Competition rules relating to technology transfer agreements

Communication pursuant to Article 5 of Council Regulation No 19/65/EEC of 2 March 1965 on the application of Article 81(3) of the EC Treaty to certain categories of agreements and concerted practices, as last amended by Regulation (EC) No 1/2003

(2003/C 235/04)

(Text with EEA relevance)

The Commission invites all interested parties to send their comments on the following texts:

- draft Commission Regulation on the application of Article 81(3) of the EC Treaty to categories of technology transfer agreements,

- draft Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements.

These comments should be sent to the Commission not later than eight weeks after the date of the publication in the Official Journal of the European Union. It is standard Commission practice to publish the submissions received in response to a public consultation. However, it is possible to request that submissions or parts thereof remain confidential. Should this be the case, please indicate clearly on the front page of the submission that you request it should not be made publicly available. In this case, a non-confidential version of the submission should also be forwarded to the Commission for publication. Comments should be sent either by e-mail to:

COMP-TECHNOLOGY-TRANSFER@cec.eu.int

or in writing to: European Commission Directorate-General for Competition

Unit A 1 - Policy Development (Antitrust/mergers)

Technology Transfer Review

B - 1049 Brussels.

Draft Commission Regulation on the application of Article 81(3) of the Treaty to categories of technology transfer agreements

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation No 19/65/EEC of 2 March 1965 on application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices(1), as last amended by Regulation (EC) No 1/2003(2), and in particular Article 1 thereof,

Having published a draft of this Regulation(3),

Having consulted the Advisory Committee on Restrictive Practices and Dominant Positions,

Whereas:

(1) Regulation No 19/65/EEC empowers the Commission to apply Article 81(3) of the Treaty by Regulation to certain categories of technology transfer agreements and corresponding concerted practices to which only two undertakings are party, falling within Article 81(1).

(2) Pursuant to Regulation No 19/65/EEC, the Commission has, in particular, adopted Regulation (EC) No 240/96 of 31 January 1996 on the application of Article 81(3) of the Treaty to certain categories of technology transfer agreements(4).

(3) On 20 December 2001 the Commission published an Evaluation Report on the Transfer of Technology Block Exemption Regulation (EC) No 240/96(5). This generated a public debate on the application of this Regulation and on the application in general of Articles 81(1) and (3) of the Treaty to technology transfer agreements. The response to the Evaluation Report from Member States and third parties has been generally in favour of reform of Community competition policy on technology transfer agreements. It has been considered therefore that Regulation (EC) No 240/96 should be replaced.

(4) A new regulation, replacing Regulation (EC) No 240/96, should meet the two requirements of ensuring effective competition and providing adequate legal security for undertakings. The pursuit of these objectives should take account of the need to simplify the regulatory framework and its application. It is appropriate to move away from the approach of listing exempted clauses and to place greater emphasis on defining the categories of agreements which are exempted up to a certain level of market power and on specifying the restrictions or clauses which are not to be contained in such agreements. This is consistent with an economics based approach which assesses the impact of agreements on the relevant market. It is also consistent with such an approach to make a distinction between agreements between competitors and agreements between non-competitors.

(5) Technology transfer agreements concern the licensing of technology. This Regulation should only deal with such agreements where the licensor permits the licensee to exploit the licensed technology for the manufacture or provision of goods or services. It should not deal with licensing agreements for the purpose of doing further research and development. It should also not deal with licensing agreements to set up patent pools, i.e. agreements for the pooling of technologies with the purpose of licensing the created package of intellectual property rights to third parties.

(6) For the application of Article 81(3) by regulation, it is not necessary to define those technology transfer agreements that are capable of falling within Article 81(1). In the individual assessment of agreements under Article 81(1), account has to be taken of several factors, and in particular the market structure on the relevant technology and product markets.

(7) The benefit of the block exemption should be limited to those agreements which can be assumed with sufficient certainty to satisfy the conditions of Article 81(3). In order to attain the benefits and objectives of technology transfer the benefit of this Regulation should also apply to provisions contained in technology transfer agreements that do not constitute the primary object of such agreements, but are directly related to the application of the licensed technology.

(8) Transfer of technology agreements will usually improve economic efficiency and be pro-competitive as they can facilitate diffusion, reduce duplication of research and development, strengthen the incentive for the initial research and development, spur incremental innovation and generate product market competition.

(9) The likelihood that such efficiency enhancing and pro-competitive effects will outweigh any anti-competitive effects due to restrictions contained in technology transfer agreements depends on the degree of market power of the undertakings concerned and, therefore, on the extent to which those undertakings face competition from undertakings owning substitute technologies or undertakings producing substitute products.

(10) For technology transfer agreements between competitors, it can be presumed that, where the combined share of the relevant markets accounted for by the parties does not exceed 20 % and the agreements do not contain certain severely anti-competitive restraints, that they generally lead to an improvement in production or distribution and allow consumers a fair share of the resulting benefits.

(11) For technology transfer agreements between non-competitors it can be presumed that, where the individual share of the relevant markets accounted for by each of the parties does not exceed 30 % and the agreements do not contain certain severely anti-competitive restraints, that they generally lead to an improvement in production or distribution and allow consumers a fair share of the resulting benefits.

(12) Above these market share thresholds there can be no presumption that technology transfer agreements falling within the scope of Article 81(1) will usually give rise to objective advantages of such a character and size as to compensate for the disadvantages which they create for competition.

(13) This Regulation should not exempt technology transfer agreements containing restrictions which are not indispensable to the improvement of production or distribution. In particular, technology transfer agreements containing certain severely anti-competitive restraints such as the fixing of prices charged to third parties should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market shares of the undertakings concerned. In the case of such hardcore restrictions, the whole agreement should be excluded from the benefit of the block exemption.

(14) In order to protect incentives to innovate and the appropriate application of intellectual property rights, certain conditions should be attached to the block exemption. To this end, the exemption of, in particular, grant back obligations for severable improvements should be limited to non-exclusive obligations. Where such conditions are not respected, only the restriction in question should be excluded from the benefit of the block exemption.

(15) The market-share thresholds, the non-exemption of technology transfer agreements containing severely anti-competitive restraints and the conditions provided for in this Regulation will normally ensure that the agreements to which the block exemption applies do not enable the participating undertakings to eliminate competition in respect of a substantial part of the products in question.

(16) In particular cases in which the agreements falling under this Regulation nevertheless have effects incompatible with Article 81(3), the Commission may withdraw the benefit of the block exemption. This may occur in particular where the incentives to innovate are reduced or where access to the markets is hindered.

(17) Regulation (EC) No 1/2003 empowers the competent authorities of Member States to withdraw the benefit of the block exemption in respect of technology transfer agreements having effects incompatible with the conditions laid down in Article 81(3), where such effects are felt in their respective territory, or in a part thereof, and where such territory has the characteristics of a distinct geographic market. Member States should ensure that the exercise of this power of withdrawal does not prejudice the uniform application throughout the common market of the Community competition rules or the full effect of the measures adopted in implementation of those rules.

(18) In order to strengthen supervision of parallel networks of technology transfer agreements which have similar restrictive effects and which cover more than 50 % of a given market, the Commission may declare this Regulation inapplicable to technology transfer agreements containing specific restraints relating to the market concerned, thereby restoring the full application of Article 81 to such agreements.

(19) This Regulation only covers technology transfer agreements between a licensor and a licensee. It covers such agreements even if conditions are stipulated for more than one level of trade, by for instance requiring the licensee to set up a particular distribution system and specifying the obligations the licensee must or may impose on resellers of the products produced under the licence. However, such conditions and obligations must comply with the competition rules applicable to supply and distribution agreements. Supply and distribution agreements concluded between a licensee and its buyers are not exempted by this Regulation. These agreements are only exempted if covered by a block exemption regulation for supply and distribution agreements.

