Europe Finalizes Technology Transfer Rules

Readers will recall that in our December edition, I wrote with some alarm about the European Commission's proposals to revise anti-trust law affecting technology licensing deals (see “Are Anti-Trust Laws About To Bite Europe On Its IP Assets?“).

My alarm was set off by some of the more extreme proposals, which appeared to outlaw exclusive licence deals in many common situations, and there were a considerable number of flaws in the Commission's draft proposals.

Faced with a howl of protests, the Commission has, to some extent, watered down its proposals, but the new regime, which came into force on May 1, still presents a number of potential pitfalls for technology companies wishing to do business in Europe. On May 1, 10 countries joined the European Union (EU) to bring the number of member states to 25.

In this piece, I shall run through some of the more significant elements of the new Technology Transfer Block Exemption Regulations (TTBER).

What TTBER Aims To Do

The TTBER is designed to protect technology-transfer agreements from the effects of Article 81 of the European Treaty. Article 81 prohibits all agreements and concerted practices between undertakings and decisions by associations of undertakings that may affect trade between member states of the European communities and that have as their object or effect the prevention, restriction or distortion of competition. This broad wording means that any agreement that negatively affects the market in Europe will, in principle, fall foul of Article 81. However, there are a number of general, and then specific, exemptions.

Detailing the Exemptions

Firstly, Article 81(3) exempts an agreement from Article 81 if an agreement contributes to improving the production or distribution of products, or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits. Such agreements must not impose restrictions unless strictly necessary for the attainment of these objectives, and must not afford the parties the possibility of eliminating competition in respect of a substantial part of the market for the products concerned.

Until May 1, it was possible for the parties to an agreement to approach the EU and seek an individual decision confirming that their agreement met the requirements of Article 81(3), but this is no longer the case. The parties themselves, and their advisers, will have to come to a view as to whether the requirements of Article 81(3) are met ' the final test being if the agreement is challenged before a court.

Secondly, to fall foul of Article 81, an agreement must “appreciably” restrict competition, and generally the Commission is of the view that this threshold will not be met if either the aggregate market share held by the parties to the agreement does not exceed 10% where the parties are actual or potential competitors, or 15% where the parties are not competitors. However, this rule will not apply to any agreement that contains “hardcore” restrictions, these including restrictions on the buyer's ability to determine:

• Its sale prices;
• Restrictions on the territory into which or the customers to whom the buyer may sell the contract goods or services; and
• A restriction between a supplier of components and a buyer who incorporates those components that limits the supplier's ability to sell the components as spare parts to end users or to repairers.

The legislation is, however, complex, and there are a number of caveats to these general provisions.

Thirdly, to fall foul of Article 81, an agreement must “appreciably” affect trade between EU member states. The Commission has publicly stated that agreements between small and medium-sized undertakings are rarely capable of appreciably affecting trade between member states ' small and medium-sized undertakings being currently defined as undertakings which have fewer than 250 employees and have either an annual turnover not exceeding 40 million (around US $47.3 million), or an annual balance-sheet total not exceeding 27 million (around US $32 million).

Finally, the E.U. has produced a number of so-called “block exemptions,” regulations that exempt particular types of agreements from Article 81 in particular circumstances. As the name suggests, the TTBER is a block exemption designed to protect certain “technology transfer agreements.”

Defining Terms

A technology transfer agreement is defined as a patent licence. In this case, a “patent” includes:

• Designs;
• Semiconductor topographies and pharmaceutical supplementary-protection certificates;
• Know-how licences;
• Software copyright licences; and
• ' Any mix of these.

The term technology transfer agreement will also cover assignments (outright sales) of patents, know-how and software copyright licenses if the agreement involves some kind of earn-out whereby the amount the seller gets for the sale depends in part on how successfully the buyer exploits the technology after the sale.

The TTBER makes it clear that it is designed to protect agreements dealing with products only; pure research agreements are not covered (they have a block exemption of their own). Of particular note is that the TTBER will protect only agreements between two parties; if there are more than two parties, the TTBER will not apply.

The TTBER divides technology transfer agreements into two types – those between competitors (either actual or potential), and those between noncompetitors – and treats them very differently. The requirements that must be met before an agreement between competitors will be protected by the TTBER are considerably stricter than those applying to agreements between noncompetitors.

Firstly, an agreement between competitors will be protected by the TTBER only if the parties' combined market share does not exceed 20% of the affected relevant technology and product market. Note in particular that this is the combined market share of both parties, and will include the relevant market shares of each party's “connected undertakings,” which, broadly, will include all group companies.

