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Competition and dissemination of innovation. The new block exemption regulation for technology transfer agreements

Jean-François PONS

Cannes

5/06/96


On 31 January 1996, following a long consultation process with industry, the Commission adopted its new block exemption regulation on technology transfer agreements. This regulation marks a step forward by the Commission towards the creation of a favourable legal environment for development of technological innovation and its dissemination within the European Union, while ensuring that both healthy competition as well as the achievement of the single market are not affected.

I. ORIGIN OF THE REGULATION

A certain number of factors and, in particular, a recognition of the stimulus provided by technology transfers to economic development in today's society as highlighted in the White Paper on Growth, Competitiveness and Employment, has led the Commission to introduce significant simplification to the existing rules governing technology transfer agreements.


These rules were set out in the former regulations (EEC) 2349/84 of 25th July 1984 and 556/89 of 30th November 1988, under which the Commission had already granted block exemptions to pure patent of know-how licences as well as to mixed patent and know-how licences. These regulations enabled businesses to avoid having to notify most of their patent or know-how licence agreements in order to obtain an exemption from Article 85(1).

The rules also enabled the Commission to decide quickly on border-line cases by means of an opposition procedure (under which the exemption extended to agreements which included additional restrictions on competition not included in the text of the regulation, on condition that such agreements were notified to the Commission and the Commission did not oppose them within six months of notification). However, as the Commission stated in its 20th Report on Competition policy, there remained practical difficulties. These were principally related to the detailed character of the two former regulations as well as the uncertain legal position concerning mixed licences, which were covered in some manner by both regulations. The purpose of the new regulation is to overcome these difficulties. It merges the previous exemption regulations into a single legal instrument enabling business to benefit from a single set of rules for patent licences, know-how licences and mixed patent and know-how licences. The new Regulation recognises the fact that in practice, mixed agreements play an ever more important role in technology transfers.


At the same time, the adoption of the new rules offered the Commission the possibility of broadening the scope of application of the regulation. The previous regulations had in general been considered as useful legal instruments but they restricted the contractual freedom of the parties. The new regulation provides for a series of improvements and simplifications and is marked by a more open attitude to provisions which are frequently encountered in practice.


From the outset, given the primary objective of disseminating new technology in a competitive climate in the Community, the Commission considered the current rules inadequate in that they took no account of undertakings' economic power and the danger that companies with a significant market share could potentially block the implementation of innovations which would compete with their products and processes.


You will recall that the Commission, influenced by the Tetra Pak case and similar cases(1) initially favoured a solution which would have excluded from the benefit of an automatic exemption, agreements granting territorial exclusivity in favour of a licensee which was part of a close oligopoly of which, at the time the agreement was made, had a market share of at least 40%. After heated discussion with several industry groups (in particular UNICE and the European Committee of LES International) the Commission decided to adopt a less rigid position and reserve the 40% market share threshold only as a criterion for possible withdrawal of the benefit of the exemption.


II. STRUCTURE AND PRINCIPAL PROVISIONS OF REGULATION 240/96


The structure of the new regulation follows the usual model with respect to block exemptions by making a distinction between white, black and grey clauses. Its principal elements can be summarised as follows :


1. Article 1 sets out the list of obligations which restrict competition and are normally covered by Article 85, paragraph 1, and which are automatically exempted by the Regulation. A licence agreement containing such provisions does not have to be notified to the Commission. Article 1 primarily concerns clauses providing for territorial restrictions between parties or between licensees. They are exempted between parties throughout the term of validity of the patent, of for 10 years in the case of know-how agreements and, in particular, between licensees for 5 years with respect to the prohibition on both active and passive sales.


2. Article 2 sets out a certain number of obligations which are often found in licence agreements but which do not generally restrict competition. It provides that, if by reason of a particular economic or legal context, they were to be covered by Article 85, paragraph 1, they should also be covered by the block exemption (these are the so-called white-listed clauses). New white clauses were also added (in particular, the right for the licensor to terminate the agreement where the licensee contests the validity of the patent, to terminate the exclusive character of the licensee's rights were the licensee competes and the right of the licensor to reserve the right to avail of the rights conferred by a patent in order to oppose exploitation by the licensee of the technology outside the territory granted to the licensee.


3. Article 3 sets out the "black list" of clauses or restrictions whose presence in an agreement prevents the grant of a block exemption (price limitations, restrictions on competition, restrictions on clientele between competing manufacturers, restrictions on the extent of exploitation, an obligation on the licensee to assign improvements to the technology, territorial restrictions in-excess of the exempted period).


