Technology Licensing in the European Union
The founding document of the European Union (EU) (the Treaty of Rome) came into effect on January 1, 1958 and established a Common Market based on an elimination of tariffs between member states, a common external tariff and the so-called “four freedoms”: freedom of movement of goods, services, capital and labor between the member states. This treaty has been amended many times since. Currently two separate treaties set out the workings of the Uropean Union: the Treaty on the European Union and the Treaty on the Functioning of the European Union. Provisions relevant to patent licensing have been present from the beginning. Articles 85 and 86 of the Treaty of Rome which are now Articles 101 and 102 on the Treaty on the Functioning of the European Union. These provisions roughly parallel Sections 1 and 2 of the Sherman Act. Article 101 makes illegal and renders void all agreements between undertakings, decisions by associations of undertakings and concerted practices which, unless they are subject to an exemption, may affect trade between the member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market. Article 102, which contains no provision for an exemption, makes unlawful “any abuse by one or more undertakings of a dominant position within the common market or a substantial part of it”. Coupled with these provisions are provisions aimed at prevention of resurrection of barriers to the free circulation of goods within the EU that would contravene the free flow of gods principle. Article 34 of the treaty on Functioning of the European Union prohibits all quantitative restrictions on imports and all measures having an equivalent effect thereto on trade between member states of the EU. Article 36 of the Treaty on Functioning of the European Union, on the other hand made provision for retention of certain national rights that might be used to prevent importation of goods from other EEC member states as long as such impediments do not “constitute a means of arbitrary discrimination or disguised restriction on trade between member states”. Among the rights referred to in Article 36 are industrial property rights.
Impact on Licensing
The basic black letter law of the EU on intellectual property rights and the Free Flow of Goods doctrine is by now well established.. One cannot in general use an intellectual property right to prevent importation of goods from another EU member state if the goods were first put on the market in that EEC member state by the holder of the intellectual property right or with his consent.
The free flow of goods doctrine imposes certain problems when licensing intellectual property rights since it means that one can never assure a licensee of absolute exclusivity within a licensed territory unless the licensed territory is the entire EU – which is often not the case.
The Treaty on the Functioniing of the European Union itself contains two antitrust provisions. Article 101 which is generally similar to Section 1 of the Sherman Act and Article 102 which resembles Section 2 of the Sherman Act, although talking of “abuse of a dominant position” rather than monopolization. In the present section, we will focus on Article 101.
Under EU law, all agreements in breach of Article 101 as a result of their anti-competitive nature and adverse effect on trade between the member states are void unless they have been exempted. There are two types of exemptions – group exemptions promulgated by the Commission for certain classes of agreement and specific exemptions are actually granted – the bureaucracy has too big a backlog. Technology licensing has long been the subject of a group exemption.
One further factor to bear in mind with respect to Europe is a near obsession in the thinking of the authorities in Brussels that nothing should be done that might resurrect trade barriers between the European countries. For this reason, in addition to addressing anti-trust type issues discussed above, the European legislation is also particularly concerned about provisions in agreements that might have the effect of separating national markets. Case law of the European Court of Justice has long ago established that one cannot use an intellectual property right that one owns in one EU member country to prevent the import into that country of a product first put on to the market by the owner of the right or with his consent in any other EU-member country, irrespective of whether there were any rights in the country in which the product was initially marketed. This case law has had an impact on the wording of the Technology License Group Exemption.
Under EU law, all agreements in breach of Article 101(1)58 of the Treaty on the Functioning of the European Union as a result of their anti-competitive nature and adverse effect on trade between the member states are void unless they have been exempted. The basic provisions of Article 101 read as follows:
(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between the member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular …
(2) Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
(3) The provisions of this article may, however, be declared inapplicable in the case of any agreement … which contributes to improving the production or distribution of goods or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which des not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
The European Commission has noted that the Court of Justice has indicated that the above strictures may not apply where the impact of an agreement etc is unlikely to have any appreciable effect on trade between the Member States and so has issued a notice on Agreements of Minor Importance.59 Currently this notice applies inter alia to agreements between small and medium sized enterprises (those having fewer than 250 employees and a turnover of less than 40 million euro), agreements between larger undertakings when the market share involved is less than 15% if the participants are not competitors or 10% if they are.
