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Print articleRevised Technology Transfer Block Exemption Regulations Commence
January, 2006 - John Whelan
On 1 May 2004 a new and revised Technology Transfer Block Exemption Regulation (the TTBER) entered into force - Regulation No. 772/2004. The TTBER will provide block exemptions for IP licensing agreements, ensuring that certain technology transfer agreements are automatically exempt from the application of Article 81(1) of the EC Treaty, which prohibits anti-competitive agreements. John Whelan explains what this means to Irish business
The TTBER replaced the old Regulation 240/96 which provided that certain types of technology transfer agreements (pure and mixed patent and know-how licensing agreements) were automatically exempt from the application of Article 81(1) of the EC Treaty, provided they met certain conditions and did not contain certain hardcore restrictions. While the TTBER continues to ensure that these patent and know-how licensing agreements remain exempt from Article 81(1), it extends the benefits of the block exemption to certain software copyright and design right agreements. The Guidelines to the TTBER suggest that the rules may be also now applied to other types of copyright agreements (such as those relating to DVDs, CDs and books).
As well as extending the scope of the exemptions offered by Regulation 240/96, the TTBER extends the period of exclusivity for as long as the licensed intellectual property right remains valid or the know-how remains secret - under Regulation No 240/96 exclusivity provisions in know-how licenses were exempted for up to 10 years from the date when the licensed product was first put on the EU common market by a licensee.
The benefits of gaining a block exemption in respect of certain agreements can be of considerable commercial benefit as the effect of an agreement being anti-competitive is that the entire agreement, or at least the offending provision, will be unenforceable and fines and damages may be imposed on the offending parties.
Any benefits from exemptions afforded to existing agreements under the Regulation 240/96 may be relied upon until 31 October 2005, after which such agreements will become subject to the provisions of the TTBER.
The key provisions of importance in the TTBER are the new market share thresholds, and the new hardcore and excluded restrictions.
Market Share Thresholds
The TTBER will only exempt agreements from the application of Article 81(1) where they fall below certain market share thresholds:
where the undertakings party to the technology transfer agreement are competing undertakings the exemption will only apply if the combined market share of the parties does not exceed 20%.
where the undertakings party to the technology transfer agreement are not competing undertakings the exemption will only apply if the market share of each of the parties does not exceed 30%.
The TTBER contains definitions of when undertakings are deemed to be competing on relevant product or technology markets. It provides that when undertakings are not competing at the time that the agreement is entered into but become competing undertakings afterwards then they will continue to be treated as non-competing undertakings for the purposes of the TTBER during the life of the agreement, unless the agreement is materially amended. If the market shares of the parties move above the thresholds during the course of the agreement then the block exemption shall continue to apply for a period of two years following the year in which the threshold was first exceeded.
At the time of entering into any agreement, one must therefore consider whether the contracting parties’ combined market share is and will remain less than 20 percent or, if the parties are not competitors, whether each party’s market share is and will remain less than 30 percent. It will be difficult to say with confidence that the parties will not, and will not during the life of the agreement become competitors or potential competitors, or that their combined market shares do not and will not exceed the relevant thresholds. In fact the thresholds could result in parties effectively being penalised for success!
Hardcore Restrictions
There has been a significant shift in the “black list” of contractual provisions, now known as “hardcore” restrictions. While the hardcore restrictions in the TTBER are less in number than the equivalent restrictions in Regulation 240/96, they are arguably wider in scope. The new hardcore restrictions differ depending on whether the agreement is between competing or non-competing undertakings.
The hardcore restrictions for competing undertakings are:
Restrictions on pricing when selling products to third parties.
Limitations on output, except in non-reciprocal agreements or where imposed on only one of the licensees in a reciprocal agreement (reciprocal and non-reciprocal agreements are defined terms).
Allocation of markets or customers, other than in a number of specified circumstances. The situations in which it is permissible to allocate markets or customers has been extended in the final draft from that in the draft Regulation and it is now permissible to include field of use restrictions on licensees in reciprocal licences and on licensors and/or the licensee in non-reciprocal agreements. It is also permitted for a licensor to grant exclusive territorial licenses, to restrict active or passive sales by licensees/licensors in territories reserved for the other party, to restrict the licensee from making active sales in the exclusive territory of another licensee and to oblige the licensee (in a non-reciprocal agreement) to produce the contract goods for a particular customer in order to create an alternative source of supply for that customer.
Restrictions on the licensee's ability to exploit his own technology.
The hardcore restrictions for non-competing undertakings are:
Restrictions on prices.
Territorial/customer restrictions. The final Regulation limits the prohibited restrictions to those relating to active sales. Restrictions on passive sales into exclusive territories or to exclusive customer groups are not permitted.
