Jurisdiction of EC Competition Law If your IP license contemplates use in the EU[2], you are probably subject to EU law. The ECJ asserts jurisdiction over contracts which are "implemented" in the EU. (The Commission has taken a more expansive view and would assert jurisdiction based only on an "effects" standard, but so far the Commission's views have not been supported by the ECJ.) Ahlström v. Commission[3] (the so-called "Woodpulp case") involved horizontal price fixing by Finnish and U.S. producers of wood pulp on sales to customers located in the EU. The Commission asserted jurisdiction based on an "effects" standard. ("The effect of the agreements and practices on prices . . . to customers . . . within the EEC was therefore not only substantial but intended, and was the primary and direct result of the agreements and practices." (opinion ¶3)).[4] The ECJ held that because the producers had agreed on prices to be charged to customers in the EU, and had actually sold at the coordinated prices to customers within the EU, the producers had entered into an agreement which had both the object and the effect of restricting competition within the common market. The Court, in language which could well apply to IP licenses, emphasized that its jurisdiction was territorial and was based on the implementation of the agreement within the territory of the Community:
An agreement which has had the effect of restricting competition within the common market, consists of conduct made up of two elements, the formation of the agreement, decision or a concerted practice and the implementation thereof. If the applicability of prohibitions laid down under competition law were made to depend on the place where the agreement, decision or a concerted practice was formed, the result would obviously be to give undertakings an easy means of evading those prohibitions. The decisive factor is therefore the place where it is implemented. (opinion ¶¶16; emphasis supplied).
Although the producers in Woodpulp reached agreement outside the EU and were all headquartered outside the EU, they implemented their pricing agreement by charging the coordinated prices to customers in the EU. Therefore, subject matter jurisdiction was appropriate.[5]
Imperial Chemical Industries Ltd. v. Commission[6] ("Dyestuffs") had earlier asserted jurisdiction based on a doctrine of economic unity of interest between parent companies located outside the Community and subsidiaries located within the Community:
If the subsidiary does not in fact have autonomy in determining its course of conduct on the market, the prohibition of Article 85, paragraph 1, is inapplicable to the relationship between it and the parent company, with which it forms an economic unity. Since an affiliated group so structured forms a unity, the parent company can, under certain circumstances, be held responsible for the actions of the subsidiary.
In Dyestuffs jurisdiction to enforce Article 85 was taken although the parent company was domiciled outside the Community. The parent company was able to, and in fact did, decisively influence the pricing policy of its subsidiaries in the Common Market.
Under Woodpulp and Dyestuffs, where a U.S. company licenses intellectual property to someone in Europe, it must seriously analyze whether EU competition law applies and whether the terms of its license are enforceable. The license must be drafted so that, if and when it is scrutinized, valuable IP can in fact be fully protected.
The Sources of EU Competition Law EC Enforcement Authorities The sources of EU competition law are Articles 85 and 86 of the Treaty of Rome[7] (the "EC Treaty"). Articles 85 and 86 of the EC Treaty are administered by the European Commission. The Commission consists of twenty members nominated by the Member States, but operates independently of the Member States. Its work is carried out by 23 Directorates-General. The Directorate-General for competition (DG-IV) is staffed by approximately 400 lawyers and economists and is responsible for enforcing Articles 85 and 86 and the Merger Control Regulation.
The Court of First Instance ("CFI") was created in 1987 by amendment to the EC Treaty; it was constituted by decision of the European Council in October 1988. Actions by companies or individuals against the European Commission relating to the EC competition rules must be brought in the Court of First Instance, with a right of appeal to the European Court of Justice. The ECJ sits in Luxembourg and consists of 16 judges. It has original jurisdiction over issues referred by Member State National Courts under Article 177 of the Treaty and over actions brought by Member States or by Community institutions.
A company or individual can seek a remedy by going to the Commission or by filing a suit for damages in certain of the Member States' courts. The Commission can issue an injunction (in appropriate cases) but does not have the power to award damages. If the Commission does not act, the complaining company or individual can go to the Court of First Instance and ask for an order directing the Commission to act. But the CFI or ECJ will not themselves act on the complaint; they will refer it to the Commission or to the national courts.