(20) This Regulation is without prejudice to the application of Article 82,

HAS ADOPTED THIS REGULATION:

Article 1

Definitions

1. For the purposes of this Regulation the following definitions shall apply:

(a) "agreement" means an agreement, a decision of an association of undertakings or a concerted practice;

(b) "technology transfer agreement" means a patent licensing agreement, a know-how licensing agreement, a software copyright licensing agreement or a mixed patent, know-how or software copyright licensing agreement, including such agreement containing provisions which relate to the sale and purchase of products or which relate to the licensing of other intellectual property rights or the assignment of intellectual property rights, provided that those provisions do not constitute the primary object of the agreement and are directly related to the manufacture or provision of the contract products; assignments of patents, know-how, software copyright or a combination thereof where the risk associated with the exploitation of the technology remains with the assignor, in particular where the sum payable in consideration of the assignment is dependent on the turnover obtained by the assignee in respect of products manufactured or provided with the assigned technology, the quantity of such products produced or the number of operations carried out employing the technology, shall also be deemed to be technology transfer agreements;

(c) "product" means a good and/or a service, including both intermediary goods and/or services and final goods and/or services;

(d) "contract products" means products manufactured or provided with the licensed technology;

(e) "intellectual property rights" includes industrial property rights, copyright and neighbouring rights;

(f) "patents" means patents, patent applications, utility models, applications for registration of utility models, designs, topographies of semiconductor products, supplementary protection certificates for medicinal products or other products for which such supplementary protection certificates may be obtained and plant breeder's certificates;

(g) "know-how" means a package of non-patented practical information, resulting from experience and testing, which is secret, substantial and identified: in this context, "secret" means that the know-how is not generally known or easily accessible; "substantial" means that the know-how includes information which is indispensable for the manufacture or provision of the contract products; "identified" means that the know-how is described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality;

(h) "competing undertakings" means undertakings which compete on the relevant technology market and/or the relevant product market:

- undertakings compete on the "relevant technology market" if the undertakings license competing technologies (actual competitors on the technology market),

- undertakings compete on the "relevant product market" if the undertakings are both active on the relevant product and geographic market(s) on which the contract products are sold (actual competitors on the product market) or would, on realistic grounds, undertake the necessary additional investments or other necessary switching costs so that they could enter the(se) relevant product and geographic market(s) in response to a small and permanent increase in relative prices (potential competitors on the product market);

(i) "selective distribution system" means a distribution system where the licensor undertakes to license the manufacture and provision of the contract products only to licensees selected on the basis of specified criteria and where these licensees undertake not to sell the contract products to unauthorised distributors.

2. The terms "undertaking", "licensor" and "licensee" shall include their respective connected undertakings.

"Connected undertakings" means:

(a) undertakings in which a party to the agreement, directly or indirectly:

(i) has the power to exercise more than half the voting rights; or

(ii) has the power to appoint more than half the members of the supervisory board, board of management or bodies legally representing the undertaking; or

(iii) has the right to manage the undertaking's affairs;

(b) undertakings which directly or indirectly have, over a party to the agreement, the rights or powers listed in (a);

(c) undertakings in which an undertaking referred to in (b) has, directly or indirectly, the rights or powers listed in (a);

(d) undertakings in which a party to the agreement together with one or more of the undertakings referred to in (a), (b) or (c), or in which two or more of the latter undertakings, jointly have the rights or powers listed in (a);

(e) undertakings in which the rights or the powers listed in (a) are jointly held by:

(i) parties to the agreement or their respective connected undertakings referred to in (a) to (d); or

(ii) one or more of the parties to the agreement or one or more of their connected undertakings referred to in (a) to (d) and one or more third parties.

Article 2

Exemption

Pursuant to Article 81(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 81(1) shall not apply to technology transfer agreements entered into between two undertakings for the manufacture or provision of contract products.

This exemption shall apply to the extent that such agreements contain restrictions of competition falling within the scope of Article 81(1). The exemption shall apply for as long as the intellectual property right on the licensed technology has not expired or been declared invalid or, in the case of know-how, remains secret, except in the event where the know-how becomes publicly known as a result of action by the licensee, in which case the exemption shall apply for the duration of the agreement.

Article 3

Market share thresholds

1. Where the undertakings party to the technology transfer agreement are competing undertakings, the exemption provided for in Article 2 shall apply on condition that the combined market share of the parties does not exceed 20 %, either on a relevant technology market, or on a relevant product market.

2. Where the undertakings party to the technology transfer agreement are not competing undertakings, the exemption provided for in Article 2 shall apply on condition that the market share of each of the parties does not exceed 30 % on the relevant technology and product markets.

3. For the purposes of paragraphs 1 and 2, the market share of a party on the relevant technology market(s) is defined in terms of the presence of the licensed technology on the relevant product market(s). A licensor's market share on the relevant technology market(s) shall be the combined market share on the relevant product market(s) of the contract products manufactured or provided by the licensor and its licensees.

Article 4

Hardcore restrictions

1. Where the undertakings party to the agreement are competing undertakings, the exemption provided for in Article 2 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a) the restriction of a party's ability to determine its prices when selling products to third parties;

(b) the limitation of output or sales, except limitations on the output of contract products imposed on the licensee in a non-reciprocal agreement;

(c) the allocation of markets or customers except:

(i) the obligation on the licensee in a non-reciprocal agreement to exploit the licensed technology only within one or more technical fields of use or one or more product markets;

(ii) the requirement that the licensee manufactures or provides the contract products only for its own use, including sale of the contract products as spare parts for its own products;

(d) the restriction of the licensee's ability to exploit its own technology or the restriction of the ability of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent the disclosure of the licensed know-how to third parties.

2. Where the undertakings party to the agreement are not competing undertakings, the exemption provided for in Article 2 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a) the restriction of a party's ability to determine its prices when selling products to third parties, without prejudice to the possibility to impose a maximum sale price or recommend a sale price, provided that it does not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;

(b) the restriction of the territory into which, or of the customers to whom, the licensee may sell the contract products, except:

(i) the restriction of sales into the exclusive territory or to an exclusive customer group reserved for sales by the licensor;

(ii) the restriction of active sales into the exclusive territory or to an exclusive customer group allocated by the licensor to another licensee;

(iii) the requirement that the licensee manufactures or provides the contract products only for its own use, including sale of the contract products as spare parts for its own products;

(iv) the restriction of sales to end users by a licensee operating at the whole sale level of trade;

(v) the restriction of sales to unauthorised distributors by the members of a selective distribution system;

(c) the restriction of active or passive sales to end users by a licensee which is a member of a selective distribution system and which operates at the retail level, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment.

Article 5

Conditions

1. The exemption provided for in Article 2 shall not apply to any of the following obligations contained in technology transfer agreements:

(a) any direct or indirect obligation on the licensee to grant an exclusive license to the licensor or to a third party designated by the licensor in respect of its own severable improvements to or its new applications of the licensed technology;

(b) any direct or indirect obligation on the licensee to assign, in whole or in part, to the licensor or to a third party designated by the licensor, rights to improvements to or new applications of the licensed technology;

(c) any direct or indirect obligation not to challenge the validity or contest the secrecy or substantiality of intellectual property rights which the licensor holds in the common market, without prejudice to the possibility to provide for termination of the technology transfer agreement in the event that the licensee challenges the validity or contests the secrecy or substantiality of the licensed intellectual property rights.

2. The exemption provided for in Article 2 shall not apply to any direct or indirect obligation limiting the output of contract products by the licensee in a non-reciprocal technology transfer agreement between competing undertakings.

3. The exemption provided for in Article 2 shall not apply, where the undertakings party to the agreement are not competing undertakings, to any direct or indirect obligation limiting the licensee's ability to exploit its own technology or limiting the ability of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent the disclosure of the licensed know-how to third parties.

Article 6

Withdrawal of the benefit of the Regulation

1. The Commission may withdraw the benefit of this Regulation, pursuant to Article 29 of Regulation (EC) No 1/2003, where it finds in any particular case, that a technology transfer agreement to which this Regulation applies nevertheless has effects which are incompatible with the conditions laid down in Article 81(3) of the Treaty, and in particular where:

(a) access of third parties' technologies to the market is restricted, for instance by the cumulative effect of parallel networks of similar restrictive agreements prohibiting licensees from using third parties' technologies;

(b) access of potential licensees to the market is restricted, for instance by the cumulative effect of parallel networks of similar restrictive agreements prohibiting licensors from licensing to other licensees;

(c) without any objectively valid reason, the parties do not exploit the licensed technology.

2. Where in any particular case, a technology transfer agreement to which the exemption provided for in Article 2 applies has effects incompatible with the conditions laid down in Article 81(3) of the Treaty in the territory of a Member State, or in a part thereof, which has all the characteristics of a distinct geographic market, the competition authority of that Member State may withdraw the benefit of application of this Regulation in respect of that territory, under the same conditions as those set out in paragraph 1.

Article 7

Non-application of the Regulation

1. Pursuant to Article 1a of Regulation No 19/65/EEC, the Commission may by regulation declare that, where parallel networks of similar technology transfer agreements cover more than 50 % of a relevant market, this Regulation shall not apply to technology transfer agreements containing specific restraints relating to that market.

