EFTA SURVEILLANCE AUTHORITY DECISION

No 38/15/COL

of 4 February 2015

adopting a notice: ‘Guidelines on the applicability of Article 53 of the EEA Agreement to technology transfer agreements’ [2016/196]

THE EFTA SURVEILLANCE AUTHORITY,

Having regard to the Agreement between the EFTA states on the Establishment of a Surveillance Authority and a Court of Justice, in particular Articles 5(2)(b) and 25(1) thereof,

Whereas:

Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements (1) has been incorporated into the EEA Agreement as point 5 of Annex XIV to the EEA Agreement.

The European Commission has issued a communication entitled ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ (2).

The European Commission's guidelines are also of relevance for the European Economic Area.

Uniform application of the EEA competition rules is to be ensured throughout the European Economic Area.

According to point II under the heading ‘General’ at the end of Annex XIV to the EEA Agreement, the EFTA Surveillance Authority is to adopt, after consultation with the European Commission, acts corresponding to those adopted by the European Commission in order to maintain equal conditions of competition.

The Advisory Committee on Restrictive Practices and Dominant Positions and the European Commission have been consulted,

HAS ADOPTED THIS DECISION:

The following notice, which is annexed to this Decision: ‘Guidelines on the applicability of Article 53 of the EEA Agreement to technology transfer agreements’, shall be issued.

(1) OJ L 93, 28.3.2014, p. 17, incorporated into the EEA Agreement by Decision of the EEA Joint Committee No 293/2014 of 12 December 2014 (not yet published).

(2) OJ C 89, 28.3.2014, p. 3.

ANNEX

EFTA SURVEILLANCE AUTHORITY NOTICE

Guidelines on the applicability of Article 53 of the EEA Agreement to technology transfer agreements

A. This notice is issued pursuant to the rules of the Agreement on the European Economic Area (‘EEA Agreement’) and the Agreement between the EFTA states on the establishment of a Surveillance Authority and a Court of Justice (‘Surveillance and Court Agreement’).

B. The European Commission (‘Commission’) has issued a notice entitled ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ (1). That non-binding act sets out the principles which the Commission follows for the assessment of technology transfer agreements under Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’).

C. The EFTA Surveillance Authority (‘Authority’) considers the Commission guidelines to be EEA relevant. In order to maintain equal conditions of competition and to ensure uniform application of the EEA competition rules throughout the European Economic Area (‘EEA’), the Authority has adopted the present notice under the powers conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. It intends to follow the principles and rules laid down in this notice when applying the relevant EEA rules in a particular case.

D. In particular, this notice sets out the principles for the assessment of technology transfer agreements under Article 53 of the EEA Agreement and provides guidance on their application.

E. This notice applies to cases where the Authority is the competent surveillance authority under Article 56 of the EEA Agreement.

F. This notice replaces the Authority's previous notice of 2005 on the application of Article 53 of the EEA Agreement to technology transfer agreements (2).

TABLE OF CONTENTS

1. INTRODUCTION

2. GENERAL PRINCIPLES

2.1. Article 53 and intellectual property rights

2.2. The general framework for applying Article 53

2.3. Market definition

2.4. The distinction between competitors and non-competitors

3. APPLICATION OF THE TTBER

3.1. The effects of the TTBER

3.2. Scope and duration of the TTBER

3.2.1. The concept of technology transfer agreements

3.2.2. The concept of ‘transfer’

3.2.3. Agreements between two parties

3.2.4. Agreements for the production of contract products

3.2.5. Duration

3.2.6. Relationship with other block exemption regulations

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

3.2.6.2. The Block Exemption Regulation on vertical agreements

3.3. The market share thresholds of the safe harbour

3.4. Hardcore restrictions of competition under the Block Exemption Regulation

3.4.1. General principles

3.4.2. Agreements between competitors

3.4.3. Agreements between non-competitors

3.5. Excluded restrictions

3.6. Withdrawal and non-application of the Block Exemption Regulation

3.6.1. Withdrawal procedure

3.6.2. Non-application of the Block Exemption Regulation

4. APPLICATION OF ARTICLE 53(1) AND 53(3) OUTSIDE THE SCOPE OF THE TTBER

4.1. The general framework for analysis

4.1.1. The relevant factors

4.1.2. Negative effects of restrictive licence agreements

4.1.3. Positive effects of restrictive licence agreements and the framework for analysing such effects

4.2. Application of Article 53 to various types of licensing restraints

4.2.1. Royalty obligations

4.2.2. Exclusive licensing and sales restrictions

4.2.2.1. Exclusive and sole licences

4.2.2.2. Sales restrictions

4.2.3. Output restrictions

4.2.4. Field of use restrictions

4.2.5. Captive use restrictions

4.2.6. Tying and bundling

4.2.7. Non-compete obligations

4.3. Settlement agreements

4.4. Technology pools

4.4.1. The assessment of the formation and operation of technology pools

4.4.2. Assessment of individual restraints in agreements between the pool and its licensees

1. INTRODUCTION

(1) These guidelines set out the principles for the assessment of technology transfer agreements under Article 53 of the EEA Agreement (‘Article 53’). Technology transfer agreements concern the licensing of technology rights where the licensor permits the licensee to exploit the licensed technology rights for the production of goods or services, as defined in Article 1(1)(c) of the act referred to in point 5 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements (‘TTBER’)) (3).

(2) The purpose of these guidelines is to provide guidance on the application of the TTBER as well as on the application of Article 53 to technology transfer agreements that fall outside the scope of the TTBER. The TTBER and the guidelines are without prejudice to the possible parallel application of Article 54 of the EEA Agreement (‘Article 54’) to technology transfer agreements (4).

(3) The standards set forth in these guidelines must be applied in the light of the circumstances specific to each case. This excludes a mechanical application. Each case must be assessed on its own facts and these guidelines must be applied reasonably and flexibly. Examples given serve as illustrations only and are not intended to be exhaustive. The Authority will keep under review the functioning of the TTBER and the guidelines in the enforcement system created by Chapter II of Protocol 4 to the Surveillance and Court Agreement (‘Protocol 4’) (5) to consider whether changes need to be made.

(4) These guidelines are without prejudice to the interpretation of Article 53 and the TTBER that may be given by the EFTA Court, the Court of Justice and the General Court.

2. GENERAL PRINCIPLES

2.1. Article 53 and intellectual property rights

(5) The aim of Article 53 as a whole is to protect competition on the market with a view to promoting consumer welfare and an efficient allocation of resources. Article 53(1) prohibits all agreements and concerted practices between undertakings and decisions by associations of undertakings (6) which may affect trade between Contracting Parties (‘EEA States’) (7) and which have as their object or effect the prevention, restriction or distortion of competition (8). As an exception to this rule Article 53(3) provides that the prohibition contained in Article 53(1) may be declared inapplicable in the case of agreements between undertakings 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 its intellectual property and to exploit it, for example, by licensing it to third parties. Once a product incorporating an intellectual property right, with the exception of performance rights (9), has been put on the market inside the EEA by the holder or with its consent, the intellectual property right is exhausted in the whole territory of the EEA including the EFTA states in the sense that the holder can no longer use it to control the sale of the product (principle of EEA exhaustion) (10). The right-holder has no right under intellectual property laws to prevent sales by licensees or buyers of such products incorporating the licensed technology. The principle of EEA 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 its intellectual property without its 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. Article 53 is in particular applicable to agreements whereby the holder licenses another undertaking to exploit its intellectual property rights (11). Nor does it imply that there is an inherent conflict between intellectual property rights and the EEA 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 by putting pressure on undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.

