EFTA Surveillance Authority Decision No 228/05/COL of 21 September 2005 issuing a Notice entitled Guidelines on the application of Article 53 of the EEA Agreement to technology transfer agreements
Date: 2005-09-21
Institutions: EFTA Surveillance Authority
Subjects: European Economic Area, agreement (EU), application of EU law, competition law, technology transfer

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IV

(Other acts)

EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

EFTA SURVEILLANCE AUTHORITY DECISION

No 228/05/COL

of 21 September 2005

issuing a Notice entitled ‘Guidelines on the application of Article 53 of the EEA Agreement to
technology transfer agreements’

THE EFTA SURVEILLANCE AUTHORITY,

HAVING REGARD TO the Agreement on the European Economic Area (1), in particular Articles 53 and 55,

HAVING REGARD TO the Agreement between the EFTA States on the establishment of a Surveillance Authority
and a Court of Justice (2), in particular Articles 5(2)(b) and 25(1),

AFTER CONSULTING the Advisory Committee on Restrictive Practices and Dominant Positions and the
European Commission,

WHEREAS the European Commission has adopted a Notice entitled ‘Guidelines on the application of Article 81
of the EC Treaty to technology transfer agreements’ (3),

WHEREAS this Notice is of relevance also for the European Economic Area,

WHEREAS it is necessary to provide guidance for undertakings by indicating the principles for the application
of Article 53 of the EEA Agreement to technology transfer agreements,

WHEREAS a uniform application of the EEA competition rules is to be ensured throughout the European
Economic Area,

WHEREAS according to point II under the heading ‘General’ at the end of Annex XIV to the EEA Agreement,
the 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,

(1) Hereinafter referred to as the EEA Agreement.
(2) Hereinafter referred to as the Surveillance and Court Agreement.
(3) OJ C 101, 27.4.2004, p. 2.

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HAS ADOPTED THIS DECISION:

1.

2.

3.

4.

5.

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

The Decision, including the Notice set out in the Annex, shall be authentic in the English language.

The Notice shall be published in the EEA Section of the Official Journal of the European Union and in the
EEA Supplement thereto.

The EFTA States shall be informed by means of a copy of the Decision, including the Annex.

The European Commission shall be informed by means of a copy of the Decision, including the Annex.

Done at Brussels, 21 September 2005.

For the EFTA Surveillance Authority

Einar M. BULL

President

Kurt JÄGER

College Member

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ANNEX

‘EFTA SURVEILLANCE AUTHORITY NOTICE

2.

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

The purpose of the guidelines is to provide guidance on the
application of the TTBER as well as on the application of Article 53
of the EEA Agreement 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 to licensing agreements (5).

The present notice is issued pursuant to the rules of the Agreement
on the European Economic Area (hereafter the “EEA Agreement”)
and the Agreement between the EFTA States on the establishment
of a Surveillance Authority and a Court of Justice (hereafter the
“Surveillance and Court Agreement”).

3.

A.

B.

C.

D.

E.

1.

The European Commission (hereafter
the “Commission”) has
issued a notice entitled “Guidelines on the application of Article 81
of the EC Treaty to technology transfer agreements.” (1) That non-
binding act sets out the principles for the assessment of technology
transfer agreements under Article 81 of the EC Treaty.

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

In particular, the 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.

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

I.

INTRODUCTION

These guidelines set out the principles for the assessment of
technology transfer agreements under Article 53 of
the EEA
Agreement. Technology transfer agreements concern the licensing
of technology where the licensor permits the licensee to exploit the
licensed technology for the production of goods or services, as
defined in Article 1(1)(b) of the act referred to in point 5 of
Annex XIV to the EEA Agreement (Commission Regulation (EC)
No 772/2004 (3) on the application of Article 53(3) of the EEA
Agreement
technology transfer agreements
(hereafter “the TTBER”) (4).

to categories of

(1) OJ C 101, 27.4.2004, p. 2.
(2) The competence to handle individual cases falling under Articles 53 and 54 of
the EEA Agreement, is divided between the EFTA Surveillance Authority and
the Commission according to the rules laid down in Article 56 of the EEA
Agreement. Only one of the surveillance authorities is competent to handle
any given case.

(3) OJ L 123, 27.4.2004, p. 11.
(4) The TTBER replaces the act referred to in point 5 of Annex XIV to the EEA
Agreement (Commission Regulation (EC) No 240/96 of 31 January 1996, OJ
L 31, 9.2.1996, p. 2) on the application of Article 53(3) of the EEA Agreement
to certain categories of technology transfer agreements.

The standards set forth in these guidelines must be applied in light
the circumstances specific to each case. This excludes a
of
mechanical application. Each case must be assessed on its own
facts and the guidelines must be applied reasonably and flexibly.
Examples given serve as illustrations only and are not intended to
be exhaustive. The EFTA Surveillance Authority will keep under
review the functioning of the TTBER and the guidelines in the new
enforcement system created by Chapter II of Protocol 4 to the
Surveillance and Court Agreement (6) to consider whether changes
need to be made.

4.

The present guidelines are without prejudice to the interpretation
of Article 53 of the EEA Agreement and the TTBER that may be
given by the EFTA Court, the Court of Justice and the Court of First
Instance of the European Communities.

II.

GENERAL PRINCIPLES

1.

Article 53 of the EEA Agreement and intellectual property

rights

5.

(5)

(6)

The aim of Article 53 of the EEA Agreement as a whole is to
protect competition on the market with a view to promoting
resources.
consumer welfare and an efficient allocation of

See Joined Cases C-395/96 P and C-396/96 P, Compagnie Maritime Belge,
[2000] ECR I-1365, paragraph 130, and paragraph 106 of
the EFTA
Surveillance Authority Guidelines on the application of Article 53(3) of the
EEA Agreement, not yet published. Article 6 of the EEA Agreement provides
that, without prejudice to future developments of case-law, the provisions of
this Agreement, in so far as they are identical in substance to corresponding
rules of the Treaty establishing the European Community and the Treaty
establishing the European Coal and Steel Community and to acts adopted in
application of these two treaties, shall in their implementation and application,
be interpreted in conformity with the relevant rulings of the Court of Justice of
the European Communities given prior to the date of signature of the EEA
Agreement. As regards relevant rulings by the Court of Justice given after the
date of signature of the EEA Agreement, it follows from Article 3(2) of the
Surveillance and Court Agreement that the EFTA Surveillance Authority and
the EFTA Court shall pay due account to the principles laid down by these
rulings.
Following the Agreement amending Protocol 4 to the Agreement of the EFTA
States on the establishment of a Surveillance Authority and a Court of Justice
of 24 September 2004, which entered into force on 20 May 2005, Chapter II
of Protocol 4 to the Surveillance and Court Agreement reflects to a large
extent in the EFTA pillar Council Regulation (EC) No 1/2003 (OJ L 1,
4.1.2003, p. 1).

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Article 53(1) prohibits all agreements and concerted practices
between undertakings and decisions by associations of under-
takings (7) which may affect trade between Contracting Parties to
the EEA Agreement (hereafter “EEA States”) (8) and which have as
their object or effect the prevention, restriction or distortion of
competition (9). 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.

are in particular applicable to agreements whereby the holder
licenses another undertaking to exploit his intellectual property
rights (12). 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
Innovation constitutes an essential and dynamic
resources.
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.

6.

7.

(7)

(8)

(9)

Intellectual property laws confer exclusive rights on holders of
patents, copyright, design rights, trademarks and other legally
protected rights. The owner of intellectual property is entitled
under intellectual property laws to prevent unauthorised use of his
intellectual property and to exploit it, inter alia, by licensing it to
third parties. Once a product incorporating an intellectual property
right has been put on the market inside the EEA by the holder or
with his consent, the intellectual property right is exhausted in the
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 technol-
ogy (11). The principle of EEA exhaustion is in line with the
essential function of intellectual property rights, which is to grant
to exclude others from exploiting his
the holder
intellectual property without his consent.

the right

The fact that intellectual property laws grant exclusive rights of
exploitation does not imply that intellectual property rights are
immune from competition law intervention. Articles 53 and 54

In the following the term “agreement” includes concerted practices and
decisions of associations of undertakings.
See EFTA Surveillance Authority Notice on the concept of effect on trade
between EEA States contained in Articles 53 and 54 of the EEA Agreement,
not yet published.
In the following the term “restriction” includes the prevention and distortion
of competition.

(10) This principle of EEA exhaustion is for example enshrined in Article 7(1) of the
act referred to in point 4 of Annex XVII to the EEA Agreement (Directive 89/
104/EEC, OJ L 40, 11.2.1989, p. 1) to approximate the laws of the EEA States
relating to trademarks which provides that the trademark shall not entitle the
proprietor to prohibit its use in relation to goods which have been put on the
market in the territory covered by the EEA Agreement under that trademark by
the proprietor or with his consent. With regard to international exhaustion,
the EFTA Court has held that “it is for the EFTA States (…) to decide whether they
wish to introduce or maintain the principle of international exhaustion of rights
conferred by a trade marked with regard to goods originating from outside the EEA”,
see Case E-2/97 Maglite,
the EFTA Court, p. 172,
[1998] Report of
paragraphs 25-27. The Court of Justice of the European Communities has
in a later judgment held that “national rules providing for exhaustion of trademark
rights in respect of products put on the market outside the EEA under that mark by the
proprietor or with his consent are contrary to Article 7(1) of the Directive, as amended
by the EEA Agreement”, Case C-355/96, Silhouette, [1998] ECR I-4799,
paragraph 31.

(11) On the other hand, the sale of copies of a protected work does not lead to the
exhaustion of performance rights, including rental rights, in the work, see in
this respect Case 158/86, Warner Brothers and Metronome Video, [1988]
ECR 2605, and Case C-61/97, Foreningen af danske videogramdistributører,
[1998] ECR I-5171.

8.

9.

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 it 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
normally be free to seek compensation for successful projects that
is sufficient
taking failed
projects into account. Technology licensing may also require the
licensee to make significant sunk investments 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.

to maintain investment

incentives,

In assessing licensing agreements under Article 53, the existing
analytical framework is sufficiently flexible to take due account of
the dynamic aspects of
technology licensing. There is no
presumption that intellectual property rights and licence agree-
ments 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
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 (13). The great majority of licence agree-
ments are therefore compatible with Article 53.

technology and promotes innovation.

(12) See e.g.

Joined Cases 56/64 and 58/64, Consten and Grundig,

[1966]

ECR 429.

(13) The methodology for the application of Article 53(3) is set out in the EFTA
Surveillance Authority Guidelines on the application of Article 53(3) of the
EEA Agreement cited in note 5.

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2.

The general framework for applying Article 53 of the EEA

Agreement

10. Article 53(1) of the EEA Agreement prohibits agreements which
the restriction of competition.
have as their object or effect
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 competi-
tion must be made within the actual context in which competition
would occur in the absence of the agreement with its alleged
restrictions (14). In making this assessment it is necessary to take
account of the likely impact of the agreement on inter-technology
competition (i.e. competition between undertakings using compet-
ing
competition
(i.e. competition between undertakings using the same techno-
logy) (15). 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.

intra-technology

technologies)

and

on

to the parties themselves and not

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 (16). Such exclusion of
the application of
Article 53(1) can only be made on the basis of objective
factors external
the
the parties. The
subjective views and characteristics of
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. For instance, territorial
restraints in an agreement between non-competitors may fall
outside Article 53(1) for a certain duration if the restraints
are objectively necessary for a licensee to penetrate a new
market. Similarly, a prohibition imposed on all licensees to
sell to certain categories of end users may not be restrictive
of competition if such a restraint is objectively necessary for
reasons of safety or health related to the dangerous nature of
the product in question. Claims that in the absence of a
the supplier would have resorted to vertical
restraint
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.

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 restraints may be capable of affecting
both inter-technology competition and intra-technology competi-
tion at the same time, it may be necessary to analyse a restraint in
the light of both questions before it can be concluded whether or
not competition within the meaning of Article 53(1) is restricted:

13.

In the application of the analytical framework set out in the
previous paragraph it must be taken into account 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. An agreement or
its
contractual restraint is only prohibited by Article 53(1)
object or effect is to restrict inter-technology competition and/or
intra-technology competition.

if

(a)

Does the licence agreement restrict actual or potential
competition that would have existed without the contem-
plated 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 licence
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 his licensees not to use
competing technologies and these obligations foreclose third
party technologies, actual or potential competition that
would have existed in the absence of
the agreement is
restricted.

(b) Does the agreement restrict actual or potential competition
that would have existed in the absence of the contractual
restraint(s)? If so, the agreement may be caught by Arti-
cle 53(1). For instance, where a licensor restricts its licensees
from competing with each other, (potential) competition that
could have existed between the licensees absent the restraints
is restricted. Such restrictions include vertical price fixing and
territorial or customer sales restrictions between licensees.

the purposes of applying Article 53(1)

14. Restrictions of competition by object are those that by their very
nature restrict competition. These are restrictions which in light of
the objectives pursued by the EEA competition rules have such a
high potential for negative effects on competition that it is not
necessary for
to
demonstrate any actual 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
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 hardcore restriction 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

factors. These factors include,

in particular,

(16) See in this respect the judgment in Société Technique Minière cited in note 14

and Case 258/78, Nungesser, [1982] ECR 2015.

(17) See in this

respect e.g. Case C-49/92 P, Anic Partecipazioni,

[1999]

ECR I-4125, paragraph 99.

(14) See Case 56/65, Société Technique Minière, [1966] ECR 337, and Case

C-7/95 P, John Deere, [1998] ECR I-3111, paragraph 76.

(15) See in this respect e.g. judgment in Consten and Grundig cited in note 12.

(18) See Joined Cases 29/83 and 30/83, CRAM and Rheinzink, [1984] ECR 1679,
paragraph 26, and Joined Cases 96/82 and others, ANSEAU-NAVEWA, [1983]
ECR 3369, paragraphs 23-25.

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15.

16.

17.

factor but not a necessary condition. For licence agreements, the
EFTA Surveillance Authority considers that the restrictions covered
by the list of hardcore restrictions of competition contained in
Article 4 of the TTBER are restrictive by their very object.

it has

If an agreement is not restrictive of competition by object it is
restrictive effects on
necessary to examine whether
competition. Account must be taken of both actual and potential
effects (19). 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 (20). 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. 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 of the EEA Agreement.

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

Licence agreements, however, also have substantial pro-competitive
potential. Indeed, the vast majority of licence agreements are 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 him 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,

(19) See the judgment in John Deere, [1998] cited in note 14.
(20) Guidance on the issue of appreciability can be found in EFTA Surveillance
Authority notice on agreements of minor
importance which do not
appreciably restrict competition under Article 53(1) of the EEA Agreement
(OJ C 67, 20.3.2003, p. 20 and EEA Supplement No 15, 20.3.2003, p. 11.).
The notice defines appreciability in a negative way. Agreements, which fall
outside the scope of the de minimis notice, do not necessarily have appreciable
restrictive effects. An individual assessment is required.

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 exploita-
tion 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 his intellectual property rights to prevent the sale of
the licensee’s products, the agreement removes an obstacle to the
the licensee's product and thus generally promotes
sale of
competition.

18.

the conditions of Article 53(3)

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, no prior decision to
that effect being required (21). Hardcore restrictions of competition
only fulfil
in exceptional
circumstances. Such agreements generally fail (at least) one of the
first two conditions of Article 53(3). They generally do not create
objective economic benefits or benefits for consumers. Moreover,
these types of agreements generally also fail the indispensability
test under the third condition. For example, if the parties fix the
price at which the products produced under the licence must be
sold, this will generally 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.

3.

Market definition

19. The EFTA Surveillance Authority’s approach to defining the
relevant market
definition
guidelines (22). The present guidelines only address aspects of
market definition that are of particular importance in the field of
technology licensing.

down in its market

laid

is

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

(21) See Article 1(2) of Chapter II of Protocol 4 to the Surveillance and Court

Agreement.

(22) EFTA Surveillance Authority notice on the definition of the relevant market for
the purposes of EEA competition law (OJ L 200, 16.7.1998, p. 48 and EEA
Supplement No 28, 16.7.1998, p. 3.).

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and service markets (product markets) as well as technology
markets (23). The term “product market” used in Article 3 of the
TTBER refers to relevant goods and service markets in both their
geographic and product dimension. As is clear from Article 1(1)(j)
of the TTBER, the term is used merely to distinguish relevant goods
and service markets from relevant technology markets.

making him less competitive, causing him to lose sales. A
technology’s market share on the product market also captures
this element and is thus normally a good indicator of licensor
market power. In individual cases outside the safe harbour of the
TTBER it may be necessary, where practically possible, to apply
both of
to assess more
accurately the market strength of the licensor.

the described approaches in order

21. The TTBER and these guidelines are concerned with effects both on
product markets for final products and on product markets for
intermediate products. The relevant product market
includes
products regarded by the buyers as interchangeable with or
substitutable for the contract products incorporating the licensed
technology, by reason of the product characteristics, their prices
and their intended use.

24. Moreover, outside the safe harbour of the TTBER it must also be
taken into account that market share may not always be a good
indication of the relative strength of available technologies. The
EFTA Surveillance Authority will therefore,
inter alia, also have
regard to the number of independently controlled technologies
available in addition to the technologies controlled by the parties to
the agreement
the licensed
that may be substitutable for
technology at a comparable cost to the user (see paragraph 131
below).

22. Technology markets consist of the licensed technology and its
substitutes,
i.e. other technologies regarded by the licensees as
interchangeable with or substitutable for the licensed technology,
by reason of the technologies’ characteristics, their royalties and
their intended use. The methodology for defining technology
markets follows the same principles as the definition of product
markets. Starting from the technology marketed by the licensor,
one needs to identify those other technologies to which licensees
could switch in response to a small but permanent increase in
relative prices, i.e. the royalties. An alternative approach is to look
at the market for products incorporating the licensed technology
(cf. paragraph below).

25.

