular market share. The particular market share is evaluated by looking at:

• The licensee’s market share, calculated on the basis of the licensee’s sales of products

incorporating the licensor’s technology and competing products.

• If the licensor is also a supplier of products on the relevant market, the licensor’s sales on

the relevant market (Guideline 71).

• The sales value data, and where this is not available, sales volume data.

The relevant technology market includes the licensed technology and its substitutes, that is,

other technologies that are regarded as interchangeable with or substitutable for the licensed

technology, by reason of the technologies’ characteristics, royalties and intended use ( Guideline

22). In identifying the technology market, both the product and the geographic dimensions are

considered. There are two approaches to be used to start defining the market. The first is by

looking at the licensor and identifying other technologies to which licensees could switch in

response to a small but permanent increase in relative prices, that is, royalties (Guideline 22).

The second approach (which is used under Article 3(3)) considers products incorporating the

licensed technology in the downstream market. Under this approach, all sales on the relevant

product market are taken into account, irrespective of whether the product incorporates a

technology that is being licensed. This approach is favoured because it captures potentialcompetition (that is, from undertakings that are using their own technology solely in-house but

are likely to licence it in the event of a small but permanent increase in the price for licences).

Also, it is important to assess the technology´s market share in relation to the product market,

as the licensor may not necessarily have market power on the technology market just because

he has a high share of licensing income. When the particular market share is evaluated, the

following should be considered, in particular:

• Sales of products on the downstream market (as mentioned above).

• Each technology’s total income from licensing, that is, royalties (Guideline 23).

• Competitors: where parties are competitors on the technology market, sales of products

incorporating the licensee´s own technology must be combined with the sales of the

products incorporating the licensed technology (Article 3(1) and Guideline 70). Parties are

competitors on the technology market if they are actual competitors, that is, the licensee

is already licensing out his technology and the licensor enters the technology market by

granting a licence for a competing technology to the licensee (Guideline 28).

• New technologies: where there are new technologies that have not yet generated any

sales, a zero market share is assigned. When sales commence, the technology will start

accumulating market share (Guideline 70).

• Sales value data: this normally gives a more accurate indication of the strength of atechnology than looking at volume data. However, sales volume data can be looked at

where there is no sales value data (Guideline 72).





Distinction between competitors and non-competitors

Different market share thresholds apply to competitors and non-competitors. Once the market

has been defined, on needs to consider whether the parties are (actual or potential) competitorsor non-competitors. Actual competitors on the product market are undertakings that are both

active on the same product and geographic market on which the products incorporating the

licensed technology are sold (Guideline 67 ). Parties are actual competitors on the technology

market if the licensee is already licensing out his technology and the licensor enters the technology

market by granting a licence for a competing technology to the licensee, as mentioned above

(Guideline 28). Potential competitors on the product market are undertakings that, in the absence

of the agreement and without infringing the intellectual property rights of the other party, it is

likely that they would have undertaken the necessary additional investment to enter the relevant

market in response to a small but permanent increase in product prices. Entry to the relevant

market would have to happen within one to two years for there to be potential competition

(Guideline 29). Potential competition on the technology market is not taken into account forthe application of the market share threshold or the hardcore list. However, it will be taken into

account outside the safe harbour of the TTBE (Guideline 66).

Parties are non-competitors under any other circumstances and also specifically when the

parties own technologies that are in a one-way or two-way blocking position. A one-way

blocking position exists when a technology cannot be exploited without infringing upon another

technology, resulting in a party needing to seek a licence from the holder of the basic technology.

A two-way blocking position exists where neither technology can be exploited without infringing

the other technology, resulting in both parties needing to obtain a licence or waiver from the

other party (Guideline 32). Parties can also be deemed to be non-competitors on the relevant

product and technology market by virtue of the licensed technology representing such a drastic

innovation that the technology of the licensee has become obsolete or uncompetitive. It has to

be obvious at the time of the agreement that the licensee´s technology will become obsolete

in order to be deemed non-competitors from the beginning. However, parties may become

non-competitors at a later date, when it becomes obvious that the technology is obsolete

(Guideline 33).

The question of whether or not the undertakings party to the agreement are competing

undertakings is determined at the time of the conclusion of the agreement. Where parties were

non-competitors at the start of the agreement, but become competitors later on, the agreement

will still be considered to be between non-competitors, unless the agreement is subsequentlyamended in any material respect (Article 4(3)).

Market share thresholds for competitors and non-competitors

Having defined the relevant market and established whether the parties are competitors or not,

the relevant market share thresholds must be established:

• For competitors, in order to fall within the exemption, the combined market share of the

parties must not exceed 20% of the relevant technology market and product market (Article

3(1)).

• For non-competitors, in order to fall within the exemption, the market share of each of the

parties must not exceed 30% of the relevant product and technology market ( Article 3(2)).





The basis for calculating market shares has been considered above.

Hardcore restriction list

A number of "hardcore restrictions" would cause the whole agreement to fall outside the TTBE.

In most cases these restrictions are unlikely to satisfy the exemption criteria in Article 81(3). The

list for competitors is more restrictive than for non-competitors.

Distinction between reciprocal and non-reciprocal agreements

For the application of the hardcore list, the TTBE distinguishes between reciprocal and

non-reciprocal agreements. A reciprocal agreement is a technology transfer agreement where

two undertakings grant each other a licence for competing technologies, or for technologies

that can be used for the production of competing products. A non-reciprocal agreement is a

technology transfer agreement where one undertaking grants another a licence or where twoundertakings grant each other a licence but for non-competing technologies or technologies for

the production of non-competing products (Guidelines 82-83). A reciprocal licence does not

necessarily have to be granted in the same agreement but can result from several agreements.

Hardcore restrictions between competitors

• Price-fixing: where the agreement between the competitors has as its object the fixing of

prices for products sold to third parties, including the products incorporating the licensed

technology. This will apply where there is fixed, maximum, minimum or recommended

pricing. However, an obligation on the licensee to pay a minimum royalty does not

necessarily amount to price fixing. Where the royalty is calculated on the basis of productsales, the amount of the royalty will have an impact on the marginal cost of the product

and therefore an impact on the end product price. This means that competitors could

use cross-licensing with reciprocal running royalties to co-ordinate prices. In this case,

the Commission will only treat the arrangement as price fixing where the agreement is

devoid of any pro-competitive purpose and thus is not a bona fide licensing arrangement

(Guidelines 79-80).

• Limiting output: where a limit is set on how much a party may produce and sell. This

restriction does not apply to output limitations on the licensee in a non-reciprocal

agreement or output limitations on one of the licensees in a reciprocal agreement provided

that the output limitation only concerns products produced with the licensed technology.

• Market or customer-sharing: where competitors agree not to produce in certain territories

or not to sell actively and/or passively into certain territories or to certain customers

reserved for the other party. This applies even where the licensee is still free to use his own

technology. Exceptions to this restriction are:

• where there is an obligation on the licensee to use only the licensed technology to

produce within one or more technical fields of use or one or more product markets

(Guideline 90-91);

• where there is an obligation on the licensor and/or the licensee in a non-reciprocal

agreement not to produce with the licensed technology within one or more technical

fields of use, one or more product markets or one or more exclusive territories reserved

for the other party. This is quite normal where, for example, the licensor grants an





exclusive licence on the basis of the licensed technology in a particular territory, and

thus agrees not to produce the contract products in that territory himself (Guideline

86);

• where there is an obligation on the licensor not to licence the technology to another

licensee in a particular territory, that is, the licensor appoints a licensee as his sole

licensee in a particular territory. This applies to reciprocal and non-reciprocal

agreements (Guideline 88);

• where there is a restriction, in a non-reciprocal agreement, of active and/or passive

sales by the licensee and/or the licensor into the exclusive territory or to the exclusive

customer group reserved for the other party (Guideline 87 );

• where there is a restriction, in a non-reciprocal agreement, of active sales by the

licensee into the exclusive territory or to the exclusive customer group allocated by thelicensor to another licensee provided that the latter was not a competing undertaking

of the licensor at the time of the conclusion of its own licence. Giving such protection

to a licensee will most likely induce the licensee to exploit the licensed technology

more efficiently (Guideline 89);

• where there is an obligation on the licensee to produce the contract products only for

its own use provided that the licensee is not restricted in selling the contract products

actively and passively as spare parts for its own products. This means that the licensee

can produce the parts to place in his own products, and can sell the parts to third

parties as spare parts for his own products, but he cannot sell the parts to third parties

for any other use (Guideline 92);

• where there is an obligation on the licensee, in a non-reciprocal agreement, to produce

the contract products only for a particular customer, where the licence was granted in

order to create an alternative source of supply for that customer. This exception also

covers the situation where more than one undertaking is granted a licence to supply

the same specified customer (Guideline 93).

• Restrictions on licensee s use of his own technology: where there is a restriction of

the licensee´s ability to exploit his own technology or the restriction of the ability of

any of the parties to the agreement to carry out research and development, unless such

latter restriction is indispensable to prevent the disclosure of the licensed know-how to

third parties. The restriction to protect the licensor´s know-how must be necessary and

proportionate. Regarding exploitation of the licensee s own competing technology, the

licensee must not be subject to limitations in terms of where he produces or sells, how

much he produces or sells and at what price he sells as long as he does not infringe the

licensee´s technology. He must not be made to pay royalties on products produced based

on his own technology and he must not be restricted in licensing his own technology to

third parties (Guidelines 94-95).

Hardcore restrictions between non-competitors

• Price-fixing: where there is a restriction which has as its direct or indirect object the

establishment of a fixed or a minimum selling price, or a fixed or minimum price to be

observed by the licensor or licensee when selling products to third parties. It can cover





situations where agreements fix the margin, fix the maximum level of discounts, link the

sales price to the sales prices of competitors, and so on (Guideline 97 ).

• Passive sales: where there is a restriction of the territory into which, or of the customersto whom, the licensee may passively sell the contract products. Passive sales restrictions

can be as a result of direct obligations, such as to not sell to certain customers, or to refer

orders from customers to other licensees. They can also be as a result of indirect measures,

by inducing the licensee to refrain from making sales, for example, by giving the licensee

financial incentives to do so, and by placing quantity restrictions on the licensee (where these

are being used to implement an underlying market partitioning agreement). The exceptions

to this restriction are as follows:

• where there is a restriction of passive sales into an exclusive territory or to an exclusive

customer group reserved for the licensor up to the market share threshold of 30%. For

a territory or group to be reserved to a licensor, it is not required that the licensor isactually producing with the licensed technology in that territory or for that customer

group. A territory or group can be reserved for later exploitation by the licensor

(Guideline 100);

• where there is a restriction of passive sales into an exclusive territory or to an exclusive

customer group allocated by the licensor to another licensee for the first two years

that the protected licensee is selling the contract products in that territory or to that

customer group. This is to enable a licensee to develop its new territory without fear of

passive sales from other licensees. On expiry of the two-year period, the passive sales

restriction constitutes a hardcore restriction and is unlikely to be exemptable under

Article 81(3) (Guideline 101);

• where there is the obligation to produce the contract products incorporating the

licensed technology only for the licensee´s own use (captive use restriction) provided

that the licensee is not restricted in selling the contract products actively and passively

as spare parts for its own products (Guideline 102);

• where there is the obligation to produce the contract products only for a particular

customer, where the licence was granted in order to create an alternative source of

supply for that customer (Guideline 103);

• where there is a restriction of sales to end users by a licensee operating at the wholesale

level of trade, that is, an obligation on the licensee not to sell to end users and only to

sell to retailers (Guideline 104);

• where there is a restriction of sales to unauthorised distributors by the members of

a selective distribution system, provided a licensee operating at the retail level is not

restricted from actively/passively selling to end users (Guideline 105).

Excluded restrictions

There are four restrictions listed in Article 5, which are not block exempted and which require

individual assessment of their anti-competitive and pro-competitive effects. However, if any of

the excluded restrictions are included in an agreement, the rest of the agreement can still be

covered by the block exemption, if the restriction can be severed from the agreement (Guideline





107 ). The question of severability is a question of national (contract) law. The excluded

restrictions are as follows:

• Exclusive grant back obligations: any direct or indirect obligation on the licensee togrant an exclusive licence to the licensor or to a third party designated by the licensor in

respect of its own severable improvements to or its own new applications of the licensed

technology. An improvement is severable if it can be exploited without infringing upon

the licensed technology. This would work as a major disincentive to licensees to innovate

using the licensed technology. The block exemption does cover non-exclusive grant back

obligations in respect of severable improvements and this is the case even where the grant

back obligation is non-reciprocal (that is, only imposed on the licensee and the licensor can

pass on severable improvements to other licensees). This is because it is pro-competitive to

allow the licensor to decide to what extent he wishes to pass on his own improvements to

licensees, and it means that all licensees are on an equal footing in terms of the technology

they have. When such an excluded restriction is individually assessed, factors looked at willbe whether the grant back was made against consideration, what the market position of

the licensor is, and what the position of the licensor´s technology is (Guidelines 109-111).

• Exclusive assignment back obligations: any direct or indirect obligation on the licensee to

assign, in whole or in part, to the licensor or to a third party designated by the licensor,

rights to its own severable improvements to or its own new applications of the licensed

technology (Guidelines 109-111).

• No challenge clauses: any direct or indirect obligation on the licensee not to challenge

the validity of intellectual property rights which the licensor holds in the common market,

without prejudice to the possibility of providing for termination of the technology transferagreement, in the event that the licensee challenges the validity of oneor more of the licensed

intellectual property rights. A non-challenge restriction in relation to know-how could

satisfy the conditions for exemption in Article 81(3) of the EC Treaty, as the Commission

takes a favourable view of non-challenge clauses relating to know-how where disclosed, it

is likely to be impossible or very difficult to recover the licensed know-how (Guideline 112).

• Exploitation/development by the licensee of its own technology if non-competing: where

parties are non-competitors, arrangements are excluded from the scope of the block

exemption, if they impose a direct or indirect obligation limiting the licensee´s ability to

exploit its own technology or limiting the ability of any of the parties to the agreement to

carry out research and development, unless such latter restriction is indispensable to preventthe disclosure of the licensed know-how to third parties. This provision corresponds with

the hardcore restriction in Article 4(1)(d), but applying to non-competitors, which will

require individual assessment, as such clauses do not necessarily have a negative effect on

competition (Guideline 114).

White List

Guideline 155 outlines obligations in agreements that will fall outside of Article 81(1) of the EC

Treaty. These are:

• Confidentiality obligations.

• Obligations on licensees not to sub-licence.





• Obligations not to use the licensed technology after the expiry of the agreement, provided

that the licensed technology remains valid and in force.

• Obligations to assist the licensor in enforcing the licensed intellectual property rights.

• Obligations to pay minimum royalties or to produce a minimum quantity of products

incorporating the licensed technology.

• Obligations to use the licensor´s trade mark or indicate the name of the licensor on the

product.

Withdrawal or disapplication of the benefit of the TTBE

The Commission and the national competition authorities in each member state of the EU will

be able to withdraw the benefit of the block exemption if the effect of an agreement will be to

restrict access to the market for other technologies or for other potential licensees, or where the

licensed technology is not exploited. The application of Article 81 in this event is considered

below. Where the withdrawal procedure is applied, the withdrawing authority bears the burden

of proving that the agreement that satisfies the conditions in Article 2 nevertheless does not

satisfy the four conditions under Article 81(3) of the EC Treaty. In particular, withdrawal may be

warranted in the following situations (listed in Article 6):

• Access of third parties’ technologies to the market is restricted.

• Access of potential licensees to the market is restricted.

• Without any objectively valid reason, the parties do not exploit the licensed technology. Inthe case of licensing between competitors, the fact that parties do not exploit the technology

may be a sign of a disguised cartel (Guidelines 117-122).

