The New EC Technology Transfer Block Exemption Regulation

Pat Treacy and Thomas Heide, Bristows

In a development likely to be of interest to any company active in licensing or with

substantial IP interests, the European Commission has published its revision of the rules on

intellectual property (“IP”) licensing.1 These rules, contained in the new Technology

Transfer Block Exemption Regulation (“TTBER”), set out the basis for the exemption of

certain IP licences from the application of the EC competition rules.2 Without such an

exemption – commonly referred to as a “safe harbour” – many common licence provisions

might breach the rules that prohibit anti-competitive agreements. The scope of the TTBER is

therefore important to those who license IP, whether licensors or licensees, as it is intended to

provide certainty about the legality and enforceability of licences.

The new TTBER came into force on 1 May 2004. It is accompanied by a detailed set of

guidelines (“Guidelines”) explaining the approach to IP licensing under Article 81 of the

Treaty; the way in which the new TTBER applies; and how companies should analyse

agreements that are not within the safe-harbour provided by the TTBER. The Guidelines are

particularly important because, since 1 May, it is no longer possible for parties to agreements

that are not covered by the exemption provided by the TTBER to seek an individual

exemption from the Commission. Parties and their advisers will need to assess the legality of

their agreements themselves and will have to decide whether an agreement is pro-competitive

overall – and therefore legal and enforceable – by applying EC law using the Commission’s

Guidelines.

As we set out immediately below, there are several ways in which the new TTBER will be

better for businesses licensing IP in Europe.3 The main difference from the previous block

1 The new regulation and its accompanying Guidelines were adopted by the Commission on 7 April 2004 and are

available on the DG Competition web-site: www.europa.eu.int/comm/competition/antitrust/legislation/entente3_en.html#technology. They replace the previous technology transfer block exemption, Regulation 240/96. EEC Regulation 240/96, OJ L 31, 9.2.96, p.2.

2 Article 81(1) of the EC Treaty prohibits agreements or concerted practices which have as their object or effect the prevention, restriction or distortion of competition and which may affect trade between the EU Member States.

3 In late 2001 the Commission published a report on the application of Regulation 240/96. The report suggested revising the block exemption now, rather than in 2006, when Regulation 240/96 was set to expire. In summary, the Commission suggested that Regulation 240/96 should be replaced sooner because it was generally viewed as

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exemption is that the way in which the TTBER will apply, and the scope of protection it

provides will depend on whether the parties to the agreement are competitors or non-

competitors and on whether they can satisfy certain market share thresholds. We discuss the

key concepts to navigating the TTBER and how agreements and certain types of restrictions

falling outside the TTBER should be assessed. We also point to certain problem areas that

licensing parties should be aware of and conclude with a few comments on how the new

TTBER is likely to fit into the new modernised regime of EC competition law.

What’s New? Comparison with the old TTBER

The new TTBER is a “new style” block exemption.4 It is simpler than its predecessor5 and is

concerned only with prohibiting the most serious “hard-core” restrictions – e.g. restrictions

on prices, output or sales restrictions, and market or customer allocation restrictions. Its

general approach marks a significant departure from the previous block exemption. In a

reversal of the position earlier, any provision, not expressly excluded from the exemption,

will be covered by its safe-harbour.6 Other readily apparent changes include:7

More IP is covered: The new TTBER will cover software copyright licences, licences of

designs and licences of utility models as well as licences dealing mainly with patents and/or

know-how.8 Its predecessor covered only pure patent or mixed patent and know-how

licences. Other intellectual property rights (copyright, design rights, trademarks) were

covered only if ancillary to a patent and/or know-how licence.

complex and formalistic, not having regard to market realities. The report can be found on the DG Competition web-site: http://www.europa.eu.int/comm/competition/antitrust/technology_transfer/

4 In the past few years, the European Commission has introduced several new block exemptions covering vertical restraints (Regulation 2790/1999), specialisation agreements (Regulation 2658/2000) and research and development agreements (Regulation 2659/2000). They are referred to as “new style” exemptions because their approach is concerned with the economic effect of an agreement rather than its form.

5 Regulation 240/96 featured an intricate list of exempted restrictions. It also contained a detailed “white list” of common clauses which were exempted “for the avoidance of doubt”. Any other provision which affected competition was not covered by the regulation. This led companies to draft licence agreements following the structure of the block exemption very closely, causing a strait-jacket effect.