23. 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
the market where competing technologies are licensed.
of
However, this may often be a mere theoretical and not a practical
way to proceed because of lack of clear information on royalties,
etc. An alternative approach, which is the one used in Article 3(3)
of the TTBER,
is to calculate market shares on the technology
market on the basis of sales of products incorporating the licensed
technology on downstream product markets (see paragraph 70
below). Under this approach all sales on the relevant product
market are taken into account, irrespective of whether the product
incorporates a technology that is being licensed. In the case of
technology markets the approach of Article 3(3) to take into
account
is
justified. Indeed, this approach is in general a good indicator of the
strength of
it captures any potential
competition from undertakings that are producing with their
own technology and that are likely to start licensing in the event of
a small but permanent increase in the price for licenses. Secondly,
even where it is unlikely that other technology owners would start
licensing, the licensor does not necessarily have market power on
the technology market even if he has a high share of licensing
income.
is competitive,
competition at this level may effectively constrain the licensor.
An increase in royalties upstream affects the costs of the licensee,

technologies that are (only) being used in-house,

the downstream product market

the technology. First,

If

innovation markets.

to examining the impact of

Some licence agreements may affect
In
analysing such effects, however, the EFTA Surveillance Authority
will normally confine itself
the
agreement on competition within existing product and technology
markets (24). 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 define
innovation markets. This is particularly the case where the
agreement affects innovation aiming at creating new products
and where it is possible at an early stage to identify research and
development poles (25). In such cases it can be analysed whether
after the agreement there will be a sufficient number of competing
research and development poles left for effective competition in
innovation to be maintained.

4.

The distinction between competitors and non-competitors

26.

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
further competition between
these products, but also spur
undertakings that use competing technologies. In the context of
licensing it must also be taken into account that licensees are
selling their own product. They are not re-selling a product
supplied by another undertaking. There may thus be greater scope
for product differentiation and quality-based competition between
licensees than in the case of vertical agreements for the resale of
products.

(23) As to these distinctions, see also EFTA Surveillance Authority Guidelines on
the applicability of Article 53 of the EEA Agreement to horizontal cooperation
agreements (OJ C 266, 31.10.2002, p. 1 and EEA Supplement No 55,
31.10.2002, p. 1).

(24) See to that effect paragraphs 50 to 52 of the Guidelines on horizontal

cooperation agreements, cited in the previous note.
Idem, paragraph 51.

(25)

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27.

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.

licence and where the licensor subsequently enters the product
market either on the basis of the licensed technology or a new
technology. Also in this case the hardcore list
for
agreements between non-competitors will continue to apply to
the agreement unless the agreement is subsequently amended in
any material respect (cf. Article 4(3) of the TTBER).

relevant

28. Where the licensor and the licensee are both active on the same
product market or the same technology market without one or
both parties infringing the intellectual property rights of the other
party, they are actual competitors on the market concerned. The
parties are deemed to be actual competitors on the technology
market if the licensee is already licensing out his technology and
the licensor enters the technology market by granting a license for
a competing technology to the licensee.

32.

29. The parties are considered to be potential competitors on the
product market if in the absence of the agreement and without
infringing the intellectual property rights of the other party it is
likely that they would have undertaken the necessary additional
investment to enter the relevant market in response to a small but
permanent increase in product prices. In order to constitute a
realistic competitive constraint entry has to be likely to occur
within a short period. 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 patents (see
paragraph 32 below).

30. The parties are considered to be potential competitors on the
technology market where they own substitutable technologies if in
the specific case the licensee is not licensing his own technology,
provided that he would be likely to do so in the event of a small but
the
permanent
application of the TTBER potential competition on the technology
market is not taken into account (see paragraph 66 below).

increase in technology prices. However,

for

33.

31.

In some cases the parties may become competitors subsequent to
the conclusion of the agreement because the licensee develops and
starts exploiting a competing technology. In such cases it must be
taken into account that the parties were non-competitors at the
time of conclusion of the agreement and that the agreement was
concluded in that context. The EFTA Surveillance Authority will
therefore mainly focus on the impact of the agreement on the
licensee’s ability to exploit his 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 (cf. Article 4(3) of the
TTBER). 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 product market prior to the

If the parties own technologies that are in a one-way or two-way
blocking position, the parties are considered to be non-competitors
on the technology market. A one-way blocking position exists
when a technology cannot be exploited without infringing upon
another technology. This is for instance the case where one patent
covers an improvement of a technology covered by another patent.
In that case the exploitation of the improvement patent pre-
supposes that the holder obtains a licence to the basic patent. A
two-way blocking position exists where neither technology can be
exploited without infringing upon the other technology and where
the holders thus need to obtain a licence or a waiver from each
other. In assessing whether a blocking position exists the EFTA
Surveillance Authority will rely on objective factors as opposed to
the subjective views of the parties. Particularly convincing evidence
of the existence of a blocking position is required where the parties
may have a common interest in claiming the existence of a
blocking position in order to be qualified as non-competitors, for
instance where the claimed two-way blocking position concerns
technologies that are technological substitutes. Relevant evidence
includes court decisions including injunctions and opinions of
independent experts.
in
particular, closely examine how the expert has been selected.
including expert
However, also other
evidence from the parties that they have or had good and valid
reasons to believe that a blocking position exists or existed, can be
relevant to substantiate the existence of a blocking position.

In the latter case the Authority will,

convincing evidence,

that

the older

In some cases it may also be possible to conclude that while the
licensor and the licensee produce competing products, they are
non-competitors on the relevant product market and the relevant
technology market because the licensed technology represents such
a drastic innovation that the technology of the licensee has become
obsolete or uncompetitive. In such cases the licensor’s technology
either creates a new market or excludes the licensee’s technology
from the market. Often, however, it is not possible to come to this
conclusion at the time 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
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
the licensee’s technology is
obsolete or uncompetitive. However, given that both Articles 53(1)
and Article 53(3) must be applied in light of the actual context in
which the agreement occurs, the assessment is sensitive to material
changes in the facts. The classification of the relationship between
the parties will
therefore change into a relationship of non-
competitors, if at a later point in time the licensee’s technology
becomes obsolete or uncompetitive on the market.

is not obvious that

it

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III.

APPLICATION OF THE TTBER

1.

The effects of the TTBER

distinguishing between agreements between two undertakings and
multiparty agreements is whether the agreement in question is
concluded between more than two undertakings.

34. Technology transfer agreements that fulfil the conditions set out in
the TTBER are block exempted from the prohibition rule contained
in Article 53(1) of
the EEA Agreement. 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 EFTA Surveillance Authority or an
EFTA competition authority. Block exempted agreements cannot
be prohibited under Article 53 by national courts in the context of
private litigation.

35. Block exemption of categories of technology transfer agreements is
based on the presumption that such agreements − to the extent
that they are caught by Article 53(1) − 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 Arti-
cle 53(3) are block exempted.

39. 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.

40.

Licence agreements concluded between more than two under-
takings 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 EFTA
Surveillance Authority will apply by analogy the principles set
out in the TTBER.

2.2. Agreements for the production of contract products

36. As set out in section IV below, 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 (26). 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) (27).

41.

37. Outside the scope of the block exemption it is relevant to examine
whether
is caught by
in the individual case the agreement
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 when agreements contain
hardcore restrictions of competition that
it can normally be
presumed that they are prohibited by Article 53.

2.

Scope and duration of the TTBER

2.1. Agreements between two parties

38. According to Article 2(1) of the TTBER, the act 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

(26) See in this respect the Notice on agreements of minor importance cited in note

20.

(27) According to Article 3(2) of Chapter II of Protocol 4 to the Surveillance and
Court Agreement, agreements which may affect trade between EEA States but
which are not prohibited by Article 53 of the EEA Agreement cannot be
prohibited by national competition law.

the licensee to exploit

It follows from Article 2 that for licence agreements to be covered
by the TTBER they must concern “the production of contract
products”,
i.e. products incorporating or produced with the
licensed technology. In other words, to be covered by the TTBER
the licence must permit
the licensed
technology for production of goods or services. The TTBER does
not cover technology pools. The notion of technology pools covers
agreements whereby two or more parties agree to pool their
respective technologies and 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 him
to license on the package of technologies. Technology pools are
dealt with in section IV.4 below.

42. The TTBER applies to licence agreements for the production of
contract products whereby the licensee is also permitted to
sublicense the licensed technology to third parties provided,
however, that the production of contract products constitutes the
primary object of the agreement. Conversely, the TTBER does not
apply to agreements that have sublicensing as their primary object.
However, the EFTA Surveillance Authority will apply by analogy
the principles set out in the TTBER and these guidelines to such
“master
licensing” agreements between licensor and licensee.
Agreements between the licensee and sub-licensees are covered
by the TTBER.

43. The term “contract products” encompasses goods and services
produced with the licensed technology. This is the case both where
the licensed technology is used in the production process and
where it is incorporated into the product itself. In these guidelines
the term “products incorporating the licensed technology” covers
both situations. The TTBER applies in all cases where technology is
licensed for the purposes of producing goods and services. It is
sufficient in this respect that the licensor undertakes not to exercise
his intellectual property rights against the licensee. Indeed, the

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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.

supplementary protection certificates for medicinal products or
other products for which such supplementary protection certifi-
cates may be obtained, software copyright, and know-how. The
licensed technology should allow the licensee with or without
other inputs to produce the contract products.

thereof exclusively for

44. The TTBER covers “subcontracting” whereby the licensor licenses
technology to the licensee who undertakes to produce certain
products on the basis
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, the licensed technology and not the
supplied equipment must constitute the primary object of the
agreement. Subcontracting is also covered by the EFTA Surveil-
lance Authority’s notice concerning the assessment of certain
subcontracting agreements in relation to Article 53(1) of the EEA
Agreement (28). According to this notice, which remains applicable,
subcontracting agreements whereby the subcontractor undertakes
to produce certain products exclusively for the contractor generally
fall outside Article 53(1). However, other restrictions imposed on
the subcontractor such as the obligation not to conduct or exploit
his own research and development may be
caught by
Article 53 (29).

is required,

the agreement

45. 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 the
the object of
production of an identified contract product. On the other hand,
the TTBER and the guidelines do not cover agreements whereby a
technology is licensed for the purpose of enabling the licensee to
carry out further research and development in various fields. 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. The framework of the TTBER and the guidelines is
based on the premise that there is a direct link between the licensed
technology and an identified contract product. In cases where no
such link exists the main object of the agreement is research and
development as opposed to bringing a particular product to the
market; in that case the analytical framework of the TTBER and the
guidelines may not be appropriate. For the same reasons the
TTBER and the guidelines do not cover research and development
sub-contracting 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.
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.

47. Know-how is defined in Article 1(1)(i) as a package of non-
patented practical
information, resulting from experience and
testing, which is secret, substantial and identified. “Secret” means
that the know-how is not generally known or easily accessible.
the know-how includes information
“Substantial” means that
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 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 his production costs. “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.

48. The concept of “transfer” implies that technology must flow from
one undertaking to another. Such transfers normally take the form
of licensing whereby the licensor grants the licensee the right to
use his technology against payment of royalties. It can also take the
form of sub-licensing, whereby a licensee, having been authorised
to do so by the licensor, grants licenses to third parties (sub-
licensees) for the exploitation of the technology.

2.3. The concept of technology transfer agreements

46. The TTBER and these guidelines cover agreements for the transfer
of technology. According to Article 1(1)(b) and (h) of the TTBER
the concept of “technology” covers patents and patent applications,
utility models and applications for utility models, design rights,
plant breeders rights, topographies of semiconductor products,

(28) OJ L 153, 18.6.1994, p. 30 and EEA Supplement No 15, 18.6.1994, p. 29.
(29) See paragraph 3 of the subcontracting notice.

49. The TTBER only applies to agreements that have as their primary
object the transfer of technology as defined in that act as opposed
to the purchase of goods and services or the licensing of other
types of intellectual property. Agreements containing provisions
relating to the purchase and sale of products are only covered by
the TTBER to the extent that those provisions do not constitute the
primary object of the agreement and are directly related to the
application of the licensed technology. This is likely to be the case
where the tied products take the form of equipment or process

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input which is specifically tailored to efficiently exploit the licensed
technology. If, on the other hand, the product is simply another
input into the final product, it must be carefully examined whether
the licensed technology constitutes the primary object of
the
agreement. For instance,
in cases where the licensee is already
manufacturing a final product on the basis of another technology,
the licence must lead to a significant improvement of the licensee's
production process, exceeding the value of the product purchased
from the licensor. The requirement that the tied products must be
related to the licensing of technology implies that the TTBER does
not cover the purchase of products that have no relation with the
products incorporating the licensed technology. This is for example
the case where the tied product is not intended to be used with the
licensed product, but relates to an activity on a separate product
market.

that

to the extent

50. The TTBER only covers the licensing of other types of intellectual
property such as trademarks and copyright, other than software
copyright,
they are directly related to the
exploitation of the licensed technology and do not constitute the
primary object of
the agreement. This condition ensures that
agreements covering other types of intellectual property rights are
only block exempted to the extent that these other intellectual
property rights serve to enable the licensee to better exploit the
licensed technology. The licensor may for instance authorise the
licensee to use his trademark on the products incorporating the
licensed technology. The trademark licence may allow the licensee
to better exploit the licensed technology by allowing consumers to
make an immediate link between the product and the character-
istics imputed to it by the licensed technology. An obligation on
the licensee to use the licensor’s trademark may also promote the
dissemination of technology by allowing the licensor to identify
himself as the source of the underlying technology. However,
where the value of the licensed technology to the licensee is limited
because he already employs an identical or very similar technology
and the main object of the agreement is the trademark, the TTBER
does not apply (30).

51. The licensing of copyright for the purpose of reproduction and
distribution of the protected work, i.e. the production of copies for
resale, is considered to be similar to technology licensing. Since
such licence agreements relate to the production and sale of
products on the basis of an intellectual property right, they are
considered to be of a similar nature as technology transfer
agreements and normally raise comparable issues. Although the
TTBER does not cover copyright other than software copyright, the
EFTA Surveillance Authority will as a general rule apply the
principles set out
in the TTBER and these guidelines when
assessing such licensing of copyright under Article 53 of the EEA
Agreement.

renting of protected material such as films, music or sporting
events. In the application of Article 53 the specificities of the work
and the way in which it
is exploited must be taken into
account (31). For instance, resale restrictions may give rise to less
competition concerns whereas particular concerns may arise where
licensors impose on their licensees to extend to each of
the
licensors more favourable conditions obtained by one of them. The
EFTA Surveillance Authority will therefore not apply the TTBER
and the present guidelines by way of analogy to the licensing of
these other rights.

53. The EFTA Surveillance Authority will also not extend the principles
developed in the TTBER and these guidelines to trademark
licensing. 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 (Regulation (EC)
No 2790/1999) on the application of Article 53(3) of the EEA
Agreement to categories of vertical agreements and concerted
practices (hereafter the “Vertical Block Exemption”) (32).

2.4. Duration

54.

Subject to the duration of the TTBER, 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 shall
apply for the duration of the agreement (cf. Article 2 of the
TTBER).

55. The block exemption applies to each licensed property right
covered by the agreement and ceases to apply on the date of expiry,
invalidity or the coming into the public domain of
the last
intellectual property right which constitutes “technology” within
the meaning of the TTBER (cf. paragraph above).

2.5. Relationship with other block exemptions

52. On the other hand, the licensing of rights in performances and
other rights related to copyright is considered to raise particular
issues and it may not be warranted to assess such licensing on the
basis of the principles developed in these guidelines. In the case of
the various rights related to performances value is created not by
the reproduction and sale of copies of a product but by each
individual performance of the protected work. Such exploitation
can take various forms including the performance, showing or the

56. The TTBER covers

agreements between two undertakings
concerning the licensing of technology for the purpose of the
production of contract products. However, technology can also be
an element of other types of agreements. In addition, the products
incorporating the licensed technology are subsequently sold on the
market. It is therefore necessary to address the interface between
the TTBER and the act referred to in point 6 of Annex XIV to the
EEA Agreement
(Regulation (EC) No 2658/2000) on the
application of Article 53(3) of the EEA Agreement to categories

(30) See in this respect Commission Decision in Moosehead/Whitbread (OJ L 100,

20.4.1990, p. 32).

(31) See in this respect Case 262/81, Coditel (II), [1982] ECR 3381.
(32) OJ L 103, 12.4.2001, p. 36 and EEA Supplement No 20, 12.4.2001, p. 179.

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of specialisation agreements (33) (hereafter the “Specialisation Block
Exemption”), the act referred to in point 7 of Annex XIV to the EEA
Agreement (Regulation (EC) 2659/2000) on the application of
Article 53(3) to categories of research and development agree-
ments (34)
the “Research and Development Block
Exemption”) and the Vertical Block Exemption (35).

(hereafter

2.5.1. T h e B l o c k

E x e m p t i o n s

o n

s p e c i a l i s a t i o n

a n d

R & D a g r e e m e n t s

2.5.2. T h e B l o c k E x e m p t i o n o n v e r t i c a l a g r e e m e n t s

61. The Vertical Block Exemption covers agreements entered into
the
between two or more undertakings each operating,
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.

for

57. According to Article 1(1)(c) of the Specialisation Block Exemption,
that act covers, inter alia, joint production agreements by virtue of
which two or more undertakings agree to produce certain products
jointly. The act 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.

62. 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, these two block exemptions are closely related. The
agreement between licensor and licensee is subject to the TTBER
whereas agreements concluded between a licensee and buyers are
subject to the Vertical Block Exemption and the Guidelines on
Vertical Restraints (36).

58. 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 and not
the TTBER. Accordingly, licensing in the context of a production
joint venture normally falls to be considered under the Specialisa-
tion Block Exemption. 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 act. Such licensing arrangements, which bring together the
technologies of the parties, constitute technology pools, which are
dealt with in section IV.4 below.

63. The TTBER also block exempts agreements between the licensor
and the licensee where the agreement imposes obligations on the
licensee as to the way in which he must sell
the products
incorporating the licensed technology. In particular, the licensee
can be obliged to establish a certain type of distribution system
such as exclusive distribution or selective distribution. However,
the purposes of
the distribution agreements concluded for
implementing such obligations must,
to be block
exempted, comply with the Vertical Block Exemption. 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) that
distributors must be free to make passive sales into the territories
of other exclusive distributors.

in order

59. The Research and Development Block Exemption covers agree-
ments whereby two or more undertakings agree to jointly carry
out research and development and to jointly exploit the results
thereof. According to Article 2(11), research and development and
the exploitation of the results are carried out jointly where the
work involved is carried out by a joint team, organisation or
jointly entrusted to a third party or allocated
undertakings,
between the parties by way of
specialisation in research,
development, production and distribution, including licensing.

64.

60.

It follows that the Research and Development Block Exemption
covers licensing between the parties and by the parties to a joint
entity in the context of a research and development agreement. In
the context of such 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. Such
licence agreements are block exempted by the TTBER where they
fulfil the conditions of that act.