In order to facilitate technology transfers the black list has been significantly reduced - almost by half - in comparison with the two former regulations. The black-listed clauses which have been eliminated have not, however, been transferred to the white list. They have been moved to the opposition procedure, as is the case specifically, for the non-challenge clauses and for the tie-in obligations which are not necessary for exploitation of the transferred technology.


4. Article 4 requires that agreements notified to the Commission which contain grey clauses, be subject to an opposition procedure. Grey clauses are restrictions on competition not referred to in Articles 1 and 2 and which are also not covered by Article 3. In order to make the procedure more efficient, the time within which the Commission must intervene has been shortened from 6 to 4 months.


Moreover, in the 25th recital to the regulation, the Commission has stated that instead of all the documentation required by Form A/B, it requires only notification of the text of the agreement and an estimate of the market.


Therefore, the notification will be considered as having been validly made at the date of such communication, even if the Commission, in the light of the particular circumstances, requires additional information after this date.


5. Even though the regulation no longer provides for a market share threshold beyond which the relevant licence agreements would have to be notified, the existence of significant market share will be particularly important in the context of possible withdrawal of the exemption. In accordance with the provisions of Article 7, paragraph 1 of the Regulation, the Commission will attach particular importance, in assessing conditions of competition, to situations in which the licensee's market share exceeds a threshold of 40% of the total market for the licensed products and all products or services which the consumer considers as being interchangeable or substitutable by reason of their properties, price and use.


The United States authorities also attach particular significance to situations in which a licensee has a strong market share. The Department of Justice has intervened in the past in order to force the licensor to grant non-exclusive licences instead of a single exclusive licence (see the Bayer/Johnson case).


The Antitrust Guidelines for intellectual property licences highlight the anti-competitive risks associated with the grant of exclusive licences in concentrated markets or in favour of licensees holding significant market share.


The 11th example of those guidelines specifically refers to the case where a licence is granted for the manufacture and distribution of a patented pharmaceutical substance in favour of a business which already offers the only remedy on the market for treating the same illness. Even though such licence was not formally exclusive, the patent holder has refused to grant other licences on reasonable conditions.


The importance of the market share threshold should not be exaggerated. It is only one indication, among others, of the existence of market power and does not itself lead to the conclusion that there exists possible abuse of such power. In addition, if the Commission were to institute proceedings, in particular on the basis of a complaint, the parties would, prior to any possible decision to withdraw the exemption, have the benefit of all procedural rights available in cases of examination of individual cases such as communication of the complaint, access to the file and the possibility of an oral hearing.


III. RESULTS OF EXPERT STUDIES


In order to have an exact idea of the numbers and types of exclusive licences, the Commission asked three experts, British, French and German, to carry out studies (in their respective countries) based on a representative sample of licensors and licensees. In particular, the idea was to evaluate the annual flow of exclusive licences for which the licensee's market share was above the 40% threshold.


There were difficulties in obtaining detailed data, by reason of a certain foreseeable reluctance on the part of business to divulge information on their licence agreements, to which must be added the difficulty linked to the determination of the relevant market. The studies nevertheless, permitted identification of the sectors where the risk of concentration of technological protection is highest as well as confirming that the annual flow of licences above the 40% mark is limited (about 10 per year for the French study whose results seem to be the most reliable). Another interesting result was that the pharmaceutical and biotechnology sectors seem to be the most likely sectors of anti-competitive risk.


IV. CONCLUSION


In ending my speech, I would like to make the following observation : at the dawn of the third millennium no one would dream of contesting the vital importance of innovation in products and processes for economic development. In the Commission's view, the industrial progress in the European Union is inextricably linked to the dynamism of its businesses in the conception of new technologies.


For this purpose, the Commission has launched various international cooperation programmes in the area of research, such as Esprit, Drive and Brite, and a significant portion of the Community's budget is devoted to them. Simplification of technology transfers, in the context of the rules on competition, is an important addition to these actions.


Of course, the new regulation is not revolutionary, but it appears to be a significant improvement on the existing situation. The new regulation abolishes the disparities which existed between the patent licence regulation and the regulation on transfers of know-how : it eliminates, or transfers to the opposition procedure, several clauses from the old regulations which prevented the block exemption being obtained and, in order to attach greater respect to the freedom of parties to contract, it provides for new acceptable clauses.


(1) See the Sega-Nintendo case (MMC's Report - March 95).

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