6 It is also important to keep in mind the Commission’s favourable view of licence agreements: “most” or the “vast majority” of licence agreements do not restrict competition and are pro-competitive. See Guidelines, paras. 9, 17 and 36. See also Recital 5 TTBER.

7 The Guidelines, in paras. 210-235, also include a detailed discussion of how technology pools or multiparty agreements can be assessed. This is not addressed in this article.

8 See Article 1(1)(b) and 1(1)(h) TTBER.

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Included IP is covered for longer: Know-how licences will continue to enjoy exemption

under the new TTBER as long as the licensed know-how is kept “secret”.9 Its predecessor

exempted most (though not all) restrictions relating to patent rights for the duration of the

patent but many restrictions relating to know-how were covered only for a maximum of 10

years.

Territorial restrictions are more generous: Sales restrictions – both on active and passive

sales – are exempted up to the market share threshold of 30% in licences between non-

competitors.10 Such restrictions are also exempted in “non-reciprocal” agreements between

competitors, and where an exclusive territory or customer group is reserved to one of the

parties.11

Non-compete obligations are permissible: It is possible to impose obligations on a licensee

not to exploit third-party technology. This is permissible both in agreements between

competitors and those between non-competitors, up to the relevant market share thresholds.12

“Reach-through” and post-expiry royalties are acceptable: “Reach-through” royalties –

where royalties are calculated on the basis of the price of the final product incorporating the

licensed technology – are generally acceptable under the new TTBER.13 It is also

permissible for parties to extend royalty obligations beyond the duration of the licensed IP

rights.14

9 See Articles 1(i); 2 TTBER. 10 The treatment of active sales is not limited in duration, unlike the previous block exemption. Licensees are

however only restricted from making passive sales to other licensees during the first two years that the other licensee is selling the contract products in the territory to the customer group. See Article 4(2)(b)(ii) TTBER and text accompanying note 48 below. Compare with Articles 1(1)(5), (2), (3), (4) of Regulation 240/96.

11 These are exempted up the market share threshold of 20%. See Article 4(1)(c)(iv)-(v) TTBER. The new TTBER adds a definition of “non-reciprocal agreement” which means “a technology transfer agreement where one undertaking grants another undertaking a patent licence, a know-how licence, a software copyright licence or a mixed patent, know-how or software copyright licence, or where two undertakings grant each other such a licence but where these licences do not concern competing technologies and can not be used for the production of competing products.” See Article 1(d) TTBER.

12 See Guidelines, paras. 196-203. Under the predecessor block exemption, non-compete clauses were regarded as “hard-core” restrictions. See Article 3(2) of Regulation 240/96.

13 See Guidelines, paras. 156 and 160. The Guidelines state that as a “general rule” reach-through licences are not restrictive of competition. These paragraphs should be read in conjunction with paras. 80 and 81 which state that royalty obligations can in certain circumstances amount to price-fixing – a hard-core restriction which may lead to the entire agreement losing the benefit of the TTBER. See para. 75.

14 See Guidelines, para. 159. However, where royalties are calculated on the basis of all product sales, this restriction needs to be indispensable for the on-balance pro-competitive licensing to occur in order to be acceptable. See Guidelines, para. 81.

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Settlement agreements can be considered under the TTBER: The Guidelines confirm that

settlement agreements can be assessed like licence agreements for purposes of the TTBER.15

The agreement as a whole or individual restrictions will be able to benefit where the

requirements of the TTBER are satisfied.

Key Concepts to Navigating the New TTBER

The central tenet of the Commission’s more economic approach is that IP licences, like other

agreements, need to be assessed on their own individual facts. This approach necessarily

excludes a “one size fits all” approach or the type of box-ticking exercise that was common

under old-style block exemptions.16 In applying the new TTBER, it is important to keep the

following in mind:

The Distinction between Competitors and Non-Competitors

The safe-harbour provided by the new TTBER is larger for agreements between non-

competitors than for agreements between competitors.

In assessing whether the parties are competitors or non-competitors, it is necessary to ask

whether, in the absence of the agreement, the parties would have been actual or potential

competitors in any relevant market affected by the agreement.17 If this is the case, the parties

are considered competitors; otherwise they are non-competitors.