Furthermore, distributors must in principle be free to sell both
actively and passively into territories covered by the distribution
systems of other licensees producing their own products on the
basis of the licensed technology. This is because for the purposes of
the Vertical Block Exemption each licensee is a separate supplier.
However, the reasons underlying the block exemption contained in
that act may also apply where the products incorporating the
licensed technology are sold by the licensees under a common
brand belonging to the licensor. When the products incorporating
the licensed technology are sold under a common brand identity
there may be the same efficiency reasons for applying the same
types of restraints between licensees’ distribution systems as within
a single vertical distribution system.
In such cases the EFTA
Surveillance Authority would be unlikely to challenge restraints
where by analogy the requirements of
the Vertical Block
Exemption are fulfilled. For a common brand identity to exist
the products must be sold and marketed under a common brand,
which is predominant in terms of conveying quality and other
relevant information to the consumer. It does not suffice that in
addition to the licensees’ brands the product carries the licensor’s
brand, which identifies him as
the licensed
technology.

the source of

(33) OJ L 52, 22.2 2001, p. 38 and EEA Supplement No 9, 22.2.2001, p. 5.
(34) OJ L 52, 22.2.2001, p. 38 and EEA Supplement No 9, 22.2.2001, p. 5.
(35) See note 32.

(36) See note 32 and OJ C 122, 23.5.2002, p. 1 and EEA Supplement No 26,

23.5.2002, p. 7.

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3.

The safe harbour established by the Block Exemption

65. According to Article 3 of the TTBER the block exemption of
restrictive agreements is subject
to market share thresholds,
confining the scope of the block exemption to agreements that
although they may be restrictive of competition can generally be
presumed to fulfil the conditions of Article 53(3) of the EEA
Agreement. 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, market analysis is required.

66. 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. For
the
the TTBER undertakings are competitors on the
purposes of
relevant technology market when they license competing technol-
ogies. Potential competition on the technology market is not taken
into account for the application of the market share threshold or
the hardcore list. 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 (see also paragraph 31 above).

67. Undertakings are competitors on the relevant product market
where both undertakings are active on the same product and
geographic market(s) on which the products incorporating the
licensed technology are sold (actual competitors). They are also
considered competitors where they would be likely, on realistic
investments or
grounds, to undertake the necessary additional
other necessary switching costs to enter the relevant product and
geographic market(s) within a reasonably short period of time (37)
in response to a small and permanent increase in relative prices
(potential competitors).

68.

69.

It follows from paragraphs 66 and 67 that two undertakings are
not competitors for the purposes of the TTBER where the licensor
is neither an actual nor a potential supplier of products on the
relevant market and the licensee, already present on the product
market, is not licensing out a competing technology even if he
owns a competing technology and produces on the basis of that
technology. However, the parties become competitors if at a later
point in time the licensee starts licensing out his technology or the
licensor becomes an actual or potential supplier of products on the
relevant market.
for
agreements between non-competitors will continue to apply to
the agreement unless the agreement is subsequently amended in
the TTBER and
any material
paragraph 31 above.

In that case the hardcore list

see Article 4(3) of

relevant

respect,

In the case of agreements between competitors the market share
threshold is 20 % and in the case of agreements between non-
competitors it is 30 % (cf. Article 3(1) and (2) of the TTBER).
Where the undertakings party to the licensing agreement are not
competitors the agreement is covered if the market share of neither
technology and
party exceeds 30 % on the affected relevant
product markets. Where the undertakings party to the licensing
agreement are competitors the agreement
the
combined market shares of the parties do not exceed 20 % on
the relevant technology and product markets. The market share

is covered if

thresholds apply both to technology markets and markets for
products incorporating the licensed technology. If the applicable
market share threshold is exceeded on an affected relevant market,
the block exemption does not apply to the agreement for that
relevant market. For instance, if the licence agreement concerns
two separate product markets or two separate geographic markets,
the block exemption may apply to one of the markets and not to
the other.

In the case of technology markets, it follows from Article 3(3) of
the TTBER that the licensor’s market share is to be calculated on
the basis of the sales of the licensor and all his licensees of products
incorporating the licensed technology and this for each relevant
market separately (38). Where the parties are competitors on the
technology market, sales of products incorporating the licensee’s
own technology must be combined with the sales of the products
incorporating the licensed technology.
In the case of new
technologies that have not yet generated any sales, a zero market
share is assigned. When sales commence the technology will start
accumulating market share.

the licensee’s

In the case of product markets, the licensee’s market share is to be
calculated on the basis of
sales of products
incorporating the licensor’s technology and competing products,
i.e. 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.

70.

71.

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

73. The principles set out above can be illustrated by the following

examples:

Licensing between non-competitors

E x a m p l e 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 one, B was selling EUR 25 million
worth of products produced with the freely available
technologies. In year two, A gives a licence to B to produce
Xeran. In that year B sells EUR 15 million produced with
the help of
and
freely available
EUR 15 million of Xeran. In year three and the following

technologies

the

(37) See paragraph 29 above.

(38) The reasons for this calculation rule are explained in paragraph 23 above.

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years B produces and sells only Xeran worth EUR
40 million annually. In addition in year two, A is also
licensing to C. C was not active on that product market
before. C produces and sells only Xeran, EUR 10 million in
year two and EUR 15 million in year three and thereafter.
It is established that the total market of Xeran and its
is worth
substitutes where B and C are
EUR 200 million in each year.

active

In year two, the year the licence agreement is concluded,
A’s market share on the technology market is 0 % as its
market share has to be calculated on the basis of the total
sales of Xeran in the preceding year. In year three A’s
market
is 12,5 %,
reflecting the value of Xeran produced by B and C in
the preceding year 2. In year four 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.

share on the technology market

In year two B’s market share on the product market is
12,5 %, reflecting B’s EUR 25 million sales in year one. In
year three B’s market share is 15 % because its sales have
increased to EUR 30 million in year two. In year four 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 one and two, 5 % in year three and
7,5 % thereafter.

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

E x a m p l e 2

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

In this case, A’s market share on the technology market
has to be calculated for each of
the two geographic
markets. In the market where B is active A’s market share
depends on the sale of Xeran by B. As in this example the
total market is assumed to be EUR 100 million, i.e. half
the size of the market in example 1, the market share of A
is 0 % in year two, 15 % in year three and 40 % thereafter.
B’s market share is 25 % in year two, 30 % in year three
and 40 % thereafter. In year two and three both A’s and B’s
market share does not exceed the 30 % threshold. The
threshold is however exceeded from year four and this
means that, in line with Article 8(2) of the TTBER, after
year six 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 two, 10 % in year three and 15 %
thereafter. The market share of C on the product market is

the same: 0 % in year two, 10 % in year three and 15 %
thereafter. The licence agreement between A and C
therefore falls within the safe harbour for the whole
period.

Licensing between competitors

E x a m p l e 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 one
A and B sign a cross licence agreement licensing each
other to use their respective technologies. In year one A
and B produce only with their own technology and A sells
EUR 15 million of the product and B sells EUR 20 million
of the product. From year two they both use their own
and the other’s technology. From that year onward A sells
EUR 10 million of the product produced with its own
technology and EUR 10 million of the product produced
with B’s technology. B sells from year two 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 two the market share of A on the technology market
is therefore 15 %, reflecting its own production and sales
of EUR 15 million in year one. From year three A’s market
share on the technology market is 20 %, reflecting the
EUR 20 million sale of the product produced with A’s
technology and produced and sold by A and B
(EUR 10 million each). Similarly, in year two 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
two and 20 % thereafter. The market share of B on the
product market is 20 % in year two 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 two and 45 % thereafter. This agreement between
competitors will therefore have to be assessed on an
individual basis.

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4.

Hardcore restrictions of competition under the Block

(v)

Exemption

4.1. General principles

74. Article 4 of the TTBER contains a list of hardcore restrictions of
competition. The classification of a restraint as a hardcore
restriction of competition is based on the nature of the restriction
and experience showing that such restrictions are almost always
anti-competitive. In line with the case law of the Community
Courts (39) such a restriction may result from the clear objective of
the agreement or from the circumstances of the individual case
(cf. paragraph 14 above).

75. When a technology transfer agreement contains a hardcore
restriction of competition, it follows from Article 4(1) and 4(2)
of the TTBER that the agreement as a whole falls outside the scope
of the block exemption. For the purposes of the TTBER hardcore
restrictions cannot be severed from the rest of the agreement.
Moreover, the EFTA Surveillance Authority considers that in the
context of individual assessment hardcore restrictions of competi-
tion will only in exceptional circumstances
the four
conditions of Article 53(3) of the EEA Agreement (cf. paragraph 18
above).

fulfil

76. Article 4 of the TTBER distinguishes between agreements between

competitors and agreements between non-competitors.

4.2. Agreements between competitors

(d)

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

in isolation or

indirectly,

(a)

(b)

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

78.

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

imposed on only one of

(c)

the allocation of markets or customers except:

(i)

(ii)

the obligation on the licensee(s) to produce with the
licensed technology only within one or more technical
fields of use, or one or more product markets;

the obligation on the licensor and/or the licensee, in a
non-reciprocal agreement, not to produce with the
licensed technology within one or more technical fields
of use or one or more product markets or one or more
exclusive territories reserved for the other party;

(iii)

the obligation on the licensor not
to license the
technology to another licensee in a particular territory;

(iv)

the restriction, in a non-reciprocal agreement, of active
and/or passive sales by the licensee and/or the licensor
into the exclusive territory or to the exclusive customer
group reserved for the other party;

(39) See e.g. the case law cited in note 18.

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;

(vi)

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;

(vii)

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;

to the agreement

the restriction of the licensee’s ability to exploit its own
technology or the restriction of the ability of any of the
parties
research and
development, unless such latter restriction is indispensable
to prevent the disclosure of the licensed know-how to third
parties.

to carry out

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 to the
other party or where in case of cross-licensing the licensed
technologies are not competing technologies and cannot be used
for the production of competing products. An agreement is not
reciprocal merely because the agreement contains a grant back
obligation or because the licensee licenses back own improvements
of the licensed technology. In case at a later point in time a non-
reciprocal agreement becomes a reciprocal agreement due to the
conclusion of a second licence between the same parties, they may
have to revise the first licence in order to avoid that the agreement
contains a hardcore restriction. In the assessment of the individual
case the EFTA Surveillance Authority will take into account the
time lapsed between the conclusion of the first and the second
licence.

79. The hardcore restriction of competition contained in Article 4(1)(a)
concerns agreements between competitors that have as their object
the fixing of prices for products sold to third parties, including the
products
incorporating the licensed technology. Price fixing
between competitors constitutes a restriction of competition by
its very object. Price fixing can for instance take the form of a direct
agreement on the exact price to be charged or on a price list with
certain allowed maximum rebates. It is immaterial whether the

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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.

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 obliging each other to
make payments if a certain level of output is exceeded.

80. 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 (40).
Competitors can therefore use cross licensing with reciprocal
running royalties as a means of co-ordinating prices on down-
stream product markets (41). However,
the EFTA Surveillance
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.

so both in the

81. The hardcore restriction contained in Article 4(1)(a) also covers
agreements whereby royalties are calculated on the basis of all
product sales irrespective of whether the licensed technology is
being used. Such agreements are also caught by Article 4(1)(d)
according to which the licensee must not be restricted in his ability
to use his own technology (see paragraph 95 below). In general
such agreements restrict competition since the agreement raises the
cost of using the licensee's own competing technology and restricts
competition that existed in the absence of the agreement (42). This
is
reciprocal and non-reciprocal
arrangements. Exceptionally, however, an agreement whereby
royalties are calculated on the basis of all product sales may fulfil
the conditions of Article 53(3) of the EEA Agreement 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.

case of

82. The hardcore restriction of competition set out in Article 4(1)(b)
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 cover 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 his own technology. When

(40) See in this respect paragraph 98 of the Guidelines on the application of

Article 53(3) of the EEA Agreement cited in note 5.

(41) This is also the case where one party grants a licence to the other party and
accepts to buy a physical input from the licensee. The purchase price can serve
the same function as the royalty.

(42) See in this respect Case 193/83, Windsurfing International, [1986] ECR 611,

paragraph 67.

83. 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
also the risk that the agreement is not a bona fide licensing
arrangement is less when the restriction is non-reciprocal. When a
licensee is willing to accept a one-way restriction, it is likely that
the agreement
integration of complementary
technologies or an efficiency enhancing integration of the licensor's
superior technology with the licensee's productive assets. In a
reciprocal agreement an output restriction on 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.

leads to a real

84. The hardcore restriction of competition set out in Article 4(1)(c)
concerns the allocation of markets and customers. Agreements
whereby competitors share markets and customers have as their
object the restriction of competition. It is a hardcore restriction
where competitors in a reciprocal agreement agree not to produce
in certain territories or not to sell actively and/or passively into
certain territories or to certain customers reserved for the other
party.

85. Article 4(1)(c) applies irrespective of whether the licensee remains
free to use his own technology. 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 restraint the
licensee may have little incentive to produce under his own
technology. Such restrictions are also highly unlikely to be
indispensable for pro-competitive licensing to occur.

86. Under Article 4(1)(c)(ii) 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 himself the
contract products in or provide the contract products from that
territory. Such exclusive licences are block exempted irrespective of
the scope of
the
exclusivity implies that the licensor abstains from entering or
remaining on the market. The block exemption also applies where
the licence is limited to one or more technical fields of use or one
or more product markets. The purpose of agreements covered by
Article 4(1)(c)(ii) may be to give the licensee an incentive to invest
the
in and develop the licensed technology. The object of
agreement is therefore not necessarily to share markets.

the licence is world-wide,

the territory.

If

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87. According to Article 4(1)(c)(iv) and for the same reason, the block
exemption also applies to non-reciprocal agreements whereby the
parties agree not to sell actively or passively (43) into an exclusive
territory or to an exclusive customer group reserved for the other
party.

regard that the restriction relates to distinct product markets or
fields of use and not to customers, allocated by territory or by
group, who purchase products falling within the same product
market or technical field of use. The risk of market sharing is
considered substantially greater in the latter case (see paragraph 85
above). In addition, field of use restrictions may be necessary to
promote pro-competitive licensing (see paragraph 182 below).

88. According to Article 4(1)(c)(iii) it is also not a hardcore restriction
if the licensor appoints the licensee as his 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. 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 in the respective territories.

89. Article 4(1)(c)(v) excludes from the hardcore list and thus block
exempts up to the market share threshold restrictions in a non-
reciprocal agreement on active sales by a licensee into the territory
or to the customer group allocated by the licensor to another
licensee. It is a condition, however, that the protected licensee was
not a competitor of
the licensor when the agreement was
concluded. It is not warranted to hardcore such restrictions. By
allowing the licensor to grant a licensee, who was not already on
the market, protection against active sales by licensees which are
competitors of the licensor and which for that reason are already
established on the market, such restrictions are likely to induce the
licensee to exploit the licensed technology more efficiently. On the
other hand, if the licensees agree between themselves not to sell
actively or passively into certain territories or to certain customer
groups, the agreement amounts to a cartel amongst the licensees.
Given that such agreements do not
involve any transfer of
technology they fall outside the scope of the TTBER.

90. According to Article 4(1)(c)(i) restrictions in agreements between
competitors that limit the licence to one or more product markets
or technical fields of use (44) are not hardcore restrictions. Such
restrictions are block exempted up to the market share threshold of
20 % irrespective of whether the agreement is reciprocal or not. It
is a condition for the application of the block exemption, however,
that the field of use restrictions do not go beyond the scope of the
licensed technologies. It is also a condition that licensees are not
limited in the use of their own technology (see Article 4(1)(d)).
Where licensees are limited in the use of their own technology the
agreement amounts to market sharing.

92. Article 4(1)(c)(vi) contains a further exception, namely captive use
restrictions, i.e. a requirement whereby the licensee may produce
the products incorporating the licensed technology only for his
own use. Where the contract product is a component the licensee
can thus be obliged to produce that component only for
incorporation into his own products and can be obliged not to
sell the components to other producers. The licensee must be able,
however, to sell the components as spare parts for his own
products and must thus be able to supply third parties that
perform after
sale services on these products. Captive use
restrictions as defined may be necessary to encourage the
dissemination of
technology, particularly between competitors,
and are covered by the block exemption. Such restrictions are also
dealt with in section IV.2.5 below.

93.

Finally, Article 4(1)(c)(vii) excludes from the hardcore list an
obligation on the licensee in a non-reciprocal agreement
to
produce the contract products only for a particular customer with
a view to creating an alternative source of supply for that customer.
It is thus a condition for the application of Article 4(1)(c)(vii) that
the licence is limited to creating an alternative source of supply for
that particular customer. It is not a condition, however, that only
one such licence is granted. Article 4(1)(c)(vii) also covers situations
where more than one undertaking is licensed to supply the same
specified customer. The potential of such agreements to share
markets is limited where the licence is granted only for the purpose
in such
of
circumstances it cannot be assumed that the agreement will cause
the licensee to cease exploiting his own technology.

supplying a particular customer.

In particular,

91. The block exemption applies irrespective of whether the field of
use restriction is symmetrical or asymmetrical. An asymmetrical
field of use restriction in a reciprocal licence agreement implies that
both parties are allowed to use the respective technologies that they
license in only within different fields of use. As long as the parties
are unrestricted in the use of their own technologies, it is not
assumed that the agreement leads the parties to abandon or refrain
from entering the field(s) covered by the licence to the other party.
Even if the licensees tool up to use the licensed technology within
the licensed field of use, there may be no impact on assets used to
produce outside the scope of the licence. It is important in this

(43) For a general definition of active and passive sales, reference is made to
paragraph 50 of the Guidelines on vertical restraints cited in note 36.
(44) Field of use restrictions are further dealt with in Section IV.2.4 below.

94. The hardcore restriction of competition set out in Article 4(1)(d)
covers firstly restrictions on any of the parties’ ability to carry out
research and development. Both parties must be free to carry out
independent research and development. This rule applies irrespec-
tive of whether the restriction applies to a field covered by the
licence or to other fields. However, the mere fact that the parties
agree to provide each other with future improvements of their
respective technologies does not amount
to a restriction on
independent research and development. The effect on competition
of such agreements must be assessed in light of the circumstances
of the individual case. Article 4(1)(d) also does not extend to
restrictions on a party to carry out research and development with
third parties, where such restriction is necessary to protect the
licensor’s know-how against disclosure. In order to be covered by
the exception, the restrictions imposed to protect the licensor’s
know-how against disclosure must be necessary and proportionate
to ensure such protection. For instance, where the agreement

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designates particular employees of the licensee to be trained in and
it may be
responsible for the use of the licensed know-how,
sufficient to oblige the licensee not to allow those employees to be
involved in research and development with third parties. Other
safeguards may be equally appropriate.

