technology transfer: the european commission's technology transfer regulation

Technology Transfer

TECHNOLOGY TRANSFER THE EUROPEAN COMMISSION’S TECHNOLOGY TRANSFER REGULATION

Mark D. Powell’

I. Introduction Generally speaking, the licensing of patents and know-how maximizes economic welfare by ensuring a broader utilization of innovative technology. Rather than sitting on its technology or exploiting it alone, the licenser through the licensing regime - elects to increase the number of parties capable of exploiting the technology. This may allow exploitation of the technology in a new territory, in which the licenser has no expertise, or allow intensified competition on a given territory among several licensees. Moreover, licensing of technology permits the licenser to increase potential profits from its innovation, thereby acting as an incentive for future research and development.

That said, innovation can be an important parameter of competition, and competition authorities, to varying degrees, have expressed concern about horizontal technology transfer agreements, which may, in certain circum- stances, diminish competition, as competitors collectively opt for a quieter life by sharing the fruits of their respective research and development. In addition, certain licensing conditions in vertical agreements may stifle innovation, if, say, the licensee is obliged to assign back any improvements it may develop to the licenser. However, the manner in which competition policy is applied to these kind of agreements vary from jurisdiction to jurisdiction (see the OECD’s “Compe- tition Policy and Intellectual Property Rights”, for a comparative study).

On 31 January 1996, the European Commission, which is known as a

126 Computer Law & Security Report 01997, Elsevier Science Ltd

heavy-handed referee in international antitrust circles, adopted its Technol- ogy Transfer Block Exemption Regula- tion’ (hereinafter referred to as “the New Regulation”), which lays down specific rules on exclusive technology transfer agreements. Any patent, know-how, or mixed patent/know- how licence agreement entered into after 1 April 1996, which may have an impact on trade with the European Union, must be examined in the light of the New Regulation.

The New Regulation replaces the Patent Licensing Regulation (Regula- tion 234984) due to expire at the end of 1994, and the Know-How Licensing Regulation (Regulation 556/89), which was not due to expire until 31 Decem- ber 1999. However, rather than intro- duce a new Patent Licensing Regulation, the Commission decided to merge the Patent and the Know- How Licensing Regulation (“the Old Regulations”) into one.

The stated aim of the New Regula- tion is “to promote innovation and dissemination of technical knowledge throughout the European Union”. But, despite this, upon closer examination, it does not herald the advent of a more liberal regime. True, the so-called list of acceptable clauses - the White List - has been expanded, and the list of unacceptable clauses - the Black List - has been reduced; but the clauses removed from the Black List will nonetheless have to be notified under the so-called “Opposition Procedure” if they are restrictive of competition. For business people, the European Commission’s continued desire to mi-

Vol. 13 no. 2 1997

cro-manage these kind of basically pro- competitive agreements is perplexing.

Also, while the merging of the rules applicable to patent licences and know-how licences is to be welcomed, the New Regulation fails to cover copyright licences, such as computer software agreements, which are still shrouded in legal uncertainty.

II. Summary of the principal changes The principal modifications to the existing regime are:

(a) The rules applicable to patent and know-how licences have been harmonized. This means that, at a stroke, the rules on patent licensing, which were formulated prior to the rules on know-how licensing, have been relaxed.

(b) The scope of the New Regula- tion has been enlarged to permit the licensee to offer a service on the basis of the licensed technology. Previous drafts of the Regulation limited the application of the New Regulation to cases where the licensee himself manufactured the licensed products or had them manufactured for his own account.

In addition, the term ‘patent’ has been extended to include: l topographies of semiconductor

products; 0 supplementary protection certifi-

cates for medicinal products or other products for which supple-

Technology Transfer

mentary protection certificates may be obtained; and

l plant breeders’ certificates (see III.2 below).

c) The White List has been extended (see III.4 below). For example, the licenser may now legitimately terminate a licence if the licensee challenges:

(i) the validity of the patent;

(ii) the necessity of the patent;

Tii) the secret and substantial nature of the know-how.