Competitors are defined as undertakings that compete on the relevant technology market

(i.e. they license competing technologies) and/or the relevant product market and geographic

market where the contract products are sold. They are considered actual competitors where,

without infringing each other’s IPRs, they are active on either the same technology or product

market. They are potential competitors where, again without infringing each other’s IPRs, it

is possible for one of the parties to enter the relevant market within a short period, usually

between one and two years. For example, if the parties are presently active on different

geographical/product markets, they will be considered potential competitors. In assessing

15 See Guidelines, paras. 204-209. 16 See Guidelines, para. 3. 17 See Article 1(j) TTBER and Guidelines, paras. 26-33.

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potential competition, the Guidelines state that it is only necessary to look at the product

market and not the technology market for the purposes of applying the block exemption.18

The Guidelines provide two examples of situations in which the parties will be considered

non-competitors.19 The first deals with IP blocking positions – most likely to arise because of

patent rights – and states that the parties are non-competitors if they are either in a one-way

or two-way blocking position with respect to their patent rights.20 A one-way blocking

position exists where a technology cannot be exploited without infringing another

technology. A two-way or mutual blocking position exists where neither of the parties can

exploit its technology without a licence or waiver from the other party. The second example

concerns so-called “drastic innovations”. The Guidelines state that the parties will not be

considered competitors where the technology being licensed represents such a drastic

innovation over the existing technology of one of the parties that it will be sufficient to render

that technology obsolete or uncompetitive.21

It is important to keep in mind that the Commission does not view all agreements between

competitors as necessarily anti-competitive. On the contrary, it states that competition

between licensees that use the same technology – which it refers to as “intra-technology”

competition – constitutes an important complement to competition between licensees that use

competing technologies – referred to as “inter-technology” competition.22 Intra-technology

competition is seen as particularly important in the technology transfer context because

licensees are not simply reselling the same good. Instead, they are licensing technology – an

input among others – and this can result in greater scope for end product differentiation and

quality-based competition between the licensees, to the overall benefit of consumers.

However, to the extent that licences between competitors contain restrictions, they can

benefit from the block exemption only up to a given market share threshold, as discussed

further below.

18 See Guidelines, paras. 30 and 66. 19 See Guidelines, paras. 32-33. 20 The Commission states that it will rely on “objective factors” to determine whether a blocking position exists.

Where the parties have a common interest in claiming the existence of a blocking position – i.e. because this will allow them to be considered as non-competitors – the Commission states that it will require “particularly convincing evidence” such as court decisions, including injunctions, and opinions of independent experts to show the existence of such a position. Ibid, para. 32.

21 The Guidelines mention CD technology replacing the LP as an example of a “drastic innovation.” Presumably VHS tapes and DVDs and celluloid film and digital imaging are other potential examples.

22 See Guidelines, para. 26.

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The Commission’s appreciation that not all restrictions between competitors are seriously

anti-competitive is specifically reflected in its further distinction between “reciprocal” and

“non-reciprocal” agreements.23 A “non-reciprocal agreement” is an agreement where only

one of the parties is licensing its technology to the other party or where, in case of cross-

licensing, the licensed technologies are not competing technologies and cannot be used for

the production of competing products. Such an agreements between competitors benefit from

more generous treatment under the TTBER than agreements between competitors which have

an element of reciprocity.24

The Market Share Thresholds

The only way to benefit from the safe harbour is to be able to satisfy its market share

thresholds. Where the parties are competitors, the revised TTBER will only apply if the

combined market share of the parties does not exceed 20%.25 Where the parties are non-

competitors, the revised TTBE will apply if the market share of each of the parties does not

exceed 30%.26 If the applicable market share threshold is exceeded on any relevant market,

the TTBER will not apply to the agreement for that relevant market. However, provided that

the thresholds are satisfied initially, it is possible to exceed the thresholds for up to two years

without losing the benefit of the safe harbour.27

The market share thresholds apply both to the technology markets of which the licensed

technology forms part and to the markets for the products in which the licensed technology is

incorporated. Each party’s share on the relevant technology market is defined by reference to

the incidence of its licensed technology on the relevant product market.28 For example, a

company’s market share on the relevant technology market of which its technology forms

part is the combined market share on the relevant product market of products manufactured

or provided by that company and its licensees using its technology.29 The relevant product

market to be used for this assessment includes products which are regarded by buyers as