The prohibitions of Articles 85 and 86 produce direct effects on relations between individuals and thus also create rights enforceable in Member States' courts.[8] Articles 85 and 86 are incorporated into the law of the Member States and several of the Member States' highest courts have permitted actions for damages under Articles 85 and 86. Community law requires Member States' courts to provide a remedy for violations of competition law.[9] When a Member State court has questions regarding the application of EC competition law it can seek informal guidance from the ECJ[10] or request a preliminary ruling under Article 177 of the treaty.
The Commission has stated that cases under Articles 85 and 86 which do not have particular political, economic or legal significance to the EU should be decided in the national courts.[11] The Commission's decisions are binding on the courts and agreements or practices which benefit from a block or individual exemption from Article 85 must be fully recognized by the Member State courts.[12] Only the Commission has the power to grant Article 85(3) exemptions. National courts may not grant exemptions under Article 85(3) and may not alter or extend the scope of the block exemptions. Therefore undertakings seeking the benefit of a block exemption must comply fully with the precise provisions therein or must get an individual exemption from the Commission.
Article 85 The principal sources of EU competition law are Article 85 (dealing with agreements restraining competition) and Article 86 (dealing with abuses of dominant position). Article 85(1) provides:
"The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
- directly or indirectly fix purchase or selling prices or any other trading conditions;
- limit or control production, markets, technical development, or investment;
- share markets or sources of supply;
- apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
- make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."
In deciding whether any particular transaction falls within Article 85(1), it is necessary that the three following requirements be met:
- There must be an agreement, decision or concerted practice between undertakings
- having as its object or effect the prevention, restriction or distortion of competition and
- affecting trade between Member States.
Article 85(1) applies only where the agreement has the object or effect of restricting competition.[13] The "object" (purpose) of an agreement is determined by an objective assessment of its terms, not by the parties' subjective intent.[14] In cases where it is not clear that the object of an agreement is to restrict competition, the Commission or Court will consider its effects and whether such effects are necessary to achieve a legitimate pro competitive business purpose.[15] Where the "effects" standard applies, Article 85(1) prohibits agreements containing restrictions on competition which have an "appreciable" effect.[16] This rule of appreciability is in some respects comparable to the rule of reason analysis under the United States Sherman Act, although some would say that the threshold for showing an applicable impact on competition with EU is lower than the effect on competition which must be shown under the U.S. rule of reason.
According to Article 85(2) agreements which fall within the prohibition of Article 85(1) are automatically void. In practice, however, only those specific contractual provisions which run afoul of Article 85(1) are automatically void.[17] Whether other provisions of a contract are affected by such voidness depends on the law of severability of the jurisdiction whose substantive contract law applies.[18]
Under Article 85(3) of the Treaty, the Commission is empowered to exempt restrictive agreements from the prohibition of Article 85(1) if four conditions are met:
- The agreement (or provision) at issue must contribute to improving the production or distribution of the goods involved or to promoting technical or economic progress. Such contributions include savings in distribution costs, avoidance of duplicative development costs, promotion of technological innovation, and protection of the environment.
- Consumers must obtain a fair share of the resulting benefits. The Commission has regarded as relevant benefits, inter alia, the following: improved supply of goods, the introduction of new or improved products, better use of resources and lower costs, and hence lower prices for consumers. The Commission tends to interpret the "fair share" concept in terms of lower prices rather than in terms of improved services. The Commission has also permitted restructuring agreements during recession.
- It must not include restrictions which are unnecessary to the objective of improving production or distribution.
- It must not afford the parties the possibility of eliminating competition in a substantial part of the relevant market.
Only the European Commission has the power to grant Article 85(3) exemptions.[19] Parties seeking such exemptions must notify them to the Commission on a document entitled Form A/B.[20] Because of the Commission's limited staff, it can take as long as two to three years for the Commission to decide an application for exemption. In many circumstances the Commission will, at the request of the parties, issue on an expedited basis a comfort letter confirming that certain conduct falls outside the scope of Article 85(1).