(8) In the assessment of licence agreements under Article 53 it must be kept in mind that the creation of intellectual property rights often entails substantial investment and that this is often a risky endeavour. In order not to reduce dynamic competition and to maintain the incentive to innovate, the innovator must not be unduly restricted in the exploitation of intellectual property rights that turn out to be valuable. For these reasons the innovator should be free to seek appropriate remuneration for successful projects that is sufficient to maintain investment incentives, taking failed projects into account. Technology rights licensing may also require the licensee to make significant sunk investments (that is to say, that upon leaving that particular field of activity the investment cannot be used by the licensee for other activities or sold other than at a significant loss) in the licensed technology and production assets necessary to exploit it. Article 53 cannot be applied without considering such ex ante investments made by the parties and the risks relating thereto. The risk facing the parties and the sunk investment that must be committed may thus lead to the agreement falling outside Article 53(1) or fulfilling the conditions of Article 53(3), as the case may be, for the period of time required to recoup the investment.

(9) In assessing licensing agreements under Article 53, the existing analytical framework is sufficiently flexible to take due account of the dynamic aspects of technology rights licensing. There is no presumption that intellectual property rights and licence agreements as such give rise to competition concerns. Most licence agreements do not restrict competition and create pro-competitive efficiencies. Indeed, licensing as such is pro-competitive as it leads to dissemination of technology and promotes innovation by the licensor and licensee(s). In addition, even licence agreements that do restrict competition may often give rise to pro-competitive efficiencies, which must be considered under Article 53(3) and balanced against the negative effects on competition (12). The great majority of licence agreements are therefore compatible with Article 53.

2.2. The general framework for applying Article 53

(10) Article 53(1) prohibits agreements which have as their object or effect the restriction of competition. Article 53(1) applies both to restrictions of competition between the parties to an agreement and to restrictions of competition between any of the parties and third parties.

(11) The assessment of whether a licence agreement restricts 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 (that is to say, competition between undertakings using competing technologies) and on intra-technology competition (that is to say, competition between undertakings using the same technology) (14). Article 53(1) prohibits restrictions of both inter-technology competition and intra-technology competition. It is therefore necessary to assess to what extent the agreement affects or is likely to affect these two aspects of competition on the market.

(12) The following two questions provide a useful framework for making this assessment. 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. As restrictions may be capable of affecting both inter-technology competition and intra-technology competition at the same time, it may be necessary to analyse a restriction in the light of the two questions in points (a) and (b) before it can be concluded whether or not competition within the meaning of Article 53(1) is restricted: (a) Does the licence agreement restrict actual or potential competition that would have existed without the contemplated agreement? If so, the agreement may be caught by Article 53(1). In making this assessment it is necessary to take into account competition between the parties and competition from third parties. For instance, where two undertakings established in different EEA States cross-license competing technologies and undertake not to sell products in each other's home markets, (potential) competition that existed prior to the agreement is restricted. Similarly, where a licensor imposes obligations on its 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 licence agreement restrict actual or potential competition that would have existed only in the absence of the contractual restraint(s)? If so, the agreement may be caught by Article 53(1). For instance, where a licensor restricts its licensees, who were not actual or potential competitors before the agreement, from competing with each other, (potential) competition that could have existed between the licensees in the absence of the restraints is restricted. Such restrictions include vertical price fixing and territorial or customer sales restrictions between licensees. However, certain restraints may in certain cases not be caught by Article 53(1) when the restraint is objectively necessary for the existence of an agreement of that type or that nature (15). Such exclusion of the application of Article 53(1) can only be 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 not 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 not have been concluded by undertakings in a similar setting (16). Claims that in the absence of a restraint 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.

(13) The fact that Article 53(1) distinguishes between those agreements that have a restriction of competition as their object and those agreements that have a restriction of competition as their effect should be taken into account in the application of the analytical framework set out in point (12) of these guidelines. An agreement or contractual restraint is only prohibited by Article 53(1) if its object or effect is to restrict inter-technology competition and/or intra-technology competition.

(14) Restrictions of competition by object are those that by their very nature restrict competition. These are restrictions which in the light of the objectives pursued by the EEA competition rules have such a high potential for negative effects on competition that it is not necessary for the purposes of applying Article 53(1) to demonstrate any effects on the market (17). Moreover, the conditions of Article 53(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 a 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 (18). In other words, an examination of the facts underlying the agreement and the specific circumstances in which it operates may be required before it can be concluded whether a particular restriction constitutes a restriction by object of competition. 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. An agreement may be regarded as having a restrictive object even if it does not have the restriction of competition as its sole aim but also pursues other legitimate objectives (19). For licence agreements, the Authority considers that the restrictions covered by the list of hardcore restrictions of competition set out in Article 4 of the TTBER are restrictive by their very object (20).

(15) If an agreement is not restrictive of competition by object it is necessary to examine whether it has restrictive effects on competition. Account must be taken of both actual and potential effects (21). In other words the agreement must have likely anti-competitive effects. For licence agreements to be restrictive of competition by effect they must affect actual or potential 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 (22). Appreciable 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 not insignificant period of time (23). The degree of market power normally required for a finding of an infringement under Article 53(1) is less than the degree of market power required for a finding of dominance under Article 54 (24).

(16) For the purposes of analysing restrictions of competition by effect it is normally necessary to define the relevant market and to examine and assess, in particular, 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. In some cases, however, it may be possible to show anti-competitive effects directly by analysing the conduct of the parties to the agreement on the market. It may for example be possible to ascertain that an agreement has led to price increases.

(17) However, licence agreements may also have substantial pro-competitive potential and the vast majority of those agreements are indeed pro-competitive. Licence agreements may promote innovation by allowing innovators to earn returns to cover at least part of their research and development costs. Licence agreements also lead to a dissemination of technologies, which may create value by reducing the production costs of the licensee or by enabling it to produce new or improved products. Efficiencies at the level of the licensee often stem from a combination of the licensor's technology with the assets and technologies of the licensee. Such integration of complementary assets and technologies 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. Licensing may also serve the pro-competitive purpose of removing obstacles to the development and exploitation of the licensee's own technology. In particular in sectors where large numbers of patents are prevalent licensing often occurs in order to create design freedom by removing the risk of infringement claims by the licensor. When the licensor agrees not to invoke its intellectual property rights to prevent the sale of the licensee's products, the agreement removes an obstacle to the sale of the licensee's product and thus generally promotes competition.

