A.

This notice is issued pursuant to the rules of the Agreement on the European Economic Area (‘EEA Agreement’) and the Agreement between the EFTA states on the establishment of a Surveillance Authority and a Court of Justice (‘Surveillance and Court Agreement’).

B.

The European Commission (‘Commission’) has issued a notice entitled ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ (1). That non-binding act sets out the principles which the Commission follows for the assessment of technology transfer agreements under Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’).

C.

The EFTA Surveillance Authority (‘Authority’) considers the Commission guidelines to be EEA relevant. In order to maintain equal conditions of competition and to ensure uniform application of the EEA competition rules throughout the European Economic Area (‘EEA’), the Authority has adopted the present notice under the powers conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. It intends to follow the principles and rules laid down in this notice when applying the relevant EEA rules in a particular case.

D.

In particular, this notice sets out the principles for the assessment of technology transfer agreements under Article 53 of the EEA Agreement and provides guidance on their application.

E.

This notice applies to cases where the Authority is the competent surveillance authority under Article 56 of the EEA Agreement.

F.

This notice replaces the Authority's previous notice of 2005 on the application of Article 53 of the EEA Agreement to technology transfer agreements (2).

1.

2.

2.1.

2.2.

2.3.

2.4.

3.

3.1.

3.2.

3.2.1.

3.2.2.

3.2.3.

3.2.4.

3.2.5.

3.2.6.

3.2.6.1.

3.2.6.2.

3.3.

3.4.

3.4.1.

3.4.2.

3.4.3.

3.5.

3.6.

3.6.1.

3.6.2.

4.

4.1.

4.1.1.

4.1.2.

4.1.3.

4.2.

4.2.1.

4.2.2.

4.2.2.1.

4.2.2.2.

4.2.3.

4.2.4.

4.2.5.

4.2.6.

4.2.7.

4.3.

4.4.

4.4.1.

4.4.2.

(1)

These guidelines set out the principles for the assessment of technology transfer agreements under Article 53 of the EEA Agreement (‘Article 53’). Technology transfer agreements concern the licensing of technology rights where the licensor permits the licensee to exploit the licensed technology rights for the production of goods or services, as defined in Article 1(1)(c) of the act referred to in point 5 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements (‘TTBER’)) (3).

(2)

The purpose of these guidelines is to provide guidance on the application of the TTBER as well as on the application of Article 53 to technology transfer agreements that fall outside the scope of the TTBER. The TTBER and the guidelines are without prejudice to the possible parallel application of Article 54 of the EEA Agreement (‘Article 54’) to technology transfer agreements (4).

(3)

The standards set forth in these guidelines must be applied in the light of the circumstances specific to each case. This excludes a mechanical application. Each case must be assessed on its own facts and these guidelines must be applied reasonably and flexibly. Examples given serve as illustrations only and are not intended to be exhaustive. The Authority will keep under review the functioning of the TTBER and the guidelines in the enforcement system created by Chapter II of Protocol 4 to the Surveillance and Court Agreement (‘Protocol 4’) (5) to consider whether changes need to be made.

(4)

These guidelines are without prejudice to the interpretation of Article 53 and the TTBER that may be given by the EFTA Court, the Court of Justice and the General Court.

(5)

The aim of Article 53 as a whole is to protect competition on the market with a view to promoting consumer welfare and an efficient allocation of resources. Article 53(1) prohibits all agreements and concerted practices between undertakings and decisions by associations of undertakings (6) which may affect trade between Contracting Parties (‘EEA States’) (7) and which have as their object or effect the prevention, restriction or distortion of competition (8). As an exception to this rule Article 53(3) provides that the prohibition contained in Article 53(1) may be declared inapplicable in the case of agreements between undertakings which contribute to improving the production or distribution of products or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits and which do not impose restrictions which are not indispensable to the attainment of these objectives and do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products concerned.

(6)

Intellectual property laws confer exclusive rights on holders of patents, copyright, design rights, trademarks and other legally protected rights. The owner of intellectual property is entitled under intellectual property laws to prevent unauthorised use of its intellectual property and to exploit it, for example, by licensing it to third parties. Once a product incorporating an intellectual property right, with the exception of performance rights (9), has been put on the market inside the EEA by the holder or with its consent, the intellectual property right is exhausted in the whole territory of the EEA including the EFTA states in the sense that the holder can no longer use it to control the sale of the product (principle of EEA exhaustion) (10). The right-holder has no right under intellectual property laws to prevent sales by licensees or buyers of such products incorporating the licensed technology. The principle of EEA exhaustion is in line with the essential function of intellectual property rights, which is to grant the holder the right to exclude others from exploiting its intellectual property without its consent.

(7)

The fact that intellectual property laws grant exclusive rights of exploitation does not imply that intellectual property rights are immune from competition law intervention. Article 53 is in particular applicable to agreements whereby the holder licenses another undertaking to exploit its intellectual property rights (11). Nor does it imply that there is an inherent conflict between intellectual property rights and the EEA competition rules. Indeed, both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources. Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition by putting pressure on undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.

(8)

In the assessment of licence agreements under Article 53 it must be kept in mind that the creation of intellectual property rights often entails substantial investment and that this is often a risky endeavour. In order not to reduce dynamic competition and to maintain the incentive to innovate, the innovator must not be unduly restricted in the exploitation of intellectual property rights that turn out to be valuable. For these reasons the innovator should be free to seek appropriate remuneration for successful projects that is sufficient to maintain investment incentives, taking failed projects into account. Technology rights licensing may also require the licensee to make significant sunk investments (that is to say, that upon leaving that particular field of activity the investment cannot be used by the licensee for other activities or sold other than at a significant loss) in the licensed technology and production assets necessary to exploit it. Article 53 cannot be applied without considering such ex ante investments made by the parties and the risks relating thereto. The risk facing the parties and the sunk investment that must be committed may thus lead to the agreement falling outside Article 53(1) or fulfilling the conditions of Article 53(3), as the case may be, for the period of time required to recoup the investment.

(9)

In assessing licensing agreements under Article 53, the existing analytical framework is sufficiently flexible to take due account of the dynamic aspects of technology rights licensing. There is no presumption that intellectual property rights and licence agreements as such give rise to competition concerns. Most licence agreements do not restrict competition and create pro-competitive efficiencies. Indeed, licensing as such is pro-competitive as it leads to dissemination of technology and promotes innovation by the licensor and licensee(s). In addition, even licence agreements that do restrict competition may often give rise to pro-competitive efficiencies, which must be considered under Article 53(3) and balanced against the negative effects on competition (12). The great majority of licence agreements are therefore compatible with Article 53.

(10)

Article 53(1) prohibits agreements which have as their object or effect the restriction of competition. Article 53(1) applies both to restrictions of competition between the parties to an agreement and to restrictions of competition between any of the parties and third parties.

(11)

The assessment of whether a licence agreement restricts competition must be made within the actual context in which competition would occur in the absence of the agreement with its alleged restrictions (13). In making this assessment it is necessary to take account of the likely impact of the agreement on inter-technology competition (that is to say, competition between undertakings using competing technologies) and on intra-technology competition (that is to say, competition between undertakings using the same technology) (14). Article 53(1) prohibits restrictions of both inter-technology competition and intra-technology competition. It is therefore necessary to assess to what extent the agreement affects or is likely to affect these two aspects of competition on the market.

(12)

The following two questions provide a useful framework for making this assessment. The first question relates to the impact of the agreement on inter-technology competition while the second question relates to the impact of the agreement on intra-technology competition. As restrictions may be capable of affecting both inter-technology competition and intra-technology competition at the same time, it may be necessary to analyse a restriction in the light of the two questions in points (a) and (b) before it can be concluded whether or not competition within the meaning of Article 53(1) is restricted:

(13)

The fact that Article 53(1) distinguishes between those agreements that have a restriction of competition as their object and those agreements that have a restriction of competition as their effect should be taken into account in the application of the analytical framework set out in point (12) of these guidelines. An agreement or contractual restraint is only prohibited by Article 53(1) if its object or effect is to restrict inter-technology competition and/or intra-technology competition.

(14)

Restrictions of competition by object are those that by their very nature restrict competition. These are restrictions which in the light of the objectives pursued by the EEA competition rules have such a high potential for negative effects on competition that it is not necessary for the purposes of applying Article 53(1) to demonstrate any effects on the market (17). Moreover, the conditions of Article 53(3) are unlikely to be fulfilled in the case of restrictions by object. The assessment of whether or not an agreement has as its object a restriction of competition is based on a number of factors. These factors include, in particular, the content of the agreement and the objective aims pursued by it. It may also be necessary to consider the context in which it is (to be) applied or the actual conduct and behaviour of the parties on the market (18). In other words, an examination of the facts underlying the agreement and the specific circumstances in which it operates may be required before it can be concluded whether a particular restriction constitutes a restriction by object of competition. The way in which an agreement is actually implemented may reveal a restriction by object even where the formal agreement does not contain an express provision to that effect. Evidence of subjective intent on the part of the parties to restrict competition is a relevant factor but not a necessary condition. An agreement may be regarded as having a restrictive object even if it does not have the restriction of competition as its sole aim but also pursues other legitimate objectives (19). For licence agreements, the Authority considers that the restrictions covered by the list of hardcore restrictions of competition set out in Article 4 of the TTBER are restrictive by their very object (20).

(15)

If an agreement is not restrictive of competition by object it is necessary to examine whether it has restrictive effects on competition. Account must be taken of both actual and potential effects (21). In other words the agreement must have likely anti-competitive effects. For licence agreements to be restrictive of competition by effect they must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation or the variety or quality of goods and services can be expected with a reasonable degree of probability. The likely negative effects on competition must be appreciable (22). Appreciable anti-competitive effects are likely to occur when at least one of the parties has or obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power. Market power is the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a not insignificant period of time (23). The degree of market power normally required for a finding of an infringement under Article 53(1) is less than the degree of market power required for a finding of dominance under Article 54 (24).

(16)

For the purposes of analysing restrictions of competition by effect it is normally necessary to define the relevant market and to examine and assess, in particular, the nature of the products and technologies concerned, the market position of the parties, the market position of competitors, the market position of buyers, the existence of potential competitors and the level of entry barriers. In some cases, however, it may be possible to show anti-competitive effects directly by analysing the conduct of the parties to the agreement on the market. It may for example be possible to ascertain that an agreement has led to price increases.

(17)

However, licence agreements may also have substantial pro-competitive potential and the vast majority of those agreements are indeed pro-competitive. Licence agreements may promote innovation by allowing innovators to earn returns to cover at least part of their research and development costs. Licence agreements also lead to a dissemination of technologies, which may create value by reducing the production costs of the licensee or by enabling it to produce new or improved products. Efficiencies at the level of the licensee often stem from a combination of the licensor's technology with the assets and technologies of the licensee. Such integration of complementary assets and technologies may lead to a cost/output configuration that would not otherwise be possible. For instance, the combination of an improved technology of the licensor with more efficient production or distribution assets of the licensee may reduce production costs or lead to the production of a higher quality product. Licensing may also serve the pro-competitive purpose of removing obstacles to the development and exploitation of the licensee's own technology. In particular in sectors where large numbers of patents are prevalent licensing often occurs in order to create design freedom by removing the risk of infringement claims by the licensor. When the licensor agrees not to invoke its intellectual property rights to prevent the sale of the licensee's products, the agreement removes an obstacle to the sale of the licensee's product and thus generally promotes competition.

(18)

In cases where a licence agreement is caught by Article 53(1) the pro-competitive effects of the agreement must be balanced against its restrictive effects in the context of Article 53(3). When all four conditions of Article 53(3) are satisfied, the restrictive licence agreement in question is valid and enforceable, with no prior decision to that effect being required (25). Hardcore restrictions are unlikely to fulfil the conditions of Article 53(3). Such agreements generally fail (at least) one of the first two conditions of Article 53(3). In general they do not create objective economic benefits or benefits for consumers. Moreover, these types of agreements generally fail the indispensability test (under the third condition). For example, if the parties fix the price at which the products produced under the licence must be sold, this will in principle lead to a lower output and a misallocation of resources and higher prices for consumers. The price restriction is also not indispensable to achieve the possible efficiencies resulting from the availability to both competitors of the two technologies.

(19)

The EFTA Surveillance Authority's approach to defining the relevant market is laid down in its notice on the definition of the relevant market for the purposes of EEA competition law (26). These guidelines only address aspects of market definition that are of particular importance in the field of technology rights licensing.

(20)

Technology is an input, which is integrated either into a product or a production process. Technology rights licensing can therefore affect competition both upstream in input markets and downstream in output markets. For instance, an agreement between two parties which sell competing products downstream and which also cross-license technology rights relating to the production of these products upstream may restrict competition on the downstream goods or services market concerned. The cross-licensing may also restrict competition on the upstream market for technology and possibly also on other upstream input markets. For the purposes of assessing the competitive effects of licence agreements it may therefore be necessary to define the relevant product market(s) as well as the relevant technology market(s) (27).

(21)

The relevant product market comprises the contract products (incorporating the licensed technology) and products which are regarded by the buyers as interchangeable with or substitutable for the contract products, by reason of the products' characteristics, their prices and their intended use. Contract products can be part of a final and/or an intermediate product market.

(22)

The relevant technology markets consist of the licensed technology rights and its substitutes, that is to say, other technologies which are regarded by the licensees as interchangeable with or substitutable for the licensed technology rights, by reason of the technologies' characteristics, their royalties and their intended use. Starting from the technology which is marketed by the licensor, it is necessary to identify those other technologies to which licensees could switch in response to a small but permanent increase in relative prices, that is to say, to the royalties. An alternative approach is to look at the market for products incorporating the licensed technology rights (cf. point (25) below).

(23)

The term ‘relevant market’ used in Article 3 of the TTBER and defined in Article 1(1)(m) refers to the relevant product market and the relevant technology market in both their product and geographic dimension.

(24)

The ‘relevant geographic market’ is defined in Article 1(1)(l) of the TTBER and comprises the area in which the undertakings concerned are involved in the supply of and demand for products or the licensing of technology, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas The geographic market of the relevant technology market(s) can differ from the geographic market of the relevant product market(s).

(25)

Once relevant markets have been defined, market shares can be assigned to the various sources of competition in the market and used as an indication of the relative strength of market players. In the case of technology markets, one way to proceed is to calculate market shares on the basis of each technology's share of total licensing income from royalties, representing a technology's share of the market where competing technologies are licensed. However, this may often be a merely theoretical and not a practical way to proceed because of lack of clear information on royalties. Another approach, which is the one used for calculating the safe harbour, as explained in Article 8(d) of the TTBER, is to calculate market shares on the technology market on the basis of sales of products incorporating the licensed technology on downstream product markets (see for more details point (86) ff.). In individual cases outside the safe harbour of the TTBER it may be necessary, where practically possible, to apply both of the described approaches in order to assess the market strength of the licensor more accurately and to take into account other available factors which give a good indication of the relative strength of the available technologies (see for more factors points (157) and (159) ff.) (28).

(26)

Some licence agreements may affect competition in innovation. In analysing such effects, however, the Authority will normally confine itself to examining the impact of the agreement on competition within existing product and technology markets (29). Competition on such markets may be affected by agreements that delay the introduction of improved products or new products that over time will replace existing products. In such cases innovation is a source of potential competition which must be taken into account when assessing the impact of the agreement on product markets and technology markets. In a limited number of cases, however, it may be useful and necessary to also analyse the effects on competition in innovation separately. This is particularly the case where the agreement affects innovation aiming at creating new products and where it is possible at an early stage to identify research and development poles (30). In such cases it can be analysed whether after the agreement there will be a sufficient number of competing research and development poles left for effective competition in innovation to be maintained.

(27)

In general, agreements between competitors pose a greater risk to competition than agreements between non-competitors. However, competition between undertakings that use the same technology (intra-technology competition between licensees) constitutes an important complement to competition between undertakings that use competing technologies (inter-technology competition). For instance, intra-technology competition may lead to lower prices for the products incorporating the technology in question, which may not only produce direct and immediate benefits for consumers of these products, but also spur further competition between undertakings that use competing technologies. In the context of licensing the fact that licensees are selling their own product must also be taken into account. They are not re-selling a product supplied by another undertaking. There may thus be greater scope for product differentiation and quality-based competition between licensees than in the case of vertical agreements for the resale of products.

(28)

In order to determine the competitive relationship between the parties it is necessary to examine whether the parties would have been actual or potential competitors in the absence of the agreement. If without the agreement the parties would not have been actual or potential competitors in any relevant market affected by the agreement they are deemed to be non-competitors.

(29)

In principle, the parties to an agreement are not considered competitors if they are in a one-way or two-way blocking position. A one-way blocking position exists where a technology right cannot be exploited without infringing upon another valid technology right, or where one party cannot be active in a commercially viable way on the relevant market without infringing the other party's valid technology right. This is, for instance, the case where one technology right covers an improvement of another technology right and the improvement cannot be legally used without a licence of the basic technology right. A two-way blocking position exists where neither technology right can be exploited without infringing upon the other valid technology right or where neither party can be active in a commercially viable way on the relevant market without infringing the other party's valid technology right and where the parties thus need to obtain a licence or a waiver from each other (31). However, in practice there will be cases where there is no certainty whether a particular technology right is valid and infringed.

(30)

The parties are actual competitors on the product market if prior to the agreement both are already active on the same relevant product market. The fact that both parties are already active on the same relevant product market, without having entered into a licensing arrangement, is a strong indicator that the parties are not blocking each other. In such a scenario, the parties can be presumed to be actual competitors, until a blocking position is proven (in particular by a final court judgment).

(31)

The licensee can be considered a potential competitor on the product market if it is likely that, in the absence of the agreement, it would undertake the necessary additional investments to enter the relevant market in response to a small but permanent increase in product prices. Likely entry should be assessed on realistic grounds, that is to say based on the facts of the case at hand. Entry is more likely if the licensee possesses assets that can easily be used to enter the market without incurring significant sunk costs or if it has already developed plans, or started to invest otherwise, to enter the market. There have to be real concrete possibilities for the licensee to enter the relevant market and compete with established undertakings (32). Accordingly, the licensee cannot be described as a potential competitor if its entry into a market is not an economically viable strategy (33).

(32)

In the specific context of intellectual property rights, an additional factor for assessing whether the parties are potential competitors on a particular market is the possibility that their intellectual property rights are in a blocking position, that is to say that the licensee cannot enter the respective market without infringing the intellectual property rights of the other party.

