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Licensing helps disseminate innovations and allows companies to integrate and use complementary technologies and capabilities. The European Commission (EC) has developed rules to regulate commercial licensing agreements. Specifically, Art. 81(1) of the EC Treaty prohibits agreements that prevent, restrict or distort competition. Agreements violating this article are void, and the parties to such agreements are liable to severe fines. However, agreements that satisfy certain criteria, set out in Art. 81(3), may be exempt from the provisions of Art. 81(1). Agreements that meet these criteria are said to be "block exempted" and are considered not to violate Art. 81(1). The EC has passed several block exemption regulations, such as the Technology Transfer Block Exemption regulation of 1996 (1996 TTBE). The 1996 TTBE divided clauses in agreements into four categories: exempt, white, black and grey. However, copyright, design rights and trade-marks were not covered. Although the 1996 TTBE was originally intended to stay in force until March 31, 2006, the EC adopted a new Technology Transfer Block Exemption regulation (new TTBE) on April 27, 2004. The new TTBE, which has been in effect since May 1, 2004, brings important changes to the rules governing technology licensing and has dramatic consequences for many companies operating in Europe. The new regulation reflects a fundamental refocussing of the Commission's technology licensing policy. While the former framework was based on a static list of prohibited and exempted behaviours, the new framework is based on the competitive status of the parties: the primary criterion is now market share. Indeed, the determination of whether the market share thresholds governing the application of the block exemption have been reached and of whether the parties are competitors is based on market definitions. The most important changes to technology licensing introduced by the new TTBE are: Additionally, the new TTBE offers greater flexibility in the types of provisions which can be included in technology agreements and provides companies more freedom to draw up licence agreements reflecting their commercial needs. All in all, the new regulation is a clear improvement over the 1996 TTBE, and entities licensing technology thus need to be aware of it. The Commission's approach to defining the relevant market is laid out in its market definition guidelines. It may be necessary to define both the relevant product market and the relevant technology market. Under the new rule, the market share threshold for exemption depends on whether the parties to the agreement under review are competitors or non-competitors. As can be seen from the diagram below, the parties have to first determine their competitive status and then the relevant market shares they hold. Assuming that the parties do not exceed the market share thresholds (20% or 30%, depending on competitive status), their agreement must not contravene the new TTBE's hardcore restrictions (HCR), enunciated in Art. 4. Contravention of any of these restrictions will most likely invalidate the complete agreement. The new TTBE also contains a list of excluded restrictions (Art. 5). Any provisions in the agreement that correspond to an excluded restriction are likely to be found invalid. If the market share is below the exemption threshold at the time the agreement is signed, but subsequently rises above the threshold, the exemption continues for two consecutive calendar years following the year the threshold was first exceeded. When the parties are not initially competitors, but later become competitors, the provisions governing non-competitors continue to apply for the full life of the agreement. It is important to mention that exceeding market share thresholds is not, in itself, sufficient evidence of illegality. In such cases, the conformity of the agreement with the provisions of Art. 81(3) must be verified, in accordance with its associated guidelines. Under this new regime, assessment of the legality of technology licensing agreements requires a complex evaluation of the technology market and the product market. It is no longer possible to assess the compatibility of a technology licensing agreement simply by looking at the terms of the agreement. The effects of the new TTBE are wide-ranging, since even agreements between two non-European Union (EU) companies may fall within its provisions if those agreements have the potential to affect trade between EU Member States. The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
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