(18) In cases where a licence agreement is caught by Article 53(1) the pro-competitive effects of the agreement must be balanced against its restrictive effects in the context of Article 53(3). When all four conditions of Article 53(3) are satisfied, the restrictive licence agreement in question is valid and enforceable, with no prior decision to that effect being required (25). Hardcore restrictions are unlikely to fulfil the conditions of Article 53(3). Such agreements generally fail (at least) one of the first two conditions of Article 53(3). In general they do not create objective economic benefits or benefits for consumers. Moreover, these types of agreements generally fail the indispensability test (under the third condition). For example, if the parties fix the price at which the products produced under the licence must be sold, this will in principle lead to a lower output and a misallocation of resources and higher prices for consumers. The price restriction is also not indispensable to achieve the possible efficiencies resulting from the availability to both competitors of the two technologies.

2.3. Market definition

(19) The EFTA Surveillance Authority's approach to defining the relevant market is laid down in its notice on the definition of the relevant market for the purposes of EEA competition law (26). These guidelines only address aspects of market definition that are of particular importance in the field of technology rights licensing.

(20) Technology is an input, which is integrated either into a product or a production process. Technology rights licensing can therefore affect competition both upstream in input markets and downstream in output markets. For instance, an agreement between two parties which sell competing products downstream and which also cross-license technology rights relating to the production of these products upstream may restrict competition on the downstream goods or services market concerned. The cross-licensing may also restrict competition on the upstream market for technology and possibly also on other upstream input markets. For the purposes of assessing the competitive effects of licence agreements it may therefore be necessary to define the relevant product market(s) as well as the relevant technology market(s) (27).

(21) The relevant product market comprises the contract products (incorporating the licensed technology) and products which are regarded by the buyers as interchangeable with or substitutable for the contract products, by reason of the products' characteristics, their prices and their intended use. Contract products can be part of a final and/or an intermediate product market.

(22) The relevant technology markets consist of the licensed technology rights and its substitutes, that is to say, other technologies which are regarded by the licensees as interchangeable with or substitutable for the licensed technology rights, by reason of the technologies' characteristics, their royalties and their intended use. Starting from the technology which is marketed by the licensor, it is necessary to identify those other technologies to which licensees could switch in response to a small but permanent increase in relative prices, that is to say, to the royalties. An alternative approach is to look at the market for products incorporating the licensed technology rights (cf. point (25) below).

(23) The term ‘relevant market’ used in Article 3 of the TTBER and defined in Article 1(1)(m) refers to the relevant product market and the relevant technology market in both their product and geographic dimension.

(24) The ‘relevant geographic market’ is defined in Article 1(1)(l) of the TTBER and comprises the area in which the undertakings concerned are involved in the supply of and demand for products or the licensing of technology, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas The geographic market of the relevant technology market(s) can differ from the geographic market of the relevant product market(s).

(25) 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. However, this may often be a merely theoretical and not a practical way to proceed because of lack of clear information on royalties. Another approach, which is the one used for calculating the safe harbour, as explained in Article 8(d) 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 (see for more details point (86) ff.). In individual cases outside the safe harbour of the TTBER it may be necessary, where practically possible, to apply both of the described approaches in order to assess the market strength of the licensor more accurately and to take into account other available factors which give a good indication of the relative strength of the available technologies (see for more factors points (157) and (159) ff.) (28).

(26) Some licence agreements may affect competition in innovation. In analysing such effects, however, the Authority will normally confine itself to examining the impact of the agreement on competition within existing product and technology markets (29). Competition on such markets may be affected by agreements that delay 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 also analyse the effects on competition in innovation separately. 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 (30). 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.

2.4. The distinction between competitors and non-competitors

(27) In general, agreements between competitors pose a greater risk to competition than agreements between non-competitors. However, competition between undertakings that use the same technology (intra-technology competition between licensees) 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 for consumers of these products, but also spur further competition between undertakings that use competing technologies. In the context of licensing the fact that licensees are selling their own product must also be taken into account. 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.

(28) In order to determine the competitive relationship between the parties it is necessary to examine 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 affected by the agreement they are deemed to be non-competitors.

(29) In principle, the parties to an agreement are not considered competitors if they are in a one-way or two-way blocking position. A one-way blocking position exists where a technology right cannot be exploited without infringing upon another valid technology right, or where one party cannot be active in a commercially viable way on the relevant market without infringing the other party's valid technology right. This is, for instance, the case where one technology right covers an improvement of another technology right and the improvement cannot be legally used without a licence of the basic technology right. A two-way blocking position exists where neither technology right can be exploited without infringing upon the other valid technology right or where neither party can be active in a commercially viable way on the relevant market without infringing the other party's valid technology right and where the parties thus need to obtain a licence or a waiver from each other (31). However, in practice there will be cases where there is no certainty whether a particular technology right is valid and infringed.

(30) The parties are actual competitors on the product market if prior to the agreement both are already active on the same relevant product market. The fact that both parties are already active on the same relevant product market, without having entered into a licensing arrangement, is a strong indicator that the parties are not blocking each other. In such a scenario, the parties can be presumed to be actual competitors, until a blocking position is proven (in particular by a final court judgment).

(31) The licensee can be considered a potential competitor on the product market if it is likely that, in the absence of the agreement, it would undertake the necessary additional investments to enter the relevant market in response to a small but permanent increase in product prices. Likely entry should be assessed on realistic grounds, that is to say based on the facts of the case at hand. Entry is more likely if the licensee possesses assets that can easily be used to enter the market without incurring significant sunk costs or if it has already developed plans, or started to invest otherwise, to enter the market. There have to be real concrete possibilities for the licensee to enter the relevant market and compete with established undertakings (32). Accordingly, the licensee cannot be described as a potential competitor if its entry into a market is not an economically viable strategy (33).

(32) In the specific context of intellectual property rights, an additional factor for assessing whether the parties are potential competitors on a particular market is the possibility that their intellectual property rights are in a blocking position, that is to say that the licensee cannot enter the respective market without infringing the intellectual property rights of the other party.

(33) In the absence of certainty in the form of a final court decision that a blocking position exists and therefore of certainty on this point, the parties, when addressing the question whether they are potential competitors, will have to base themselves on all the available evidence at the time, including the possibility that intellectual property rights are infringed and whether there are, in a specific case, effective possibilities to work around existing intellectual property rights. Substantial investments already made or advanced plans to enter a particular market, can support the view that the parties are at least potential competitors, even if a blocking position cannot be excluded. Particularly convincing evidence of the existence of a blocking position may be required where the parties have a common interest in claiming the existence of a blocking position in order to be qualified as non-competitors, for instance where the alleged blocking position concerns technologies that are technological substitutes (see point (22) above) or if there is a significant financial inducement from the licensor to the licensee.