23 See Guidelines, para. 78. Reciprocal agreements are cross-licensing agreements where the licensed technologies

are competing technologies or can be used for the production of competing products. See Article 1(c) TTBER. 24 This is evident by looking at Articles 4(1)(b); 4(1)(c)(ii), (iv), (v), and (vii). 25 See Article 3(1) TTBER. 26 See Article 3(2) TTBER. 27 See Article 8(2) TTBER. 28 See Article 3(3) TTBER. 29 Ibid.

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interchangeable with or substitutable for products incorporating the licensed technology, by

reason of the products’ characteristics, their prices and their intended use.30

The parties’ shares on the relevant product market are assessed by reference to their own

sales of products competing in that market. For these purposes, no sales undertaken by

licensees are relevant. Further, if either party sells products, competing with products

manufactured using the licensed technology but not using that technology, those products

must be taken into account in calculating its share of the product market.31

Market shares are calculated on the basis of market sales value data for the preceding

calendar year.32 This means that a new technology which has not generated any sales will

initially be assigned a zero market share. Where market share information is not available,

estimates can be based on other reliable market information, including sales volumes.33

Understanding the Hard-Core List of Restrictions

The so-called “hard-core” restrictions are divided into two lists. One relates to agreements

between competitors and one to agreements between non-competitors.34 Both contain the

type of restrictions which one would expect: price fixing – including certain types of royalty

obligations – and, as we discuss further below, the allocation of markets or customers

between the parties to the agreement.35 The inclusion of any of these restrictions, with

certain limited exceptions, prevents the entire agreement from benefiting from the TTBER.

For agreements between competitors, it is also hard-core to restrict output between the

parties.36 However, if the competing parties are licensing non-competing technology, it is

permissible to impose an output restriction on the licensee. Even where the agreement

concerns competing technology, it is permissible to restrict output, but only if multiple

licensees are being licensed and only one of them is being restricted in its output.37 A further

30 See Guidelines, para. 21. 31 See Guidelines, para. 71. 32 See Article 8(1)(a)-(b) TTBER and Guidelines, para. 72. 33 Ibid. 34 See respectively Articles 4(1) and 4(2). 35 See Articles 4(1)(a); (c) and 4(2)(a);(b) TTBER. 36 See Article 4(1)(b) TTBER. 37 Ibid. These exceptions to the rule against restricting output follow the distinction between “reciprocal” and “non-

reciprocal” agreements, discussed above in the text accompanying notes 23-24.

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“hard-core” restriction concerns the ability of the licensee to use his own technology or carry

out research and development.38 This restriction cannot be included in any agreement

between competitors if that agreement is to benefit from the TTBER. However, it may be

included in agreements between non-competitors. The agreement will continue to benefit

from the TTBER but the specific restriction may be unenforceable unless the conditions of

Article 81(3) are satisfied.39

It is evident from both the hard-core lists applicable to competitors and non-competitors that

the Commission has devoted considerable attention to concerns over unlawful market sharing

and customer allocation. This theme significantly affects exclusive licensing arrangements

and commonly found restrictions, including sales restrictions and field of use restrictions40:

Exclusive and Sole Licences

Exclusive licences exist where the licensee is the only party permitted to produce on the basis

of the licensed technology within a given territory. Such licences are distinct from sole

licences which, according to the Guidelines, are licences where the licensor undertakes not to

license any third party to produce within the territory.41

Where the parties are competitors and enter into an agreement to cross-license competing

technology or technology which can be used to produce competing products – a reciprocal

licence – the concern is that the licence is really a market sharing arrangement. It will be

prohibited in all instances under Article 81(1). As a corollary, if the competitors are not

licensing competing technology – i.e. the agreement is non-reciprocal exclusive licence – it is

generally possible to benefit from the TTBER. The issue is more complex for sole licences.