Under Article 7, the Commission can disapply from the scope of the TTBE, by regulation,

agreements containing specific restraints where there are parallel networks of similar technology

transfer agreements covering more than 50% of a relevant market. This measure is not addressed

to individual undertakings, but encompasses all undertakings whose agreements are pinpointed

as being disapplied by the regulation. Where a disapplication regulation is adopted, Article

81 will apply to each individual agreement. For the purpose of calculating the 50% market

coverage, account must be taken of each individual network of licence agreements containing

restraints, or combinations of restraints, producing similar effects on the market. Any regulationadopted under Article 7 must clearly set out its scope. The product and geographic markets

must be defined and the type of licensing restraint that it is covering must be laid out. The

Commission can be flexible in what licensing restraint the regulation covers, to keep it in line

with the competition concern. For example, the Commission may restrict the scope of the

regulation to restraints in agreements over a certain duration, because agreements for lesser

durations, although containing the same restraint, are not as restrictive in nature. Article 7(2)

allows for a grace period of six months from the issue of the regulation to allow undertakings to

modify their agreements to take account of the regulation. The regulation will have no effect on

the block exempted status of the agreements prior to its entering into force (Guidelines 123-129).

Existing agreements





As the TTBE is of more limited scope than the previous block exemption, there were many

existing agreements of significant duration that it did not cover. To some degree this was catered

for by a transitional period, which provided that an agreement that benefited from the outgoing

block exemption on 30 April 2004 would continue to be exempted until 31 March 2006. Longerterm agreements will now have to be considered in light of the new rules.

Assessing and addressing the risks

The analysis of particular clauses as to whether the TTBE might apply or not will require a more

complete understanding of the market dynamics and context of the agreement concerned than

under the previous, more formalistic, block exemption. However, it should not be thought that

this will always be a taxing process. Indeed in many instances the analysis will be reasonably

straightforward. However, if a potential competition issue is identified which is not clearly

resolved by the TTBE, the Guidelines or existing case law, a number of questions arise:

• What are the potential outcomes if a competition issue arises? The risks that may arise

from a competition restriction in a licensing agreement are: lack of enforceability of all

or part of the contract, intervention by a competition authority (perhaps with fines being

imposed), and private actions for damages or other remedies before a national court. The

most obvious scenario is that one party might seek to enforce the contract against the

other and be met by a defence (and/or counterclaim) of breach of the EC competition

prohibition. If the restriction of competition is particularly severe, however, intervention by

a competition authority (and fines) may be a possibility. Equally, a party to an agreement

may in principle sue the other for damages caused to it, as may a third party suffering

damage.

• Which party is at risk? There may be asymmetrical risk as between the parties. For example,

if an exclusivity provision might not be enforceable (perhaps because the licensee is already

dominant on the relevant product market), it may be that this clause alone would be struck

out by a court (depending on the possibility of severability under national law). The licensor

may thus in effect be free to license others while the licensee is left paying royalties on the

basis of exclusivity - all the risk is on the licensee in such a case, unless the agreement is

drafted to anticipate the problem.

• How great is the risk? A broad range of commercial and legal considerations will affect

the degree of risk if an agreement contains potentially unlawful restrictions. As well as

the nature of the ongoing relationship between the parties, risk may be affected by thenature of the industry concerned and the territories affected.Some national competition

authorities are perceived to be more interventionist than others, and the approach may

vary across industries. Further, the choice of law of the contract and likely forum for any

dispute may materially affect the risk of a legal dispute being brought before a national

court. Whether the restrictions affect parallel importation will be an important factor in

assessing likelihood of action by the European Commission. Finally, the likelihood of a

competitor complaining or bringing other action will vary depending upon the industry

and the importance and profile of the arrangements in question.

• What can be done to avoid or minimise any risks? There are a number of means of

addressing the competition risks. If the concerns justify a very cautious approach it maybe possible to seek the views of one or more competition authorities. In certain member

states national authorities still allow parties to obtain a formal or informal view regarding





their approach to an issue, while the European Commission will in terms of its formal

procedures give guidance only if novel issues arise.

Informal contact may in certain circumstances provide assistance. In respect of enforceability concerns in particular, severability will be a central issue. In most situations

it will be desirable to ensure that the agreement is drafted in such a way that any infringing

clauses may be severed from the rest of the agreement (and subject to national contractual

laws which permit such a result). There may also be a need to ensure that royalty and other

payments also fall away or are reduced in the event of unenforceability, or that the period

of termination is short enough to permit the affected party to exit from an arrangement

that has become unattractive. These solutions not only reduce exposure to risk, but tend

to reduce the incentive to dispute enforceability on competition grounds.

Agreements falling outside of the TTBE

Where an agreement falls outside of the TTBE, it will generally have to be assessed under Article

81. First of all, it will be necessary to assess whether the agreement is anti-competitive under

Article 81(1) EC Treaty. Guideline 12 of the TTBE offers two questions to be asked in order to

facilitate this analysis:

• Does the licence agreement restrict actual or potential competition that would have existed

without the contemplated agreement? If so, it will be caught by Article 81(1). This question

is aimed at assessing the impact of the agreement on inter-technology competition.

• Does the agreement restrict actual or potential competition that would have existed in the

absence of the contractual restraint? If so, it will be caught by Article 81(1). This question isaimed at assessing the impact of the agreement on intra-technology competition. The test

is an objective one, that is, whether a less restrictive agreement would have been adopted

by undertakings in a similar situation. Guideline 12 makes an exception for agreements

containing restraints that are objectively necessary for the existence of an agreement of

that type or that nature, for example, are necessarily restrictive for a certain duration

to allow a licensee to establish itself in a market. Article 81(1) also makes a distinction

between agreements that have a restriction of competition as their object and those that

have it as their effect. In the case of agreements restricting competition as their object, it is

highly unlikely that they will qualify for exemption under Article 81(3) (see below). The

restrictions covered by the list of hardcore restrictions in Article 4 are restrictive by their

object. If it is thought that an agreement has a restriction of competition as its effect, itwill be necessary to look at both the actual and potential effect on competition and then

to assess whether such an effect is appreciable (such as when one party has considerable

market power).

Where an agreement is found to restrict competition and fall within Article 81(1), it will be

necessary to consider whether the agreement will satisfy all of the four criteria for exemption

under Article 81(3). This is an exemption for agreements that fall within Article 81(1), where the

pro-competitive effects of the agreement outweigh the anti-competitive effects. The four criteria

to be satisfied are (Guidelines 146-152):

• The agreement offers efficiency benefits by contributing to the improvement of productionor distribution or to the promotion of technical or economic progress. In the context of

licensing agreements, licensing often occurs because it is more efficient for the licensor to





licence the technology than exploit it himself, and it is more efficient for the licensee to

utilise the licensor´s technology in unison with other products to enhance and find new

technology.

• The agreement offers consumer benefits. This in fact means that the consumer should not

be affected by any negative effects of the agreement and should be benefited, whether that

be by lower prices, or by access to better technology.

• The agreement does not impose on the undertakings concerned any restrictions that are not

indispensable to the attainment of the efficiency benefits. The parties here would have to

show that less restrictive agreements would not have been efficient and in fact would have

caused a loss in efficiencies, making the restriction indispensable.

• The agreement does not afford the undertakings the possibility of eliminating competition

in respect of a substantial part of the products concerned.

Settlement and non-assertion agreements

The individual terms and conditions of settlement and non-assertion agreements may be caught

by Article 81(1), even if the licensing contained in such agreements is not in itself restrictive

of competition. Licensing is treated like other licence agreements, that is, if technologies are

substitutes then they must be assessed to analyse whether they are in a one-way or two-way

blocking position (Guideline 204). The TTBE will apply to such agreements provided that it

does not contain any of the Article 4 hardcore restrictions (Guideline 205). If the agreement is

a cross-licensing agreement, the extent of the parties´ market power and the extent to which the

agreement impacts on the parties´ incentive to innovate must be assessed to consider whether theagreement is likely to be caught by Article 81(1) under Guidelines 207-208.

Patent pools

Patent pools are arrangements whereby two or more parties assemble a package of technology

that is licensed not only to contributors to the pool but also to third parties (Guidelines 210-235).

Agreements establishing such pools and setting out the terms and conditions of the pool will not

be covered by the TTBE. However, individual licences granted from the pool to third parties´

licensees are treated like other licence agreements that are block-exempted when the conditions

set out in the TTBE are fulfilled.

Patent pools can be restrictive of competition by reducing competition between the parties,

foreclosing alternative technologies, in particular when the pool supports an industry

standard, and creating barriers to entry (Guideline 213). However, these considerations can

be counter-balanced by the pro-competitive effects of patent pools, such as reduced costs and

one-stop licensing of technologies covered by the pool.

The competitive risks of pools will depend on the relationship between the pooled technologies

and the technologies outside the pool. Basic distinctions need to be made between technology

complements and substitutes and between essential and non-essential technologies. Two

technologies will be complements where they are both required to produce the product, or carry

out the process to which the technologies relate. Two technologies will be substitutes whereeither technology allows the holder to produce a product or carry out the process to which the

technologies relate. A technology is essential if there are no substitutes for that technology

inside and outside the pool and the technology is necessary to produce the product, or carry





out the process to which the pool relates. Technologies that are essential are by necessity also

complements (Guideline 216).

Generally, the Commission considers the inclusion of substitute technologies in a pool to be aninfringement of Article 81(1), and that it is unlikely that such an inclusion would satisfy the

conditions of Article 81(3). Where the pool is mainly made up of substitutes, the arrangement

effectively amounts to price-fixing between competitors (Guideline 209).

Where the pool is solely made up of essential (and therefore complementary) technologies, this

will generally fall outside of Article 81(1), irrespective of the market positions of the parties. The

conditions under which licences are granted may however be caught by Article 81(1).

Where non-essential but complementary technologies are included in the pool, this can amount

to collective bundling and is likely to be caught by Article 81(1) where the pool has a significant

position on any relevant market.

The assessment of essentiality is an on-going process, given that substitute and complementary

technologies may be developed after the creation of the pool. A technology may therefore become

non-essential later on due to the emergence of third party technologies, so one way around this

is to exclude from the pool technologies that have become non-essential. In the assessment of

technology pools comprising non-essential technologies, the Commission will take into account

the following factors (Guideline 222):

• Whether there are any pro-competitive reasons for including the non-essential technologies

in the pool;

• Whether the licensors remain free to licence their respective technologies independently;

• Whether the pool offers the technologies only as a single package, or whether it offers

different packages for distinct applications;

• Whether the pool offers the technologies only as a single package, or whether the licensees

can obtain a licence for only part of thepackage with a corresponding reduction of royalties.

Assessment of individual restraints

Certain restraints are commonly found in patent pools relating to the terms agreed between the

pool and the licensee. The Commission will assess the licences for the purposes of the TTBE,and will have regard to the following main principles (Guideline 224):

• The stronger the market position of the pool, the greater the risk of anti-competitive effects.

• Pools that hold a strong position in the market should be open and non-discriminatory.

• Pools should not unduly foreclose third party technologies or limit the creation of

alternative pools.

Where the pool has a dominant position on the market, royalties and other licensing terms should

be fair and non-discriminatory and licences should be non-exclusive. The Commission will takeinto account whether licensors are also subject to royalty obligations. Licensors and licensees

must be free to develop competing products and must be free to grant and obtain licences outside





the pool. Grant back obligations should be non-exclusive and be limited to developments that

are essential or important to the use of the pooled technology.

In early 2006, the Commission closed an investigation into allegations that the EuropeanCD-Recordable (CD-R) Disc Licensing Programmes administered by Philips Electronics

infringed both Articles 81 and 82 of the EC Treaty. For a number of years Philips offered

European disc manufacturers joint portfolio licences including patents for its own CD-R discs

as well as those of Sony and Taiyo Yuden. It also offered an individual licence, the Philips Only

Licence Agreement (PLA), solely for its own CD-R patents. In 2003, the Commission received a

complaint from the Federation of Interested Parties in Fair Competition in the Optical Media

Sector (FIPCOM), which represents European manufacturers of CD-R discs. FIPCOM alleged

both that Philips was abusing its dominant position contrary to Article 82 by implementing

these licensing programmes and that the terms and conditions of the programmes infringed

Article 81.

In December 2005, Philips decided to discontinue the joint patent portfolio licences and revised

the terms and conditions of the PLA so that:

• Summaries of independent expert reports on those Philips patents that were essential to

produce CD-R discs were made available on Phlips’ website.

• Philips had an express obligation to address technical problems associated with the

management of the CD-R standard.

• The CD-R standard was updated to clarify that discs that do not use certain proprietary

technology but instead use alternative technologies wouldstill qualify as CD-R discs.

• The level of royalty has been reduced from 4.5 US cents to 2.5 US cents per disc. This rate

would apply retroactively from 1 October 2005 for all licensees that have paid all royalties

due and which were compliant with the licensing programme.

The Commission was satisfied that the changes were sufficient to address any potential

competition concerns (see Commission press release IP/06/139).

Standard setting

Patent pools may support a de facto, or de iure industry standard. This may give rise to

additional concern. In the absence of a standard there may be competing patent pools relating

to competing technologies to chose from. Where a patent pool relates to an adopted industry

standard there usually is no competing patent pool. This may lead to foreclosure of new and

improved technologies. Also, controlling the patent pool or individual essential patents which

relate to an industry standard confers control over the industry which is required to use the

standard. This addresses the concern of hold-up. Hold-up usually occurs where the owner of

standard related essential IP right is in a position by way of assertion of the IP right to block the

use of the standard and hold-up the entire industry which is "locked into" using the industry

standard. This issue was dealt with in recent US cases such as In the matter of Rambus Inc.,

FTC Docket 9302.

On 30 July 2007, the Commission itself sent Rambus a statement of objections alleging that

Rambus had breached Article 82 of the EC Treaty by claiming unreasonable royalties for use

of certain patents. The Commission considers that Rambus engaged in intentional deceptive





the application of Article 81 to trade mark licences. On the other hand, there is a substantial

body of case law dealing with the effect of the EC Treaty’s free movement of goods provisions

on the enforcement of trade mark rights, which is considered separately under Free movement of

goods and services, and exhaustion of rights.

The essential purpose of a trade mark is to guarantee the origin of the goods in relation to which

it is used. By using a trade mark on a product, the producer associates it with the owner of the

trade mark, so enhancing the value of the product (depending on the reputation of the owner).

As the use of a trade mark without the owner’s consent is generally an infringement of the mark,

any arrangement for the use of the trade mark will require a licence.

The licence of a trade mark in a commercial agreement is often linked to, and dependent on, the

creation of a wider relationship between the parties, to which the right to use the licensor’s trade

mark is ancillary. Agreements which typically contain a trade mark licence of this kind include:

• Distribution agreements.

• Franchising agreements.

• Sales agency agreements.

• Technology transfer agreements.

• Original equipment manufacturer (OEM) manufacturing and tolling agreements. These

agreements, which can take many different forms, typically involve the manufacture of

goods by one party (the original equipment manufacturer or "OEM", also known as a

sub-contractor), using the intellectual property of the other party (the contractor). Thegoods may then be sold by the OEM directly to end users, using the contractor’s trade

mark, or supplied exclusively to the contractor, in which case a trade mark licence may not

be required.

Application of block exemptions

The specific block exemptions that apply to specialisation, technology transfer and vertical

agreements will generally also cover the terms on which necessary trade marks may be licensed:

• Technology transfer block exemption. Agreements that fall within the TTBE may contain

a trade mark licence, provided that the trade mark licence "does not constitute the primary

object of the agreement" (recital 4 and Article 1(1)(b)); and is directly related to theapplication of the licensed technology (recital 4 and Article 1(1)(b)

The second of these requirements ensures that agreements covering other types of

intellectual property rights are only block exempted to the extent that these other rights

serve to enable the licensee to better exploit the licensed technology. It is common, for

example, for a technology licence to include a provision permitting the licensee to attach

the licensor’s trade mark to finished goods made using the licensed process. This will fall

within the scope of the block exemption, provided that (as is usually the case) the use of

the trade mark helps the licensee to exploit this process (for example, by higher sales) (see

Technology Transfer Block Exemption).