(33)

In the absence of certainty in the form of a final court decision that a blocking position exists and therefore of certainty on this point, the parties, when addressing the question whether they are potential competitors, will have to base themselves on all the available evidence at the time, including the possibility that intellectual property rights are infringed and whether there are, in a specific case, effective possibilities to work around existing intellectual property rights. Substantial investments already made or advanced plans to enter a particular market, can support the view that the parties are at least potential competitors, even if a blocking position cannot be excluded. Particularly convincing evidence of the existence of a blocking position may be required where the parties have a common interest in claiming the existence of a blocking position in order to be qualified as non-competitors, for instance where the alleged blocking position concerns technologies that are technological substitutes (see point (22) above) or if there is a significant financial inducement from the licensor to the licensee.

(34)

In order to constitute a realistic competitive constraint entry has to be likely to occur within a short period (34). Normally a period of one to two years is appropriate. However, in individual cases longer periods can be taken into account. The period of time needed for undertakings already on the market to adjust their capacities can be used as a yardstick to determine this period. For instance, the parties are likely to be considered potential competitors on the product market where the licensee produces on the basis of its own technology in one geographic market and starts producing in another geographic market on the basis of a licensed competing technology. In such circumstances, it is likely that the licensee would have been able to enter the second geographic market on the basis of its own technology, unless such entry is precluded by objective factors, including the existence of blocking intellectual property rights.

(35)

The parties are actual competitors on the technology market if they are either already both licensing out substitutable technology, or the licensee is already licensing out its technology and the licensor enters the technology market by granting a licence for a competing technology to the licensee.

(36)

The parties are considered to be potential competitors on the technology market if they own substitutable technologies and the licensee is not licensing-out its own technology, provided that it would be likely to do so in the event of a small but permanent increase in technology prices. In the case of technology markets, it is generally more difficult to assess whether the parties are potential competitors. This is why, for the application of the TTBER, potential competition on the technology market is not taken into account (see point (83) below) and the parties are treated as non-competitors.

(37)

In some cases it may also be possible to conclude that while the licensor and the licensee produce competing products, they are non-competitors on the relevant product market and the relevant technology market because the licensed technology represents such a drastic innovation that the technology of the licensee has become obsolete or uncompetitive. In such cases the licensor's technology either creates a new market or excludes the licensee's technology from the existing market. It is, however, often not possible to come to this conclusion at the time the agreement is concluded. It is usually only when the technology or the products incorporating it have been available to consumers for some time that it becomes apparent that the older technology has become obsolete or uncompetitive. For instance, when CD technology was developed and players and discs were put on the market, it was not obvious that this new technology would replace LP technology. This only became apparent some years later. The parties will therefore be considered to be competitors if at the time of the conclusion of the agreement it is not obvious that the licensee's technology is obsolete or uncompetitive. However, given that both Articles 53(1) and Article 53(3) must be applied in the light of the actual context in which the agreement occurs, the assessment is sensitive to material changes in the facts. The classification of the relationship between the parties will therefore change into a relationship of non-competitors, if at a later point in time the licensee's technology becomes obsolete or uncompetitive on the market.

(38)

In some cases the parties may become competitors subsequent to the conclusion of the agreement because the licensee develops or acquires and starts exploiting a competing technology. In such cases the fact that the parties were non-competitors at the time of conclusion of the agreement and that the agreement was concluded in that context must be taken into account. The Authority will therefore mainly focus on the impact of the agreement on the licensee's ability to exploit its own (competing) technology. In particular, the list of hardcore restrictions applying to agreements between competitors will not be applied to such agreements unless the agreement is subsequently amended in any material respect after the parties have become competitors (see Article 4(3) of the TTBER).

(39)

The undertakings party to an agreement may also become competitors subsequent to the conclusion of the agreement where the licensee was already active on the relevant market where the contract product is sold prior to the licence and where the licensor subsequently enters the relevant market either on the basis of the licensed technology rights or a new technology. In this case also the hardcore list relevant for agreements between non-competitors will continue to apply to the agreement unless the agreement is subsequently amended in any material respect (see Article 4(3) of the TTBER). A material amendment includes the conclusion of a new technology transfer agreement between the parties concerning competing technology rights which can be used for the production of products competing with the contract products.

(40)

Categories of technology transfer agreements that fulfil the conditions set out in the TTBER are exempted from the prohibition rule contained in Article 53(1). Block-exempted agreements are legally valid and enforceable. Such agreements can only be prohibited for the future and only upon withdrawal of the block exemption by the Authority and the competition authorities of the EFTA states. Block-exempted agreements cannot be prohibited under Article 53 by national courts in the context of private litigation.

(41)

Block exemption of categories of technology transfer agreements is based on the presumption that — to the extent that they are caught by Article 53(1) — those agreements fulfil the four conditions laid down in Article 53(3). It is thus presumed that the agreements give rise to economic efficiencies, that the restrictions contained in the agreements are indispensable to the attainment of these efficiencies, that consumers within the affected markets receive a fair share of the efficiency gains and that the agreements do not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question. The market share thresholds (Article 3), the hardcore list (Article 4) and the excluded restrictions (Article 5) set out in the TTBER aim at ensuring that only restrictive agreements that can reasonably be presumed to fulfil the four conditions of Article 53(3) are block-exempted.

(42)

As set out in Section 4 of these guidelines, many licence agreements fall outside Article 53(1), either because they do not restrict competition at all or because the restriction of competition is not appreciable (35). To the extent that such agreements would anyhow fall within the scope of the TTBER, there is no need to determine whether they are caught by Article 53(1) (36).

(43)

Outside the scope of the block exemption it is relevant to examine whether in the individual case the agreement is caught by Article 53(1) and if so, whether the conditions of Article 53(3) are satisfied. There is no presumption that technology transfer agreements falling outside the block exemption are caught by Article 53(1) or fail to satisfy the conditions of Article 53(3). In particular, the mere fact that the market shares of the parties exceed the market share thresholds set out in Article 3 of the TTBER is not a sufficient basis for finding that the agreement is caught by Article 53(1). Individual assessment of the likely effects of the agreement is required. It is only where agreements contain hardcore restrictions of competition, that it can normally be presumed that they are prohibited by Article 53.

(44)

The TTBER and these guidelines cover agreements for the transfer of technology. According to Article 1(1)(b) of the TTBER the concept of ‘technology rights’ covers know-how as well as patents, utility models, design rights, topographies of semiconductor products, supplementary protection certificates for medicinal products or other products for which such supplementary protection certificates may be obtained, plant breeder's certificates and software copyrights or a combination thereof as well as applications for these rights and for registration of these rights. The licensed technology rights should allow the licensee, with or without other input, to produce the contract products. The TTBER only applies in EEA States where the licensor holds relevant technology rights. Otherwise, there are no technology rights to be transferred within the meaning of the TTBER.

(45)

Know-how is defined in Article 1(1)(i) of the TTBER as a package of practical information, resulting from experience and testing, which is secret, substantial and identified:

(46)

Provisions in technology transfer agreements relating to the purchase of products by the licensee are only covered by the TTBER if, and to the extent that, those provisions are directly related to the production or sale of the contract products. Therefore the TTBER does not apply to those parts of a technology transfer agreement relating to input and/or equipment that are used for other purposes than the production of the contract products. For instance, where milk is sold together with licensing of technology to produce cheese, only the milk used for the production of cheese with the licensed technology will be covered by the TTBER.

(47)

Provisions in technology transfer agreements relating to the licensing of other types of intellectual property such as trademarks and copyright, other than software copyright (on software copyright see points (44) and (62)), are only covered by the TTBER if, and to the extent that, they are directly related to the production or sale of the contract products. This condition ensures that provisions covering other types of intellectual property rights are block-exempted to the extent that these other intellectual property rights serve to enable the licensee to better exploit the licensed technology rights. For instance, where a licensor authorises a licensee to use its trademark on the products incorporating the licensed technology, this trademark licence may allow the licensee to better exploit the licensed technology by allowing consumers to make an immediate link between the product and the characteristics imputed to it by the licensed technology rights. An obligation on the licensee to use the licensor's trademark may also promote the dissemination of technology by allowing the licensor to identify itself as the source of the underlying technology. The TTBER covers technology transfer agreements in this scenario even if the principal interest of the parties lies in the exploitation of the trademark rather than the technology (37).

(48)

The TTBER does not cover licensing of copyright other than software copyright (except for the situation set out in point (47)). The Authority will, however, as a general rule apply the principles set out in the TTBER and these guidelines when assessing licensing of copyright for the production of contract products under Article 53.

(49)

On the other hand, the licensing of rental rights and public performance rights protected by copyright, in particular for films or music, is considered to raise particular issues and it may not be warranted to assess such licensing on the basis of the principles developed in these guidelines. In the application of Article 53 the specificities of the work and the way in which it is exploited must be taken into account (38). The Authority will therefore not apply the TTBER and the present guidelines by way of analogy to the licensing of these other rights.

(50)

The Authority will also not extend the principles developed in the TTBER and these guidelines to trademark licensing (except for the situation set out in point (47)). Trademark licensing often occurs in the context of distribution and resale of goods and services and is generally more akin to distribution agreements than technology licensing. Where a trademark licence is directly related to the use, sale or resale of goods and services and does not constitute the primary object of the agreement, the licence agreement is covered by the act referred to in point 2 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (‘Vertical Block Exemption Regulation’)) (39).

(51)

The concept of ‘transfer’ implies that technology must flow from one undertaking to another. Such transfers normally take the form of licensing whereby the licensor grants the licensee the right to use its technology rights against payment of royalties.

(52)

As set out in Article 1(1)(c) of the TTBER, assignments where part of the risk associated with the exploitation of the technology rights remains with the assignor are also deemed to be technology transfer agreements. In particular, this is the case where the sum payable in consideration of the assignment is dependent on the turnover obtained by the assignee in respect of products produced with the assigned technology, the quantity of such products produced or the number of operations carried out employing the technology.

(53)

An agreement whereby the licensor commits not to exercise its technology rights against the licensee can also be seen as a transfer of technology rights. Indeed, the essence of a pure patent licence is the right to operate inside the scope of the exclusive right of the patent. It follows that the TTBER also covers so-called non-assertion agreements and settlement agreements whereby the licensor permits the licensee to produce within the scope of the patent (40).

(54)

According to Article 1(1)(c) of the TTBER, the Regulation only covers technology transfer agreements ‘between two undertakings’. Technology transfer agreements between more than two undertakings are not covered by the TTBER. The decisive factor in terms of distinguishing between agreements between two undertakings and multiparty agreements is whether the agreement in question is concluded between more than two undertakings.

(55)

Agreements concluded by two undertakings fall within the scope of the TTBER even if the agreement stipulates conditions for more than one level of trade. For instance, the TTBER applies to a licence agreement concerning not only the production stage but also the distribution stage, stipulating the obligations that the licensee must or may impose on resellers of the products produced under the licence (41).

(56)

Agreements establishing technology pools and licensing out from technology pools are generally multiparty agreements and are therefore not covered by the TTBER (42). The notion of technology pools covers agreements whereby two or more parties agree to pool their respective technologies and license them as a package. The notion of technology pools also covers arrangements whereby two or more undertakings agree to license a third party and authorise it to license-on the package of technologies.

(57)

Licence agreements concluded between more than two undertakings often give rise to the same issues as licence agreements of the same nature concluded between two undertakings. In its individual assessment of licence agreements which are of the same nature as those covered by the block exemption but which are concluded between more than two undertakings, the Authority will apply by analogy the principles set out in the TTBER. However, technology pools and licensing out from technology pools are specifically dealt with in Section 4.4.

(58)

It follows from Article 1(1)(c) of the TTBER that for licence agreements to be covered by it they must be entered into ‘for the purpose of the production of contract products’, that is to say, products incorporating or produced with the licensed technology rights. The licence must permit the licensee and/or its sub-contractor(s) to exploit the licensed technology for the purpose of producing goods or services (see also recital 7 in the preamble of the TTBER).

(59)

Where the purpose of the agreement is not the production of contract products but, for instance, merely to block the development of a competing technology, the licence agreement is not covered by the TTBER and these guidelines may also not be appropriate for the agreement's assessment. More generally, if the parties refrain from exploiting the licensed technology rights, no efficiency enhancing activity takes place, in which case the very rationale of the block exemption is absent. However, exploitation does not need to take the form of an integration of assets. Exploitation also occurs where the licence creates design freedom for the licensee by allowing it to exploit its own technology without facing the risk of infringement claims by the licensor. In the case of licensing between competitors, the fact that the parties do not exploit the licensed technology may be an indication that the arrangement is a disguised cartel. For these reasons the Authority will examine cases of non-exploitation very closely.

(60)

The TTBER applies to licence agreements for the purpose of the production of contract products by the licensee and/or its subcontractor(s). Therefore, the TTBER does not apply to (those parts of) technology transfer agreements that allow for sublicensing. However, the Authority will apply by analogy the principles set out in the TTBER and these guidelines to ‘master licensing’ agreements between licensor and licensee (that is to say an agreement whereby the licensor allows the licensee to sublicense the technology). Agreements between the licensee and sublicensees for the production of contract products are covered by the TTBER.

(61)

The term ‘contract products’ encompasses goods and services produced with the licensed technology rights. This is the case both where the licensed technology is used in the production process and where it is incorporated into the product itself. In these guidelines the term ‘products incorporating the licensed technology’ covers both situations. The TTBER applies in all cases where technology rights are licensed for the purposes of producing goods and services. The framework of the TTBER and these guidelines is based on the premise that there is a direct link between the licensed technology rights and a contract product. In cases where no such link exists, that is to say where the purpose of the agreement is not to enable the production of a contract product, the analytical framework of the TTBER and these guidelines may not be appropriate.

(62)

The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be ‘production’ within the meaning of the TTBER and thus is not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by the Vertical Block Exemption Regulation (43) and the guidelines on vertical restraints (44). Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end-users. Nor do they cover the licensing of software copyright and distribution of software by means of ‘shrink wrap’ licences, that is, a set of conditions included in the package of the hard copy which the end-user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.

(63)

However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.

(64)

The TTBER covers ‘subcontracting’ whereby the licensor licenses technology rights to the licensee who undertakes to produce certain products on the basis thereof exclusively for the licensor. Subcontracting may also involve the supply of equipment by the licensor to be used in the production of the goods and services covered by the agreement. For the latter type of subcontracting to be covered by the TTBER as part of a technology transfer agreement, the supplied equipment must be directly related to the production of the contract products. Subcontracting is also covered by the Authority's notice concerning its assessment of certain subcontracting agreements in relation to Article 53(1) of the EEA Agreement (45). According to that notice, which remains applicable, subcontracting agreements whereby the subcontractor undertakes to produce certain products exclusively for the contractor generally fall outside Article 53(1). Subcontracting agreements whereby the contractor determines the transfer price of the intermediate contract product between subcontractors in a value chain of subcontracting generally also fall outside Article 53(1) provided the contract products are exclusively produced for the contractor. However, other restrictions imposed on the subcontractor such as the obligation not to conduct or exploit its own research and development may be caught by Article 53 (46).

(65)

The TTBER also applies to agreements whereby the licensee must carry out development work before obtaining a product or a process that is ready for commercial exploitation, provided that a contract product has been identified. Even if such further work and investment is required, the object of the agreement is the production of an identified contract product, that is to say, products produced with the licensed technology rights.

(66)

The TTBER and these guidelines do not cover agreements whereby technology rights are licensed for the purpose of enabling the licensee to carry out further research and development in various fields, including further developing a product arising out of such research and development (47). For instance, the TTBER and the guidelines do not cover the licensing of a technological research tool used in the process of further research activity. Nor do they cover research and development subcontracting whereby the licensee undertakes to carry out research and development in the field of the licensed technology and to hand back the improved technology package to the licensor (48). The main object of such agreements is the provision of research and development services aimed at improving the technology as opposed to the production of goods and services on the basis of the licensed technology.

(67)

Subject to the duration of the TTBER, which expires on 30 April 2026, the block exemption applies for as long as the licensed property right has not lapsed, expired or been declared invalid. In the case of know-how the block exemption applies as long as the licensed know-how remains secret, except where the know-how becomes publicly known as a result of action by the licensee, in which case the exemption applies for the duration of the agreement (see Article 2 of the TTBER).

(68)

The block exemption applies to each licensed technology right covered by the agreement and ceases to apply on the date of expiry, invalidity or the coming into the public domain of the last technology right within the meaning of the TTBER.

(69)

The TTBER covers agreements between two undertakings concerning the licensing of technology rights for the purpose of the production of contract products. However, technology rights can also be an element of other types of agreements. In addition, the products incorporating the licensed technology are subsequently sold on the market. It is therefore necessary to address the interface between the TTBER and the act referred to in point 6 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 1218/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of specialisation agreements (‘Specialisation Block Exemption Regulation’)) (49), the act referred to in point 7 of Annex XIV to the EEA Agreement (Commission Regulation (EU) No 1217/2010 of 14 December 2010 on the application of the Treaty on the Functioning of the European Union to certain categories of research and development agreements (‘Research and Development Block Exemption Regulation’)) (50) and the Vertical Block Exemption Regulation (51).

(70)

The TTBER does not apply to licensing in the context of specialisation agreements which are covered by the Specialisation Block Exemption Regulation or to licensing in the context of research and development agreements which are covered by the Research and Development Block Exemption Regulation(see recital 7 and Article 9 of the TTBER).

(71)

According to Article 1(1)(d) of the Specialisation Block Exemption Regulation, that Regulation covers, in particular, joint production agreements by virtue of which two or more parties agree to produce certain products jointly. The Regulation extends to provisions concerning the assignment or use of intellectual property rights, provided that they do not constitute the primary object of the agreement, but are directly related to and necessary for its implementation.

(72)

Where undertakings establish a production joint venture and license the joint venture to exploit technology, which is used in the production of the products produced by the joint venture, such licensing is subject to the Specialisation Block Exemption Regulation and not to the TTBER. Accordingly, licensing in the context of a production joint venture normally falls to be considered under the Specialisation Block Exemption Regulation. However, where the joint venture engages in licensing of the technology to third parties, the activity is not linked to production by the joint venture and therefore not covered by that Regulation. Such licensing arrangements, which bring together the technologies of the parties, constitute technology pools, which are dealt with in Section 4.4 of these guidelines.

