Opinion of the European Economic and Social Committee on the "Draft Commission Regulation on the application of Article 81(3) of the Treaty to categories of technology transfer agreements"
Date: 2003-12-11
Institutions: European Economic and Social Committee
Subjects: ESC opinion, competition policy, inter-company agreement, opt-out clause, technology transfer

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on the ‘Draft Commission Regulation
on the application of Article 81(3) of the Treaty to categories of technology transfer agreements’ (1)

(2004/C 80/07)

On 4 September 2003, the Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the ‘Draft
Commission Regulation on the application of Article 81(3) of the Treaty to categories of technology
transfer agreements’.

The European Economic and Social Committee instructed the Section for the Single Market, Production
and Consumption to prepare its work on the subject.

In view of the urgency of the matter, at its 404th plenary session, held on 10 and 11 December 2003
(meeting of 11 December) the European Economic and Social Committee appointed Mr Metzler as
rapporteur-general and adopted the following opinion by 29 votes to 3, with 1 abstention.

1.

Introduction

The proposal for a new block exemption regulation
1.1.
for technology transfer agreements (TTBER) is to replace block
exemption Regulation (EC) No 240/96. Application of this —
with its white, grey and black lists of permitted and prohibited
clauses — has in practice led to heavy restrictions in the
drafting of contracts and has given rise to the oft-mentioned
‘strait-jacket effect’. As a consequence, contracts have been
drawn up which are not in line with economic reality, but
solely in keeping with the guidelines laid down in these lists.
The technology industry has been calling for a long time for
the block exemption regulation to be revised in order to
improve this situation.

1.2.
In this connection, account should be taken of the new
legal situation which will be created when Regulation (EC)
No 1/2003 on the implementation of the rules on competition
comes into force on 1 May 2004. After this date it will no
longer be possible to submit notification of competition-
restricting contracts for the purposes of exemption by the
Commission. In future, it is rather the firms themselves who
must judge whether their agreements contravene antitrust
Article 81 (1) of the EC Treaty, and whether the preconditions
are met for an exemption from the antitrust provisions set out
in Article 81 (3) of that treaty. This also creates a new situation
for technology transfer agreements;
in the
interests of legal certainty, firms require different support than
hitherto on offer from Regulation (EC) No 240/96.

in particular,

1.3.
From an economic point of view, the following points
should be taken into consideration: owners of exclusive
intellectual property rights, such as patents, can prohibit a
third party from any action impinging upon their rights. If
they were however to grant a licensee the use of
their
innovation, this would in principle be pro-competitive. Tech-
nology licence contracts do in fact bring new products on to

(1) OJ C 235, 1.10.2003, p. 11.

existing markets, or even create completely new product
markets. Such contracts also make major investments in
duplicate research unnecessary, provided that two or more
firms have the same research objective and approaches. Only
when agreements are reached which go beyond the safe
legislative haven protecting the right
in question should
competition law come into play.

If the EU is to become the most competitive economy
1.4.
in the world by 2010,
it is not only important that new
technologies be developed, but also that there be sustained
efforts to disseminate them rapidly. Here, however, the strong
position which legislators have wanted to give intellectual
property right (IPR) holders must not be curbed unreasonably;
rather, the right framework conditions must be created to
allow IPR holders to transfer their technology to third parties.
Licensors, as holders of an intellectual property right, must be
given enough incentive to allow other parties to use their
technology. In this connection, it should be borne in mind
that even a limited amount of competition makes more sense
economically than none at all in the case that an innovator
grants no licences. The responsibility for deciding whether to
allow others to use an innovation lies entirely with the licensor.

1.5.
Compared to other kinds of contracts, the awarding of
licences also involves much more risk, because if a contract
falls through, once technical knowledge has been transferred
it cannot be taken back. It is also for this reason that there is a
strong need for licensors to have legal certainty.

2. Overview of the key components of the block exemp-
tion regulation for technology transfer agreements
(TTBER) and the Committee’s assessment

2.1.
In many respects, the TTBER does not meet the general
demands which have been made in this connection. This
opinion will first list the main criticisms of the draft regulation
and then examine them in greater detail in section 3.