(iv)

the obligation 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;

95. According to Article 4(1)(d) the licensee must also be unrestricted
in the use of his own competing technology provided that in so
doing he does not make use of the technology licensed from the
licensor. In relation to his own technology the licensee must not be
subject to limitations in terms of where he produces or sells, how
much he produces or sells, and at what price he sells. He must also
not be obliged to pay royalties on products produced on the basis
of his own technology (cf. paragraph 81 above). Moreover, the
licensee must not be restricted in licensing his own technology to
third parties. When restrictions are imposed on the licensee’s use of
his own technology or to carry out research and development, the
competitiveness of the licensee’s technology is reduced. The effect
of
to reduce competition on existing product and
technology markets and to reduce the licensee’s incentive to invest
in the development and improvement of his technology.

this

is

4.3. Agreements between non-competitors

96. Article 4(2) lists the hardcore restrictions for licensing between
non-competitors. According to this provision, the TTBER does not
cover agreements which, directly or indirectly, in isolation or in
combination with other factors under the control of the parties,
have as their object:

(a)

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

(b)

the restriction of
the
customers to whom, the licensee may passively sell the
contract products, except:

the territory into which, or of

(i)

the restriction of passive sales into an exclusive
territory or to an exclusive customer group reserved
for the licensor;

(ii)

the restriction of passive sales into an exclusive
territory or to an exclusive customer group allocated
by the licensor to another licensee during the first two
years that this other licensee is selling the contract
products in that territory or to that customer group;

(v)

the restriction of sales to end users by a licensee
operating at the wholesale level of trade;

(vi)

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

(c)

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

97. The hardcore restriction of competition set out in Article 4(2)(a)
concerns the fixing of prices charged when selling products to
third parties. More specifically, this provision covers restrictions
which have as their direct or indirect object the establishment of a
fixed or a minimum selling price or a fixed or minimum price level
to be observed by the licensor or the licensee when selling
products to third parties. In the case of agreements that directly
establish the selling price, the restriction is clear-cut. However, the
fixing of selling prices can also be achieved through indirect means.
Examples of the latter are agreements fixing the margin, fixing the
maximum level of discounts, linking the sales price to the sales
prices of competitors, threats, intimidation, warnings, penalties, or
contract terminations in relation to observance of a given price
level. Direct or indirect means of achieving price fixing can be
made more effective when combined with measures to identify
price-cutting, such as the implementation of a price monitoring
system, or the obligation on licensees to report price deviations.
Similarly, direct or indirect price fixing can be made more effective
when combined with measures that reduce the licensee’s incentive
to lower his selling price, such as the licensor obliging the licensee
i.e. an obligation to
to apply a most-favoured-customer clause,
grant to a customer any more favourable terms granted to any
other customer. The same means can be used to make maximum
or recommended prices work as fixed or minimum selling prices.
However, the provision of a list of recommended prices to or the
imposition of a maximum price on the licensee by the licensor is
not considered in itself as leading to fixed or minimum selling
prices.

98. Article 4(2)(b) identifies as hardcore restrictions of competition
agreements or concerted practices that have as their direct or
indirect object the restriction of passive sales by licensees of
products incorporating the licensed technology (45). Passive sales
restrictions on the licensee may be the result of direct obligations,
such as the obligation not to sell to certain customers or to
customers in certain territories or the obligation to refer orders
from these customers to other licensees. It may also result from
indirect measures aimed at inducing the licensee to refrain from
making such sales,
and the
implementation of a monitoring system aimed at verifying the

incentives

such as

financial

(iii)

the obligation 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;

(45) This hardcore restriction applies to licence agreements concerning trade within
the territory covered by the EEA Agreement. As
regards agreements
concerning exports outside the EEA or imports/re-imports from outside the
EEA, see for instance Case C-306/96, Javico, [1998] ECR I-1983 concerning
imports/re-imports from outside the Community.

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effective destination of the licensed products. Quantity limitations
may be an indirect means to restrict passive sales. The EFTA
Surveillance Authority will not assume that quantity limitations as
such serve this purpose. However,
it will be otherwise where
quantity limitations are used to implement an underlying market
partitioning agreement. Indications thereof include the adjustment
the
of quantities over
combination of quantity limitations and an obligation to sell
minimum quantities in the territory, minimum royalty obligations
linked to sales
in the territory, differentiated royalty rates
depending on the destination of the products and the monitoring
of the destination of products sold by individual licensees. The
general hardcore restriction covering passive sales by licensees is
subject to a number of exceptions, which are dealt with below.

time to cover only local demand,

technology are often sunk, i.e. they cannot be recovered if the
licensee exits the market. In such circumstances, it is often the case
that licensees would not enter into the licence agreement without
protection for a certain period of time against (active and) passive
sales into their territory by other licensees. Restrictions on passive
sales into the exclusive territory of a licensee by other licensees
therefore often fall outside Article 53(1) of the EEA Agreement for
a period of up to two years from the date on which the product
incorporating the licensed technology was first put on the market
in the exclusive territory by the licensee in question. However, to
the extent that in individual cases such restrictions are caught by
Article 53(1) they are block exempted. After the expiry of this two-
year period restrictions on passive sales between licensees
constitute hardcore restrictions. Such restrictions are generally
caught by Article 53(1) and are unlikely to fulfil the conditions of
Article 53(3). In particular, passive sales restrictions are unlikely to
be indispensable for the attainment of efficiencies (46).

99. Article 4(2)(b) does not cover sales restrictions on the licensor. All
sales restrictions on the licensor are block exempted up to the
market share threshold of 30 %. The same applies to all restrictions
on active sales by the licensee, with the exception of what is said on
active selling in paragraphs 105 and 106 below. The block
exemption of
restrictions on active selling is based on the
assumption that such restrictions promote investments, non-price
competition and improvements in the quality of services provided
by the licensees by solving free rider problems and hold-up
problems.
In the case of restrictions of active sales between
licensees’ territories or customer groups, it is not a condition that
the protected licensee has been granted an exclusive territory or an
exclusive customer group. The block exemption also applies to
active sales restrictions where more than one licensee has been
appointed for a particular territory or customer group. Efficiency
enhancing investment is likely to be promoted where a licensee can
be ensured that he will only face active sales competition from a
limited number of licensees inside the territory and not also from
licensees outside the territory.

Indeed,

they are block exempted.

100. Restrictions on active and passive sales by licensees into an
exclusive territory or to an exclusive customer group reserved for
the licensor do not constitute hardcore restrictions of competition
(cf. Article 4(2)(b)(i)).
is
presumed that up to the market share threshold such restraints,
where restrictive of competition, promote pro-competitive dis-
semination of technology and integration of such technology into
the production assets of the licensee. For a territory or customer
group to be reserved for the licensor, it is not required that the
licensor is actually producing with the licensed technology in the
territory or for the customer group in question. A territory or
customer group can also be reserved by the licensor for later
exploitation.

It

102. Article 4(2)(b)(iii) brings under the block exemption a restriction
whereby the licensee is obliged to produce products incorporating
the licensed technology only for his own (captive) use. Where the
contract product is a component the licensee can thus be obliged
to use that product only for incorporation into his own products
and can be obliged not to sell the product to other producers. The
licensee must however be able to actively and passively sell the
products as spare parts for his own products and must thus be able
to supply third parties that perform after sale services on these
products. Captive use restrictions are also dealt with in section
IV.2.5 below.

103. As in the case of agreements between competitors (cf. paragraph 93
above) the block exemption also applies to agreements whereby the
licensee is obliged to produce the contract products only for a
particular customer in order to provide that customer with an
alternative source of supply (cf. Article 4(2)(b)(iv)). In the case of
agreements between non-competitors,
are
unlikely to be caught by Article 53(1).

such restrictions

104. Article 4(2)(b)(v) brings under the block exemption an obligation
on the licensee not to sell to end users and thus only to sell to
retailers. Such an obligation allows the licensor to assign the
wholesale distribution function to the licensee and normally falls
outside Article 53(1) (47).

101. Restrictions on passive sales by licensees into an exclusive territory
or customer group allocated to another
licensee are block
exempted for two years calculated from the date on which the
protected licensee first markets the products incorporating the
licensed technology inside his exclusive territory or to his exclusive
customer group (cf. Article 4(2)(b)(ii)). Licensees often have to
commit substantial investments in production assets and promo-
tional activities in order to start up and develop a new territory.
The risks facing the new licensee are therefore likely to be
substantial, in particular since promotional expenses and invest-
ment in assets required to produce on the basis of a particular

105. Finally Article 4(2)(b)(vi) brings under the block exemption a
restriction on the licensee not to sell to unauthorised distributors.
This exception allows the licensor to impose on the licensees an
obligation to form part of a selective distribution system. In that
case, however, the licensees must according to Article 4(2)(c) be
permitted to sell both actively and passively to end users, without
prejudice to the possibility to restrict the licensee to a wholesale
function as
the previous
paragraph).

foreseen in Article 4(2)(b)(v)

(cf.

(46) See in this respect paragraph 77 of the judgment in Nungesser cited in

note 16.

(47) See in this respect Case 26/76, Metro (I), [1977] ECR 1875.

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106. It is recalled (cf. paragraph 39 above) that the block exemption
covers licence agreements whereby the licensor imposes obliga-
tions which the licensee must or may impose on his buyers,
including distributors. However, these obligations must comply
with the competition rules applicable to supply and distribution
agreements. Since the TTBER is limited to agreements between two
parties the agreements concluded between the licensee and his
buyers implementing such obligations are not covered by the
TTBER. Such agreements are only block exempted when they
comply with the Vertical Block Exemption (cf. section 2.5.2 above).

5.

Excluded restrictions

107. Article 5 of the TTBER lists four types of restrictions that are not
block exempted and which thus require individual assessment of
their anti-competitive and pro-competitive effects. It follows from
Article 5 that the inclusion in a licence agreement of any of the
restrictions contained in these provisions does not prevent the
application of the block exemption to the rest of the agreement. It
is only the individual restriction in question that is not block
exempted,
required.
Accordingly, the rule of severability applies to the restrictions set
out in Article 5.

individual assessment

implying that

is

108. Article 5(1) provides that the block exemption shall not apply to

the following three obligations:

(a)

(b)

(c)

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

any direct or indirect obligation on the licensee to assign to
the licensor or to a third party designated by the licensor
rights to severable improvements to or new applications of
the licensed technology;

any direct or indirect obligation on the licensee not to
challenge the validity of intellectual property rights held by
the licensor in the common market. However, the TTBER
does cover the possibility for the licensor to terminate the
licence agreement in the event that the licensee challenges
the validity of the licensed technology.

The purpose of Article 5(1)(a),
is to avoid block
exemption of agreements that may reduce the incentive of
licensees to innovate.

(b) and (c)

109. Article 5(1)(a) and 5(1)(b) concerns exclusive grant backs or
assignments to the licensor of severable improvements of the
licensed technology. An improvement is severable if it can be
exploited without infringing upon the licensed technology. An
obligation to grant the licensor an exclusive licence to severable
improvements of
to assign such
the licensed technology or
improvements to the licensor is likely to reduce the licensee's
incentive to innovate since it hinders the licensee in exploiting his
improvements, including by way of licensing to third parties. This
is the case both where the severable improvement concerns the

same application as the licensed technology and where the licensee
develops new applications of the licensed technology. According to
Article 5(1)(a) and (b) such obligations are not block exempted.
However, the block exemption does cover non-exclusive grant back
obligations in respect of severable improvements. This is so even
where the grant back obligation is non-reciprocal, i.e. only imposed
on the licensee, and where under the agreement the licensor is
entitled to feed on the severable improvements to other licensees.
A non-reciprocal grant back obligation may promote innovation
and the dissemination of new technology by permitting the
licensor to freely determine whether and to what extent to pass on
his own improvements to his licensees. A feed-on clause may also
promote the dissemination of technology because each licensee
knows at the time of contracting that he will be on an equal
footing with other licensees in terms of the technology on the basis
of which he is producing. Exclusive grant backs and obligations to
assign non-severable improvements are not restrictive of competi-
tion within the meaning of Article 53(1) of the EEA Agreement
since non-severable improvements cannot be exploited by the
licensee without the licensor’s permission.

110. The application of Article 5(1)(a) and (b) does not depend on
whether or not the licensor pays consideration in return for
acquiring the improvement or for obtaining an exclusive licence.
However, the existence and level of such consideration may be a
relevant factor in the context of an individual assessment under
Article 53. When grant backs are made against consideration it is
less likely that the obligation creates a disincentive for the licensee
to innovate. In the assessment of exclusive grant backs outside the
scope of the block exemption the market position of the licensor
on the technology market is also a relevant factor. The stronger the
position of the licensor, the more likely it is that exclusive grant
back obligations will have restrictive effects on competition in
innovation. The stronger the position of the licensor’s technology
the more likely it is that the licensee will be an important source of
innovation and future competition. The negative impact of grant
back obligations can also be increased in case of parallel networks
of licence agreements containing such obligations. When available
technologies are controlled by a limited number of licensors that
impose exclusive grant back obligations on licensees, the risk of
anti-competitive effects is greater than where there are a number of
technologies only some of which are licensed on exclusive grant
back terms.

111. The risk of negative effects on innovation is higher in the case of
cross licensing between competitors where a grant back obligation
on both parties is combined with an obligation on both parties to
share with the other party improvements of his own technology.
The sharing of all improvements between competitors may prevent
each competitor from gaining a competitive lead over the other
(see also paragraph 208 below). However, the parties are unlikely
to be prevented from gaining a competitive lead over each other
where the purpose of the licence is to permit them to develop their
respective technologies and where the licence does not lead them
to use the same technological base in the design of their products.
This is the case where the purpose of the licence is to create design
freedom rather than to improve the technological base of the
licensee.

112. The excluded restriction set out in Article 5(1)(c) concerns non-
challenge clauses, i.e. obligations not to challenge the validity of the
licensor’s intellectual property. The reason for excluding non-
challenge clauses from the scope of the block exemption is the fact
that licensees are normally in the best position to determine

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whether or not an intellectual property right is invalid. In the
interest of undistorted competition and in conformity with the
principles underlying the protection of intellectual property, invalid
intellectual property rights should be eliminated. Invalid intellec-
tual property stifles innovation rather than promoting it. Arti-
cle 53(1) is likely to apply to non-challenge clauses where the
licensed technology is valuable and therefore creates a competitive
disadvantage for undertakings that are prevented from using it or
are only able to use it against payment of royalties (48). In such
cases the conditions of Article 53(3) are unlikely to be fulfilled (49).
However, the EFTA Surveillance Authority takes a favourable view
of non-challenge clauses relating to know-how where once
disclosed it is likely to be impossible or very difficult to recover
the licensed know-how. In such cases, an obligation on the licensee
not to challenge the licensed know-how promotes dissemination of
new technology,
in particular by allowing weaker licensors to
license stronger licensees without fear of a challenge once the
know-how has been absorbed by the licensee.

such circumstances neither competitors on the technology market
nor competitors on the product market (51). In such cases it is
important to ensure that the licensee is not restricted in his ability
to exploit his own technology and further develop it. This
technology constitutes a competitive constraint in the market,
which should be preserved. In such a situation restrictions on the
licensee’s use of his own technology or on research and
development
restrictive of
are normally considered to be
competition and not to satisfy the conditions of Article 53(3).
For instance, an obligation on the licensee to pay royalties not only
on the basis of products it produces with the licensed technology
but also on the basis of products it produces with its own
technology will generally limit the ability of the licensee to exploit
its own technology and thus be excluded from the scope of the
block exemption.

113. The TTBER covers the possibility for the licensor to terminate the
licence agreement in the event of a challenge of the licensed
technology. Accordingly, the licensor is not forced to continue
dealing with a licensee that challenges the very subject matter of
the licence agreement, implying that upon termination any further
use by the licensee of
the
challenger’s own risk. Article 5(1)(c) ensures, however, that the
TTBER does not cover contractual obligations obliging the licensee
not to challenge the licensed technology, which would permit the
licensor to sue the licensee for breach of contract and thereby
create a further disincentive for the licensee to challenge the
validity of the licensor's technology. The provision thereby ensures
that the licensee is in the same position as third parties.

the challenged technology is at

research and development, unless

114. Article 5(2) excludes from the scope of the block exemption, in the
case of agreements between non-competitors, any direct or indirect
obligation limiting the licensee’s ability to exploit his own
technology or limiting the ability of the parties to the agreement
to carry out
such latter
restriction is indispensable to prevent the disclosure of licensed
know-how to third parties. The content of this condition is the
same as that of Article 4(1)(d) of the hardcore list concerning
agreements between competitors, which is dealt with in para-
graphs 94 and 95 above. However,
in the case of agreements
between non-competitors it cannot be considered that such
restrictions generally have negative effects on competition or that
the conditions of Article 53(3) are generally not satisfied (50).
Individual assessment is required.

115. In the case of agreements between non-competitors, the licensee
normally does not own a competing technology. However, there
may be cases where for the purposes of the block exemption the
parties are considered non-competitors in spite of the fact that the
licensee does own a competing technology. This is the case where
the licensee owns a technology but does not license it and the
licensor is not an actual or potential supplier on the product
market. For the purposes of the block exemption the parties are in

(48)

If the licensed technology is outdated no restriction of competition arises, see
in this respect Case 65/86, Bayer v Süllhofer, [1988] ECR 5249.

(49) As to non-challenge clauses in the context of settlement agreements see point

209 below.

(50) See paragraph 14 above.

the parties to carry out

116. In cases where the licensee does not own a competing technology
or is not already developing such a technology, a restriction on the
ability of
independent research and
development may be restrictive of competition where only a few
technologies are available. In that case the parties may be an
important (potential) source of innovation in the market. This is
particularly so where the parties possess the necessary assets and
skills to carry out further research and development. In that case
the conditions of Article 53(3) are unlikely to be fulfilled. In other
cases where several technologies are available and where the parties
do not possess special assets or skills, the restriction on research
and development is likely to either fall outside Article 53(1) for
lack of an appreciable restrictive effect or satisfy the conditions of
Article 53(3). The restraint may promote the dissemination of new
technology by assuring the licensor that the licence does not create
a new competitor and by inducing the licensee to focus on the
exploitation and development of the licensed technology. More-
over, Article 53(1) only applies where the agreement reduces the
licensee’s incentive to improve and exploit his own technology.
This is for instance not likely to be the case where the licensor is
entitled to terminate the licence agreement once the licensee
commences to produce on the basis of his own competing
technology. Such a right does not reduce the licensee's incentive to
innovate, since the agreement can only be terminated when a
commercially viable technology has been developed and products
produced on the basis thereof are ready to be put on the market.

6.

Withdrawal and disapplication of the TTBER

6.1. Withdrawal procedure

117. According to Article 6 of

the TTBER, the EFTA Surveillance
Authority and the competition authorities of the EFTA States may
withdraw the benefit of
the block exemption in respect of
individual agreements that do not fulfil the conditions of Arti-
cle 53(3) of the EEA Agreement. The power of the competition
authorities of the EFTA States to withdraw the benefit of the block
exemption is limited to cases where the relevant geographic market
is no wider than the territory of the EFTA State in question.