• Vertical agreements block exemption. The vertical agreements block exemption, which

came into effect on 1 June 2000, applies to distribution, franchising and sales agency





agreements (among other agreements) (Regulation 2790/1999 OJ 1999 L336/21). It exempts

provisions relating to the licensing or assignment of IP rights if the licence or assignment of

IP rights is not the primary object of the particular agreement, but is nonetheless directly

related to the agreement.

? Research and development block exemption. The research and development block

exemption, which came into effect on 1 January 2001 and will expire on 31 December 2010,

applies to certain collaborative agreements for the purpose of conducting research and

development (Regulation 2659/2000 OJ L304/7 ). It exempts provisions allowing the joint

exploitation of the results of research and development provided that these are protected by

intellectual property rights which are decisive for the manufacture of the contract products

or the application of the contract processes.

• Specialisation agreements block exemption. The specialisation agreements block

exemption also applies to provisions which do not constitute the primary object of a specialisation agreement, but which are directly related to and necessary for its

implementation, such as those concerning the assignment or use of intellectual property

rights (Article 1(2), Regulation 2658/2000 OJ 2000 L304/3).

Position where no block exemption available

If a trade mark licence provision does not fall within the scope of any block exemption, it is

necessary to consider the application of Article 81(1) to trade mark licences generally.

The principles developed in the TTBE and TTBE Guidelines will not be extended to trade mark

licensing, as trade mark licensing occurs more in the realm of distribution and resale of goods

and services, and is generally more akin to distribution agreements than technology licensing(see TTBE Guidelines 53). Where a trade mark licence is directly related to the use, sale or resale

of goods and services and does not constitute the primary object of the agreement, the licence

agreement is covered by the vertical agreements block exemption.

The Commission’s Guidelines on vertical restraints should also be of assistance in assessing how

likely it is that a trade mark licence which falls outside the various block exemptions may benefit

from an individual exemption (OJ 2000 C 291/1).

Provisions likely to fall outside Article 81(1). A provision in a trade mark licence may well

fall outside Article 81(1) altogether, on the ground that the maintenance of the link between

the owner’s trade mark and the goods produced or marketed under his control or authority isnecessary to protect an essential element of the mark’s existence. Restrictions falling outside

Article 81(1) on this basis would include, for example, an obligation on a licensee manufacturing

products on behalf and to the specification of the trade mark owner to affix the owner’s

trade mark to all products. However, more complex arrangements, such as where an OEM

manufactures equipment for another party for sale only under that party’s trade mark, may be

caught by Article 81(1) and need to be assessed under Article 81(3)).

As of 1 May 2004, parties to an agreement are required to assess their own behaviour and to

determine whether or not the agreement in question complies with Article 81.

Other restrictions will fall outside of the scope of Article 81(1) if they are justifiable for

maintaining the value of the trade mark. For example:





• Quality control measures (such as provisions requiring adherence to strict production

procedures, or that production should take place only at approved plants, or providing for

the supervision of production by the licensor).

• An obligation on the licensee to purchase special ingredients only from the licensor

(provided that such ingredients really are essential and are not available from other

sources).

• Advertising and promotion obligations on the licensee (provided that these are objective

and not excessive).

Restrictions may also fall outside Article 81(1) if they reflect the legitimate need of the licensor to

control the use of its trade mark, for example, a straightforward restriction on the sub-licensing

of the trade mark, or change of control provisions. An obligation on the licensee not to

challenge the licensor’s ownership of the mark will not be viewed as a restriction of competition,because the question of whether the licensor or licensee owns the trade mark will not affect

the competitive position of third parties, who are in either case prevented from using the trade

mark (Moosehead-Whitbread’s Agreement OJ 1990 L100/32). However, a clause preventing

the licensee from challenging the validity of the mark may fall within Article 81(1) (see further

Provisions likely to fall within Article 81(1) for which individual exemption is unlikely, below ).

Provisions likely to fall within Article 81(1). The Commission has taken a strict approach to

exclusive trade mark licences. Even though the granting of an exclusive right to exploit a trade

mark in a specific territory is inherent in most forms of distribution agreement, it is clear that

the Commission will view a restriction that prevents a licensor from licensing its trade mark to

any other party within the licensee’s appointed territory as a de facto restriction of competition,on the basis that it prevents intra-brand competition (that is, competition from other companies

in the provision of the same goods and services bearing the same mark). This will be the case

whether or not the licensor itself is also prohibited from using the trade mark in the appointed

territory. An exclusive licence will therefore infringe Article 81(1) (assuming that the relevant

restriction is appreciable and that there is an effect on trade between member states), and will

accordingly be unenforceable. An obligation on a licensee not to sell any products which compete

with those bearing the licensed trade mark is liable to infringe Article 81(1), on the basis that it

reduces the scope for competition from such products.

A provisionthat prohibits the licensee from activelymarketing products bearingthe licensed trade

mark in an EEA territory outside its own allocated territory within the EEA is also likely to beviewed as an infringement of Article 81(1), on the basis that it reduces the scope for competition

in that other territory.

The above three restrictions are common, and generally essential, elements of any distribution

arrangement based on territorial allocation. Since the ECJ’s judgment in the Nungesser case (see

Open licences), it has generally been acknowledged as an essential element of such arrangements

that the licensee is to some extent isolated from competition in the sale of the contract products

within its allocated territory, in order to maximise its return and so justify its investment.

While in Nungesser it was concluded that these factors could take such restrictions outside the

scope of Article 81(1) altogether, in the context of trade mark licences they are viewed simply

as grounds exemption under Article 81(3). Agreements which contain such provisions are

therefore potentially unenforceable unless they fall within a block exemption or are exemptable,

although the risk of fines is very low as long as the provisions are of the type that are not the





sort of restrictions that are hardcore restrictions in one of the block exemptions. As of 1 May

2004, when Regulation 1/2003 entered into force, parties to an agreement are required to assess

their own behaviour and to determine whether or not the agreement in question complies with

Article 81.

Examples of the application of the principles discussed above are set out in the box, Moosehead

and Campari cases.

Provisions likely to fall within Article 81(1) for which exemption is unlikely

Provisions which are unlikely to be capable of exemption under Article 81(3), and which would

therefore be more likely to render the parties liable to fines, include:

• A prohibition on passive sales (i.e. an obligation on the licensee not to supply anyone

outside the appointed territory, even if he is approached by a potential customer).

• Resale restrictions which distinguish permissible sales according to the type of customer

(such as an obligation to supply end-customers only), unless the agreement forms part

of a selective distribution arrangement (see Vertical agreements:Selective distribution

agreements).

• An outright prohibition on the licensee challenging the validity of the trade mark.

The Commission’s reasoning for not exempting a prohibition on challenges to the validity of

a trade mark is set out in the Moosehead case (above). The Commission stated that, whereas

a trade mark owner may prohibit its licensees from challenging its ownership of the mark, a

prohibition on challenges to its validity will not be acceptable if the trade mark is well-known, assuch a prohibition may lead to a potentially invalid trade mark remaining in place. If the trade

mark is well-known, so that its use gives an important advantage to any company entering or

competing in the market, the continued existence of the mark may constitute a significant entry

barrier . In the Commission’s view, therefore, any party, including the licensee, should be free to

remove such a barrier if the trade mark is in fact invalid. In this case, however, the Commission

found that the "Moosehead" trade mark was not well-known in the UK and therefore did not

constitute an appreciable barrier to entry for other companies wishing to enter the market. As a

result, the prohibition on challenging the trade mark’s validity did not constitute an appreciable

restriction of competition.

Since, as the Moosehead case demonstrates, an outright prohibition on a licensee challenging thevalidity of a trade mark may infringe Article 81(1), a safer course is to provide that the licensor

may terminate the licence if the licensee challenges the validity of its trade mark.

Trade mark delimitation agreements

A trade mark owner will frequently seek to prevent another company from registering or

assigning a trade mark on the ground that the other party’s trade mark is confusingly similar

to a trade mark owned and used by the objecting party for similar products. In order to avoid

litigation, the parties will often enter into an agreement, commonly known as a trade mark

delimitation agreement, under which one party agrees not to use the specified trade mark for

certain products or not to challenge the other party’s use of the specified trade marks in a

certain geographical area or with respect to certain products.





Although the case law in this area is not entirely consistent, the Commission’s general approach

to such agreements has been relatively pragmatic. One relevant issue will be the extent to which

there is a real risk of confusion between the parties’ respective marks: an agreement relating to

the mutual use of genuinely similar marks will generally be viewed as a genuine attempt to avoidinfringements, and thus litigation (see, for example, Toltecs/Dorcet OJ 1982 L379/90).

The key factor when considering such an agreement is whether it will lead to territorial division

of the single market. For example, in the appeal to the ECJ against the Commission’s decision

in Toltecs/Dorcet (Case 35/83 BAT Cigaretten-Fabriken GmbH v Commission [1985] ECR 363),

the ECJ made it clear that although delimitation agreements are generally lawful and useful, to

the extent that they are intended to avoid confusion or conflict between the parties, they may

infringe Article 81 if they are aimed at dividing up the market. The application of this principle

in practice is illustrated in the box, Chiquita/Fyffes case.

Free movement of goods and services, and exhaustion of rightsIn addition to the rules on competition, the rules relating to free movement of goods must

also be taken into account when considering how EC law applies to a licence of IP rights. The

circumstances in which a trade mark owner may use his rights to control the circulation of goods

bearing that mark are limited by the principle of exhaustion of rights. According to this, the

exclusive right of a holder of IP rights conferred by national law to control the distribution of a

product will expire (or is said to be "exhausted") once that particular product has been placed

on the market within the EU by the holder or with his consent. Therefore, a holder of IP rights

in, say, Germany, generally cannot prevent the import of goods into Germany if the goods have

been marketed in France by the holder of such IP rights or by another with the holder’s consent

(see alsoSingle market and free movement of goods

).

The circumstances in which the right to control distribution and resale of a trade-marked product

is exhausted have been the subject of much public debate in recent years. This debate has largely

been due to the ECJ’s judgment of July 1998 in the Silhouette case (see box, Silhouette), in which

it was established that the national laws of member states must allow a trade mark owner to

prevent imports of products bearing his mark into the EU if they have already been placed on the

market by him or with his consent outside the EU. Because there is no principle of international

exhaustion of rights under EC law, the trade mark owner’s rights are not exhausted in such

circumstances. This is in contrast to the principle of Community exhaustion explained above,

according to which a trade mark owner cannot prevent the import of products into an EU member

state if those products have already been placed on the market within the EU by or with theowner’s consent (see box, Exhaustion of rights).

The position is somewhat different in the case of the EFTA states, Norway, Iceland and

Liechtenstein, which form part of the EEA by virtue of the EEA agreement of 1 January

1994. Following a decision of the EFTA Court, these countries may still apply the principle of

international exhaustion to products originally marketed outside the EEA and subsequently

imported into any of those countries (Case E-2/97 Mag Instrument Inc. v California Trading

Company, Advisory opinion OJ 1998 C20/17 ).

The Silhouette decision was reaffirmed by the ECJ in the Sebago case (Case C-173/98 Sebago

Inc and Ancienne Maison Dubois et Fils SA v GB-Unic SA [1999] 2 CMLR 1317 ), where theECJ also confirmed that, in a case where the principle of Community exhaustion applies, a trade

mark owner’s right to prevent the use of his trade mark on goods imported into a member state

will only be exhausted with respect to those specific goods which have previously been marketed





in the EEA with his consent. The fact that goods within a certain class have been sold in the

EEA with the trade mark owner’s consent does not, therefore, constitute general exhaustion with

respect to a whole class of identical goods. In the Sebago case itself, for example, Sebago Inc., the

proprietor of the trade marks "Dockside" and "Sebago", had granted an exclusive distributionlicence for the sale of Sebago "Dockside" shoes in Belgium. A parallel importer had bought

a batch of "Dockside" shoes manufactured in El Salvador (it was not disputed that these were

genuine Sebago products). The importer argued that Sebago had consented to sale of these shoes

within the EEA because it had consented to the marketing by its licensee of Sebago "Dockside"

shoes in Belgium, but this was rejected by the ECJ on the grounds that the consent must relate to

the individual items. The fact that Sebago had consented to the sale of one batch of Sebago shoes

in the EEA, through its Belgian distributor, did not mean that it had also consented to the sale in

the EEA by a third party of an entirely different batch of shoes made and sold outside the EEA.

The ECJ has recently considered the meaning of "on the market" in the context of exhaustion of

trade mark rights (Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR I-11313). Thecase concerned the manner in which Axolin-Elinor marketed a consignment of clothing bearing a

trade mark held by Peak Holding. In this case, the ECJ ruled that placing goods bearing a trade

mark on the market must actually involve a sale of the goods within the EEA, rather than the

mere importation or the offering for sale without the sale actually taking place. Further, the ECJ

held that a contractual restriction on reselling such goods within the EEA does not mean that the

goods will not be considered as having been placed on the market and thus does not preclude

the exhaustion of rights in the event of resale within the EEA in breach of such contractual

prohibition.

Consent

The precise meaning of "consent to sale in the EEA" was dealt with by the ECJ in Davidoff , a

reference from the English High Court for a preliminary ruling pursuant to Article 234 of the EC

Treaty (Case C-414/99 Zino Davidoff SA v A&G Imports Limited [2001] ECR I-8691). In this

case, the trade mark owner, Davidoff SA, opposed the sale in England of its perfume sourced

from Singapore, by virtue of a contract in which it had required its distributor not to sell outside

the specified territory of South East Asia. Davidoff SA sought summary judgment, believing

that (following Silhouette), the defendant had no defence to the action. However, the judge,

Laddie J., found that Silhouette only meant that a member state may not impose international

exhaustion. The owner of the trade mark could still itself choose (directly or indirectly) to

consent to marketing in England (and thus the EEA). The real question was therefore whether

Davidoff SA could be said to have directly or indirectly consented to such sale. In fact, Laddie J. continued, a series of cases in English contract law show that there will be a presumption

that a purchaser may do what it likes with goods it has purchased, unless restrictions are clearly

notified to it at the time of sale. English law was taken to be the proper law of the contract.

Turning to the facts of the case, Davidoff SA had contractually restricted the purchaser from

selling outside South East Asia, but had not gone further and effectively restricted those further

down the supply chain in South East Asia from doing so. Davidoff SA was therefore treated as

having consented to marketing within the EEA.

The Davidoff case was referred to the ECJ for a preliminary ruling and was joined with further

cases raising the same issues. The ECJ delivered its judgment on 20 November 2001 ( Joined Cases

C-414/99, C-415/99 and C-416/99, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss& Co/Levi Strauss (UK) Ltd v Tesco Stores, Tesco plc and Costco Wholesale UK Ltd.). The

ECJ found conclusively in favour of the trade mark owners. It held that unequivocal consent to





the marketing within the EEA of goods put on the market outside that area was required from

the trade mark proprietor, although it could be express or implied. It was not for the trade

mark proprietor to demonstrate absence of consent but rather for the trader alleging consent to

prove it. Implied consent could therefore not be inferred from the mere silence of the trade markproprietor. Furthermore, implied consent may not be inferred from the trade mark proprietor’s

failure to communicate his opposition to marketing the goods within the EEA or from the absence

of any warning carried on the products themselves to that effect. In the same vein, consent could

not be inferred from the fact that the trade mark proprietor had transferred ownership of the

goods in question without imposing contractual reservations where the property right transferred

would, in the absence of such reservations, include an unlimited right of resale or a right to market

the goods subsequently within the EEA. A rule of national law which proceeded upon the mere

silence of the trade mark proprietor would not recognise implied consent but rather deemed

consent - which was not sufficient.

The ECJ concluded its judgment by finding that it was not relevant that the importer of goodsbearing the mark was unaware that the proprietor objected to them being marketed in the EEA.

