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Reform of European Competition Rules on Technology
Wednesday, October 27, 2004
by
Colin Miller
Like any commercial agreement, technology transfer arrangements are subject to competition law. Both the EU and UK competition rules are virtually identical and prohibit agreements which can preven, restrict or distort competition. This might happen if two competitors use a licence agreement to share customers or control pricing. The result is that restrictions in agreements cannot be relied on in court. Parties may face fines of up to 10% of worldwide turnover and claims for damages for any loss suffered by others as a result of the operation of such agreements. For example, this year Genzyme, a biotech company, was fined £3m by the Office of Fair Trading.
It can be difficult to assess how competition law affects a licence agreement. For many years the EU Commission has provided a short cut through the application of a “block exemption”. Provided the agreement contains certain restrictions on trading which are actually identified in the block exemption, then the agreement is deemed to comply automatically with the EU competition rules. Moreover the UK rules provide that if an agreement falls within an EU block exemption then it is automatically exempt from the UK rules. This means that in principle, the agreement will be valid and enforceable and the parties will avoid fines and claims for damages.
In May 2004 the Commission issued a new technology transfer block exemption (“the Regulation”). This replaces the previous block exemption introduced in 1996 (“the 1996 Regulation”). The intention was that the Regulation would help reduce bureaucracy and increase legal certainty for businesses. However it remains to be seen whether this will be the case.
The 1996 Regulation was much narrower in scope and therefore created too much of a “straight jacket”. Under the old regime parties had to ensure that their agreements were written in a certain way in order to benefit from the block exemption. If there was even one restriction in an agreement which was not specifically identified in the 1996 Regulation then the entire agreement fell outside the block exemption.
The Regulation now creates a safe harbour for most licensing agreements. It will only apply to agreements below a certain market share threshold. This has been set at 20% for agreements between competitors and 30% between non-competitors. There is also a “black list” of “hardcore” restrictions which will never be exempt such as resale price maintenance. One of the key advantages of the new regime is that what is not expressly excluded from the Regulation will now be exempt.
There are clearly implications for the biotechnology industry. There is potentially more flexibility with the abolishment of “permitted” and “non permitted” restrictions. However the creation of the “safe harbour” will in itself create legal uncertainty. Businesses will now have to make their own assessment as to whether their agreements fall within the Regulation. This will depend on economic analysis of issues such as calculation of market share. This creates its own problems in the biotech field where the producer is likely to have a complete monopoly because of the nature of the new product. Companies will be left to rely on their own assessment of the relevant market.
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.