Tech transfer rules: time for transition

The world of technology is in a constant state of evolution; the legal rules are no exception.  The European Commission is currently considering public comments as part of consultations leading up to a possible revision of the competition law rules for technology transfer agreements.

With the odd notable exception, most innovators do not take on the responsibility for manufacturing and distributing all the products which will incorporate their technology.  For those that do, legal life may be (slightly) more straightforward; the remainder must enter into agreements to license out their technology.

Licensing or tech transfer agreements are therefore necessary to allow innovators to reap the financial rewards of their investment in technology and to allow other companies to manufacture and sell advanced products.

The story so far

All significant commercial agreements, including those for tech transfer, are subject to EU competition law. These include rules that prohibit anti-competitive agreements.

The detailed rules for tech transfer agreements are contained in the European Commission’s Technology Transfer Block Exemption, issued in 2004.  Broadly speaking, this provides a ‘safe harbour’ for tech transfer agreements provided that:

(i)    the parties do not have significant market power on any relevant product or technology market;

(ii)    there are no serious or “hardcore” restrictions on competition in the agreement. 

If these criteria are met, companies have the assurance that their tech transfer agreements are unlikely to infringe competition law.

However, the existing Block Exemption is due to expire on 30 April 2014, and its replacement is the subject of intense lobbying and debate, on both sides of the licensing fence. On 6 December 2011 the European Commission invited industry associations, key players and other interested parties to submit their comments to a consultation that closed on 3 February 2012. These will be made public, and there is expected to be further consultation before a new Block Exemption is issued.

If it ain’t broke…

The question may be why the system needs to be reviewed at all – is there a problem with the current regime?  Some feel that, while broadly helpful, the application of the current rules is riddled with complexity which adds cost and uncertainty to the licensing process. If this could be improved, providing greater certainty for business, many would welcome it. 

The first major difficulty arises in assessing whether parties have significant market power on any relevant product or technology market.  Although most businesses will understand their ‘product’ markets, determining the relevant ‘technology’ markets entails asking a serious of difficult questions.

• What technology, if any, competes with the underlying technology? 
• What technology will compete with it in the future?
• Do the parties compete for the licensing of the underlying technology? 
• Could they in the future?

These questions are difficult enough in relation to existing technology; they can be impossible to answer with any certainty in relation to new/emerging technologies.

Grammatical minefield

The second major difficulty is in determining whether an agreement contains any hardcore restrictions.  The list of hardcore restrictions in the existing Block Exemption are particularly complex, containing exceptions to the exemption, and then further exceptions to the exceptions to the Block Exemption.  Currently, licensors and licensees must navigate a grammatical minefield of double-negatives to ensure that they do not fall foul of the rules.

Although the existing rules may be intellectually stimulating for competition lawyers and economists, they often make little sense to businesses.  This is far from ideal for the many industries which rely on the tech transfer regime as the backbone of their day-to-day licensing arrangements.  The application of the rules has been especially problematic for the fast-moving and technologically complex TMT and pharma sectors.

The future is… simple?

It would be preferable, and improve compliance, if businesses and their advisers could more easily identify and resolve competition law issues that may arise from licensing technology.

Some of the changes that might help would include a move away from a regime which depends on assessing market power in technology markets, focusing instead solely on power in markets for the actual product which incorporates the technology. 

A simplification of the existing lists of hardcore restrictions would also help.  In many cases, the specific rules relating to fields of use restrictions, territorial restrictions and non-compete provisions have little regard to market practice.  Rules relating to grant-back clauses are also difficult to understand and to apply – for some businesses the way in which competition law may shape their agreements seems counter-intuitive and unreasonable.

Given that the rules that emerge will shape the technological landscape across the EU for years to come, in sectors which are essential to driving Europe’s economic recovery, it is hoped that the regime that emerges from the consultation is one that is more comprehensible, easier to apply and encourages innovation and licensing.

Pat Treacy is head of the Competition Practice at the law firm Bristows. Osman Zafar is a senior associate in the Competition Practice at Bristows.