2. A regulation pursuant to paragraph 1 shall not become applicable earlier than six months following its adoption.

Article 8

Application of the market share thresholds

1. For the purposes of applying the market share thresholds provided for in Article 3, the following rules shall apply:

(a) the market share shall be calculated on the basis of market sales value data; if market sales value data are not available, estimates based on other reliable market information, including market sales volumes, may be used to establish the market share of the undertaking concerned;

(b) the market share shall be calculated on the basis of data relating to the preceding calendar year;

(c) the market share held by the undertakings referred to in point 2(e) of Article 1 shall be apportioned equally to each undertaking having the rights or the powers listed in point 2(a) of Article 1.

2. If the market share referred to in Article 3(1) or Article 3(2) is initially not more than 20 % respectively 30 % but subsequently rises above those levels without exceeding 25 % respectively 35 %, the exemption provided for in Article 2 shall continue to apply for a period of two consecutive calendar years following the year in which the 20 % threshold or 30 % threshold was first exceeded.

3. If the market share referred to in Article 3(1) or Article 3(2) is initially not more than 20 % respectively 30 % but subsequently rises above 25 % respectively 35 %, the exemption provided for in Article 2 shall continue to apply for one calendar year following the year in which the level of 25 % or 35 % was first exceeded.

4. The benefit of paragraphs 2 and 3 may not be combined so as to exceed a period of two calendar years.

Article 9

Transitional period

1. Regulation (EC) No 240/96 is repealed with effect from 1 May 2004.

2. The prohibition laid down in Article 81(1) of the Treaty shall not apply during the period from 1 May 2004 to 31 October 2005 in respect of agreements already in force on 30 April 2004 which do not satisfy the conditions for exemption provided for in this Regulation but which, on 30 April 2004, satisfied the conditions for exemption provided for in Regulation (EC) No 240/96.

Article 10

Period of validity

This Regulation shall enter into force on 1 May 2004.

It shall expire on 30 April 2014.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, ...

(1) OJ 36, 6.3.1965, p. 533/65.

(2) OJ L 1, 4.1.2003, p. 1.

(3) OJ C 235, 1.10.2003, p. 10.

(4) OJ L 31, 9.2.1996, p. 2.

(5) COM(2001) 786 final, 20.12.2001.

Draft Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements

I. INTRODUCTION

1. These guidelines set out the principles for the assessment of technology transfer agreements under Article 81 of the Treaty. Technology transfer agreements concern the licensing of technology where the licensor permits the licensee to exploit the licensed technology for the manufacture or provision of goods or services, as defined in Commission Regulation (EC) No .../2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements (the TTBER)(1).

2. The purpose of the guidelines is to provide guidance on the application of the TTBER as well as on the application of Article 81 to technology transfer agreements that fall outside the scope of the TTBER. The guidelines are without prejudice to the possible parallel application of Article 82 of the Treaty to licensing agreements. The application of Article 81(3) by way of individual application or by way of block exemption does not preclude the application of Article 82(2).

3. The standards set forth in these guidelines must be applied in light of the circumstances specific to each case. This excludes a mechanical application. Each case must be assessed on its own facts and the guidelines must be applied reasonably and flexibly. The Commission will keep under review the functioning of the TTBER and the guidelines to consider whether changes need to be made.

4. The present guidelines are without prejudice to the interpretation of Article 81 that may be given by the Court of Justice and the Court of First Instance.

II. GENERAL PRINCIPLES

1. Article 81 and intellectual property rights

5. The aim of Article 81 as a whole is to protect competition on the market with a view to promoting consumer welfare and an efficient allocation of resources. Article 81(1) prohibits all agreements and concerted practices between undertakings and decisions by associations of undertakings(3) which may affect trade between Member States(4) and which have as their object or effect the prevention, restriction or distortion of competition(5). As an exception to this rule Article 81(3) provides that the prohibition contained in Article 81(1) may be declared inapplicable in case of agreements which contribute 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, and which do not impose restrictions which are not indispensable to the attainment of these objectives, and do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products concerned.

6. Intellectual property laws confer exclusive rights on holders of patents, copyright, design rights, trademarks and other legally protected rights. The owner of intellectual property is entitled under intellectual property laws to prevent unauthorised use of his intellectual property and to exploit it, inter alia, by licensing it to third parties. Once a product incorporating an intellectual property right has been put on the market inside the EEA by the holder or with his consent, the intellectual property right is exhausted in the sense that the holder can no longer use it to control the sale of the product(6). The licensor has no legally protected right to prevent sales by licensees or buyers of products incorporating the licensed technology. On the other hand, the sale of copies of a protected work does not lead to the exhaustion of performance rights, including rental rights, in the work(7). The principle of exhaustion is in line with the essential function of intellectual property rights, which is to grant the holder the right to exclude others from exploiting his intellectual property without his consent.

7. The fact that intellectual property laws grant exclusive rights of exploitation does not imply that intellectual property rights are immune from competition law intervention. Articles 81 and 82 are applicable to agreements whereby the holder licenses another undertaking to exploit its intellectual property rights(8). Nor does it imply that there is an inherent conflict between intellectual property rights and the Community competition rules. Indeed, both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources. Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition since it pushes undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.

8. The assessment under Article 81 does not only focus on the ex post situation where the exclusive right may reduce the level of rivalry on the market. In order not to reduce dynamic competition it must be kept in mind that the creation of intellectual property rights often entail substantial investment and that it is often a risky endeavour. Many intellectual property rights have little commercial value. In order to maintain the incentive to innovate, the innovator must therefore not be unduly restricted in the exploitation of intellectual property rights that turn out to be valuable.

9. In assessing licensing agreements under Article 81 the Commission applies to intellectual property rights in principle the same analytical framework as in the case of any other property. This framework is sufficiently flexible to allow the Commission to take due account of the dynamic aspects of technology licensing. This means, in particular, that there is no presumption that intellectual property rights and licence agreements as such give rise to competition concerns. Licence agreements may be non-restrictive of competition and create only pro-competitive efficiencies. Also, restrictive licence agreements may often give rise to pro-competitive efficiencies, which must be considered under Article 81(3) and balanced against the negative effects on competition, which flow from such restrictive agreements(9).

2. The general framework for applying Article 81

10. Article 81(1) applies both to restrictions of competition between the parties to an agreement and to restrictions of competition between the parties or any of the parties and third parties. These restrictions of competition can be either restrictions by object or restrictions by effect. Restrictions of competition by object are those that by their very nature restrict competition. These are restrictions which in light of the objectives pursued by the Community competition rules are presumed to have negative effects on competition and in respect of which it is therefore unnecessary for the purposes of applying Article 81(1) to demonstrate any actual effects on the market(10). Moreover, the conditions of Article 81(3) are unlikely to be fulfilled in the case of restrictions by object. The assessment of whether or not an agreement has as its object the restriction of competition is based on a number of factors. These factors include, in particular, the content of the agreement and the objective aims pursued by it. It may also be necessary to consider the context in which it is (to be) applied or the actual conduct and behaviour of the parties on the market(11). The way in which an agreement is actually implemented may reveal a restriction by object even where the formal agreement does not contain an express provision to that effect. Evidence of subjective intent on the part of the parties to restrict competition is a relevant factor but not a necessary condition. For licence agreements, the Commission considers that the restrictions covered by the list of hardcore restrictions of competition contained in Article 4 of the TTBER are restrictive by their very object.

11. For licence agreements to be restrictive of competition by effect they must be capable of affecting competition to such an extent that on the relevant market negative effects on prices, output, innovation or the variety or quality of goods and services can be expected with a reasonable degree of probability. The likely negative effects on competition must be appreciable(12). Anti-competitive effects are likely to occur when at least one of the parties has or obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power. Market power is the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a significant period of time.

12. Licence agreements can contribute to the creation, maintenance or strengthening of market power by restricting competition between the parties or by restricting competition from third parties. In the assessment of the likely negative effects on competition, it is important to take account not only of effects on price and output but also of any negative impact on innovation. Licence agreements that have an appreciable negative impact on innovation by the parties to the agreement or by third parties are caught by Article 81(1).

13. For the purposes of analysing the restrictive effects of agreements, it is normally necessary to define the relevant market and to examine and assess, inter alia, the nature of the products and technologies concerned, the market position of the parties, the market position of competitors, the market position of buyers, the existence of potential competitors and the level of entry barriers.

