Paul Hughes andTrudy Feaster

Do you licence technology or manufacture and distribute under licence within the European Economic Area (“EEA”)?
If so, you should know about the proposed revisions to the existing Technology Transfer Block Exemption (TTBE) published by the European Commission on 1 October 2003.

Why should you care about the TTBE?
Because the TTBE provides a safe harbour from certain elements of European competition law (antitrust law for US readers), and EU competition law almost certainly applies to your company’s activities in Europe where there is an affect on trade between Member States of the EEA. More specifically, EU competition law applies to activities and agreements with the potential to have a significant impact on competition within the EEA. To the surprise of many owners of intellectual property rights, the “ordinary” exercise and protection of one’s intellectual property rights frequently can violate EU competition law.

Why are licences of technology often caught by EU competition law?
A key objective of EU competition law is to ensure that there are no internal barriers to trade between Member States. From the perspective of the European Commission, which promulgates EU competition law, all of the countries in the EEA ideally make up a single free market. Unsurprisingly, companies that deal in intellectual property rights typically have a different view: Intellectual property rights are primarily national in nature, and most companies naturally expect to exploit their intellectual property rights on a national rather than EEA-wide basis. However, licensing restrictions that are unexceptional in other parts of the world, such as territorial restrictions with strong restraints on passive sales, can have the effect of creating barriers to free trade within the European internal market. Accordingly, there is an inherent tension between EU competition law and the “ordinary” exercise of intellectual property rights.

What sort of agreements are covered by the TTBE?
The existing TTBE provides a limited safe harbour to parties who engage in technology transfers where the primary intellectual property rights consist of patents and know-how. Patents are taken as including patent applications, (applications for registration of) utility models, topographies of semi-conductor products, supplementary protection certificates and plant breeders’ certificates. The proposed new TTBE will also apply to copyright in software and to design rights, so software and other design companies can take advantage of the safe harbour that benefits patent and know-how licensors.

Licences of copyright other than software copyright are not covered by the new TTBE although the same rules will be applied by analogy to some copyright licences (but not to licences of performance rights). Trade marks also are not covered by the new or old TTBE.

As with the old TTBE, the new TTBE only applies to agreements between two parties. Patent pools and other multi-party agreements must be assessed in the light of the accompanying Guidelines.

How do the requirements of the new TTBE differ from the old TTBE?
In recent years, the European Commission has been moving away from a relatively abstract rules-based approach and toward a market effects-based analysis of potentially anti-competitive practices. In other words, your market share and the likely effect of your proposed agreements and activities on competition within the EEA are absolutely critical.

The draft new TTBE makes a strong distinction between restraints that are permissible when licensor and licensee are not competitors, and those restraints that are permissible when licensor and licensee are competitors. For example, a licensor who competes with its licensee in a relevant technology or product market cannot restrict the licensee’s ability to determine sale prices, agree to limit output or sales, or allocate markets or customers (except that it is possible to impose a field of use restriction on the licensee and to require that the licensee manufacture the contract products only for its own use). It is not permissible to restrict the licensee’s ability to exploit its own technology or conduct R&D, unless the latter restriction is indispensable to protect the licensor’s know-how. When a licensor and licensee are not competitors, the licensor can (under certain conditions) restrict the territories into which or the customers to whom the licensee sells the contract products, and the licensor can impose a maximum sale price on the licensee or recommend a sale price. Reference should be made to the TTBE for a full list of prohibited clauses and also to the Guidelines for a proper understanding of the scope of these prohibited clauses.

Controversially, the new TTBE introduces market share caps for determining which licences may benefit from block exemption. If competing undertakings have a combined market share exceeding 20% on any relevant technology or product market, their agreement cannot benefit from block exemption in respect of that market. The market share cap is 30% each for non-competing undertakings. The draft Guidelines give examples of when companies will qualify as competitors and how to calculate market shares.

Subject to the block exemption being withdrawn owing to the anti-competitive effects of a given licence, the new TTBE will apply to the licence until the date of expiry, invalidity or the coming into the public domain (in the case of know-how) of the last intellectual property right which the licence covers and which constitutes “technology” within the meaning of the TTBE.

What should you do with existing licences?
The proposals are due to come into force 1 May 2004. There is a transitional period for licences which at the time satisfy the conditions for exemption stipulated in the old TTBE. The transitional period expires 31 October 2005. During that period it will advisable to review existing agreements and negotiate any amendments necessary to comply with the new rules in order to remain within the safe harbour of the block exemption. Agreements outside of the scope of the TTBE will require individual assessment in the light of the Guidelines.

This is a fairly complex area of law but extremely important, particularly as breaches of EU competition law can result in fines of up to 10% of group world-wide turnover, clauses which infringe the competition rules (and thus potentially the whole licence) are void and unenforceable and third parties harmed by an anti-competitive agreement can seek damages from the parties involved.

If you would like to learn more about the proposal for a new Technology Transfer Block Exemption, please send an e-mail to Jamesfry@eversheds.com requesting a copy of Eversheds’ more detailed note introducing the new TTBE, or please contact Paul Hughes or Trudy Feaster if you have specific queries (contact details given below):

Paul Hughes
Partner
Direct Dial: +44 1223 443831
Mobile: +44 7736 640 820
Email: paulhughes@eversheds.com

Trudy Feaster
Barrister and Associate
Direct Dial: +44 113 200 4666
Mobile: +44 7785 233 574
Email: trudyfeaster@eversheds.com

This article first appeared in IPeye, the intellectual property newsletter published by Eversheds Solicitors. For more information about, or to receive copies of IPeye, please contact Janet Knowles on +44 161 837 6107 or +44 113 200 4186 or at janetknowles@eversheds.com

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