Technology Licensing – Planning the Perfect Marriage!

A new EU technology transfer and licensing regime is due to come into force in May 2004 and will impact on anyone licensing technology in or out, including software. Current arrangements will also need to be reviewed as existing agreements will be required to be compliant by 31 March 2006.

The Commission's expressed intent is to simplify the regime, introduce an "economics based approach" and to bring the EU approach further in line with the approach in the United States. Concerns have however been expressed from many that what has been proposed may provide greater uncertainty and severely hinder the market for technology transfer and therefore innovation.

In the European Commissioner for Competition Policy's speech on 16 January 2004 he countered the apparent outdated thinking that the marriage of "the innovation bride and the competition groom … will unavoidably lead to divorce because of conflicting aims of IPR law and competition law". He stated that "competition is a necessary stimulus for innovation" and "IPR law and competition law have a complementary role to play in promoting innovation to the benefit of consumers. Like in all good marriages, the real question is how to achieve a good balance between both policies". So will this balance be achieved with the new regime or will it stifle technology licensing?

In Europe all technology transfer agreements are considered potentially anti-competitive as preventing, restricting or distorting competition, unless specifically exempted by the Commission or falling within the terms of the current Technology Transfer Block Exemption Regulation ("TTBER").

If an agreement is considered anti-competitive and not exempt the agreement will be likely to be unenforceable, fines could be levied against the parties, and in theory people harmed could claim damages.

The TTBER exempts agreements from these effects by setting out a "black" list of prohibited provisions, a "white" list of clearly exempt provisions and a "grey" list of potentially authorised provisions. There is little reference to economic criteria and no consideration as to whether the parties are competitors. If there are no more than two parties to an agreement relating to patents and know-how and the terms of the Agreement can be brought within the rules of the TTBER, the Agreement will be exempt.

Most parties preparing and negotiating such agreements relating to patents and know-how have relied on the TTBER to provide a safe harbour. If in limited circumstances they are unable to come within the TTBER, they have been able to refer to the Commission to request guidance/exemption.

The new Block Exemption ("new TTBER") will revoke the old TTBER on 1 May 2004 and will apply to all agreements entered into on or after that date. Existing agreements will remain valid until 31 March 2006 when they must also comply with the new rules. The procedure for referring to the Commission for an individual exemption is being withdrawn, so parties to an agreement, with their advisers, will have to assess for themselves whether their agreement falls within the new exemption and if not whether it would be likely to be considered anti-competitive.

The proposed Regulation is to apply not just to the licensing of patented technology and know-how but is also to apply to software copyright licences (as well as to mixed agreements for the licensing of technology involving all or any of these). It will also relate to designs.

Until now it would appear that licences of software have been regarded as a distinct type of licence and in many respects not subject to the same scrutiny by the EU competition authorities. They will now be treated in the same way as other technology licences. It will be interesting to see if this has a dramatic effect on their terms.

The main area of concern relates to the introduction of market share thresholds for the application of the new TTBE. If the parties are competing undertakings and the combined market share of the parties does not exceed 20% either on a relevant technology market or on a relevant product market; or the parties are not competing and their individual market share does not exceed 30% on the relevant technology and product markets then the Block Exemption may apply. "Potential" competitors will also be considered under this market share test. These limits will continue to apply for the duration of the agreement so if the parties' market share does not exceed these limits at the time of entering into the agreement but may do at some point during the life of the agreement, the agreement could become unenforceable (although a grace period of two consecutive calendar years following the year in which the relevant threshold is first exceeded is provided).

Assuming the parties are within the market share provisions, there are different black listed restrictions to be considered depending on whether the parties are competing. This is another major change from the old regime. There is also no "white list" of restrictions that are permitted in agreements.

There is a broader list of restrictions which competing parties must avoid in their agreements if they wish to claim "safe harbour" compared with non-competing parties. However in both cases price fixing will not be permitted and restrictions on output and allocating customers, markets, and fields of use will need to be considered carefully.

The new rules also list "grey conditions" which are not within the exemption but could leave the rest of the agreement exempt. Importantly however these provisions would be at risk of being unenforceable, which will depend on their anti-competitive effect. They include agreements not to challenge the rights being licensed, certain non-reciprocal limitations on output of licensed products by licensees, restrictions on R&D activity and obligations on a licensee to grant an exclusive licence back or assign certain improvements.

The European Commissioner has been keen to stress that agreements not within the Block Exemption as the parties are above the market share thresholds will not necessarily be deemed to be illegal. The new TTBE rather creates a "safe harbour" for those types of restrictions and situations where the Commission can safely assume that either the Agreement is not anti-competitive or the conditions for exemption are fulfilled. However, it will remain for the parties to assess the impact of their agreements i.e. whether they are anti-competitive. The number of parties able to take advantage of the safe harbour will undoubtedly have diminished. This will inevitably create some uncertainty. This in turn may increase the likelihood of challenge to the enforceability of the terms of licences by one party during the life of the Agreement, even if just as a tactic to renegotiate terms.

Any business involved in technology transfer or licensing (including software licensing) will now have to consider carefully its own market share, that of the other party to the proposed agreement and whether or not they would be considered competitors or potential competitors, before the commercial terms can be negotiated. Parties to such agreements will have to get used to these economic considerations.

However, it is anticipated that the application of the new TTBE to the restrictions to be included in such agreements will be simplified, as it largely specifies the types of restrictions that must be avoided rather than providing for the form of the clauses that should or should not be included.

Given the increased international nature of technology licensing, bringing the EU approach further in line with the United States must also be welcomed.