14. The assessment of whether a licence agreement is restrictive of competition must be made within the actual context in which competition would occur in the absence of the agreement with its alleged restrictions(13). In making this assessment it is necessary to take account of the likely impact of the agreement on inter-technology competition (i.e. competition between undertakings using competing technologies) and on intra-technology competition (i.e. competition between undertakings using the same technology)(14). Article 81(1) prohibits restrictions of both inter-technology competition and intra-technology competition. In order to ascertain whether an agreement or its individual parts are restrictive of competition within the meaning of Article 81(1) it is relevant to ask the following two questions. The first question relates to the impact of the agreement on inter-technology competition while the second question relates to the impact of the agreement on intra-technology competition:

(a) Does the agreement restrict actual or potential competition that would have existed had no licence been granted? If so, the agreement is normally caught by Article 81(1) provided that trade between Member States is capable of being appreciably affected. For instance, where two undertakings established in different Member States cross licence competing technologies and undertake not to sell products in each others home markets, (potential) competition that existed prior to the agreement is restricted. Similarly, where a licensor imposes on his licensees not to use competing technologies and these obligations foreclose third party technologies, actual or potential competition that would have existed in the absence of the agreement is restricted.

(b) Does the agreement restrict competition that would have existed in the absence of its alleged restriction(s) of competition? This question relates to the issue of whether or not the restriction is objectively necessary for the conclusion of the agreement. If so, the agreement with its restraints is not caught by Article 81(1). This assessment is made on the basis of objective factors external to the parties themselves and not the subjective views and characteristics of the parties. The question is not whether the parties in their particular situation would have accepted to conclude a less restrictive agreement, but whether given the nature of the agreement and the characteristics of the market a less restrictive agreement would have been concluded by undertakings in a similar setting. For instance, territorial restraints in an agreement between non-competitors may fall outside Article 81(1), if the restraints are objectively necessary in order to penetrate a new market. Claims that in the absence of a restriction the supplier would have resorted to vertical integration are not sufficient. Decisions on whether or not to vertically integrate depend on a broad range of complex economic factors, a number of which are internal to the undertaking concerned. The initial choice to rely on cooperation rather than vertical integration anyhow already generally indicates that vertical integration was not practicable.

15. Licence agreements, however, are not only capable of producing anti-competitive effects. They also have significant pro-competitive potential. Licence agreements may promote innovation by allowing innovators to earn returns to cover at least part of their research and development costs. Licence agreements may also lead to a dissemination of technologies, which creates value by reducing the production costs of the licensee or by enabling him to produce new or improved products. Efficiencies at the level of the licensee normally stem from a combination of the licensor's technology with the assets and technologies of the licensee. Such integration of complementary assets may lead to a cost/output configuration that would not otherwise be possible. For instance, the combination of an improved technology of the licensor with more efficient production or distribution assets of the licensee may reduce production costs or lead to the production of a higher quality product.

16. The pro-competitive effects of licence agreements must be balanced against the restrictive effects in the context of Article 81(3). When all four conditions of Article 81(3) are fulfilled, the restrictive licence agreement in question is valid and enforceable, no prior decision to that effect being required(15). Hardcore restrictions of competition only fulfil the conditions of Article 81(3) in very exceptional circumstances. Such agreements generally fail (at least) one of the first two conditions of Article 81(3). They normally do not create objective economic benefits or benefits for consumers. Moreover, these types of agreements generally also fail the indispensability test under the third condition. For example, if two competitors license each other their respective technologies and as part of this agreement restrict each other's pricing or output of the products produced with these technologies, this will normally lead to a lower output and a misallocation of resources and higher prices for the consumers. The price and output restrictions on the products to be produced are also not indispensable to achieve the possible efficiencies resulting from the availability to both competitors of the two technologies.

3. Market definition

17. The Commission's approach to defining the relevant market is laid down in its market definition guidelines(16). The present guidelines only address aspects of market definition that are of particular importance in the field of technology licensing.

18. Technology is an input, which is either integrated into a product or a production process. Technology licensing can therefore affect competition both in input markets and in output markets. An agreement between two parties which sell competing products and which cross licence technologies used for the production of these products may restrict competition on the product market concerned. It may also restrict competition on the market for technology and possibly also on other input markets. For the purposes of assessing the competitive effects of licence agreements it may therefore be necessary to define relevant goods and service markets (product markets) as well as technology markets(17). The term "product market" used in Article 3 of the TTBER refers to relevant goods and service markets in both their geographic and product dimension. As is clear from Article 1(1)(h) of the TTBER the term is used merely to distinguish relevant goods and service markets from relevant technology markets.

19. Product markets comprise in particular final and intermediate products incorporating the licensed technology as well as their substitutes.

20. Technology markets consist of the licensed technology and its substitutes, i.e. other technologies which customers could use as substitutes. The methodology for defining technology markets follows the same principles as the definition of product markets. Starting from the technology, which is marketed by the parties, one needs to identify those other technologies to which customers could switch in response to a small but permanent increase in relative prices, i.e. the royalties. An alternative approach is to look at the market for products incorporating the licensed technology, cf. point 21 below.

21. Once relevant markets have been defined, market shares can be assigned to the various sources of competition in the market and used as an indication of the relative strength of market players. In the case of technology markets one way to proceed is to calculate market shares on the basis of each technology's share of total licensing income from royalties, representing a technology's share of the market where competing technologies are licensed. An alternative approach, which is the one used in Article 3(3) of the TTBER, is to calculate market shares on the technology market on the basis of sales of products incorporating the licensed technology on downstream product markets. Under this approach all sales are taken into account, irrespective of whether the product incorporates a technology that is being licensed. By taking into account technologies that are (only) being used in-house, Article 3(3) departs from standard practice(18). However, in the case of technology markets the approach of Article 3(3) is considered justified. Indeed, this approach is in general a good indicator of the strength of the technology. First, it captures any potential competition from undertakings that are producing with their own technology and that are likely to start licensing in the event of a small but permanent increase in the price for licenses. Secondly, even where it is unlikely that other technology owners would start licensing, the licensor does not necessarily have market power on the technology market even if he has a high share of licensing income. If the downstream product market is competitive, competition at this level may effectively constrain the licensor. An increase in royalties upstream affects the costs of the licensee, making him less competitive, causing him to lose sales. A technology's market share on the product market also captures this element and is thus normally a good indicator of licensor market power. In individual cases outside the safe harbour of the TTBER, it may be necessary, however, to apply both of the described approaches in order to accurately assess the market strength of the licensor.

22. Some licence agreements may affect innovation. In analysing such effects, however, the Commission will normally confine itself to examining the impact of the agreement on competition within existing product and technology markets(19). Competition on such existing markets may be affected by agreements that retard the introduction of improved products or new products that over time will replace existing products. In such cases innovation is a source of potential competition which must be taken into account when assessing the impact of the agreement on product markets and technology markets. In a limited number of cases, however, it may be useful and necessary to define innovation markets. This is particularly the case where the agreement affects innovation aiming at creating new products and where it is possible at an early stage to identify research and development poles(20). In such cases, it can be analysed whether after the agreement there will be a sufficient number of competing research and development poles left for effective competition in innovation to be maintained.

4. The distinction between competitors and non-competitors

23. In general agreements between competitors pose a greater risk to competition on the market than agreements between non-competitors. However, competition between undertakings that use the same technology (intra-technology competition) constitutes an important complement to competition between undertakings that use competing technologies (inter-technology competition). For instance, intra-technology competition may lead to lower prices for the products incorporating the technology in question, which may not only produce direct and immediate benefits to consumers of these products, but also spur further competition between undertakings that use competing technologies. In the context of licensing it must also be taken into account that licensees are selling their own product. They are not re-selling a product supplied by another undertaking. There may thus be greater scope for product differentiation and quality based competition between licensees than in the case of vertical agreements for the resale of products.

24. In order to determine the competitive relationship between the parties, it must be examined whether the parties would have been actual or potential competitors in the absence of the agreement. If without the agreement the parties would not have been actual or potential competitors in any relevant market, they are deemed to be non-competitors. Where on the other hand, the licensor and the licensee are both active on the same product market or the same technology market, they are actual competitors on the market concerned. The parties are considered to be potential competitors on the product market if in the absence of the agreement they would likely have undertaken the necessary additional investment to enter the relevant market in response to a small but permanent increase in product prices. The parties are for instance likely to be considered potential competitors on the product market where the licensee produces on the basis of its own technology in one geographic market and starts producing in another geographic market on the basis of a competing technology. In such circumstances, it is likely that the licensee would have been able to enter the second geographic market on the basis of its own technology, unless such entry is precluded by objective factors. The parties are considered to be potential competitors on the technology market where they own substitutable technologies, even if in the specific case the licensee is not licensing his own technology, provided that he would be likely to do so in the face of a small but permanent increase in technology prices.