For agreements that are not covered by the Notice on Agreements of Minor Importance, for the provisions of paragraphs 1 and 2 of Article 101 to be declared inapplicable as contemplated by paragraph 3, an exemption is required. Any agreement etc. falling within the scope of paragraph 1 that is not exempted is illegal, and so can result in the imposition of fines and is void. Whether a void provision in an agreement can be severed to preserve the rest of the agreement is a matter of national contract law. There are two types of exemption – group exemptions promulgated by the Commission for certain classes of agreement and specific exemptions issued after consideration of the facts of the case. Few specific exemptions are actually granted – the bureaucracy has too big a backlog.60
The European Commission was authorized to promulgate a group exemption for patent licenses as early as 1965. However, it was not until 1985 that a group exemption for patent licenses came into effect. The reason was that the Commission wished to review a number of individual agreements notified to it under the Article 85 (now Article 101 set out above) procedure before going ahead with a group exemption and in doing so it found that matters were more complicated than originally thought. In particular, it found itself having major problems over the question of exclusivity. Granting an exclusive license for a territory prima facie runs contrary to the EEC’s free movement of goods principle set out in Article 30 of the Treaty of Rome (now Article 34 of the treaty on Functioning of the European Union). This Article prohibits all quantitative restrictions on imports and all measures having an equivalent effect thereto on trade between member states of the EEC. Article 36 of the Treaty of Rome (now Article 36 of the Treaty on Functioning of the European union) on the other hand made provision for retention of certain national rights that might be used to prevent importation of goods from other EEC member states as long as such impediments do not “constitute a means of arbitrary discrimination or disguised restriction on trade between member states”. Among the rights referred to in Article 36 are industrial property rights.
The interrelation between Articles 30 and 36 of the Treaty of Rome was left to the Courts to resolve. As discussed previously, the European Court of Justice has consistently held that intellectual property laws cannot be used to prevent imports into one EEC member state from another EEC member state if the goods were originally part on the market by or with the consent of owner of the intellectual property right.
Clearly, these decisions of the European Court had a significant impact on the Commission’s views on the propriety of exclusivity in patent licensing. At one time, it was thought that the European Court decisions might preclude the possibility of the grant of an exclusive license for parts of the EEC (If one cannot prevent imports from other licenses, how can it be said that a license is exclusive?).61 This issue was resolved by a further decision of the European Court. In the so-called Maize Seed 62 case, the European Court invented the concept of the so-called “open exclusive license” which it held to be lawful under Article 85 of the Treaty of Rome if the grant of some exclusivity was necessary to induce a licensee to devote sufficient effort to introduce new technology into the licensed territory. Such an open exclusive license was one in which the licensor undertook not to exploit a right in the licensed territory nor to license others in that territory, but which did not affect the position of third parties such as parallel importers and licensees for other territories.
A somewhat similar decision was reached in a copyright case (Coditel II) where it was held that in appropriate circumstances the grant of exclusive distribution rights in copyright films to one EC member state was permissible and did not infringe Article 85 of the Treaty.63
At about the time that the first group exemption in this field was under contemplation, a case in which the Commission had imposed fines with respect to a technology license was making its way through the judicial system. This was the Windsurfing case64. In this case, the European Court of Justice upheld the imposition of fines on a licensor for imposing a number of anti-competitive terms on its licensee. The license related to a rig for use with sailboards for windsurfing and the decision seems to have been influenced by the fact that claims in the patent application that provided the basis for the license had originally extended to sailboards and rigs but had been limited to rigs alone during prosecution. Among the clauses that the Court agreed were in breach of Article 85 were the following:
a requirement that the licensee could only exploit the licensed rig in conjunction with boards which were approved by the licensor;
a requirement that except for supplies needed for repairs, the licensee could not sell rigs separately from complete rig and sailboard combinations;
a requirement that the licensee manufactured only at a particular plant, and thus only in an area of the Common Market in which the licensor has patent protection;
a requirement that the licensee mark on the boards which they manufactured that these were licensed products; and
an obligation not to challenge the licensed patents or trademarks.
The Court did, however, disagree with the Commission’s view that basing royalty payments on the sales price of a combination of an unpatented sailboard and the patented rig was anti-competitive.