(d) The Commission has reduced the number of Black-listed clauses (from 12 to seven). For example, tying clauses, quality specifications and no- challenge clauses, which were unacceptable under the Patent Licensing and Know-How Li- censing Regulations, have been removed from the Black List (see III.5 below). Nonetheless, such clauses will probably have to be notified under the Oppo- sition Procedure, otherwise the whole agreement may be beyond the ‘safe haven’ offered by the Regulation.

(e) The time period within which the Commission can decide whether to withdraw the benefit of the Block Exemption under the Opposition Eroce- dure has been reduced from six to four months. Also, the notitication requirements under the Opposition Procedure have in theory been relaxed, making this procedure more attractive to companies which require legal certainty in a short period of time (see 11~6 below).

(f) Market-share thresholds have been introduced as a criteria which, if exceeded, will enable the Commission to remove the protection of the Block Exemp- tion (Article 7). This is not a significant change, since under the Old Regulations the Com- mission had the power to withdraw the exemption in cases where it considered that the agreement was incompatible with Article 85(3).3

III. The technology transfer regulation

1. The market-share test furore The Commission’s first proposal for the New Regulation, published on 30 Sep- tember 1994, introduced a controver- sial market-share whereby: l licenseeswith a market-share above

40%, or caught by an oligopoly test, would be deprived of the benefit of the automatic exemption in respect of exclusivity; and

l licensers and licensees with market shares over 20% would not benefit from the automatic exemption for restraints designed to protect their exclusive territory.

The market-share test proposed was strongly opposed by industry. On 31 January 1995, the Commission oganised a hearing, attended by industry representatives, lawyers and Commission officials. There was unani- mity among the participants that the market-share test would result in uncertainty, leading to a significant increase in the number of notifications. Companies argued that they could never accurately determine their market shares, since this depended on the Commission’s definition of the relevant product market, which could never be predicted.

Following the hearing, a revised draft of the proposed Regulation was circulated to interested parties in April 1995. The revised draft simplified the market-share tests by introducing a single test to apply to licensees with a market share exceeding 40%, where the licenser and licensee were “competing manufacturers”. However, the modification failed to placate industry. There was disagreement within the Commission. Both the Industry Com- missioner, Martin Bangemann, and the Commissioner for Research and Devel- opment, Edith Cresson, strongly opposed the market-share test.

After a delay of several months, a compromise was finally reached: DG IV made a proposal to move the market- share test to Article 7 of the Regula- tion, which sets out the non-exhaustive list of situations where the Block Exemption may be withdrawn by the Commission. As a result, the market- share test is no longer a precondition

for obtaining the benefit of the Block Exemption. Rather, the Commission (assuming it ever learned of the agreement) could decide at a later stage to withdraw the benefit of the Block Exemption, if it determines that the 40% market-share test has been sur- passed. Thus, although the New Reg- ulation has, in principle, maintained the market-share test, in reality, its inclusion is only a face-saving measure. The Commission has always had the power to withdraw an exemption in cases where it considers the agreement to be incompatible with Article 85(l) & (3).

2. What type of agreements will the New Regulation cover? The New Regulation covers ‘pure’ patent and know-how licensing agreements, as well as so-called ‘mixed’ patent and know-how agreements.

Like the Old Regulations, it does not cover trademark, design right, copyright or software licences, unless they are ancillary to a patent or a know-how licence (see III.7 below).

To fall within the New Regulation, the agreement must be between two parties only. In addition, it must include one or more of the restraints set forth in Article l(1) (see III.3 below).

Early versions of the New Regula- tion provided that it should only apply where the licensee himself manufac- tures the licensed products or has them manufactured for his account. The final version expands the scope of the New Regulation by permitting the licensee to offer a seruice by virtue of the technology. Thus, Recital 8 now provides that the New Regulation applies where the licensed product is a service if:

“[the licensee] provides the service himself or has the service provided for his account, irrespective of whether or not the licensee is also entitled to use confidential information provided by the licenser for the promotion and sale of the licensed product”.