(34) In order to constitute a realistic competitive constraint entry has to be likely to occur within a short period (34). Normally a period of one to two years is appropriate. However, in individual cases longer periods can be taken into account. The period of time needed for undertakings already on the market to adjust their capacities can be used as a yardstick to determine this period. For instance, the parties are 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 licensed 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, including the existence of blocking intellectual property rights.

(35) The parties are actual competitors on the technology market if they are either already both licensing out substitutable technology, or the licensee is already licensing out its technology and the licensor enters the technology market by granting a licence for a competing technology to the licensee.

(36) The parties are considered to be potential competitors on the technology market if they own substitutable technologies and the licensee is not licensing-out its own technology, provided that it would be likely to do so in the event of a small but permanent increase in technology prices. In the case of technology markets, it is generally more difficult to assess whether the parties are potential competitors. This is why, for the application of the TTBER, potential competition on the technology market is not taken into account (see point (83) below) and the parties are treated as non-competitors.

(37) 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 existing market. It is, however, often not possible to come to this conclusion at the time the agreement is concluded. 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 53(1) and Article 53(3) must be applied in the 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 into a relationship of non-competitors, if at a later point in time the licensee's technology becomes obsolete or uncompetitive on the market.

(38) In some cases the parties may become competitors subsequent to the conclusion of the agreement because the licensee develops or acquires and starts exploiting a competing technology. In such cases the fact that the parties were non-competitors at the time of conclusion of the agreement and that the agreement was concluded in that context must be taken into account. The Authority will therefore mainly focus on the impact of the agreement on the licensee's ability to exploit its own (competing) technology. In particular, the list of hardcore restrictions applying to agreements between competitors will not be applied to such agreements unless the agreement is subsequently amended in any material respect after the parties have become competitors (see Article 4(3) of the TTBER).

(39) The undertakings party to an agreement may also become competitors subsequent to the conclusion of the agreement where the licensee was already active on the relevant market where the contract product is sold prior to the licence and where the licensor subsequently enters the relevant market either on the basis of the licensed technology rights or a new technology. In this case also the hardcore list relevant for agreements between non-competitors will continue to apply to the agreement unless the agreement is subsequently amended in any material respect (see Article 4(3) of the TTBER). A material amendment includes the conclusion of a new technology transfer agreement between the parties concerning competing technology rights which can be used for the production of products competing with the contract products.

3. APPLICATION OF THE TTBER

3.1. The effects of the TTBER

(40) Categories of technology transfer agreements that fulfil the conditions set out in the TTBER are exempted from the prohibition rule contained in Article 53(1). Block-exempted agreements are legally valid and enforceable. Such agreements can only be prohibited for the future and only upon withdrawal of the block exemption by the Authority and the competition authorities of the EFTA states. Block-exempted agreements cannot be prohibited under Article 53 by national courts in the context of private litigation.

(41) Block exemption of categories of technology transfer agreements is based on the presumption that — to the extent that they are caught by Article 53(1) — those agreements fulfil the four conditions laid down in Article 53(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 excluded restrictions (Article 5) set out in the TTBER aim at ensuring that only restrictive agreements that can reasonably be presumed to fulfil the four conditions of Article 53(3) are block-exempted.

(42) As set out in Section 4 of these guidelines, many licence agreements fall outside Article 53(1), either because they do not restrict competition at all or because the restriction of competition is not appreciable (35). 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 53(1) (36).

(43) Outside the scope of the block exemption it is relevant to examine whether in the individual case the agreement is caught by Article 53(1) and if so, whether the conditions of Article 53(3) are satisfied. There is no presumption that technology transfer agreements falling outside the block exemption are caught by Article 53(1) or fail to satisfy the conditions of Article 53(3). In particular, the mere fact that the market shares of the parties exceed the market share thresholds set out in Article 3 of the TTBER is not a sufficient basis for finding that the agreement is caught by Article 53(1). Individual assessment of the likely effects of the agreement is required. It is only where agreements contain hardcore restrictions of competition, that it can normally be presumed that they are prohibited by Article 53.

3.2. Scope and duration of the TTBER

3.2.1. The concept of technology transfer agreements

(44) The TTBER and these guidelines cover agreements for the transfer of technology. According to Article 1(1)(b) of the TTBER the concept of ‘technology rights’ covers know-how as well as patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates for medicinal products or other products for which such supplementary protection certificates may be obtained, plant breeder's certificates and software copyrights or a combination thereof as well as applications for these rights and for registration of these rights. The licensed technology rights should allow the licensee, with or without other input, to produce the contract products. The TTBER only applies in EEA States where the licensor holds relevant technology rights. Otherwise, there are no technology rights to be transferred within the meaning of the TTBER.

(45) Know-how is defined in Article 1(1)(i) of the TTBER as a package of practical information, resulting from experience and testing, which is secret, substantial and identified: (a) ‘Secret’ means that the know-how is not generally known or easily accessible. (b) ‘Substantial’ means that the know-how includes information which is significant and useful for the production of the products covered by the licence agreement or the application of the process covered by the licence agreement. In other words, the information must significantly contribute to or facilitate the production of the contract products. In cases where the licensed know-how relates to a product as opposed to a process, this condition implies that the know-how is useful for the production of the contract product. This condition is not satisfied where the contract product can be produced on the basis of freely available technology. However, the condition does not require that the contract product is of higher value than products produced with freely available technology. In the case of process technologies, this condition implies that the know-how is useful in the sense that it can reasonably be expected at the date of conclusion of the agreement to be capable of significantly improving the competitive position of the licensee, for instance by reducing its production costs. (c) ‘Identified’ means that it is possible to verify that the licensed know-how fulfils the criteria of secrecy and substantiality. This condition is satisfied where the licensed know-how is described in manuals or other written form. However, in some cases this may not be reasonably possible. The licensed know-how may consist of practical knowledge possessed by the licensor's employees. For instance, the licensor's employees may possess secret and substantial knowledge about a certain production process which is passed on to the licensee in the form of training of the licensee's employees. In such cases it is sufficient to describe in the agreement the general nature of the know-how and to list the employees that will be or have been involved in passing it on to the licensee.

(46) Provisions in technology transfer agreements relating to the purchase of products by the licensee are only covered by the TTBER if, and to the extent that, those provisions are directly related to the production or sale of the contract products. Therefore the TTBER does not apply to those parts of a technology transfer agreement relating to input and/or equipment that are used for other purposes than the production of the contract products. For instance, where milk is sold together with licensing of technology to produce cheese, only the milk used for the production of cheese with the licensed technology will be covered by the TTBER.

(47) Provisions in technology transfer agreements relating to the licensing of other types of intellectual property such as trademarks and copyright, other than software copyright (on software copyright see points (44) and (62)), are only covered by the TTBER if, and to the extent that, they are directly related to the production or sale of the contract products. This condition ensures that provisions covering other types of intellectual property rights are block-exempted to the extent that these other intellectual property rights serve to enable the licensee to better exploit the licensed technology rights. For instance, where a licensor authorises a licensee to use its trademark on the products incorporating the licensed technology, this 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 rights. An obligation on the licensee to use the licensor's trademark may also promote the dissemination of technology by allowing the licensor to identify itself as the source of the underlying technology. The TTBER covers technology transfer agreements in this scenario even if the principal interest of the parties lies in the exploitation of the trademark rather than the technology (37).