Secondly, an agreement between competitors must not include any of a list of hardcore restrictions. These include:

• Restrictions of a party's ability to determine its prices when selling products to third parties;
• Limitations of output;
• Allocations of markets or customers; and
• Restrictions of the licensee's ability to exploit its own technology, or the restriction of the ability of any of the parties to the agreement to carry out research and development.

The hardcore restrictions have been the subject of heated debate in Europe, and as a result of that debate, a number of detailed caveats have been introduced, particularly with regard to restrictions on markets or customers. Anyone drafting a technology-transfer agreement is well advised to review these provisions most carefully.

Requirements for an agreement between noncompetitors to comply with the TTBER are somewhat less strict. In such a case, the market share of each party must not exceed 30% of the affected relevant technology and product market. The TTBER also contains a separate list of hardcore restrictions that are somewhat less onerous than those applying to agreements between competitors.

Finally, the TTBER sets out a shortlist of “excluded restrictions,” provisions not regarded as “hardcore” but that will potentially take an agreement outside the protection of a TTBER. Such provisions need careful and individual examination to see whether they meet the requirements of Article 81(3).

Conclusions

Well, it could have been worse. The draft legislation that the Commission produced midway through 2003 betrayed a fundamental misunderstanding of the way technology licensing works in practice, and the new TTBER and the Commission's guidelines published with it go to some lengths to confirm the Commission's view that technology licensing is a “good thing.”

Nonetheless, the TTBER's protection is considerably limited by the market thresholds mentioned above, and careful ongoing analysis of market definitions and market shares needs to be carried out prior to entering into a technology-transfer agreement, and throughout its life as a result of the structure of this new legislation.

Within those market thresholds, the parties have a reasonable scope to impose fairly standard restrictions on each other. The list of hardcore restrictions, particularly in the case of agreements between noncompetitors, is relatively small and contains few surprises. Still, when doubts surface about when TTBER market-threshold requirements are met, then, in light of abolition of the Commission notification scheme (under which an individual Article 81(3) exemption could be obtained), parties are left with some potentially significant exposure and uncertainty as to the legal affect of their agreement.

In addition, with more powers being devolved to national competition authorities under separate provisions that also came into force on May 1, there is a danger of inconsistent decision-making on such matters across the EU. It is likely that the new anti-trust regime in Europe will take some time to bed down.

Readers will recall that in our December edition, I wrote with some alarm about the European Commission's proposals to revise anti-trust law affecting technology licensing deals (see “Are Anti-Trust Laws About To Bite Europe On Its IP Assets?“).

My alarm was set off by some of the more extreme proposals, which appeared to outlaw exclusive licence deals in many common situations, and there were a considerable number of flaws in the Commission's draft proposals.

Faced with a howl of protests, the Commission has, to some extent, watered down its proposals, but the new regime, which came into force on May 1, still presents a number of potential pitfalls for technology companies wishing to do business in Europe. On May 1, 10 countries joined the European Union (EU) to bring the number of member states to 25.

In this piece, I shall run through some of the more significant elements of the new Technology Transfer Block Exemption Regulations (TTBER).

What TTBER Aims To Do

The TTBER is designed to protect technology-transfer agreements from the effects of Article 81 of the European Treaty. Article 81 prohibits all agreements and concerted practices between undertakings and decisions by associations of undertakings that may affect trade between member states of the European communities and that have as their object or effect the prevention, restriction or distortion of competition. This broad wording means that any agreement that negatively affects the market in Europe will, in principle, fall foul of Article 81. However, there are a number of general, and then specific, exemptions.

Detailing the Exemptions

Firstly, Article 81(3) exempts an agreement from Article 81 if an agreement contributes to improving the production or distribution of products, or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits. Such agreements must not impose restrictions unless strictly necessary for the attainment of these objectives, and must not afford the parties the possibility of eliminating competition in respect of a substantial part of the market for the products concerned.

Until May 1, it was possible for the parties to an agreement to approach the EU and seek an individual decision confirming that their agreement met the requirements of Article 81(3), but this is no longer the case. The parties themselves, and their advisers, will have to come to a view as to whether the requirements of Article 81(3) are met ' the final test being if the agreement is challenged before a court.

Secondly, to fall foul of Article 81, an agreement must “appreciably” restrict competition, and generally the Commission is of the view that this threshold will not be met if either the aggregate market share held by the parties to the agreement does not exceed 10% where the parties are actual or potential competitors, or 15% where the parties are not competitors. However, this rule will not apply to any agreement that contains “hardcore” restrictions, these including restrictions on the buyer's ability to determine:

• Its sale prices;
• Restrictions on the territory into which or the customers to whom the buyer may sell the contract goods or services; and
• A restriction between a supplier of components and a buyer who incorporates those components that limits the supplier's ability to sell the components as spare parts to end users or to repairers.

