Two exemption regulations have operated in the past for Patent Licensing Agreements (no. 2349/84) O.J. 1984 L 219/15. and for Know-How Licensing Agreements (no. 556/89) O.J. 1989 L 61/1.
The block exemption for patent licences covered not only agreements for technology that was the subject of a registered patent but included coverage for ancillary unregistered technology. This regulation was due to expire in 1994 but its operation has been extended to the end of 1995.
The patent regulation has come to be used almost exclusively only when there is no qualifying know-how included in the licence - usually where a patent dispute between competitors is resolved by the granting of a licence (see V. KORAH "EC Competition Law and Practice", London, Sweet & Maxwell, 1994).
The block exemption for know-how licences covered know-how that was secret, substantial and identified. This regulation arose following the decision in the Boussois/Interplane Case Boussois/Interplane Case, 15 December 1986, O.J. 1987 L 50/30. wherein the Commission held the block exemption for patent licence agreements could not apply to mixed agreements where know-how was the dominant factor.
These Regulations were amended by Regulation (EEC) No. 151/93 O.J. 1993 L 21/8.
II. THE NEW DRAFT
As the preamble to the published draft regulation indicates, the Commission considered that a single regulation replacing both previous block exemptions ought to achieve, inter alia, the objectives of - harmonisation and simplification of the rules governing patent and know-how licensing agreements;
- encouraging dissemination of technical knowledge in the Community;
- promoting manufacture of technically more sophisticated goods;
- covering "pure" patent licences, "pure" know-how licences and "mixed" agreements;
- harmonising the scope of the regulation to include additional licensing for intellectual property rights other than patents (i.e., trademarks, software and design rights) where the same are only ancillary and contribute to the objects of the licensed patent or know-how technology; however, such agreements will only be exempted when patents are necessary for the achievement of the object of the licensed technology or know-how is secret, substantial and identified;
- ensuring that the regulation applies to agreements containing obligations that relate to:
(i) common market territories and non-member countries (ii) non-member countries or territories extending beyond the Community which nonetheless have effects within the common market that may fall within the scope of Article 85(1) (iii) one Member State but are capable of affecting trade between Member States
- ensuring the regulation applies only to manufacturing by or for the licensee and does not apply to
(i) agreements solely for the purpose of sale such as exclusive distribution agreements or franchising agreements; the word "solely" is emphasised because an exception is made for a preliminary period when the licensor provides goods for sale to the licensee until the licensee commences manufacture. (ii) licensing agreements in connection with joint venture or patent pool or other arrangements where a licence is granted in exchange for other licences not related to the improvements or applications of the licensed technology.
- ensuring the regulation applies to agreements concerning the assignment and acquisition of patents or know-how where the risk associated with exploitation remains with the assignor. This avoids the danger of persons trying to bypass the Regulation by presenting as an assignment what is really in fact an exclusive licence restrictive of competition. Similarly, the regulation will apply to licensors who are not owners of the technology but only authorised to grant the licence.
If one turns to the specific scheme of the draft regulation, the white list of exempted clauses has been extended, the black list of prohibited clauses has been reduced and a market share threshold has been introduced for agreements between competing manufacturers.
III. ARTICLE 1 - EXEMPTED CLAUSES
Article 1 now sets out the exempted clauses taken from both prior regulations but in a combined form. The content is essentially the same but the structure is revised so that it is not useful to try and indicate which clauses are new, but rather what aspects are new.
IV. THE MARKET SHARE TEST
One of the changes in the published draft regulation is the adoption of a market share percentage threshold test to determine the operation of the exemption. Article 1 paragraphs 5 and 6 provide that:
Art. 1.5 When the parties are competing manufacturers, the exemption in paragraph 1.1.(1) of the obligation of the licensor not to grant other licences shall apply only provided that the licencee's market share shall not exceed 40%.
Art. 1.6 When the parties are competing manufacturers, the exemption of the obligations referred to in paragraph 1.1.(2) - 1.1.(6) shall apply only where the party which is protected by such obligations holds a market share of no more than 40%.
The definition of the relevant market is regrettably not easy, as has been shown from experience in the application of the competition rules. One needs to consider not only the extent of the geographical area but also what equivalent competing products fall to be considered in any assessment. It is not clear if the market share is based on production or sales. The definition of "market share" in Article 9(8) uses the words "products (...) provided by the licensor/licensee" which would seem to indicate an assessment based on supply.
As recital (11) indicates the new licensed technology remains out of the assessment of market share, and the assessment is made at the time of conclusion of the agreement. The Commission considers that this maximises the dissemination of new technology into the marketplace, by reducing the problem of finding licensees prepared to invest in tooling up and developing markets, and furthermore, it will prevent the imposition of the cap later, should the technology prove to be successful enough to prohibit competition.
In an earlier draft of this regulation there was no exemption also for agreements where the licensee was operating in an oligopolistic market.
