Intellectual property rights (IPRs) confer an exclusive legal right on the owner to exploit the patent, copyright, design right, trade mark or other IPR in question. The IPR owner is unilaterally able to prevent unauthorised use of its intellectual property and has a monopoly over whether to exploit it itself or through licensing to third parties.
When considering IPRs within the framework of EU law, the following two sets of rules are relevant:
The competition rules: EU competition law aims to protect competition in markets throughout the EU and reduce barriers to cross-border trade, with a view to promoting the efficient use and dissemination of goods and services. Although these objectives may sometimes appear at odds with the aims of intellectual property laws (which seek to encourage and reward innovation by IPR owners), both EU competition law and intellectual property legislation share broadly the same basic policy objectives of promoting consumer welfare and ensuring the efficient allocation of resources. The main EU competition rules are contained at Article 101 TFEU, which prohibits anti-competitive agreements, and Article 102 TFEU, which prohibits the abuse of a dominant position. Since the licensing of IPRs is brought about by means of agreements, Article 101 is the principal instrument for regulating such forms of collaboration from a competition law perspective. Although EU competition policy accepts that some limitations on the contract parties are necessary to protect IPRs, other restrictions can raise competition concerns. In exceptional cases, the way in which a company exploits its IPRs may also raise Article 102 issues, for example if competitors seeking to develop activities on a market that is dominated by a particular undertaking cannot do so unless they are granted access to essential IPRs owned by that dominant undertaking (e.g. by being granted licences to relevant patents or copyright material). The European Courts have considered the circumstances in which a refusal to license can constitute an abuse in a number of important cases; these are discussed towards the end of this publication. The rules on free movement of goods: Articles 34 to 36 TFEU prohibit Member States from imposing unjustified barriers to cross-border trade. While Article 36 permits the adoption of legislation by Member States to protect IPRs, this is subject to the limitations imposed by the
TFEU’s free movement objectives. The European ‘exhaustion of rights’ principle means that IPRs cannot be enforced to prevent the marketing of goods in one Member State if those goods have previously been marketed in another Member State by, or with the consent of, the owner of the relevant IPR.
This publication considers the application of the EU competition rules to the exploitation of IPRs through the granting of licence agreements to third parties. Such agreements, particularly exclusive licences, often impose restrictions on how the licensee can exploit the IPRs that may be caught by Article 101(1), and may therefore be unenforceable unless they satisfy the exemption criteria of Article 101(3). In some cases, they may even raise issues under Article 102.
The Technology Transfer Block Exemption Regulation (TTBER) sets out the basis for exemption of agreements relating to certain technology (essentially patents, proprietary know-how, software copyright and certain design rights), offering a ‘safe harbour’ from the prohibition contained in Article 101(1).1 The current TTBER came into force on 1 May 2014. It is accompanied by a detailed
1 Commission Reg. (EU) 316/2014 (OJ 2014 L93/17, 28.3.2014).
set of guidelines (Technology Transfer Guidelines) that explain the Commission’s approach to the licensing of IPRs under Article 101, including an assessment of how the TTBER applies and how agreements that do not meet the criteria set out in the TTBER should be analysed when applying Article 101.2 The Technology Transfer Guidelines, which are binding on the Commission, are an essential point of reference in assessing the legality of restrictions contained in licence agreements outside the safe harbour of the TTBER.
2 Guidelines on the application of Art. 101 of the Treaty on the Functioning of the European Union to technology transfer agreements (OJ 2014 C89/03, 28.3.2014).
2. Technology transfer agreements and the TTBER Features of technology transfer agreements
Technology transfer agreements usually involve the grant by the IPR owner (the licensor) of a licence to a third party (the licensee) authorising the licensee to exploit the IPRs by manufacturing, marketing and selling certain goods or services (the contract products). The TTBER applies to agreements concerning “technology rights” including software copyright, design rights, utility models, patents and/or know-how. The licensing of trade marks, copyright or other IPRs is not covered by the TTBER unless it is directly related to the production or sale of the contract products.
