UK: Technology Transfers The New Block Exemption

Last Updated: 6 December 1996

The new technology transfer block exemption came into force last month, after a controversial consultation process. Mark Turner and Phil McDonnell examine its impact.

Glossary

Field of use. An obligation on the licensee to limit the exploitation of the technology to a defined technical field of application.

Notice on Agreements of Minor Importance. Agreements which have been formally recognised by the Commission as not having an appreciable effect on competition and whose effect on inter-state trade is insignificant do not fall within Article 85(1). Broadly, the Commission has indicted that agreements will fall within this category if the products concerned and any equivalent products supplied by the parties do not represent more than 5 per cent. of the total market for such products in the area of the common market affected by the agreement and the aggregate group turnover of the parties the agreement does not exceed 300 million ECU (about £240 million). Reliance on the Notice gives a measure of comfort, but it is not legally binding on either the Commission itself or the European Court of Justice.

Parallel Trade. Imports of the licensed products into the licensee's territory.

Passive sales. Sales in response to unsolicited orders from outside the territory.

Technology licensing is becoming increasingly important, as even the largest businesses are unable to bear the costs necessary to develop new products and services in-house. In many industries, particularly information technology and pharmaceuticals, technology licensing is an essential component of a competitive strategy.

The new technology transfer block exemption, which came into force on 1st, April 1996, replaces the existing know-how block exemption, which had another four years to run, and the patent licensing block exemption, which expired on 31st December 1995. The adoption of the new block exemption followed a year of increasingly acrimonious debate between the Commission and industry, and a climb down by the Commission on what it had seen as a key issue: the treatment of licenses where the licensee has a significant market share.

The end result is a largely sensible and useful measure, not least because it avoids the need to accommodate the provisions of two regulations when drafting technology licences, which often cover a bundle of intellectual property rights.

Market Share

Until the final draft, the Commission was insisting on limiting the benefit of the block exemption to those companies which did not have large market shares in the relevant products or services at the time the licence is granted. This approach had several drawbacks:

  • It is extremely difficult to measure market share for products which, by definition, are new and innovative. Given the Commission's approach of defining relevant markets very narrowly, many companies would be unsure whether they would benefit from the block exemption and, ironically, in the case of truly innovative products, the market share (according to the Commission) could be 100 per cent.
  • There appeared to be little empirical evidence that there was a widespread problem with dominant companies' licensing practices, so it appeared inequitable to use the block exemption in the way that the Commission proposed.
  • The test would deprive small company licensors from achieving effective market penetration by appointing larger companies as licensees.

Following intensive lobbying by industry, the market share test has been all but dropped. As in all block exemptions, the Commission retains the power to withdraw the benefit of the block exemption if effective competition is being impeded. The block exemption states that this will be a particular concern where the licensee's market share exceeds 40 per cent. (Article 7.1).

The New Regime

The new technology transfer block exemption provides a single regime for the exemption of licenses of patents, know-how and mixed patents and know-how from Article 85(1) of the EC Treaty.

The definition of these rights remains much the same as before. "Patents" includes patents, patent applications, utility models, applications for registration of utility models, certificats d'utilite and certificats d'addition under French law, all of which were covered by the old patent block exemption. The new block exemption now also includes other forms of industrial property protection, namely semiconductor topography rights, supplementary protection certificates for medicinal products and plant breeders certificates. As before, "know-how" means a body of technical information that is secret, substantial and identified.

However, the block exemption does not cover trade marks, copyright and other intellectual property rights where such rights are more than ancillary to the patents and/or know-how. This leaves software development licences and other technologies where copyright is the main vehicle for protection outside the scope of the block exemption.

The new block exemption follows the usual format, with a list of permitted restrictions (the white list, Article 1), a list of restrictions which are "generally not restrictive of competition" and so also permitted (the grey list, Article 2) and a list of prohibited restrictions (the black list, Article 3). Agreements which contain one or more of the restrictions listed in Article 1.1 (or any of the obligations in Article 2.1) will automatically be able to claim the benefit of the block exemption unless they contain any of the restrictions listed in the black list. The black list has been shortened from the previous block exemptions. If the agreement does not contain any of the restrictions in the white list, but does contain any of the restrictions set out in the grey list, it will still be able to claim the benefit of the block exemption (Article 2.2).

The block exemption also provides an "opposition procedure" for the fast-track (four month) clearance of restrictions not covered by the white, grey or black lists (Article 4). In certain circumstances, the Commission can withdraw the benefit of the block exemption, although again, this list of circumstances is shorter under the new regime (Article 7).

Typical licensing provisions

The following is an examination of the common clauses that arise in licensing agreements and their treatment under the new block exemption.

Territorial restrictions. To a certain extent, the simplicity of a single regulation is only skin deep. Separate rules still apply to the duration of territorial restrictions which depend upon the type of licence at issue. The position is very much the same as under the old patent and know how regulations. The licensee can be restricted from actively selling into the territory of the licensor or another licensee for:

  • In the case of patents, the duration of the licensed patents in each territory.
  • In the case of know-how, ten years from when the licensed product was first put on the EU market by any licensee (note: this may give the licensee a longer period of protection than under the old regulation where the ten year period ran from the date of the first licence agreement in the EU).
  • In the case of mixed licences, the longer of ten years from when the licensed product was first put on the EU market by one of the licensees or, if longer, the duration of the licensed patents in each territory which are necessary to continue to sell the licensed products.