These decisions set the stage for the first group exemption for patent licenses. This issued as a regulation by the European Commission under the powers delegated to it to regulate competition policy came into force on January 1, 1985.65 It was fairly tough in the limited number of provisions that were exempted. It was, however, accepted by industry as being better than nothing. This exemption was followed in 1989 by a group exemption providing for know-how licensing.66 Both had similar formats in granting an exemption for certain types of “open exclusive licenses” that were compatible with the free flow of goods doctrine, as long as the agreement in question did not contain any provisions that were on a “black list” and enumerating certain provisions that were deemed to be acceptable (a “white” list). In application, the two group exemptions became subject to increasing criticism that their existence was inhibiting practices which did not pose problems from a competition law perspective, would be helpful in technology development but which industry was afraid to adopt because they were not on the appropriate white list. In 1996 the two regulations were combined to form a Technology License Group Exemption.
A new he current technology license group exemption came into effect on May 1, 2004, together with general changes in the administration of the EU’s competition policy. This will be replaced from May 1, 2014 by a new regulation which was published on March 21, 2014.
The 2004 regulation starts with a general exemption for technology transfer agreements between two parties67 for the manufacture or provision of goods or services manufactured or provided with licensed technology and then sets out certain derogations from this broad exemption. These include the following:
1. Under Article 3, where the agreement is between competitors68, the exemption does not apply if the combined market share of the parties does not exceed 20% of either the relevant technology market69 or the relevant product market. If the parties are not competitors, the percentage rises to 30%.
2. Under Article 4, “hard core restrictions” which take the agreement outside the exemption:
A Where the agreement is between competitors and directly or indirectly or in combination with other factors under the control of the parties has the object of:
(a) restriction of a party’s ability to determine prices when selling to a third party;
(b) certain restrictions on a party’s output or sales70;
(c) certain allocations of markets or customers71; and
(d) restrictions on a party to use its own technology or ro carry out research and development unless such limitation is necessary to maintain the secrecy of licensed know-how.
B Where the agreement is between non-competitors and directly or indirectly or in combination with other factors under the control of the parties has the object of:
(a) restriction of a party’s ability to determine prices when selling to a third party, although provision of a maximum sales price or a non-binding recommended sales price may be permitted;
(b) restriction of the territory into which or the customers to whom the licensed products may be sold, except for
(i) reservation of exclusive territory for the licensor’s own sales;
(ii)) restriction of active sales into the territory of another licensee;
(iii) restrictions where the licensee is producing only for its own use;
(iv) restrictions on wholesalers to prevent them from selling to end-users; and
(v) restrictions in furtherance of a permitted selective distribution system.
(c) restriction on sales to end users by a licensee who is a member of a selective distribution system which operates at the retail level.
23. Other conditions to which the exemption does not apply are set out in Article 5:
(a) Where the licensee is required to grant an exclusive license to the licensor or its designee of any “severable improvement” or new application of the licensed technology developed by the licensee.
(b) Where the licensee is required to assign to the licensor or its designee of any improvement or new application of the licensed technology developed by the licensee.
(c) Where the agreement contains a direct or indirect obligation not to challenge the validity or contest the secrecy or substantiality of rights which the licensor holds in the EU, although the licensor may have the right to terminate the license if such challenge is made.
d ) restrictions in an agreement between non-competing parties that prevent a party from using its own technology or carrying out research and development unless such limitation is necessary to maintain the secrecy of licensed know-how..
Other changes include the following:
1. The exemption covers not only patent and know-how agreements, but also agreements relating to design rights72 and “software computer licensing agreements”.73
2. The definition of Know-how has been changed so that this is now defined as being a “package of non-patented practical information, resulting from experience and testing, which is secret, substantial and identified”. In this context the definition of “substantial” has been changed from the current exemption so that this requirement is only met if it is indispensable for the manufacture or provision of the licensed products.
3. Finally, the new regulation provides that the benefit of the exemption may be withdrawn in certain circumstances particularly where the effect of agreements is to impede the access of third party technology or a licensee’s technology to the market by virtue of the existence of parallel networks of similar restrictive agreements or where “without any objective reason” there is a failure to exploit the licensed technology. In an interesting acknowledgment of the new competition regime that will follow the introduction of the Modernization Regulation, national competition authorities are authorized to act to withdraw the benefit of the exemption within their jurisdiction. The Commission also reserves the right to declare that the exemption does not apply where parallel networks of similar technology agreements cover more than 50% of a relevant market.