It was also irrelevant that the authorised retailers and wholesalers had not imposed contractual

reservations on their own purchasers, setting out the trade mark proprietor’s objection to

marketing in the EEA, even though they were aware of such objection.

Following the ECJ ruling, the claimants sought summary judgment, arguing that consent could

not be inferred in this case. The High Court held under English and EC law that a trade mark

proprietor can prevent the resale in the EEA of its marked goods sourced outside the area and

that on the facts there was at least one example of the sale of jeans to the defendants without

the consent of the claimants (Levi Strauss & Co and Levi Strauss (UK) Limited v Tesco Stores

Limited, Tesco Stores plc and Costco Wholesale UK Limited [2002] EWHC 1556).

It may on occasion be difficult for the person importing the product to know if consent has

been given, or for the brand owner to prove that it has not. It may be hard to identify the

provenance and nature of the product. Differing competition rules may complicate issues further.

For example, an importer may remove product codes, on some occasions, on the grounds that

batch codes may force it to reveal its source and there may be risk of market partitioning if sources

are revealed (Case C-244/00 Van Doren [2003] ECR I-3051).

The effect of the ECJ cases has been to confirm the right of trade mark owners to prevent parallel

imports of products from outside the EEA. Since this means that there is less scope for goods to beimported from cheaper countries for sale in the EEA without the manufacturer’s consent, there

is greater scope for trade mark owners to maintain higher prices for their products within the

EEA. This has led to much political discussion within, and between, member states.

Trade mark owners increasingly use customs actions in an attempt to restrict parallel imports

by detaining goods bearing their trade marks at ports around Europe. There are two provisions

under the Community Customs Code (Regulation 2913/92) which provide that:

Non-Community goods can be moved from one point to another in the customs territory of the

Community without being subject to import duties and other charges, as long as they are sold

on outside the EU (the External Transit Procedure or ’ETP’).





Non-Community goods can be stored in warehouses in the Community without being subject

to import duties and other charges, as long as they are sold on outside the EU (the Customs

Warehousing Procedure or ’CWP’).

In a recent case regarding shipments of branded toothpaste, the ECJ held that a trade mark

owner cannot oppose the mere entry of original goods into the EEA under either the ETP or

the CWP which had not already been put on the market by the proprietor or with his consent

(Case C-405/03 Class International BV v (1) Colgate-Palmolive Company (2) Unilever NV (3)

Smithkline Beecham plc (4) Beecham Group plc [2005] ECR I-8735). This is the case even in

the absence of a specified final destination outside the EEA. The trademark owner may oppose

the offering or the sale of such goods if the importer puts the goods on the market in the EEA.

Putting the goods on the market may include the offering and sale of goods bearing a trade mark

and having the customs status of non-Community goods while the goods are under the ETP or

the CWP. The trade mark owner can still legitimately oppose the imports from outside the EEA

where the ultimate destination of the goods is within the EEA. However, the burden will be onthe trade mark owner to prove the final destination of the goods.

The Trade Marks Directive (Directive 89/104 OJ 1989 L40/1) confirms that exhaustion of rights

will not apply where there are "legitimate reasons" for a trade mark owner to oppose further

commercialisation of the goods (Article 7(2)). A trade mark owner may therefore still prevent

the sale of its products by a parallel importer if this is justified in order to preserve the essential

function of the trade mark, namely to guarantee the origin of the product on which it is used and

to preserve the value of the owner’s brand. Where goods have been repackaged or relabelled, the

ECJ has held that the trade mark owner has legitimate interests which he may lawfully protect

by preventing the sale of the goods in ensuring that the repackaging cannot adversely affect the

original condition of the product and that the presentation of the product is not such as to be

liable to damage the reputation of the trade mark (Cases C-427/93, C-429/ 93 and C-436/93

Bristol-Myers Squibb [1996] ECR 3457; Case 102/77 Hoffmann-La Roche v Centrafarm [1978]

ECR 1139).

Decisions of the ECJ in cases concerning pharmaceutical products have confirmed that the

circumstances in which a trade mark owner will not be able to prevent such parallel importation

are where:

• The assertion of the trade mark rights by the trade mark owner would contribute towards

artificially dividing markets in member states (it is not necessary that the trade mark owner

deliberately sought to achieve this effect); and

• Where the parallel importer has repackaged the goods (for example, to conform to national

laws relating to the marketing of goods):

• the repackaging is not capable of affecting the original condition of the product

marked;

• the new packaging clearly states who it is responsible for carrying out the repackaging;

• the presentation of the repackaged product will not harm the reputation of the trade

mark and/or its owner; and

• the parallel importer has given prior warning of its intention to repackage the goods

and import them. It is for the national court to decide whether the period of notice





provided the trade mark proprietor with a reasonable time to react to the proposed

repackaging. The ECJ has indicated that a notice period of 15 working days is likely

to be reasonable if a sample of the repackaging is provided with the notice.

(See, for example, Bristol-Myers Squibb and Hoffmann-La Roche v Centrafarm, above and Case

C-143/00 Boehringer Ingelheim KG & Ors v Swingard Ltd & Ors [2002] ECR 2002 I-3759 (see

further box, Boehringer ).)

The circumstances in which the assertion of trade mark rights may contribute to the artificial

partitioning of markets between member states as mentioned above can include a situation where

the same product is sold under different trade marks in different member states (Case C-379/97

Pharmacia & Upjohn SA v Paranova A/S [19992] ECR I-6927 ). In such a case, a parallel importer

of the product must be allowed to replace the original trade mark with the trade mark of the

country of import if it is "objectively necessary" for the marketing of the product in that country.

According to the ECJ:

• It would be "objectively necessary" to replace a trade mark where the rules or practices

in the importing member state would prevent the product from being marketed under the

original trade mark (for example, where there was a rule which would prohibit the use of

the original trade mark on the ground that it was liable to mislead consumers);

• It would not be objectively necessary if the replacement of the trade mark was explicable

"solely by the parallel importer’s attempt to secure a commercial advantage". The ECJ

expressed its view in Boehringer Ingelheim KG & Ors v Swingard Ltd & Ors (see above and

box, Boehringer ) that strong resistance to relabelled products from a significant proportion

of consumers could hinder effective access to the market, but this is for a national court todetermine.

Although the pharmaceutical market has special characteristics, it is likely that similar principles

will apply in the case of all goods sold or services offered by reference to a trade mark.

Assignments of national trade marks - no exhaustion

Whereas a licensor will exhaust his national trade mark rights in granting a trade mark licence in

another territory within the EEA, an assignor will not do so unless he retains a degree of control

over the licensee. This means that, unlike a licensor, a trade mark owner who assigns certain of

his trade mark rights might be in a position to prevent the importation of products to which that

trade mark has been applied by the assignee by asserting his retained national trade mark rights(see box, Exhaustion of rights).

Exhaustion of rights

This general position follows from the Ideal Standard case (Case C-9/93 IHT Internationale

Heiztechnik GmbH and Uwe Danzinger v Ideal-Standard GmbH and Wabco Standard GmbH

[1994] ECR2789) in which the ECJ held that the consent implicit in any voluntary assignment of

a trade mark is not the consent required for application of the doctrine of exhaustion of rights.

For that, the owner of the right in the importing state must, directly or indirectly, be able to

determine the products to which the trade mark may be affixed in the exporting state and control

their quality. The underlying logic to this position flows from the essential function of a trade

mark, which is to guarantee origin and quality.





Consequently, a trade mark owner may in certain cases wish to compare the relative commercial

benefits to be obtained by an assignment under which all control passes with licensing. The

similarities are greatest when the options being considered are a long-term exclusive licence or

an assignment. In each case, a third party obtains the exclusive right to apply the trade markto the product in return for payment, and there is a potential division of the internal market.

An exercise in comparing relative commercial advantages will be particularly relevant where the

licence/assignment is to a party in an EEA country where the products are likely to be sold at

substantially lower prices. If a licence (or assignment with a degree of control relating to product

quality remaining) is granted, losses could be expected to occur through parallel importation

into the higher priced "home" market. If an assignment is used, there will be no exhaustion.

An important caveat when considering the application of Ideal Standard is that the case did not

rule out the application of the competition rules. It will need to be carefully considered whether

Article 81 could apply to any implementation of a strategy to divide up the markets through trade

mark assignment. The ECJ was far from clear on this point, stating:

"Where undertakings independent of each other make trade mark assignments following a

market-sharing agreement, the prohibition of anti-competitive agreements under Article 81 of

the Treaty applies and assignments which give effect to such an agreement are consequently void.

However, a trade mark assignment can be treated as giving effect to an agreement prohibited by

Article 81 only after an analysis of the context, the commitments underlying the assignment, the

intention of the parties and the consideration for the assignment."

Likewise, the Advocate General in Ideal Standard did not find it necessary to reach a conclusion

on the question of whether a "pure" assignment (that is, with no contractual undertaking relating

to market division) might be caught by Article 81 on the basis of previous case law, saying the

point was "difficult".

It is nevertheless strongly arguable, following Ideal Standard, that where there is a pure

assignment of a trade mark and subsequent assertion of national trade mark rights, the division

of the internal market which occurs will be the result of the legitimate exercise of national trade

mark rights (and so outside Article 81).

Copyright licensing

The application of EC competition rules to copyright licensing is not straightforward. There

are no block exemptions or Commission notices dealing specifically with copyright licences.In addition, there are relatively few decided cases dealing with the circumstances in which the

terms on which copyright is licensed will infringe competition law. As a result, when considering

copyright licences it is necessary to apply by analogy the law which applies to other IP rights, in

particular patents, while recognising that the specific characteristics of copyright may in some

cases produce a different result. Therefore, although the ECJ has stated that "the commercial

exploitation of copyright raises the same problems as that of any other industrial or commercial

property right" (Case C-92/92 Phil Collins v Imtrat Handels-GmbH [1993] ECR I-5145), the

permissible solutions to these problems may differ.

The Commission’s reports on competition policy provide useful guidance on its approach to

copyright licensing, although cases referred to in these reports do not have the same authorityas formal decisions or court judgments. The notes in the reports concerning copyright cases





consistently refer to the Commission’s use of a similar approach to that adopted in patent

licensing cases.

When dealing with copyright licences, it is important to bear in mind that a range of subjectmatter is protected by copyright, and that each type of subject matter may give rise to different

competition law considerations. This reflects the fact that, although ownership of copyright

generally confers the exclusive rights to copy the protected work, to issue copies to the public, to

perform it in public and to broadcast it, the relative importance of each of these rights will vary

according to the nature of the work concerned, for example whether it is a book, painting, table

of data, sound recording or film. Restrictions which may be permissible to prevent a film being

rebroadcast in another territory may not be acceptable if applied to control the distribution of a

book, since the importance of restricting performance is fundamental to the value of the former,

whereas the primary value of copyright in a book lies in the owner’s ability to prevent copying,

rather than in controlling distribution of the physical medium on which the work is printed (see

the discussion of the Coditel 1 case, below). The distinction between so-called "performancerights", which control the performance or broadcasting of a work, and "non-performance rights",

which control copying and other infringing activities, is particularly important with respect to

the free movement of goods and services, and is considered further in Free movement of goods

and services, and exhaustion of rights.

It is settled that the means by which a copyright owner exercises his rights is subject to Article

81(1). In the leading case of Deutsche Grammophon GmbH v Metro-SB-Grossmärkte (Case

78/70 [1971] ECR 487 ), the ECJ was asked whether Article 81(1) prohibited the copyright owner,

Deutsche Grammophon (DG), from taking action against Metro to prevent it selling records in

Germany which it had bought in France from DG’s French subsidiary. Although the ECJ’s ruling

(that DG’s right to control distribution of the records was exhausted when they were sold with

DG’s consent in France) was primarily founded on the Treaty’s rules as to the free movement of

goods, the ECJ made it clear that the exercise of the exclusive distribution right conferred by

copyright may infringe Article 81(1) "...if it is proved that it is the object, means or consequence

of a cartel agreement which effects a division of the common market by prohibiting imports from

other Member States of products duly brought onto the market in those States." (The Court’s use

of the term "cartel" in this context appears simply to refer to an anti-competitive agreement.)

Restrictions involving exclusivity

The most common form of restriction contained in copyright licences relates to the exclusive

right to exploit the copyright in a certain territory. The Commission’s attitude to suchrestrictions differs according to whether the relevant licence relates to performance or

non-performance rights.

• Non-performance rights. The Commission has made it clear in a series of informal

decisions that copyright does not entitle the owner to restrict the physical distribution of

goods covered by the copyright in a manner which imposes absolute territorial exclusivity

(that is, it amounts to an export ban). The Commission has, for example, required the

British Broadcasting Corporation to remove a restriction in a copyright sub-licence which

prevented its sub-licensee from exporting copyright goods to other member states, and has

objected to a licence which prohibited sales of Ernest Hemingway’s The Old Man and the

Sea in the UK and Ireland. Consequently, any provision in a copyright licence which seeksto prevent the export of copyright goods to other member states is likely to infringe Article

81(1) and is unlikely to be exempted under Article 81(3) (Sixth Report on Competition

Policy (1976), paragraph 163). As of 1 May 2004, when Regulation 1/2003 entered into





scope of permissible restrictions is related to the nature of the right protected and the need

to ensure its commercial exploitation.

The Commission’s approach to exclusive licences of performance rights was illustrated in acase concerning a licence granted by MGM/United Artists to the ARD television companies

of the exclusive right to show its films on television in German-speaking countries (Film

purchases by German television stations OJ 1989 L284/36). The Commission decided that

the duration and scope of the exclusivity conferred by the licence was such that Article 81(1)

was infringed. Important factors were the number and popularity of the films covered by the

agreement, and the fact that the exclusivity could extend beyond the initial 15-year term.

The Commission did, however, grant an individual exemption under Article 81(3) for a

ten-year period after amendments had been made to reduce the scope of the exclusivity, for

example by allowing licensing to third parties during certain "windows", and permitting

foreign language broadcasts.

The granting of exclusive rights to broadcast sports events is now a particularly sensitive

issue under EC competition rules (see box, Broadcasting sports events).

Other restrictions

By analogy with the Commission’s treatment of licences of patents, know-how and trade marks,

it may be assumed that certain restrictions relating to copyright will not infringe Article 81(1),

where the copyright licence relates to the production of goods (see box, Restrictions in copyright

licences). This list is not exhaustive: close examination of the TTBE provides further examples

of provisions which are likely to be judged not restrictive of competition.

Given the very few decisions of the ECJ or the Commission relating to the treatment of clauses

in copyright licences (other than those relating to exclusivity) that do fall within Article 81(1), it

is again necessary to consider such clauses by analogy with the Commission’s treatment of other

forms of IP rights (see box, Restrictions in copyright licences). Reference should also be made to

the TTBE and to the Commission’s Guidelines on the application of the EC competition rules to

vertical restraints.

TTBE

As discussed above, the TTBE applies to licences of patents, know-how and software copyright

and design. The TTBE only extends to the licensing of copyright other than software copyright

to the extent that it is directly related to the exploitation of the licensed technology, rather thanbeing the primary object of the agreement (TTBE Guideline 50). Furthermore, the Commission

will generally apply the principles of the TTBE and the TTBE Guidelines when considering

the application of Article 81 to the licensing of copyright (TTBE Guideline 51). However,

TTBE Guideline 52 makes clear that the Commission will not consider the licensing of rights in

performance or resale restrictions to be analogous to technology transfer agreements.