(73)

The Research and Development Block Exemption Regulation covers agreements whereby two or more undertakings agree to jointly carry out research and development and to jointly exploit the results thereof. According to Article 1(1)(m) of that Regulation, research and development and the exploitation of the results are carried out jointly where the work involved is carried out by a joint team, organisation or undertakings, jointly entrusted to a third party or allocated between the parties by way of specialisation in research, development, production and distribution, including licensing. That Regulation also covers paid-for research and development agreements whereby two or more undertakings agree that the research and development is carried out by one party and financed by another party, with or without joint exploitation of the results thereof (see Article 1(1)(a)(vi) of the Research and Development Block Exemption Regulation).

(74)

It follows that the Research and Development Block Exemption Regulation covers licensing between the parties and by the parties to a joint entity in the context of a research and development agreement. Such licensing is subject only to the Research and Development Block Exemption Regulation and not to the TTBER. In the context of such agreements the parties can also determine the conditions for licensing the fruits of the research and development agreement to third parties. However, since third-party licensees are not party to the research and development agreement, the individual licence agreement concluded with third parties is not covered by the Research and Development Block Exemption Regulation. That licence agreement is covered by the block exemption in the TTBER if the conditions of it are fulfilled.

(75)

The Vertical Block Exemption Regulation covers agreements entered into between two or more undertakings each operating, for the purposes of the agreement, at different levels of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. It thus covers supply and distribution agreements (52).

(76)

Given that the TTBER only covers agreements between two parties and that a licensee, selling products incorporating the licensed technology, is a supplier for the purposes of the Vertical Block Exemption Regulation, those two block exemption regulations are closely related. The agreement between licensor and licensee is subject to the TTBER whereas agreements concluded between a licensee and buyers of the contract products are subject to the Vertical Block Exemption Regulation (53).

(77)

The TTBER also exempts agreements between the licensor and the licensee where the agreement imposes obligations on the licensee as to the way in which it must sell the products incorporating the licensed technology. In particular, the licensee can be obliged to establish a certain type of distribution system such as exclusive distribution or selective distribution. However, the distribution agreements concluded for the purposes of implementing such obligations must, in order to be covered by a block exemption, comply with the Vertical Block Exemption Regulation. For instance, the licensor can oblige the licensee to establish a system based on exclusive distribution in accordance with specified rules. However, it follows from Article 4(b) of the Vertical Block Exemption Regulation that generally distributors must be free to make passive sales into the territories of other exclusive distributors of the licensee.

(78)

Furthermore, under the Vertical Block Exemption Regulation distributors must in principle be free to sell both actively and passively into territories covered by the distribution systems of other suppliers, that is to say, other licensees producing their own products on the basis of the licensed technology rights. This is because for the purposes of the Vertical Block Exemption Regulation each licensee is a separate supplier. However, the reasons underlying the block exemption of active sales restrictions within a supplier's distribution system contained in that Regulation, may also apply where the products incorporating the licensed technology are sold by different licensees under a common brand belonging to the licensor. When the products incorporating the licensed technology are sold under a common brand identity there may be the same efficiency reasons for applying the same types of restraints between licensees' distribution systems as within a single vertical distribution system. In such cases the Authority would be unlikely to challenge restraints where by analogy the requirements of the Vertical Block Exemption Regulation are fulfilled. For a common brand identity to exist the products must be sold and marketed under a common brand, which is predominant in terms of conveying quality and other relevant information to the consumer. It does not suffice that in addition to the licensees' brands the product carries the licensor's brand, which identifies it as the source of the licensed technology.

(79)

According to Article 3 of the TTBER, the block exemption of restrictive agreements, or in other words the safe harbour of the TTBER, is subject to market share thresholds, confining the scope of the block exemption to agreements that although they may be restrictive of competition can generally be presumed to fulfil the conditions of Article 53(3). Outside the safe harbour created by the market share thresholds individual assessment is required. The fact that market shares exceed the thresholds does not give rise to any presumption either that the agreement is caught by Article 53(1) or that the agreement does not fulfil the conditions of Article 53(3). In the absence of hardcore restrictions as set out in Article 4 of the TTBER, market analysis is required.

(80)

The market share threshold to be applied for the purpose of the safe harbour of the TTBER depends on whether the agreement is concluded between competitors or non-competitors.

(81)

The market share thresholds apply both to the relevant market(s) of the licensed technology rights and the relevant market(s) of the contract products. If the applicable market share threshold is exceeded on one or several product and technology market(s), the block exemption does not apply to the agreement for that relevant market(s). For instance, if the licence agreement concerns two separate product markets, the block exemption may apply to one of the markets and not to the other.

(82)

According to Article 3(1) TTBER the safe harbour provided for in Article 2 TTBER applies to agreements between competitors on condition that the combined market share of the parties does not exceed 20 % on any relevant market. The market share threshold of Article 3(1) of the TTBER is applicable if the parties are actual competitors or potential competitors on the product market(s) and/or actual competitors on the technology market (for the distinction between competitors and non-competitors, see point (27) ff.).

(83)

Potential competition on the technology market is not taken into account for the application of the market share threshold or the hardcore list relating to agreements between competitors. Outside the safe harbour of the TTBER potential competition on the technology market is taken into account but does not lead to the application of the hardcore list relating to agreements between competitors.

(84)

Where the undertakings party to the licensing agreement are not competitors, the market share threshold of Article 3(2) of the TTBER applies. An agreement between non-competitors is covered if the market share of each party does not exceed 30 % on the affected relevant technology and product markets.

(85)

Where the parties become competitors within the meaning of Article 3(1) TTBER at a later point in time, for instance where the licensee was already present, before the licensing, on the relevant market where the contract products are sold and the licensor subsequently becomes an actual or potential supplier on the same relevant market, the 20 % market share threshold will apply from the point in time when they became competitors. However, in that case the hardcore list relevant for agreements between non-competitors will continue to apply to the agreement unless the agreement is subsequently amended in any material respect (see Article 4(3) of the TTBER and point (39) of these guidelines).

(86)

The calculation of market shares on the relevant markets where the technology rights are licensed, under the TTBER, deviates from the usual practice for the reasons explained in point (87) of these guidelines. In the case of technology markets, it follows from Article 8(d) of the TTBER that, both for the product and the geographic dimension of the relevant market, the licensor's market share is to be calculated on the basis of the sales of the licensor and all its licensees of products incorporating the licensed technology. Under this approach the combined sales of the licensor and its licensees of contract products are calculated as part of all sales of competing products, irrespective of whether these competing products are produced with a technology that is being licensed.

(87)

This approach of calculating the market share of the licensor on the technology market as its ‘footprint’ at the product level, has been chosen because of the practical difficulties in calculating a licensor's market share based on royalty income (see point (25) above). In addition to the general difficulty of obtaining reliable royalty income data, the actual royalty income may also seriously underestimate a technology's position on the market in the event that royalty payments are reduced as a result of cross-licensing or of the supply of tied products. Basing the licensor's market share on the technology market on the products produced with that technology as compared with products produced with competing technologies would not carry that risk. Such a footprint at the product level will in general reflect the market position of the technology well.

(88)

Ideally that footprint would be calculated by excluding from the product market the products produced with in-house technologies that are not licensed out, as those in-house technologies are only an indirect constraint on the licensed technology. However, as it may be difficult in practice for licensor and licensees to know whether other products in the same product market are produced with licensed or in-house technologies, the calculation of the technology market share, for the purposes of the TTBER, is based on the products produced with the licensed technology as part of all products sold in that product market. This approach based on the technology's footprint on the overall product market(s) can be expected to reduce the calculated market share by including products produced with in-house technologies, but will nonetheless in general provide a good indicator of the strength of the technology. First, it captures any potential competition from undertakings that are producing with their own technology and that are likely to start licensing in the event of a small but permanent increase in the price for licenses. Secondly, even where it is unlikely that other technology owners would start licensing, the licensor does not necessarily have market power on the technology market even if it has a high share of licensing income. If the downstream product market is competitive, competition at this level may effectively constrain the licensor. An increase in royalties upstream affects the costs of the licensee, which makes it less competitive and thereby may cause it to lose sales. A technology's market share on the product market also captures this element and is thus normally a good indicator of licensor market power on the technology market.

(89)

To estimate the strength of the technology, the geographic dimension of the technology market has also to be taken into account. This might sometimes differ from the geographic dimension of the respective downstream product market. For the purpose of applying the TTBER, the geographic dimension of the relevant technology market is also determined by the product market(s). However, outside the TTBER safe harbour it may be appropriate to also consider a possibly wider geographic area, in which the licensor and licensees of competing technologies are involved in the licensing of these technologies, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.

(90)

In the case of new technologies that did not generate any sales in the preceding calendar year, a zero market share is assigned. When sales commence the technology will start accumulating market share. If the market share rises subsequently above the relevant threshold of 20 % or 30 %, the safe harbour will continue to apply for a period of two consecutive calendar years following the year in which the threshold was exceeded (see Article 8(e) of the TTBER).

(91)

In the case of relevant markets where the contract products are sold, the licensee's market share is to be calculated on the basis of the licensee's sales of products incorporating the licensor's technology and competing products, that is to say, the total sales of the licensee on the product market in question. Where the licensor is also a supplier of products on the relevant market, the licensor's sales on the product market in question must also be taken into account. In the calculation of market shares for product markets, however, sales made by other licensees are not taken into account when calculating the licensee's and/or licensor's market share.

(92)

Market shares should be calculated on the basis of sales value data of the preceding year where such data are available. Such data normally provide a more accurate indication of the strength of a technology than volume data. However, where value based data are not available, estimates based on other reliable market information may be used, including market sales volume data.

(93)

The principles set out in Section 3.3 of these guidelines can be illustrated by the following examples:

(94)

Article 4 of the TTBER contains a list of hardcore restrictions of competition. The classification of a restraint as a hardcore restriction of competition is based on the nature of the restriction and experience showing that such restrictions are almost always anti-competitive. In line with the case-law of the Court of Justice and the General Court (54) such a restriction may result from the clear objective of the agreement or from the circumstances of the individual case (see point (14) above). Hardcore restrictions may be objectively necessary in exceptional cases for an agreement of a particular type or nature (55) and therefore fall outside Article 53(1) of the EEA Agreement. In addition, undertakings can always plead an efficiency defence under Article 53(3) in an individual case (56).

(95)

It follows from Article 4(1) and 4(2) of the TTBER that, when a technology transfer agreement contains a hardcore restriction of competition, the agreement as a whole falls outside the scope of the block exemption. For the purposes of the TTBER hardcore restrictions cannot be severed from the rest of the agreement. Moreover, the Authority considers that in the context of individual assessment it is unlikely that hardcore restrictions of competition fulfil the four conditions of Article 53(3) (see point (18) above).

(96)

Article 4 of the TTBER distinguishes between agreements between competitors and agreements between non-competitors.

(97)

Article 4(1) TTBER lists the hardcore restrictions for licensing between competitors. According to Article 4(1), the TTBER does not cover agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object any of the following:

(98)

For a number of hardcore restrictions the TTBER makes a distinction between reciprocal and non-reciprocal agreements. The hardcore list is stricter for reciprocal agreements than for non-reciprocal agreements between competitors. Reciprocal agreements are cross-licensing agreements where the licensed technologies are competing technologies or can be used for the production of competing products. A non-reciprocal agreement is an agreement where only one of the parties is licensing its technology rights to the other party or where, in the case of cross-licensing, the licensed technologies rights are not competing technologies and the rights licensed cannot be used for the production of competing products. An agreement is not reciprocal for the purposes of the TTBER merely because the agreement contains a grant-back obligation or because the licensee licenses back own improvements of the licensed technology. Where a non-reciprocal agreement subsequently becomes a reciprocal agreement due to the conclusion of a second licence between the same parties, those parties may have to revise the first licence in order to avoid the agreement containing a hardcore restriction. In the assessment of the individual case the Authority will take into account the time lapsed between the conclusion of the first and the second licence.

(99)

The hardcore restriction of competition contained in Article 4(1)(a) TTBER concerns agreements between competitors that have as their object the fixing of prices for products sold to third parties, including the products incorporating the licensed technology. Price fixing between competitors constitutes a restriction of competition by its very object. Price fixing can take the form of a direct agreement on the exact price to be charged or on a price list with certain allowed maximum rebates. It is immaterial whether the agreement concerns fixed, minimum, maximum or recommended prices. Price fixing can also be implemented indirectly by applying disincentives to deviate from an agreed price level, for example, by providing that the royalty rate will increase if product prices are reduced below a certain level. However, an obligation on the licensee to pay a certain minimum royalty does not in itself amount to price fixing.

(100)

When royalties are calculated on the basis of individual product sales, the amount of the royalty has a direct impact on the marginal cost of the product and thus a direct impact on product prices (57). Competitors can therefore use cross-licensing with reciprocal running royalties as a means of coordinating and/or increasing prices on downstream product markets (58). However, the Authority will only treat cross-licences with reciprocal running royalties as price fixing where the agreement is devoid of any pro-competitive purpose and therefore does not constitute a bona fide licensing arrangement. In such cases where the agreement does not create any value and therefore has no valid business justification, the arrangement is a sham and amounts to a cartel.

(101)

The hardcore restriction contained in Article 4(1)(a) TTBER also covers agreements whereby royalties are calculated on the basis of all product sales irrespective of whether the licensed technology is being used. Such agreements are also caught by Article 4(1)(d) according to which the licensee must not be restricted in its ability to use its own technology rights (see point (116) of these guidelines). In general such agreements restrict competition since the agreement raises the cost of using the licensee's own competing technology rights and restricts competition that existed in the absence of the agreement (59). This is so both in the case of reciprocal and non-reciprocal arrangements.

(102)

Exceptionally, however, an agreement whereby royalties are calculated on the basis of all product sales may fulfil the conditions of Article 53(3) in an individual case where on the basis of objective factors it can be concluded that the restriction is indispensable for pro-competitive licensing to occur. This may be the case where in the absence of the restraint it would be impossible or unduly difficult to calculate and monitor the royalty payable by the licensee, for instance because the licensor's technology leaves no visible trace on the final product and practicable alternative monitoring methods are unavailable.

(103)

The hardcore restriction of competition set out in Article 4(1)(b) TTBER concerns reciprocal output restrictions on the parties. An output restriction is a limitation on how much a party may produce and sell. Article 4(1)(b) does not apply to output limitations on the licensee in a non-reciprocal agreement or output limitations on one of the licensees in a reciprocal agreement provided that the output limitation only concerns products produced with the licensed technology. Article 4(1)(b) thus identifies as hardcore restrictions reciprocal output restrictions on the parties and output restrictions on the licensor in respect of its own technology. When competitors agree to impose reciprocal output limitations, the object and likely effect of the agreement is to reduce output in the market. The same is true of agreements that reduce the incentive of the parties to expand output, for example by applying reciprocal running royalties per unit which increase as output increases or by obliging each party to make payments if a certain level of output is exceeded.

(104)

The more favourable treatment of non-reciprocal quantity limitations is based on the consideration that a one-way restriction does not necessarily lead to a lower output on the market while the risk that the agreement is not a bona fide licensing arrangement is also lower when the restriction is non-reciprocal. When a licensee is willing to accept a one-way restriction, it is likely that the agreement leads to a real integration of complementary technologies or an efficiency enhancing integration of the licensor's superior technology with the licensee's productive assets. Similarly, in a reciprocal agreement an output restriction on only one of the licensees is likely to reflect the higher value of the technology licensed by one of the parties and may serve to promote pro-competitive licensing.

(105)

The hardcore restriction of competition set out in Article 4(1)(c) TTBER concerns the allocation of markets and customers. Agreements whereby competitors share markets and customers have as their object the restriction of competition. An agreement whereby competitors agree, in a reciprocal agreement, not to produce in certain territories or not to sell, both actively and passively or only actively, into certain territories or to certain customers reserved for the other party, is considered a hardcore restriction. Thus for instance reciprocal exclusive licensing between competitors is considered market sharing.

(106)

Article 4(1)(c) applies irrespective of whether the licensee remains free to use its own technology rights. Once the licensee has tooled up to use the licensor's technology to produce a given product, it may be costly to maintain a separate production line using another technology in order to serve customers covered by the restrictions. Moreover, given the anti-competitive potential of the restraints the licensee may have little incentive to produce under its own technology. Such restrictions are also highly unlikely to be indispensable for pro-competitive licensing to occur.

(107)

Under Article 4(1)(c)(i) it is not a hardcore restriction for the licensor in a non-reciprocal agreement to grant the licensee an exclusive licence to produce on the basis of the licensed technology in a particular territory and thus agree not to produce itself the contract products in or provide the contract products from that territory. Such exclusive licences are block-exempted irrespective of the scope of the territory. If the licence is worldwide, the exclusivity implies that the licensor will abstain from entering or remaining on the market. The block exemption also applies if in a non-reciprocal agreement the licensee is not allowed to produce in an exclusive territory reserved for the licensor. The purpose of such agreements may be to give the licensor and/or licensee an incentive to invest in and develop the licensed technology. The object of the agreement is therefore not necessarily to share markets.

(108)

According to Article 4(1)(c)(i) and for the same reason, the block exemption also applies to non-reciprocal agreements whereby the parties agree not to sell actively or passively into an exclusive territory or to an exclusive customer group reserved for the other party. For the application of the TTBER, the Authority interprets ‘active’ and ‘passive’ sales as defined in the guidelines on vertical restraints (60). Restrictions on licensee or licensor to sell actively and/or passively into the other party's territory or customer group are only block-exempted if that territory or customer group has been exclusively reserved to that other party. However, in some specific circumstances, agreements containing such sales restrictions may, in an individual case, also fulfil the conditions of Article 53(3) if the exclusivity is shared on an ad hoc basis, for instance if necessary to alleviate a temporary shortage in the production of the licensor or licensee to which the territory or customer group is exclusively allocated. In such cases, the licensor or licensee is still likely to be sufficiently protected against active and/or passive sales to have the incentive to license its technology or invest to work with the licensed technology. Such restraints, even where restrictive of competition, would promote pro-competitive dissemination and integration of that technology into the production assets of the licensee.

(109)

By implication the fact that the licensor appoints the licensee as its sole licensee in a particular territory, implying that third parties will not be licensed to produce on the basis of the licensor's technology in the territory in question, does not constitute a hardcore restriction either. In the case of such sole licences the block exemption applies irrespective of whether the agreement is reciprocal or not given that the agreement does not affect the ability of the parties to fully exploit their own technology rights in their respective territories.