(48) The TTBER does not cover licensing of copyright other than software copyright (except for the situation set out in point (47)). The Authority will, however, as a general rule apply the principles set out in the TTBER and these guidelines when assessing licensing of copyright for the production of contract products under Article 53.

(49) On the other hand, the licensing of rental rights and public performance rights protected by copyright, in particular for films or music, 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 application of Article 53 the specificities of the work and the way in which it is exploited must be taken into account (38). The Authority will therefore not apply the TTBER and the present guidelines by way of analogy to the licensing of these other rights.

(50) The Authority will also not extend the principles developed in the TTBER and these guidelines to trademark licensing (except for the situation set out in point (47)). 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 the act referred to in point 2 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (‘Vertical Block Exemption Regulation’)) (39).

3.2.2. The concept of ‘transfer’

(51) 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 its technology rights against payment of royalties.

(52) As set out in Article 1(1)(c) of the TTBER, assignments where part of the risk associated with the exploitation of the technology rights remains with the assignor are also deemed to be technology transfer agreements. In particular, this is the case where the sum payable in consideration of the assignment is dependent on the turnover obtained by the assignee in respect of products produced with the assigned technology, the quantity of such products produced or the number of operations carried out employing the technology.

(53) An agreement whereby the licensor commits not to exercise its technology rights against the licensee can also be seen as a transfer of technology rights. Indeed, the essence of a pure patent licence is the right to operate inside the scope of the exclusive right of the patent. It follows that the TTBER also covers so-called non-assertion agreements and settlement agreements whereby the licensor permits the licensee to produce within the scope of the patent (40).

3.2.3. Agreements between two parties

(54) According to Article 1(1)(c) of the TTBER, the Regulation only 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 undertakings and multiparty agreements is whether the agreement in question is concluded between more than two undertakings.

(55) Agreements concluded by two undertakings 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 (41).

(56) Agreements establishing technology pools and licensing out from technology pools are generally multiparty agreements and are therefore not covered by the TTBER (42). The notion of technology pools covers agreements whereby two or more parties agree to pool their respective technologies and license them as a package. The notion of technology pools also covers arrangements whereby two or more undertakings agree to license a third party and authorise it to license-on the package of technologies.

(57) 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 undertakings. 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 undertakings, the Authority will apply by analogy the principles set out in the TTBER. However, technology pools and licensing out from technology pools are specifically dealt with in Section 4.4.

3.2.4. Agreements for the production of contract products

(58) It follows from Article 1(1)(c) of the TTBER that for licence agreements to be covered by it they must be entered into ‘for the purpose of the production of contract products’, that is to say, products incorporating or produced with the licensed technology rights. The licence must permit the licensee and/or its sub-contractor(s) to exploit the licensed technology for the purpose of producing goods or services (see also recital 7 in the preamble of the TTBER).

(59) Where the purpose of the agreement is not the production of contract products but, for instance, merely to block the development of a competing technology, the licence agreement is not covered by the TTBER and these guidelines may also not be appropriate for the agreement's assessment. More generally, if the parties refrain from exploiting the licensed technology rights, no efficiency enhancing activity takes place, in which case the very rationale of the block exemption is absent. However, exploitation does not need to take the form of an integration of assets. Exploitation also occurs where the licence creates design freedom for the licensee by allowing it to exploit its own technology without facing the risk of infringement claims by the licensor. In the case of licensing between competitors, the fact that the parties do not exploit the licensed technology may be an indication that the arrangement is a disguised cartel. For these reasons the Authority will examine cases of non-exploitation very closely.

(60) The TTBER applies to licence agreements for the purpose of the production of contract products by the licensee and/or its subcontractor(s). Therefore, the TTBER does not apply to (those parts of) technology transfer agreements that allow for sublicensing. However, the Authority will apply by analogy the principles set out in the TTBER and these guidelines to ‘master licensing’ agreements between licensor and licensee (that is to say an agreement whereby the licensor allows the licensee to sublicense the technology). Agreements between the licensee and sublicensees for the production of contract products are covered by the TTBER.

(61) The term ‘contract products’ encompasses goods and services produced with the licensed technology rights. 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 rights are licensed for the purposes of producing goods and services. The framework of the TTBER and these guidelines is based on the premise that there is a direct link between the licensed technology rights and a contract product. In cases where no such link exists, that is to say where the purpose of the agreement is not to enable the production of a contract product, the analytical framework of the TTBER and these guidelines may not be appropriate.

(62) The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be ‘production’ within the meaning of the TTBER and thus is not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by the Vertical Block Exemption Regulation (43) and the guidelines on vertical restraints (44). Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end-users. Nor do they cover the licensing of software copyright and distribution of software by means of ‘shrink wrap’ licences, that is, a set of conditions included in the package of the hard copy which the end-user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.

(63) However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.

(64) The TTBER covers ‘subcontracting’ whereby the licensor licenses technology rights to the licensee who undertakes to produce certain products on the basis thereof exclusively for the licensor. 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 as part of a technology transfer agreement, the supplied equipment must be directly related to the production of the contract products. Subcontracting is also covered by the Authority's notice concerning its assessment of certain subcontracting agreements in relation to Article 53(1) of the EEA Agreement (45). According to that notice, which remains applicable, subcontracting agreements whereby the subcontractor undertakes to produce certain products exclusively for the contractor generally fall outside Article 53(1). Subcontracting agreements whereby the contractor determines the transfer price of the intermediate contract product between subcontractors in a value chain of subcontracting generally also fall outside Article 53(1) provided the contract products are exclusively produced for the contractor. However, other restrictions imposed on the subcontractor such as the obligation not to conduct or exploit its own research and development may be caught by Article 53 (46).

(65) The TTBER also applies to agreements whereby the licensee must carry out development work before obtaining a product or a process that is ready for commercial exploitation, provided that a contract product has been identified. Even if such further work and investment is required, the object of the agreement is the production of an identified contract product, that is to say, products produced with the licensed technology rights.

(66) The TTBER and these guidelines do not cover agreements whereby technology rights are licensed for the purpose of enabling the licensee to carry out further research and development in various fields, including further developing a product arising out of such research and development (47). 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. Nor do they cover research and development subcontracting whereby the licensee undertakes to carry out research and development in the field of the licensed technology and to hand back the improved technology package to the licensor (48). The main object of such agreements is the provision of research and development services aimed at improving the technology as opposed to the production of goods and services on the basis of the licensed technology.

3.2.5. Duration

(67) Subject to the duration of the TTBER, which expires on 30 April 2026, the block exemption applies for as long as the licensed property right has not lapsed, 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 action by the licensee, in which case the exemption applies for the duration of the agreement (see Article 2 of the TTBER).