Technology transfer agreements have a number of special features:
they involve the licensing of IPRs, usually in return for the payment of royalties (e.g. on a per unit or lump sum basis). The licensee acquires the right to manufacture the goods or otherwise use the licensor’s technology. The licensor therefore needs to exercise a certain amount of continuing control over the licensee to safeguard its IPRs; they differ from true assignments of IPRs, under which ownership is transferred completely to another party (often in exchange for a single upfront payment).3 An assignor or vendor of IPRs generally has less scope to restrict the purchaser’s use of the rights transferred; and they can bring about a cross-fertilisation of ideas, insofar as the licensee may further develop the technology. This can result in the parties subsequently cross-licensing their respective IPRs and possibly granting licences to third parties.4
The TTBER is only available for technology transfer agreements between two parties. The Technology Transfer Guidelines do, however, provide guidance for the appraisal of multi-party agreements. For example, while the TTBER does not apply to agreements setting up technology pools nor to licensing out from these pools5, the Guidelines provide a ‘safe harbour’ so that the creation and operation of such pools should fall outside of Article 101(1) if they fulfil certain conditions.6
The TTBER only applies to licence agreements entered into for the purpose of producing the contract products. Where the parties do not exploit the licensed technology (for example, if the intention is simply to block the development of a competing technology), the agreement will not be covered by the TTBER. Furthermore, when competing parties fail to exploit the licensed technology, this could arouse suspicions of disguised anti-competitive conduct.
3 Assignments of technology rights may constitute technology transfer agreements under the TTBER where part of the risk associated with the exploitation of the technology remains with the assignor.
4 See para. 3.18 below on the grant-back of licences to improvements or new applications of the licensed technology.
5 Technology Transfer Guidelines, para. 247. Licensing out from the pool is considered to be a multi-party agreement as the contributors commonly determine the conditions for licensing the technology package.
6 Technology Transfer Guidelines, para. 261. The conditions (irrespective of the market position of the parties) are that:
(a) participation in the pool creation process is open to all interested technology rights owners; (b) sufficient safeguards are adopted to ensure that only essential technologies (which are therefore necessarily also complements) are pooled; (c) sufficient
safeguards are adopted to ensure that exchange of sensitive information (such as pricing and output data) is restricted to what is necessary for the creation and operation of the pool; (d) the pooled technologies are licensed into the pool on a non-exclusive basis; (e) the pooled technologies are licensed out to all potential licensees on fair, reasonable and non-discriminatory (FRAND) terms; (f) the parties contributing technology to the pool and the licensees are free to challenge the validity and the essentiality of the pooled technologies; and (g) the parties contributing technology to the pool and the licensee remain free to develop competing products and technology.
Does the TTBER apply to the agreement?
A technology transfer agreement could potentially fall within the terms of several block exemption regulations. The TTBER confirms that it does not apply to licence agreements that fall within the terms of the research and development block exemption or the specialisation agreements block exemption.7
It is also necessary to consider whether the technology licence in question is caught by Article 101(1) in the first place:
Is there an agreement between two or more independent undertakings? For example, intra-group licences are not caught by Article 101(1); Is the licence or agreement capable of affecting trade between Member States to an appreciable extent? Technology licences are more likely to affect inter-State trade if they are concluded between undertakings from different Member States or form part of a technology-licensing network that extends beyond a single Member State. Much will depend on whether the licensor’s IPRs are protected in more than one Member State, so giving the parties scope to control the extent to which individual licensees’ activities are restricted to particular geographic areas within the EEA; and Does the licence or agreement have as its object or effect the prevention, restriction or distortion of competition to an appreciable extent in a relevant market within the EEA? Restrictions relating solely to the exploitation of technology in markets outside Europe will not be caught by the Article 101(1) prohibition unless they are capable of having an effect within the EEA.