(110)

Article 4(1)(c)(ii) excludes from the hardcore list, and thus block-exempts up to the market share threshold, restrictions in a non-reciprocal agreement on active sales by a licensee into the territory or to the customer group allocated by the licensor to another licensee. However, this presupposes that the protected licensee was not a competitor of the licensor when the agreement was concluded. It is not warranted to treat such restrictions in that situation as hardcore restrictions. By allowing the licensor to grant a licensee, who was not already on the market, protection against active sales by licensees which are competitors of the licensor and which for that reason were already established on the market, such restrictions are likely to induce the licensee to exploit the licensed technology more efficiently. On the other hand, if the licensees were to agree between themselves not to sell actively or passively into certain territories or to certain customer groups, the agreement would amount to a cartel amongst the licensees. Given that such an agreement does not involve any transfer of technology it would in addition fall outside the scope of the TTBER.

(111)

Article 4(1)(c)(iii) contains a further exception to the hardcore restriction of Article 4(1)(c), namely captive use restrictions, that is to say, requirements whereby the licensee may produce the products incorporating the licensed technology only for its own use. Where the contract product is a component the licensee can thus be obliged to produce that component only for incorporation into its own products and can be obliged not to sell the components to other producers. The licensee must be able, however, to sell the components as spare parts for its own products and must thus be able to supply third parties that perform after sale services on these products. Captive use restrictions may be necessary to encourage the dissemination of technology, particularly between competitors, and are covered by the block exemption. Such restrictions are also dealt with in Section 4.2.5.

(112)

Finally, Article 4(1)(c)(iv) excludes from the hardcore list an obligation on the licensee in a non-reciprocal agreement to produce the contract products only for a particular customer with a view to creating an alternative source of supply for that customer. It is thus a condition for the application of Article 4(1)(c)(iv) that the licence is limited to creating an alternative source of supply for that particular customer. It is not a condition, however, that only one such licence is granted. Article 4(1)(c)(iv) also covers situations where more than one undertaking is licensed to supply the same specified customer. Article 4(1)(c)(iv) applies regardless of the duration of the licence agreement. For instance, a one-off licence to fulfil the requirements of a project of a particular customer is covered by this exception. The potential of such agreements to share markets is limited where the licence is granted only for the purpose of supplying a particular customer. In such circumstances it can, in particular, not be assumed that the agreement will cause the licensee to cease exploiting its own technology.

(113)

Restrictions in agreements between competitors that limit the licence to one or more product markets or technical fields of use (61) are not hardcore restrictions. Such restrictions are block-exempted up to the market share threshold of 20 % irrespective of whether the agreement is reciprocal or not. Such restrictions are not considered to have as their object the allocation of markets or customers. It is a condition for the application of the block exemption, however, that the field of use restrictions do not go beyond the scope of the licensed technologies. For instance, where licensees are also limited in the technical fields in which they can use their own technology rights, the agreement amounts to market sharing.

(114)

The block exemption applies irrespective of whether the field of use restriction is symmetrical or asymmetrical. An asymmetrical field of use restriction in a reciprocal licence agreement implies that both parties are allowed to use the respective technologies that they license-in only within different fields of use. As long as the parties are unrestricted in the use of their own technologies, there is no assumption that the agreement leads the parties to abandon or refrain from entering the field(s) covered by the licence to the other party. Even if the licensees tool up to use the licensed technology within the licensed field of use, there may be no impact on assets used to produce outside the scope of the licence. It is important in this regard that the restriction relates to distinct product markets, industrial sectors or fields of use and not to customers, allocated by territory or by group, who purchase products falling within the same product market or technical field of use. The risk of market sharing is considered substantially greater in the latter case (see point (106) above). In addition, field of use restrictions may be necessary to promote pro-competitive licensing (see point (212) below).

(115)

The hardcore restriction of competition set out in Article 4(1)(d) covers restrictions on any of the parties' ability to carry out research and development. Both parties must be free to carry out independent research and development. This rule applies irrespective of whether the restriction applies to a field covered by the licence or to other fields. However, the mere fact that the parties agree to provide each other with future improvements of their respective technologies does not amount to a restriction on independent research and development. The effect on competition of such agreements must be assessed in the light of the circumstances of the individual case. Article 4(1)(d) also does not extend to restrictions on a party to carry out research and development with third parties, where such restriction is necessary to protect the licensor's know-how against disclosure. In order to be covered by the exception, the restrictions imposed to protect the licensor's know-how against disclosure must be necessary and proportionate to ensure such protection. For instance, where the agreement designates particular employees of the licensee to be trained in and responsible for the use of the licensed know-how, it may be sufficient to oblige the licensee not to allow those employees to be involved in research and development with third parties. Other safeguards may be equally appropriate.

(116)

According to Article 4(1)(d) the licensee must also be unrestricted in the use of its own competing technology rights provided that in doing so it does not make use of the technology rights licensed from the licensor. In relation to its own technology rights the licensee must not be subject to limitations in terms of where it produces or sells, the technical fields of use or product markets within which it produces, how much it produces or sells and the price at which it sells. It must also not be obliged to pay royalties on products produced on the basis of its own technology rights (see point (101) above). Moreover, the licensee must not be restricted in licensing its own technology rights to third parties. When restrictions are imposed on the licensee's use of its own technology rights or its right to carry out research and development, the competitiveness of the licensee's technology is reduced. The effect of this is to reduce competition on existing product and technology markets and to reduce the licensee's incentive to invest in the development and improvement of its technology. Article 4(1)(d) does not extend to restrictions on the licensee's use of third-party technology which competes with the licensed technology. Although such non-compete obligations may have foreclosure effects on third-party technologies (see Section 4.2.7), they usually do not have the effect of reducing the incentive of licensees to invest in the development and improvement of their own technologies.

(117)

Article 4(2) TTBER lists the hardcore restrictions for licensing between non-competitors. According to this provision, the TTBER does not cover agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object any of the following:

(118)

The hardcore restriction of competition set out in Article 4(2)(a) concerns the fixing of prices charged when selling products to third parties. More specifically, that provision covers restrictions which have as their direct or indirect object the establishment of a fixed or a minimum selling price or a fixed or minimum price level to be observed by the licensor or the licensee when selling products to third parties. In the case of agreements that directly establish the selling price, the restriction is clear-cut. However, the fixing of selling prices can also be achieved through indirect means. Examples of the latter are agreements fixing margins, fixing the maximum level of discounts, linking the sales price to the sales prices of competitors, threats, intimidation, warnings, penalties, or contract terminations in relation to observance of a given price level. Direct or indirect means of achieving price fixing can be made more effective when combined with measures to identify price-cutting, such as the implementation of a price monitoring system, or the obligation on licensees to report price deviations. Similarly, direct or indirect price fixing can be made more effective when combined with measures that reduce the licensee's incentive to lower its selling price, such as the licensor obliging the licensee to apply a most-favoured-customer clause, that is to say, an obligation to grant a customer any more favourable terms granted to any other customer. The same means can be used to make maximum or recommended prices work as fixed or minimum selling prices. However, the provision of a list of recommended prices to or the imposition of a maximum price on the licensee by the licensor is not considered in itself as leading to fixed or minimum selling prices.

(119)

Article 4(2)(b) identifies as hardcore restrictions of competition agreements or concerted practices that have as their direct or indirect object the restriction of passive sales (62) by licensees of products incorporating the licensed technology (63). Passive sales restrictions on the licensee may be the result of direct obligations, such as the obligation not to sell to certain customers or to customers in certain territories or the obligation to refer orders from these customers to other licensees. It may also result from indirect measures aimed at inducing the licensee to refrain from making such sales, such as financial incentives and the implementation of a monitoring system aimed at verifying the effective destination of the licensed products. Quantity limitations may be an indirect means to restrict passive sales. The Authority will not assume that quantity limitations as such serve this purpose. However, it will assume otherwise where quantity limitations are used to implement an underlying market partitioning agreement. Indications thereof include the adjustment of quantities over time to cover only local demand, the combination of quantity limitations and an obligation to sell minimum quantities in the territory, as well as minimum royalty obligations linked to sales in the territory, differentiated royalty rates depending on the destination of the products and the monitoring of the destination of products sold by individual licensees. The general hardcore restriction covering passive sales by licensees is subject to a number of exceptions, which are dealt with in points (120) to (125).

(120)

Exception 1: Article 4(2)(b) does not cover sales restrictions (both active and passive) on the licensor. All sales restrictions on the licensor are block-exempted up to the market share threshold of 30 %. The same applies to all restrictions on active sales by the licensee, with the exception of what is said on active selling in point (125). The block exemption of restrictions on active selling is based on the assumption that such restrictions promote investments, non-price competition and improvements in the quality of services provided by the licensees by solving free rider problems and hold-up problems. In the case of restrictions of active sales between licensees' territories or customer groups, it is not necessary that the protected licensee has been granted an exclusive territory or an exclusive customer group. The block exemption also applies to active sales restrictions where more than one licensee has been appointed for a particular territory or customer group. Efficiency enhancing investment is likely to be promoted where a licensee can be sure that it will only face active sales competition from a limited number of licensees inside the territory and not also from licensees outside the territory.

(121)

Exception 2: Restrictions on active and passive sales by licensees into an exclusive territory or to an exclusive customer group reserved for the licensor do not constitute hardcore restrictions of competition (see Article 4(2)(b)(i)) and are block-exempted. It is presumed that up to the market share threshold such restraints, where restrictive of competition, promote pro-competitive dissemination of technology and integration of such technology into the production assets of the licensee. For a territory or customer group to be reserved for the licensor, the licensor does not actually have to be producing with the licensed technology in the territory or for the customer group in question. A territory or customer group can also be reserved by the licensor for later exploitation.

(122)

Exception 3: Article 4(2)(b)(ii) brings under the block exemption a restriction whereby the licensee is obliged to produce products incorporating the licensed technology only for its own (captive) use. Where the contract product is a component the licensee can thus be obliged to use that product only for incorporation into its own products and can be obliged not to sell the product to other producers. The licensee must however be able to actively and passively sell the products as spare parts for its own products and must thus be able to supply third parties that perform after sale services on these products. Captive use restrictions are also dealt with in Section 4.2.5.

(123)

Exception 4: As in the case of agreements between competitors (see point (112) above) the block exemption also applies to agreements whereby the licensee is obliged to produce the contract products only for a particular customer in order to provide that customer with an alternative source of supply, regardless of the duration of the licence agreement (cf. Article 4(2)(b)(iii)). In the case of agreements between non-competitors, such restrictions are unlikely to be caught by Article 53(1).

(124)

Exception 5: Article 4(2)(b)(iv) brings under the block exemption an obligation on the licensee, if operating at the wholesale level of trade, not to sell to end-users and thus only to sell to retailers. Such an obligation allows the licensor to assign the licensee to the wholesale distribution function and normally falls outside Article 53(1) (64).

(125)

Exception 6: Finally Article 4(2)(b)(v) brings under the block exemption a restriction on the licensee not to sell to unauthorised distributors. This exception allows the licensor to impose an obligation on the licensees to form part of a selective distribution system. In that case, however, the licensees must according to Article 4(2)(c) be permitted to sell both actively and passively to end-users, without prejudice to the possibility to restrict the licensee to a wholesale function as provided for in Article 4(2)(b)(iv) (see point (124) above). Within the territory where the licensor operates a selective distribution system, this system may not be combined with exclusive territories or exclusive customer groups where this would lead to a restriction of active or passive sales to end-users as that would lead to a hardcore restriction under Article 4(2)(c), without prejudice to the possibility of prohibiting a licensee from operating out of an unauthorised place of establishment.

(126)

Restrictions on passive sales by licensees into an exclusive territory or customer group allocated to another licensee, while normally a hardcore restriction, may fall outside Article 53(1) for a certain duration if the restraints are objectively necessary for the protected licensee to penetrate a new market. This may be the case where licensees have to commit substantial investments in production assets and promotional activities in order to start up and develop a new market. The risks facing a new licensee may therefore be substantial, in particular since promotional expenses and investment in assets required to produce on the basis of a particular technology are often sunk, that is to say, that upon leaving that particular field of activity the investment cannot be used by the licensee for other activities or sold other than at a significant loss. For instance, the licensee may be the first to produce and sell a new type of product or the first to apply a new technology. In such circumstances, it is often the case that licensees would not enter into the licence agreement without protection for a certain period of time against (active and) passive sales into their territory or to their customer groups by other licensees. Where substantial investments by the licensee are necessary to start up and develop a new market, restrictions of passive sales by other licensees into such a territory or to such a customer group fall outside Article 53(1) for the period necessary for the licensee to recoup those investments. In most cases a period of up to two years from the date on which the contract product was first put on the market in the exclusive territory by the licensee in question or sold to its exclusive customer group would be considered sufficient for the licensee to recoup the investments made. However, in an individual case a longer period of protection for the licensee might be necessary in order for the licensee to recoup the costs occurred.

(127)

Similarly, a prohibition imposed on all licensees not to sell to certain categories of end-users may not be restrictive of competition if such a restraint is objectively necessary for reasons of safety or health related to the dangerous nature of the product in question.

(128)

Article 5 of the TTBER lists three types of restrictions that are not block-exempted and which thus require individual assessment of their anti-competitive and pro-competitive effects. The purpose of Article 5 is to avoid block exemption of agreements that may reduce the incentive to innovate. It follows from Article 5 that the inclusion in a licence agreement of any of the restrictions contained in that Article does not prevent the application of the block exemption to the rest of the agreement, if the remainder is severable from the excluded restriction(s). It is only the individual restriction in question that is not covered by the block exemption, implying that individual assessment is required.

(129)

Article 5(1)(a) TTBER concerns exclusive grant-backs (that is to say an exclusive licence back to the licensor of the licensee's improvement) or assignments to the licensor of improvements of the licensed technology. An obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee's incentive to innovate since it hinders the licensee in exploiting the improvements, including by way of licensing to third parties. An exclusive grant-back is defined as a grant-back which prevents the licensee (which is the innovator and licensor of the improvement in this case) from exploiting the improvement (either for its own production or for licensing out to third parties). This is the case both where the improvement concerns the same application as the licensed technology and where the licensee develops new applications of the licensed technology. According to Article 5(1)(a) such obligations are not covered by the block exemption.

(130)

The application of Article 5(1)(a) does not depend on whether or not the licensor pays consideration in return for acquiring the improvement or for obtaining an exclusive licence. However, the existence and level of such consideration may be a relevant factor in the context of an individual assessment under Article 53. When grant-backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate. In the assessment of exclusive grant-backs outside the scope of the block exemption the market position of the licensor on the technology market is also a relevant factor. The stronger the position of the licensor, the more likely it is that exclusive grant-back obligations will have restrictive effects on competition in innovation. The stronger the position of the licensor's technology the more important it is that the licensee can become an important source of innovation and future competition. The negative impact of grant-back obligations can also be increased in case of parallel networks of licence agreements containing such obligations. When available technologies are controlled by a limited number of licensors that impose exclusive grant-back obligations on licensees, the risk of anti-competitive effects is greater than where there are a number of technologies only some of which are licensed on exclusive grant-back terms.

(131)

Non-exclusive grant-back obligations are covered by the safe harbour of the TTBER. This is the case even where they are non-reciprocal, that is to say, only imposed on the licensee, and where under the agreement the licensor is entitled to feed-on the improvements to other licensees. A non-reciprocal grant-back obligation may promote the dissemination of new technology by permitting the licensor to freely determine whether and to what extent to pass on its own improvements to its licensees. A feed-on clause may also promote the dissemination of technology, in particular when each licensee knows at the time of contracting that it will be on an equal footing with other licensees in terms of the technology on the basis of which it is producing.

(132)

Non-exclusive grant-back obligations may in particular have negative effects on innovation in the case of cross-licensing between competitors where a grant-back obligation on both parties is combined with an obligation on both parties to share improvements of its own technology with the other party. The sharing of all improvements between competitors may prevent each competitor from gaining a competitive lead over the other (see also point (241) below). However, the parties are unlikely to be prevented from gaining a competitive lead over each other where the purpose of the licence is to permit them to develop their respective technologies and where the licence does not lead them to use the same technological base in the design of their products. This is the case where the purpose of the licence is to create design freedom rather than to improve the technological base of the licensee.

(133)

The excluded restriction set out in Article 5(1)(b) TTBER concerns non-challenge clauses, that is to say, direct or indirect obligations not to challenge the validity of the licensor's intellectual property, without prejudice to the possibility, in the case of an exclusive licence, for the licensor to terminate the technology transfer agreement in the event that the licensee challenges the validity of any of the licensed technology rights.

(134)

The reason for excluding non-challenge clauses from the scope of the block exemption is the fact that licensees are normally in the best position to determine whether or not an intellectual property right is invalid. In the interest of undistorted competition and in accordance with the principles underlying the protection of intellectual property, invalid intellectual property rights should be eliminated. Invalid intellectual property stifles innovation rather than promoting it. Article 53(1) is likely to apply to non-challenge clauses where the licensed technology is valuable and therefore creates a competitive disadvantage for undertakings that are prevented from using it or are only able to use it against payment of royalties. In such cases the conditions of Article 53(3) are unlikely to be fulfilled. However, if the licensed technology is related to a technically outdated process which the licensee does not use, or if the licence is granted for free, no restriction of competition arises (65). As to non-challenge clauses in the context of settlement agreements see points (242) and (243) below.

(135)

Generally a clause obliging the licensee not to challenge the ownership of the technology rights does not constitute a restriction of competition within the meaning of Article 53(1). Whether or not the licensor has the ownership of the technology rights, the use of the technology by the licensee and any other party is dependent on obtaining a licence in any event, and competition would thus generally not be affected (66).

(136)

Article 5(1)(b) TTBER also excludes from the safe harbour of the block exemption the right, in the context of non-exclusive licences, for the licensor to terminate the agreement in the event that the licensee challenges the validity of any of the intellectual property rights that the licensor holds in the EEA. Such a termination right can have the same effect as a non-challenge clause, in particular where switching away from the licensor's technology would result in a significant loss to the licensee (for example where the licensee has already invested in specific machines or tools which cannot be used for producing with another technology) or where the licensor's technology is a necessary input for the licensee's production. For example, in the context of standard essential patents the licensee producing a standard compliant product will necessarily have to use all patents reading on the standard. In such a case, challenging the validity of the relevant patents may result in a significant loss if the technology transfer agreement is terminated. Where the licensor's technology is not standard essential, but has a very significant market position, the disincentive to challenge may also be high considering the difficulty for the licensee in finding a viable alternative technology to license-in. The question whether the licensee's loss of profit would be significant, and therefore act as a strong disincentive to challenge, would need to be assessed on a case-by-case basis.