(68) The block exemption applies to each licensed technology 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 technology right within the meaning of the TTBER.

3.2.6. Relationship with other block exemption regulations

(69) The TTBER covers agreements between two undertakings concerning the licensing of technology rights for the purpose of the production of contract products. However, technology rights 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 the act referred to in point 6 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 1218/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of specialisation agreements (‘Specialisation Block Exemption Regulation’)) (49), the act referred to in point 7 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 1217/2010 of 14 December 2010 on the application of the Treaty on the Functioning of the European Union to certain categories of research and development agreements (‘Research and Development Block Exemption Regulation’)) (50) and the Vertical Block Exemption Regulation (51).

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

(70) The TTBER does not apply to licensing in the context of specialisation agreements which are covered by the Specialisation Block Exemption Regulation or to licensing in the context of research and development agreements which are covered by the Research and Development Block Exemption Regulation(see recital 7 and Article 9 of the TTBER).

(71) According to Article 1(1)(d) of the Specialisation Block Exemption Regulation, that Regulation covers, in particular, joint production agreements by virtue of which two or more parties 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.

(72) Where undertakings establish a production joint venture and license 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 the Specialisation Block Exemption Regulation and not to the TTBER. Accordingly, licensing in the context of a production joint venture normally falls to be considered under the Specialisation Block Exemption Regulation. 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 4.4 of these guidelines.

(73) The Research and Development Block Exemption Regulation 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 1(1)(m) of that Regulation, 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. That Regulation also covers paid-for research and development agreements whereby two or more undertakings agree that the research and development is carried out by one party and financed by another party, with or without joint exploitation of the results thereof (see Article 1(1)(a)(vi) of the Research and Development Block Exemption Regulation).

(74) It follows that the Research and Development Block Exemption Regulation covers licensing between the parties and by the parties to a joint entity in the context of a research and development agreement. Such licensing is subject only to the Research and Development Block Exemption Regulation and not to the TTBER. In the context of such agreements 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 the Research and Development Block Exemption Regulation. That licence agreement is covered by the block exemption in the TTBER if the conditions of it are fulfilled.

3.2.6.2. The Vertical Block Exemption Regulation

(75) The Vertical Block Exemption Regulation 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 (52).

(76) 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 the Vertical Block Exemption Regulation, those 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 of the contract products are subject to the Vertical Block Exemption Regulation (53).

(77) The TTBER also exempts agreements between the licensor and the licensee where the agreement imposes obligations on the licensee as to the way in which it 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 covered by a block exemption, comply with the Vertical Block Exemption Regulation. For instance, the licensor can oblige the licensee to establish a system based on exclusive distribution in accordance with specified rules. However, it follows from Article 4(b) of the Vertical Block Exemption Regulation that generally distributors must be free to make passive sales into the territories of other exclusive distributors of the licensee.

(78) Furthermore, under the Vertical Block Exemption Regulation distributors must in principle be free to sell both actively and passively into territories covered by the distribution systems of other suppliers, that is to say, other licensees producing their own products on the basis of the licensed technology rights. This is because for the purposes of the Vertical Block Exemption Regulation each licensee is a separate supplier. However, the reasons underlying the block exemption of active sales restrictions within a supplier's distribution system contained in that Regulation, may also apply where the products incorporating the licensed technology are sold by different 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 Authority would be unlikely to challenge restraints where by analogy the requirements of the Vertical Block Exemption Regulation 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 it as the source of the licensed technology.

3.3. The market share thresholds of the safe harbour

(79) According to Article 3 of the TTBER, the block exemption of restrictive agreements, or in other words the safe harbour of the TTBER, is subject to market share thresholds, confining the scope of the block exemption to agreements that although they may be restrictive of competition can generally be presumed to fulfil the conditions of Article 53(3). Outside the safe harbour created by the market share thresholds individual assessment is required. The fact that market shares exceed the thresholds does not give rise to any presumption either that the agreement is caught by Article 53(1) or that the agreement does not fulfil the conditions of Article 53(3). In the absence of hardcore restrictions as set out in Article 4 of the TTBER, market analysis is required.

Relevant market share thresholds

(80) The market share threshold to be applied for the purpose of the safe harbour of the TTBER depends on whether the agreement is concluded between competitors or non-competitors.

(81) The market share thresholds apply both to the relevant market(s) of the licensed technology rights and the relevant market(s) of the contract products. If the applicable market share threshold is exceeded on one or several product and technology market(s), the block exemption does not apply to the agreement for that relevant market(s). For instance, if the licence agreement concerns two separate product markets, the block exemption may apply to one of the markets and not to the other.

(82) According to Article 3(1) TTBER the safe harbour provided for in Article 2 TTBER applies to agreements between competitors on condition that the combined market share of the parties does not exceed 20 % on any relevant market. The market share threshold of Article 3(1) of the TTBER is applicable if the parties are actual competitors or potential competitors on the product market(s) and/or actual competitors on the technology market (for the distinction between competitors and non-competitors, see point (27) ff.).

(83) Potential competition on the technology market is not taken into account for the application of the market share threshold or the hardcore list relating to agreements between competitors. Outside the safe harbour of the TTBER potential competition on the technology market is taken into account but does not lead to the application of the hardcore list relating to agreements between competitors.

(84) Where the undertakings party to the licensing agreement are not competitors, the market share threshold of Article 3(2) of the TTBER applies. An agreement between non-competitors is covered if the market share of each party does not exceed 30 % on the affected relevant technology and product markets.

(85) Where the parties become competitors within the meaning of Article 3(1) TTBER at a later point in time, for instance where the licensee was already present, before the licensing, on the relevant market where the contract products are sold and the licensor subsequently becomes an actual or potential supplier on the same relevant market, the 20 % market share threshold will apply from the point in time when they became competitors. However, in that case the hardcore list relevant for agreements between non-competitors will continue to apply to the agreement unless the agreement is subsequently amended in any material respect (see Article 4(3) of the TTBER and point (39) of these guidelines).

Calculating market shares for technology market(s) for the application of the safe harbour

(86) The calculation of market shares on the relevant markets where the technology rights are licensed, under the TTBER, deviates from the usual practice for the reasons explained in point (87) of these guidelines. In the case of technology markets, it follows from Article 8(d) of the TTBER that, both for the product and the geographic dimension of the relevant market, the licensor's market share is to be calculated on the basis of the sales of the licensor and all its licensees of products incorporating the licensed technology. Under this approach the combined sales of the licensor and its licensees of contract products are calculated as part of all sales of competing products, irrespective of whether these competing products are produced with a technology that is being licensed.

(87) This approach of calculating the market share of the licensor on the technology market as its ‘footprint’ at the product level, has been chosen because of the practical difficulties in calculating a licensor's market share based on royalty income (see point (25) above). In addition to the general difficulty of obtaining reliable royalty income data, the actual royalty income may also seriously underestimate a technology's position on the market in the event that royalty payments are reduced as a result of cross-licensing or of the supply of tied products. Basing the licensor's market share on the technology market on the products produced with that technology as compared with products produced with competing technologies would not carry that risk. Such a footprint at the product level will in general reflect the market position of the technology well.