The licensee in each case can still only be restrained from making passive sales for the first five years from when the licensed products was first put on the EU market by one of the licensees.

The licensor can be restricted from licensing others in the territory or exploiting the licensed technology itself in the territory for the same period as the licensee is restrained from making active sales under the above rules.

In all events. territorial protection ends once the patent ends or once the know-how ceases to be secret and substantial. Also, as before, the block exemption is not available where the parties agree or take concerted action to inhibit parallel trade once the licensed product has been lawfully first marketed (Article 3.3).

Royalties. The former black-listed clause relating to royalty calculations has been removed from the block exemption. Now, an obligation to continue paying royalties throughout the term of the know-how licence (whether or not the know-how has entered the public domain) or beyond the duration of the licensed patents (provided that it is to facilitate payment, for example, by providing for lower royalties over a longer period of time) is not considered a restriction (Article 2. 7).

Royalty rates cannot be used indirectly to achieve any of the blacklisted restrictions, for example, by doubling the royalty rate on passive sales outside the licensed territory (Recital 21). Minimum royalty payments, payable regardless of the level of sales, are still not caught by Article 85(1).

Price and output restrictions. As before, the licensee must remain free to set his own prices (Article 3 1) and the licensor cannot limit the licensee's production of the licensed products. Regarding the latter, there are certain very limited exceptions:

  • It is now possible in both patent and know-how licences to grant a licence limited to production by the licensee of the licensed product solely for incorporation into his own products (that is, a licence for captive production only rather than for resale), provided that the licensee is free to determine his own production levels (Article 1.1.8).
  • Where the licensor grants a licence to a licensee at the request of a particular customer so as to provide that customer with a second source of supply in a territory, the licensor can impose an obligation on that licensee only to supply a limited quantity to that customer (Article 2.1.13).

The licensor is still able to impose a minimum level of production on the licensee below which he can be entitled to terminate the licence.

Customer restrictions. Where the parties are competing manufacturers before the grant of the licence, the licence cannot be used as a means of sharing customers (or otherwise dividing markets) between them (Article 3.4). Except in these circumstances, a restriction on which customers a licensee may supply is not a blacklisted restriction. However, it is typically a restriction caught by Article 85(1) and is not exempted by the white list in the block exemption. Therefore, such a customer restriction would have to be notified to the Commission under the opposition procedure.

It is still possible to include a field of use restriction within the licence (Article 2.1.8). The licensee may also be restricted from using the licensor's know-how to construct facilities for third parties, although he must remain free to continue to be able to use the know-how to expand his own facilities (Article 2.1.12).

Tie-ins. Certain forms of tie-ins, where the licensee is contractually obliged to purchase goods or services from the licensor under the licence, are exempted by the block exemption. The grey list covers tie-ins where:

  • It is necessary for the technically satisfactory exploitation of the licensed technology .
  • It is necessary to ensure that the licensee's production meets quality standards applicable to the licensor and other licensees

If these criteria are not met, tie-ins are typically regarded as restrictions which are not covered by the white list and must be notified under the opposition procedure. Article 4.2 expressly lists such tie-in clauses as a type of clause which the opposition procedure is designed for.

Improvements. The position regarding the licensing back of improvements between the parties was particularly complex under the old regulations. The position under the new block exemption is a little simpler. The licensor still cannot oblige the licensee to assign rights to improvements of the technology to the licensor. However, the licensee can be obliged to disclose and license back improvements in, or new applications of, the licensed technology, provided that in the case of severable improvements the licence is non-exclusive and is matched by an equivalent licence from the licensor in respect of its improvements (which may be exclusive) (Article 2 1 4).

Non-competition. The licensor cannot prevent the licensee from being involved with competing products during the term of the licence. Such an obligation is black-listed and would not be exempted under the opposition procedure.

However, the licensor can reserve to himself the right to terminate the licensee's exclusivity or to terminate the communication of improvements should the licensee engage in competing activities (Article 2.1.18). Also, the licensee can be required to use his best endeavours to manufacture and market the licensed products.

Term and post-term bans. The old regulations blacklisted provisions which automatically extended the term of a licence by the inclusion of new patents or improvements to the licensed technology. The new block exemption makes no mention of automatic extensions. Presumably, such clauses could still amount to a restriction but could be notified under the opposition procedure to obtain exemption. The exceptions to the old black-listed clause would still be relevant (for example, the ability of either party to terminate the licence at least annually after the expiry of the original term).

The licensor can still prevent the licensee disclosing the know-how after the end of the agreement, provided that it has not entered the public domain. For patents, a post-term use ban is perfectly valid, provided that the patents are still in force.

The block exemption expires on 31st March, 2006. This does not affect the term of licences: it just means there is uncertainty about what will replace the regulation at that time.

No-challenge. The Commission's position on no-challenge clauses (clauses which provide that the licensee may not challenge the validity of the licensed patents or secrecy or substantiality of the licensed know-how) has changed slightly. Such clauses are still regarded as restrictions but they are no longer blacklisted. The new block exemption provides that they may be exempted under the opposition procedure. It is still possible to provide in the licence for a licensor to terminate in the event of a challenge by the licensee.

Other exceptions from Article 85

Apart from the block exemption, there are two possible ways to avoid the delay and uncertainty of an individual notification for a technology licence:

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