The criticism of this phraseology led to a redrafting in which, the reference to oligopolies was deleted.
The setting of the market share limit at 40% is an increase from the previous limits set at 20%, and thereby theoretically increased the possibility of the benefit of an exclusion.
It is probably worth noting here that licensing agreements relating to the activities of joint-ventures between competing undertakings are treated in Article 5 as a specific exclusion, unless the licensed products or substitutable products represent not more than 20% of the market in the case of a production licence Ä or not more than 10% of the market in the case of a production and distribution licence.
V. THE CALCULATION OF TIME PERIODS
The calculation of the time period for the duration of the exemption, for all the types of agreements, pure patent, pure know-how or mixed, has been altered from the time of the agreement to the time that the licencee has first put the products on the market. See Articles 1.2 and 1.3.
The structure of paragraphs 1.2, 1.3 and 1.4 of Article 1, is that they respectively deal with the different types of agreement and impose time limitations of 5 or 10 years for each type of agreement, depending on the subject matter of the agreement and the type of obligation exempted.
VI. ARTICLE 2 - THE WHITE LIST
The list of obligations that are normally not regarded to be restrictive of competition has been extended. It covers all of the previous obligations such as
- obligation on the licensee not to divulge the know-how communicated by the licensor, even after the expiration of the agreement
- obligation of the licensee not to grant sublicences or to assign the licence
- obligation on the licensee not to exploit the licensed know-how or patents after the termination of the agreement in as far as the know-how is still secret or the patent is still in force
- obligation on the licensee to grant to the licensor a licence in respect of his own improvements to or his new applications of the licensed technology, subject to the conditions in article 2.1.(4)
- obligation on the licensee to observe minimum quality specifications or to procure good or services from the licensor
- obligation to inform the licensor of misappropriation of the know-how or infringement of the licensed patents and to take or assist the licensor in taking legal action
- obligation on the licensee to continue paying the royalties until the end of the agreement in the event of the know-how becoming publicly known or the patents prematurely losing their validity
- obligation on the licensee to restrict his exploitation of the licensed technology to one or more field of use
- obligation on the licensee to pay a minimum royalty or to produce a minimum quantity of the licensed product
- obligation on the licensor to grant the licensee any more favourable terms that the licensor may grant to another undertaking
- obligation on the licensee to mark the licensed product with the licensor's name or patent
- obligation on the licensee not to use the licensor's Know-how to construct facilities for third parties.
It also adds new paragraphs 2.1.(13) to 2.1.(15) which I have transcribed below.
Article 2.1.(13): an obligation on the licensee to supply only a limited quantity of the licensed product to a particular customer, where the licence was granted so that the licensee might have a second supplier inside the licensed territory.
Article 2.1.(14): a reservation by the licensor of the right to exercise the rights conferred by the patent to oppose the exploitation of the technology by the licensee outside the licensed territory.
Article 2.1.(15): a reservation by the licensor of the right to terminate the agreement if the licensee contests the secrecy of the licensed know-how or challenges the validit of the licensed patents (previously covered under art. 3.1.(1) Pat. Reg. and art. 3.1.(4) Know-How Reg.)
VII. ARTICLE 3 - THE BLACK LIST
The black list has been shortened on the basis that territorial protection will not be exempted when there is market power.
The list now covers prohibitions on:
- restriction on the determination of prices;
- restriction on competition between the parties to the agreement in relation to research and development, production, use or distribution of competing products;
- restriction on sale to resellers, in order to protect the respective licensed territories;
- restriction on allocation of customers between competing manufacturers;
- restriction as to quantities of licensed products to be manufactured or sold;
- an obligation on the licensee to assign back improvements of the licensed technology;
- a prohibition on the licensor not to license other undertakings to exploit or on a party not to exploit the same technology in the licensed territory for periods exceeding the duration permitted under article 1.
Where the parties are competitors or potential competitors, a non competition clause in a licence in relation to other competing products which might restrict competition is also prohibited.
However a "best endeavours" obligation is not regarded to be inconsistent with the group exemption. It is not clear if the "without prejudice" clause is treated as not being restrictive of competition and not requiring an individual exemption.
VIII. Article 4
It will be possible for the Commission to rapidly establish whether agreements which are not automatically covered by the exemption may be eligible for the application of the block exemption by way of the opposition procedure provided for in article 4.
Such agreements will be exempted if they are notified to the Commission and the Commission does not oppose the application of the exemption within a period of four months.
The opposition procedure has been reintroduced in the last version of the draft at the request of the interested parties. The Commission has a wide discretion but at least the uncertainty about the applicability or not of the block exemption can be determined within the short time period of four months. Furthermore, the procedure is such that the mere passage of time is sufficient for the application of the exemption, compared with the normal procedure of a decision or comfort letter from the Commission.
IX. ARTICLE 5
Some agreements are totally excluded from the block exemption benefit:
- when the parties are members of a patent or know-how pool and the agreement relate to the pooled techno
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