(88) Ideally that footprint would be calculated by excluding from the product market the products produced with in-house technologies that are not licensed out, as those in-house technologies are only an indirect constraint on the licensed technology. However, as it may be difficult in practice for licensor and licensees to know whether other products in the same product market are produced with licensed or in-house technologies, the calculation of the technology market share, for the purposes of the TTBER, is based on the products produced with the licensed technology as part of all products sold in that product market. This approach based on the technology's footprint on the overall product market(s) can be expected to reduce the calculated market share by including products produced with in-house technologies, but will nonetheless in general provide 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 it 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, which makes it less competitive and thereby may cause it 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 on the technology market.

(89) To estimate the strength of the technology, the geographic dimension of the technology market has also to be taken into account. This might sometimes differ from the geographic dimension of the respective downstream product market. For the purpose of applying the TTBER, the geographic dimension of the relevant technology market is also determined by the product market(s). However, outside the TTBER safe harbour it may be appropriate to also consider a possibly wider geographic area, in which the licensor and licensees of competing technologies are involved in the licensing of these technologies, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.

(90) In the case of new technologies that did not generate any sales in the preceding calendar year, a zero market share is assigned. When sales commence the technology will start accumulating market share. If the market share rises subsequently above the relevant threshold of 20 % or 30 %, the safe harbour will continue to apply for a period of two consecutive calendar years following the year in which the threshold was exceeded (see Article 8(e) of the TTBER).

Calculating market shares for product market(s) for the application of the safe harbour

(91) In the case of relevant markets where the contract products are sold, the licensee's market share is to be calculated on the basis of the licensee's sales of products incorporating the licensor's technology and competing products, that is to say, the total 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 market shares for product markets, however, sales made by other licensees are not taken into account when calculating the licensee's and/or licensor's market share.

(92) Market shares should be calculated on the basis of sales value data of the preceding year 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.

(93) The principles set out in Section 3.3 of these guidelines 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 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 1, B sold EUR 25 million's worth of products produced with the freely available technologies. In year 2, A gives a licence 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 3 and the following years B produces and sells only Xeran worth EUR 40 million annually. In addition in year 2, A also licenses to C. C was not active on that product market before. C produces and sells only Xeran, EUR 10 million in year 2 and EUR 15 million in year 3 and thereafter. 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 2, the year the licence agreements are 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 3, 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 2. In year 4 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 2, B's market share on the product market is 12,5 %, reflecting B's EUR 25 million sales in year 1. In year 3, B's market share is 15 % because its sales have increased to EUR 30 million in year 2. In year 4 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 and 2, 5 % in year 3 and 7,5 % thereafter.

As the licence agreements between A and B, and between A and C, are between non-competitors and the individual market shares of A, B and C are below 30 % each year, each agreement falls within the safe harbour of the TTBER.

Example 2

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

In this case, A's market share on the relevant technology markets has to be calculated on the basis of product sales data of each of the two geographic product markets separately. 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, that is to say, half the size of the market in example 1, the market share of A is 0 % in year 2, 15 % in year 3 and 40 % thereafter. B's market share is 25 % in year 2, 30 % in year 3 and 40 % thereafter. In years 2 and 3, both A's and B's market share does not exceed the 30 % threshold. The threshold is however exceeded from year 4 and this means that, in line with Article 8(e) of the TTBER, after year 6 the licence 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 2, 10 % in year 3 and 15 % thereafter. The market share of C on the product market is the same: 0 % in year 2, 10 % in year 3 and 15 % thereafter. The licence agreement between A and C therefore falls within the safe harbour for the whole period.

Licensing between competitors

Example 3

Companies A and B are active on the same relevant product and geographic 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 to use their respective technologies. In year 1, A and B produce only with their own technology: A sells EUR 15 million of the product and B sells EUR 20 million of the product. From year 2, 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. From year 2, B sells EUR 15 million of the product produced with its own technology and EUR 10 million of the product produced with A's technology. 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, by both A and B, with A's technology. In year 2, the market share of A on the technology market is therefore 15 %, reflecting its own production and sales of EUR 15 million in year 1. From year 3, A's market share on the technology market is 20 %, reflecting the EUR 20 million sales of the product produced with A's technology and produced and sold by A and B (EUR 10 million each). Similarly, in year 2, 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 2 and 20 % thereafter. The market share of B on the product market is 20 % in year 2 and 25 % thereafter.

As the agreement is 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 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 2 and 45 % thereafter. This agreement between competitors will therefore have to be assessed on an individual basis.

3.4. Hardcore restrictions of competition under the Block Exemption Regulation

3.4.1. General principles

(94) 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 Court of Justice and the General Court (54) such a restriction may result from the clear objective of the agreement or from the circumstances of the individual case (see point (14) above). Hardcore restrictions may be objectively necessary in exceptional cases for an agreement of a particular type or nature (55) and therefore fall outside Article 53(1) of the EEA Agreement. In addition, undertakings can always plead an efficiency defence under Article 53(3) in an individual case (56).

(95) It follows from Article 4(1) and 4(2) of the TTBER that, when a technology transfer agreement contains a hardcore restriction of competition, the agreement as a whole falls outside the scope of the block exemption. For the purposes of the TTBER hardcore restrictions cannot be severed from the rest of the agreement. Moreover, the Authority considers that in the context of individual assessment it is unlikely that hardcore restrictions of competition fulfil the four conditions of Article 53(3) (see point (18) above).

(96) Article 4 of the TTBER distinguishes between agreements between competitors and agreements between non-competitors.

3.4.2. Agreements between competitors

(97) Article 4(1) TTBER lists the hardcore restrictions for licensing between competitors. According to Article 4(1), 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 any of the following: (a) the restriction of a party's ability to determine its prices when selling products to third parties; (b) the limitation of output, except limitations on the output of contract products imposed on the licensee in a non-reciprocal agreement or imposed on only one of the licensees in a reciprocal agreement; (c) the allocation of markets or customers except: (i) the obligation on the licensor and/or the licensee, in a non-reciprocal agreement, not to produce with the licensed technology rights within the exclusive territory reserved for the other party and/or not to sell, both actively and passively or only actively, into the exclusive territory or to the exclusive customer group reserved for the other party; (ii) the restriction, in a non-reciprocal agreement, of active sales by the licensee into the exclusive territory or to the exclusive customer group allocated by the licensor to another licensee provided that the latter was not a competing undertaking of the licensor at the time of the conclusion of its own licence; (iii) the obligation on the licensee to produce the contract products only for its own use provided that the licensee is not restricted in selling the contract products actively and passively as spare parts for its own products; (iv) the obligation on the licensee, in a non-reciprocal agreement, to produce the contract products only for a particular customer, where the licence was granted in order to create an alternative source of supply for that customer; (d) the restriction of the licensee's ability to exploit its own technology rights or the restriction of the ability of any 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.