Restrictions on sales to end users via selective distribution systems.
Where an agreement contains any of the hardcore restrictions the benefit of the block exemption is withdrawn in its entirety. In addition, there are certain types of restrictions which are not covered by the block exemption (called “excluded restrictions”) but which will not prevent the rest of the agreement benefiting from the block exemption.
The excluded restrictions are:
Obligations on the licensee to grant an exclusive licence to the licensor or a third party designated by the licensor in respect of its own severable improvements to or its new applications of the licensed technology.
Obligations on the licensee to assign to the licensor or a third party designated by the licensor rights to improvements or to new applications of the licensed technology.
No-challenge clauses.
Where the parties are not competing
undertakings, limitations on the licensee's ability to exploit its own technology.
Other Issues
Up until now, parties wishing to obtain exemptions from the competition rules could do so by availing of an EU Commission notification system. The TTBER entered into force on the same day as the Modernization Regulation (No. 1/2003) that has done away with the present procedure for seeking exemption (or assurance of non-infringement). As a result parties are no longer able to seek exemption (or assurance of non-infringement) ce of non-infringement) by notifying agreements to the Commission. This removes some of the comfort that the old notification procedure provided, by leaving the parties “on their own” when deciding whether an agreement is exempt.
Although the TTBER is broader than Regulation No 240/96, as it extends its scope to cover software copyright as well as patent and know-how licensing, the TTBER does not cover general copyright, database and pure trade mark licensing, unless they are ancillary to the technology transfer which is covered by the TTBER exemption. As mentioned earlier however, the Guidelines to the TTBER suggest that it should extend to copyright agreements relating to DVDs, CDs and books.
It was hoped that the TTBER would extend the scope of Regulation 240/96 to ensure that the legislation would cover multi-party agreements. However, like Regulation 240/96, the TTBER still only covers two-party agreements as the Commission after some deliberation decided not to extend the scope of the regime in this regard.
Existing agreements that will remain in force after 31 October 2005 will have to be re-examined to see if they will continue to be exempted by the TTBER. If not, they will have to be renegotiated, and this may not be welcomed where bargaining positions have changed.
Conclusion
The TTBER will provide the welcome addition of a block exemption for software copyright, which shows that the Commission have noticed the commercial necessity of promoting technological advancement within the EU , thereby strengthening Europe’s position in the worldwide technology market. However, the issues such as those relating to market shares and the new list of hardcore restrictions place a significant burden on parties to pay particular attention to the terms of their IP contracts.
Link to article
The TTBER replaced the old Regulation 240/96 which provided that certain types of technology transfer agreements (pure and mixed patent and know-how licensing agreements) were automatically exempt from the application of Article 81(1) of the EC Treaty, provided they met certain conditions and did not contain certain hardcore restrictions. While the TTBER continues to ensure that these patent and know-how licensing agreements remain exempt from Article 81(1), it extends the benefits of the block exemption to certain software copyright and design right agreements. The Guidelines to the TTBER suggest that the rules may be also now applied to other types of copyright agreements (such as those relating to DVDs, CDs and books).
As well as extending the scope of the exemptions offered by Regulation 240/96, the TTBER extends the period of exclusivity for as long as the licensed intellectual property right remains valid or the know-how remains secret - under Regulation No 240/96 exclusivity provisions in know-how licenses were exempted for up to 10 years from the date when the licensed product was first put on the EU common market by a licensee.
The benefits of gaining a block exemption in respect of certain agreements can be of considerable commercial benefit as the effect of an agreement being anti-competitive is that the entire agreement, or at least the offending provision, will be unenforceable and fines and damages may be imposed on the offending parties.
Any benefits from exemptions afforded to existing agreements under the Regulation 240/96 may be relied upon until 31 October 2005, after which such agreements will become subject to the provisions of the TTBER.
The key provisions of importance in the TTBER are the new market share thresholds, and the new hardcore and excluded restrictions.
Market Share Thresholds
The TTBER will only exempt agreements from the application of Article 81(1) where they fall below certain market share thresholds:
where the undertakings party to the technology transfer agreement are competing undertakings the exemption will only apply if the combined market share of the parties does not exceed 20%.
where the undertakings party to the technology transfer agreement are not competing undertakings the exemption will only apply if the market share of each of the parties does not exceed 30%.
The TTBER contains definitions of when undertakings are deemed to be competing on relevant product or technology markets. It provides that when undertakings are not competing at the time that the agreement is entered into but become competing undertakings afterwards then they will continue to be treated as non-competing undertakings for the purposes of the TTBER during the life of the agreement, unless the agreement is materially amended. If the market shares of the parties move above the thresholds during the course of the agreement then the block exemption shall continue to apply for a period of two years following the year in which the threshold was first exceeded.