The legislation is, however, complex, and there are a number of caveats to these general provisions.

Thirdly, to fall foul of Article 81, an agreement must “appreciably” affect trade between EU member states. The Commission has publicly stated that agreements between small and medium-sized undertakings are rarely capable of appreciably affecting trade between member states ' small and medium-sized undertakings being currently defined as undertakings which have fewer than 250 employees and have either an annual turnover not exceeding 40 million (around US $47.3 million), or an annual balance-sheet total not exceeding 27 million (around US $32 million).

Finally, the E.U. has produced a number of so-called “block exemptions,” regulations that exempt particular types of agreements from Article 81 in particular circumstances. As the name suggests, the TTBER is a block exemption designed to protect certain “technology transfer agreements.”

Defining Terms

A technology transfer agreement is defined as a patent licence. In this case, a “patent” includes:

• Designs;
• Semiconductor topographies and pharmaceutical supplementary-protection certificates;
• Know-how licences;
• Software copyright licences; and
• ' Any mix of these.

The term technology transfer agreement will also cover assignments (outright sales) of patents, know-how and software copyright licenses if the agreement involves some kind of earn-out whereby the amount the seller gets for the sale depends in part on how successfully the buyer exploits the technology after the sale.

The TTBER makes it clear that it is designed to protect agreements dealing with products only; pure research agreements are not covered (they have a block exemption of their own). Of particular note is that the TTBER will protect only agreements between two parties; if there are more than two parties, the TTBER will not apply.

The TTBER divides technology transfer agreements into two types – those between competitors (either actual or potential), and those between noncompetitors – and treats them very differently. The requirements that must be met before an agreement between competitors will be protected by the TTBER are considerably stricter than those applying to agreements between noncompetitors.

Firstly, an agreement between competitors will be protected by the TTBER only if the parties' combined market share does not exceed 20% of the affected relevant technology and product market. Note in particular that this is the combined market share of both parties, and will include the relevant market shares of each party's “connected undertakings,” which, broadly, will include all group companies.

Secondly, an agreement between competitors must not include any of a list of hardcore restrictions. These include:

• Restrictions of a party's ability to determine its prices when selling products to third parties;
• Limitations of output;
• Allocations of markets or customers; and
• Restrictions of the licensee's ability to exploit its own technology, or the restriction of the ability of any of the parties to the agreement to carry out research and development.

The hardcore restrictions have been the subject of heated debate in Europe, and as a result of that debate, a number of detailed caveats have been introduced, particularly with regard to restrictions on markets or customers. Anyone drafting a technology-transfer agreement is well advised to review these provisions most carefully.

Requirements for an agreement between noncompetitors to comply with the TTBER are somewhat less strict. In such a case, the market share of each party must not exceed 30% of the affected relevant technology and product market. The TTBER also contains a separate list of hardcore restrictions that are somewhat less onerous than those applying to agreements between competitors.

Finally, the TTBER sets out a shortlist of “excluded restrictions,” provisions not regarded as “hardcore” but that will potentially take an agreement outside the protection of a TTBER. Such provisions need careful and individual examination to see whether they meet the requirements of Article 81(3).

Conclusions

Well, it could have been worse. The draft legislation that the Commission produced midway through 2003 betrayed a fundamental misunderstanding of the way technology licensing works in practice, and the new TTBER and the Commission's guidelines published with it go to some lengths to confirm the Commission's view that technology licensing is a “good thing.”

Nonetheless, the TTBER's protection is considerably limited by the market thresholds mentioned above, and careful ongoing analysis of market definitions and market shares needs to be carried out prior to entering into a technology-transfer agreement, and throughout its life as a result of the structure of this new legislation.

Within those market thresholds, the parties have a reasonable scope to impose fairly standard restrictions on each other. The list of hardcore restrictions, particularly in the case of agreements between noncompetitors, is relatively small and contains few surprises. Still, when doubts surface about when TTBER market-threshold requirements are met, then, in light of abolition of the Commission notification scheme (under which an individual Article 81(3) exemption could be obtained), parties are left with some potentially significant exposure and uncertainty as to the legal affect of their agreement.

In addition, with more powers being devolved to national competition authorities under separate provisions that also came into force on May 1, there is a danger of inconsistent decision-making on such matters across the EU. It is likely that the new anti-trust regime in Europe will take some time to bed down.