(51) See paragraphs 66 and 67 above.

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118. The four conditions of Article 53(3) are cumulative and must all be
fulfilled for the exception rule to be applicable (52). The block
exemption can therefore be withdrawn where a particular
agreement fails one or more of the four conditions.

benefit of the block exemption where a significant number of
licensors of competing technologies in individual agreements
impose on their licensees to extend to them more favourable
conditions agreed with other licensors.

119. Where the withdrawal procedure is applied,

the withdrawing
authority bears the burden of proving that the agreement falls
within the scope of Article 53(1) and that the agreement does not
satisfy all four conditions of Article 53(3). Given that withdrawal
implies that the agreement in question restricts competition within
the meaning of Article 53(1) and does not fulfil the conditions of
Article 53(3), withdrawal is necessarily accompanied by a negative
decision based on Articles 5, 7 or 9 of Chapter II of Protocol 4 to
the Surveillance and Court Agreement.

120. According to Article 6, withdrawal may in particular be warranted

in the following circumstances:

122. The EFTA Surveillance Authority is also likely to withdraw the
benefit of the block exemption where the parties refrain from
exploiting the licensed technology, unless they have an objective
justification for doing so. Indeed, when the parties do not exploit
the licensed technology, no efficiency enhancing activity takes
place, in which case the very rationale of the block exemption
disappears. 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 him to
exploit his own technology without facing the risk of infringement
claims by the licensor.
licensing between
competitors, the fact that the parties do not exploit the licensed
technology may be an indication that
is a
disguised cartel. For these reasons the Authority will examine very
closely cases of non-exploitation.

In the case of

the arrangement

1.

2.

third parties’

access of
is
restricted, for instance by the cumulative effect of parallel
networks of
restrictive agreements prohibiting
licensees from using third party technology;

technologies to the market

similar

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

3.

without any objectively valid reason the parties refrain from
exploiting the licensed technology.

121. Articles 4 and 5 of the TTBER, containing the list of hardcore
restrictions of competition and excluded restrictions, aim at
ensuring that block exempted agreements do not reduce the
incentive to innovate, do not delay the dissemination of
technology, and do not unduly restrict competition between the
licensor and licensee or between licensees. However, the list of
hardcore restrictions and the list of excluded restrictions do not
take into account all the possible impacts of licence agreements. In
particular, the block exemption does not take account of any
cumulative effect of similar restrictions contained in networks of
licence agreements. Licence agreements may lead to foreclosure of
third parties both at the level of the licensor and at the level of the
licensee. Foreclosure of other
licensors may stem from the
cumulative effect of networks of licence agreements prohibiting
the licensees from exploiting competing technologies, leading to
the exclusion of other (potential) licensors. Foreclosure of licensors
is likely to arise in cases where most of the undertakings on the
take a competing licence are
market
prevented from doing so as a consequence of
restrictive
agreements and where potential
licensees face relatively high
barriers to entry. Foreclosure of other licensees may stem from the
cumulative effect of licence agreements prohibiting licensors from
licensing other licensees and thereby preventing potential licensees
from gaining access to the necessary technology. The issue of
foreclosure is examined in more detail in section IV.2.7 below. In
addition, the EFTA Surveillance Authority is likely to withdraw the

that could (efficiently)

(52) See in this respect paragraph 42 of the Guidelines on the application of

Article 53(3) of the EEA Agreement, cited in note 5.

6.2. Disapplication of the Block Exemption

123. A special procedure for the disapplication of the TTBER in the
EFTA States is set out in Article 7(2) of the TTBER as incorporated
in the EEA Agreement. Whereas the Commission can disapply the
TTBER by means of a regulation addressed to the EC Member
States, Article 7(2) of the TTBER enables the EFTA Surveillance
Authority to declare by means of a recommendation that, where
parallel networks of similar agreements cover more than 50 % of a
relevant market in the EFTA States, the TTBER shall not apply. The
recommendation is addressed to the EFTA State or EFTA States
comprising the relevant market
in question. Following the
adoption of a recommendation by the EFTA Surveillance Authority
under Article 7, the EFTA States have three months to notify the
Authority whether they accept the recommendation. Silence on the
part of an EFTA State will be understood as acceptance. If an EFTA
State accepts, or is deemed to accept, the recommendation, the
EFTA State must implement the recommendation within three
months from the day it was adopted. (53)

124. Whereas withdrawal of the benefit of the TTBER by the EFTA
Surveillance Authority under Article 6 implies the adoption of a
decision under Articles 7 or 9 of Chapter II of Protocol 4 to the
Surveillance and Court Agreement, the effect of the disapplication
of the block exemption following an Authority recommendation
and acceptance by the EFTA States under Article 7 of the TTBER is
merely to remove, in respect of the restraints and the markets
the TTBER and to restore the full
concerned, the benefit of
application of Article 53(1) and (3) of
the EEA Agreement.
Following the disapplication of
the block exemption for a
particular market in respect of agreements containing certain
restraints, the criteria developed by the relevant case law of the
EFTA Court and the Community Courts and by notices and
previous decisions adopted by the Authority will give guidance on
the application of Article 53 to individual agreements. Where
appropriate, the Authority will take a decision in an individual case,
which can provide guidance to all the undertakings operating on
the market concerned.

(53) However, it follows from Article 7(2) of the TTBER that if an EFTA State
addressee notifies the EFTA Surveillance Authority that it does not accept its
recommendation, the Authority shall notify the Commission of this response.
Should the Commission disagree with the position of the EFTA State in
question, Article 92(2) of the EEA Agreement shall apply.

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125. For the purpose of calculating the 50 % market coverage ratio,
licence
account must be taken of each individual network of
agreements containing restraints, or combinations of restraints,
producing similar effects on the market.

IV.

APPLICATION OF ARTICLE 53(1) AND 53(3) OF THE EEA

AGREEMENT OUTSIDE THE SCOPE OF THE BLOCK
EXEMPTION

126. Article 7 of the TTBER does not entail an obligation on the part of
the EFTA Surveillance Authority to act where the 50 % market-
coverage ratio is exceeded. In general, disapplication is appropriate
when it is likely that access to the relevant market or competition
therein is appreciably restricted. In assessing the need to apply
Article 7, the Authority will consider whether individual with-
drawal would be a more appropriate remedy. This may depend, in
particular, on the number of competing undertakings contributing
to a cumulative effect on a market or the number of affected
geographic markets within the EFTA States.

the Authority may modulate the scope of

127. Any recommendation adopted under Article 7 must clearly set out
its scope. This means, first, that the EFTA Surveillance Authority
must define the relevant product and geographic market(s) and,
secondly, that it must identify the type of licensing restraint in
respect of which the TTBER will no longer apply. As regards the
latter aspect,
its
recommendation according to the competition concern which it
intends to address. For instance, while all parallel networks of non-
compete arrangements will be taken into account for the purpose
of establishing the 50 % market coverage ratio, the Authority may
nevertheless restrict the scope of the recommendation only to non-
compete obligations exceeding a certain duration. Thus, agree-
ments of a shorter duration or of a less restrictive nature might be
left unaffected, due to the lesser degree of foreclosure attributable
to such restraints. Where appropriate, the Authority may also
provide guidance by specifying the market share level which, in the
specific market context, may be regarded as insufficient to bring
about a significant contribution by an individual undertaking to
the cumulative effect. In general, when the market share of the
products incorporating a technology licensed by an individual
the agreement or network of
licensor does not exceed 5 %,
technology is not considered to
agreements covering that
contribute significantly to a cumulative foreclosure effect (54).

128. The transitional period for the disapplication of the TTBER of not
less than six months that the EFTA Surveillance Authority will have
to set in the recommendation under Article 7(2), should allow the
undertakings concerned to adapt their agreements to take account
of the disapplication of the TTBER. The Authority considers that
the transitional period should run from the date of adoption by an
EFTA State addressee of national implementing measures.

129. The

recommendation and national

implementing measures
disapplying the TTBER will not affect the block exempted status
of the agreements concerned for the period preceding the entry
into force of the national implementing measures.

1.

The general framework for analysis

130. Agreements that fall outside the block exemption, for example
because the market share thresholds are exceeded or the agreement
involves more than two parties, are subject
to individual
assessment. Agreements that either do not restrict competition
within the meaning of Article 53(1) of the EEA Agreement or
which fulfil
the conditions of Article 53(3) are valid and
enforceable. It is recalled that there is no presumption of illegality
of agreements that fall outside the scope of the block exemption
they do not contain hardcore restrictions of
provided that
competition.
In particular, there is no presumption that Arti-
cle 53(1) applies merely because the market share thresholds are
exceeded. Individual assessment based on the principles described
in these guidelines is required.

131. In order to promote predictability beyond the application of the
TTBER and to confine detailed analysis to cases that are likely to
present real competition concerns, the EFTA Surveillance Author-
ity takes the view that outside the area of hardcore restrictions
Article 53 is unlikely to be infringed where there are four or more
independently controlled technologies in addition to the technol-
ogies controlled by the parties to the agreement that may be
substitutable for the licensed technology at a comparable cost to
the user. In assessing whether the technologies are sufficiently
substitutable the relative commercial strength of the technologies
in question must be taken into account. The competitive constraint
imposed by a technology is limited if it does not constitute a
commercially viable alternative to the licensed technology. For
instance, if due to network effects in the market consumers have a
strong preference for products incorporating the licensed technol-
ogy, other technologies already on the market or likely to come to
market within a reasonable period of time may not constitute a real
alternative and may therefore impose only a limited competitive
constraint. The fact that an agreement falls outside the safe harbour
described in this paragraph does not imply that the agreement is
caught by Article 53(1) and, if so, that the conditions of Arti-
cle 53(3) are not satisfied. As for the market share safe harbour of
the TTBER, this additional safe harbour merely creates a negative
presumption that the agreement is not prohibited by Article 53.
Outside the safe harbour individual assessment of the agreement
based on the principles developed in these guidelines is required.

1.1. The relevant factors

132. In the application of Article 53 of the EEA Agreement to individual
cases it is necessary to take due account of the way in which
competition operates on the market in question. The following
factors are particularly relevant in this respect:

(a)

the nature of the agreement;

(b)

the market position of the parties;

(c)

the market position of competitors;

(54) See in this respect paragraph 8 of the EFTA Surveillance Authority Notice on

agreements of minor importance, cited in note 20.

(d)

the market position of buyers of the licensed products;

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(e)

entry barriers;

(f) maturity of the market; and

(g)

other factors.

The importance of individual factors may vary from case to case
and depends on all other factors. For instance, a high market share
of the parties is usually a good indicator of market power, but in
the case of low entry barriers it may not be indicative of market
power. It is therefore not possible to provide firm rules on the
importance of the individual factors.

133. Technology transfer agreements can take many shapes and forms.
It is therefore important to analyse the nature of the agreement in
terms of the competitive relationship between the parties and the
restraints that it contains. In the latter regard it is necessary to go
beyond the express terms of the agreement. The existence of
implicit restraints may be derived from the way in which the
agreement has been implemented by the parties and the incentives
that they face.

134. The market position of the parties provides an indication of the
degree of market power,
if any, possessed by the licensor, the
licensee or both. The higher their market share the greater their
market power is likely to be. This is particularly so where the
market
share reflects cost advantages or other competitive
advantages vis-à-vis competitors. These competitive advantages
may for instance result from being a first mover in the market,
from holding essential patents or from having superior technology.

135. In analysing the competitive relationship between the parties it is
sometimes necessary to go beyond the analysis set out in the above
sections II.3 on market definition and II.4 on the distinction
between competitors and non-competitors. Even where the
licensor is not an actual or potential supplier on the product
market and the licensee is not an actual or potential competitor on
the technology market, it is relevant to the analysis whether the
licensee owns a competing technology, which is not being licensed.
If the licensee has a strong position on the product market, an
agreement granting him an exclusive licence to a competing
technology can restrict competition significantly compared to the
situation where the licensor does not grant an exclusive licence or
licences other undertakings.

136. Market shares and possible competitive advantages and disadvan-
tages are also used to assess the market position of competitors.
The stronger the actual competitors and the greater their number
the less risk there is that the parties will be able to individually
exercise market power. However, if the number of competitors is
rather small and their market position (size, costs, R&D potential,
etc.) is rather similar, this market structure may increase the risk of
collusion.

buyer on his resale market, including characteristics such as a wide
geographic spread of his outlets, and his brand image amongst
final consumers. In some circumstances buyer power may prevent
the licensor and/or the licensee from exercising market power on
the market and thereby solve a competition problem that would
otherwise have existed. This is particularly so when strong buyers
have the capacity and the incentive to bring new sources of supply
on to the market in the case of a small but permanent increase in
relative prices. Where the strong buyers merely extract favourable
terms from the supplier or simply pass on any price increase to
their customers, the position of the buyers is not such as to prevent
the exercise of market power by the licensee on the product market
and therefore not such as to solve the competition problem on that
market (55).

tariffs,

import

state aid,

limitations, essential

138. Entry barriers are measured by the extent to which incumbent
companies can increase their price above the competitive level
without attracting new entry. In the absence of entry barriers, easy
and quick entry would render price increases unprofitable. When
effective entry, preventing or eroding the exercise of market power,
is likely to occur within one or two years, entry barriers can, as a
general rule, be said to be low. Entry barriers may result from a
wide variety of factors such as economies of scale and scope,
government regulations, especially where they establish exclusive
rights,
intellectual property rights,
ownership of resources where the supply is limited due to for
facilities, a first mover
instance natural
advantage or brand loyalty of consumers created by strong
advertising over a period of time. Restrictive agreements entered
into by undertakings may also work as an entry barrier by making
access more difficult and foreclosing (potential) competitors. Entry
barriers may be present at all
the research and
development, production and distribution process. The question
whether certain of these factors should be described as entry
barriers depends particularly on whether they entail sunk costs.
Sunk costs are those costs which have to be incurred to enter or be
active on a market but which are lost when the market is exited.
The more costs are sunk, the more potential entrants have to weigh
the risks of entering the market and the more credibly incumbents
can threaten that they will match new competition, as sunk costs
make it costly for incumbents to leave the market. In general, entry
requires sunk costs, sometimes minor and sometimes major.
Therefore, actual competition is in general more effective and will
weigh more heavily in the assessment of a case than potential
competition.

stages of

139. A mature market is a market that has existed for some time, where
the technology used is well known and widespread and not
changing very much and in which demand is relatively stable or
declining. In such a market restrictions of competition are more
likely to have negative effects than in more dynamic markets.

137. The market position of buyers provides an indication of whether or
not one or more buyers possess buyer power. The first indicator of
buying power is the market share of the buyer on the purchase
market. This share reflects the importance of his demand for
possible suppliers. Other indicators focus on the position of the

140. In the assessment of particular restraints other factors may have to
be taken into account. Such factors include cumulative effects, i.e.
the coverage of the market by similar agreements, the duration of
the agreements, the regulatory environment and behaviour that

(55) See in this respect Case T-228/97,

Irish Sugar,

[1999] ECR II-2969,

paragraph 101.

1.

2.

3.

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may indicate or facilitate collusion like price leadership, pre-
announced price changes and discussions on the “right” price, price
rigidity in response to excess capacity, price discrimination and
past collusive behaviour.

1.2. Negative effects of restrictive licence agreements

141. The negative effects on competition on the market that may result
include the

from restrictive technology transfer agreements
following:

reduction of
inter-technology competition between the
companies operating on a technology market or on a
for products incorporating the technologies in
market
question,
including facilitation of collusion, both explicit
and tacit;

licensees to such an extent that an insufficient number of licensees
are available to third parties and where entry at the level of
licensees is difficult. Suppliers of substitutable technologies may
also be foreclosed where a licensor with a sufficient degree of
market power ties together various parts of a technology and
licenses them together as a package while only part of the package
is essential to produce a certain product.

145. Licence agreements may also reduce intra-technology competition,
i.e. competition between undertakings that produce on the basis of
the same technology. An agreement imposing territorial restraints
on licensees, preventing them from selling into each other's
territory reduces competition between them. Licence agreements
may also reduce intra-technology competition by facilitating
licence agreements that
collusion between licensees. Moreover,
reduce intra-technology competition may facilitate collusion
between owners of competing technologies or
reduce inter-
technology competition by raising barriers to entry.

foreclosure of competitors by raising their costs, restricting
their access to essential inputs or otherwise raising barriers to
entry; and

1.3. Positive effects of restrictive licence agreements and the framework for

analysing such effects

reduction of intra-technology competition between under-
takings that produce products on the basis of the same
technology.

142. Technology transfer agreements may reduce inter-technology
competition,
i.e. competition between undertakings that license
or produce on the basis of substitutable technologies. This is
particularly so where reciprocal obligations are imposed. For
instance, where competitors transfer competing technologies to
each other and impose a reciprocal obligation to provide each
other with future improvements of their respective technologies
and where this agreement prevents either competitor from gaining
a technological
lead over the other, competition in innovation
between the parties is restricted (see also paragraph 208 below).

143. Licensing between competitors may also facilitate collusion. The
risk of collusion is particularly high in concentrated markets.
Collusion requires that the undertakings concerned have similar
views on what is in their common interest and on how the co-
ordination mechanisms function. For collusion to work the
undertakings must also be able to monitor each other’s market
behaviour and there must be adequate deterrents to ensure that
there is an incentive not to depart from the common policy on the
market, while entry barriers must be high enough to limit entry or
expansion by outsiders. Agreements can facilitate collusion by
increasing transparency in the market, by controlling certain
behaviour and by raising barriers to entry. Collusion can also
exceptionally be facilitated by licensing agreements that lead to a
high degree of commonality of costs, because undertakings that
have similar costs are more likely to have similar views on the
terms of coordination (56).

144. Licence agreements may also affect inter-technology competition
by creating barriers to entry for and expansion by competitors.
Such foreclosure effects may stem from restraints that prevent
licensees from licensing from third parties or create disincentives
for them to do so. For instance, third parties may be foreclosed
where incumbent licensors impose non-compete obligations on

(56) See in this respect paragraph 23 of the Guidelines on horizontal cooperation

agreements, cited in note 23.