The 2014 Revision 74
On February 20, 2013, the European Commission published proposals for revision of the current regulation. Major proposals were to add some other types of intellectual property licenses to the ambit of the group exemption, lower the 30% threshold on market share above which the group exemption does not apply to agreements between non-competitors to 20% and apply this to the combined share of licensor and licensee in certain cases and to modify the rules relating to passive sales by licensees into another licensees territory and to exclusive grant backs so as to remove protection of the group exemption even if they are non-severable.
In the end, the threshold on market share above which he exemption does not to apply was left at 30% for each party for non-competitors, but changes were made:
1) to add agreements relating to supplementary protection certificates and plant breeders rights to the types of agreement to which the regulation applies;
2) to increase distinctions in treatment between reciprocal and non-reciprocal agreements;
3) to make the proposed changes with respect to grant backs by way of assignment or exclusive license; and
4) to remove from the safe harbor of the group exemption, agreements giving the licensor to terminate the agreement if the licensee challenged the validity of the licensed rights.75
Guidelines accompanying the new regulation discuss the role of patent pools, especially in the context of standards setting and state:
The creation and operation of the pool, including the licensing out, generally falls outside Article 101(1) of the Treaty, irrespective of the market position of the parties, if all the following conditions are fulfilled:
(a) participation in the pool creation process is open to all interested technology rights owners;
(b) sufficient safeguards are adopted to ensure that only essential technologies (which therefore necessarily are also complements) are pooled;
(c) sufficient safeguards are adopted to ensure that exchange of sensitive information (such as pricing and output data) is restricted to what is necessary for the creation and operation of the pool;
(d) the pooled technologies are licensed into the pool on a non-exclusive basis;
(e) the pooled technologies are licensed out to all potential licensees on FRAND terms;
(f) the parties contributing technology to the pool and the licensees are free to challenge the validity and the essentiality of the pooled technologies, and;
(g) the parties contributing technology to the pool and the licensee remain free to develop competing products and technology.
58 Formerly Article 85(1).
59 The current version of the Notice was published Official Journal of the European Community C 368, on December 22, 2001.
60 One of the earliest decisions of the Common Market, as it then was, was to delegate many of its powers in the competition field to the Commission under Regulation 17 of 1962. The delegated powers included the right to fine violators and to grant exemptions. This position was, however, changed on May 1, 2004 when the Modernization Regulation (No1/2003) comes into effect. Under the new regime, some aspects of implementation of EU competition policy will be delegated to national competition authorities and the possibility of seeking an individual exemption from the Commission will come to an end. Instead of requiring an exemption, paragraph 3 of Article 81 of the EC Treaty will become directly applicable and it will, for example be possible to plead that an agreement meets the requirements of this paragraph as a defense to an action for breach of the other requirements of Article 81 without the need for any prior administrative proceeding.
61See, for example, Davidson Rupper  1 Comm Mkt LR D52, Raymond and Nagoya  1 Comm Mkt LR D45 and Kabel Metal  2 Comm Mkt LR D40.
62L.C. Nungesser and Kurt Eisele  1 Comm. Mkt. LR 278
63Coditel SA v. Cine Vog Films SA [No 2]  1 Comm Mkt LR 49.
64Windsurfing International, Inc. v EC Commission  3 Comm. Mkt. LR 489
65Commission Regulation 2349/84
66Commission Regulation 2349/84
67 Note: patent pools are still not covered.
68 As defined in Article 1(j) the test of whether parties are competitors or not is judged by the position as it exists prior to the execution of the agreement in question, a point which is emphasized in Article 4(3) setting out which set of hard core exclusions apply if the parties become competitors during the life of the agreement. .
69 The relevant technology market is defined as “a licensor’s market share on the relevant technology market(s) shall be the combined market share on the relevant product market(s) of the [products manufactured or provided with the licensed technology] manufactured or provided by the licensor and its licensees”.
70 Limits on the output of licensed products by the licensee in a non-reciprocal agreement fall outside the exemption but may not jeopardize the entire agreement.
71 Restrictions on market allocations may be acceptable in cases where they have the effect of being field of use restrictions in a non-reciprocal agreement or where the agreement provides the licensee the right to produce only for its own use.
72 See definition of “patent” in Article 1(h)
73 Article 1(b).
74Commission Regulation 316/2014 published in  OJ L83/17.
75A one year term was provided to bring prior agreements that permitted termination of a license in the case of a challenge to validity into conformity with the new provision.