Thus, unlike the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission, the European Commission has broad regulatory powers under Article 85. All agreements which have a purpose or effect of restricting competition are brought within the broad sweep of Article 85(1) and are automatically void unless specifically exempted by the Commission in the exercise of its Article 85(3) regulatory powers. And in exercising its regulatory powers the Commission takes into account an array of industrial policy factors including production and distribution efficiencies, avoidance of duplicative development efforts and promotion of innovation -- as well as competition and consumer prices.[21]
To reduce the burdens on the Commission, and to create greater certainty for businesses, the Commission has adopted a number of so-called block exemptions. These include block exemptions for certain types of exclusive distribution agreements;[22] exclusive purchasing agreements;[23] motor vehicle distribution and servicing agreements;[24] research and development agreements;[25] specialization agreements;[26] franchising agreements;[27] insurance agreements;[28] and certain agreements in the air transport sector.[29]
The block exemptions can be extremely technical and specific, and neither the CFI, the ECJ nor a national court has the authority to rewrite or extend the scope of a block exemption even when an agreement fails to satisfy a block exemption's conditions for minor or technical reasons.
On January 31, 1996 the European Commission adopted a block exemption on technology transfer agreements, which replaced two earlier block exemptions for patent licensing and know-how licensing agreements.[30] For U.S. companies licensing technology in the EU, it is critical that their license agreements fall within this block exemption. If they don't, they risk being void and unenforceable.
Article 86 Article 86 of the EU Treaty is roughly analogous to Section 2 of the Sherman Act. It deals with abuses of dominant market positions. Whereas Article 85 is primarily directed at restrictive practices between two or more undertakings, Article 86 aims primarily at the conduct of one powerful undertaking. Article 86 provides:
"Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Such abuse may, in particular, consist in:
- directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
- limiting production, markets or technical development to the prejudice of consumers;
- applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
- making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."
The ECJ has defined a dominant position as:
a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.
United Brands v. Commission.[31] Market share is the primary test for determining whether a firm has a dominant position.[32] A market share above 50% creates a rebuttable presumption that a firm has a dominant position.[33] A share of under 10% establishes that a firm is not dominant.[34] Other factors the Commission may consider are the degree of vertical integration, technological advantages, strong brand names, and whether the relevant market is mature or rapidly changing. The mere holding of a dominant position is not unlawful. There must be a showing that the dominant position has been "abused."[35] Examples of abusive conduct include tying, predatory pricing, use of discriminatory trading conditions within the common market, and conduct aimed at preventing entry of new competitors into a market or eliminating existing competitors.[36] In some circumstances (as explained below) refusal to license a copyright or royalty rates which a court deems excessive can be abuses of a dominant position in violation of Article 86. An effect on trade between Member States must be shown. Abusive conduct must, of course, be distinguished from aggressive competition on the merits.
Under the "essential facilities" doctrine,[37] the Commission has used Article 86 to require airlines to interline with one another.[38] In another case, the Commission required a ferry service to grant a competitor access to a port which it controlled.[39] The Commission held that the company which controlled the port abused its dominant position and required that it grant its competitors access to the facility on the same terms it gave to its own controlled operations.[40] It does not require a great leap of logic to envision the Commission applying this doctrine to intellectual property which it determines is being used to block competitive access to a market. In the Magill[41] case, the Commission, the Court of First Instance and the ECJ did just that.
Although the traditional view is that the exercise of an intellectual property right cannot be prohibited by Article 86,[42] there are cases where the exercise of intellectual property rights by dominant firms has been held to violate Article 86 and has therefore been enjoined. In the Magill decision, for example, several television stations sought an injunction to restrain a company from publishing a comprehensive weekly television guide that included their copyrighted TV listings.[43] The television stations refused to grant the publisher a license to publish their listings, which were protected under national copyright laws. The CFI refused to annul a Commission decision holding the refusal to supply information to be a violation of Article 86.[44] The ECJ upheld the CFI, basing its decision upon the dominant positions of the television stations in their national markets, rather than on the existence of the copyrights. The ECJ found several "special circumstances" which it used to confirm that the Commission has the power to issue orders granting compulsory intellectual property licenses where necessary to remedy perceived abuses. The special circumstances were: There was consumer demand for a comprehensive television guide listing and there were no actual or potential substitute sources other than the television stations for the copyrighted information. By their refusals to license, the television stations were in effect reserving to themselves a secondary market for the publication of weekly television guides. There was no justification presented for the refusals to license. Under Magill, it appears that the requirement of dominance can be relatively easily met where intellectual property is involved and a refusal to license would prevent the development of a differentiated but neighboring product market.
In another case, the SACEM[45] proceeding, the Commission held that it may be an abuse of dominant position under Article 86 for a copyright collection society to seek from its members royalties which a court deems to be "excessive."
Magill, SACEM and the essential facilities doctrine read together create a competition law environment in the EU which is less receptive to the value of intellectual property than is antitrust law in the United States.