146. Even restrictive licence agreements mostly also produce pro-
competitive effects in the form of efficiencies, which may outweigh
their anti-competitive effects. This assessment takes place within
the framework of Article 53(3) of the EEA Agreement, which
contains an exception from the prohibition rule of Article 53(1).
For this exception to be applicable the licence agreement must
produce objective economic benefits, the restrictions on competi-
tion must be indispensable to attain the efficiencies, consumers
must receive a fair share of the efficiency gains, and the agreement
the possibility of eliminating
must not afford the parties
competition in respect of a substantial part of
the products
concerned.

the facts existing at any given point

147. The assessment of restrictive agreements under Article 53(3) is
made within the actual context in which they occur (57) and on the
basis of
in time. The
is sensitive to material changes in the facts. The
assessment
exception rule of Article 53(3) applies as long as the four
conditions are fulfilled and ceases to apply when that is no longer
the case (58). However, when applying Article 53(3) in accordance
with these principles it is necessary to take into account the initial
sunk investments made by any of the parties and the time needed
and the restraints required to commit and recoup an efficiency
enhancing investment. Article 53 cannot be applied without
considering the ex ante investment and the risks relating thereto.
The risk facing the parties and the sunk investment that must be
committed to implement the agreement can 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.

148. The first condition of Article 53(3) requires an assessment of what
are the objective benefits in terms of efficiencies produced by the
agreement. In this respect, licence agreements have the potential of
bringing together complementary technologies and other assets
allowing new or improved products to be put on the market or

(57) See Joined Cases 25/84 and 26/84, Ford, [1985] ECR 2725.
(58) See in this respect for example Commission Decision in TPS (OJ L 90,
2.4.1999, p. 6). Similarly,
the EEA
Agreement also only applies as long as the agreement has a restrictive object or
restrictive effects.

the prohibition of Article 53(1) of

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existing products to be produced at lower cost. Outside the context
licensing often occurs because it is more
of hardcore cartels,
efficient for the licensor to licence the technology than to exploit it
himself. This may particularly be the case where the licensee
already has access
to the necessary production assets. The
agreement allows the licensee to gain access to a technology that
can be combined with these assets, allowing him to exploit new or
improved technologies. Another example of potentially efficiency
enhancing licensing is where the licensee already has a technology
and where the combination of this technology and the licensor’s
technology gives rise to synergies. When the two technologies are
combined the licensee may be able to attain a cost/output
configuration that would not otherwise be possible. Licence
agreements may also give rise to efficiencies at the distribution
stage in the same way as vertical distribution agreements. Such
efficiencies can take the form of cost savings or the provision of
valuable services to consumers. The positive effects of vertical
agreements
are described in the Guidelines on Vertical
Restraints (59). A further example of possible efficiency gains is
agreements whereby technology owners assemble a technology
package for licensing to third parties. Such pooling arrangements
may in particular reduce transaction costs, as licensees do not have
to conclude separate licence agreements with each licensor. Pro-
competitive licensing may also occur to ensure design freedom. In
sectors where large numbers of intellectual property rights exist
and where individual products may infringe upon a number of
existing and future property rights, licence agreements whereby the
parties agree not to assert their property rights against each other
are often pro-competitive because they allow the parties to develop
their
the risk of subsequent
infringement claims.

respective technologies without

149. In the application of

individual

the indispensability test contained in
Article 53(3) the EFTA Surveillance Authority will in particular
examine whether
restrictions make it possible to
perform the activity in question more efficiently than would have
been the case in the absence of the restriction concerned. In
making this assessment the market conditions and the realities
facing the parties must be taken into account. Undertakings
invoking the benefit of Article 53(3) are not required to consider
hypothetical and theoretical alternatives. They must, however,
explain and demonstrate why seemingly realistic and significantly
less restrictive alternatives would be significantly less efficient. If
the application of what appears to be a commercially realistic and
less restrictive alternative would lead to a significant
loss of
efficiencies, the restriction in question is treated as indispensable. In
some cases,
it may also be necessary to examine whether the
agreement as such is indispensable to achieve the efficiencies. This
may for example be so in the case of technology pools that include
complementary but non-essential technologies (60), in which case it
must be examined to what extent such inclusion gives rise to
particular efficiencies or whether, without a significant loss of
efficiencies, the pool could be limited to technologies for which
there are no substitutes. In the case of simple licensing between
is generally not necessary to go beyond an
two parties it
examination of
restraints.
Normally there is no less restrictive alternative to the licence
agreement as such.

the indispensability of

individual

150. The condition that consumers must receive a fair share of the
benefits implies that consumers of the products produced under
the licence must at least be compensated for the negative effects of

(59) Cited in note 36. See in particular paragraphs 115 et seq.
(60) As to these concepts see Section IV.4.1 below.

the agreement (61). This means that the efficiency gains must fully
off-set the likely negative impact on prices, output and other
relevant factors caused by the agreement. They may do so by
changing the cost structure of the undertakings concerned, giving
them an incentive to reduce price, or by allowing consumers to
gain access to new or improved products, compensating for any
likely price increase (62).

151. The last condition of Article 53(3), according to which the
agreement must not afford the parties the possibility of eliminating
competition in respect of a substantial part of
the products
concerned, presupposes an analysis of remaining competitive
pressures on the market and the impact of the agreement on such
sources of competition. In the application of the last condition of
Article 53(3) the relationship between Article 53(3) and Article 54
must be taken into account. The application of Article 53(3)
cannot prevent
the EEA
Agreement (63). Moreover, since Articles 53 and 54 both pursue
the aim of maintaining effective competition on the market,
consistency requires that Article 53(3) be interpreted as precluding
any application of the exception rule to restrictive agreements that
constitute an abuse of a dominant position (64).

the application of Article 54 of

152. The fact that the agreement substantially reduces one dimension of
competition does not necessarily mean that competition is
eliminated within the meaning of Article 53(3). A technology
pool, for instance, can result in an industry standard, leading to a
situation in which there is little competition in terms of the
technological format. Once the main players in the market adopt a
certain format, network effects may make it very difficult for
alternative formats to survive. This does not imply, however, that
the creation of a de facto industry standard always eliminates
competition within the meaning of the last condition of Arti-
cle 53(3). Within the standard, suppliers may compete on price,
quality and product features. However, in order for the agreement
to comply with Article 53(3),
the
agreement does not unduly restrict competition and does not
unduly restrict future innovation.

it must be ensured that

2.

The application of Article 53 of the EEA Agreement to

various types of licensing restraints

153. This section deals with various types of

restraints that are
commonly included in licence agreements. Given their prevalence
it is useful to provide guidance as to how they are assessed outside

(61) See paragraph 85 of the Guidelines on the application of Article 53(3) of the

EEA Agreement, cited in note 5.
Idem, paragraphs 98 and 102.

(62)
(63) See paragraph 130 of the judgment cited in note 5. Similarly, the application
of Article 53(3) of the EEA Agreement does not prevent the application of the
EEA rules on the free movement of goods, services, persons and capital. These
provisions are in certain circumstances applicable to agreements, decisions and
concerted practices within the meaning of Article 53(1), see to that effect Case
C-309/99, Wouters, [2002] ECR I-1577, paragraph 120.

(64) See in this respect Case T-51/89, Tetra Pak (I), [1990] ECR II-309. See also
paragraph 106 of the Guidelines on the application of Article 53(3) of the EEA
Agreement cited in note 5 above.

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the safe harbour of the TTBER. Restraints that have already been
dealt with in the preceding parts of these guidelines, in particular
sections III.4 and III.5, are only dealt with briefly in the present
section.

In respect of

154. This section covers both agreements between non-competitors and
agreements between competitors.
the latter a
distinction is made − where appropriate − between reciprocal
and non-reciprocal agreements. No such distinction is required in
the case of agreements between non-competitors. When under-
takings are neither actual nor potential competitors on a relevant
technology market or on a market for products incorporating the
licensed technology, a reciprocal licence is for all practical purposes
no different from two separate licences. Arrangements whereby the
parties assemble a technology package, which is then licensed to
third parties, are technology pools, which are dealt with in
Section 4 below.

155. This section does not deal with obligations in licence agreements
that are generally not restrictive of competition within the meaning
of Article 53(1). These obligations include but are not limited to:

(a)

confidentiality obligations;

(b)

obligations on licensees not to sub-license;

(c)

obligations not to use the licensed technology after the
expiry of
licensed
technology remains valid and in force;

the agreement, provided that

the

(d)

obligations to assist the licensor in enforcing the licensed
intellectual property rights;

(e)

obligations to pay minimum royalties or to produce a
minimum quantity of products incorporating the licensed
technology; and

(f)

obligations to use the licensor’s trademark or indicate the
name of the licensor on the product.

2.1. Royalty obligations

156. The parties to a licence agreement are normally free to determine
the royalty payable by the licensee and its mode of payment
without being caught by Article 53(1) of the EEA Agreement. This
principle applies both to agreements between competitors and
agreements between non-competitors. Royalty obligations may for
instance take the form of lump sum payments, a percentage of the
selling price or a fixed amount for each product incorporating the
licensed technology. In cases where the licensed technology relates
to an input which is incorporated into a final product it is as a
general rule not restrictive of competition that royalties are
calculated on the basis of the price of the final product, provided
that it incorporates the licensed technology. In the case of software
licensing royalties based on the number of users and royalties
calculated on a per machine basis are generally compatible with
Article 53(1).

157. In the case of licence agreements between competitors it is recalled
that in a limited number of circumstances royalty obligations may

amount to price fixing, which is a hardcore restriction (cf. Arti-
cle 4(1)(a)). It is a hardcore restriction under Article 4(1)(a) if
competitors provide for reciprocal running royalties in circum-
stances where the licence is a sham, in that its purpose is not to
allow an integration of complementary technologies or to achieve
another pro-competitive aim. It is also a hardcore restriction under
Article 4(1)(a) and 4(1)(d) if royalties extend to products produced
solely with the licensee’s own technology.

158. Other types of royalty arrangements between competitors are
block exempted up to the market share threshold of 20 % even if
they restrict competition. Outside the safe harbour of the block
exemption Article 53(1) may be applicable where competitors
cross license and impose running royalties that are clearly
disproportionate compared to the market value of the licence
and where such royalties have a significant impact on market
prices. In assessing whether the royalties are disproportionate it is
relevant to have regard to the royalties paid by other licensees on
the product market for the same or substitute technologies. In such
cases it is unlikely that the conditions of Article 53(3) are satisfied.
Article 53(1) may also apply where reciprocal running royalties per
unit increase as output increases. If the parties have a significant
degree of market power, such royalties may have the effect of
limiting output.

159. Notwithstanding the fact that the block exemption only applies as
long as the technology is valid and in force, the parties can
normally agree to extend royalty obligations beyond the period of
validity of the licensed intellectual property rights without falling
foul of Article 53(1). Once these rights expire, third parties can
legally exploit the technology in question and compete with the
parties to the agreement. Such actual and potential competition
will normally suffice to ensure that the obligation in question does
not have appreciable anti-competitive effects.

160. In the case of agreements between non-competitors the block
exemption covers agreements whereby royalties are calculated on
the basis of both products produced with the licensed technology
and products produced with technologies licensed from third
parties. Such arrangements may facilitate the metering of royalties.
However, they may also lead to foreclosure by increasing the cost
of using third party inputs and may thus have similar effects as a
non-compete obligation. If royalties are paid not just on products
produced with the licensed technology but also on products
produced with third party technology, then the royalties will
increase the cost of the latter products and reduce demand for third
party technology. Outside the scope of the block exemption it must
therefore be examined whether the restriction has foreclosure
effects. For that purpose it is appropriate to use the analytical
framework set out in section 2.7 below. In the case of appreciable
foreclosure effects such agreements are caught by Article 53(1) and
unlikely to fulfil the conditions of Article 53(3), unless there is no
other practical way of calculating and monitoring royalty
payments.

2.2. Exclusive licensing and sales restrictions

161. For the present purposes it

to distinguish between
restrictions as to production within a given territory (exclusive or

is useful

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sole licences) and restrictions on the sale of products incorporating
the licensed technology into a given territory and to a given
customer group (sales restrictions).

2.2.1. E x c l u s i v e a n d s o l e l i c e n c e s

162. A licence is deemed to be exclusive if the licensee is the only one
the licensed
who is permitted to produce on the basis of
technology within a given territory. The licensor thus undertakes
not to produce itself or license others to produce within a given
territory. This territory may cover the whole world. Where the
licensor undertakes only not to licence third parties to produce
within a given territory, the licence is a sole licence. Often exclusive
or sole licensing is accompanied by sales restrictions that limit the
parties in where they may sell products incorporating the licensed
technology.

163. Reciprocal exclusive licensing between competitors falls under
Article 4(1)(c), which identifies market sharing between competi-
tors as a hardcore restriction. Reciprocal sole licensing between
competitors is block exempted up to the market share threshold of
20 %. Under such an agreement the parties mutually commit not
to license their competing technologies to third parties. In cases
where the parties have a significant degree of market power such
agreements may facilitate collusion by ensuring that the parties are
the only sources of output in the market based on the licensed
technologies.

164. Non-reciprocal exclusive licensing between competitors is block
exempted up to the market share threshold of 20 %. Above the
market share threshold it is necessary to analyse what are the likely
anti-competitive effects of such exclusive licensing. Where the
exclusive licence is world-wide it implies that the licensor leaves the
market. In cases where exclusivity is limited to a particular territory
such as an EEA State the agreement implies that the licensor
abstains from producing goods and services inside the territory in
question. In the context of Article 53(1) of the EEA Agreement it
must in particular be assessed what is the competitive significance
of the licensor. If the licensor has a limited market position on the
product market or lacks the capacity to effectively exploit the
technology in the licensee’s territory, the agreement is unlikely to
be caught by Article 53(1). A special case is where the licensor and
the licensee only compete on the technology market and the
licensor, for instance being a research institute or a small research
based undertaking, lacks the production and distribution assets to
effectively bring to market products incorporating the licensed
technology. In such cases Article 53(1) is unlikely to be infringed.

165. Exclusive licensing between non-competitors — to the extent that
it is caught by Article 53(1) (65) — is likely to fulfil the conditions
of Article 53(3). The right to grant an exclusive licence is generally
necessary in order to induce the licensee to invest in the licensed
technology and to bring the products to market in a timely
manner. This is in particular the case where the licensee must make
large investments in further developing the licensed technology. To
intervene against the exclusivity once the licensee has made a
commercial success of the licensed technology would deprive the
licensee of the fruits of his success and would be detrimental to
competition, the dissemination of technology and innovation. The
EFTA Surveillance Authority will
therefore only exceptionally
intervene against exclusive licensing in agreements between non-
competitors, irrespective of the territorial scope of the licence.

(65) See the judgment in Nungesser cited in note 16.

166. The main situation in which intervention may be warranted is
where a dominant licensee obtains an exclusive licence to one or
more competing technologies. Such agreements are likely to be
caught by Article 53(1) and unlikely to fulfil the conditions of
is a condition however that entry into the
Article 53(3).
technology market
is difficult and the licensed technology
constitutes a real source of competition on the market. In such
circumstances an exclusive licence may foreclose third party
licensees and allow the licensee to preserve his market power.

It

167. Arrangements whereby two or more parties cross licence each
other and undertake not to licence third parties give rise to
particular concerns when the package of technologies resulting
from the cross licences creates a de facto industry standard to
which third parties must have access in order
to compete
effectively on the market. In such cases the agreement creates a
closed standard reserved for the parties. The EFTA Surveillance
Authority will assess such arrangements according to the same
principles as those applied to technology pools (see section 4
below). It will normally be required that the technologies which
support such a standard be licensed to third parties on fair,
reasonable and non-discriminatory terms. Where the parties to the
arrangement compete with third parties on an existing product
market and the arrangement relates to that product market a closed
standard is likely to have substantial exclusionary effects. This
negative impact on competition can only be avoided by licensing
also to third parties.

2.2.2. S a l e s r e s t r i c t i o n s

168. Also as regards sales restrictions there is an important distinction
to be made between licensing between competitors and between
non-competitors.

169. Restrictions on active and passive sales by one or both parties in a
reciprocal agreement between competitors are hardcore restric-
tions of competition under Article 4(1)(c). Sales restrictions on
either party in a reciprocal agreement between competitors are
caught by Article 53(1) of the EEA Agreement and are unlikely to
fulfil the conditions of Article 53(3). Such restrictions are generally
considered market sharing, since they prevent the affected party
from selling actively and passively into territories and to customer
groups which he actually served or could realistically have served
in the absence of the agreement.

170. In the case of non-reciprocal agreements between competitors the
block exemption applies to restrictions on active and passive sales
by the licensee or the licensor into the exclusive territory or to the
exclusive customer group reserved for the other party (cf. Arti-
cle 4(1)(c)(iv). Above the market share threshold of 20 % sales
restrictions between licensor and licensee are caught by Arti-
cle 53(1) when one or both of the parties have a significant degree
of market power. Such restrictions, however, may be indispensable
for the dissemination of valuable technologies and therefore fulfil
the conditions of Article 53(3). This may be the case where the
licensor has a relatively weak market position in the territory
where he exploits himself the technology. In such circumstances
restrictions on active sales in particular may be indispensable to
induce the licensor to grant the licence. In the absence thereof the

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licensor would risk facing active competition in his main area of
activity. Similarly, restrictions on active sales by the licensor may be
indispensable, in particular, where the licensee has a relatively weak
market position in the territory allocated to him and has to make
significant investments in order to efficiently exploit the licensed
technology.

171. The block exemption also covers restrictions on active sales into
the territory or to the customer group allocated to another licensee,
who was not a competitor of the licensor at the time when he
concluded the licence agreement with the licensor. It is a condition,
however, that the agreement between the parties in question is
non-reciprocal. Above the market share threshold such active sales
restrictions are likely to be caught by Article 53(1) when the parties
have a significant degree of market power. However, the restraint is
likely to be indispensable within the meaning of Article 53(3) for
the period of time required for the protected licensee to penetrate a
new market and establish a market presence in the allocated
territory or vis-à-vis the allocated customer group. This protection
against active sales allows the licensee to overcome the asymmetry,
which he faces due to the fact that some of the licensees are
competing undertakings of
already
the
established on the market. Restrictions on passive sales by licensees
into a territory or to a customer group allocated to another licensee
are hardcore restrictions under Article 4(1)(c) of the TTBER.

and thus

licensor

172. In the

case of agreements between non-competitors

sales
restrictions between the licensor and a licensee are block exempted
up to the market share threshold of 30 %. Above the market share
threshold restrictions on active and passive sales by licensees to
territories or customer groups reserved for the licensor may fall
outside Article 53(1) where on the basis of objective factors it can
be concluded that in the absence of the sales restrictions licensing
would not occur. A technology owner cannot normally be
expected to create direct competition with himself on the basis
of his own technology. In other cases sales restrictions on the
licensee may be caught by Article 53(1) both where the licensor
individually has a significant degree of market power and in the
case of a cumulative effect of similar agreements concluded by
licensors which together hold a strong position on the market.

licensees’ territories and customer groups limit intra-technology
competition and are likely to be caught by Article 53(1) when the
individual licensee has a significant degree of market power. Such
restrictions, however, may fulfil the conditions of Article 53(3)
where they are necessary to prevent free riding and to induce the
licensee to make the investment necessary for efficient exploitation
of the licensed technology inside his territory and to promote sales
of the licensed product. Restrictions on passive sales are covered by
the hardcore list of Article 4(2)(b), cf. paragraph 101 above, when
they exceed two years from the date on which the licensee
benefiting from the restrictions first put the product incorporating
the licensed technology on the market inside his exclusive territory.
Passive sales restrictions exceeding this two-year period are unlikely
to fulfil the conditions of Article 53(3).