(137)

In the scenarios described in point (136), the licensee may be deterred from challenging the validity of the intellectual property right if it would risk the termination of the licensing agreement and thus face significant risks which go far beyond its royalty obligations. However, it should also be noted that, outside the context of these scenarios a termination clause will often not provide a significant disincentive to challenge and therefore not produce the same effect as a non-challenge clause.

(138)

The public interest of strengthening the incentive of the licensor to license out by not being forced to continue dealing with a licensee that challenges the very subject matter of the licence agreement has to be balanced against the public interest to eliminate any obstacle to economic activity which may arise where an intellectual property right was granted in error (67). In balancing those interests it should be taken into account whether the licensee fulfils all the obligations under the agreement at the time of the challenge, in particular the obligation to pay the agreed royalties.

(139)

In the case of exclusive licensing, termination clauses are usually less likely on balance to have anti-competitive effects. Once the licence is granted, the licensor may find itself in a particular situation of dependency, as the licensee will be its only source of income as regards the licensed technology rights if royalties are dependent on production with the licensed technology rights, as may often be an efficient way to structure royalty payments. In this scenario, the incentives for innovation and for licensing out could be undermined if, for example, the licensor were to be locked into an agreement with an exclusive licensee which no longer makes significant efforts to develop, produce and market the product (to be) produced with the licensed technology rights (68). This is why the TTBER block-exempts termination clauses for exclusive licensing agreements as long as also the other conditions of the safe harbour, such as respecting the market share threshold, are fulfilled. Outside the safe harbour, a case-by-case assessment has to be carried out taking into account the different interests as described in the point (138) above.

(140)

Moreover, the Authority takes a more favourable view of non-challenge and termination clauses relating to know-how where the recovery of the licensed know-how is likely to be impossible or very difficult once it is disclosed. In such cases, an obligation on the licensee not to challenge the licensed know-how promotes dissemination of new technology, in particular by allowing weaker licensors to license stronger licensees without fear of a challenge once the know-how has been absorbed by the licensee. Therefore, non-challenge and termination clauses solely concerning know-how are not excluded from the scope of the TTBER.

(141)

In the case of agreements between non-competitors, Article 5(2) excludes from the scope of the block exemption any direct or indirect obligation limiting the licensee's ability to exploit its own technology rights or limiting the ability of the parties to the agreement to carry out research and development, unless that restriction is indispensable to prevent the disclosure of licensed know-how to third parties. The content of this condition is the same as that of Article 4(1)(d) of the hardcore list concerning agreements between competitors, which is dealt with in points (115) and (116) of these guidelines. However, in the case of agreements between non-competitors it cannot be considered that such restrictions generally have negative effects on competition, or that the conditions of Article 53(3) are generally not satisfied (69). Individual assessment is therefore required.

(142)

In the case of agreements between non-competitors, the licensee normally does not own a competing technology. However, there may be cases where for the purposes of the block exemption the parties are considered non-competitors despite the fact that the licensee does own a competing technology. This is the case where the licensee owns a technology but does not license it and the licensor is not an actual or potential supplier on the product market. For the purposes of the block exemption, in such circumstances, the parties are neither competitors on the technology market nor competitors on the downstream product market (70). In such cases it is important to ensure that the licensee is not restricted in its ability to exploit its own technology and further develop it. This technology constitutes a competitive constraint in the market, which should be preserved. In such a situation restrictions on the licensee's use of its own technology rights or on research and development are normally considered to be restrictive of competition and not to satisfy the conditions of Article 53(3). For instance, an obligation on the licensee to pay royalties not only on the basis of products it produces with the licensed technology but also on the basis of products it produces only with its own technology will generally limit the ability of the licensee to exploit its own technology and thus be excluded from the scope of the block exemption.

(143)

In cases where the licensee does not own a competing technology or is not already developing such a technology, a restriction on the ability of the parties to carry out independent research and development may be restrictive of competition where only a few technologies are available. In that case the parties may be an important (potential) source of innovation in the market. This is particularly so where the parties possess the necessary assets and skills to carry out further research and development. In that case the conditions of Article 53(3) are unlikely to be fulfilled. In other cases where a number of technologies are available and where the parties do not possess special assets or skills, the restriction on research and development is likely either to fall outside Article 53(1) for lack of an appreciable restrictive effect or to satisfy the conditions of Article 53(3). The restraint may promote the dissemination of new technology by assuring the licensor that the licence does not create a new competitor and by inducing the licensee to focus on the exploitation and development of the licensed technology. Moreover, Article 53(1) only applies where the agreement reduces the licensee's incentive to improve and exploit its own technology. This is, for instance, not likely to be the case where the licensor is entitled to terminate the licence agreement once the licensee commences to produce on the basis of its own competing technology. Such a right does not reduce the licensee's incentive to innovate, since the agreement can only be terminated when a commercially viable technology has been developed and products produced on the basis thereof are ready to be put on the market.

(144)

According to Article 6 of the TTBER, the Authority and the competition authorities of the EFTA states may withdraw the benefit of the block exemption in respect of individual agreements that are likely to have anticompetitive effects (account must be taken of both actual and potential effects) and do not fulfil the conditions of Article 53(3). The power of the competition authorities of the EFTA states to withdraw the benefit of the block exemption is limited to cases where the relevant geographic market is no wider than the territory of the EFTA State in question.

(145)

The four conditions of Article 53(3) are cumulative and must all be fulfilled for the exception rule to be applicable (71). The block exemption can therefore be withdrawn where a particular agreement fails to fulfil one or more of the four conditions.

(146)

Where the withdrawal procedure is applied, the withdrawing authority bears the burden of proving that the agreement falls within the scope of Article 53(1) and that the agreement does not satisfy all four conditions of Article 53(3). Given that withdrawal implies that the agreement in question restricts competition within the meaning of Article 53(1) and does not fulfil the conditions of Article 53(3), withdrawal is necessarily accompanied by a negative decision based on Articles 5, 7 or 9 of Chapter II of Protocol 4.

(147)

According to Article 6 of the TTBER, withdrawal may in particular be warranted in the following circumstances:

(148)

Articles 4 and 5 of the TTBER, containing the list of hardcore restrictions of competition and excluded restrictions, aim at ensuring that block-exempted agreements do not reduce the incentive to innovate, do not delay the dissemination of technology, and do not unduly restrict competition between the licensor and licensee or between licensees. However, the list of hardcore restrictions and the list of excluded restrictions do not take into account all the possible impacts of licence agreements. In particular, the block exemption does not take account of any cumulative effect of similar restrictions contained in networks of licence agreements. Licence agreements may lead to foreclosure of third parties both at the level of the licensor and at the level of the licensee. Foreclosure of other licensors may stem from the cumulative effect of networks of licence agreements prohibiting the licensees from exploiting competing technologies, leading to the exclusion of other (potential) licensors. Foreclosure of licensors is likely to arise in cases where most of the undertakings on the market that could (efficiently) take a competing licence are prevented from doing so as a consequence of restrictive agreements and where potential licensees face relatively high barriers to entry. Foreclosure of other licensees may stem from the cumulative effect of licence agreements prohibiting licensors from licensing other licensees and thereby preventing potential licensees from gaining access to the necessary technology. The issue of foreclosure is examined in more detail in Sections 4.2.2 and 4.2.7. In addition, the Authority is likely to withdraw the benefit of the block exemption where, in individual agreements, a significant number of licensors of competing technologies impose on their licensees to extend to them more favourable conditions agreed with other licensors.

(149)

A special procedure for the disapplication of the TTBER in the EFTA states is set out in Article 7(2) of the TTBER as incorporated in the EEA Agreement. Whereas the Commission can disapply the TTBER by means of a regulation addressed to the EU Member States, Article 7(2) of the TTBER enables the Authority to declare by means of a recommendation that, where parallel networks of similar technology transfer agreements cover more than 50 % of a relevant market in the EFTA states, the TTBER shall not apply to technology transfer agreements containing specific restraints relating to that market. The recommendation is addressed to the EFTA state or EFTA states comprising the relevant market in question. Following the adoption of a recommendation by the Authority under Article 7, the EFTA states have three months to notify the Authority whether they accept the recommendation. Silence on the part of an EFTA State will be understood as acceptance. If an EFTA state accepts, or is deemed to accept, the recommendation, the EFTA State must implement the recommendation within three months from the day it was adopted (72).

(150)

Whereas withdrawal of the benefit of the TTBER by the Authority under Article 6 implies the adoption of a decision under Articles 7 or 9 of Chapter II of Protocol 4 to the Surveillance and Court Agreement, the effect of the disapplication of the block exemption following an Authority recommendation and acceptance by the EFTA states under Article 7 of the TTBER is merely to remove, in respect of the restraints and the markets concerned, the benefit of the TTBER and to restore the full application of Article 53(1) and (3) of the EEA Agreement. Following the disapplication of the block exemption for a particular market in respect of agreements containing certain restraints, the criteria developed by the relevant case-law of the EFTA Court and the Union Courts and by notices and previous decisions adopted by the Authority will give guidance on the application of Article 53 to individual agreements. Where appropriate, the Authority will take a decision in an individual case, which can provide guidance to all the undertakings operating on the market concerned.

(151)

For the purpose of calculating the 50 % market coverage ratio, account must be taken of each individual network of licence agreements containing restraints, or combinations of restraints, producing similar effects on the market.

(152)

Article 7 of the TTBER does not entail an obligation on the part of the Authority to act where the 50 % market-coverage ratio is exceeded. In general, disapplication is appropriate when it is likely that access to the relevant market or competition therein is appreciably restricted. In assessing the need to apply Article 7, the Authority will consider whether individual withdrawal would be a more appropriate remedy. This may depend, in particular, on the number of competing undertakings contributing to a cumulative effect on a market or the number of affected geographic markets within the EFTA states.

(153)

Any recommendation adopted under Article 7 must clearly set out its scope. This means, first, that the Authority must define the relevant product and geographic market(s) and, secondly, that it must identify the type of licensing restraint in respect of which the TTBER will no longer apply. As regards the latter aspect, the Authority may modulate the scope of its recommendation according to the competition concern which it intends to address. For instance, while all parallel networks of non-compete arrangements will be taken into account for the purpose of establishing the 50 % market coverage ratio, the Authority may nevertheless restrict the scope of the recommendation only to non-compete obligations exceeding a certain duration. Thus, agreements of a shorter duration or of a less restrictive nature might be left unaffected, due to the lesser degree of foreclosure attributable to such restraints. Where appropriate, the Authority may also provide guidance by specifying the market share level which, in the specific market context, may be regarded as insufficient to bring about a significant contribution by an individual undertaking to the cumulative effect. In general, when the market share of the products incorporating a technology licensed by an individual licensor does not exceed 5 %, the agreement or network of agreements covering that technology is not considered to contribute significantly to a cumulative foreclosure effect (73).

(154)

The transitional period for the disapplication of the TTBER of not less than six months that the Authority will have to set in the recommendation under Article 7(2), should allow the undertakings concerned to adapt their agreements to take account of the disapplication of the TTBER. The Authority considers that the transitional period should run from the date of adoption by an EFTA state addressee of national implementing measures.

(155)

The recommendation and national implementing measures disapplying the TTBER will not affect the block exempted status of the agreements concerned for the period preceding the entry into force of the national implementing measures.

(156)

Agreements that fall outside the block exemption, for example because the market share thresholds are exceeded or the agreement involves more than two parties, are subject to individual assessment. Agreements that either do not restrict competition within the meaning of Article 53(1) or which fulfil the conditions of Article 53(3) are valid and enforceable. It is recalled that there is no presumption of illegality of agreements that fall outside the scope of the block exemption provided that they do not contain hardcore restrictions of competition. In particular, there is no presumption that Article 53(1) applies merely because the market share thresholds are exceeded. Individual assessment based on the principles described in these guidelines is always required.

(157)

In order to promote predictability beyond the application of the TTBER and to confine detailed analysis to cases that are likely to present real competition concerns, the Authority takes the view that outside the area of hardcore restrictions Article 53 is unlikely to be infringed where there are four or more independently controlled technologies in addition to the technologies controlled by the parties to the agreement that may be substitutable for the licensed technology at a comparable cost to the user. In assessing whether the technologies are sufficiently substitutable the relative commercial strength of the technologies in question must be taken into account. The competitive constraint imposed by a technology is limited if it does not constitute a commercially viable alternative to the licensed technology. For instance, if due to network effects in the market consumers have a strong preference for products incorporating the licensed technology, other technologies already on the market or likely to come to market within a reasonable period of time may not constitute a real alternative and may therefore impose only a limited competitive constraint.

(158)

The fact that an agreement falls outside the safe harbour described in point (157) does not imply that the agreement is caught by Article 53(1) and, if so, that the conditions of Article 53(3) are not satisfied. As for the market share safe harbour of the TTBER, this additional safe harbour merely creates a presumption that the agreement is not prohibited by Article 53. Outside the safe harbour individual assessment of the agreement based on the principles developed in these guidelines is required.

(159)

In the application of Article 53 to individual cases it is necessary to take due account of the way in which competition operates on the market in question. The following factors are particularly relevant in this respect:

(160)

The importance of individual factors may vary from case to case and depends on all other factors. For instance, a high market share of the parties is usually a good indicator of market power, but in the case of low entry barriers it may not be indicative of market power. It is therefore not possible to provide firm rules on the importance of the individual factors.

(161)

Technology transfer agreements can take many shapes and forms. It is therefore important to analyse the nature of the agreement in terms of the competitive relationship between the parties and the restraints that it contains. In the latter regard it is necessary to go beyond the express terms of the agreement. The existence of implicit restraints may be derived from the way in which the agreement has been implemented by the parties and from the incentives that they face.

(162)

The market position of the parties, including any undertakings de facto or de jure controlled by the parties, provides an indication of the degree of market power, if any, possessed by the licensor, the licensee or both. The higher their market share the greater their market power is likely to be. This is particularly so where the market share reflects cost advantages or other competitive advantages vis-à-vis competitors. These competitive advantages may for instance result from being a first mover in the market, from holding essential patents or from having superior technology. However, market shares are always only one factor in assessing market positions. For instance, in particular in the case of technology markets, market shares may not always be a good indicator of the relative strength of the technology in question and the market share figures may differ considerably depending on the different calculation methods.

(163)

Market shares and possible competitive advantages and disadvantages are also used to assess the market position of competitors. The stronger the actual competitors and the greater their number the less risk there is that the parties will be able to exercise market power individually. However, if the number of competitors is rather small and their market position (size, costs, R & D potential, etc.) is rather similar, this market structure may increase the risk of collusion.

(164)

The market position of buyers provides an indication of whether or not one or more buyers possess buyer power. The first indicator of buyer power is the market share of the buyer on the purchase market. This share reflects the importance of its demand for possible suppliers. Other indicators focus on the position of the buyer on its resale market, including characteristics such as a wide geographic spread of its outlets, and its brand image amongst final consumers. In some circumstances buyer power may prevent the licensor and/or the licensee from exercising market power on the market and thereby solve a competition problem that would otherwise have existed. This is particularly so when strong buyers have the capacity and the incentive to bring new sources of supply on to the market in the case of a small but permanent increase in relative prices. Where the strong buyers merely extract favourable terms from the supplier or simply pass on any price increase to their customers, the position of the buyers is not such as to prevent the exercise of market power by the licensee on the product market and therefore not such as to solve the competition problem on that market (74).

(165)

Entry barriers are measured by the extent to which incumbent companies can increase their price above the competitive level without attracting new entry. In the absence of entry barriers, easy and quick entry would render price increases unprofitable. When effective entry, preventing or eroding the exercise of market power, is likely to occur within one or two years, entry barriers can, as a general rule, be said to be low.

(166)

Entry barriers may result from a wide variety of factors such as economies of scale and scope, government regulations, especially where they establish exclusive rights, state aid, import tariffs, intellectual property rights, ownership of resources where the supply is limited due to for instance natural limitations, essential facilities, a first mover advantage or brand loyalty of consumers created by strong advertising over a period of time. Restrictive agreements entered into by undertakings may also work as an entry barrier by making access more difficult and foreclosing (potential) competitors. Entry barriers may be present at all stages of the research and development, production and distribution process. The question whether certain of these factors should be described as entry barriers depends particularly on whether they entail sunk costs. Sunk costs are those costs which have to be incurred to enter or be active on a market but which are lost when the market is exited. The more costs are sunk, the more potential entrants have to weigh the risks of entering the market and the more credibly incumbents can threaten that they will match new competition, as sunk costs make it costly for incumbents to leave the market. In general, entry requires sunk costs, sometimes minor and sometimes major. Therefore, actual competition is in general more effective and will weigh more heavily in the assessment of a case than potential competition.

(167)

In a mature market, that is to say a market that has existed for some time, where the technology used is well known and widespread and not changing very much and in which demand is relatively stable or declining, restrictions of competition are more likely to have negative effects than in more dynamic markets.

(168)

In the assessment of particular restraints other factors may have to be taken into account. Such factors include cumulative effects, that is to say, the coverage of the market by similar agreements, the duration of the agreements, the regulatory environment and behaviour that may indicate or facilitate collusion such as price leadership, pre-announced price changes and discussions on the ‘right’ price, price rigidity in response to excess capacity, price discrimination and past collusive behaviour.

(169)

The negative effects on competition on the market that may result from restrictive technology transfer agreements include the following:

(170)

Technology transfer agreements may reduce inter-technology competition, that is to say, competition between undertakings that license or produce on the basis of substitutable technologies. This is particularly the case where reciprocal obligations are imposed. For instance, where competitors transfer competing technologies to each other and impose a reciprocal obligation to provide each other with future improvements of their respective technologies and where this agreement prevents either competitor from gaining a technological lead over the other, competition in innovation between the parties is restricted (see also point (241) below).

(171)

Licensing between competitors may also facilitate collusion. The risk of collusion is particularly high in concentrated markets. Collusion requires that the undertakings concerned have similar views on what is in their common interest and on how the coordination mechanisms function. For collusion to work the undertakings must also be able to monitor each other's market behaviour and there must be adequate deterrents to ensure that there is an incentive not to depart from the common policy on the market, while entry barriers must be high enough to limit entry or expansion by outsiders. Agreements can facilitate collusion by increasing transparency in the market, by controlling certain behaviour and by raising barriers to entry. Collusion can also exceptionally be facilitated by licensing agreements that lead to a high degree of commonality of costs, because undertakings that have similar costs are more likely to have similar views on the terms of coordination (75).