The potential importance of this block exemption should not be overlooked when considering the

exploitation in the EU of developments in information technology which involves the production

of a new product or service (for example, a new development relating to provision of services

over the internet), rather than a simple distribution or sales agreement relating to software. In

such a case, patented information and/or know-how may well be central to the transaction, andthe software only ancillary. In the absence of clear direction on software licensing from the

Commission (or the European Courts), difficult questions will arise as to the circumstances in

which software may cease to be "ancillary"





Vertical agreements block exemption

Vertical agreements for the supply of goods or services which contain copyright licensing

provisions may be covered by the new vertical agreements block exemption (Regulation

2790/1999 L336/21). This exempts all agreements between companies operating at differentlevels of the supply chain for the purposes of the agreement, provided that:

• The parties are not competitors;

• The copyright provisions are not the primary object of the agreement and are directly related

to the use, sale or resale of the relevant goods or services (note that the block exemption

does not apply to rental or lease agreements);

• The agreement contains no "blacklisted" provisions; and

• The supplier/licensor does not have a share of more than 30% of the relevant market.

The Guidelines issued by the Commission to assist in the interpretation of the block exemption

state that an obligation on a licensee only to resell copyright works under the condition that the

buyer is obliged not to infringe the copyright will, to the extent that it would infringe Article

81(1), be covered by the block exemption (although it is difficult to envisage circumstances in

which such a provision would in any event be restrictive of competition) (paragraph 39, Guidelines

on the application of the EC competition rules to vertical restraints, above).

The application of the block exemption to IP rights is considered further in Vertical agreements:

Intellectual property rights.

Free movement of goods and services, and exhaustion of rights

Whereas the right to restrict distribution of copyright works in the form of physical media is

subject to the provisions relating to free movement of goods in Articles 28 to 30 of the EC Treaty,

performance rights are subject to the Treaty’s rules as to the free movement of services in Articles

49 to 55.

As has been noted above in relation to patents and trade marks, a rights owner may restrict

the free movement of goods or services incorporating its intellectual property if such restriction

is justified in order to protect the specific subject matter of that property. Owing to the wide

variety of interests protected by copyright law, the means by which the specific subject matter in

a copyright work may be legitimately protected will vary.

Copyright gives an author the exclusive right to protect the expression of his ideas, and as there

are many possible forms of expression, the "specific subject matter" of copyright may consist of

various elements. The following examples have been drawn from the case law:

• The right to reproduce the work.

• The right of first marketing or sale in relation to a work (in the case of physical media).

• The right to require payment for public performance or transmission.

• The right to rent out a work (or so-called "rental right", now contained in the Directive onrental right and lending right and on certain rights related to copyright (Council Directive

92/100 (Rental Directive) OJ 1992 L346/61).





The specific rules relating to one category of copyright works - computer programs - are

considered separately in Computer software licensing.

The right of first marketing or sale of physical media (such as a video cassette), referred to in theRental Directive as the distribution right, will be exhausted once the product is first placed on the

market anywhere in the EU. This is a straightforward application of the Treaty rules on the free

movement of goods. The ECJ has also recently confirmed that the exhaustion of rights doctrine

in relation to imports and sales of DVDs is confined to the European Community. Therefore,

when transposing EC Directives into national law, member states may not provide for measures

that would allow for the exhaustion of rights on a wider international basis (Case C-479/04

Laserdisken ApS v Kulturministeriet, judgment of 12 September 2006, [2007] 1 CMLR 6 ).

However, the sale of the physical media will not exhaust other elements of the specific subject

matter of the copyright. In Warner Bros. and Metronome v Christiansen, the sale of video

cassettes in the UK was held not to have exhausted the separate right to sell cassettes for rentaluse in Denmark (Case 158/86 [1988] ECR 2605).

The nature of the rental right was clarified further in a case decided after the Rental Directive

came into force, where it was held that the right to authorise rental of a film was not exhausted

when it was first exercised in one member state, so that the holder of the right could prohibit

copies of the film from subsequently being offered for rental in another member state (Case

C-61/97 Foreningen af Danske Videogramdistributører and others v Laserdisken [1998] ECR

5171).

Similarly, the ECJ has held that the free movement rules did not mean that an author’s right to

require royalties for public performance (of recorded music) in one member state was exhaustedby having exacted payment for reproduction of that work (by placing it on the market in the form

of a physical product, such as a record) in another member state. Like the rental right, the right

to exact payment for public performance was not one subject to the principle of exhaustion of

rights (Case 395/87 Ministère Public v Jean-Louis Tournier [1989] ECR 2521).

Computer software licensing

As computer software is protected as a form of literary work by the Software Directive (see

below), many of the competition law issues which arise from the licensing of computer software

are similar to those described above in relation to copyright licences. However, the particular

characteristics of computer software raise certain issues which merit separate consideration.

Forms of software

Software takes many different forms, from boxed "off-the-shelf" programs to individually written

"bespoke" programs developed for one user. The common characteristic of all types of software

is that its use requires the software to be copied to the memory of the computer on which it is to

be used; an action which, without a licence, would infringe the owner’s copyright.

Licences permitting the use of software also take a variety of forms, depending on the nature of

the software (see box, Common types of software licence).

Software DirectiveThe Software Directive was introduced to harmonise the legal protection of software programs

across the EU (Council Directive 91/250 on the legal protection of computer programs, OJ





1991 L122/42, as amended by Council Directive 93/98 OJ 1993 L290/9 and by Annex XVII

of the Agreement on the European Economic Area OJ 1994 L1/482). The Directive has been

implemented by all member states.

Although the Directive is not directly concerned with EC competition law, the application of

the competition rules must be informed by the rules contained in the Directive. Specifically, the

Directive effectively sets out the "specific subject matter" of copyright in relation to computer

software and contains rules relating to the exhaustion of copyright in this context.

The Directive provides that the author of a computer program shall have the exclusive right to

copy, adapt, rent and distribute the program or to authorise such actions (Article 4). The first sale

in the EU of a copy of a program by the rights-holder or with his consent is expressed to exhaust

the distribution right within the EU of that copy, but does not exhaust the right to control the

further rental of that program or a copy of it (Article 4(c)).

This separation of the specific subject matter of computer software copyright into different

elements is analogous to that described above in relation to copyright generally (see Free

movement of goods and services, and exhaustion of rights). In particular, the distinction

between a distribution right relating to the individual physical product (which is exhausted on

first sale) and a rental right (which is not exhausted) follows the approach of the Rental Directive

(see above).

With regard to copying or reproduction, it is specifically provided that a lawful acquirer of the

software does not require authorisation to reproduce, load or perform other specified acts in

relation to the software where those acts are necessary to use the program in accordance with its

intended purpose (Article 5(1)).

The Directive also grants certain rights to lawful users of software, including the right to copy,

translate or alter the software where this is necessary for the use of the program in accordance

with its intended purpose or to correct errors. In addition, a lawful user is entitled to:

• Make a back-up copy of the software;

• Observe, study or test the functioning of the software in order to determine its underlying

elements and principles; and

• Decompile a program in order to obtain interface information necessary to permit theoperation of the software with another program, provided that such interface information

is not readily available from the copyright owner.

Common restrictions in software licences

The competition law issues raised by a software licence will depend on the type of licence

in question. Some of the general issues which are likely to arise are as follows (see also box,

Microsoft software licences for an indication of the Commission’s approach to restrictive

provisions in software licences):

• Restrictions on copying or dealing in software. As mentioned above, it is clear from the

Software Directive that the right to distribute an individual physical product is exhaustedby the first placing of the product on the market in a member state by the rights-holder

or with his consent. However, the use of the software by anyone other than the original

licensee will be an infringing act without the consent of the owner of the IP rights, as it is in





the very nature of software that such use involves copying. Equally, software distribution or

resale agreements may permit the distributor to copy the software for distribution purposes,

provided that the software is only supplied to end users.

• Territorial restrictions. As with the licensing of other IP rights, territorial restrictions may

create specif ic problems. Therefore, if a licensor wishes to establish a distribution system

based on national territories, it may be advisable simply to prohibit active sales outside

the distributor’s territory, as in the case of standard distribution arrangements (see Open

licences ).

• Restrictions as to the location at which the software may be used. A provision which

allows a program only to be used on one computer at one specified site could be viewed as

preventing the user from moving it to another member state, and therefore as an unlawful

restriction on the free movement of goods. Although the law in this area is by no means

clear, the Commission has in one case issued a statement of objections in respect of sucha provision in an IP licence (the case was ultimately closed without a formal decision)

(Case IV/E-2/36.233 ARCO Chemical/Repsol). The safest course may be to grant the

user an option to move the software to another site, possibly on payment of a reasonable

administrative fee.

• Restrictions as to the hardware on which the software may be used. Provisions which

require the software to be used only on specified hardware (for example, hardware sold

by the licensor) may contravene Article 81(1) if the software could readily be used on third

party hardware. This potentially forecloses market access by hardware manufacturers. In

practice, this may only be viewed as a serious issue if the software supplier is dominant

in the supply of software or hardware, although the risk remains that such a tie will beunenforceable.

Vertical agreements block exemption

Vertical agreements for the supply of goods or services which contain copyright licensing

provisions may be covered by the new vertical agreements block exemption. However, as has

been mentioned above, the block exemption only applies to contracts involving the licensing of

IP rights (including computer software licensing) where the IP rights are not the primary object

of the agreement. The Guidelines issued by the Commission to assist in the interpretation of

the block exemption (see above) give the following examples of contracts to which the block

exemption can apply:

• A contract for the distribution of "shrink-wrapped" software (which will be treated as an

agreement for the supply of goods for resale); and

• An obligation on a buyer of hardware which incorporates software protected by copyright

not to infringe that copyright (for example by copying).

Application of Article 82 to the exercise of IP rights

The discussion below focuses on the application of Article 82 of the EC Treaty to the exercise

of IP rights specifically and deals with the general aspects of Article 82 in outline only. If, after

reading the following text, it is concluded that Article 82 may apply, the user should refer to

Competition regime, Article 82 for detailed consideration of Article 82 generally.





Article 82 of the EC Treaty prohibits any abuse by one or more undertakings of a dominant

position within the common market, or a substantial part of it, insofar as it may affect trade

between member states.

Article 82 provides examples of abuses, which include imposing unfair purchase or selling prices,

limiting production, markets or technical development, using discriminatory trading conditions

in a way that places other parties at a competitive disadvantage and making the conclusion of

contracts subject to acceptance by the other parties of unconnected supplementary obligations.

A firm which infringes Article 82 can be ordered by the Commission to cease the abusive conduct

and may be fined up to 10% of its annual turnover. An infringement may also enable third parties

to claim damages or injunctive relief in national courts.

It is not possible to gain an exemption from Article 82. An arrangement which has been

exempted from Article 81(1) may therefore still give rise to an infringement of Article 82, whichapplies independently of Article 81 (case T-51/89 Tetra Pak Rausing SA v Commission [1990]

ECR II-309).

Whereas Article 81(1) only applies to agreements or concerted practices between undertakings,

Article 82 applies to unilateral conduct by one firm (a dominant position may also be held by

more than one firm if they are sufficiently closely linked: this is known as "joint" or "collective"

dominance). Such conduct may be expressed through the terms of an agreement with another

firm, such as a patent licence, or through a purely unilateral act, such as a decision to terminate

the licence.

Article 82 will only regulate the conduct of a firm if it is dominant. The ECJ has defineddominance as:

"... a position of economic strength enjoyed by an undertaking which enables it to hinder the

maintenance of effective competition on the relevant market by allowing it to behave to an

appreciable extent independently of its competitors and customers and ultimately of consumers"

(Case 322/81 Nederlandsche Banden-Industrie Michelin NV v Commission [1983] ECR 3461 ).

Such a position of economic strength may be derived from a variety of factors including, but not

limited to, market share. When assessing market power, it is generally the case that the more

a company’s market share exceeds 40%, the greater is the likelihood that it will be found to

be dominant. Below 40%, it is quite unlikely that a company will have dominance, althoughthe Commission has stated that this cannot be ruled out if a company enjoys a market share

above 25%. Dominance at such a low market share would be very rare, although it could be

present, for example, if all other competitors were extremely weak and had correspondingly

low market shares. Even above 40%, many other factors are just as important as market share

in establishing dominance, such as the strength of competitors, barriers to market entry, the

regulatory environment and customer preferences.

Article 82 does not seek to penalise dominance itself. It does, however, place a "special

responsibility" on a dominant firm not to act in a manner which abuses its position

(Nederlandsche Banden-Industrie Michelin NV v Commission, above). As a rule, there must be

a link between the dominant position and the abusive conduct. This generally requires that the

abuse must impede competition on the market in which a dominant position is held. In certain

cases, however, it is possible for a firm to infringe Article 82 if it uses its dominant position on





one market to impede competition on a separate, albeit closely related, market (see, for example,

Case C-333/94 Tetra Pak International SA v Commission (Tetra Pak II) [1996] ECR 5951).

It is important to note that although owners of IP rights enjoy a legal monopoly over certain acts,ownership of an IPR will not in itself place the owner in a dominant position. It may, however,

be an important factor in determining whether the owner can impede effective competition, and

in certain circumstances the IP rights concerned may be of such importance for competition on

the market that their possession alone comes close to conferring dominance (see Refusal to grant

a licence to any third party at all).

The different categories of abusive conduct which are of particular relevance to IP transactions

are examined below.

It is helpful to distinguish four situations:

• The acquisition of a licence by a firm in a dominant position which would strengthen that

dominance.

• The application of abusive terms in granting a licence, or the discriminatory refusal to grant

a licence to one party where other licences have already been granted.

• A refusal on the part of an IP rights-holder to grant a licence to any third party at all.

• The misuse of a patent which was obtained in an anti-competitive way either by making

misrepresentations to patent offices or by otherwise playing the rules.

Acquisition of a licence by a dominant firmThe acquisition of IP rights by a firm in a dominant position on a market which strengthens

that dominance may itself be an abuse of a dominant position contrary to Article 82. In Tetra

Pak I, the CFI held that Tetra Pak had abused its dominant position on the market for aseptic

milk cartons and filling machinery by acquiring its competitor and, with it, an exclusive licence

to a patented new technology (Case T-51/89 Tetra Pak v Commission [1990] ECR 309). It is

important to note, however, that the mere fact of dominant firm acquiring a patent will not in

itself infringe Article 82. The application of Article 82 must be looked at in the light of all the

circumstances, particularly the effect on the structure of the market as a whole: in Tetra Pak I, the

firm held a 90% share of the market and the acquisition would have prevented a new competitor

from entering the market.

The Carlsberg/Interbrew case (which did not involve a formal decision) provides a further

indication as to the likely approach of the Commission (24th Report on Competition Policy

(1994), paragraph 209). The Commission objected to an exclusive licence from Carlsberg to

Interbrew for the distribution of Carlsberg’s beer products in Belgium. Interbrew’s dominant

position would have been strengthened by increasing the portfolio of beers it would be able to

offer, while making it more difficult for competitors to make a similar offer. Although the case

primarily involved a distribution agreement rather than pure IP licensing, the Commission is

likely to look at any such "portfolio effect" as part of its analysis of the application of Article 82

to the acquisition of IP licences.

Applying abusive licence terms or refusing to license whereother licences have already been granted





Once an IP right holder has decided to grant a licence, if he is in a position of dominance the

situation may be analysed in the usual way under Article 82. The licensing of IP rights raises

few issues beyond those which occur in other situations involving the application of Article 82:

for example, tying ("bundling") one product or service to another so as to foreclose a marketfrom competitors, discriminatory refusal to licence, or discriminating between licensees without

objective justification may fall foul of Article 82 (see generally Competition regime, Article 82:

Abuse).

Excessive pricing

An exception to this is in the approach to deciding whether the level of royalties charged for an

IP licence is excessive. Excessive pricing in an IP licence may be contrary to Article 82 (excessive

pricing in a general commercial context is considered in Pricing: Excessive pricing). The

application of Article 82 to the charges exacted by a national copyright management society

(SACEM) from a discotheque in France for playing its records in public was considered in Case

402/85 Basset v SACEM [1987] ECR 1747 . The ECJ held that it was possible that royalties

charged (or other conditions imposed) could infringe Article 82 as being unfair, but was not

asked to rule on the level of royalties.