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In practice, it will be more difficult to determine market
2.2.
share than has been the case to date, because not only the
product market, but also the technology market and possibly
the innovation market too, have to be included in the equation.
It is too much to expect of firms that they should take
the situation on three different markets into account when
assessing whether or not licence agreements comply with
antitrust legislation.

At 20 to 30 %, market share thresholds have been set
2.3.
too low for licensing purposes.
In order to disseminate
technologies comprehensively, an extension of the ‘safe haven’
concept is required, or even better, complete abolition of these
thresholds. In practice, the concept used to date in Regulation
(EC) No 240/96 has proved its worth, whereby only isolated
cases of competition-restricting agreements are picked up on.

2.4.
Licence agreements between competitors are to be
more strictly assessed than those between non-competitors.
This principle has been taken from the 1995 USA Antitrust
Guidelines for the Licensing of Intellectual Property. Europe
does not yet, however, have any practical experience with this
concept which would justify adopting it.
In many cases,
licences actually promote competition between competing
firms. This happens when, for example, a firm acquires the
patent licence of a competitor with a view to using it to
develop a product of its own and then placing it on the market.
Here it does not seem appropriate to judge licences between
competitors more strictly.

2.5.
The TTBER guidelines highlight the main dangers of
certain clauses in licence contracts, and refer less to their
economic value. Experience to date with licence contracts does
not, however, provide any reason for adopting such a critical
stance. Rather, when licensors allow other parties to share
in their technological knowledge,
it should be thoroughly
welcomed. Licensors reading the guidelines will probably get
the impression that the licensing process itself entails a highly
problematical legal procedure for them.

3. The key clauses in the proposal for a TTBER

3.1. Definitions

to deal with the subject matter in a single regulation. In
addition, for patents and know-how, which Regulation (EC)
No 240/96 deals with exclusively, there is already legislation
with which the EU has gained experience; this is not the case
Including software
with other intellectual property rights.
copyright licences in the TTBER is to be welcomed, as in
practice a great deal of software is licensed which can be used
exclusively to operate the patented product — a machine, for
example — and constitutes more than just an insignificant
part of an overall package.

Article 1(1)(g) limits the definition of know-how
3.1.2.
considerably in relation to the definition set out in Regulation
(EC) No 240/96. Know-how is now only described as ‘substan-
tial’ provided it includes information which is indispensable
for the manufacture or provision of the contract products.
Hitherto it was described as ‘useful’ know-how. The Committee
sees no reason to change the definition in this way.

3.2. Market share thresholds

3.2.1.
Article 3 of the proposed new regulation stipulates
that there are no exemptions for agreements between non-
competing firms, provided that the market share of each of
the parties concerned in the relevant technology and product
markets does not exceed 30 %. For competing firms, the
combined market share should not exceed 20 % of the market.

3.2.2.
Information about market share on product markets,
technology markets and, in keeping with Guideline 22 of the
TTBER, in some cases on innovation markets, can therefore be
necessary. It is, however, already extremely difficult for many
firms to define the product market, especially since they also
have to take account of potential competitors here. When
licensing contracts are being concluded, the extent to which
products can be replaced by other products is regularly
left open, particularly since the contracts often concern
innovations for which there is no substitute. It is even more
difficult to ascertain whether this might be the case in the
future with regard to potential competitors. This creates
considerable legal uncertainty. The Commission’s decisions to
date are evidence of the fact that there is often a sharp
difference between firms’ ideas of their market share and that
of the competition authorities.

3.1.1.
According to Article 1(1)(b), the scope of the pro-
posed regulation covers patent licensing agreements, know-
how licensing agreements and mixed patent and know-how
licensing agreements. Software copyright licensing agreements
are also covered. In the Committee’s view, licensing of other
intellectual property rights should be dealt with separately
because, due to the considerable differences between patent
law and copyright law in particular, it is exceedingly difficult

3.2.3.
The licensing of patents and know-how is, on the
other hand, covered by the technology market concept. Here,
just as on the product market, a hypothetical monopolist is to
be created, who gradually raises the royalties by 5 to 10 %
(SSNIP test). The way that markets are to be defined in practice,
however, is not adequately explained in the guidelines.