At the time of entering into any agreement, one must therefore consider whether the contracting parties’ combined market share is and will remain less than 20 percent or, if the parties are not competitors, whether each party’s market share is and will remain less than 30 percent. It will be difficult to say with confidence that the parties will not, and will not during the life of the agreement become competitors or potential competitors, or that their combined market shares do not and will not exceed the relevant thresholds. In fact the thresholds could result in parties effectively being penalised for success!
Hardcore Restrictions
There has been a significant shift in the “black list” of contractual provisions, now known as “hardcore” restrictions. While the hardcore restrictions in the TTBER are less in number than the equivalent restrictions in Regulation 240/96, they are arguably wider in scope. The new hardcore restrictions differ depending on whether the agreement is between competing or non-competing undertakings.
The hardcore restrictions for competing undertakings are:
Restrictions on pricing when selling products to third parties.
Limitations on output, except in non-reciprocal agreements or where imposed on only one of the licensees in a reciprocal agreement (reciprocal and non-reciprocal agreements are defined terms).
Allocation of markets or customers, other than in a number of specified circumstances. The situations in which it is permissible to allocate markets or customers has been extended in the final draft from that in the draft Regulation and it is now permissible to include field of use restrictions on licensees in reciprocal licences and on licensors and/or the licensee in non-reciprocal agreements. It is also permitted for a licensor to grant exclusive territorial licenses, to restrict active or passive sales by licensees/licensors in territories reserved for the other party, to restrict the licensee from making active sales in the exclusive territory of another licensee and to oblige the licensee (in a non-reciprocal agreement) to produce the contract goods for a particular customer in order to create an alternative source of supply for that customer.
Restrictions on the licensee's ability to exploit his own technology.
The hardcore restrictions for non-competing undertakings are:
Restrictions on prices.
Territorial/customer restrictions. The final Regulation limits the prohibited restrictions to those relating to active sales. Restrictions on passive sales into exclusive territories or to exclusive customer groups are not permitted.
Restrictions on sales to end users via selective distribution systems.
Where an agreement contains any of the hardcore restrictions the benefit of the block exemption is withdrawn in its entirety. In addition, there are certain types of restrictions which are not covered by the block exemption (called “excluded restrictions”) but which will not prevent the rest of the agreement benefiting from the block exemption.
The excluded restrictions are:
Obligations on the licensee to grant an exclusive licence to the licensor or a third party designated by the licensor in respect of its own severable improvements to or its new applications of the licensed technology.
Obligations on the licensee to assign to the licensor or a third party designated by the licensor rights to improvements or to new applications of the licensed technology.
No-challenge clauses.
Where the parties are not competing
undertakings, limitations on the licensee's ability to exploit its own technology.
Other Issues
Up until now, parties wishing to obtain exemptions from the competition rules could do so by availing of an EU Commission notification system. The TTBER entered into force on the same day as the Modernization Regulation (No. 1/2003) that has done away with the present procedure for seeking exemption (or assurance of non-infringement). As a result parties are no longer able to seek exemption (or assurance of non-infringement) ce of non-infringement) by notifying agreements to the Commission. This removes some of the comfort that the old notification procedure provided, by leaving the parties “on their own” when deciding whether an agreement is exempt.
Although the TTBER is broader than Regulation No 240/96, as it extends its scope to cover software copyright as well as patent and know-how licensing, the TTBER does not cover general copyright, database and pure trade mark licensing, unless they are ancillary to the technology transfer which is covered by the TTBER exemption. As mentioned earlier however, the Guidelines to the TTBER suggest that it should extend to copyright agreements relating to DVDs, CDs and books.
It was hoped that the TTBER would extend the scope of Regulation 240/96 to ensure that the legislation would cover multi-party agreements. However, like Regulation 240/96, the TTBER still only covers two-party agreements as the Commission after some deliberation decided not to extend the scope of the regime in this regard.
Existing agreements that will remain in force after 31 October 2005 will have to be re-examined to see if they will continue to be exempted by the TTBER. If not, they will have to be renegotiated, and this may not be welcomed where bargaining positions have changed.
Conclusion
The TTBER will provide the welcome addition of a block exemption for software copyright, which shows that the Commission have noticed the commercial necessity of promoting technological advancement within the EU , thereby strengthening Europe’s position in the worldwide technology market. However, the issues such as those relating to market shares and the new list of hardcore restrictions place a significant burden on parties to pay particular attention to the terms of their IP contracts.
Link to article