The ECJ did, however, consider what may amount to excessive pricing in the context of copyright

licensing in Ministère Public v Tournier (above). The Court’s approach did not follow the normal

methodology set out in United Brands (Case 27/76 United Brands v Commission [1978] ECR

207 ), which would be to compare the costs actually incurred in producing the product (or service)

and the price actually charged as a first step in determining whether the price is excessive. The

Advocate General said that it would be inappropriate to use such a cost/price analysis in the

context of copyright licensing, because it was impossible to determine the cost of creating a workof the imagination such as a musical work. The ECJ implicitly accepted this point, and (moving

straight to the second stage of the United Brands test) simply compared the rates charged by

SACEM with those charged by copyright management societies in other member states, which it

thought it could do on an objective basis.

Once it had been determined that SACEM charged rates significantly higher than its counterparts

in other member states, the onus was on SACEM to justify the difference by reference to objective

and relevant dissimilarities in copyright management between the member states.

It appears to follow from this case that, because of the special considerations which apply to IP

rights (namely the need to reward creative effort), the ECJ will not attempt to decide what may bea "fair" rate of return in the abstract when considering whether prices are excessive and contrary

to Article 82. Instead it will seek to compare what it considers to be objectively similar situations

and require justification on the part of the IP rights-holder should large price differences be found.

It appears that the ECJ in the Tournier case would also have compared royalties charged to

discotheques in France with royalties charged to other types of user in France if the evidence

had permitted a comparison on an objective basis. This would in reality have been an analysis of

discriminatory pricing, which may also be contrary to the prohibition in Article 82.

Tying

The IBM case in 1984 provides an example of the tying of the purchase of one product to anotherproduct as part of an IP licence which the Commission maintained was contrary to Article 82 (OJ

1984 L118/24). The Commission objected, among other things, to IBM’s practice of only selling

mainframe processors (CPUs) with memory included, a practice known as "memory bundling".





This, together with a practice of not providing necessary information to competitors, foreclosed

the market. IBM undertook to amend its practices in return for the Commission suspending

proceedings under Article 82.

The application of Article 82 to tying practices in a general commercial context is considered in

Competition regime, Article 82: Tying

Refusal to grant a licence to any third party at all

A more difficult question is to what extent an absolute refusal to grant a licence may fall foul of

Article 82.

In Volvo/Veng, Veng (UK) Ltd imported spare parts for Volvo cars into the UK which had been

manufactured without Volvo’s consent (Case 238/87 AB Volvo v Erik Veng (UK) Ltd [1988] ECR

6211). Volvo, who held IP rights in respect of the spare parts, brought an action against Veng

for infringement of those rights. On a reference to the ECJ, the Court held that the right to

prevent third parties from manufacturing and importing products incorporating Volvo’s IP rights

constituted the very subject matter of those rights. It could not be an abuse of a position of a

dominant position to refuse to licence the protected design, even in return for a reasonable royalty.

However, the Court did say that the following may nevertheless constitute an abuse:

• An arbitrary refusal to supply spare parts to independent repairers;

• The charging of unfair prices; or

• A decision no longer to produce spare parts for a particular model even though many carsof that model are still in circulation.

The first two situations relate to use of the technology concerned on a downstream market,

namely car repairs, and so may be seen as consistent with the pre-existing case law on abuse of a

dominant position. The third situation, however, relates directly to the IP right itself: the owner

of the IP right is effectively required to put the IP to use. This may be regarded as detracting from

the absolute right of the IP rights-holder to decide whether, and how, it will use its IP right.

It is a small step from saying that the holder of an IP right must use that right in order to

manufacture goods (as in Volvo/Veng), to requiring it to license those rights (at least, should it

fail to exploit them itself). The extent to which the failure to license IP rights may amount to anabuse of a dominant position fell to be decided again in the Magill case (which is also discussed

in Competition regime, Article 82: Essential facilities) ( Joined Cases C-241/91 and C-242.91P

Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v Commission

[1995] ECR 743).

The case concerned the copyright of three television broadcasters in their programme listings.

Each published a weekly magazine listing its own programmes and Magill sought to amalgamate

the inf ormation and publish a single listings guide. The broadcasters sought to exercise their

copyright to prevent this activity.

The ECJ, upholding the decision of the CFI and the Commission, reiterated the statement inVolvo/Veng that a refusal to licence cannot in itself amount to an abuse of a dominant position,

before going on to say that the exercise of an exclusive right may in exceptional circumstances





involve abusive conduct. The Court pointed to three exceptional circumstances that meant that

an abuse of dominance had occurred in this case:

• The refusal to provide basic information by relying on copyright prevented the appearanceof a new product for which there was potential consumer demand;

• There was no justification for such refusal; and

• The IP rights-holders reserved to themselves the secondary market of weekly television

guides by excluding all competition on that market, since they denied access to the basic

raw material (in this case, information) necessary to compile a guide.

The Advocate General had argued that an abuse could only occur where the refusal to licence

related to a product which would not compete with the product subject to the IP right itself. The

ECJ seems to have taken a rather broader approach, but did not elaborate on its reasoning for

doing so.

In Tiercé Ladbroke (Case T-504/93 Tiercé Ladbroke v Commission [1997] ECR 927, paragraphs

130-131), the CFI considered Magill and emphasised that Article 82 would only apply where the

emergence of a new product might be prevented. Article 82 would also apply where the concerned

product or service was essential for the exercise of the activity in question.

Although the Commission and the European Courts have gone some way to requiring a party in

a dominant position to deal with actual or potential competitors where necessary to enable them

to produce competing or new products (see Competition regime, Article 82:Essential facilities),

it is far from clear that this principle should extend to the holder of an IP right, who is supposed

to earn a reward for creative effort through his endeavours.

It is perhaps because there appeared to be little creative effort involved in the putting together of

TV listings (so that the analogy became clearer with the cases in which a simple "raw material",

rather than something worthy of IP right protection, was withheld from competitors) that the

ECJ took the line it did in Magill. Indeed, Advocate-General Jacobs referred to this factor in

Oscar Bronner v Mediaprint (Case C-7/97 [1994]4 CMLR 112, paragraph 63).

The diff iculty in practice now is in identifying the exceptional circumstances in which a refusal

to licence an IP right may amount to an abuse of a dominant position. The distinction between

upstream and downstream markets is a useful one to bear in mind in this context. It is possiblein many cases to distinguish the market for the IP right necessary to produce a downstream

product, and the market for that downstream product itself. The examples of potential abuse of

dominance relating to IP rights set out in Volvo/Veng (above), and in the ECJ decision in Magill,

have in common the fact that the exercise (or non-exercise) of the IP right amounting to an abuse

would prevent a downstream market from being created - car maintenance in the case of Volvo,

or a comprehensive weekly guide in Magill.

In IMS Health, the President of the CFI, hearing an application for relief from interim measures,

gave positive guidance on the upstream-downstream debate, suggesting that it is an essential

condition to establish exceptional circumstances within the Magill test (Case T-184/01 R II, IMS

Health Inc. v Commission [2002] 4 CMLR 2).

IMS Health is a provider of sales data to pharmaceutical companies in Germany, and had

developed a successful system for compiling this information which was protected by copyright.





different from those offered by the holder of the IP right and respond to specific needs of

consumers dissatisfied with the existing goods or services on offer.

Here it seems that for the refusal to be unlawful, it is not necessary that the refusal prevents theappearance of a new product for which there is customer demand: it will be unlawful simply if the

new goods or services differ from those already supplied by the dominant undertaking holding

the IP right and if they allegedly attempt to meet the needs of dissatisfied customers.

The highest fine (EUR497 million) imposed for breach of EC law has involved the refusal by

Microsoft to supply information necessary to allow other suppliers to compete in an upstream

market (see box, Microsoft).

Until the legal position has been clarified, a holder of IP rights may need to consider as potentially

incompatible with Article 82 any refusal to licence its IP to a party wishing to create and market a

new product, or which leads to a downstream market failing to be satisfied. This raises questionsas to how many customers need to be dissatisfied or as to how materially different the proposed

products or services need to be for a refusal to be unlawful. However, given the legal uncertainty

brought about by the circumstances-based approach in Magill or the questions left open by IMS,

it is at least to be hoped that fines will not be imposed on a party unwittingly falling foul of

Article 82. It may be some comfort to note that fines were not imposed on the parties in Magill.

The CFI’s ruling upholding the Commission’s EUR497 million fine on Microsoft provides

guidance as to the test for determining how much interoperability information it is necessary to

disclose (in situations where such information is indispensable to competitors) (Case T-201/04

Microsoft Corporation v Commission, judgment of 17 September 2007 ). The CFI established

that sufficient information must be provided to ensure that the competitor can viably competeon the market on essentially the same footing as the dominant undertaking’s own products.

Patent misuse

Patent misuse is a known defence in the US which is frequently used in patent litigation.

Although a patent might be valid and infringed the patent holder might be prevented from

asserting its patent if the patent was obtained by breaching antitrust laws or by illegally

extending the term of the patent. This problem has recently been dealt with by the European

Commission and can be expected to become increasingly an issue in Europe. (For a case on a

national level see UK volume: Transaction and practices: Intellectual property transactions:

box, SanDisk Corporation: Abusive enforcement of patent rights for a recent UK case involving

arguments on patent misuse.)

In June 2005, the Commission announced that it had fined AstraZeneca EUR60 million for

breach of Article 82 due to misuse of the patent system (Commission press release IP/05/737 ).

The Commission found that between 1993 and 2000, AstraZeneca abused its dominant position

in the market for proton pump inhibitors by blocking or delaying market access for generic

versions of Losec, which at that time was the world’s best-selling prescription medicine, and

preventing parallel imports of Losec. AstraZeneca achieved these abuses by:

• Making misrepresentations to a certain number of EEA national patent offices with a view

to obtaining supplementary protection certificates (SPCs) for Losec. By using misleading

information when making SPC applications, which was relied on by the patent offices,

AstraZeneca obtained additional patent protection in Belgium, Denmark, Germany,





the Netherlands, Norway and the UK without, as would be the case in normal patent

applications, having to show that the product was innovative.

• Misusing rules ’nd procedures (these have now been changed) applied by the nationalmedicines agencies that issue market authorisations for medicinal products. AstraZeneca

requested the national medicines agencies in Denmark, Norway and Sweden to de-register

the market authorisations for Losec capsules (having replaced the product with a tablet

form). This was done with the intent to block the entry of generic products or parallel

traders.

However, recognising that some of the abusive behaviour was novel in character, the

Commission imposed a fine that was significantly lower than the maximum fine of 10% of

turnover. AstraZeneca´s appeal seeking annulment of the Commission’s decision is currently

pending before the CFI.

In February 2007, the Commission opened an investigation into Boehringer’s potentially

anti-competitive patenting activity in relation to a mist inhaler for its chronic obstructive

pulmonary disease (COPD) drug, Spiriva, its best selling drug last year (EUR1.4billion) ( Case

COMP/B2/39246). According to the Commission’s initiation of proceedings statement, the

investigation was opened with a view to adopting a decision in application of Chapter III of

Council Regulation 1/2003 and concern misuse of the patent system in order to exclude potential

competition from the market. This case is at a very early stage and it remains to be seen whether

the Commission will open proceedings formally.

Patent ambush

On 30 July 2007, the Commission sent Rambus a statement of objections alleging that Rambushas breached Article 82 of the EC Treaty by claiming unreasonable royalties for use of certain

patents. The Commission considers that Rambus engaged in intentional deceptive conduct in

the context of the standard-setting process. In particular, it engaged in a "patent ambush" by not

by not disclosing standards that it later claimed were relevant to the JEDEC adopted standard.

As a result of this patent ambush, Rambus was able to charge higher royalty rates than it would

otherwise have been able to.

The statement of objections sets out the Commission’s provisional view that an appropriate

remedy to address the alleged abuse would be that Rambus charge a reasonable and

non-discriminatory royalty rate. The amount of this should be determined with regard to all

the circumstances of the case.

This is the first time that the Commission has considered an abuse of dominance in the context

of a patent ambush.

Applying unreasonable terms and conditions

On1October 2007, the Commission announced that it had decided to initiate formal proceedings

against US chipset manufacturer Qualcomm in relation to an alleged breach of Article 82. The

Commission is investigating complaints that Qualcomm has abused its dominant position by

imposing licensing terms and conditions for use of its intellectual property rights (in relation to

the standards for mobile phone technology) that are not fair, reasonable and non-discriminatory.

Qualcomm holds intellectual property rights in the CDMA and WCMDA standards for

mobile telephones. The WCDMA standard forms part of the third generation (3G) standard





for European mobile phone technology (UMTS). Therefore, licenses for use of Qualcomm’s

intellectual property rights are needed by anyone that wishes to manufacture mobile phone

technology that is compliant with the established standards.

The Commission received complaints from a number of mobile phone and/or chipsets

manufacturers claiming that Qualcomm’s terms and conditions for licensing its IP are not fair,

reasonable and non-discriminatory (FRAND) and so may breach Article 82 of the EC Treaty.

The complaints relate to the terms on which Qualcomm licenses the patents that are essential

to the WCDMA standard.

The Commission will examine whether Qualcomm has engaged in exploitative practices in the

WCDMA licensing market and whether this breaches Article 82 of the EC Treaty. In the context of

standard setting, holders of essential patents are subject to a commitment to licence on FRAND

terms so that they are not able to exploit the extra power that they have obtained as a result of

the fact that their patented technology is incorporated in the industry standard. Therefore, anyfinding by the Commission as to whether Qualcomm has breached Article 82 may depend on

whether Qualcomm’s licensing terms are in breach of its FRAND commitment.

Syfait

The European Court of Justice (ECJ) considered in the Syfait case the extent to which conduct by

a dominant company may breach Article 82 of the EC Treaty where it refuses fully to meet orders

placed by pharmaceutical wholesalers with the intention of limiting parallel trade (Case C-53/03

Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v GlaxoSmithKline plc

and Others [2005] ECR I-4609). Refusal to supply is a recognised category of potential abuse of

dominance contrary to Article 82. This case involved a preliminary reference made by the GreekCompetition Commission under Article 234 of the EC Treaty. The ECJ found that it could not

rule on the case as the Greek authority is not a court or tribunal for the purposes of Article 234.

However, Advocate General Jacobs’ Opinion in this matter sets out a detailed analysis of the

issues referred.

Over recent years, the pharmaceutical industry has argued that the regulation of prices by

national governments and health authorities requires a sophisticated approach to be taken with

regard to restrictions on parallel imports. Despite this, the Commission has actively pursued

attempts by manufacturers to restrict parallel importation. The Advocate General found in

this case that, due to the unique nature of the pharmaceutical sector, in particular regarding

the level of applicable regulation and the sunk costs involved in research and development,pharmaceutical companies may be objectively justified in refusing to supply wholesalers with the

aim of limiting parallel trade. He acknowledged that there are potentially negative consequences

for competition and reduced incentives for innovation arising from parallel trade. Therefore, it

cannot be assumed that there are consumer benefits from parallel importation in this industry,

which is, of course, the aim of the competition rules. This Opinion therefore suggests that the

Courts should take a flexible, economics-based approach in Article 81 and 82 cases relating to

the pharmaceutical sector in future.

Finally, in 2006, the Greek Competition Commission followed the Advocate General’s Opinion

in its decision on this case, allowing GSK to implement its innovative strategy to combat parallel

imports.





FiguresFigure 1





Boxes

IP rights and the single market: EC Treaty provisions

Article 3

"1. For the purposes set out in Article 2, the activities of the Community shall include, as provided

in this Treaty and in accordance with the timetable set out therein...

• (c) an internal market characterised by the abolition, as between Member States, of

obstacles to the free movement of goods, persons, services and capital...

• (g) a system ensuring that competition in the internal market is not distorted..."

Article 28

"Quantitativerestrictionson imports and all measures having equivalent effect shall be prohibited

between Member States."

Article 29

"Quantitative restrictions on exports, and all measures having equivalent effect, shall be

prohibited between Member States."