In relation to the third point, some agreements may not restrict competition at all. For example, restrictive provisions may not be caught by Article 101(1) where the restriction is objectively necessary for the existence of an agreement. Here the question is not whether the parties in their particular situation would not have accepted to conclude a less restrictive agreement, but whether, given the nature of the agreement and the characteristics of the market, a less restrictive agreement would not have been concluded by undertakings in a similar setting. The Technology Transfer Guidelines also recognise that exclusive licensing between non-competitors will normally either fall outside Article 101(1) or meet the Article 101(3) extension criteria.8
Furthermore, a licensing agreement may fall outside Article 101(1) if the likely negative effects on competition are not appreciable. Many technology licensing agreements will fall within the scope of the Commission’s Notice on agreements of minor importance, known as the De Minimis Notice.9
The De Minimis Notice, which was revised in 2014, states that agreements between SMEs (small and medium-sized enterprises with fewer than 250 employees and annual turnover not exceeding €50 million or assets not exceeding €43 million) are not normally capable of affecting trade between Member States and will not normally merit investigation.10 It also confirms that larger companies should not face investigation where the parties’ combined market shares in the relevant markets do
7 See Slaughter and May publication on The EU competition rules on horizontal agreements.
8 Technology Transfer Guidelines, para. 194.
9 Notice on agreements of minor importance which do not appreciably restrict competition under Article 101 of the Treaty on the
Functioning of the European Union (De Minimis Notice) (OJ 2014 C291/1, 30.8.2014) adopted on 25 June 2014, replacing the 2001 version. The De Minimis Notice is accompanied by a Commission Staff Working Document that aims to help companies assess whether or not the De Minimis Notice applies to their agreement.
10 This is based on the definition of SME in the Annex to Commission Recommendation 2003/361 (OJ 2003 L124/36, 20.5.2003).
not exceed certain thresholds; these are 10% for agreements between actual or potential competitors (or where it is difficult to classify the status of the parties) and a 15% for agreements between non-competitors.11 An agreement can only benefit from the De Minimis Notice if it does not have as its object the prevention, restriction or distortion of competition, and it must not contain any ‘hardcore’ restrictions such as price fixing or market sharing restrictions. Agreements that exceed the thresholds set out in the De Minimis Notice do not necessarily have appreciable restrictive effects but an individual assessment will be required.
The status of a technology transfer agreement may change over the lifetime of the agreement, for example, if the market shares and the business of the parties change.
11 The thresholds are reduced to 5% when competition is restricted in the relevant market by the cumulative effect of parallel agreements entered into by different suppliers or distributors. The De Minimis Notice states that a cumulative foreclosure effect is unlikely to exist if less than 30% of the relevant market is covered by parallel agreements having similar effects.
3. The safe harbour of the TTBER and the three-stage analysis
The TTBER is consistent with the Commission’s approach in other block exemption regulations, seeking to apply an economic effects approach to analysing agreements rather than concentrating on legal form.12 It is primarily concerned with prohibiting ‘hardcore’ restrictions such as price fixing, output or sales restrictions and market sharing. Any restriction not expressly prohibited by the TTBER is permitted, provided the agreement as a whole satisfies the TTBER ‘safe harbour’ criteria. This requires an analysis of the competitive position of the parties and technology in the relevant markets.
Consistent with its economic and effects-based approach towards vertical agreements and horizontal cooperation, the Commission is more inclined to accept that technology licences between non-competitors, even if exclusive, generally do not restrict competition.13
The TTBER provides a blanket exemption or ‘safe harbour’ for all technology transfer agreements falling within its scope (see paragraph 6) and meeting certain criteria. The following three steps should be considered when assessing whether an agreement falls within the safe harbour (see flowchart overleaf):
whether the parties to the agreement are competitors; what market shares are attributable to each party; and whether the agreement contains any problem clauses (hardcore or excluded restrictions).
The distinction between competitors and non-competitors
In determining whether the parties to the agreement should be treated as competitors for the purposes of applying the TTBER, it is necessary to review competition both on the relevant market where the technology rights are licensed (the relevant technology market) and on the relevant market where the contract products are sold (the relevant product market).