Provided the market share thresholds are met, competitors licensing competing technology

can benefit from the TTBER so long as the licensor is not prevented from entering into

competition with the licensee.42

38 See Article 4(1)(d) and Guidelines, paras. 94-95. 39 See Article 5(2) and Guidelines, paras. 114-116. 40 It also impacts clauses concerning captive use (Articles 4(1)(c)(vi); 4(2)(b)(iii)), alternative sources of supply

(Articles 4(1)(c)(vii); 4(2)(b)(iv)), and restrictions not to sell to end users (Article 4(2)(b)(v) or unauthorised distributors (Article 4(2)(b)(vi). These are not discussed here.

41 See Guidelines, paras. 162-167. 42 See Article 4(1)(c)(iii) and Guidelines, para. 88.

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If the exclusive licence is between non-competitors, it may not be caught by Article 81(1) at

all or, if it is, will be likely to fulfil the requirements of exemption under Article 81(3). The

Guidelines views these licensing arrangements favourably because exclusive licences

between non-competitors are generally seen as necessary in order to encourage the licensee to

invest in the licensed technology and to bring the products to market in a timely manner.43

Sales Restrictions

Sales restrictions are commonly imposed to protect a licensee’s investment in the exploitation

of licensed technology and to prevent free-riding from other parties, including other

licensees. Such restrictions either concern “active” or “passive” selling.44 From a

competition law perspective, it is necessary to consider both sales restrictions between the

licensor and the licensee as well as restrictions imposed in licences which protect any given

licensee from other licensees. Generally, sales restrictions are subject to careful scrutiny

under the competition rules because of the concern that they are really market sharing

arrangements which will interfere with the goal of EU market integration.

��

Competitors

The TTBER and Guidelines confirm that restrictions on active and passive sales in a

reciprocal agreement between competitors are hard-core. This is also the case where the

licensor licenses several licensees and wishes to include restrictions on passive sales which

prevent any one licensee selling into the territory or to a customer group allocated to another

licensee. However, the TTBER contains some flexibility and permits competitors to impose

certain restrictions. Provided the agreement is non-reciprocal it is possible to gain exemption

if the parties include restrictions both on active and passive sales.45 Where the licensor

licenses several licensees, the TTBER also exempts restrictions on any one licensee actively

43 The Guidelines state that the Commission will only object to these types of licences where either of two scenarios

arise: if (1) a dominant company obtains an exclusive licence to one or more competing technologies; or (2) the exclusive licence includes a cross licence which results in a de facto industry standard. See Guidelines, paras. 166-167.

44 Active sales are sales made by actively promoting the product (e.g. by soliciting orders and advertising). Passive sales are sales made in response to a purchaser independently approaching the licensee.

45 See Article 4(1)(c)(iv) and Guidelines, para. 87. These restrictions will be block exempted to the 20% market share threshold.

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selling into the territory or customer group allocated to another licensee.46 Again, it is a

prerequisite that the agreement is non-reciprocal.

Non-competitors ��

In the case of agreements between non-competitors restrictions on active selling between the

licensor and a licensee are block exempted up to the market share threshold of 30%. This is

also the case as regards active selling between licensees where the licensor has licensed

several licensees. Although restrictions on passive selling are generally considered hard-

core, the TTBER contains important concessions. It exempts the restriction of passive selling

into an exclusive territory or to an exclusive customer group reserved for the licensor.47

Where there are several licensees, the TTBER also exempts for two years any passive selling

between licensees.48

Field of Use Restrictions

Field of use restrictions are commonly included in technology licences because technology

can frequently be used to make different products or can sometimes be incorporated into

different products belonging to different product markets.49 Such restrictions commonly limit

the exploitation of the licensed technology by the licensee to one or more particular fields of

use without limiting the licensor’s ability to exploit the licensed technology.

From a competition law perspective, field of use restrictions are generally acceptable as long

as they do not amount to market sharing or customer allocation.50 The Guidelines introduce

the distinction between “symmetrical” and “asymmetrical” field of use restrictions to assist in

the application of the TTBER. Symmetrical field of use restrictions exist where the parties to

an agreement are cross-licensed to use each other’s technologies within the same fields of

46 See Article 4(1)(c)(v) and Guidelines, para. 89. 47 See Article 4(2)(b)(i) and Guidelines, para. 100. 48 See Article 4(2)(b)(ii) and Guidelines, para. 101. The two year period starts from the date on which the licensee

benefiting from the restrictions first puts the product incorporating the licensed technology on the market inside his exclusive territory. Ibid.