Like the Old Regulations, the New Regulation does not apply to: l agreements solely for the purpose

of sale; l agreements relating to marketing

know-how communicated in the context of franchising agreements

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Technology Transfer

Active and Passive the life of the

Active and Passive sales: IO years

Active and Passive sales:

Active and Passive

sales: the life of the

Active and Passive

sales: 10 years

Active and Passive sales:

IO years or the life of the patent whichever is longer

(since these agreements are expli- Paragraphs (l)-(6) are summarized identifying himself as the manufac-

citly covered by other Block Ex- in the table above. turer of the licensed products” emptions);* and As far as the fixed time limits are (Article 1.1(7));

l certain (but not all) licensing agree- concerned, they start to run from the . “to limit his production of the

ments entered into in connection date when the licensed products are licensed product to the quantities with joint ventures or patent pools first put on the market within the EC he requires in manufacturing his and cross-licences between compe- &JJ any licensee (as opposed to the Old own products and to sell the titors. Regulations which started the clock licensed product only as an integral

The term ‘patent’ for the purposes running “upon the date of signature of part of or a replacement part for his

of the New Regulation has been ex- the first licence”). This has had the own products or otherwise in con-

tended to include: effect of extending the period of nection with the sale of his own

a topographies of semiconductor protection. products, provided that such quan-

products; Mixed know-how and patent agree- tities are freely determined by the

merits: Pursuant to Article 1.4, where licensee” (Article 1.1(8)). 0 supplementary protection certifi-

cates for medicinal products or an agreement is a mixed agreement,

other products for which supple- the exemption of the obligations set

In pure know-how agreements,

out in Articles l.l( l)-(5) (on territorial these obligations are permitted during

mentary protection certificates may the lifetime of the agreement only “for

protection - be obtained; and

see the far right-hand column in the table above) shall apply

as long as the know-how remains secret and substantial”.’

l plant breeders’ certificates. (Article in Member States in which the tech- 8.1) nology is protected by ‘necessary pa-

To benefit from the New Regula- tion, at least one of the foregoing

Agreements which were covered tents’, where the duration of such Article 1 restrictions must appear in by either of the Old Regulations, but protection exceeds the periods per- the agreement. The New Regulation fall outside the scope of the New mitted for pure know-how licensing

agreements. The Commission has will nonetheless apply where the par-

Regulation, are not exposed to the ties undertake obligations similar to application of Article 85(l) of the EC added a further clarification to the those identified above but with a more Treaty, provided they were in force in term ‘necessary patents’ in Article 10.5:

31 March 1996.5 “‘necessary patents’ are patents limited scope (Article 1.5).

where a licence under the patent

3. What is the extent of exclusivity permitted by the

is necessary for the putting into 4. What are the changes to effect of the licensed technology in so far as, in the absence of such a

the White-listed provisions

licence, the realization of the li- The Old Regulations both contained

New Regulation? lists of provisions which were deemed

Article 1.1, paragraphs (l)-(8) list the tensed technology would not be

territorial restraints that would ordina- possible or would be possible only not to restrict competition - the so- called ‘White Lists’.

rily be caught by Article 85(l), but to a lesser extent or in more difticult or costly conditions. Such

Articles 2.1(l)-( 12) of the New which are permitted under the New

patents must therefore be of tech- Regulation are based on the White List

Regulation (provided all other condi- of the Know-How Licensing Regula- tions are satisfied). nical, legal or economic interest to tion. Thus, the more relaxed provisions

For example, Article 1.1(3) permits the licensee”.6 relating to know-how licences are now

the licenser to oblige the licensee not In addition, the following obliga- available for patent licences. to exploit the licensed technology in tions may be placed on the licensee: his teetory. Exploitation is &tied l 'ItO Use OdJ' the kCXlSOr’S trade-

However, the Commission has added the following obligations to the

broadly. It means any use of the mark or get up to distinguish the White List, allowing the licenser: technology, notably the production, licensed product during the term of (a) to exercise the rights conferred by active or passive sales, or leasing the agreement, provided that the (see Article lO( 10)). licensee is not prevented from

the patent so as to oppose the exploitation of the technology by

128 Computer Law & Security Report Vol. 13 no, 2 1997 01997, Elsevier Science Ltd.

Technology Transfer

the licensee outside the licensed territory;*

(b) to terminate the agreement if the licensee contests the secrecy or the validity of the licensed know- how and patents;’