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The innovation market takes even less account of
3.2.4.
licensing practice, which relies on simple standards. This
concept is foreign to European law and is rooted in American
antitrust law. The guidelines lack both a definition of the
innovation market and also precise guidance as to how to
differentiate between markets. The innovation market in the
USA covers the development of new, as yet non-existent or
improved products and processes, where the competition
parameter of R&D is seen as a product of the innovation
market. In practice however, if the market is determined in
this way, the results of a particular research process can
scarcely be anticipated ex ante, neither can their timing.
Research project results often depend on many random factors
which might not even come into play. In addition, discoveries
can also occur spontaneously and unintentionally. It may
scarcely be possible to ascertain potential competitors in this
connection, since firms are normally very secretive about their
research and development activities.

Also to be taken into account is the fact that new
3.2.5.
products which are regularly covered by licence agreements
very quickly acquire a large share of the market, if not a
monopoly. Such a market situation is typical when a licence
contract is concluded and does not necessarily lead to a
position of market power in terms of antitrust law. This is
particularly the case when the introduction of new products
and processes creates niche markets which do not have
any impact on competition. Introducing rigid market share
thresholds is therefore to the Committee’s mind inappropriate.

3.2.6.
The twelfth whereas clauses of the TTBER stipulates
that above these market share thresholds there can be no
presumption that
technology transfer agreements falling
within the scope of Article 81(1) will usually give rise to
objective advantages. Nowhere is there any proof, however,
for this highly general and economically unfounded statement.
Rather, the market share thresholds seem to be arbitrarily set
at 20 or 30 %. Clearly the Commission would like to align the
rules on technology transfer on the block exemption regulation
for vertical agreements. The background to the two regulations
is however quite different and the two situations are not
comparable. Fixed market share thresholds may be a suitable
instrument for the assessment of distribution contracts, but
this does not hold true for technology transfer contracts,
where, as has already been explained, it is very hard to know
where to set these thresholds.

3.2.7.
The Committee feels that such strict, schematic rules
run the risk of slowing down the flow of technology within
the EU, and with it
the dissemination of scientific and
technical progress. Licensors could also decide to transfer their
technologies to licensees outside the EU, where they can
benefit from more flexible rules. Alternatively, licensors could

decide to keep the technology for themselves, which would
mean major losses to national economic prosperity. Taking as
a basis the market share threshold used in other block
exemption regulations does not take into consideration the
fact that licence agreements warrant particular support, and is
more restrictive than Regulation (EC) No 240/96 which went
further. Also with a view to the introduction of the new
antitrust Regulation (EC) No 1/2003, which encumbers firms
with the decision on the admissibility of a competition-
restricting agreement, a technology transfer regulation should
be adopted which is simpler to deal with, and not one which
makes the assessment of the subject matter much more
complicated.

3.2.8.
Consequently, the Committee considers that market
share thresholds should be dispensed with completely. If they
are retained, they should be raised to 40 to 50 % at least. Only
in this way can the uncertainties arising from the definition of
the relevant market be at least minimised.

3.3. Hardcore restrictions

Article 4(1)(b) stipulates that the limitation of output
3.3.1.
or sales is generally not admissible. The regulation should,
however, allow for an explicit exemption for licensors who
undertake an obligation not to use their own technology.
There should also be exemption from ‘field-of-use’ limitations
in point (c), as long as this entails no restriction on licensors
for using their own technology, as provided for also in
Regulation (EC) No 240/96. In parallel, an explicit exemption
should be allowed for ‘second source’ limitations, since in
practice such clauses are of major importance. The wording of
point (d), whereby licensees may not be restricted in their
ability to exploit their own technology, is too restrictive, unless
such a restriction is ‘indispensable’ for preventing the disclosure
of the licensed know-how to third parties. The term ‘indispens-
able’ should therefore be replaced by ‘suitable’.

As regards the territorial restriction set out

3.3.2.
in
Article 4(2)(b), the regulation should also state that passive
sales in another contract area may be prohibited. This pro-
vision has proved its worth in Regulation (EC) No 240/96,
since it enabled protected licensees to penetrate the market
with the product concerned. Only Guideline 93 stipulates that
the restrictions on passive sales fall outside Article 81(1) for a
period of two years from the date on which the licensed
product was first put on the market. For the sake of legal
the Committee recommends that an equivalent
certainty,
clause be incorporated directly into the TTBER. The two-year
period is too short for this. The Committee advocates using
the tried and tested rule contained in Regulation (EC) No 240/
96, which provides for a five-year period.