49 The Guidelines use as an example a new moulding technology which can be used to make plastic bottles and plastic glasses. See para. 179.

50 See Articles 4(1)(c) and 4(2)(b) TTBER. The Guidelines state that it is a requirement that the field of use be defined objectively by reference to identified and meaningful technical characteristics of the licensed product. See para. 180.

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use. These types of restrictions do not generally raise competition concerns.51 In contrast,

asymmetric field of use restrictions – “where one party is permitted to use the licensed

technology within one product market or technical field of use and the other party is

permitted to use the other licensed technology within another product market or technical

field of use” – can raise competition issues if the effect of the restriction is to hinder or fetter

the licensee’s ability to be a competitive force outside of the licensed field of use.52

The TTBER exempts field of use restrictions in agreements between actual or potential

competitors up to the market share threshold of 20%.53 It also provides additional room for

manoeuvre if the agreement is non-reciprocal. In such an instance, it is permissible to restrict

either the licensor or the licensee from using the licensed technology to produce within one or

more technical fields of use, product markets or exclusive territories reserved for the other

party.54

The TTBER also exempts field of use restrictions in agreements between non-competitors up

to the market share threshold of 30%. Even if this threshold is exceeded, field of use

restrictions between non-competitors are likely to benefit from exemption under Article 81(3)

because these restrictions are considered either non-restrictive of competition or efficiency

enhancing.55

Self-Assessment under the TTBER and Guidelines

It is necessary to undertake a self assessment of any agreement that falls outside the TTBER,

for example because the market share thresholds are exceeded or the agreement involves

more than two parties.56 Such an assessment is also required for any agreement benefiting

51 See Guidelines, paras. 91 and 183. 52 Ibid. 53 See Article 4(1)(c)(i) and Guidelines, paras. 90-91. 54 See Article 4(1)(c)(ii) and Guidelines, para. 86. 55 See Guidelines, para. 184. 56 See Guidelines, paras. 130-152. The TTBER and the Guidelines both underscore that there is no presumption of

illegality of agreements that fall outside the scope of the TTBER provided that they do not contain hardcore restrictions. See Recital 12 TTBER; Guidelines, para. 130.

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from the TTBER which contains certain types of restrictions which could be viewed as

reducing the incentive of a licensee to innovate.57

Parties should initially review the TTBER and its Guidelines, for example to ascertain

whether a restriction falls within Article 81(1) in the first place.58 Only where it is likely that

Article 81(1) will apply to an agreement or a particular restriction contained in it will it be

necessary to consider whether the conditions set out under Article 81(3) are satisfied. The

Guidelines provide extensive discussion of common licence restrictions and the instances

where certain restrictions can be considered indispensable to a licence agreement – thus

meeting one of the more difficult, if not the most difficult, requirements under Article

81(3).59 It is also advisable to consult the Commission’s new Article 81(3) Notice for more

general insights into the cumulative conditions required by Article 81(3) and what will be

necessary for a party to establish in order to benefit from the Article 81(3) exemption.60

Dominant companies, in particular, and any company exceeding the relatively modest market

share thresholds contained in the TTBER will have to undertake this self assessment. They

will need to consider certain relevant factors, including the nature of the agreement and the

market position of the parties and any competitors. Such companies will also need to

consider whether any buyer power for the licensed products exists, whether there are any

entry barriers and how mature or dynamic the market in issue is.61

The Guidelines state that a possible negative effect on competition can arise where inter-

technology competition is reduced – that is, where companies using different technologies

compete on the same technology or product market – because an agreement between them

57 These are set out in Article 5 TTBER. Self assessment will be necessary where a licence contains grant backs or

non-challenge clauses. See Articles 5(1)(a)-(c) TTBER. Self assessment is also necessary where the restriction concerns the licensee’s ability to use his own technology or carry out R&D. See Article 5(2) TTBER.

58 See Guidelines, paras. 37 and 65. 59 In addition to addressing the types of restrictions discussed above (exclusive licensing, sales restrictions, and field

of use restrictions), the Guidelines also address royalty obligations, non-compete obligations, and restrictions concerning output, captive use, and tying and bundling. See Guidelines, paras. 156-160; 175-178; and 186-203.