Distinction between reciprocal and non-reciprocal agreements between competitors

(98) For a number of hardcore restrictions the TTBER makes a distinction between reciprocal and non-reciprocal agreements. The hardcore list is stricter for reciprocal agreements than for non-reciprocal agreements between competitors. Reciprocal agreements are cross-licensing agreements where the licensed technologies are competing technologies or can be used for the production of competing products. A non-reciprocal agreement is an agreement where only one of the parties is licensing its technology rights to the other party or where, in the case of cross-licensing, the licensed technologies rights are not competing technologies and the rights licensed cannot be used for the production of competing products. An agreement is not reciprocal for the purposes of the TTBER merely because the agreement contains a grant-back obligation or because the licensee licenses back own improvements of the licensed technology. Where a non-reciprocal agreement subsequently becomes a reciprocal agreement due to the conclusion of a second licence between the same parties, those parties may have to revise the first licence in order to avoid the agreement containing a hardcore restriction. In the assessment of the individual case the Authority will take into account the time lapsed between the conclusion of the first and the second licence.

Price restrictions between competitors

(99) The hardcore restriction of competition contained in Article 4(1)(a) TTBER concerns agreements between competitors that have as their object the fixing of prices for products sold to third parties, including the products incorporating the licensed technology. Price fixing between competitors constitutes a restriction of competition by its very object. Price fixing can 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 is immaterial whether the agreement concerns fixed, minimum, maximum or recommended prices. Price fixing 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. However, an obligation on the licensee to pay a certain minimum royalty does not in itself amount to price fixing.

(100) 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 (57). Competitors can therefore use cross-licensing with reciprocal running royalties as a means of coordinating and/or increasing prices on downstream product markets (58). However, the Authority will only treat cross-licences with reciprocal running royalties as price fixing where the agreement is devoid of any pro-competitive purpose and therefore does not constitute a bona fide licensing arrangement. In such cases where the agreement does not create any value and therefore has no valid business justification, the arrangement is a sham and amounts to a cartel.

(101) The hardcore restriction contained in Article 4(1)(a) TTBER 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 its ability to use its own technology rights (see point (116) of these guidelines). In general such agreements restrict competition since the agreement raises the cost of using the licensee's own competing technology rights and restricts competition that existed in the absence of the agreement (59). This is so both in the case of reciprocal and non-reciprocal arrangements.

(102) Exceptionally, however, an agreement whereby royalties are calculated on the basis of all product sales may fulfil the conditions of Article 53(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.

Output restrictions between competitors

(103) The hardcore restriction of competition set out in Article 4(1)(b) TTBER concerns reciprocal output restrictions on the parties. An output restriction is a limitation on how much a party may produce and sell. Article 4(1)(b) does not apply to output limitations on the licensee in a non-reciprocal agreement or output limitations on one of the licensees in a reciprocal agreement provided that the output limitation only concerns products produced with the licensed technology. Article 4(1)(b) thus identifies as hardcore restrictions reciprocal output restrictions on the parties and output restrictions on the licensor in respect of its own technology. When competitors agree to impose reciprocal output limitations, the object and likely effect of the agreement is to reduce output in the market. The same is true of agreements that reduce the incentive of the parties to expand output, for example by applying reciprocal running royalties per unit which increase as output increases or by obliging each party to make payments if a certain level of output is exceeded.

(104) The more favourable treatment of non-reciprocal quantity limitations is based on the consideration that a one-way restriction does not necessarily lead to a lower output on the market while the risk that the agreement is not a bona fide licensing arrangement is also lower when the restriction is non-reciprocal. 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. Similarly, in a reciprocal agreement an output restriction on only one of the licensees is likely to reflect the higher value of the technology licensed by one of the parties and may serve to promote pro-competitive licensing.

Market and customer allocation between competitors

(105) The hardcore restriction of competition set out in Article 4(1)(c) TTBER concerns the allocation of markets and customers. Agreements whereby competitors share markets and customers have as their object the restriction of competition. An agreement whereby competitors agree, in a reciprocal agreement, not to produce in certain territories or not to sell, both actively and passively or only actively, into certain territories or to certain customers reserved for the other party, is considered a hardcore restriction. Thus for instance reciprocal exclusive licensing between competitors is considered market sharing.

(106) Article 4(1)(c) applies irrespective of whether the licensee remains free to use its own technology rights. Once the licensee has tooled up to use the licensor's technology to produce a given product, it may be costly to maintain a separate production line using another technology in order to serve customers covered by the restrictions. Moreover, given the anti-competitive potential of the restraints the licensee may have little incentive to produce under its own technology. Such restrictions are also highly unlikely to be indispensable for pro-competitive licensing to occur.

(107) Under Article 4(1)(c)(i) it is not a hardcore restriction for the licensor in a non-reciprocal agreement to grant the licensee an exclusive licence to produce on the basis of the licensed technology in a particular territory and thus agree not to produce itself the contract products in or provide the contract products from that territory. Such exclusive licences are block-exempted irrespective of the scope of the territory. If the licence is worldwide, the exclusivity implies that the licensor will abstain from entering or remaining on the market. The block exemption also applies if in a non-reciprocal agreement the licensee is not allowed to produce in an exclusive territory reserved for the licensor. The purpose of such agreements may be to give the licensor and/or licensee an incentive to invest in and develop the licensed technology. The object of the agreement is therefore not necessarily to share markets.

(108) According to Article 4(1)(c)(i) and for the same reason, the block exemption also applies to non-reciprocal agreements whereby the parties agree not to sell actively or passively into an exclusive territory or to an exclusive customer group reserved for the other party. For the application of the TTBER, the Authority interprets ‘active’ and ‘passive’ sales as defined in the guidelines on vertical restraints (60). Restrictions on licensee or licensor to sell actively and/or passively into the other party's territory or customer group are only block-exempted if that territory or customer group has been exclusively reserved to that other party. However, in some specific circumstances, agreements containing such sales restrictions may, in an individual case, also fulfil the conditions of Article 53(3) if the exclusivity is shared on an ad hoc basis, for instance if necessary to alleviate a temporary shortage in the production of the licensor or licensee to which the territory or customer group is exclusively allocated. In such cases, the licensor or licensee is still likely to be sufficiently protected against active and/or passive sales to have the incentive to license its technology or invest to work with the licensed technology. Such restraints, even where restrictive of competition, would promote pro-competitive dissemination and integration of that technology into the production assets of the licensee.

(109) By implication the fact that the licensor appoints the licensee as its sole licensee in a particular territory, implying that third parties will not be licensed to produce on the basis of the licensor's technology in the territory in question, does not constitute a hardcore restriction either. In the case of such sole licences the block exemption applies irrespective of whether the agreement is reciprocal or not given that the agreement does not affect the ability of the parties to fully exploit their own technology rights in their respecti