2.3. Output restrictions

technology and the output

175. Reciprocal output restrictions in licence agreements between
competitors constitute a hardcore restriction covered by Arti-
cle 4(1)(b) of the TTBER (cf. point 82 above). Article 4(1)(b) does
not cover output restrictions imposed on the licensee in a non-
reciprocal agreement or on one of the licensees in an reciprocal
agreement. Such restrictions are block exempted up to the market
share threshold of 20 %. Above the market share threshold, output
restrictions on the licensee may restrict competition where the
parties have a significant degree of market power. However,
Article 53(3) of the EEA Agreement is likely to apply in cases
where the licensor’s technology is substantially better than the
licensee's
limitation substantially
exceeds the output of the licensee prior to the conclusion of the
agreement. In that case the effect of the output limitation is limited
even in markets where demand is growing. In the application of
Article 53(3)
that such
restrictions may be necessary in order to induce the licensor to
disseminate his technology as widely as possible. For instance, a
licensor may be reluctant to license his competitors if he cannot
limit the licence to a particular production site with a specific
capacity (a site licence). Where the licence agreement leads to a real
integration of complementary assets, output restrictions on the
the conditions of Article 53(3).
licensee may therefore fulfil
However, this is unlikely to be the case where the parties have
substantial market power.

it must also be taken into account

173. Sales restrictions on the licensor, when caught by Article 53(1), are
likely to fulfil the conditions of Article 53(3) unless there are no
real alternatives to the licensor’s technology on the market or such
alternatives are licensed by the licensee from third parties. Such
restrictions and in particular restrictions on active sales are likely to
be indispensable within the meaning of Article 53(3) in order to
induce the licensee to invest in the production, marketing and sale
of the products incorporating the licensed technology. It is likely
that the licensee’s incentive to invest would be significantly reduced
if he would face direct competition from the licensor whose
production costs are not burdened by royalty payments, possibly
leading to sub-optimal levels of investment.

176. Output restrictions in licence agreements between non-competi-
tors are block exempted up to the market share threshold of 30 %.
The main anti-competitive risk flowing from output restrictions on
licensees in agreements between non-competitors is reduced intra-
technology competition between licensees. The significance of such
anti-competitive effects depends on the market position of the
licensor and the licensees and the extent to which the output
limitation prevents the licensee from satisfying demand for the
products incorporating the licensed technology.

174. As regards restrictions on sales between licensees in agreements
between non-competitors, the TTBER block exempts restrictions
on active selling between territories or customer groups. Above the
share threshold restrictions on active sales between
market

177. When output restrictions are combined with exclusive territories
or exclusive customer groups, the restrictive effects are increased.
The combination of the two types of restraints makes it more likely
that the agreement serves to partition markets.

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178. Output limitations imposed on the licensee in agreements between
effects by
non-competitors may also have pro-competitive
promoting the dissemination of
technology. As a supplier of
technology, the licensor should normally be free to determine the
output produced with the licensed technology by the licensee. If
the licensor were not free to determine the output of the licensee, a
number of licence agreements might not come into existence in
the first place, which would have a negative impact on the
dissemination of new technology. This is particularly likely to be
the case where the licensor is also a producer, since in that case the
output of the licensees may find their way back into the licensor’s
main area of operation and thus have a direct impact on these
activities. On the other hand, it is less likely that output restrictions
are necessary in order to ensure dissemination of the licensor’s
technology when combined with sales restrictions on the licensee
prohibiting him from selling into a territory or customer group
reserved for the licensor.

2.4. Field of use restrictions

179. Under a field of use restriction the licence is either limited to one or
more technical
fields of application or one or more product
markets. There are many cases in which the same technology can
be used to make different products or can be incorporated into
products belonging to different product markets. A new moulding
technology may for instance be used to make plastic bottles and
plastic glasses, each product belonging to separate product
markets. However, a single product market may encompass several
technical fields of use. For instance a new engine technology may
be employed in four cylinder engines and six cylinder engines.
Similarly, a technology to make chipsets may be used to produce
chipsets with up to four CPUs and more than four CPUs. A licence
limiting the use of the licensed technology to produce say four
cylinder engines and chipsets with up to four CPUs constitutes a
technical field of use restriction.

the TTBER,

180. Given that field of use restrictions are block exempted and that
restrictions are hardcore restrictions under
certain customer
Articles 4(1)(c) and 4(2)(b) of
it is important to
distinguish the two categories of restraints. A customer restriction
presupposes that specific customer groups are identified and that
the parties are restricted in selling to such identified groups. The
fact that a technical field of use restriction may correspond to
certain groups of customers within a product market does not
imply that the restraint is to be classified as a customer restriction.
For instance, the fact that certain customers buy predominantly or
exclusively chipsets with more than four CPUs does not imply that
a licence which is limited to chipsets with up to four CPUs
constitutes a customer restriction. However, the field of use must
be defined objectively by reference to identified and meaningful
technical characteristics of the licensed product.

181. A field of use restriction limits the exploitation of the licensed
technology by the licensee to one or more particular fields of use
without
the licensed
technology. In addition, as with territories, these fields of use can
be allocated to the licensee under an exclusive or sole licence. Field
of use restrictions combined with an exclusive or sole licence also

limiting the licensor's ability to exploit

restrict the licensor’s ability to exploit his own technology, by
preventing him from exploiting it himself, including by way of
licensing to others. In the case of a sole license only licensing to
third parties is restricted. Field of use restrictions combined with
exclusive and sole licences are treated in the same way as the
exclusive and sole licenses dealt with in section 2.2.1 above. In
for licensing between competitors, this means that
particular,
reciprocal exclusive licensing is hardcore under Article 4(1)(c).

182. Field of use restrictions may have pro-competitive effects by
encouraging the licensor to license his technology for applications
that fall outside his main area of focus. If the licensor could not
prevent licensees from operating in fields where he exploits the
technology himself or in fields where the value of the technology is
not yet well established, it would be likely to create a disincentive
for the licensor to license or would lead him to charge a higher
royalty. It must also be taken into account that in certain sectors
licensing often occurs to ensure design freedom by preventing
infringement claims. Within the scope of the licence the licensee is
able to develop his own technology without fearing infringement
claims by the licensor.

183. Field of use restrictions on licensees in agreements between actual
or potential competitors are block exempted up to the market
share threshold of 20 %. The main competitive concern in the case
of such restrictions is the risk that the licensee ceases to be a
competitive force outside the licensed field of use. This risk is
greater in the case of cross licensing between competitors where
the agreement provides for asymmetrical field of use restrictions. A
field of use restriction is asymmetrical where one party is
permitted to use the licensed technology within one product
market or technical field of use and the other party is permitted to
use the other licensed technology within another product market
or technical field of use. Competition concerns may in particular
arise where the licensee’s production facility, which is tooled up to
use the licensed technology, is also used to produce with his own
technology products outside the licensed field of use.
the
agreement is likely to lead the licensee to reduce output outside the
licensed field of use, the agreement is likely to be caught by
Article 53(1) of the EEA Agreement. Symmetrical field of use
restrictions, i.e. agreements whereby the parties are licensed to use
each other’s technologies within the same field(s) of use, are
unlikely to be caught by Article 53(1). Such agreements are
unlikely to restrict competition that existed in the absence of the
agreement. Article 53(1) is also unlikely to apply in the case of
agreements that merely enable the licensee to develop and exploit
his own technology within the scope of the licence without fearing
infringement claims by the licensor. In such circumstances field of
use restrictions do not in themselves restrict competition that
existed in the absence of the agreement. In the absence of the
agreement the licensee also risked infringement claims outside the
scope of the licensed field of use. However, if the licensee without
business justification terminates or scales back his activities in the
area outside the licensed field of use this may be an indication of an
underlying market sharing arrangement amounting to a hardcore
restriction under Article 4(1)(c) of the TTBER.

If

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184. Field of use restrictions on licensee and licensor in agreements
between non-competitors are block exempted up to the market
share threshold of 30 %. Field of use restrictions in agreements
between non-competitors whereby the licensor reserves one or
more product markets or technical fields of use for himself are
generally either non-restrictive of competition or efficiency
enhancing. They promote dissemination of new technology by
giving the licensor an incentive to license for exploitation in fields
in which he does not want to exploit the technology himself. If the
licensor could not prevent licensees from operating in fields where
the licensor exploits the technology himself, it would be likely to
create a disincentive for the licensor to licence.

185. In agreements between non-competitors the licensor is normally
also entitled to grant sole or exclusive licences to different licensees
limited to one or more fields of use. Such restrictions limit intra-
technology competition between licensees in the same way as
exclusive
same way
(cf. section 2.2.1 above).

analysed in the

and are

licensing

2.5. Captive use restrictions

186. A captive use restriction can be defined as an obligation on the
licensee to limit his production of the licensed product to the
quantities required for the production of his own products and for
the maintenance and repair of his own products. In other words,
this type of use restriction takes the form of an obligation on the
licensee to use the products incorporating the licensed technology
only as an input for incorporation into his own production; it does
not cover the sale of the licensed product for incorporation into
the products of other producers. Captive use restrictions are block
exempted up to the respective market share thresholds of 20 % and
30 %. Outside the scope of the block exemption it is necessary to
examine what are the pro-competitive and anti-competitive effects
of
it is necessary to distinguish
agreements between competitors from agreements between non-
competitors.

In this respect

the restraint.

187. In the case of licence agreements between competitors a restriction
that imposes on the licensee to produce under the licence only for
incorporation into his own products prevents him from being a
supplier of components to third party producers. If prior to the
conclusion of the agreement, the licensee was not an actual or
likely potential supplier of components to other producers, the
captive use restriction does not change anything compared to the
pre-existing situation. In those circumstances the restriction is
assessed in the same way as in the case of agreements between
non-competitors. If, on the other hand, the licensee is an actual or
likely component supplier, it is necessary to examine what is the
impact of the agreement on this activity. If by tooling up to use the
licensor’s technology the licensee ceases to use his own technology
on a stand-alone basis and thus to be a component supplier, the
agreement restricts competition that existed prior to the agree-
ment. It may result in serious negative market effects when the
licensor has a significant degree of market power on the
component market.

188. In the case of licence agreements between non-competitors there
are two main competitive risks stemming from captive use

restrictions: (a) a restriction of intra-technology competition on the
market for the supply of inputs and (b) an exclusion of arbitrage
between licensees enhancing the possibility for the licensor to
impose discriminatory royalties on licensees.

189. Captive use restrictions, however, may also promote pro-
competitive licensing. If the licensor is a supplier of components,
the restraint may be necessary in order for the dissemination of
technology between non-competitors to occur. In the absence of
the restraint the licensor may not grant the licence or may do so
only against higher royalties, because otherwise he would create
direct competition to himself on the component market. In such
cases a captive use restriction is normally either not restrictive of
competition or covered by Article 53(3) of the EEA Agreement. It
is a condition, however, that the licensee is not restricted in selling
the licensed product as replacement parts for his own products.
The licensee must be able to serve the after market for his own
products, including independent service organisations that service
and repair the products produced by him.

190. Where the licensor is not a component supplier on the relevant
market, the above reason for imposing captive use restrictions does
not apply. In such cases a captive use restriction may in principle
promote the dissemination of
technology by ensuring that
licensees do not sell to producers that compete with the licensor
on other markets. However, a restriction on the licensee not to sell
into certain customer groups reserved for the licensor normally
constitutes a less restrictive alternative. Consequently, in such cases
a captive use restriction is normally not necessary for
the
dissemination of technology to take place.

2.6. Tying and bundling

191. In the context of technology licensing tying occurs when the
licensor makes the licensing of one technology (the tying product)
conditional upon the licensee taking a licence for another
technology or purchasing a product from the licensor or someone
designated by him (the tied product). Bundling occurs where two
technologies or a technology and a product are only sold together
as a bundle. In both cases, however, it is a condition that the
products and technologies involved are distinct in the sense that
there is distinct demand for each of the products and technologies
forming part of the tie or the bundle. This is normally not the case
where the technologies or products are by necessity linked in such
a way that the licensed technology cannot be exploited without the
tied product or both parts of the bundle cannot be exploited
without the other. In the following the term “tying” refers to both
tying and bundling.

192. Article 3 of the TTBER, which limits the application of the block
exemption by market share thresholds, ensures that tying and
bundling are not block exempted above the market
share
thresholds of 20 % in the case of agreements between competitors
and 30 % in the case of agreements between non-competitors. The
market share thresholds apply to any relevant
technology or
product market affected by the licence agreement, including the
market for the tied product. Above the market share thresholds it is
necessary to balance the anti-competitive and pro-competitive
effects of tying.

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193. The main restrictive effect of tying is foreclosure of competing
suppliers of the tied product. Tying may also allow the licensor to
maintain market power in the market for the tying product by
raising barriers to entry since it may force new entrants to enter
several markets at the same time. Moreover, tying may allow the
licensor to increase royalties, in particular when the tying product
and the tied product are partly substitutable and the two products
are not used in fixed proportion. Tying prevents the licensee from
switching to substitute inputs in the face of increased royalties for
the tying product. These competition concerns are independent of
whether the parties to the agreement are competitors or not. For
tying to produce likely anti-competitive effects the licensor must
have a significant degree of market power in the tying product so
as to restrict competition in the tied product. In the absence of
market power in the tying product the licensor cannot use his
technology for
foreclosing
suppliers of the tied product. Furthermore, as in the case of non-
compete obligations, the tie must cover a certain proportion of the
market for the tied product for appreciable foreclosure effects to
occur. In cases where the licensor has market power on the market
for the tied product rather than on the market for the tying
product, the restraint is analysed as non-compete or quantity
forcing, reflecting the fact that any competition problem has its
origin on the market for the “tied” product and not on the market
for the “tying” product (66).

the anti-competitive purpose of

2.7. Non-compete obligations

196. Non-compete obligations in the context of technology licensing
take the form of an obligation on the licensee not to use third party
technologies which compete with the licensed technology. To the
extent
that a non-compete obligation covers a product or
additional technology supplied by the licensor the obligation is
dealt with in the preceding section on tying.

197. The TTBER exempts non-compete obligations both in the case of
agreements between competitors and in the case of agreements
between non-competitors up to the market share thresholds of
20 % and 30 % respectively.

194. Tying can also give rise to efficiency gains. This is for instance the
case where the tied product
is necessary for a technically
satisfactory exploitation of the licensed technology or for ensuring
that production under the licence conforms to quality standards
respected by the licensor and other licensees. In such cases tying is
normally either not restrictive of competition or covered by
Article 53(3) of the EEA Agreement. Where the licensees use the
licensor’s trademark or brand name or where it is otherwise
obvious to consumers that there is a link between the product
incorporating the licensed technology and the licensor, the licensor
has a legitimate interest in ensuring that the quality of the products
are such that it does not undermine the value of his technology or
his reputation as an economic operator. Moreover, where it is
known to consumers that the licensees (and the licensor) produce
on the basis of the same technology it is unlikely that licensees
would be willing to take a licence unless the technology is
exploited by all in a technically satisfactory way.

instance, where the licensor

195. Tying is also likely to be pro-competitive where the tied product
allows the licensee to exploit the licensed technology significantly
licenses a
more efficiently. For
particular process technology the parties can also agree that the
licensee buys a catalyst from the licensor which is developed for
use with the licensed technology and which allows the technology
to be exploited more efficiently than in the case of other catalysts.
Where in such cases the restriction is caught by Article 53(1), the
conditions of Article 53(3) are likely to be fulfilled even above the
market share thresholds.

(66) For

the applicable analytical

framework see Section 2.7 below and
paragraphs 138 et seq. of the Guidelines on Vertical Restraints cited in
note 36.

198. The main competitive risk presented by non-compete obligations is
foreclosure of third party technologies. Non-compete obligations
may also facilitate collusion between licensors in the case of
cumulative use. Foreclosure of competing technologies reduces
competitive pressure on royalties charged by the licensor and
technologies by
reduces competition between the incumbent
limiting the possibilities
to substitute between
competing technologies. As in both cases the main problem is
foreclosure, the analysis can in general be the same in the case of
agreements between competitors and agreements between non-
in the case of cross licensing between
competitors. However,
competitors where both agree not to use third party technologies
the agreement may facilitate collusion between them on the
product market,
share
threshold of 20 %.

thereby justifying the lower market

licensees

for

199. Foreclosure may arise where a substantial part of potential
in the case of cumulative
licensees are already tied to one or,
effects, more sources of
technology and are prevented from
exploiting competing technologies. Foreclosure effects may result
from agreements concluded by a single licensor with a significant
degree of market power or by a cumulative effect of agreements
concluded by several
licensors, even where each individual
agreement or network of agreements is covered by the TTBER.
In the latter case, however, a serious cumulative effect is unlikely to
arise as long as less than 50 % of the market is tied. Above this
threshold significant foreclosure is likely to occur when there are
relatively high barriers to entry for new licensees. If barriers to
entry are low, new licensees are able to enter the market and
exploit commercially attractive technologies held by third parties
and thus represent a real alternative to incumbent licensees. In
order to determine the real possibility for entry and expansion by
third parties it is also necessary to take account of the extent to
which distributors are tied to licensees by non-compete obliga-
tions. Third party technologies only have a real possibility of entry
if they have access to the necessary production and distribution
assets. In other words, the ease of entry depends not only on the
availability of licensees but also the extent to which they have
access to distribution.
the
distribution level the EFTA Surveillance Authority will apply the
analytical framework set out in section IV.2.1 of the Guidelines on
Vertical Restraints (67).

In assessing foreclosure effects at

(67) See note 36.