Neither the grant of an individual exemption nor a block exemption under Article 85(3) renders Article 86 inapplicable.[46] While the Court has stated that Article 85 block exemptions are intended to improve legal certainty, it has nonetheless preserved the position that block exemptions do not necessarily discharge firms with dominant market positions from complying with Article 86.
The Technology Transfer Block Exemption On January 31, 1996 the European Commission adopted a block exemption for certain technology transfer agreements. Commission Regulation (EC) No. 240/96 on the Application of Article 85(3) of the Treaty to certain categories of technology transfer agreements (the "Technology Block Exemption").[47] This block exemption supersedes two earlier block exemptions and covers both patent licensing and know-how licensing agreements.
The Technology Block Exemption reflects the regulatory and administrative approach of the EU system. Long lists of specific contract clauses are either permitted (white listed) or prohibited (black listed). Different restraints are permitted depending on the location of the customer and whether a purchase order was actively sought or passively received. Some restraints are permissible for only five years, others for ten years, and yet others for the life of the patent. The Commission may involve itself in determining whether know-how is truly secret and substantial and, thus, whether a restraint protecting the know how is justifiable. Compliance with this new block exemption for technology licenses will reduce, though not eliminate, the risk that European courts will impair or rewrite intellectual property rights. If the precise terms of the Technology Block Exemption do not apply, then the exemption is not available. Even if the block exemption is available, Article 86 may still apply to a licensor with a dominant position in a relevant market.
Broadly speaking, the Technology Block Exemption creates lists of permitted restraints, clauses which are generally not restrictive of competition and prohibited provisions. For license agreements not falling within the precise terms of the block exemption it creates an expedited review period of four months.
Permitted restraints in patent or know-how licenses include: a prohibition of sublicensing; an agreement that the licensor will not itself exploit the IP in the licensed territory; an obligation that the licensee not exploit the IP in territories within the Common Market which the licensor has reserved to itself or to other licensees; an obligation on the licensee not to actively market the licensed product in the territories of other licensees; an obligation not to put the licensed product on the market in territories of other licensees in response to unsolicited orders (so-called "passive competition"); a requirement that the licensee use the licensor's trademark; and a limitation on production to the quantities which the licensee requires for the manufacture of his own products.[48] A prohibition on passive competition, i.e., a requirement that the licensee not put the licensed product on the market of other licensees in response to unsolicited orders, is permissible for only five years from the date one of the licensees involved first puts the product on the market within the EU.
In pure know-how licenses, most permissible restraints may not exceed ten years from the date the licensed product is first put on the market within the EU.[49] In know-how licenses (as in patent licenses), a prohibition on passive competition (i.e., making sales in response to unsolicited orders) is valid only for five years from the date a licensee first puts the licensed product on the market within the EU. Requirements that the licensor's trademark be used, that quantities be limited to the licensee's own manufacturing needs, and most other restraints listed in the block exemption are permissible only for so long as the know-how remains "secret and substantial".[50]
For mixed patent and know-how licenses, most of the permissible restraints are permitted for the duration of the patents, even though the know-how involved may no longer be secret or substantial. Again, a restraint on passive competition is valid for only five years. Mixed patent and know-how licenses qualify for the exemption only for so long as the patents remain in force or so long as the non-patented know-how remains secret and substantial, whichever period is longer.[51]
Of course, Article 85 only voids provisions the purpose or effect of which is to restrict competition. Many types of clauses usually do not restrict competition and therefore do not fall within the prohibition of Article 85(1). The Technology Block Exemption lists a number of such provisions, including: a requirement that the licensee hold non-patented know-how secret even after a license agreement has expired; an obligation not to sublicense; obligations not to exploit the IP after expiry of the license; non-exclusive cross-licenses of improvements; obligations to maintain quality and technical specifications; obligations to inform and assist the licensor in prosecuting infringements and misappropriation of the IP; agreed royalty schedules through the term of the agreement regardless of whether know-how has become public; field of use limitations; minimum royalty and quantity requirements; obligations to grant a licensee any more favorable terms that the licensor may later grant to other licensees; a requirement that the licensee not use the licensed IP to construct facilities for third parties; reservation of the right to terminate the license if the licensee contests the validity of the patent or know-how; and a right to terminate the license if the licensee starts competing with the licensor.[52]