Article 30

"The provisions of Articles 28 and 29 shall not preclude prohibitions or restrictions on imports,

exports or goods in transit justified on grounds of .... the protection of industrial and commercial

property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary

discrimination or a disguised restriction on trade between Member States."

Article 295

"This Treaty shall in no way prejudice the rules in Member States governing the system of

property ownership."

Crehan

Following the European Court of Justice’s (ECJ) ruling, the Crehan case returned in 2003 to the

UK High Court, which found that there was no evidence that Article 81 had been infringed.

However, this judgment was overturned by the Court of Appeal in 2004, which for the first time

awarded substantial damages to an individual in the UK for loss caused by a contract in breach

of Article 81. In the final instalment of this case in 2006, the House of Lords overturned the

Court of Appeal’s decision without, however, weakening the general principle that damages are

available for victims of competition law infringements (Inntrepreneur Pub Company and others

v Crehan [2006] UKHL 38).





Modernisation

The changes implemented by Regulation 1/2003 may lead to inconsistent application of Articles

81 and 82 by the national competition authorities (NCAs) and national courts and potentially

give aggrieved parties a range of potential venues for the dispute in the enlarged EU of 27

member states. Each NCA is, however, required by Regulation 1/2003 to send the Commission

drafts of its intended decisions at least 30 days before the NCA intends to adopt the decision

(Article 11, Regulation 1/2003). The Commission is thus able to detect any inconsistency in

the application of EC law and take over the investigation where necessary and there is close

co-operation between the NCAs and the Commission. The information mechanisms within the

ECN permit the detection of parallel investigations and Regulation 1/2003 expressly provides

for the rejection of complaints on the basis that another authority is dealing with or has already

dealt with a case.

The Commission issued notices providing guidance on a range of important aspectsconcerning the new enforcement system. These were issued with Regulation 1/2003 to form

a "Modernisation Package". The guidance includes advice on co-operation amongst member

states, the handling of complaints by the Commission and the concept of "effect on trade"

together with guidelines on the application of Article 81(3) (Commission Notice on co-operation

within the Network of Competition Authorities (OJ 2004 C101/43), Commission Notice on

the co-operation between the Commission and the courts of the EU member states in the

application of Articles 81 and 82 EC (OJ 2004 C101/54), Commission Notice on the handling of

complaints by the Commission under Articles 81 and 82 of the EC Treaty (OJ 2004 C101/65),

Commission Notice on informal guidance relating to novel questions concerning Articles 81

and 82 of the EC Treaty that arise in individual cases (guidance letters) (OJ 2004 C101/178),

Guidelines on the effect on trade concept contained in Articles 81 and 82 of the treaty (OJ 2004C101/81) and Guidelines on the Application of Article 81(2) of the Treaty (OJ 2004 C101/97)).

The NCAs within the ECN now have the power to exchange confidential information; to use

such information as evidence in their respective proceedings, subject to certain safeguards; and

are subject to information obligations (see, in particular, Articles 2.2 and 3.1, Commission

Notice on co-operation within the Network of Competition Authorities). Most member states´

competition authorities have signed a declaration that they will abide by the principles set out in

the Commission Notice on co-operation within the Network of Competition Authorities. Only

those authorities that have committed to these co-operative principles may receive information

on leniency cases and in order to receive detailed information, the national competition

authority will have to sign a declaration that it will not use the information transferred to

impose sanctions on the leniency applicant.

Regulation 1/2003 established that national judges may ask the European Commission for an

opinion or for information held and also created the possibility of the Commission submitting

observations to national courts. The Commission Notice on the co-operation between the

Commission and the courts of the EU member states in the application of Articles 81 and 82 of

the EC Treaty gives particular attention to the methods involved in a case where the national

court is dealing with a case in parallel with or subsequent to the European Commission and

details the nature of the co-operation. For example, the Commission may act as amicus curiae

in helping national courts apply EC competition rules as part of its duty to defend the publicinterest (Section III A, Commission Notice on the co-operation between the Commission and the

courts of the EU member states in the application of Articles 81 and 82 EC ). The Commission´s

observations are to be limited to an economic and legal analysis of the facts underlying the case





(Section III A, Commission Notice on the co-operation between the Commission and the courts

of the EU member states in the application of Articles 81 and 82 of the EC Treaty ).

Negative clearance/individual exemptionsIt was previously possible to ask the Commission to certify whether the agreement in question

infringes Article 81(1). This procedure, known as negative clearance, was triggered by notifying

the agreement to the Commission using Form A/B and usually accompanied by a request for

individual exemption (in case Article 81(1) applied).

With the coming into force of Regulation 1/2003 on 1 May 2004, Article 81(3) is directly

applicable to allow joint enforcement of the entirety of the competition rules by the

Commission, the competition authorities of the member states and their courts. Parties to

an agreement are required to assess their own behaviour and to determine whether or not the

agreement in question complies with Article 81 and would withstand an investigation by a

regulator or challenge by the other party during the life of the arrangements or even after theyare included. Only in very limited circumstances, where the "Community public interest" so

requires, may the Commission, on its own initiative, by decisions find that Article 81 or Article

82 is not applicable to an agreement (Article 10, Regulation 1/2003).

Regulation 1/2003 allows individual undertakings to seek informal guidance from the

Commission but only in exceptional circumstances: where cases give rise to genuine uncertainty

because they present novel or unresolved questions for the application of the rules. Informal

guidance cannot be used to circumvent proceedings pending before the Commission or before

a member state´s competition authorities or courts. Similarly, it is not to be used to replace

the notification system and it should be noted that any informal guidance given would in any

event not bind the European Commission, European courts, national competition authorities

or national courts (Commission Notice on informal guidance relating to novel questions

concerning Articles 81 and 82 of the EC Treaty that arise in individual cases (guidance letters)).

Windsurfing International Inc.

This case concerned the terms on which Windsurfing International Inc. (WI) licensed its

sailboard technology to its European distributors and, in particular, the extent to which WI

could use its German patent to restrict the activities of its distributors. The patent related to the

configuration of a sailboard’s rig (the mast and sail, and the joint on which these were mounted).WI also licensed know-how to its distributors, together with the trade marks "Windsurfer",

"Windsurfing"’ and WI’s logo.

A number of trade competitors complained to the Commission about WI’s licensing

arrangements. Following an investigation, the Commission found that a number of provisions

in WI’s agreements infringed Article 81(1) of the EC Treaty. The Commission emphasised that

ownership of an IP right only entitles the owner to impose restrictions which reflect the specific

subject matter of the patent, and it concluded that a number of restrictions went beyond this. It

therefore fined WI EUR50,000.

On appeal, the ECJ substantially upheld the Commission’s decision, ruling that the followingrestrictions did not fall within the specific subject matter of the patent:





• Quality controls imposed by the licensor either in respect of products not covered by the

patent or which were not based on objective criteria, laid down in advance;

• An obligation on the licensee only to sell the patented product (the rig) in conjunction witha product outside the scope of the patent (the sailboard);

• A method of calculating royalties which was based on the selling price of a product that

comprised both patented and unpatented products, which induced the licensee to refuse to

sell separately a WI product which was not covered by the patent;

• An obligation on the licensee to affix a notice of the patent to a product not covered by the

patent; and

• A no-challenge clause with regard to the licensor’s trade marks and patents (preventing

licensees f rom challenging their validity).

(Case 193/83 Windsurfing International Inc. v Commission [1986] ECR 611.)

Technology transfer block exemption: key elements

The transfer technology block exemption (TTBE) applies to licences:

• Of certain types of IP (patents and related rights, know-how, software copyright and

design);

• Which may include ancillary provisions relating to other forms of IP rights;

• For the purposes of manufacturing a product or providing a service (pure sales agreements

are excluded);

• To which two undertakings are party;

• Which may contain any of the prohibited obligations set out in the so-called excluded

restrictions, as long as such an obligation does not infringe Article 81 affecting the rest of

the agreement; and

• Which may not contain any of the prohibited obligations set out in the so-called hardcore

restrictions.

Patent-related rights

In addition to patents (and applications for patents), the EC technology transfer block exemption

applies to the following patent-related rights, which are not defined in the block exemption:

• Utility models (and applications for their registration). These are "lesser inventions" that

do not qualify for protection as full patents and are instead given modified protection in a

number of countries under a utility model system.

• Semi-conductor topography rights. These are a form of design right which protect the layout

of integrated circuits (computer chips).





• Certificats d’utilité and certificats d’addition (and applications for them) under French law.

• Supplementary protection certificates. The effect of a supplementary protection certificate

(SPC) is, in respect of patented products which have received a marketing authorisation,to extend the period of patent protection (20 years in the EU) for up to five years, or 15

years from the first such marketing authorisation in the EU, whichever is the less. SPCs may

currently be issued in relation to medicinal and plant protection products.

• Plant breeders’ certificates. Plant breeders’ or plant variety rights protect new varieties

of plant. The rights owner has the exclusive right to control the production and sale of

reproductive material (such as seeds or cuttings) and harvested material of the protected

variety. Such rights have much in common with patents, although in most countries they

are administered separately from the patent system.

Block exemption: definition of know-how

"Know-how" is defined under the TTBE as "a package of non-patented practical information,

resulting f rom experience and testing which is secret.., substantial.. and identified.." (Article

1(i)). For this purpose:

• "Secret" means "not generally known or easily accessible" (Article 1(i)(i));

• "Substantial" means "significant and useful for the production of the contract products"

(Article 1(i)(ii));

• "Identified" means "described in a sufficiently comprehensive manner so as to make it

possible to verify that it fulfils the criteria of secrecy and substantiality" (Article 1(i)(iii)).

Internet sales

A website used by a licensee to advertise the licensed products will generally be easily accessed

by buyers from outside the licensed territory. The question therefore arises as to whether sales

made by means of the site are to be regarded as active or passive sales.

The Commission has stated that it generally regards the use of the internet to advertise or sell

products as a form of passive selling, insofar as a particular website is not clearly designed

primarily to reach customers inside the territory or customer group exclusively allocated to

another distributor or distributors (for example, by using banners or links in pages specifically

made for such exclusively allocated customers) (Guidelines on vertical restraints, OJ 2000

C291/1).

However, the Commission considers the sending of unsolicited e-mails to individual customers

to be active selling.

Differences between the old technology transfer block exemptionand the TTBE





Regulation 240/96, the previous technology transfer block exemption, had been criticised for its

rigidity. Further to the Commission´s publication of an evaluation report on Regulation 240/96,

and the publication of a draft regulation, a consultation process resulted in a new technology

transfer block exemption. In the recitals to the TTBE, the Commission lists a number of waysin which the legal position in this area has been improved. Most importantly, the TTBE takes

into consideration the need both to encourage innovation and to safeguard effective competition

(recital 4). Whilst pursuing these objectives, the TTBE also simplifies the regulatory framework

and its application (recital 4). The Commission´s new rules represent a significant shift in

the approach taken to technology licensing under the EC competition rules. Importantly,

new market share limitations have been introduced for the first time in relation to technology

licensing arrangements.

Moosehead and Campari casesThe Moosehead case concerned an exclusive trade mark licence from Moosehead to Whitbread

for the production and marketing of Moosehead’s beer in the UK. The licence included a ban

on active sales outside the UK and a non-compete clause, both of which the Commission found

appreciably restricted competition, and so breached Article 81(1), but it was prepared to exempt

the provisions under Article 81(3). The Commission found that other restrictions protecting the

licensor’s IP rights were outside the scope of Article 81(1). These included obligations to sell

the licensed product only under the "Moosehead" trade mark, to produce the beer only using

Moosehead’s know-how, and to purchase the special yeast required to give the beer its distinctive

taste only from Moosehead.

In Moosehead, the Commission followed closely its approach in the Campari case of over 12

years earlier, where it examined Campari’s arrangements for the production and marketing of its

famous aperitif in the EU. Under these arrangements, which were notified to the Commission,

Campari appointed exclusive licensees for certain EU member states. The licensees were granted

the exclusive right to use Campari’s trade marks for the manufacture of its aperitifs, using its

secret processes and concentrates, in their appointed territories. The agreements were granted

an individual exemption under Article 81(3) only after Campari had removed the obligation on

licensees to purchase non-secret raw materials exclusively from it. Campari was also required to

remove its prohibition on all exports by the licensees to other EU countries and replace it with

a prohibition on carrying on active sales, opening a branch or advertising outside the allotted

territory.

(Moosehead-Whitbread’s Agreement OJ 1990 L100/32; Campari-Milano’s Agreement OJ 1978

L70/69.)

Chiquita/Fyffes case

The Chiquita/Fyffes case arose out of the acquisition in 1986 by Fyffes plc of Chiquita Europe’s

UK distributor, Fyffes Group Ltd (FGL). Chiquita had previously sold its bananas in the EU

under the "Fyffes" brand, but was gradually phasing it out in favour of the "Chiquita" brand.

Under the arrangements for the acquisition, FGL granted Chiquita an exclusive licence to use the

"Fyffes" trade mark outside the UK and Ireland for three years. In addition, FGL agreed not to

use the "Fyffes" brand for sales of fruit outside the UK and Ireland until 2006, despite the fact





that Chiquita’s licence to use this trade mark expired in 1989. Fyffes was therefore prevented,

solely as a result of this non-use provision, from selling bananas in the continental EU after 1989

under its "Fyff es" trade mark, thus substantially reducing its ability to compete with Chiquita.

The Commission decided that the continuation of the restriction on Fyffes not to use its mark

in the continental EU after its exclusive licence to Chiquita had expired went beyond what was

necessary to effect the transfer of the business, including the "Fyffes" trade mark, from Chiquita

to Fyffes.

In order to meet the Commission’s concerns, Chiquita and Fyffes agreed that Fyffes would

acquire all remaining rights to the "Fyffes" trade mark and that the 1986 trade mark licence

would lapse. On this basis the Commission was prepared to take no further action.

(Commission Press Release IP/92/461, 4th June, 1992.)

UK and Ireland Rest of EUFyffes Group Limited retained exclusive

rights to "Fyffes" trademark

Chiquita Europe was granted a three-year

exclusive licence of "Fyffes" trade markFyffes Group Limited agreed not to sell fruit

using "Fyffes" trade mark for 20 years

Silhouette

Silhouette was an Austrian producer of designer spectacle frames sold under the trade mark

"Silhouette", which took proceedings to prevent an Austrian discount retailer, Hartlauer, from

selling a large quantity of out-of-fashion spectacle frames which Silhouette had sold to a third

party exclusively for sale in Bulgaria and the former Soviet Union.

Hartlauer argued that, by placing the spectacles on the market outside the EU, Silhouette’s right

to prevent their resale within the EU without its consent had been exhausted, so that it could not

prevent the resale of the spectacles in Austria.

The ECJ held that Silhouette’s rights had not been exhausted. The ECJ stated that the rule of

Community exhaustion, as set out in the Trade Marks Directive (Article 7, Directive 89/104/EEC),

did not leave it open to EU member states to provide in their domestic laws for the exhaustion

of the rights conferred by a trade mark in respect of products put on the market in non-member

countries. The national laws of all EU member states were therefore required to permit a trade

mark owner to prevent imports into the EU of goods bearing its trade mark, even where those

goods had been placed on the market outside the EU with its consent.

(Case C-355/96 Silhouette International Schmied GmbH & Co KG v Hartlauer

Handelsgesellschaft mbH [1998] ECR 4799)

Broadcasting sports events

The importance of sports events for fans, and the corresponding value of broadcasting rights forpay-TV operators, have made the granting of exclusive broadcasting rights a particularly sensitive

issue under EC competition rules.





Exclusivity is an accepted commercial practice in the broadcasting sector. However, in deciding

whether an exclusive broadcasting licence infringes Article 81(1), or whether it should be

exempted under Article 81(3), the Commission will pay particular attention to:

• The respective market strength of the parties;

• The scope and duration of the exclusivity;

• The impact on competition between broadcasters in the acquisition of rights and on

downstream television markets; and

• Whether exclusivity is justified in order to enable an operator to enter a new market with

an innovative service or to introduce a new technology which requires very high risk and

substantial investment.