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200. When the licensor has a significant degree of market power,
obligations on licensees to obtain the technology only from the
licensor can lead to significant foreclosure effects. The stronger the
market position of the licensor the higher the risk of foreclosing
competing technologies. For appreciable foreclosure effects to
occur the non-compete obligations do not necessarily have to
cover a substantial part of the market. Even in the absence thereof,
appreciable foreclosure effects may occur where non-compete
obligations are targeted at undertakings that are the most likely to
license competing technologies. The risk of
foreclosure is
particularly high where there is only a limited number of potential
licensees and the licence agreement concerns a technology which is
used by the licensees to make an input for their own use. In such
cases the entry barriers for a new licensor are likely to be high.
Foreclosure may be less likely in cases where the technology is used
to make a product that is sold to third parties; although in this case
in
the restriction also ties production capacity for the input
question, it does not tie demand for the product incorporating the
input produced with the licensed technology. To enter the market
in the latter case licensors only need access to one or more
licensee(s) that have suitable production capacity and unless only
few undertakings possess or are able to obtain the assets required
to take a licence,
it is unlikely that by imposing non-compete
obligations on its licensees the licensor is able to deny competitors
access to efficient licensees.

201. Non-compete obligations may also produce pro-competitive
effects. First, such obligations may promote dissemination of
technology by reducing the risk of misappropriation of the licensed
technology,
in particular know-how. If a licensee is entitled to
license competing technologies from third parties, there is a risk
that particularly licensed know-how would be used in the
exploitation of competing technologies and thus benefit competi-
tors. When a licensee also exploits competing technologies,
it
normally also makes monitoring of
royalty payments more
difficult, which may act as a disincentive to licensing.

202. Second, non-compete obligations possibly in combination with an
exclusive territory may be necessary to ensure that the licensee has
an incentive to invest in and exploit the licensed technology
effectively. In cases where the agreement is caught by Article 53(1)
of the EEA Agreement because of an appreciable foreclosure effect,
it may be necessary in order to benefit from Article 53(3) to
choose a less restrictive alternative,
instance to impose
minimum output or royalty obligations, which normally have less
potential to foreclose competing technologies.

for

203. Third, in cases where the licensor undertakes to make significant
client-specific investments for instance in training and tailoring of
the licensed technology to the licensee’s needs, non-compete
obligations or alternatively minimum output or minimum royalty
obligations may be necessary to induce the licensor to make the
investment and to avoid hold-up problems. However, normally the
licensor will be able to charge directly for such investments by way
of a lump sum payment, implying that less restrictive alternatives
are available.

3.

Settlement and non-assertion agreements

is not as

204. Licensing may serve as a means of settling disputes or avoiding that
one party exercises his intellectual property rights to prevent the
other party from exploiting his own technology. Licensing
including cross licensing in the context of settlement agreements
and non-assertion agreements
such restrictive of
competition since it allows the parties to exploit their technologies
post agreement. However, the individual terms and conditions of
such agreements may be caught by Article 53(1) of the EEA
Agreement. Licensing in the context of settlement agreements is
treated like other licence agreements. In the case of technologies
that from a technical point of view are substitutes, it is therefore
necessary to assess to what extent it is likely that the technologies
in question are in a one-way or two-way blocking position
(cf. paragraph 32 above). If so, the parties are not deemed to be
competitors.

205. The block exemption applies provided that the agreement does not
contain any hardcore restrictions of competition as set out in
Article 4 of the TTBER. The hardcore list of Article 4(1) may in
particular apply where it was clear to the parties that no blocking
position exists and that consequently they are competitors. In such
cases the settlement is merely a means to restrict competition that
existed in the absence of the agreement.

206. In cases where it is likely that in the absence of the licence the
licensee could be excluded from the market, the agreement is
generally pro-competitive. Restrictions that limit intra-technology
competition between the licensor and the licensee are often
compatible with Article 53, see section 2 above.

207. Agreements whereby the parties cross license each other and
including
impose restrictions on the use of their technologies,
restrictions on the licensing to third parties, may be caught by
Article 53(1). Where the parties have a significant degree of market
power and the agreement imposes restrictions that clearly go
beyond what is required in order to unblock, the agreement is
likely to be caught by Article 53(1) even if it is likely that a mutual
blocking position exists. Article 53(1) is particularly likely to apply
where the parties share markets or fix reciprocal running royalties
that have a significant impact on market prices.

208. Where under the agreement the parties are entitled to use each
other’s technology and the agreement extends to future develop-
ments, it is necessary to assess what is the impact of the agreement
on the parties’ incentive to innovate. In cases where the parties
have a significant degree of market power the agreement is likely to
be caught by Article 53(1) where the agreement prevents the
parties
from gaining a competitive lead over each other.
Agreements that eliminate or substantially reduce the possibilities
of one party to gain a competitive lead over the other reduce the
incentive to innovate and thus adversely affect an essential part of
the competitive process. Such agreements are also unlikely to
satisfy the conditions of Article 53(3). It is particularly unlikely that
the restriction can be considered indispensable within the meaning
of the third condition of Article 53(3). The achievement of the

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objective of the agreement, namely to ensure that the parties can
continue to exploit their own technology without being blocked by
the other party, does not require that the parties agree to share
future innovations. However,
the parties are unlikely to be
prevented from gaining a competitive lead over each other where
the purpose of the licence is to allow the parties to develop their
respective technologies and where the licence does not lead them
to use the same technological solutions. Such agreements merely
create design freedom by preventing future infringement claims by
the other party.

209. In the context of a settlement and non-assertion agreement, non-
challenge clauses are generally considered to fall outside Arti-
cle 53(1). It is inherent in such agreements that the parties agree
not to challenge ex post the intellectual property rights covered by
the agreement. Indeed, the very purpose of the agreement is to
settle existing disputes and/or to avoid future disputes.

4.

Technology pools

210. Technology pools are defined as arrangements whereby two or
more parties assemble a package of technology which is licensed
not only to contributors to the pool but also to third parties. In
terms of their structure technology pools can take the form of
simple arrangements between a limited number of parties or
elaborate organisational arrangements whereby the organisation of
the licensing of the pooled technologies is entrusted to a separate
entity. In both cases the pool may allow licensees to operate on the
market on the basis of a single licence.

211. There is no inherent link between technology pools and standards,
but in some cases the technologies in the pool support (wholly or
partly) a de facto or de jure industry standard. When technology
pools support an industry standard they do not necessarily support
a single standard. Different
technology pools may support
competing standards.

212. Agreements establishing technology pools and setting out the
terms and conditions for their operation are not − irrespective of
the number of parties − covered by the block exemption
(cf. section III.2.2 above). Such agreements are addressed only by
these guidelines. Pooling arrangements give rise to a number of
particular issues regarding the selection of the included technol-
ogies and the operation of the pool, which do not arise in the
context of other types of licensing. The individual licences granted
by the pool to third party licensees, however, are treated like other
licence agreements, which are block exempted when the conditions
set out in the TTBER are fulfilled, including the requirements of
Article 4 of the TTBER containing the list of hardcore restrictions.

213. Technology pools may be restrictive of competition. The creation
of a technology pool necessarily implies joint selling of the pooled
technologies, which in the case of pools composed solely or
predominantly of substitute technologies amounts to a price fixing
cartel. Moreover, in addition to reducing competition between the
in particular when they
parties,
support an industry standard or establish a de facto industry

technology pools may also,

in a reduction of

standard, result
innovation by foreclosing
alternative technologies. The existence of the standard and the
related technology pool may make it more difficult for new and
improved technologies to enter the market.

214. Technology pools can also produce pro-competitive effects,

in
particular by reducing transaction costs and by setting a limit on
cumulative royalties to avoid double marginalisation. The creation
of a pool allows for one-stop licensing of the technologies covered
in sectors where
by the pool. This is particularly important
intellectual property rights are prevalent and where in order to
operate on the market
licences need to be obtained from a
significant number of licensors. In cases where licensees receive
on-going services concerning the application of
the licensed
technology, joint licensing and servicing can lead to further cost
reductions.

4.1. The nature of the pooled technologies

215. The competitive risks and the efficiency enhancing potential of
technology pools depend to a large extent on the relationship
between the pooled technologies and their relationship with
technologies outside the pool. Two basic distinctions must be
made, namely (a) between technological complements and
technological substitutes and (b) between essential and non-
essential technologies.

216. Two technologies (68) are complements as opposed to substitutes
when they are both required to produce the product or carry out
the process to which the technologies relate. Conversely, two
technologies are substitutes when either technology allows the
holder to produce the product or carry out the process to which
the technologies relate. A technology is essential as opposed to
non-essential if there are no substitutes for that technology inside
or outside the pool and the technology in question constitutes a
necessary part of the package of technologies for the purposes of
producing the product(s) or carrying out the process(es) to which
the pool relates. A technology for which there are no substitutes,
remains essential as long as the technology is covered by at least
one valid intellectual property right. Technologies that are essential
are by necessity also complements.

217. When technologies in a pool are substitutes, royalties are likely to
be higher than they would otherwise be, because licensees do not
benefit from rivalry between the technologies in question. When
the technologies in the pool are complements the arrangement
reduces transaction costs and may lead to lower overall royalties
because the parties are in a position to fix a common royalty for
the package as opposed to each fixing a royalty which does not
take account of the royalty fixed by others.

218. The distinction between complementary and substitute technolo-
in all cases, since technologies may be
gies is not clear-cut
substitutes in part and complements in part. When due to
efficiencies stemming from the integration of two technologies
licensees are likely to demand both technologies the technologies
are treated as complements even if they are partly substitutable. In
such cases it is likely that in the absence of the pool licensees
would want to licence both technologies due to the additional
economic benefit of employing both technologies as opposed to
employing only one of them.

(68) The term “technology”

is not

limited to patents.

It covers also patent

applications and intellectual property rights other than patents.

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219. The inclusion in the pool of substitute technologies restricts inter-
technology competition and amounts to collective bundling.
Moreover, where the pool is substantially composed of substitute
technologies, the arrangement amounts to price fixing between
competitors. As a general rule the EFTA Surveillance Authority
considers that the inclusion of substitute technologies in the pool
constitutes a violation of Article 53(1) of the EEA Agreement. The
Authority also considers that it is unlikely that the conditions of
Article 53(3) will be fulfilled in the case of pools comprising to a
significant extent substitute technologies. Given that the technol-
ogies in question are alternatives, no transaction cost savings
In the
accrue from including both technologies in the pool.
absence of the pool
licensees would not have demanded both
technologies. It is not sufficient that the parties remain free to
license independently. In order not to undermine the pool, which
allows them to jointly exercise market power, the parties are likely
to have little incentive to do so.

220. When a pool is composed only of technologies that are essential
and therefore by necessity also complements, the creation of the
pool as such generally falls outside Article 53(1) irrespective of the
market position of the parties. However, the conditions on which
licences are granted may be caught by Article 53(1).

221. Where non-essential but complementary patents are included in
the pool there is a risk of foreclosure of third party technologies.
Once a technology is included in the pool and is licensed as part of
the package, licensees are likely to have little incentive to license a
competing technology when the royalty paid for the package
already covers a substitute technology. Moreover, the inclusion of
technologies which are not necessary for
the purposes of
producing the product(s) or carrying out the process(es) to which
the technology pool relates also forces licensees to pay for
technology that they may not need. The inclusion of complemen-
tary patents thus amounts to collective bundling. When a pool
encompasses non-essential technologies, the agreement is likely to
be caught by Article 53(1) where the pool has a significant position
on any relevant market.

the pool,

222. Given that substitute and complementary technologies may be
developed after the creation of
the assessment of
essentiality is an on-going process. A technology may therefore
become non-essential after the creation of the pool due to the
emergence of new third party technologies. One way to ensure that
such third party technologies are not foreclosed is to exclude from
the pool technologies that have become non-essential. However,
there may be other ways to ensure that third party technologies are
not foreclosed. In the assessment of technology pools comprising
non-essential technologies, i.e. technologies for which substitutes
exist outside the pool or which are not necessary in order to
produce one or more products to which the pool relates, the EFTA
Surveillance Authority will in its overall assessment, inter alia, take
account of the following factors:

(a)

whether there are any pro-competitive reasons for including
the non-essential technologies in the pool;

(b) whether the licensors remain free to license their respective
technologies independently. Where the pool is composed of
a limited number of technologies and there are substitute

technologies outside the pool, licensees may want to put
together their own technological package composed partly of
technology forming part of
the pool and partly of
technology owned by third parties;

(c)

the pooled technologies,

whether,
in cases where the pooled technologies have
different applications some of which do not require using
all of
the
technologies only as a single package or whether it offers
separate packages for distinct applications. In the latter case it
is avoided that technologies which are not essential to a
particular product or process are tied to essential technol-
ogies;

the pool offers

(d) whether the pooled technologies are available only as a single
package or whether
licensees have the possibility of
obtaining a licence for only part of the package with a
corresponding reduction of royalties. The possibility to
obtain a licence for only part of the package may reduce the
risk of foreclosure of third party technologies outside the
pool, in particular where the licensee obtains a correspond-
ing reduction in royalties. This requires that a share of the
overall royalty has been assigned to each technology in the
pool. Where the licence agreements concluded between the
pool and individual licensees are of relatively long duration
and the pooled technology supports a de facto industry
standard, it must also be taken into account that the pool
may foreclose access to the market of new substitute
technologies. In assessing the risk of foreclosure in such
cases it is relevant to take into account whether or not
licensees can terminate at reasonable notice part of the
licence and obtain a corresponding reduction of royalties.

4.2. Assessment of individual restraints

223. The purpose of this section is to address a certain number of
restraints that in one form or another are commonly found in
technology pools and which need to be assessed in the overall
context of the pool. It is recalled, cf. paragraph 212 above, that the
TTBER applies to licence agreements concluded between the pool
and third party licensees. This section is therefore limited to
addressing the creation of the pool and licensing issues that are
particular to licensing in the context of technology pools.

224. In making its assessment the EFTA Surveillance Authority will be

guided by the following main principles:

1.

2.

3.

the stronger the market position of the pool the greater the
risk of anti-competitive effects;

pools that hold a strong position on the market should be
open and non-discriminatory;

pools should not unduly foreclose third party technologies
or limit the creation of alternative pools.

225. Undertakings setting up a technology pool that is compatible with
Article 53 of the EEA Agreement, and any industry standard that it
may support, are normally free to negotiate and fix royalties for the
technology package and each technology’s share of the royalties
either before or after the standard is set. Such agreement is inherent
in the establishment of the standard or pool and cannot in itself be
considered restrictive of
competition and may in certain
In certain
circumstances
circumstances it may be more efficient if the royalties are agreed

lead to more efficient outcomes.

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before the standard is chosen and not after the standard is decided
upon, to avoid that the choice of the standard confers a significant
degree of market power on one or more essential technologies. On
the other hand, licensees must remain free to determine the price
of products produced under the licence. Where the selection of
technologies to be included in the pool
is carried out by an
independent expert this may further competition between available
technological solutions.

226. Where the pool has a dominant position on the market, royalties
and other licensing terms should be fair and non-discriminatory
and licences should be non-exclusive. These requirements are
necessary to ensure that the pool is open and does not lead to
foreclosure and other anti-competitive effects on down stream
markets. These requirements, however, do not preclude different
royalties for different uses. It is in general not considered restrictive
of competition to apply different royalty rates to different product
markets, whereas there should be no discrimination within product
the treatment of
markets.
licensees should not
depend on whether
they are licensors or not. The EFTA
Surveillance Authority will therefore take into account whether
licensors are also subject to royalty obligations.

In particular,

227. Licensors and licensees must be free to develop competing
products and standards and must also be free to grant and obtain
licences outside the pool. These requirements are necessary in
order to limit the risk of foreclosure of third party technologies and
ensure that the pool does not limit innovation and preclude the
creation of competing technological solutions. Where a pool
supports a (de facto) industry standard and where the parties are
subject to non-compete obligations, the pool creates a particular
risk of preventing the development of new and improved
technologies and standards.

228. Grant back obligations should be non-exclusive and be limited to
developments that are essential or important to the use of the
pooled technology. This allows the pool to feed on and benefit
from improvements to the pooled technology. It is legitimate for
the parties to ensure that the exploitation of the pooled technology
cannot be held up by licensees that hold or obtain essential patents.

229. One of the problems identified with regard to patent pools is the
risk that they shield invalid patents. Pooling raises the costs/risks
for a successful challenge, because the challenge fails if only one
patent in the pool is valid. The shielding of invalid patents in the
pool may oblige licensees to pay higher royalties and may also
prevent innovation in the field covered by an invalid patent. In
order to limit this risk, any right to terminate a licence in the case
of a challenge must be limited to the technologies owned by the
licensor who is the addressee of the challenge and must not extend
to the technologies owned by the other licensors in the pool.

4.3. The institutional framework governing the pool

230. The way in which a technology pool is created, organised and
operated can reduce the risk of it having the object or effect of

restricting competition and provide assurances to the effect that the
arrangement is pro-competitive.

231. When participation in a standard and pool creation process is open
to all interested parties representing different interests it is more
likely that technologies for inclusion into the pool are selected on
the basis of price/quality considerations than when the pool is set
up by a limited group of technology owners. Similarly, when the
relevant bodies of the pool are composed of persons representing
different
licensing terms and
is more likely that
conditions, including royalties, will be open and non-discrimina-
tory and reflect the value of the licensed technology than when the
pool is controlled by licensor representatives.

interests,

it

232. Another relevant factor is the extent to which independent experts
are involved in the creation and operation of the pool. For instance,
the assessment of whether or not a technology is essential to a
standard supported by a pool
is often a complex matter that
requires special expertise. The involvement in the selection process
of independent experts can go a long way in ensuring that a
commitment to include only essential technologies is implemented
in practice.

233. The EFTA Surveillance Authority will

take into account how
experts are selected and what are the exact functions that they are
to perform. Experts should be independent from the undertakings
that have formed the pool. If experts are connected to the licensors
or otherwise depend on them, the involvement of the expert will
be given less weight. Experts must also have the necessary technical
expertise to perform the various functions with which they have
been entrusted. The functions of independent experts may include,
in particular, an assessment of whether or not technologies put
forward for inclusion into the pool are valid and whether or not
they are essential.

234. It is also relevant to consider the arrangements for exchanging
sensitive information among the parties. In oligopolistic markets
exchanges of sensitive information such as pricing and output data
may facilitate collusion (69). In such cases the EFTA Surveillance
Authority will take into account to what extent safeguards have
been put in place, which ensure that sensitive information is not
exchanged. An independent expert or licensing body may play an
important role in this respect by ensuring that output and sales
data, which may be necessary for the purposes of calculating and
verifying royalties is not disclosed to undertakings that compete on
affected markets.

235. Finally,

it is relevant to take account of the dispute resolution
mechanism foreseen in the instruments setting up the pool. The
more dispute resolution is entrusted to bodies or persons that are
independent of the pool and the members thereof, the more likely
it is that the dispute resolution will operate in a neutral way.

(69) See in this respect the judgment in John Deere cited in note 14.’