Article 3 of the Technology Block Exemption sets forth a list of prohibited clauses. The benefits of the block exemption will not be available where IP licenses contain resale price agreements for licensed products, restraints on competition in R&D, production, use or distribution of competing products within the EU; agreed refusals to sell to resellers located within the licensee's territory where the resellers would market the products in other territories within the EU; licenses between pre-existing competitors which divide markets between them or restrain competition that existed between them prior to entry into the license; compulsory grantbacks of improvements or new applications for the licensed technology; and obligations not to license others after the patent has expired or after non patented know-how has become public.[53]
The Technology Block Exemption specifically does not apply to licenses between participants in a joint venture if the joint venturers are competitors, unless the joint venture accounts for 20% or less of the production in a relevant market in the event of a production joint venture, or, in the event of a production and distribution joint venture, it accounts for 10% or less of a relevant market for the licensed products.[54] The benefits of the block exemption are available for patent pools provided that the parties are not subject to any territorial restrictions within the EU.[55]
The Technology Block Exemption applies to sublicenses as well as to licenses by the owner of the IP.[56] The Commission reserves the right to withdraw the benefits of the block exemption if the effect of a license prevents competition between identical, interchangeable or substitutable goods or services, especially where the licensee's market share exceeds 40%. The benefits of the block exemption may also be withdrawn if a licensee refuses to meet unsolicited orders from users or resellers outside its territory.[57]
The European Commission's approach contrasts with the approach of U.S. antitrust law in its treatment of territorial restraints and tying.
Territorial Restraints It comes as no surprise that the Commission is vigilant in fostering development of an integrated market within the EU. Restraints on passive competition by licensees are valid only for the lesser of five years or for so long as patents remain in effect. Likewise, for know-how licenses, restraints on passive competition are valid only for the lesser of five years or for so long as the know-how remains secret and substantial. Restraints (whether territorial or otherwise) in pure know-how licenses may not, in any event, exceed ten years from the date a licensed product is first put on the market within the EU.
This contrasts with the U.S. approach, which, instead of creating bright-line time periods of validity, analyzes vertical territorial restraints according to a weighing of their pro-competitive and anti-competitive effects in a given relevant market. See Continental T.V., Inc. v. GTE Sylvania Inc., 443 U.S. 36 (1977).
Under U.S. antitrust law, because a licensor of intellectual property could lawfully refuse to license the intellectual property at all, it may carve the IP up into different exclusive territories, time periods and/or fields of use as it may deem fit, provided only that the license does not leverage the lawful power of valid IP into an anti-competitive advantage in another market.[58] The EU requirement that passive sales must be accepted after five years reflects the particular concern of the Commission with creating a single European market. Likewise, the limitation of ten years for territorial restraints in know-how licenses, and the further limitation that such restraints are permissible only so long as the know-how remains "secret and substantial," reflect the importance in the EU of creating a single unified market. U.S. law would in most cases leave the duration of know-how licenses to the decisions of private contracting parties, so long as the licenses are not used as the vehicle for restraining what would otherwise be existing or potential competition.[59]
Tying The Technology Block Exemption permits conduct which U.S. law would view as a per se tying violation.[60] In the interest of quality control, a licensee can be required "to procure goods or services from the licensor or from an undertaking designated by the licensor".[61] The licensor is permitted to conduct quality checks to make sure that these requirements are honored. Id.
U.S. law might very well find this to be a per se violation of the Sherman Act. A tie is an arrangement whereby a seller (or licensor) agrees to sell one product only on the condition that the buyer (or licensee) purchase a second product that the buyer did not want at all, or would have preferred to purchase somewhere else.[62] A tying arrangement is a per se violation of Section 1 of the Sherman Act if "the seller has 'appreciable economic power' in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market."[63] A license conditioned on the purchase of goods used in operating under the license might be illegal tying under U.S. law.[64] While U.S. law permits the enforcement of quality and technical standards, it would not do so by enforcing a tying agreement where the licensor has market power in a tying product.
Article 86 Remains Applicable The Technology Block Exemption does not purport to address Article 86 abuses of dominant position. Nor would the Commission have the power to exempt any such abuses from Article 86. Therefore, companies licensing IP in the European Union who have large market shares remain subject to the Magill case and the essential facilities doctrine and should seek careful counsel so that their IP licenses in Europe will not be deemed void in whole or in part or rewritten by the European courts.