This is an important policy area as the economic development of the EU and its ability to compete effectively in the rest of the world depends on the capacity of industry to devise new technologies and to disseminate them on a large scale. The Commission acknowledges that competition is one of the main driving forces of innovation and that it is therefore important to find the right balance between protecting competition and protecting intellectual property rights.
The evaluation report adopted by the Commission raises issues such as the treatment of software licensing agreements and licensing pools which have become increasingly important for the development and dissemination of new technologies. In its report the Commission is asking for comments on its competition policy approach to licensing agreements. After discussion on the report with industry, consumer associations and other interested parties the Commission may propose new competition rules relating to licensing agreements in the second half of 2002.
The details
The EC Treaty prohibits agreements which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market. However, the Treaty also provides an exception. An anti-competitive agreement may be permissible if the positive effects brought about by the agreement outweigh its negative effects. The Commission can block exempt categories of agreements of the same nature and did so in 1996 for certain licensing agreements by adopting the technology transfer block exemption Regulation, known as the "TTBE" which covers the licensing of patent and know-how rights.
The report provides a critical analysis of the application and the policy approach underpinning the TTBE. It discusses the problems arising in the context of licences of intellectual property rights (IPRs) and acknowledges the complementary role of competition and innovation policies. It also contains a comparison between the competition policy approach to licensing of IPRs in the Community and in the US. It stresses the need to adapt the TTBE to ensure consistency with the new Commission block exemptions concerning distribution agreement as well as R&D and specialisation agreements that are based on a more economic approach.
Basic findings of the report
The Commission found that the TTBE has four main shortcomings:
- Firstly, the TTBE is too prescriptive and seems to work as a straitjacket, which may discourage efficient transactions and hamper dissemination of new technologies.
- Secondly, the TTBE only covers certain patent and know-how licensing agreements. This narrow scope of application of the TTBE seems increasingly inadequate to deal with the complexity of modern licensing arrangements such as pooling arrangements and software licenses involving copyright.
- Thirdly, a number of restraints are currently presumed illegal or excluded from the block exemption without a good economic justification. This concerns in particular certain restrictions extending beyond the scope of the licensed IPR, such as non-compete obligations and tying. In terms of economic analysis, such restraints may be efficiency enhancing or anti-competitive depending on the competitive relationship between the parties, the market structure and the parties' market power.
- Fourthly, by concentrating on the form of the agreement the TTBE extends the benefit of the block exemption to situations which cannot always be presumed to fulfil the conditions of the Treaty's exception for anti-competitive agerements, either because the contracting parties are competitors or because they hold a strong position on the market. For instance, the grant of an exclusive license can have serious foreclosure effects when an exclusive license is granted to a dominant producer which prevents other companies gaining access to technology that might foster their market entry.
Issues for discussion
The report invites comments on a number of issues:
- Should the scope of the TTBE which only applies to patents and know-how be widened to cover also copyright, design rights and trademarks? This issue is of particular importance for a number of sectors including the software industry, which depends upon a chain of copyright licences for manufacture and distribution.
- Should the TTBE also cover licensing agreements between more than two companies such as licensing pools? Such arrangements have become increasingly important for industry, given the growing complexity of new technologies.
- Should there be a more lenient approach to licensing agreements between non-competitors? It is generally acknowledged that if the parties to an agreement are in a vertical relationship, i.e. are not competitors, exclusive licences are generally efficiency enhancing and pro-competitive. For instance, if the IPR holder does not have the assets for the production or distribution of the licensed products, it is more efficient to license to someone who does have these assets. The exclusivity may be necessary to protect the licensee against free riding on his investments or to create the necessary incentives for both parties to invest in further improvements.
- Should there be a more prudent approach to licensing agreements between competitors? Agreements between competitors may give rise to a number of competition concerns if the licence prevents competition that could have taken place between the licensor and the licensee absent the licence. On the one hand, exclusive licences will often lead to market sharing through the allocation of territories or customers, especially when the licence is reciprocal or the exclusivity extends also into non-licensed competing products. Production quotas agreed in licensing agreements between competitors may easily lead to a straightforward output restriction. On the other hand, under certain conditions, in particular in the case of licensing to a joint venture and in case of non-reciprocal licensing, the exclusivity may not only lead to a loss of inter-brand competition but also to efficiencies. To assess whether the negative effects on competition may be outweighed by the efficiencies, the market power of the parties and the structure of the markets affected by the agreement need to be taken into account.
Comments on the report have to be sent to the Commission by 26 April 2002.
Comments can be e-mailed to [email protected]