25. If the parties own technologies that are in a one-way or two-way blocking position, the parties are considered to be non-competitors on the technology market. A one-way blocking position exists when a technology cannot be exploited without infringing upon another technology. This is for instance the case, where one patent covers an improvement of a technology covered by another patent. In that case, the exploitation of the improvement patent presupposes that the holder obtains a licence to the basic patent. A two-way blocking position exists where neither technology can be exploited without infringing upon the other technology and where the holders thus need to obtain a licence or a waiver from each other. In assessing whether a blocking position exists the Commission will rely on objective factors as opposed to the subjective views of the parties. The Commission assumes that holders of technologies, which from a technical point of view are substitutable, are potential competitors on the technology market, unless the parties provide convincing evidence of the existence of a blocking position. Particularly convincing evidence is required in the case of a two-way blocking position. Relevant evidence comprises final court decisions on the matter and opinions of independent experts. In the latter case the Commission will, in particular, closely examine how the expert has been selected.

26. In some cases, it may also be possible to conclude that while the licensor and the licensee produce competing products, they are non-competitors on the relevant product market and the relevant technology market because the licensed technology represents such a drastic innovation that the technology of the licensee has become obsolete or uncompetitive. In such cases the licensor's technology either creates a new market or excludes the licensee's technology from the market. Often, however, it is not possible to come to this conclusion at the time of the conclusion of the agreement. It is usually only when the technology or the products incorporating it have been available to consumers for some time that it becomes apparent that the older technology has become obsolete or uncompetitive. For instance, when CD technology was developed and players and discs were put on the market, it was not obvious that this new technology would replace LP technology. This only became apparent some years later. The parties will therefore be considered to be competitors if at the time of the conclusion of the agreement it is not obvious that the licensee's technology is obsolete or uncompetitive. However, given that both Articles 81(1) and 81(3) must be applied in light of the actual context in which the agreement occurs, the assessment is sensitive to material changes in the facts. The classification of the relationship between the parties will therefore change if at a later point in time the licensee's technology becomes obsolete or uncompetitive on the market.

III. APPLICATION OF THE BLOCK EXEMPTION REGULATION

1. The effects of the block exemption

27. Technology transfer agreements that fulfil the conditions set out in the TTBER are block exempted from the prohibition rule contained in Article 81(1). Block exempted agreements are legally valid and enforceable. Such agreements can only be prohibited for the future and only upon formal withdrawal of the block exemption by the Commission or a Member State competition authority. Block exempted agreements cannot be held invalid on competition grounds by national courts in the context of private litigation.

28. Block exemption of categories of restrictive technology transfer agreements is based on the presumption that such agreements fulfil the four conditions laid down in Article 81(3). It is thus presumed that the agreements give rise to economic efficiencies, that the restrictions contained in the agreements are indispensable to the attainment of these efficiencies, that consumers within the affected markets receive a fair share of the efficiency gains and that the agreements do not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question. The market share thresholds (Article 3), the hardcore list (Article 4) and the conditions (Article 5) aim at ensuring that only agreements that can reasonably be presumed to fulfil the four conditions of Article 81(3) are block exempted.

29. Most technology transfer agreements are not restrictive of competition within the meaning of Article 81(1). In a number of cases, some of which are mentioned in section IV below, individual licence agreements fall outside Article 81(1) either because they do not restrict competition at all or because the restriction of competition is not appreciable(21). To the extent that such agreements would anyhow fall within the scope of the TTBER, there is no need to determine whether they are caught by Article 81(1)(22).

30. Outside the scope of the block exemption, it becomes relevant to examine whether in the individual case the agreement is caught by Article 81(1) and if so whether the conditions of Article 81(3) are satisfied. There is no presumption that technology transfer agreements falling outside the block exemption are incompatible with Article 81. In particular, there is no presumption of illegality merely because the market shares of the parties exceed the market share thresholds set out in Article 3 of the TTBER. Such agreements may be non-restrictive or, if restrictive, may fulfil the conditions of Article 81(3). The non-application of the block exemption merely signifies that individual assessment is required. It is only when agreements contain hardcore restrictions of competition that it can normally be presumed that they are prohibited by Article 81.

2. Scope and duration of the Block Exemption Regulation

2.1. Agreements between two parties

31. According to Article 2(1) of the TTBER the Regulation covers technology transfer agreements "between two undertakings". Technology transfer agreements between more than two undertakings are not covered by the TTBER. The decisive factor in terms of distinguishing between agreements between two parties and multiparty agreements is whether the agreement in question is concluded between more than two parties.

32. Agreements concluded by two parties fall within the scope of the TTBER even if the agreement stipulates conditions for more than one level of trade. For instance, the TTBER applies to a licence agreement, concerning not only the production stage but also the distribution stage, stipulating the obligations that the licensee must or may impose on resellers of the products produced under the licence(23).

33. Licence agreements concluded between more than two undertakings often give rise to the same issues as licence agreements of the same nature concluded between two parties. In its individual assessment of licence agreements which are of the same nature as those covered by the block exemption but which are concluded between more than two parties, the Commission will apply by analogy the principles set out in the TTBER. Agreements between more than two undertakings that would have been block exempted had they been concluded between only two undertakings will in principle be treated as if they were covered by the block exemption.

2.2. Agreements for the manufacture or provision of contract products

34. It follows from Article 2 that for licence agreements to be covered by the TTBER they must be "for the manufacture or provision of contract products", i.e. products incorporating or produced with the licensed technology. The TTBER does not cover technology pools. The notion of technology pools covers agreements whereby two or more parties agree to pool their respective technologies and licence them as a package. The notion of technology pools also covers arrangements whereby two or more undertakings agree to licence a third party and authorise him to licence on the package of technologies. Technology pools are dealt with in section IV.4 below. Similarly, the TTBER does not apply to agreements whereby the licensee is authorised by the licensor to grant licenses to third parties (sub-licensees) for the exploitation of the licensor's technology. However, the Commission will apply by analogy the principles set out in the TTBER and these guidelines to such "master licensing" agreements between licensor and licensee. Agreements between the licensee and sub-licensees are covered by the TTBER.

35. The TTBER does not apply to licence agreements, including cross licensing agreements, which aim at ensuring that one party does not invoke his intellectual property rights to prevent the other party from exploiting his own technology (non-assertion agreements). Nor does it apply to agreements that aim solely at settling claims that the intellectual property rights of one party infringes upon the intellectual property rights of the other party and vice versa (settlement agreements). In neither case is the agreement entered into for the manufacture or provision of contract products. Such agreements are dealt with in section IV.3 below.

36. The term "contract products" encompasses goods manufactured or services provided with the licensed technology. This is the case both where the licensed technology is used in the production process and where it is incorporated into the product itself. In these guidelines the term "products incorporating the licensed technology" covers both situations. The TTBER applies in all cases where technology is licensed for the purposes of producing goods and services, including subcontracting by the licensor(24).

37. Subcontracting is an arrangement whereby the licensor licences technology to the licensee who undertakes to manufacture certain products exclusively for the licensor on the basis thereof. Subcontracting may also involve the supply of equipment by the licensor to be used in the production of the goods and services covered by the agreement. For the latter type of subcontracting to be covered by the TTBER, the licensed technology and not the supplied equipment must constitute the primary object of the agreement.

38. Subcontracting agreements as such normally fall outside Article 81(1) when the licensed technology or the supplied equipment is necessary for the purpose of producing the goods and services covered by the agreement. It is not in itself restrictive of competition for an undertaking to outsource production to another undertaking and oblige the subcontractor to use the licensed technology only to produce the goods and services covered by the agreement and supply those goods and services exclusively to the licensor. The exclusive supply obligation is inherent in subcontracting and does not constitute a customer restriction for the purposes of the TTBER. The test of necessity is satisfied if in the absence of the agreement the sub-contractor could not have produced a product with the same features as that ordered by the licensor.

39. Subcontracting agreements, however, may be caught by Article 81(1) when they go beyond simple outsourcing as described in the previous point. Competition concerns may for instance arise where subcontracting agreements reduce the ability or incentive of the subcontractor to innovate, where they foreclose third parties or where they facilitate collusion on the market. Restrictions on the subcontractor to carry out research and development and grant back obligations are treated in the same way as in the context of any other licence agreement. The same is true of non-compete obligations, imposing on the subcontractor not to deal with third parties in respect of products not manufactured for the subcontracting licensor or in respect of technologies not licensed from him. However, the mere fact that production under the agreement takes up most or all of the subcontractor's capacity is not sufficient for a finding of foreclosure, provided that the subcontractor is not prevented from expanding his capacity.

40. Subcontracting, as defined, does not encompass research and development subcontracting whereby the licensee undertakes to carry out further research and development in the field covered by the licensed technology and to hand back the improved technology package to the licensor. The main object of such agreements is the provision of research and development services aiming at improving the technology as opposed to the production of goods and services on the basis of the licensed technology. Such agreements fall outside the scope of the TTBER and the present guidelines.