60 Reference should be made to the Commission’s Notice: Guidelines on the application of Article 81(3) of the Treaty, available at: http://www.europa.eu.int/comm/competition/antitrust/legislation/. These guidelines establish a high hurdle to benefit from exemption, notably because it will be necessary to demonstrate efficiencies resulting from the agreement, including costs efficiencies or efficiencies taking the form of new or improved products. See in particular paragraphs 51 and 64-72 of these guidelines. However, it may be easier to show these efficiencies where technology transfer agreements are in issue, not least because they often lead to new or improved products.

61 See Guidelines, paras. 131-140.

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facilitates collusion.62 Another possible negative effect arises where competitors are

foreclosed from a market owing to an agreement which raises their costs, restricts access to

essential inputs or otherwise raises barriers to entry. The Commission is also concerned with

any agreement which reduces intra-technology competition, that is where companies

producing products compete on the basis of the same technology.

Exemption from Article 81(1) may be possible if the benefits of the agreement as a whole

outweigh the anti-competitive effect of the restrictive clauses.63 The Guidelines are

encouraging, stating that “even restrictive licence agreements mostly also produce

pro-competitive effects in the form of efficiencies which may outweigh their anti-competitive

effects.”64 The Commission lists several examples where there are likely to be efficiency

gains, including where licensed technology leads to cost or output improvements in

production or distribution. Such gains are also possible where several technology owners

assemble a technology package for licensing to third parties – a “technology pool” – thereby

leading to lower transaction costs. With particular reference to the high technology and

pharmaceutical industries where large numbers of IP rights exist and where products can

easily infringe upon such rights, the Guidelines also emphasise that “design freedom” or

“freedom to operate” licensing agreements are often pro-competitive.65

Problem Areas

Self assessment of agreements is not new. Companies and their advisors have engaged in self

assessment under the existing EC competition law framework for years.66 This is clear from

the small number of notifications for individual exemption over the past few years, a number

that has been steadily decreasing since the Commission announced its modernisation

62 See Guidelines, paras. 141-145. 63 Article 81(3) provides that an agreement will be exempt if it satisfies four conditions: (1) it contributes to

improving the production or distribution of goods or to promoting technical or economic progress; (2) consumers are allowed a fair share of the resulting benefit; (3) it contains only indispensable restrictions; and (4) the parties are not able to eliminate competition in respect of the relevant products or services.

64 See Guidelines, para. 146. 65 Under such licensing agreements, parties agree not to assert their IP rights against each other. This allows

companies to develop their technologies and products without the risk of infringement claims. 66 However, the main difference when the new post modernisation self-assessment is compared to the self-

assessment taking place prior to 1 May 2004 is that there is now no longer the possibility of seeking an individual exemption under Article 81(3) from the European Commission. After 1 May the responsibility for getting the self-assessment right is entirely up to the parties themselves.

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proposals.67 However, despite the already existing reality of self assessment, it is necessary

to ask whether IP licences pose particular issues or problems in the context of the

Commission’s new regulation and Guidelines.

Uncertainty and the Availability of Market Share Information

Reliable market share information is often difficult to come by. Even where it is obtainable,

it is unlikely to give more than a general estimate of a party’s market share. This problem is

exacerbated in dynamic industries where market shares can change very quickly.68

The difficulty in obtaining market share information raises the question whether parties will

be limited in their ability to rely on the new TTBER’s safe harbour or to apply the Guidelines

with certainty. This concern is heightened in the modernisation context where parties to an

agreement may be in a situation of defending the compliance of their agreement before a

court in one of the EU Member States. Where they are not able to demonstrate that they

satisfy the market share thresholds, they may be forced to argue that they satisfy the revised

TTBER’s requirements by analogy only, or relying on the Guidelines, a situation which may

entail unnecessary legal uncertainty and increased legal costs.

