Germany: The Draft Block Exemption Regulation on Technology Transfer Agreements – Is the New Safe Harbor Less Safe?

On 1 October 2003, the European Commission published its draft block exemption Regulation on the application of Article 81(3) EC Treaty to technology transfer agreements¹ ("Draft TTBER"). The Commission intends to replace the current block exemption Regulation, Regulation (EC) No 240/96 on technology transfer agreements² ("Current TTBER"). This change will come into force on 1 May 2004. At the same time, the Commission published draft Guidelines on the application of Article 81 EC Treaty to technology transfer agreements³ (the "Draft Guidelines").

Both the Current TTBER and the Draft TTBER provide a safe harbour for certain types of intellectual property licensing agreements because they automatically exempt restrictions of competition resulting from these agreements from the prohibition of Article 81(1) EC. Such agreements are valid and enforceable. However, the two TTBERs differ in the requirements which must be met in order for an agreement to qualify for the exemption.

The Draft TTBER seeks to reduce the regulatory burden for companies with regard to concluding patent and know-how licensing agreements, while ensuring an effective control under competition rules of agreements between companies holding significant market power. This approach reflects the new economic attitude of the Commission which is also displayed in the new block exemption regulations for Vertical Distribution Agreements,⁴ Specialisation Agreements⁵ and Research and Development Agreements.⁶ This process is also linked to the "modernisation" of the European antitrust enforcement rules which will come into force on 1 May 2004 with the accession of the new Member States to the European Union.

The Draft TTBER, as well as the Current TTBER, applies to the licensing of technology for the manufacture and sale of goods or provision of services. In contrast, licensing for the purpose of further research or setting up of patent pools is excluded from the exemption. The Draft TTBER covers, in conformity with the Current TTBER, pure patent licence agreements, pure know-how licence agreements and mixed patent and know-how licence agreements. Patent licence agreements include, inter alia, the licensing of utility models, design rights or supplementary protection certificates. The agreement must be concluded between only two parties. However, pursuant to the Draft Guidelines, in multi-party agreements, the principles of the Draft TTBER shall apply by analogy.

In addition and as a novelty, the Draft TTBER applies to software copyright licensing agreements. Furthermore, in contrast to the Current TTBER, cross-licensing agreements can fall within the ambit of the Draft TTBER.

In the same way as the Current TTBER, the Draft TTBER covers provisions relating to other intellectual property rights if those are not the primary object of the agreement.

However, it does not exempt clauses relating to other types of agreements, for instance supply and distribution agreements. Furthermore, the Draft TTBER catches the assignment of patents or know-how provided the risk remains with the seller.

Even though not specifically mentioned, the Draft TTBER does not (in the same way as its predecessor) apply to mere sales licences, because these do not include a technology transfer.

The Current TTBER has a three-fold approach: (i) a list of certain clauses with hardcore restrictions which prevent the applicability of the TTBER to an agreement ("black clauses"), (ii) a list of clauses which are admissible ("white clauses"); and (iii) a provision on restrictive clauses which will be exempt under the Current TTBER on condition that they are notified to the Commission and that the Commission does not oppose such exemption ("grey clauses").

The Draft TTBER does away with the white and grey clauses and only contains a list of black clauses. These hardcore restrictions will place the entire agreement outside the scope of the block exemption. In addition, the Draft TTBER lists certain clauses, so-called conditions, which if included in an agreement have the result that the clause itself does not benefit from the safe harbour of the Draft TTBER. However, the remainder of the agreement remains exempt. The hardcore restrictions and the conditions include clauses which were consistently held to be black clauses under the Current TTBER. It can be assumed that in compliance with the Regulation for Vertical Distribution Agreements any clauses relating to the licensing of the technology which are restrictive of competition and are not expressly prohibited in the Draft TTBER as hardcore restrictions or conditions will in principle be admissible and valid. However, it is important to note that the Commission can withdraw the benefits of the block exemption if it finds in a particular case that the agreement has effects which are incompatible with Article 81(3) EC Treaty.

Finally and probably of most importance the Draft TTBER introduces market share thresholds. These thresholds must not be exceeded in order for the exemption to apply. Whether or not the market share thresholds are met will be a primary consideration.