Competition on the relevant technology market is assessed by reference only to actual competition on the relevant geographic market.14 In other words, the parties will be considered to be competitors where the licensee already licenses out its technology and the licensor seeks to grant a licence for a substitutable technology to the licensee.15 The parties are not considered to be competitors where they both hold IPRs to a substitutable technology but the licensee does not license out its technology to third parties.
12 This ensures that undertakings have greater commercial freedom in drafting their agreements by removing the straitjacket approach that used to exist under the earlier 1996 Technology Transfer Block Exemption Regulation.
13 See Slaughter and May publication on The EU competition rules on vertical agreements, in particular para. 1.5, for a description of the distinction between vertical and horizontal agreements. Also see Slaughter and May publication on The EU competition rules
on horizontal agreements (e.g. at Part A.3 of Table 1.1).
14 Technology Transfer Guidelines, para. 36.
15 Technology Transfer Guidelines, para. 35.
Technology transfer block exemption flowchart
Competition on the product market is assessed by reference to both actual and potential competition on the relevant geographic markets. Where the parties are active on the same geographic market for substitutable products, they will be considered to be actual competitors. Equally, where one party would be likely to undertake the necessary investment to enter the relevant market within a short period of time (usually one to two years) in response to a small but significant non-transitory increase in prices (known as the "SSNIP" test), the parties will be considered to be potential competitors on the product market and therefore competitors for the purposes of assessment under the TTBER.16
The competitive status of the parties is assessed at the time of conclusion of the agreement. If they are non-competitors at the outset but subsequently become competitors during the lifetime of the agreement, the agreement will continue to be assessed as one between non-competitors unless it is subsequently renewed or materially amended.17 Competitors may also become non-competitors due to the obsolete or uncompetitive nature of the licensee's technology; in this case, the classification of the relationship will change into one between non-competitors.
Market share thresholds
The TTBER’s safe harbour is only available to agreements between parties meeting particular market share thresholds. The threshold tests apply to the parties’ shares of both the technology and the product markets. For agreements between competitors, the combined market shares of the parties must not exceed 20%. For agreements between non-competitors, neither party must have a share in excess of 30%. Where an agreement initially falls within the market share threshold but subsequently exceeds it, the safe harbour will continue to apply for a further two years.18
Exceeding the market share thresholds does not give rise to a presumption that the agreement will fall foul of Article 101(1) or be incapable of exemption under Article 101(3) in the absence of hardcore restrictions. Individual assessment will be required, taking account of the principles set out in the Technology Transfer Guidelines.19
Calculating a party’s market share on the technology market involves an assessment of all sales of products incorporating the licensed technology on downstream product markets. Account must therefore be taken both of sales by the licensor of the relevant product and of sales by any licensees. When assessing the size on the total technology market, account must be taken of all substitutable technologies, including those that are currently only being used in-house.20 Market shares are calculated on the basis of sales for the preceding calendar year, which means that in respect of new technologies that have not yet generated any sales, a zero market share will be assigned.21
The market share on the relevant product market consists only of that party’s sales of the relevant product on the relevant geographic market. This will include not only products incorporating the licensed technology but also any substitutable products using alternative technology.
16 Technology Transfer Guidelines, para. 31.
17 Technology Transfer Guidelines, paras. 38 and 39.
18 TTBER, Art. 8(e); Technology Transfer Guidelines, para. 90. 19 Technology Transfer Guidelines, para. 43. Also see Chapter 5. 20 Technology Transfer Guidelines, para. 88.
21 TTBER, Art. 8(b); Technology Transfer Guidelines, para. 90.
As the TTBER draws a distinction between agreements between competitors and those between non-competitors, there are two separate lists of hardcore restrictions – contained in Article 4(1) for agreements between competitors and in Article 4(2) for agreements between non-competitors. Agreements including any of these restrictions will fall outside the safe harbour of the TTBER and in most circumstances will not satisfy the criteria for exemption under Article 101(3) TEFU.
In general terms, the TTBER treats reciprocal agreements less favourably (or more strictly) from a competition perspective than non-reciprocal agreements, on the basis that there is greater potential for market foreclosure when competing technologies are cross-licensed.22
Likewise, there are more hardcore restrictions for agreements between competi