For example, in 1993 the Commission issued a comfort letter exempting a five-year exclusiveagreement between the British Broadcasting Corporation, BSkyB and the English Football

Association in view of the fact that BSkyB was at the time a new entrant to the market. It stated

at the time that contracts of a duration of more than a single season would fall within Article

81(1).

In the 1998 Audiovisual Sport case, the Commission found that initial period of up to 11 years

exclusivity for the pay-per-view rights to Spanish football in Spain requested by the parties

would have foreclosed the market for too long. A three-year period of exclusivity was acceptable,

because it involved the introduction of new technology by the broadcaster and was related to

the level of risk involved (Case IV/M709 Telefónica/Sociedad Canal Plus/Cabletelevision, 19

July 1976).

The Commission has emphasised that it is not possible to state what the maximum duration of

an exclusive licence should be as much will depend on individual circumstances. An assessment

of market definition, the market power of the seller and the acquirer and the cumulative effect of

the acquisition of the rights, which may strengthen an already strong position of a broadcaster

because it adds to an already attractive portfolio of sports rights, will need to be made to see

whether the downstream market is likely to be foreclosed.

In particular, in 2006, the Commission accepted binding commitments from the Football

Association Premier League (FAPL) in the UK in respect of the joint selling of media rights to

Premier League matches. The Commission found that joint-selling of these rights restricted

competition for the acquisition of football media rights, created barriers to entry and led to

foreclosure on downstream markets. Under the commitments, which bind FAPL until June 2013,

FAPL agreed to create a range of packages of rights, which would be sold by auction. Additional

conditions were imposed, such as the FAPL not being permitted to sell all of the packages to a

sole bidder (OJ 2004 C115/3).

Given the potentially narrow market definitions which may be accepted by the Commission in

relation to sports rights (apparent from recent communications on the issue), agreements where

the duration of exclusivity goes beyond a single season, particularly where the rights in question

are especially valuable should be assessed carefully with respect to compliance with Article 81.





of the ISPs would be provided to users of Microsoft Internet Connection Wizard in return for

a referral fee for each new user signed up in this way. In addition, the ISPs would acquire the

non-exclusive right to adapt the Explorer software and to distribute it to their customers.

The Commission objected to certain licensing terms, on the basis that they risked foreclosing

access to the browser market by competitors (principally Netscape), and unduly benefited

Microsoft’s own technology. As a result, Microsoft agreed to remove clauses requiring minimum

distribution volumes for, and use of, Internet Explorer, as well as clauses preventing ISPs

promoting other browser software, and on this basis the Commission agreed to issue a comfort

letter to Microsoft.

It was notable that the Commission did not raise objections to licence terms which permitted

ISPs to distribute the software, via specified territorial channels, only to their end customers in

conjunction with their own services.

Although the Commission’s approach in this case may have reflected its specific concern with

issues of dominance under Article 82 of the EC Treaty, rather than vertical restraints, it does

at least suggest that such resale restrictions in software licences will not be viewed as serious

infringements of Article 81(1). The risk remains, however, that they will be unenforceable.

Boehringer

The European Court of Justice (ECJ) in Boehringer considered the extent to which trade mark

proprietors may rely on their trade mark rights to prevent a parallel importer from repackaging

pharmaceutical products within the EU.

The parallel importers in this case had altered the packaging of the products and their

accompanying instruction leaflets. In some cases, a label setting out the name of the parallel

importer was attached to the original package and the trade mark was not covered up. In other

cases, the product was repackaged in boxes designed by the parallel importer and the trade

mark was reproduced on packaging. All the packages contained an instruction leaflet written

in English bearing the trade mark. The trade mark proprietors brought proceedings for trade

mark infringement (and in some cases passing off), arguing that the changes in packaging were

not necessary to enable the products to be marketed in the UK and that the parallel importers

were doing more repackaging than necessary and so gaining an unfair advantage.

The UK High Court referred the case to theECJ under Article 234 of theEC Treaty with questions

regarding the interpretation of Article 7(2) of the Trade Mark Directive (89/104), which provides

that exhaustion of rights will not apply where there are "legitimate reasons" for a trade mark

owner to oppose further commercialisation of the goods.

The ECJ held:

• A trade mark proprietor may rely on its trade mark rights in order to prevent a parallel

importer from repackaging pharmaceutical products. However, he may not do so where

exercise of those rights contributes to an artificial partitioning of the markets between

member states, provided that the repackaging respects the trade mark proprietor’s

legitimate interests.





• A trade mark proprietor can oppose the import of repackaged goods unless the

repackaging is "necessary". He does not need to provide evidence of actual damage to the

mark. Replacement packaging is necessary if without the repackaging effective access to

the market concerned is hindered. A trade mark proprietor’s opposition to repackagingis not justified where there are national rules relating to packaging, which prevents the

products from being placed on the market in their original packaging. However, the trade

mark proprietor may oppose repackaging where it is not necessary and instead is merely

intended to give the importer a commercial advantage. Strong resistance to relabelled

products from a significant proportion of consumers could hinder effective access to the

market, but this is for a national court to determine.

• A parallel importer must give prior notice of the repackaging to the trade mark proprietor

and, if requested, supply a sample of the repackaging. It is not sufficient that the proprietor

receives notice from other sources. If such notice is not given, the marketing of the

repackaged product constitutes trade mark infringement. The national court must decidewhether the period of notice provides the trade mark proprietor with a reasonable time to

react to the proposed repackaging. However, the ECJ considered that a notice period of

15 working days is likely to be reasonable if a sample of the repackaging is provided with

the notice.

The judgment will be welcomed by trade mark proprietors as confirming that they are entitled to

receive reasonable notice of any proposed repackaging. If a trade mark proprietor’s products are

repackaged, this will amount to trade mark infringement unless the repackaging is necessary to

gain effective access to the market and protects the trade mark proprietor’s legitimate interests.

However, the judgment did not expressly cover the extent to which the repackaging must protect

legitimate interests of the trade mark proprietor. The ECJ also failed to provide guidance on

what constitutes hindrance to effective access to a significant part of the market, an issue which

the national court must decide.

Following this ECJ ruling, the UK High Court found that although the defendants were entitled

to rebox, the co-branding and de-branding effected by defendants’ reboxing were objectionable as

they did not respect the legitimate interests of the trade mark owner (Glaxo Group Ltd and others

v Dowelhurst Ltd and other actions [2003] EWHC 110 (Ch), 6 February 2003). Consequently, all

the trade mark actions in respect of reboxing succeeded. Those actions in respect of relabelling

failed.

The defendants appealed the case to the Court of Appeal, which has deferred its judgment on

the form of the reboxing and relabelling permitted, because it considered that, despite years of

repackaging cases, the law was not free from doubt. It referred a number of questions to the ECJ

for a preliminary ruling, on which judgment was handed down on 26 April 2007. The ECJ ruled

that the conditions to be made out by a parallel importer in order to avoid a claim for trade mark

infringement, as set out in the Bristol-Myers Squibb case apply not only to the repackaging of

pharmaceuticals but also to cases of "over-stickering". The Court of Appeal’s application of the

ECJ’s ruling is awaited.

Case C-143/00 Boehringer Ingelheim KG & Ors v Swingard Ltd & Ors [2002] ECR 2002 I-3759.

Case C-348/04 Boehringer Ingelheim KG, Boehringer Ingelheim Pharma GmbH & Co. KG,Glaxo Group Limited, The Wellcome Foundation Ltd, Smithkline Beecham Plc, Beecham Group

Plc, SmithKline & French Laboratories Ltd and Eli Lilly and Co v Dowelhurst Limited.





Microsoft

In the Microsoft case, Article 82 had potentially been infringed by Microsoft. It had refusedto supply competitors with the interface information necessary to create their own different,

innovative products capable of interoperating with Microsoft’s desktop operating systems. This

refusal foreclosed competition in the adjacent workgroup server market.

The Commission adopted its formal decision (Case COMP/C-3/37.792) on Microsoft on 24

March 2004. This found that Microsoft , the quasi-monopoly provider of desktop operating

systems had infringed Article 82 by refusing to provide information. Further, it found that

Microsoft had engaged in illegal tying of its media player into the Windows operation system

(for further information on tying see Competition regime, Article 82: Tying and bundling).

The Commission held amongst other things that Microsoft had to take action to change its

behaviour and imposed an obligation on Microsoft to license this interface information (limited

to information necessary to create interoperable software and not Microsoft’s program code) to

competitors on reasonable and non-discriminatory terms. It also ordered Microsoft to provide

an unbundled version of Windows without the media player. Further, it imposed a fine of

EUR497 million, the highest fine ever imposed on an individual company. The Commission´s

decision is very specific to the facts of the case.

Microsoft however lodged an appeal with the Court of First Instance (CFI) on 7 June 2004 (Case

T-20/04). The President of the CFI handed down judgment in July 2004, according to which

various third parties were granted leave to intervene. Microsoft sought interim relief to suspend

the operative parts of the Commission’s decision and the Commission agreed not to enforce thedecision until this issue had been resolved. In December 2004, the CFI dismissed the interim

measures application. The CFI agreed that Microsoft had demonstrated that it had a prima

facie case. However, Microsoft had argued that if the decision were to be enforced, its IP rights

would be damaged as would Microsoft´s commercial freedom and capability of developing its

products and that therefore market conditions would be irreversibly altered. The CFI held that

Microsoft had not shown that the urgency condition was satisfied on each of these issues and

that Microsoft had failed to prove to the necessary legal standard that the remedies might cause

serious or irreparable damage. The President of the CFI also held that two parties be removed

as interveners in the interim measures proceedings following their settlement with Microsoft.

Following this judgment, the remedies were effective against Microsoft as of 22 December 2004.

Microsoft made available an unbundled version of Windows but discussions continued with

the Commission about the scope of the interoperability remedy. In June 2005, the Commission

announced that Microsoft had made proposals relating to the implementation of this remedy,

but informed Microsoft that it was required to permit distribution to non-licensee third parties,

in source code form, of software developed by competitors who had received the interoperability

information (Windows protocol specifications), unless that software included a novel invention

by Microsoft.

Microsoft appealed this requirement to disclose the source code information, claiming that the

distribution in source code form of the software in question would give non-licensees access

to Microsoft’s trade secrets and would not allow Microsoft to impose licensing conditionsrequiring protection of confidential information (Case T-313/05). It also claimed that the

remedy required by the Commission would unlawfully deprive Microsoft of its property rights





and that the criteria of novelty and inventiveness, which give rise to an exception to the disclosure

obligation, are unclear, imprecise and difficult to apply meaningfully and so breach the principle

of legal certainty and that, by requiring global, and so extraterritorial, disclosure of Microsoft’s

property rights, the Commission was in breach of binding principles of public international law.

The Commission then appointed a Monitoring Trustee to provide the Commission with

impartial advice in relation to Microsoft’s compliance with the remedies. The Commission had

been market testing Microsoft’s proposals in relation to the interoperability remedy. In light

of the results of this market testing, the Commission made a decision on 10 November 2005

under Article 24(1) of Regulation 1/2003 (which provides for the imposition of periodic penalty

payments) which provided that the Commission would impose a daily fine of EUR2 million if

Microsoft did not comply, by 15 December 2005, with its obligation to supply complete and

accurate interoperability information, and make that information available on reasonable terms.

This deadline was subsequently extended to 15 February 2006.

Microsoft revised the interoperability information that it was obliged to disclose. However,

despite these revisions, the Commission still considered that the information was incomplete

and inaccurate. The Commission therefore issued Microsoft with a statement of objections

setting out the Commission’s preliminary view that it failed to supply complete and accurate

interoperability information. The Commission continued to assess, on the basis of additional

information submitted by Microsoft, whether Microsoft had complied with the second

requirement of making the interoperability information on reasonable terms (the Commission

had concerns about the level of royalty payments being imposed).

In July 2006, the Commission announced that, as of 20 June 2006, Microsoft had still not

supplied complete and accurate interoperability information as required by the interoperability

remedy in the Commission’s 2004 decision. The Commission considered that the obligations on

Microsoft and the aim of the interoperability remedy were clearly set out in the 2004 decision

and had not been changed subsequently. Further, Microsoft had been allowed full access to all

the reports on which the Commission based its conclusion. The Commission therefore decided,

under Article 24(2) of Regulation 1/2003, to impose penalty payments totalling EUR280.5

million. This comprised daily penalties of EUR1.5 million from 16 December 2005 to 20 June

2006.

In November 2006, the Commission announced that Microsoft had provided interoperability

documentation and that it would decide in due course whether Microsoft is in compliance withits obligations or whether further penalty payments should be imposed.

Microsoft has brought an appeal before the Court of First Instance requesting that the

Commission’s decision to impose the above penalty payments be annulled (Case T-271-06

Microsoft v Commission (OJ 2006 C294/56)).

This is the first time that the Commission has used its powers under Article 24 of Regulation

1/2003, or the equivalent provision in Regulation 17/62, to fine a company for failure to comply

with an Article 81 or 82 decision.

On 17 September 2007, the CFI essentially upheld the Commission’s decision of 24 March 2004. Itupheld the Commission’s finding that Microsoft had breached Article 82 by virtue of its refusal to

grant interoperability information and its bundling of Windows Media Player with the Windows

PC operating system. The CFI also confirmed the EUR497 million fine imposed on Microsoft





and the Commission’s remedies requiring the provision of interoperability information and the

unbundling of Windows Media Player.

However, the CFI did conclude that the mechanism for the appointment of a monitoring trusteewas unlawful. It concluded that the Commission had no authority to compel Microsoft to grant

a monitoring trustee powers that the Commission itself is not authorised to confer on a third

party or to require Microsoft to pay the costs of the monitoring trustee.

As noted above, the remedies imposed in the Commission’s March 2004 decision became effective

after the refusal of interim measures. Microsoft made available an unbundled version of Windows

but discussions continued with the Commission about the scope of the interoperability remedy.

On 22 October 2007, the Commission announced that Microsoft had agreed to take the steps that

the Commission considers to be necessary for it to comply fully with the remedial interoperability

obligations imposed in the Commission’s decision.

Microsoft has agreed to make the interoperability information available to "open source"

software developers and it also to reduce the royalties payable. Microsoft will also guarantee the

completeness and accuracy of the information provided in agreements that will be enforceable

before the High Court in London.

Microsoft subsequently confirmed that it will not appeal the judgment of the CFI. It has also

withdrawn two other outstanding appeals: one relating to the scope of the obligations in the

interoperability remedy with respect to open source licences (Case T-313/05) and the other

relating to the periodic penalty of EUR280,500,000 imposed by the Commission in July 2006 for

non-compliance with its remedial obligations (Case T-271/06).





Article InformationRESOURCE INFORMATION

The fulltext is available at http://www.practicallaw.com/7-107-3704

General

· Article ID: 7-107-3704

· Document Generated: 07/01/08 14:36:03

Resource Type

· Practice notes · http://www.practicallaw.com/1-103-0982

Jurisdiction

· European Union · http://www.practicallaw.com/4-103-0626

Subject

· Intellectual property: competition · http://www.practicallaw.com/0-103-2057

· Parallel trading · http://www.practicallaw.com/6-103-1168

References

· Transactions and practices: EC Pricing: Excessive pricing

(http://www.practicallaw.com/A14476)

· Vertical agreements (http://www.practicallaw.com/A14480)

· Article 81 (http://www.practicallaw.com/A14484)

· Article 82 (http://www.practicallaw.com/A14485)

· Market Definition (http://www.practicallaw.com/A14487)

· Glossary (http://www.practicallaw.com/A14505)

· Transactions and practices: EC Collaborative agreements(http://www.practicallaw.com/3-107-3701)

· Competition regime: Article 82: Tying and bundling (http://www.practicallaw.com/8-107-3708)

ip transactions and 81&82 ec treaty - plc 2007

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