The duration of the exemption period is simplified. Under the Current TTBER, different durations apply depending on the nature of the restriction and the type of intellectual property right.⁷ The Draft TTBER removes this. Instead, the exemption now applies for as long as:

• the patent or other intellectual property right on the licensed technology has not expired or been declared invalid;
• the know-how remains secret; however, if the knowhow becomes publicly known as a result of action of the licensee, the exemption applies for the duration of the agreement.

Under the new economic approach, the Draft TTBER distinguishes whether the parties are actual or potential competitors or not. Restrictions of competition resulting from agreements between competitors are usually more harmful. Therefore, these agreements are viewed more suspiciously. In the case of agreements between competitors, these may benefit from the Draft TTBER where the combined market share of the parties does not exceed 20% on the relevant product or technology market. Where the parties are noncompetitors, the market share of each of the parties must not exceed 30% on the relevant product or technology markets. This means that even if one party has a market share in excess of 30%, the Draft TTBER would not apply.

Parties are competitors:

• on a product market, if they are both active on the same product and geographic market on which the contract goods are sold ("actual competitors") or if they would in response to a small but significant price increase undertake the necessary costs to enter the market ("potential competitors"); this will in particular often be so if the parties are active on the same product but different geographic markets.
• on a technology market, if the companies license competing technologies; in contrast, if the parties’ own technologies which are in a one-way or two-way blocking position, the parties are considered to be non-competitors. In conclusion, if the licensor does not sell the products manufactured under the licence and would not do so potentially, either, and if the licensee does not own a competing technology, the parties are non-competitors.

Relevant product markets include the final and intermediate products incorporating the technology and their substitutes. Relevant technology markets include the technology and its substitutes. The determination of market shares is based on the following rules:

• Market shares shall be calculated in terms of the market sales by value for the preceding calendar year. If this is not possible then "reliable market data" may be used.
• With regard to a technology market, the market share on the technology market is assessed in terms of the presence of the licensor and all its licensees on the related product markets. It is interesting to note that this method of calculation even the draft Guidelines indicate that this approach is not the only approach.

As competition problems are more likely to arise in licensing between competitors than in licensing between non-competitors the hardcore list differs accordingly. In agreements between competitors the agreement must not contain clauses which have as their object:

• the restriction of a party’s ability to determine its prices when selling products to third parties ("resale price maintenance");
• the limitation of output or sales, except limitation of output of contract products imposed on the licensee in a non-reciprocal agreement. It should be noted, however, that the exception, whilst not constituting a hardcore restriction, is not covered by the Draft TTBER.
• the allocation of markets or customers, except restrictions imposed on the licensee (i) only to exploit the licensed technology within one or more technical fields of use or product markets; or (ii) to manufacture only for its own use, for instance as spare parts for its own products; a prohibited clause would for instance be an undertaking or the licensor not to use the licensed technology himself and therefore to cease being a competitor;
• non-compete clauses by which the licensee is restricted in his right to exploit its own technology or itself develop products unless such restriction is indispensable to prevent the disclosure of the licensor’s know-how.

Where the undertakings to the agreement are not competing companies different hardcore restrictions apply. Some of the provisions are well-known from the Regulation on Vertical Distribution Agreements. They show a general approach towards the assessment of vertical agreements, that is agreements between parties which act on different levels of the distribution chain. Under the Draft TTBER the exemption will not apply if the agreements have as their object:

• resale price maintenance practices; however, it is allowed to impose maximum prices or recommend prices;
• restrictions of the territory into which or the customer to whom the licensee may sell the products; however, by way of exception, (i) the licensor is allowed to prohibit the sales into the exclusive territory or an exclusive customer group either of himself or another licensee; (ii) furthermore, the licensor can order the licensee to manufacture only for its own use; (iii) where the licensee is a wholesaler he can be prevented from selling to end-users or in a selective distribution system to unauthorised distributors.
• if the licensee is a member of a selective distribution system and acts on the retail level he cannot be restricted in active or passive sales to end-users, however, he can be prohibited from selling from an unauthorised place of establishment.

Conditions are clauses which restrict competition, however, they are not found by the Commission to be as severe as hardcore restrictions and therefore have the effect that only they themselves but not the entire agreement fall foul of Article 81(1) EC Treaty under the Draft TTBER (principle of severability) and need to be assessed separately and individually under Article 81(3) EC Treaty. The nature of conditions is also well-known from the Regulation on Vertical Distribution Agreements. In the Current TTBER the conditions are partly black clauses and partly grey clauses.

