United States: EU Adopts New Safe Harbour For Licensing of Patents, Know-How And Software Copyright

On 27 April 2004, the European Commission (EC) published its new Technology Transfer Block Exemption Regulation (TTBE), together with accompanying guidelines. The TTBE provides a "safe harbour" from the application of EC competition law for certain technology licenses (i.e., patents, know-how, and software copyright licenses).

The old TTBE provided a framework which, if followed carefully by licensing parties, ensured that patent/know-how licenses were automatically protected from competition law compliant and were legal and enforceable. Anti-competitive provisions such as price-fixing clauses were blacklisted and acceptable provisions (e.g., exclusivity grants, minimum royalties and minimum quality specifications) were white-listed. The old TTBE was often criticized, however, for its prescriptive format. According to the commission, "[T]hese new generation regulations represent a shift from the old legalistic and form-based approach to a more economic and effects-based approach, and offer greater flexibility to companies engaged in innovative activities and who do not want to follow standard industry practices."

A key positive change includes a more liberal approach to grant-backs of intellectual property. Imposing an exclusive license/assignment of improvements on the licensee will not take the whole agreement outside the safe harbour, just that individual provision. Further, an obligation on the licensor to license its improvements to the licensee is not excluded from the new TTBE. Another positive change is the extension to software. Software copyright licensed for the manufacture or provision of specific contract products/services is included within the scope of the new TTBE. This reflects the commission’s keenness to ensure that the converging Information Society markets remain competitive.

The commission’s guidelines direct parties on how to apply EC competition law to multiparty licenses, patent pools and other licensing arrangements falling outside of the new TTBE. The guidelines reflect the commission’s desire to ensure businesses and their legal advisers have as much guidance as possible on the application of EC competition law to commercial arrangements, particularly given the abolition of the notification/individual exemption system from 1 May 2004.

There are also several changes that may adversely affect existing licensing programs:

Certain restrictions commonly found in reciprocal cross-licensing arrangements between competing companies will not fall within the new TTBE (e.g., restrictions on field of use in reciprocal cross-licenses which may have the effect of restricting activities to technical fields/territories/products reserved to the other licensee). Licenses containing such provisions will need to be analyzed under EC competition law from first principles.

Competitors will only benefit from the new TTBE if their combined market share does not exceed 20 percent. Non-competitors’ market shares each need to be 30 percent or less in order fall within the safe harbour. Companies and their legal advisers will now need to define the relevant product markets, and calculate market shares, which may be difficult in certain dynamic technological markets. Further, those companies that may fall below the thresholds will need to monitor their market shares over the life of the license agreement in order to ensure that they do not "move" out of the safe harbour.

Practice Note: The following actions might usefully be taken now to adapt business practices to these changes: prioritization of existing and proposed licensing agreements for compliance audit under EU competition law, based on the new TTBE and guidelines; review of licensing agreements existing on 30 April 2004 to consider whether they fall within the old TTBE and therefore benefit from the transitional rules (i.e., safe harbour until 30 March 2006); and review of whether licensing agreements identified as falling outside the TTBE are likely to meet the criteria for exemption, based on the TTBE Guidelines and economic analysis.

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