(c) to terminate a patent licence agreement if the licensee raises the claim that the patent is not ‘necessary”’ (see discussion on mixed agreements above);

(d) to terminate the exclusivity

(e>

granted to the licensee and to stop licensing improvements when the licensee enters into competition with the licenser in respect of research and development, production, use or distribution of competing products, and to require the licensee to prove that the licensed know-how is not being used other than for the purpose licensed.” This legiti- mises a useful form of control for licensers of new technology. In addition, the White List now permits an obligation on the licensee to use his best endeavours to manufacture and market the licensed product. ‘* Licensers should consider systematically in- corporating these two provisions into their agreements; and

Customer restrictions: The general rule under the Old Regulations was that the licenser cannot restrict the licensee as to the customers he may serve. But under the New Regulation the licenser may restrict the quantity of licensed products to be supplied to a particular customer, where the licence was granted so that a customer might have a second source of supply inside the licensed territory. This exemption also applies where the customer is in fact the licensee.13

The White List is said to be non- exhaustive. According to Recital 18, the white-listed clauses are normally not restrictive of competition, but are exempted just in case. The indication is helpful for analysing agreements that cannot be brought within the New Regulation, i.e. copyright or trademark licences, since it might be argued, by analogy, that similar provisions in these agreements are not caught by Article 85( 1).

5. What are the modifications to the Black List? Article 3 of the New Regulation sets forth the provisions which are considered to be restrictive of competition. Inclusion of these provisions in an agreement will mean that the ‘safe haven’ offered by the New Regulation will not apply. Also, by analogy, they should be avoided in other kinds of intellectual property licences. They are known as black-listed clauses. Such provisions may only obtain exemption by way of an individual decision.

The good news is that the Black List has been shortened from 12 to seven provisions. The seven deadly sins are as follows: (a) The Agreement must not deter-

mine prices, components of prices or discounts for the licensed products.14

(b) The Agreement must not restrict one of the parties from competing with the other in respect of R&D, production, use or distribution of products deriving from R&D,15 (however, as mentioned above, the licensee may be required to use best endeavours to exploit the licensed technology. Also, the li- censor has the right to terminate the exclusive arrangement in the event that the licensee does com- pete (but not the licence itself)).16

(cl The Agreement must not require one or both of the parties to refuse to meet demand from users and resellers wishing to market the products in other territories, or to make it difficult for users or resellers to obtain the products from other resellers,

“in particular to exercise intellectual property rights or take mea- sures so as to prevent users or resellers from obtaining outside, or from putting on the market in the licensed territory, products which have been lawfully put on the market within the common market by the licenser or with his consent”;

without any objectively justified rea- s0n.l’

An open question is whether paral- lel trade from outside the EU can be actively discouraged in a licensing agreement. The purists’ view is that

the doctrine of exhaustion does not apply outside the EU. Thus, a right- holder in the EU can legitimately invoke an EU intellectual property right to block imports from outside the EU. However, recently there are signs that the Commission’s competition authority is seeking indirectly to extend the doctrine of exhaustion beyond the EU frontiers. Thus, agreements which prevent trade between the EU and countries with which it has concluded a free trade agreement may be caught by Article 85(l), irrespective of the existence of intellectual property rights which could block such trade (see Chanel Watches, OJ 1994 c 334/11). (d) The Agreement must not contain

customer restrictions, but only where the parties were competing manufacturers before the grant of the licence. The reference to competing manufacturers narrows the scope of this restriction. The Old Regulations prohibited all customer restrictions.18

(e) The Agreement must not deter-

w

mine the quantities of the licensed products to be manufactured or sold, or the number of operations exploiting the licensed technology.

The licenser must not oblige the licensee to assign to the licenser rights to improvements to, or new applications of, the licensed technology. Thus, the rules on grant- back provisions may be sum- marised as follows: Article 2.4 of the Regulation may be interpreted as permitting an obligation on the licensee to license non-severable improvements exclusively to the licenser, i.e. to the exclusion of third parties. However, since one of the objectives of the Regula- tions’ grant-back provisions is to ensure that licensees are free to use their own improvements, pre- venting licensees from exploiting such improvements (assignments or truly exclusive licences) will fall outside the Regulation.