The Draft TTBER lists the following conditions:

• an obligation imposed on the licensee to grant an exclusive licence to the licensor or a designated third party for his severable improvements to, or its new applications of, the licensed technology or to assign these results (exclusive grant-back); in contrast, non-exclusive grant-back obligations are covered by the Draft TTBER, even if they are non-reciprocal;
• no-challenge clauses with regard to the licensed intellectual property imposed on the licensee, without prejudice to the right of the licensor to terminate the agreement in the event the licensee challenges the validity of the intellectual property right;
• the limitation of output of the products manufactured under the licence in non-reciprocal agreements between competitors;
• non-compete clauses limiting non-competitors to exploit their own technology or to carry out R&D unless this is indispensable to protect the licensed know-how.

The aim is to provide an incentive on licensees to innovate.

The Commission can, by formal decision, withdraw the benefits of the block exemption regulation if, in a particular case, an agreement shows effects which are incompatible with Article 81(3) EC Treaty. This might be where access to the market is restricted by a network of exclusive licence agreements or agreements which prevent licensees from exploiting third party technologies. Another situation would be if the parties do not use the licensed technology and do not exercise the licence without due reason.

Agreements which were exempt under the Current TTBER and do not fulfil the requirements of the Draft TTBER will benefit from the exemption for a transitional period until 31 October 2005. It can be assumed that this will mainly be relevant for agreements which do not meet the market share thresholds of the Draft TTBER.

The main and significant changes arising from the Draft TTBER for the daily licensing practice of companies will result from the introduction of market shares. One implication of this new economic approach will be that companies, as a first step in the analysis of their agreement under antitrust laws, need to determine the relevant market in order to assess their market shares. Even though the Notice of the Commission on the definition of the relevant market⁸ will apply, this will only provide limited assistance in this process. More assistance may come from case law precedents.

A second implication of the introduction of the market share threshold will be that for companies, whose agreements were formerly exempt under the Current TTBER but who hold market shares above the threshold of the Draft TTBER, the situation will be less certain. There is a transitional period that expires 31 October 2005. All agreements that continue beyond that date, but in particular those where market shares may exceed the relevant thresholds, will need to be individually assessed for their validity under the Draft TTBER or under Article 81 EC Treaty. Due to the abolition of the notification system from 1 May 2004 under the new antitrust enforcement rules, such assessment will be at their own risk. This is in contrast to the pre-1 May 2004 situation where an agreement could be notified for individual exemption to the Commission. Only in rare situations of novel, unprecedented questions might companies address the Commission and obtain an informal, unbinding guidance letter from the Commission.⁹ The Draft Guidelines are designed to give assistance in an individual assessment of an agreement, however, they probably do not fully compensate for the loss of legal certainty.

In contrast to these changes, the abolition of the white and grey clauses which appears to take away legal certainty appears to be of limited (negative) effect. First, it can be assumed that the Current TTBER provides an indication as to which clauses will be considered as admissible under the new regime. Secondly, the white clauses often induced companies to draft their agreements along the lines of these "guidelines." In the absence of this guidance, agreements may be more flexible and less pre-determined.

Another benefit of the Draft TTBER is that it contains easier- to-apply language, in particular with regard to the black clauses and conditions. Furthermore, in certain aspects the scope of application has been enlarged and with it legal certainty for the companies. For example, cross licences may benefit from the automatic exemption.

In conclusion, the Draft TTBER provides a less safe harbour than the Current TTBER because its scope of application is substantially smaller due to the market share requirement. However, this aside, it clarifies aspects on how to assess technology transfer agreements under Article 81 EC Treaty, thanks mainly to the Draft Guidelines. Furthermore, the Draft TTBER seems to be easier to apply in itself, in accordance with other block exemption regulations.

We will have to wait and see whether the Draft TTBER will come into force in its present wording. The Commission is currently reviewing the input it received during a consultation period. At the least, there is little doubt that the market share threshold will be introduced. Therefore, 1 May 2004 will bring about a substantial change for technology transfer agreements.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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