(172)

Licence agreements may also affect inter-technology competition by creating barriers to entry for and expansion by competitors. Such foreclosure effects may stem from restraints that prevent licensees from licensing from third parties or create disincentives for them to do so. For instance, third parties may be foreclosed where incumbent licensors impose non-compete obligations on licensees to such an extent that an insufficient number of licensees are available to third parties and where entry at the level of licensees is difficult. Suppliers of substitutable technologies may also be foreclosed where a licensor with a sufficient degree of market power ties together various parts of a technology and licenses them together as a package while only part of the package is essential to produce a certain product.

(173)

Licence agreements may also reduce intra-technology competition, that is to say, competition between undertakings that produce on the basis of the same technology. An agreement imposing territorial restraints on licensees, preventing them from selling into each other's territory reduces competition between them. Licence agreements may also reduce intra-technology competition by facilitating collusion between licensees. Moreover, licence agreements that reduce intra-technology competition may facilitate collusion between owners of competing technologies or reduce inter-technology competition by raising barriers to entry.

(174)

Even restrictive licence agreements often also produce pro-competitive effects in the form of efficiencies, which may outweigh their anti-competitive effects. The assessment of the possible pro-competitive effects takes place within the framework of Article 53(3), which contains an exception from the prohibition rule of Article 53(1). For that exception to be applicable the licence agreement must produce objective economic benefits, the restrictions on competition must be indispensable to attain the efficiencies, consumers must receive a fair share of the efficiency gains, and the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned. An undertaking that relies on Article 53(3) must demonstrate, by means of convincing arguments and evidence, that the conditions for obtaining an exemption are satisfied (76).

(175)

The assessment of restrictive agreements under Article 53(3) is made within the actual context in which they occur (77) and on the basis of the facts existing at any given point in time. The assessment is therefore sensitive to material changes in the facts. The exception rule of Article 53(3) applies as long as the four conditions are fulfilled and ceases to apply when that is no longer the case (78). However, when applying Article 53(3) it is necessary to take into account the initial sunk investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency enhancing investment. Article 53 cannot be applied without considering the ex ante investment and the risks relating thereto. The risk facing the parties and the sunk investment that must be committed to implement the agreement can thus lead to the agreement falling outside Article 53(1) or fulfilling the conditions of Article 53(3), as the case may be, for the period of time required to recoup the investment.

(176)

The first condition of Article 53(3) requires an assessment of the objective benefits in terms of efficiencies produced by the agreement. In this respect, licence agreements have the potential of bringing together complementary technologies and other assets allowing new or improved products to be put on the market or existing products to be produced at lower cost. Outside the context of hardcore cartels, licensing often occurs because it is more efficient for the licensor to licence the technology than to exploit it itself. This may particularly be the case where the licensee already has access to the necessary production assets. The agreement then allows the licensee to gain access to a technology that can be combined with those assets, allowing it to exploit new or improved technologies. Another example of potentially efficiency-enhancing licensing is where the licensee already has a technology and the combination of this technology and the licensor's technology gives rise to synergies. When the two technologies are combined the licensee may be able to attain a cost/output configuration that would not otherwise be possible. Licence agreements may also give rise to efficiencies at the distribution stage in the same way as vertical distribution agreements. Such efficiencies can take the form of cost savings or the provision of valuable services to consumers. The positive effects of vertical agreements are described in the Authority guidelines on vertical restraints (79). A further example of possible efficiency gains is to be found in agreements whereby technology owners assemble a technology package for licensing to third parties. Such pooling arrangements may in particular reduce transaction costs, as licensees do not have to conclude separate licence agreements with each licensor. Pro-competitive licensing may also occur to ensure design freedom. In sectors where large numbers of intellectual property rights exist and where individual products may infringe upon a number of existing and future property rights, licence agreements whereby the parties agree not to assert their property rights against each other are often pro-competitive because they allow the parties to develop their respective technologies without the risk of subsequent infringement claims.

(177)

In the application of the indispensability test contained in Article 53(3) the Authority will in particular examine whether individual restrictions make it possible to perform the activity in question more efficiently than would have been the case in the absence of the restriction concerned. In making this assessment the market conditions and the realities facing the parties must be taken into account. Undertakings invoking the benefit of Article 53(3) are not required to consider hypothetical and theoretical alternatives. They must, however, explain and demonstrate why seemingly realistic and significantly less restrictive alternatives would be significantly less efficient. If the application of what appears to be a commercially realistic and less restrictive alternative would lead to a significant loss of efficiencies, the restriction in question is treated as indispensable. In some cases, it may also be necessary to examine whether the agreement as such is indispensable to achieve the efficiencies. This may for example be so in the case of technology pools that include complementary but non-essential technologies (80), in which case it must be examined to what extent the inclusion of those technologies gives rise to particular efficiencies or whether, without a significant loss of efficiencies, the pool could be limited to technologies for which there are no substitutes. In the case of simple licensing between two parties it is generally not necessary to go beyond an examination of whether individual restraints are indispensable. Normally there is no less restrictive alternative to the licence agreement as such.

(178)

The condition that consumers must receive a fair share of the benefits implies that consumers of the products produced under the licence must at least be compensated for the negative effects of the agreement (81). This means that the efficiency gains must fully offset the likely negative impact on prices, output and other relevant factors caused by the agreement. They may do so by changing the cost structure of the undertakings concerned, giving them an incentive to reduce price, or by allowing consumers to gain access to new or improved products, compensating for any likely price increase (82).

(179)

The last condition of Article 53(3), according to which the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned, presupposes an analysis of remaining competitive pressures on the market and the impact of the agreement on such sources of competition. In the application of the last condition of Article 53(3) the relationship between Article 53(3) and Article 54 must be taken into account. In accordance with settled case-law concerning Article 101(3) and Article 102 of the Treaty, the application of Article 53(3) cannot prevent the application of Article 54 (83). Moreover, since Articles 53 and 54 both pursue the aim of maintaining effective competition on the market, consistency requires that Article 53(3) be interpreted as precluding any application of the exception rule to restrictive agreements that constitute an abuse of a dominant position (84).

(180)

The fact that the agreement substantially reduces one dimension of competition does not necessarily mean that competition is eliminated within the meaning of Article 53(3). A technology pool, for instance, can result in an industry standard, leading to a situation in which there is little competition in terms of the technological format. Once the main players in the market adopt a certain format, network effects may make it very difficult for alternative formats to survive. This does not imply, however, that the creation of a de facto industry standard always eliminates competition within the meaning of the last condition of Article 53(3). Within the standard, suppliers may compete on price, quality and product features. However, in order for the agreement to comply with Article 53(3), it must be ensured that the agreement does not unduly restrict competition and does not unduly restrict future innovation.

(181)

This section deals with various types of restraints that are commonly included in licence agreements. Given their prevalence it is useful to provide guidance as to how they are assessed outside the safe harbour of the TTBER. Restraints that have already been dealt with in the other sections of these guidelines, in particular Sections 3.4 and 3.5, are only dealt with briefly in this section.

(182)

This section covers both agreements between non-competitors and agreements between competitors. In respect of the latter a distinction is made — where appropriate — between reciprocal and non-reciprocal agreements. No such distinction is required in the case of agreements between non-competitors. Indeed, when undertakings are neither actual nor potential competitors on a relevant technology market or on a market for products incorporating the licensed technology, a reciprocal licence is for all practical purposes no different from two separate licences. The situation is different for arrangements whereby the parties assemble a technology package, which is then licensed to third parties. Such arrangements are technology pools, which are dealt with in Section 4 below.

(183)

This section does not deal with obligations in licence agreements that are generally not restrictive of competition within the meaning of Article 53(1). These obligations include but are not limited to:

(184)

The parties to a licence agreement are normally free to determine the royalty payable by the licensee and its mode of payment without being caught by Article 53(1). This principle applies both to agreements between competitors and agreements between non-competitors. Royalty obligations may for instance take the form of lump sum payments, a percentage of the selling price or a fixed amount for each product incorporating the licensed technology. In cases where the licensed technology relates to an input which is incorporated into a final product it is as a general rule not restrictive of competition that royalties are calculated on the basis of the price of the final product, provided that it incorporates the licensed technology (85). In the case of software licensing royalties based on the number of users and royalties calculated on a per machine basis are generally compatible with Article 53(1).

(185)

In the case of licence agreements between competitors it should be borne in mind (see points (100) to (101) and (116) above) that in a limited number of circumstances royalty obligations may amount to price fixing, which is considered a hardcore restriction (see Article 4(1)(a)). It is a hardcore restriction under Article 4(1)(a) if competitors provide for reciprocal running royalties in circumstances where the licence is a sham, in that its purpose is not to allow an integration of complementary technologies or to achieve another pro-competitive aim. It is also a hardcore restriction under Article 4(1)(a) and 4(1)(d) if royalties extend to products produced solely with the licensee's own technology rights.

(186)

Other types of royalty arrangements between competitors are block-exempted up to the market share threshold of 20 % even if they restrict competition. Outside the safe harbour of the block exemption Article 53(1) may be applicable where competitors cross-license and impose running royalties that are clearly disproportionate compared to the market value of the licence and where such royalties have a significant impact on market prices. In assessing whether the royalties are disproportionate it is necessary to examine the royalties paid by other licensees on the product market for the same or substitute technologies. In such cases it is unlikely that the conditions of Article 53(3) are satisfied.

(187)

Notwithstanding the fact that the block exemption only applies as long as the technology rights are valid and in force, the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 53(1). Once these rights expire, third parties can legally exploit the technology in question and compete with the parties to the agreement. Such actual and potential competition will normally be sufficient to ensure that the obligation in question does not have appreciable anti-competitive effects.

(188)

In the case of agreements between non-competitors the block exemption covers agreements whereby royalties are calculated on the basis of both products produced with the licensed technology and products produced with technologies licensed from third parties. Such arrangements may facilitate the metering of royalties. However, they may also lead to foreclosure by increasing the cost of using third-party inputs and may thus have effects similar to those of a non-compete obligation. If royalties are paid not just on products produced with the licensed technology but also on products produced with third-party technology, then the royalties will increase the cost of the latter products and reduce demand for third-party technology. Outside the scope of the block exemption the question whether the restriction has foreclosure effects must therefore be considered. For that purpose it is appropriate to use the analytical framework set out in Section 4.2.7 below. In the case of appreciable foreclosure effects such agreements are caught by Article 53(1) and unlikely to fulfil the conditions of Article 53(3), unless there is no other practical way of calculating and monitoring royalty payments.

(189)

For the purpose of these guidelines, it is useful to distinguish between restrictions as to production within a given territory (exclusive or sole licences) and restrictions on the sale of products incorporating the licensed technology into a given territory and to a given customer group (sales restrictions).

(190)

An ‘exclusive licence’ means that the licensor itself is not permitted to produce on the basis of the licensed technology rights, nor is it permitted to license the licensed technology rights to third parties, in general or for a particular use or in a particular territory. This means that, in general or for that particular use or in that particular territory, the licensee is the only one allowed to produce on the basis of the licensed technology rights.

(191)

Where the licensor undertakes not to produce itself or license others to produce within a given territory, this territory may cover the whole world or any part of it. Where the licensor undertakes only not to licence third parties to produce within a given territory, the licence is a sole licence. Exclusive or sole licensing is often accompanied by sales restrictions that limit the parties as to where they may sell products incorporating the licensed technology.

(192)

Reciprocal exclusive licensing between competitors falls under Article 4(1)(c) TTBER, which identifies market and customer sharing between competitors as a hardcore restriction. Reciprocal sole licensing between competitors is, however, block-exempted up to the market share threshold of 20 %. Under such an agreement the parties mutually commit not to license their competing technologies to third parties. In cases where the parties have a significant degree of market power such agreements may facilitate collusion by ensuring that the parties are the only sources of output in the market based on the licensed technologies.

(193)

Non-reciprocal exclusive licensing between competitors is block-exempted up to the market share threshold of 20 %. Above the market share threshold it is necessary to analyse the likely anti-competitive effects of such exclusive licensing. Where the exclusive licence is worldwide it implies that the licensor leaves the market. In cases where exclusivity is limited to a particular territory such as an EEA State the agreement implies that the licensor abstains from producing goods and services inside the territory in question. In the context of Article 53(1), the competitive significance of the licensor must, in particular, be assessed. If the licensor has a limited market position on the product market or lacks the capacity to effectively exploit the technology in the licensee's territory, the agreement is unlikely to be caught by Article 53(1). A special case exists where the licensor and the licensee only compete on the technology market and the licensor, for instance being a research institute or a small research based undertaking, lacks the production and distribution assets to effectively bring to market products incorporating the licensed technology. In such cases Article 53(1) is unlikely to be infringed.

(194)

Exclusive licensing between non-competitors — to the extent that it is caught by Article 53(1) (86) — is likely to fulfil the conditions of Article 53(3). The right to grant an exclusive licence is generally necessary in order to induce the licensee to invest in the licensed technology and to bring the products to market in a timely manner. This is in particular the case where the licensee must make large investments in further developing the licensed technology. To intervene against the exclusivity once the licensee has made a commercial success of the licensed technology would deprive the licensee of the fruits of its success and would be detrimental to competition, the dissemination of technology and innovation. The Authority will therefore only exceptionally intervene against exclusive licensing in agreements between non-competitors, irrespective of the territorial scope of the licence.

(195)

However, if the licensee already owns a substitutable technology used for in-house production, the exclusive licence might not be necessary in order to give incentives to the licensee to bring a product to the market. In such a scenario, the exclusive licensing may instead be caught by Article 53(1), in particular where the licensee has market power on the product market. The main situation in which intervention may be warranted is where a dominant licensee obtains an exclusive licence to one or more competing technologies. Such agreements are likely to be caught by Article 53(1) and unlikely to fulfil the conditions of Article 53(3). However, for Article 53(1) to apply entry into the technology market must be difficult and the licensed technology must constitute a real source of competition on the market. In such circumstances an exclusive licence may foreclose third-party licensees, raise the barriers to entry and allow the licensee to preserve its market power.

(196)

Arrangements whereby two or more parties cross-licence each other and undertake not to licence third parties give rise to particular concerns when the package of technologies resulting from the cross-licences creates a de facto industry standard to which third parties must have access in order to compete effectively on the market. In such cases the agreement creates a closed standard reserved for the parties. The Authority will assess such arrangements according to the same principles as those applied to technology pools (see Section 4.4). There will normally be a requirement that the technologies which support such a standard be licensed to third parties on fair, reasonable and non-discriminatory terms (87). Where the parties to the arrangement compete with third parties on an existing product market and the arrangement relates to that product market, a closed standard is likely to have substantial exclusionary effects. This negative impact on competition can only be avoided by licensing also to third parties.

(197)

Also as regards sales restrictions there is an important distinction to be made between licensing between competitors and between non-competitors.

(198)

Restrictions on active and passive sales by one or both parties in a reciprocal agreement between competitors are hardcore restrictions of competition under Article 4(1)(c) TTBER. Such sales restrictions are caught by Article 53(1) and are unlikely to fulfil the conditions of Article 53(3). Such restrictions are generally considered market sharing, since they prevent the affected party from selling actively and passively into territories and to customer groups which it actually served or could realistically have served in the absence of the agreement.

(199)

In the case of non-reciprocal agreements between competitors the block exemption applies to restrictions on active and/or passive sales by the licensee or the licensor into the exclusive territory or to the exclusive customer group reserved for the other party (see Article 4(1)(c)(i) TTBER). Above the market share threshold of 20 % sales restrictions between licensor and licensee are caught by Article 53(1) when one or both of the parties have a significant degree of market power. Such restrictions may, however, be indispensable for the dissemination of valuable technologies and may therefore fulfil the conditions of Article 53(3). This may be the case where the licensor has a relatively weak market position in the territory where it exploits the technology itself. In such circumstances restrictions on active sales in particular may be indispensable to induce the licensor to grant the licence. In the absence of such restrictions the licensor would risk facing active competition in its main area of activity. Similarly, restrictions on active sales by the licensor may be indispensable, in particular, where the licensee has a relatively weak market position in the territory allocated to it and has to make significant investments in order to efficiently exploit the licensed technology.

(200)

The block exemption also covers restrictions on active sales into the territory or to the customer group allocated to another licensee, which was not a competitor of the licensor at the time when it concluded the licence agreement with the licensor. This is, however, only the case when the agreement between the parties in question is non-reciprocal (see Article 4(1)(c)(ii) TTBER). Above the market share threshold such active sales restrictions are likely to be caught by Article 53(1) when the parties have a significant degree of market power. The restraint is nevertheless likely to be indispensable within the meaning of Article 53(3) for the period of time required for the protected licensee to penetrate a new market and establish a market presence in the allocated territory or vis-à-vis the allocated customer group. This protection against active sales allows the licensee to overcome the asymmetry, which it faces due to the fact that some of the licensees are competing undertakings of the licensor and thus already established on the market. Restrictions on passive sales by licensees into a territory or to a customer group allocated to another licensee are hardcore restrictions under Article 4(1)(c) of the TTBER.

(201)

In the case of agreements between non-competitors sales restrictions between the licensor and a licensee are block-exempted up to the market share threshold of 30 %. Above the market share threshold restrictions on active and passive sales by licensees to territories or customer groups reserved exclusively for the licensor may be indispensable for the dissemination of valuable technologies and therefore fall outside Article 53(1) or fulfil the conditions of Article 53(3). This may be the case where the licensor has a relatively weak market position in the territory where it exploits itself the technology. In such circumstances restrictions on active sales in particular may be indispensable to induce the licensor to grant the licence. In the absence of such restrictions the licensor would risk facing active competition in its main area of activity. In other cases sales restrictions on the licensee may be caught by Article 53(1) and may not fulfil the conditions of Article 53(3). This is likely to be the case where the licensor individually has a significant degree of market power and also where a series of similar agreements concluded by licensors which together hold a strong position on the market have a cumulative effect.

(202)

Sales restrictions on the licensor, when caught by Article 53(1), are likely to fulfil the conditions of Article 53(3) unless there are no real alternatives to the licensor's technology on the market or such alternatives are licensed by the licensee from third parties. Such restrictions and in particular restrictions on active sales are likely to be indispensable within the meaning of Article 53(3) in order to induce the licensee to invest in the production, marketing and sale of the products incorporating the licensed technology. It is likely that the licensee's incentive to invest would be significantly reduced if it faced direct competition from the licensor whose production costs are not burdened by royalty payments, possibly leading to sub-optimal levels of investment.