Transient Voidness/Legality

What happens if the circumstances between the parties to an IP agreement change, for

example, the market share thresholds are exceeded or the parties become competitors? The

TTBER like the other new style block exemptions – on Vertical Restraints, Specialisation

Agreements, and Research and Development Agreements – requires that any block exempted

agreement be kept under review. It is not sufficient for the parties simply to satisfy

themselves that they benefit from the TTBER when the agreement is signed. It is possible

that an agreement could be prohibited at some future point in time, in whole or in part, owing

67 This is evident by looking at the Commission’s Annual Reports on Competition Policy for 1997 to 2000. In 1997,

there were 221 new notifications. By 2000, there were 101 new notifications, less than half the statistics for 1997. The Commission’s Annual Reports are available at: http://europa.eu.int/comm/competition/annual_reports/ The Commission announced its modernisation program in its 1999 White paper on modernisation of the rules implementing articles 85 and 86 [now 81 and 82] of the EC Treaty, available at: http://www.europa.eu.int/comm/competition/antitrust/others/

68 In relation to some of the problems of defining relevant markets and assessing market shares in industries where innovation is a key competitive driver, see the Economic Discussion paper published by the UK’s Office of Fair Trading in March 2002, particularly pages 54-57. This paper is available at www.oft.gov.uk.

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to changed circumstances. There is no ECJ case law on this exact point, but the UK Court of

Appeal found that the enforceability of an agreement or a provision in that agreement may

vary according to changes in market circumstances.69 In short, an agreement’s enforceability

– and ultimately its legality – is transient.

Given the inherent nature of technology licensing, it is perhaps more likely that changes in

circumstances may occur than with other types of agreements. The issue becomes serious

where there is an issue of potential voidness under Article 81(2). This issue is not likely to be

so critical where the parties are exceeding the TTBER market share thresholds. They would

still be able to rely on Article 81(3) if they satisfy its conditions (and there is a limited period

of protection provided even after the market share threshold is exceeded).70 The potential

voidness issue also arises where the parties become competitors after having concluded their

licence on the basis that it was between non-competitors.

The TTBER provides some comfort. It states that where the parties become competitors after

the licence is concluded, the parties can go on benefiting from the more lenient safe-harbour

available to non-competitors for the full life of the agreement. However, this will only be

possible where the parties do not amend their agreement “in any material respect”.71 Because

of the limited nature of this concession, it is to be expected that transient voidness/legality

will become a significant issue for IP agreements. This will also be the case for those

agreements which were never within the TTBER to begin with, e.g. because they exceeded

the market share threshold applicable to non-competitors at the time the agreement was

signed.

Conclusion: Will the new TTBER work in the modernisation context?

For most companies licensing IP in Europe, the TTBER will be an important business

document. Like its predecessor – Regulation 240/96 – its provisions will undoubtedly be

used as a guide for companies drafting agreements. It may also provide a safe harbour for

many IP licences.

69 Passmore v. Morland plc, [1999] 3 All ER 1005, [1999] 1 CMLR 1129. 70 See Article 8(2) TTBER.

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The Commission’s initiative in engaging with the many complex issues surrounding how the

TTBER can be improved to encourage innovation and the dissemination of new technologies

– while still allowing the competition authorities to intervene in potentially anti-competitive

arrangements between competitors that threaten to foreclose access to the market – should be

applauded.

Nevertheless, there are considerable concerns about the practical utility of the TTBER,

primarily due to its market share thresholds. There are also concerns about being able to rely

on the TTBER and its Guidelines in the modernisation context. The overriding concern is

that the application of the TTBER will require specific information which either will not be

available to parties seeking to enter into an agreement or which will only be available at high

cost. On a cost-benefit analysis, it is altogether possible that licensors and licensees will not

be prepared to make the detailed investigations and complex analysis necessary to be

reasonably (though never entirely) certain of benefiting from the TTBER.

Only very significant licensing programmes may justify the necessary time and expense.

Potentially useful technologies, which may be of limited interest to the owner, but which

might in the past have been licensed out for exploitation by others to earn some return may

well now be left unlicensed and unexploited. Equally licensees may well be unwilling to

license-in technologies of less than key interest when faced with the transaction costs of

establishing the basis on which they will be able to take a licence and the probable

uncertainty that will surround any licence they take. This may lead to a reduction in licensing

activity to avoid both cost and uncertainty, contrary to the stated objective of the TTBER.72

71 See Article 4(3) of the TTBER and Guidelines, paras. 31 and 68. 72 The expressed purpose of the TTBER is to provide certainty and to encourage licensing. See Recital 4 TTBER.

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