41. Similarly, the TTBER and the guidelines do not cover agreements whereby a technology is licensed for the purposes of enabling the licensee to carry out further research and development for his own account for later exploitation. For instance, the TTBER and the guidelines do not cover the licensing of a technological research tool used in the process of further research activity.

2.3. The concept of technology transfer agreements

42. The TTBER and these guidelines cover agreements for the transfer of technology. According to Article 1(1)(b) and (f) of the TTBER the concept of "technology" covers patents and patent applications, utility models and applications for utility models, design rights, plant breeders rights, topographies of semiconductor products, supplementary protection certificates for medicinal products or other products for which such supplementary protection certificates may be obtained, software copyright, and know-how.

43. Know-how is defined in Article 1(1)(g) as a package of non-patented practical information, resulting from experience and testing, which is secret, substantial and identified. "Secret" means that the know-how is not generally known or easily accessible. "Substantial" means that the know-how includes information, which is indispensable for the manufacture or provision of the products covered by the licence agreement or the application of the process covered by the licence agreement. "Identified" means that the know-how is described in a sufficiently comprehensive manner to make it possible to verify that it fulfils the criteria of secrecy and substantiality.

44. The concept of "transfer" implies that technology must flow from one undertaking to another. Such transfers normally take the form of licensing whereby the licensor grants the licensee the right to use his technology against payment of royalties. It can also take the form of sub-licensing, whereby a licensee, having been authorised to do so by the licensor, grants licenses to third parties (sub-licensees) for the exploitation of the technology. In the case of sub-licensing, however, the agreement between the licensor and the licensee is not covered by the TTBER since that licence is not granted for the purpose of producing goods and services on the basis of the licensed technology, cf. point 34 above.

45. According to Article 1(1)(b) of the TTBER, the Regulation also covers agreements whereby technology is assigned, provided that the assignor retains the risk associated with the exploitation of the intellectual property. This is particularly the case where the sum payable in consideration of the assignment is dependent on the turnover obtained by the assignee in respect of the products manufactured or provided with the assigned technology, the quantity of such products produced or the number of operations carried out employing the technology. Such assignments are in functional terms akin to a traditional licence agreement. It is a common feature of licence agreements that the consideration payable to the licensor depends on the licensee's use of the licensed technology. Other cases of assignment are not covered by the TTBER.

46. The TTBER only applies to agreements that have as their primary object the transfer of technology as opposed to the purchase of goods and services or the licensing of other types of intellectual property. Agreements containing provisions relating to the purchase and sale of products are only covered by the TTBER to the extent that those provisions do not constitute the primary object of the agreement and are directly related to the application of the licensed technology. This is likely to be the case where the tied products take the form of machinery or process input which is specifically tailored to incorporate the licensed technology or allow it to be efficiently exploited. If, on the other hand, the product is simply another input into the final product, it must be carefully examined whether the licensed technology constitutes the primary object of the agreement. For instance, in cases where the licensee is already manufacturing a final product on the basis of another technology, the licence must lead to a significant improvement of the licensee's production process, exceeding the value of the product purchased from the licensor. The requirement that the tied products must be directly related to the licensing of technology implies that the TTBER does not cover the purchase of products that have no relation with the products incorporating the licensed technology. This is for example the case where the tied product is not intended to be used with the licensed product, but relates to an activity on a separate product market.

47. The TTBER only covers the licensing of other types of intellectual property such as trademarks and copyright, other than software copyright, to the extent that they are directly related to the exploitation of the licensed technology and do not constitute the primary object of the agreement. This condition ensures that agreements covering other types of intellectual property rights are only block exempted to the extent that these other intellectual property rights serve to enable the licensee to better exploit the licensed technology. The licensor may for instance authorise the licensee to use his trademark on the products incorporating the licensed technology. The trademark licence may allow the licensee to better exploit the licensed technology by allowing consumers to make an immediate link between the product and the characteristics imputed to it by the licensed technology. An obligation on the licensee to use the licensor's trademark may also promote the dissemination of technology by allowing the licensor to identify himself as the source of the underlying technology. However, where the value of the licensed technology to the licensee is limited because he already employs an identical or very similar technology and the main object of the agreement is the trademark, the TTBER does not apply(25).

48. The licensing of copyright for the purpose of reproduction and distribution of the protected work, i.e. the production of copies for resale, is considered to be similar to technology licensing. Since such licence agreements relate to the production and sale of products on the basis of an intellectual property right, they are considered to be of the same nature as technology transfer agreements and normally raise similar issues. As a general rule the Commission will therefore apply the principles set out in the TTBER and these guidelines when assessing under Article 81 such licensing of copyright.

49. On the other hand, the licensing of rights in performances and other rights related to copyright is considered to raise particular issues and it may not be warranted to assess such licensing on the basis of the principles developed in these guidelines. In the case of the various rights related to performances value is created not by the reproduction and sale of copies of a product but by each individual performance of the protected work. Such exploitation can take various forms including the performance, showing or the renting of protected material such as movies, music or sporting events. In the application of Article 81, the specificities of the work and the way in which it is exploited must be taken into account(26). The Commission will therefore not apply by way of analogy the TTBER and the present guidelines to the licensing of these other rights.

50. The Commission will also not extend the principles developed in the TTBER and these guidelines to trademark licensing. However, trademark licensing often occurs in the context of distribution and resale of goods and services and is generally more akin to distribution agreements than technology licensing. Where a trademark licence is directly related to the use, sale or resale of goods and services and does not constitute the primary object of the agreement, the licence agreement is covered by Commission Regulation (EC) No 2790/1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices(27).

2.4. Duration

51. The block exemption applies for as long as the licensed property right has not expired or been declared invalid. In the case of know-how the block exemption applies as long as the licensed know-how remains secret, except where the know-how becomes publicly known as a result of the action of the licensee, in which case the exemption shall apply for the duration of the agreement, cf. Article 2 of the TTBER.

52. The block exemption applies to each licensed property right covered by the agreement and ceases to apply on the date of expiry, invalidity or the coming into the public domain of the last intellectual property right which constitutes "technology" within the meaning of the TTBER, cf. point 42 above.

53. Outside the scope of the block exemption the assessment may differ according to the intellectual property in question and whether, for instance, the agreement covers a basic patent or an improvement of an expired basic patent.

2.5. Relationship with other block exemption regulations

54. The TTBER covers agreements between two parties concerning the licensing of technology for the purpose of the manufacture or provision of contract products. However, technology can also be an element of other types of agreements. In addition, the products incorporating the licensed technology are subsequently sold on the market. It is therefore necessary to address the interface between the TTBER and Commission Regulation (EC) No 2658/2000 on the application of Article 81(3) of the Treaty to categories of specialisation agreements(28), Commission Regulation (EC) No 2659/2000 on the application of Article 81(3) to categories of research and development agreements(29), and Commission Regulation (EC) No 2790/1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices(30).

2.5.1. The Block Exemption Regulations on specialisation and R & D agreements

55. According to Article 1(1)(c) of Regulation (EC) No 2658/2000 on specialisation agreements, that Regulation covers, inter alia, joint production agreements by virtue of which two or more undertakings agree to produce certain products jointly. The Regulation extends to provisions concerning the assignment or use of intellectual property rights, provided that they do not constitute the primary object of the agreement, but are directly related to and necessary for its implementation.

56. Where undertakings establish a production joint venture and licence the joint venture to exploit technology, which is used in the production of the products produced by the joint venture, such licensing is subject to Regulation (EC) No 2658/2000 and not the TTBER. Accordingly, licensing in the context of a production joint venture normally falls to be considered under Regulation (EC) No 2658/2000. However, where the joint venture engages in licensing of the technology to third parties, the activity is not linked to production by the joint venture and therefore not covered by that Regulation. Such licensing arrangements, which bring together the technologies of the parties, constitute technology pools, which are dealt with in section IV.4 below.

57. Regulation (EC) No 2659/2000 on research and development agreements covers agreements whereby two or more undertakings agree to jointly carry out research and development and to jointly exploit the results thereof. According to Article 2(11), research and development and the exploitation of the results are carried out jointly where the work involved is carried out by a joint team, organisation or undertakings, jointly entrusted to a third party or allocated between the parties by way of specialisation in research, development, production and distribution, including licensing.

58. It follows that Regulation (EC) No 2659/2000 covers licensing between the parties and by the parties to a joint entity in the context of a research and development agreement. In the context of such agreement the parties can also determine the conditions for licensing the fruits of the research and development agreement to third parties. However, since third party licensees are not party to the research and development agreement, the individual licence agreement concluded with third parties is not covered by Regulation (EC) No 2659/2000. Such licence agreements are block exempted where they fulfil the conditions of the TTBER.