The parties must not extend exclusivity or territorial restraints beyond the period which is acceptable under the New Regulation. For example, a know-how licence with, say, 15 years territorial protection will fall outside the New Regulation.

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Technology Transfer

Notable omissions from the Black List include: (a) the nechallenge clause, i.e. a

prohibition on the licensee from challenging the validity of the licensed patents or other industrial or commercial property;

(b) the charging of royalties on pro-

(c)

ducts which are not entirely or partially patented or manufactured by means of the licensed technology. Now, royalty provisions based on the sales of products which are not covered by the patent or know-how will be judged on their merits. If they are concluded for reasons of administrative conveni- ence, they may be acceptable, provided they do not have a material foreclosing effect;

tying clauses, i.e. where the licensee is induced into licensing patents, goods or services which he does not want;

(d) the automatic extension of the agreement by the inclusion of new patented technology or new improvements to the know-how communicated by the licenser;

(e> post-term use ban, i.e. where the licensee is prevented from conti- nuing to use the licensed know- how after the termination of the agreement where the know-how has become publicly known.

The exclusion of the foregoing from the Black List does not mean that these clauses are exempt. But their inclusion will not automatically ex- clude the parties from benefitting from the New Regulation. Companies are advised to consider notifying agreements containing such clauses to the Commission under the Opposition Procedure if they wish to guarantee the enforceability of the agreement as a whole(see III.6 below). This is perhaps especially important for royalty provisions mentioned in (b), which may be considered to have a foreclosing effect.

6. Which clauses are subject to the Opposition Procedure? As under the Old Regulations, Article 4 permits an agreement which would otherwise benefit from the Block Ex- emption, but for the inclusion of a ‘grey clause’, to notify the agreement to the Commission under an accelerated procedure. A ‘grey clause’ is a restriction of

130 Computer Law & Security Report 01997, Elsevier Science Ltd.

competition that is not exempted by Article 1, and neither appears in the White List in Article 2, nor in the Black List contained in Article 3.

Thus, companies should carefully analyse additional provisions in their technology transfer agreements. The inclusion of just one additional restriction will mean that the New Regulation will only apply if a notification is made under the Opposition Procedure (see Article 4.1 l9 of the Regulation and Case C-23489, Stergios Delimitis v. Hen- ninger Briiu AG, [1991] ECRI-535).

In Recital 25, the Commission says that it may waive the requirement to supply specific information required in Form A/B. The Commission says that it will generally be content with the agreement, details of the market struc- ture and an estimate of the licensee’s market-share.

If the Commission does not object to the agreement within four months, the New Regulation is deemed to apply. However, the Commission may decide to withdraw the protection of the Block Exemption at a later date under Article 7. The four-month time period for the Opposition Procedure under the New Regulation is two months shorter than under the Old Regulations.

Article 4 (2) identifies two types of restrictions to which the Opposition Procedure will apply in particular: (a) tying clauses and quality specitica-

tions; and

(b) no-challenge clauses

It is interesting to note that inclusion of the Opposition Procedure was the result of intense lobbying from industry, because the Commission had originally proposed its abolition. How- ever, at the time of writing, the Commission has received just two notifications under the Opposition Procedure (see the Commission’s Green Paper on Vertical Restraints).

7. Will the Block Exemption apply to other types of intellectual property rights? Article 5.1(4) prevents the application of the exemption to licensing agreements for intellectual property rights other than patents, unless such rights are ancillary to the patent/know-how agreements. “Ancillary provisions” are defined in Article 10.15 as:

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I’.. provisions relating to the exploitation of intellectual property rights other than patents, which contain no obligations restrictive of competition other than those also at- tached to the licensed know-how or patents and exempted under this Regulation”.

Thus, a pre-condition for benefitting from the Block Exemption is that ‘ancillary’ intellectual property provisions do not contain restrictions of competition. One restrictive clause in, say, an ancillary trademark licence could deprive the main agreement of protection. Thus, companies should carefully check such ancillary agreements.