(203)

As regards sales restrictions between licensees in agreements between non-competitors, the TTBER block-exempts restrictions on active selling between territories or customer groups. Above the market share threshold of 30 % restrictions on active sales between licensees' territories and customer groups limit intra-technology competition and are likely to be caught by Article 53(1) when the individual licensee has a significant degree of market power. However, such restrictions may fulfil the conditions of Article 53(3) where they are necessary to prevent free riding and to induce the licensee to make the investment necessary for efficient exploitation of the licensed technology inside its territory and to promote sales of the licensed product. Restrictions on passive sales are covered by the hardcore list of Article 4(2)(b) of the TTBER (see points (119) to (127) above).

(204)

Reciprocal output restrictions in licence agreements between competitors constitute a hardcore restriction as set out in Article 4(1)(b) of the TTBER (see point (103) above). Article 4(1)(b) does not cover output restrictions on the licensor's technology imposed on the licensee in a non-reciprocal agreement or on one of the licensees in an reciprocal agreement. Such restrictions are block-exempted up to the market share threshold of 20 %. Above the market share threshold, output restrictions on the licensee may restrict competition where the parties have a significant degree of market power. However, Article 53(3) is likely to apply in cases where the licensor's technology is substantially better than the licensee's technology and the output limitation substantially exceeds the output of the licensee prior to the conclusion of the agreement. In that case the effect of the output limitation is limited even in markets where demand is growing. In the application of Article 53(3) it must also be taken into account that such restrictions may be necessary in order to induce the licensor to disseminate its technology as widely as possible. For instance, a licensor may be reluctant to license its competitors if it cannot limit the licence to a particular production site with a specific capacity (a site licence). Where the licence agreement leads to a real integration of complementary assets, output restrictions on the licensee may therefore fulfil the conditions of Article 53(3). However, this is unlikely to be the case where the parties have substantial market power.

(205)

Output restrictions in licence agreements between non-competitors are block-exempted up to the market share threshold of 30 %. The main anti-competitive risk flowing from output restrictions on licensees in agreements between non-competitors is reduced intra-technology competition between licensees. The significance of such anti-competitive effects depends on the market position of the licensor and the licensees and the extent to which the output limitation prevents the licensee from satisfying demand for the products incorporating the licensed technology.

(206)

When output restrictions are combined with exclusive territories or exclusive customer groups, the restrictive effects are increased. The combination of the two types of restraints makes it more likely that the agreement serves to partition markets.

(207)

Output limitations imposed on the licensee in agreements between non-competitors may also have pro-competitive effects by promoting the dissemination of technology. As a supplier of technology, the licensor should normally be free to determine the output produced with the licensed technology by the licensee. If the licensor were not free to determine the output of the licensee, a number of licence agreements might not come into existence in the first place, which would have a negative impact on the dissemination of new technology. This is particularly likely to be the case where the licensor is also a producer, since the licensee' output may find its way back into the licensor's main area of operation and thus have a direct impact on those activities. On the other hand, it is less likely that output restrictions are necessary in order to ensure dissemination of the licensor's technology when they are combined with sales restrictions on the licensee prohibiting it from selling into a territory or customer group reserved for the licensor.

(208)

Under a field of use restriction the licence is either limited to one or more technical fields of application or one or more product markets or industrial sectors. An industrial sector may encompass several product markets but not part of a product market. There are many cases in which the same technology can be used to make different products or can be incorporated into products belonging to different product markets. A new moulding technology may for instance be used to make plastic bottles and plastic glasses, each product belonging to a separate product market. However, a single product market may encompass several technical fields of use. For instance a new engine technology may be employed in four-cylinder engines and six-cylinder engines. Similarly, a technology to make chipsets may be used to produce chipsets with up to four CPUs and more than four CPUs. A licence limiting the use of the licensed technology to produce, say, four-cylinder engines and chipsets with up to four CPUs constitutes a technical field of use restriction.

(209)

Given that field of use restrictions are covered by the block exemption and that certain customer restrictions are hardcore restrictions under Articles 4(1)(c) and 4(2)(b) of the TTBER, it is important to distinguish the two categories of restrictions. A customer restriction presupposes that specific customer groups are identified and that the parties are restricted in selling to such identified groups. The fact that a technical field of use restriction may correspond to certain groups of customers within a product market does not imply that the restraint is to be classified as a customer restriction. For instance, the fact that certain customers buy predominantly or exclusively chipsets with more than four CPUs does not imply that a licence which is limited to chipsets with up to four CPUs constitutes a customer restriction. However, the field of use must be defined objectively by reference to identified and meaningful technical characteristics of the contract product.

(210)

Because certain output restrictions are hardcore restrictions under Article 4(1)(b) of the TTBER, it is important to note that field of use restrictions are not considered to be output restrictions because a field of use restriction does not limit the output the licensee may produce within the licensed field of use.

(211)

A field of use restriction limits the exploitation of the licensed technology by the licensee to one or more particular fields of use without limiting the licensor's ability to exploit the licensed technology. In addition, as with territories, these fields of use can be allocated to the licensee under an exclusive or sole licence. Field of use restrictions combined with an exclusive or sole licence also restrict the licensor's ability to exploit its own technology, by preventing it from exploiting it itself, including by way of licensing to others. In the case of a sole licence only licensing to third parties is restricted. Field of use restrictions combined with exclusive and sole licences are treated in the same way as the exclusive and sole licenses dealt with in Section 4.2.2 above. In particular, for licensing between competitors, this means that reciprocal exclusive licensing is hardcore under Article 4(1)(c).

(212)

Field of use restrictions may have pro-competitive effects by encouraging the licensor to license its technology for applications that fall outside its main area of focus. If the licensor could not prevent licensees from operating in fields where it exploits the technology itself or in fields where the value of the technology is not yet well established, it would be likely to create a disincentive for the licensor to license or would lead it to charge a higher royalty. The fact that in certain sectors licensing often occurs to ensure design freedom by preventing infringement claims must also be taken into account. Within the scope of the licence the licensee is able to develop its own technology without fearing infringement claims by the licensor.

(213)

Field of use restrictions on licensees in agreements between actual or potential competitors are block-exempted up to the market share threshold of 20 %. The main competitive concern in the case of such restrictions is the risk that the licensee ceases to be a competitive force outside the licensed field of use. This risk is greater in the case of cross-licensing between competitors where the agreement provides for asymmetrical field of use restrictions. A field of use restriction is asymmetrical where one party is permitted to use the licensed technology within one industrial sector, product market or technical field of use and the other party is permitted to use the other licensed technology within another industrial sector, product market or technical field of use. Competition concerns may in particular arise where the licensee's production facility, which is tooled up to use the licensed technology, is also used to produce products outside the licensed field of use with its own technology. If the agreement is likely to lead the licensee to reduce output outside the licensed field of use, the agreement is likely to be caught by Article 53(1). Symmetrical field of use restrictions, that is to say, agreements whereby the parties are licensed to use each other's technologies within the same field(s) of use, are unlikely to be caught by Article 53(1). Such agreements are unlikely to restrict competition that existed in the absence of the agreement. Article 53(1) is also unlikely to apply in the case of agreements that merely enable the licensee to develop and exploit its own technology within the scope of the licence without fearing infringement claims by the licensor. In such circumstances field of use restrictions do not in themselves restrict competition that existed in the absence of the agreement. In the absence of the agreement the licensee also risked infringement claims outside the scope of the licensed field of use. However, if the licensee terminates or scales back its activities in the area outside the licensed field of use without business justification, this may be an indication of an underlying market sharing arrangement amounting to a hardcore restriction under Article 4(1)(c) of the TTBER.

(214)

Field of use restrictions on licensee and licensor in agreements between non-competitors are block-exempted up to the market share threshold of 30 %. Field of use restrictions in agreements between non-competitors whereby the licensor reserves one or more product markets or technical fields of use for itself are generally either non-restrictive of competition or efficiency enhancing. They promote dissemination of new technology by giving the licensor an incentive to license for exploitation in fields in which it does not want to exploit the technology itself. If the licensor could not prevent licensees from operating in fields where the licensor exploits the technology itself, it would be likely to create a disincentive for the licensor to licence.

(215)

In agreements between non-competitors the licensor is normally also entitled to grant sole or exclusive licences to different licensees limited to one or more fields of use. Such restrictions limit intra-technology competition between licensees in the same way as exclusive licensing and are analysed in the same way (see Section 4.2.2.1 above).

(216)

A captive use restriction can be defined as an obligation on the licensee to limit its production of the licensed product to the quantities required for the production of its own products and for the maintenance and repair of its own products. In other words, this type of use restriction takes the form of an obligation on the licensee to use the products incorporating the licensed technology only as an input for incorporation into its own production; it does not cover the sale of the licensed product for incorporation into the products of other producers. Captive use restrictions are block-exempted up to the respective market share thresholds of 20 % and 30 %. Outside the scope of the block exemption it is necessary to examine the pro-competitive and anti-competitive effects of the restraint. In this respect it is necessary to distinguish agreements between competitors from agreements between non-competitors.

(217)

In the case of licence agreements between competitors a restriction that imposes on the licensee to produce under the licence only for incorporation into its own products prevents it from supplying components to third-party producers. If prior to the conclusion of the agreement, the licensee was not an actual or likely potential supplier of components to other producers, the captive use restriction does not change anything compared to the pre-existing situation. In those circumstances the restriction is assessed in the same way as in the case of agreements between non-competitors. If, on the other hand, the licensee is an actual or likely supplier of components, it is necessary to examine what is the impact of the agreement on that activity. If by tooling up to use the licensor's technology the licensee ceases to use its own technology on a stand alone basis and thus to be a component supplier, the agreement restricts competition that existed prior to the agreement. It may result in serious negative market effects when the licensor has a significant degree of market power on the component market.

(218)

In the case of licence agreements between non-competitors there are two main competitive risks stemming from captive use restrictions: a restriction of intra-technology competition on the market for the supply of inputs and an exclusion of arbitrage between licensees enhancing the possibility for the licensor to impose discriminatory royalties on licensees.

(219)

Captive use restrictions, however, may also promote pro-competitive licensing. If the licensor is a supplier of components, the restraint may be necessary in order for the dissemination of technology between non-competitors to occur. In the absence of the restraint the licensor may not grant the licence or may do so only against higher royalties, because otherwise it would create direct competition with itself on the component market. In such cases a captive use restriction is normally either not restrictive of competition or covered by Article 53(3). However, the licensee must not be restricted in selling the licensed product as replacement parts for its own products. The licensee must be able to serve the after-market for its own products, including independent service organisations that service and repair the products produced by it.

(220)

Where the licensor is not a component supplier on the relevant product market, the above reason for imposing captive use restrictions does not apply. In such cases a captive use restriction may in principle promote the dissemination of technology by ensuring that licensees do not sell to producers that compete with the licensor on other product markets. However, a restriction on the licensee not to sell into certain customer groups reserved for the licensor normally constitutes a less restrictive alternative. Consequently, in such cases a captive use restriction is normally not necessary for the dissemination of technology to take place.

(221)

In the context of technology licensing tying occurs when the licensor makes the licensing of one technology (the tying product) conditional upon the licensee taking a licence for another technology or purchasing a product from the licensor or someone designated by it (the tied product). Bundling occurs where two technologies or a technology and a product are only sold together as a bundle. In both cases, however, it is a condition that the products and technologies involved are distinct in the sense that there is distinct demand for each of the products and technologies forming part of the tie or the bundle. This is normally not the case where the technologies or products are by necessity linked in such a way that the licensed technology cannot be exploited without the tied product or both parts of the bundle cannot be exploited without the other. In the following the term ‘tying’ refers to both tying and bundling.

(222)

Article 3 of the TTBER, which limits the application of the block exemption by market share thresholds, ensures that tying and bundling are not block-exempted above the market share thresholds of 20 % in the case of agreements between competitors and 30 % in the case of agreements between non-competitors. The market share thresholds apply to any relevant technology or product market affected by the licence agreement, including the market for the tied product. Above the market share thresholds it is necessary to balance the anti-competitive and pro-competitive effects of tying.

(223)

The main restrictive effect of tying is foreclosure of competing suppliers of the tied product. Tying may also allow the licensor to maintain market power in the market for the tying product by raising barriers to entry since it may force new entrants to enter several markets at the same time. Moreover, tying may allow the licensor to increase royalties, in particular when the tying product and the tied product are partly substitutable and the two products are not used in fixed proportion. Tying prevents the licensee from switching to substitute inputs in the face of increased royalties for the tying product. These competition concerns are independent of whether the parties to the agreement are competitors or not. For tying to produce likely anti-competitive effects the licensor must have a significant degree of market power in the tying product so as to restrict competition in the tied product. In the absence of market power in the tying product the licensor cannot use its technology for the anti-competitive purpose of foreclosing suppliers of the tied product. Furthermore, as in the case of non-compete obligations, the tie must cover a certain proportion of the market for the tied product for appreciable foreclosure effects to occur. In cases where the licensor has market power on the market for the tied product rather than on the market for the tying product, the restraint is analysed as a non-compete clause or quantity forcing, reflecting the fact that any competition problem has its origin on the market for the ‘tied’ product and not on the market for the ‘tying’ product (88).

(224)

Tying can also give rise to efficiency gains. This is for instance the case where the tied product is necessary for a technically satisfactory exploitation of the licensed technology or for ensuring that production under the licence conforms to quality standards respected by the licensor and other licensees. In such cases tying is normally either not restrictive of competition or covered by Article 53(3). Where the licensees use the licensor's trademark or brand name or where it is otherwise obvious to consumers that there is a link between the product incorporating the licensed technology and the licensor, the licensor has a legitimate interest in ensuring that the quality of the products is such that it does not undermine the value of its technology or its reputation as an economic operator. Moreover, where it is known to consumers that the licensees (and the licensor) produce on the basis of the same technology it is unlikely that licensees would be willing to take a licence unless the technology is exploited by all in a technically satisfactory way.

(225)

Tying is also likely to be pro-competitive where the tied product allows the licensee to exploit the licensed technology significantly more efficiently. For instance, where the licensor licenses a particular process technology the parties can also agree that the licensee buys a catalyst from the licensor which is developed for use with the licensed technology and which allows the technology to be exploited more efficiently than in the case of other catalysts. Where in such cases the restriction is caught by Article 53(1), the conditions of Article 53(3) are likely to be fulfilled even above the market share thresholds.

(226)

Non-compete obligations in the context of technology licensing take the form of an obligation on the licensee not to use third-party technologies which compete with the licensed technology. To the extent that a non-compete obligation covers a product or an additional technology supplied by the licensor the obligation is dealt with in Section 4.2.6 on tying.

(227)

The TTBER exempts non-compete obligations both in the case of agreements between competitors and in the case of agreements between non-competitors up to the market share thresholds of 20 % and 30 % respectively.

(228)

The main competitive risk presented by non-compete obligations is foreclosure of third-party technologies. Non-compete obligations may also facilitate collusion between licensors when several licensors use it in separate agreements (that is in the case of cumulative use). Foreclosure of competing technologies reduces competitive pressure on royalties charged by the licensor and reduces competition between the incumbent technologies by limiting the possibilities for licensees to substitute between competing technologies. As in both cases the main problem is foreclosure, the analysis can in general be the same in the case of agreements between competitors and agreements between non-competitors. However, in the case of cross-licensing between competitors where both agree not to use third-party technologies the agreement may facilitate collusion between them on the product market, thereby justifying the lower market share threshold of 20 %.

(229)

Foreclosure may arise where a substantial proportion of potential licensees are already tied to one or, in the case of cumulative effects, more sources of technology and are prevented from exploiting competing technologies. Foreclosure effects may result from agreements concluded by a single licensor with a significant degree of market power or from the cumulative effect of agreements concluded by several licensors, even where each individual agreement or network of agreements is covered by the TTBER. In the latter case, however, a serious cumulative effect is unlikely to arise as long as less than 50 % of the market is tied. Above that threshold significant foreclosure is likely to occur when there are relatively high barriers to entry for new licensees. If barriers to entry are low, new licensees are able to enter the market and exploit commercially attractive technologies held by third parties and thus represent a real alternative to incumbent licensees. In order to determine the real possibility for entry and expansion by third parties it is also necessary to take account of the extent to which distributors are tied to licensees by non-compete obligations. Third-party technologies only have a real possibility of entry if they have access to the necessary production and distribution assets. In other words, the ease of entry depends not only on the availability of licensees but also the extent to which they have access to distribution. In assessing foreclosure effects at the distribution level the Authority will apply the analytical framework set out in Section VI.2.1 of the Authority guidelines on vertical restraints (89).

(230)

When the licensor has a significant degree of market power, obligations on licensees to obtain the technology only from the licensor can lead to significant foreclosure effects. The stronger the market position of the licensor the higher the risk of foreclosing competing technologies. For appreciable foreclosure effects to occur the non-compete obligations do not necessarily have to cover a substantial part of the market. Even in the absence thereof, appreciable foreclosure effects may occur where non-compete obligations are targeted at undertakings that are the most likely to license competing technologies. The risk of foreclosure is particularly high where there is only a limited number of potential licensees and the licence agreement concerns a technology which is used by the licensees to make an input for their own use. In such cases the entry barriers for a new licensor are likely to be high. Foreclosure may be less likely in cases where the technology is used to make a product that is sold to third parties. Although in this case the restriction also ties production capacity for the input in question, it does not tie demand downstream of the licensees. To enter the market in the latter case licensors only need access to one or more licensee(s) that have suitable production capacity. Unless only few undertakings possess or are able to obtain the assets required to take a licence, it is unlikely that by imposing non-compete obligations on its licensees the licensor is able to deny competitors access to efficient licensees.

(231)

Non-compete obligations may also produce pro-competitive effects. First, such obligations may promote dissemination of technology by reducing the risk of misappropriation of the licensed technology, in particular know-how. If a licensee is entitled to license competing technologies from third parties, there is a risk that particularly licensed know-how would be used in the exploitation of competing technologies and thus benefit competitors. When a licensee also exploits competing technologies, it normally also makes monitoring of royalty payments more difficult, which may act as a disincentive to licensing.