2.5.2. The Block Exemption Regulation on vertical agreements

59. Commission Regulation (EC) No 2790/1999 on vertical agreements covers agreements entered into between two or more undertakings each operating, for the purposes of the agreement, at different levels of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. It thus covers supply and distribution agreements(31).

60. Given that the TTBER only covers agreements between two parties and that a licensee, selling products incorporating the licensed technology, is a supplier for the purposes of Regulation (EC) No 2790/1999, these two block exemption regulations are closely related. The agreement between licensor and licensee is subject to the TTBER whereas agreements concluded between a licensee and buyers are subject to Regulation (EC) No 2790/1999 and the Guidelines on Vertical Restraints(32).

61. The TTBER block exempts agreements between the licensor and the licensee also where the agreement imposes obligations on the licensee as to the way in which he must sell the products incorporating the licensed technology. In particular, the licensee can be obliged to establish a certain type of distribution system such as exclusive distribution or selective distribution. However, the distribution agreements concluded for the purposes of implementing such obligations must, in order to be block exempted, comply with Regulation (EC) No 2790/1999. For instance, the licensor can impose on the licensee to establish a system based on exclusive distribution in accordance with specified rules. However, it follows from Article 4(b) of Regulation (EC) No 2790/1999 that distributors must be free to make passive sales into the territories of other exclusive distributors.

62. Furthermore, distributors must in principle be free to sell both actively and passively into territories covered by the distribution systems of other licensees producing their own products on the basis of the licensed technology. For the purposes of Regulation (EC) No 2790/1999 each licensee is a separate supplier. However, the reasons underlying the block exemption contained in that Regulation may also apply where the products incorporating the licensed technology are sold by the licensees under a common brand belonging to the licensor. When the products incorporating the licensed technology are sold under a common brand identity there may be the same efficiency reasons for applying the same types of restraints between licensees' distribution systems as within a single vertical distribution system. In such cases, the Commission would be unlikely to challenge restraints where by analogy the requirements of Regulation (EC) No 2790/1999 are fulfilled. For a common brand identity to exist the products must be sold and marketed under a common brand, which is predominant in terms of conveying quality and other relevant information to the consumer. It does not suffice that in addition to the licensees' brands the product carries the licensor's brand, which identifies him as the source of the licensed technology.

3. The safe harbour established by the Block Exemption Regulation

63. According to Article 3 of the TTBER the block exemption of restrictive agreements is subject to market share thresholds, confining the scope of the block exemption to agreements that can generally be presumed to fulfil the conditions of Article 81(3).

64. The applicable threshold depends on whether the agreement is concluded between competitors or between non-competitors. For the purposes of the TTBER undertakings are competitors on the relevant technology market when they licence competing technologies to third parties. Potential competition on the technology market is not taken into account in the application of the market share thresholds. Outside the safe harbour potential competition on the technology market is taken into account and may lead to a re-qualification of the competitive relationship between the parties, see in particular point 24 above.

65. Undertakings are competitors for the products concerned where the undertakings are both active on the relevant product and geographic market(s) on which the products incorporating the licensed technology are sold (actual competitors). They are also considered competitors where they would, on realistic grounds, undertake the necessary additional investments or other necessary switching costs so that they could enter the relevant product and geographic market(s) in response to a small and permanent increase in relative prices (potential competitors).

66. It follows from points 64 and 65 that two undertakings are not competitors for the purposes of the TTBER where the licensor is neither an actual nor a potential supplier of products on the relevant market and the licensee, already present on the product market, is not licensing out a competing technology even if he owns and produces on the basis of a competing technology. The parties, however, become competitors if at a later point in time the licensee starts licensing out his technology or the licensor becomes an actual or potential supplier of products on the relevant market. Moreover, as indicated in point 64, above the market share threshold potential competition on the technology market is taken into account.

67. In the case of agreements between competitors the market share threshold is 20 % and in the case of agreements between non-competitors, it is 30 %, cf. Article 3(1) and (2) of the TTBER. Where the undertakings party to the licensing agreement are not competitors, the agreement is covered if the market share of each of the parties does not exceed 30 % on relevant technology and product markets. Where the undertakings party to the licensing agreement are competitors, the agreement is covered if the combined market shares of the parties does not exceed 20 % on relevant technology and product markets. It follows, that the market share thresholds apply both to technology markets and markets for products incorporating the licensed technology. If the applicable market share threshold is exceeded on any relevant market, the block exemption does not apply to the agreement for that relevant market.

68. In the case of technology markets, it follows from Article 3(3) of the TTBER that the licensor's market share is to be calculated on the basis of all sales by the licensor, the licensee and other licensees of products incorporating the licensor's technology and this for each product market separately(33). Where the parties are competitors on the technology market, sales of products incorporating the licensee's technology must be added to the sales of the products incorporating the licensed technology. In the case of new technologies that have not yet generated any sales, a zero market share is assigned. When sales commence the technology will start accumulating market share.

69. In the case of product markets, the licensee's market share is to be calculated on the basis of the licensee's sales of products incorporating the licensed technology and competing products, i.e. the global sales of the licensee on the product market in question. Where the licensor is also a supplier of products on the relevant market, the licensor's sales on the product market in question must also be taken into account. In the calculation of product market shares, however, sales made by other licensees are not taken into account when calculating the licensee's and/or licensor's market share.

70. Market shares should be calculated on the basis of sales value data where such data are available. Such data normally provide a more accurate indication of the strength of a technology than volume data. However, where value based data are not available, estimates based on other reliable market information may be used, including market sales volume data.

71. The principles set out above can be illustrated by the following examples:

Licensing between non-competitors

Example 1

Company A is specialised in developing bio-technological products and techniques and has developed a new product Xeran. It is not active as a mass producer of Xeran, for which it has neither the production nor the distribution facilities. Company B is one of the producers of competing products, produced with freely available non-proprietary technologies. In year 0, B was selling EUR 25 million worth of products produced with the freely available technologies. In year 1, A gives a license to B to produce Xeran. In that year B sells EUR 15 million produced with the help of the freely available technologies and EUR 15 million of Xeran. In year 2 and the following years B produces and sells only Xeran worth EUR 40 million annually. In addition in year 1, A is also licensing to C. C was not active on that product market before. C produces and sells only Xeran, EUR 10 million in year 1 and EUR 15 million in year 2 and thereafter. Assume it is established that the total market of Xeran and its substitutes where B and C are active is worth EUR 200 million in each year.

In year 1, the year the license agreement is concluded, A's market share on the technology market is 0 % as its market share has to be calculated on the basis of the total sales of Xeran in the preceding year. In year 2, A's market share on the technology market is 12,5 %, reflecting the value of Xeran produced by B and C in the preceding year 1. In year 3 and thereafter, A's market share on the technology market is 27,5 %, reflecting the value of Xeran produced by B and C in the preceding year.

In year 1, B's market share on the product market is 12,5 %, reflecting B's EUR 25 million sales in year 0. In year 2, B's market share is 15 % because its sales have increased to EUR 30 million in year 1. In year 3 and thereafter, B's market share is 20 % as its sales are EUR 40 million annually. C's market share on the product market is 0 % in year 1,5 % in year 2 and 7,5 % thereafter.

As it concerns an agreement between non-competitors and the market share of A, B and C is below 30 % each year, the agreements are falling within the safe harbour of the TTBE.

Example 2

The same situation as in example 1, however now B and C are operating in different geographic markets. Assume it is established that the total market of Xeran and its substitutes is worth EUR 100 million annually in each market.

In this case, A's market share on the technology market has to be calculated for each of the two geographic markets. In the market where B is active, A's market share depends on the sale of Xeran by B. As in this example the total market is assumed to be EUR 100 million, i.e. half the size of the market in example 1, the market share of A is 0 % in year 1, 15 % in year 2 and 40 % thereafter. B's market share is 25 % in year 1, 30 % in year 2 and 40 % in year 3. In year 1 and 2 both A's and B's market share does not exceed the 30 % threshold. The threshold is however exceeded from year 3 and this means that, in line with Article 8(3) of the TTBER, after year 4 the license agreement between A and B can no longer benefit from the safe harbour but has to be assessed on an individual basis.

In the market where C is active, A's market share depends on the sale of Xeran by C. A's market share on the technology market, based on C's sales in the previous year, is therefore 0 % in year 1, 10 % in year 2 and 15 % thereafter. The market share of C on the product market is the same: 0 % in year 1, 10 % in year 2 and 15 % thereafter. The licence agreement between A and C falls therefore within the safe harbour for the whole period.