IV. Conclusions In 1989, the OECD observed:

“The manner in which competition policy is applied to the licensing of intellectual property can have an important influence on the creation of new technology......Given the importance of innovation to growth, care should be exercised so that competition law enforce- ment does not hamper the creation and diffusion of innovations.” (“Competition Policy and Intellec- tual Property Rights”)

In the light of the foregoing, how does the New Regulation fare? First, it gets high marks for introducing a tidier system. The consolidation of the rules on patent licensing and know-how licensing is to be welcomed, as is the extension of the Regulation to cover semiconductors, supplementary protection certificates and plant breeders’ certificates. However, it did not go far enough: copyright licenses, notably those covering computer software and databases, are still without a ‘safe haven’.

Second, the Commission should be congratulated for finally excluding the market-share test as a precondition for benefiting from the Regulation. This would have generated fees for lawyers and economists, but would have done little to promote innovation and the dissemination of technical knowledge.

Finally, the increase in the number of white-listed clauses and reduction in the number of black-listed restrictions is, at first sight, friendly to technology companies. However, provisions which were previously black-listed under the

Technology Transfer

Old Regulations are now ‘grey clauses’ Procedure. So, while the New Regula- Mark Powell, Report Correspondent and may deprive agreements of protection has been improved, it does not tion under the New Regulation, unless represent a significant departure from they are notified under the Opposition the Commission’s traditional approach.

Footnotes ‘Partner, Forrester Norall & Sutton, Brussels (tel: + 32-2-219- 1620; fax: + 32-2-219-1626; E-mail [email protected]). 2Commission Regulation (EC) 240/96 OJ 1996 No L 31/2. ‘Article 9 and Article 7 of the Patent Licensing and Know-How Licensing Regulations respectively. See also Tet- ra Pak 1 (BTG Licence), OJ 1988 No. L 272/27. *Commission Regulations 1983/83 and 1984/83 on exclusive distribution and purchasing agreements, OJ 1983 L 173/ 1, and Commission Regulation 4087/88 on franchising agreements, OJ 1988 L 359/46. 5Article 11.3. In the unpublished draft which was circulated in April 1995, agreements that fell within the Patent Licensing Regulation or the Rnow- How Licensing Regulation, but outside the Technology Transfer Regulation, that were in force on the date that the Technology Transfer Regulation entered into force, were exempt from the application of Article 85(l) until

31 December 1999. The New Regula- tion therefore provides that an agreement existing before the Regulation comes into force with greater protection, provided it satisfied the exemption requirements set out in the Patent or Know-How Licensing Regulation. 6Article l(2). ‘Article 1.3. 8Article 2.1( 14). Reserving the right to oppose the exploitation of the patent by a licensee outside the licensed territory will enable the licenser to protect each licensee from direct sales by other licensees where national patent laws permit. It appears from the inclusion of this clause that the Commission considers that the granting of a licence does not exhaust the patent. The question of exhaustion of a patent right by granting a manufacturing licence has not been considered by the Court of Justice. This right may be limited by the Court in the future. ‘Article 2.1(15). “Article 2.1(16). ‘lArticle 2.1(18). 12Article 2.1(17). 13Article 2( 1)(13). See below the

narrower Black-listed customer restriction in Article 3.4, discussed below. ‘*Article 3.1. 15Article 3.2. “Article 2.1(17) and 2.1(18). “Article 3.3. isCompeting manufacturers are now defined in the New Regulation as manufacturers “who sell products which in view of their characteristics, price and intended use, are considered by users to be interchangeable or substitutable for the licensed products” (Article lO( 17)). “Article 4.1 provides: “The exemption provided for in Articles 1 and 2 shall also apply to agreements containing obligations restrictive of competition which are not covered by those Articles and do not fall within the scope of Article 3, on condition that the agreements in question are notified to the Commission in accordance with the provisions of Articles 1, 2 and 3 of Regulation (EC) No 3385/94 and that the Commission does not oppose such exemption within a period of four months.”

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technology transfer: the european commission's technology transfer regulation

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