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3.4.

Protection for established rights

they do not meet

the conditions set out

3.4.1.
Contracts that have hitherto been exempt are, under
Article 9(2) of the TTBER, to be inadmissible as of May 2004
in the new
if
regulation. It is unreasonable to deny protection of established
rights to existing contracts. If this were to happen, it would be
necessary to renegotiate licence agreements just because of
minor clauses in contracts in order to avoid calling into
question the agreements as a whole. Because this creates
considerable uncertainty, the Committee recommends protec-
tion of established rights for existing contracts as long as they
are valid.

3.5. Guidelines

3.5.1.
Essentially it is to be welcomed that the Commission,
particularly now that it is relinquishing its exemption mon-
opoly, is providing firms with comprehensive guidelines to
help them determine whether or not a licence agreement
complies with antitrust legislation. However, in many parts of
the guidelines — particularly the part on exclusive licence
contracts — the Commission gives the impression of being
highly critical of such agreements, if not considering them per
se as restricting competition. For example Guideline 156 states
that exclusive licences are only warranted in exceptional
circumstances; they are seen as being more dangerous than
positive in their effect. However, the far greater danger is that
no more licences might be handed out if the granting of
exclusive licences is only possible under such difficult con-
ditions. In practice, a market opening or the launch of research
and development projects is often only possible when licensees
receive an exclusive licence. Therefore the guidelines should
state the economic benefit of technology agreements which do
not come under the TTBER, but which nevertheless promote
competition. This would make it easier for potential licensors
to decide on the granting of licences. In no way should they
be given the impression that in granting a licence they are
getting entangled in a legally problematical procedure.

3.5.2.
That apart, not only is the definition of the relevant
markets (Guideline 17) too vague, as already mentioned, but
the definition of potential competitors is likewise too vague.
Guideline 24 stipulates that the parties to a contract are
deemed to be potential competitors on the product market if,
in the absence of the agreement, they would likely have

Brussels, 11 December 2003.

undertaken the necessary additional investment to enter the
relevant market. This wording does not however make it
sufficiently clear when a firm would normally undertake such
investment costs.

3.5.3.
Guideline 144 f.f. sets out the various types of
restraints that are common to licence agreements. Guide-
line 146 lists, albeit only concisely, the obligations contained
in licence agreements that, irrespective of the case, do not
restrict competition within the meaning of Article 81(1). For
the purposes of legal certainty, certain points contained in
Article 2 of Regulation (EC) No 240/96 should be added to
this ‘white’ list. This would be of considerable help in the
actual drafting of a licence agreement, as doubts about the
admissibility of such kinds of clauses could be cleared up.

4. Conclusion

4.1.
The Committee welcomes the greater flexibility for
drawing up contracts which the TTBER provides by being
restricted to a number of key ‘black-list’ clauses. Moreover,
technology transfer contracts can be concluded for longer
periods than to date, in line with the period for intellectual
property rights. The relatively arbitrary ten-year period now
no longer applies in this connection.

Because of the particular nature of the product, tech-
4.2.
nology and innovation markets and the associated difficulties
in defining them, the Committee recommends that a revision
of this proposal should abandon the system of market share
thresholds and focus first and foremost on the product market.
At the very least, the market share thresholds need to be raised
to between 40 and 50 % in order to provide firms with greater
legal certainty. This would also prevent the licensing of new
technologies with competition-promoting effects from being
automatically classified as restricting competition. This would
make it easier for potential licensors to be more flexible in
their approach to contracts under the new technology transfer
regulation, and would encourage them to grant
licences
accordingly. The Committee believes that the TTBER guidelines
should also help to create certainty about
that
technology licensing is an essentially positive process. This is
in keeping with economic realities and can help ensure that
licensors do not keep their technologies only for themselves
or pass them on to licensees outside the EU, where they can
benefit from more flexible rules.

the fact

The President

of the European Economic and Social Committee

Roger BRIESCH