(232)

Second, non-compete obligations possibly in combination with an exclusive territory may be necessary to ensure that the licensee has an incentive to invest in and exploit the licensed technology effectively. In cases where the agreement is caught by Article 53(1) because of an appreciable foreclosure effect, it may be necessary in order to benefit from Article 53(3) to choose a less restrictive alternative, for instance to impose minimum output or royalty obligations, which normally have less potential to foreclose competing technologies.

(233)

Third, in cases where the licensor undertakes to make significant client specific investments for instance in training and tailoring of the licensed technology to the licensee's needs, non-compete obligations or alternatively minimum output or minimum royalty obligations may be necessary to induce the licensor to make the investment and to avoid hold-up problems. However, normally the licensor will be able to charge directly for such investments by way of a lump sum payment, implying that less restrictive alternatives are available.

(234)

Licensing of technology rights in settlement agreements may serve as a means of settling disputes or avoiding that one party exercises its intellectual property rights to prevent the other party from exploiting its own technology rights (90).

(235)

Settlement agreements in the context of technology disputes are, as in many other areas of commercial disputes, in principle a legitimate way to find a mutually acceptable compromise to a bona fide legal disagreement. The parties may prefer to discontinue the dispute or litigation because it proves to be too costly, time-consuming and/or uncertain as regards its outcome. Settlements can also save courts and/or competent administrative bodies effort in deciding on the matter and can therefore give rise to welfare-enhancing benefits. On the other hand, it is in the general public interest to remove invalid intellectual property rights as an unmerited barrier to innovation and economic activity (91).

(236)

Licensing, including cross-licensing, in the context of settlement agreements is generally not as such restrictive of competition since it allows the parties to exploit their technologies after the agreement is concluded. In cases where, in the absence of the licence, it is possible that the licensee could be excluded from the market, access to the technology at issue for the licensee by means of a settlement agreement is generally not caught by Article 53(1).

(237)

However, the individual terms and conditions of settlement agreements may be caught by Article 53(1). Licensing in the context of settlement agreements is treated in the same way as other licence agreements (92). In these cases, it is particularly necessary to assess whether the parties are potential or actual competitors.

(238)

‘Pay-for-restriction’ or ‘pay-for-delay’ type settlement agreements often do not involve the transfer of technology rights, but are based on a value transfer from one party in return for a limitation on the entry and/or expansion on the market of the other party and may be caught by Article 53(1) (93).

(239)

If, however, a settlement agreement also includes a licensing of the technology rights concerned by the underlying dispute, and that agreement leads to a delayed or otherwise limited ability for the licensee to launch the product on any of the markets concerned, the agreement may be caught by Article 53(1) and would then need to be assessed in the light of Articles 4(1)(c) and 4(1)(d) of the TTBER (see Section 3.4.2 above). If the parties to such a settlement agreement are actual or potential competitors and there was a significant value transfer from the licensor to the licensee, the Authority will be particularly attentive to the risk of market allocation/market sharing.

(240)

Settlement agreements whereby the parties cross-license each other and impose restrictions on the use of their technologies, including restrictions on the licensing to third parties, may be caught by Article 53(1). Where the parties have a significant degree of market power and the agreement imposes restrictions that clearly go beyond what is required in order to unblock, the agreement is likely to be caught by Article 53(1) even if it is likely that a mutual blocking position exists. Article 53(1) is particularly likely to apply where the parties share markets or fix reciprocal running royalties that have a significant impact on market prices.

(241)

Where under the settlement agreement the parties are entitled to use each other's technology and the agreement extends to future developments, it is necessary to assess what is the impact of the agreement on the parties' incentive to innovate. In cases where the parties have a significant degree of market power the agreement is likely to be caught by Article 53(1) where the agreement prevents the parties from gaining a competitive lead over each other. Agreements that eliminate or substantially reduce the possibilities of one party to gain a competitive lead over the other reduce the incentive to innovate and thus adversely affect an essential part of the competitive process. Such agreements are also unlikely to satisfy the conditions of Article 53(3). It is particularly unlikely that the restriction can be considered indispensable within the meaning of the third condition of Article 53(3). The achievement of the objective of the agreement, namely to ensure that the parties can continue to exploit their own technology without being blocked by the other party, does not require that the parties agree to share future innovations. However, the parties are unlikely to be prevented from gaining a competitive lead over each other where the purpose of the licence is to allow the parties to develop their respective technologies and where the licence does not lead them to use the same technological solutions. Such agreements merely create design freedom by preventing future infringement claims by the other party.

(242)

In the context of a settlement agreement, non-challenge clauses are generally considered to fall outside Article 53(1). It is inherent in such agreements that the parties agree not to challenge ex post the intellectual property rights which were the centre of the dispute. Indeed, the very purpose of the agreement is to settle existing disputes and/or to avoid future disputes.

(243)

However, non-challenge clauses in settlement agreements can under specific circumstances be anti-competitive and may be caught by Article 53(1). The restriction of the freedom to challenge an intellectual property right is not part of the specific subject-matter of an intellectual property right and may restrict competition. For instance, a non-challenge clause may infringe Article 53(1) where an intellectual property right was granted following the provision of incorrect or misleading information (94). Scrutiny of such clauses may also be necessary if the licensor, besides licensing the technology rights, induces, financially or otherwise, the licensee to agree not to challenge the validity of the technology rights or if the technology rights are a necessary input for the licensee's production (see also point (136) above).

(244)

Technology pools are defined as arrangements whereby two or more parties assemble a package of technology which is licensed not only to contributors to the pool but also to third parties. In terms of their structure technology pools can take the form of simple arrangements between a limited number of parties or of elaborate organisational arrangements whereby the organisation of the licensing of the pooled technologies is entrusted to a separate entity. In both cases the pool may allow licensees to operate on the market on the basis of a single licence.

(245)

There is no inherent link between technology pools and standards, but the technologies in the pool often support, in whole or in part, a de facto or de jure industry standard (95). Different technology pools may support competing standards (96). Technology pools can produce pro-competitive effects, in particular by reducing transaction costs and by setting a limit on cumulative royalties to avoid double marginalisation. The creation of a pool allows for one-stop licensing of the technologies covered by the pool. This is particularly important in sectors where intellectual property rights are prevalent and licences need to be obtained from a significant number of licensors in order to operate on the market. In cases where licensees receive on-going services concerning the application of the licensed technology, joint licensing and servicing can lead to further cost reductions. Patent pools can also play a beneficial role in the implementation of pro-competitive standards.

(246)

Technology pools may also be restrictive of competition. The creation of a technology pool necessarily implies joint selling of the pooled technologies, which in the case of pools composed solely or predominantly of substitute technologies amounts to a price fixing cartel. Moreover, in addition to reducing competition between the parties, technology pools may also, in particular when they support an industry standard or establish a de facto industry standard, result in a reduction of innovation by foreclosing alternative technologies. The existence of the standard and a related technology pool may make it more difficult for new and improved technologies to enter the market.

(247)

Agreements establishing technology pools and setting out the terms and conditions for their operation are not — irrespective of the number of parties — covered by the block exemption, as the agreement to establish the pool does not permit a particular licensee to produce contract products (see Section 3.2.4 above). Such agreements are addressed only by these guidelines. Pooling arrangements give rise to a number of particular issues regarding the selection of the included technologies and the operation of the pool, which do not arise in the context of other types of licensing. Licensing out from the pool is generally a multiparty agreement, taking into account that the contributors commonly determine the conditions for such licensing out, and is therefore also not covered by the block exemption. Licensing out from the pool is dealt with in point (261) and in Section 4.4.2 below.

(248)

The way in which a technology pool is formed, organised and operated can reduce the risk of it having the object or effect of restricting competition and provide assurances to the effect that the arrangement is pro-competitive. In assessing the possible competitive risks and efficiencies, the Authority will, inter alia, take account of the transparency of the pool creation process; the selection and nature of the pooled technologies, including the extent to which independent experts are involved in the creation and operation of the pool and whether safeguards against exchange of sensitive information and independent dispute resolution mechanisms have been put in place.

(249)

When participation in a standard and pool creation process is open to all interested parties it is more likely that technologies for inclusion into the pool are selected on the basis of price/quality considerations than when the pool is set up by a limited group of technology owners.

(250)

The competitive risks and the efficiency enhancing potential of technology pools depend to a large extent on the relationship between the pooled technologies and their relationship with technologies outside the pool. Two basic distinctions must be made, namely: (a) between technological complements and technological substitutes; and (b) between essential and non-essential technologies.

(251)

Two technologies are complements as opposed to substitutes when they are both required to produce the product or carry out the process to which the technologies relate. Conversely, two technologies are substitutes when either technology allows the holder to produce the product or carry out the process to which the technologies relate.

(252)

A technology can be essential either: (a) to produce a particular product or carry out a particular process to which the pooled technologies relate; or (b) to produce such a product or carry out such a process in accordance with a standard which includes the pooled technologies. In the first case, a technology is essential (as opposed to non-essential) if there are no viable substitutes (both from a commercial and technical point of view) for that technology inside or outside the pool and the technology in question constitutes a necessary part of the package of technologies for the purposes of producing the product(s) or carrying out the process(es) to which the pool relates. In the second case, a technology is essential if it constitutes a necessary part (that is to say, there are no viable substitutes) of the pooled technologies needed to comply with the standard supported by the pool (standard essential technologies). Technologies that are essential are by necessity also complements. The fact that a technology holder merely declares that a technology is essential does not imply that such a technology is essential according to the criteria described in this point.

(253)

When technologies in a pool are substitutes, royalties are likely to be higher than they would otherwise be, because licensees do not benefit from rivalry between the technologies in question. When the technologies in the pool are complements the technology pool reduces transaction costs and may lead to lower overall royalties because the parties are in a position to fix a common royalty for the package as opposed to each party fixing a royalty for its own technology while not taking into account that a higher royalty for one technology will usually decrease the demand for complementary technologies. If royalties for complementary technologies are set individually, the total of these royalties may often exceed what would be collectively set by a pool for the package of the same complementary technologies. The assessment of the role of substitutes outside the pool is set out in point (262) below.

(254)

The distinction between complementary and substitute technologies is not clear-cut in all cases, since technologies may be substitutes in part and complements in part. When, due to efficiencies stemming from the integration of two technologies, licensees are likely to demand both technologies, the technologies are treated as complements, even if they are partly substitutable. In such cases it is likely that, in the absence of the pool, licensees would want to licence both technologies due to the additional economic benefit of using both technologies as opposed to using only one of them. In the absence of such demand-based evidence on the complementarity of the pooled technologies, it is an indication that these technologies are complements if: (i) the parties contributing technology to a pool remain free to license their technology individually; and (ii) the pool is willing, besides licensing the package of technologies of all parties, to license the technology of each party also separately; and (iii) the total royalties charged when taking separate licences to all pooled technologies do not exceed the royalties charged by the pool for the whole package of technologies.

(255)

The inclusion of substitute technologies in the pool generally restricts inter-technology competition since it can amount to collective bundling and lead to price fixing between competitors. As a general rule the Authority considers that the inclusion of significant substitute technologies in the pool constitutes a violation of Article 53(1). The Authority also considers that it is unlikely that the conditions of Article 53(3) will be fulfilled in the case of pools comprising to a significant extent substitute technologies. Given that the technologies in question are alternatives, no transaction cost savings accrue from including both technologies in the pool. In the absence of the pool licensees would not have demanded both technologies. To alleviate the competition concerns it is not sufficient that the parties remain free to license independently. This is because the parties are likely to have little incentive to license independently in order not to undermine the pool's licensing activity, which allows them to jointly exercise market power.

(256)

Another relevant factor in assessing the competitive risks and the efficiencies of technology pools is the extent to which independent experts are involved in the creation and operation of the pool. For instance, the assessment of whether or not a technology is essential to a standard supported by a pool is often a complex matter that requires special expertise. The involvement in the selection process of independent experts can go a long way in ensuring that a commitment to include only essential technologies is implemented in practice. Where the selection of technologies to be included in the pool is carried out by an independent expert this may also further competition between available technological solutions.

(257)

The Authority will take into account how experts are selected and the functions that they are to perform. Experts should be independent from the undertakings that have formed the pool. If experts are connected to the licensors (or the licensing activity of the pool) or otherwise depend on them, the involvement of the expert will be given less weight. Experts must also have the necessary technical expertise to perform the various functions with which they have been entrusted. The functions of independent experts may include, in particular, an assessment of whether or not technologies put forward for inclusion into the pool are valid and whether or not they are essential.

(258)

Finally, any dispute resolution mechanisms foreseen in the instruments setting up the pool are relevant and should be taken into account. The more dispute resolution is entrusted to bodies or persons that are independent of the pool and its members, the more likely it is that the dispute resolution will operate in a neutral way.

(259)

It is also relevant to consider the arrangements for exchanging sensitive information between the parties (97). In oligopolistic markets exchanges of sensitive information such as pricing and output data may facilitate collusion (98). In such cases the Authority will take into account to what extent safeguards have been put in place, which ensure that sensitive information is not exchanged. An independent expert or licensing body may play an important role in this respect by ensuring that output and sales data, which may be necessary for the purposes of calculating and verifying royalties is not disclosed to undertakings that compete on affected markets.

(260)

Special care should be taken to put in place such safeguards when interested parties participate simultaneously in efforts to form pools of competing standards where this may lead to exchange of sensitive information between competing pools.

(261)

The creation and operation of the pool, including the licensing out, generally falls outside Article 53(1), irrespective of the market position of the parties, if all the following conditions are fulfilled:

(262)

Where significant complementary but non-essential patents are included in the pool there is a risk of foreclosure of third-party technologies. Once a technology is included in the pool and is licensed as part of the package, licensees are likely to have little incentive to license a competing technology when the royalty paid for the package already covers a substitute technology. Moreover, the inclusion of technologies which are not necessary for the purposes of producing the product(s) or carrying out the process(es) to which the technology pool relates or to comply with the standard which includes the pooled technology also forces licensees to pay for technology that they may not need. The inclusion of such complementary technology thus amounts to collective bundling. Where a pool encompasses non-essential technologies, the agreement is likely to be caught by Article 53(1) where the pool has a significant position on any relevant market.

(263)

Given that substitute and complementary technologies may be developed after the creation of the pool, the need to assess essentiality doesn't necessarily end with the creation of the pool. A technology may become non-essential after the creation of the pool due to the emergence of new third-party technologies. Where it is brought to the attention of the pool that such a new third-party technology is offered to and demanded by licensees, foreclosure concerns may be avoided by offering to new and existing licensees a licence without the no-longer-essential technology at a correspondingly reduced royalty rate. However, there may be other ways to ensure that third-party technologies are not foreclosed.

(264)

In the assessment of technology pools comprising non-essential but complementary technologies, the Authority will in its overall assessment, inter alia, take account of the following factors:

(265)

Even technology pool arrangements that restrict competition may give rise to pro-competitive efficiencies (see point (245) above), which must be considered under Article 53(3) and balanced against the negative effects on competition. For example, if the patent pool includes non-essential patents but fulfils all the other criteria of the safe harbour listed in point (261), where there are pro-competitive reasons for including non-essential patents in the pool (see point (264) above) and where licensees have the possibility of obtaining a licence for only part of the package with a corresponding reduction of royalties (see point (264) above), the conditions of Article 53(3) are likely to be fulfilled.

(266)

Where the agreement to set up a technology pool does not infringe Article 53, the next step is to assess the competitive impact of the licences agreed by the pool with its licensees. The conditions under which these licences are granted may be caught by Article 53(1). The purpose of this section is to address a certain number of restraints that in one form or another are commonly found in licensing agreements from technology pools and which need to be assessed in the overall context of the pool. Generally the TTBER does not apply to licence agreements concluded between the pool and third-party licensees (see point (247) above). This section therefore deals with the individual assessment of licensing issues that are particular to licensing in the context of technology pools.

(267)

In making its assessment of technology transfer agreements between the pool and its licensees the Authority will be guided by the following main principles:

(268)

Undertakings setting up a technology pool that is compatible with Article 53, are normally free to negotiate and fix royalties for the technology package (subject to any commitment given to license on fair, reasonable and non-discriminatory terms, FRAND) and each technology's share of the royalties either before or after the standard is set. Such agreement is inherent in the establishment of the pool and cannot in itself be considered restrictive of competition. In certain circumstances it may be more efficient if the royalties of the pool are agreed before the standard is chosen, to avoid that the choice of the standard increases the royalty rate by conferring a significant degree of market power on one or more essential technologies. However, licensees must remain free to determine the price of products produced under the licence.

(269)

Where the pool has a dominant position on the market, royalties and other licensing terms should be non-excessive and non-discriminatory and licences should be non-exclusive (100). These requirements are necessary to ensure that the pool is open and does not lead to foreclosure and other anti-competitive effects on down-stream markets. These requirements, however, do not preclude different royalty rates for different uses. It is in general not considered restrictive of competition to apply different royalty rates to different product markets, whereas there should be no discrimination within product markets. In particular, the treatment of licensees of the pool should not depend on whether or not they are also licensors. The Authority will therefore take into account whether licensors and licensees are subject to the same royalty obligations.

(270)

Licensors and licensees should be free to develop competing products and standards. They should also be free to grant and obtain licences outside the pool. These requirements are necessary in order to limit the risk of foreclosure of third-party technologies and ensure that the pool does not limit innovation and does not preclude the creation of competing technological solutions. Where pooled technology is included in a (de facto) industry standard and where the parties are subject to non-compete obligations, the pool creates a particular risk of preventing the development of new and improved technologies and standards.

(271)

Grant-back obligations should be non-exclusive and limited to developments that are essential or important to the use of the pooled technology. This allows the pool to feed on and benefit from improvements to the pooled technology. It is legitimate for the parties to ensure by grant-back obligations that the exploitation of the pooled technology cannot be held up by licensees, including subcontractors working under the licence of the licensee, that hold or obtain essential patents.

(272)

One of the problems identified with regard to technology pools is the risk that they may shield invalid patents. Pooling may raise the costs/risks for a successful challenge, because the challenge might fail if only one patent in the pool is valid. The shielding of invalid patents in the pool may oblige licensees to pay higher royalties and may also prevent innovation in the field covered by an invalid patent. In this context, non-challenge clauses, including termination clauses (101), in a technology transfer agreement between the pool and third parties are likely to fall within Article 53(1).

(273)

Pools often include both patents and patent applications. If patent applicants who submit their patent applications to pools, where available, use the patent application procedures that allow for a faster granting, this will achieve faster certainty on the validity and scope of these patents.