Licensing between competitors

Example 1

Companies A and B are active on the same relevant market for a certain chemical product. They also each own a patent on different technologies used to produce this product. In year 1, A and B sign a cross licence agreement licensing each other the use of their respective technologies. In year 0, A and B produce only with their own technology and A sells EUR 15 million of the product and B sells EUR 20 million of the product. From year 1 they both use their own and the other's technology. From that year onward A sells EUR 10 million of the product produced with its own technology and EUR 10 million of the product produced with B's technology. B sells from year 1, EUR 15 million of the product produced with its own technology and EUR 10 million of the product produced with A's technology. Assume it is established that the total market of the product and its substitutes is worth EUR 100 million in each year.

To assess the licence agreement under the TTBER, the market shares of A and B have to be calculated both on the technology market and the product market. The market share of A on the technology market depends on the amount of the product sold in the preceding year that was produced, either by A or B, with A's technology. In year 1 the market share of A on the technology market is therefore 15 %, reflecting its own production and sales of EUR 15 million in year 0. From year 2, A's market share on the technology market is 20 %, reflecting the EUR 20 million sale of the product produced with A's technology and produced and sold by A and B (EUR 10 million each). Similarly, in year 1, B's market share on the technology market is 20 % and thereafter 25 %.

The market shares of A and B on the product market depend on their respective sales of the product in the previous year, irrespective of the technology used. The market share of A on the product market is 15 % in year 1 and 20 % thereafter. The market share of B on the product market is 20 % in year 1 and 25 % thereafter.

As it concerns an agreement between competitors their combined market share, both on the technology and on the product market, has to be below the 20 % market share threshold in order to be able to benefit from the safe harbour. It is clear that this is not the case here. The combined market share on the technology market and on the product market is 35 % in year 1 and 45 % thereafter. This agreement between competitors will therefore have to be assessed on an individual basis.

4. Hardcore restrictions of competition under the Block Exemption Regulation

4.1. General principles

72. Article 4 of the TTBER contains a list of hardcore restrictions of competition. The classification of a restraint as a hardcore restriction of competition is based on the nature of the restriction and experience showing that such restrictions are almost always anti-competitive. In line with the case law of the Community Courts(34) such a restriction may result from the clear objective of the agreement or from the circumstances of the individual case, cf. point 10 above. An examination of the facts underlying the agreement and the specific circumstances in which it operates may therefore be required before it can be concluded whether a particular restriction constitutes a hardcore restriction of competition.

73. When a technology transfer agreement contains a hardcore restriction of competition, it follows from Article 4(1) and 4(2) of the TTBER that the agreement as a whole falls outside the scope of the block exemption. There is no severability for hardcore restrictions. Moreover, the Commission holds the view that in the context of individual assessment hardcore restrictions of competition will only in exceptional circumstances fulfil the four conditions of Article 81(3), cf. point 16 above.

74. Article 4 of the TTBER distinguishes between agreements between competitors and agreements between non-competitors.

4.2. Agreements between competitors

75. Article 4(1) lists the hardcore restrictions for licensing between competitors. According to this provision, the TTBER does not cover agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a) the restriction of a party's ability to determine its prices when selling products to third parties;

(b) the limitation of output or sales, except limitations on the output of products incorporating the licensed technology imposed on the licensee in a non-reciprocal agreement;

(c) the allocation of markets or customers except

(i) the obligation on the licensee in a non-reciprocal agreement to exploit the licensed technology only within one or more technical fields of use or one or more product markets, and

(ii) the requirement that the licensee manufactures or provides the contract products only for its own use including sale of the contract products as spare parts for its own products;

(d) The restriction of the licensee's ability to exploit its own technology or the restriction of the ability of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent the disclosure of the licensed know-how to third parties.

76. The hardcore restriction of competition contained in Article 4(1)(a) concerns agreements between competitors that have as their object the fixing of prices for products sold to third parties. Price fixing between competitors constitutes a restriction of competition by its very object. Price fixing can for instance take the form of a direct agreement on the exact price to be charged or on a price list with certain allowed maximum rebates. It can also be implemented indirectly by applying disincentives to deviate from an agreed price level, for example, by providing that the royalty rate will increase if product prices are reduced below a certain level.

77. Price fixing may also occur where parties, who sell competing products, cross licence technologies that are incorporated into those products. When royalties are calculated on the basis of individual product sales, the amount of the royalty has a direct impact on the marginal cost of the product and thus a direct impact on product prices(35). Competitors can therefore use royalties as a means of coordinating prices on down stream product markets(36). Where competitors conclude an agreement providing for cross licensing and reciprocal royalty payments based on the sales of the final product, the Commission will treat the arrangement as price fixing where the agreement does not lead to a significant integration of complementary technologies. In the absence thereof the agreement is devoid of any pro-competitive purpose and does not constitute a bona fide licensing arrangement. In cases where the agreement does constitute a bona fide licensing arrangement because it leads to a significant integration of complementary technologies the agreement will normally not fall under Article 4(1)(a) and will in that event be block exempted up to the market share threshold of 20 %. The Commission will only consider that the arrangement constitutes price fixing where the parties could reasonably have chosen a less restrictive payment scheme such as lump sum payments or one-way payment of net royalties and where the amount of the royalty is such that it is likely to have a not insignificant impact on prices.

78. The hardcore restriction contained in Article 4(1)(a) also covers agreements whereby royalties are calculated on the basis of all product sales irrespective of whether the licensed technology is being used. Such agreements are also caught by Article 4(1)(d) according to which the licensee must not be restricted in his ability to use his own technology, see point 89 below. The very nature of such agreements is to restrict competition since the agreement raises the cost of using the licensee's own competing technology and restricts competition that existed in the absence of the agreement(37). This is so both in the case of reciprocal and non-reciprocal arrangements. Exceptionally, however, an agreement whereby royalties are calculated on the basis of all product sales may fulfil the conditions of Article 81(3) in an individual case where on the basis of objective factors it can be concluded that the restriction is indispensable for pro-competitive licensing to occur. This may be the case where in the absence of the restraint it would be impossible or unduly difficult to calculate and monitor the royalty payable by the licensee, for instance because the licensor's technology leaves no visible trace on the final product and practicable alternative monitoring methods are unavailable.

79. The hardcore restriction of competition set out in Article 4(1)(b) concerns sales and output limitations. When competitors agree to reciprocal limitations on output the agreement amounts to a cartel. The same is true of agreements that reduce the incentive of the parties to expand output, for example by imposing on a party to make payments to the other party if a certain level of output is exceeded.

80. Quantity limitations on the licensee in non-reciprocal agreements are neither covered by the list of hardcore restrictions of competition, nor are they block exempted, cf. Articles 4(1)(b) and 5(2) of the TTBER. For the purposes of these Articles an agreement is non-reciprocal where one competitor licences a technology from another competitor but does not himself grant a licence for a competing technology. Conversely, a licence is reciprocal where a competitor licenses a technology to another competitor and obtains a licence for a competing technology from that competitor(38). The exclusion from the hardcore list only covers quantity limitations on the licensee in a non-reciprocal agreement. Restrictions on the licensor in terms of where he produces or sells, how much he produces or sells and at what price he sells are covered by the hardcore list. The more favourable treatment of quantity limitations on the licensee is based on the following two considerations: First, the risk that the agreement is not a bona fide licensing arrangement is less when the restriction is only imposed on the licensee. When a licensee is willing to accept a one-way restriction, it is likely that the agreement leads to a real integration of complementary technologies or an efficiency enhancing integration of the licensor's superior technology with the licensee's productive assets. In the case of reciprocal agreements with output limitations, on the other hand, there is a substantial risk that the object and effect of the agreement is to reduce output and raise prices. Secondly, an output restriction on the licensee may be necessary in order to give the licensor an incentive to disseminate his technology. Where the licensed technology, however, does not allow the licensee to obtain cost or other efficiencies to any significant extent the agreement will be dealt with as a hardcore restriction, because the agreement is likely to restrict competition that existed prior to the agreement without having a pro-competitive purpose. The Commission will also examine whether in the practical application of the agreement the licensor is subject to restrictions as regards his commercial activities. If so, the agreement is restrictive by object and subject to the list of hardcore restrictions of competition.

81. The hardcore restriction of competition set out in Article 4(1)(c) concerns the allocation of markets and customers. Agreements whereby competitors share markets and customers, for example by allocating exclusive territories or customer groups, have as their object the restriction of competition. Restrictions of this nature can for example take the form of cross licensing arrangements whereby each party is granted an exclusive right to exploit the licensed technology in a particular territory. They can also take the form of a non-reciprocal licence whereby the licensee is granted an exclusive territory whereas the licensor reserves another territory to himself. Even where no explicit or implicit restrictions are imposed on the licensor it is considered hardcore if the licence