TECHNOLOGY TRANSFER AGREEMENTS

ABSTRACT

Technology transfer is the process by which a technology, expertise, knowhow or facilities

developed by one individual, enterprise or organization is transferred to another individual,
enterprise or organization. Effective technology transfer results in commercialization of a
new product or service or in the improvement of an existing product or process. Technology
transfer may happen from country to country, from industry to industry or from research
laboratory to an existing or new business etc. In other sectors, where the market evolves
incessantly as new products with new functions or designs appear on a regular basis,
companies are forced to innovate by acquiring or developing new technologies.
Technological innovation is therefore a crucial element of the competitive strategy of high-
tech enterprise and the challenging issues for competition authority to provide appropriate
application of the antitrust laws to high-tech industries such as pharmaceuticals,
biotechnology, communications, international credit and finance, and various delivery
systems for entertainment and news industries.

Licensing or transferring the technology is an important part of the innovation process, as it

facilitates dissemination of new products and technologies and allows companies to
integrate and use complementary technologies. However in some circumstances licensing
agreements can also have a stifling effect on competition. When two competitors use a
licensing agreement with the aim of dividing markets between them or when an important
licensor excludes competing technologies from the market through conditions in its
licensing agreements. Competition Commission of India has been vested with adequate
powers of investigating, restraining and penalizing anti-competitive conduct of technology
transfer agreements of patent and copyright holders if they impose such conditions on their
license which may reduce or eliminate competition in the relevant market. It can inquire into
and prohibit anti-competitive agreement and abuse of dominant position on its own motion
or on receipt of information or on reference made by the government.
 INTRODUCTION

The fact that intellectual property laws grant exclusive rights of exploitation does not imply
that intellectual property rights are immune from competition law intervention1

Technology transfer agreements are tools to fulfill technological requirements of high-tech

industries like Aircraft and Spacecraft, Pharmaceuticals, Radio, TV, Communication
equipment, Medical and Optimal instruments etc.2 Market of high-tech industries is based
upon technological processes and use of advance technology. To procure or retain
competitive edge in the market, enterprise acquires new updated technology by way of
agreements with holder of technology or holder of license to use of technology.

The relationship between competition law and intellectual property (IP) rights can be best
described as a tale of uneasy bedfellows.3 That is why there is a strain between the
existence and exercise of intellectual property rights and the application of competition law.
The conventional view has been to suggest that intellectual property is a grant of monopoly
by the state as a reward for innovation. Mere monopoly does not reflect adverse effect in the
competition. But the monopoly granted to a holder of an IP right can create barriers to entry
and give rise to market power, the abuse of which is prohibited by competition law.
Monopolists and firms in the process of acquiring market power are subject to greater
scrutiny of their behavior than other firms. A monopolist abuses dominance position if it has

1
Para 7 of Commission Notice- Guidelines on the Application of Article 81 of the EC
Treaty to Technology Transfer Agreements, OJ C 101 (2004)
2
www.oecd.org/sti/industryandglobalisation/48350231.pdf - OECD Directorate for Science,
Technology and Industry 7 July, 2011 Economic Analysis and Statistics Division-
Classification of manufacturing industries into categories based on R&D intensities (Last
Accessed on 14th February, 2013 at 15:45 PM)

3
Chopra Naval Satarawala and Dinoo Muthappa, The Curious Case of Compulsory
Licensing in India, Competition Law International, Vol. 8 (2), August 2012. Also available
at http://awards.concurrences.com/business-articles-awards/article/the-curious-case-of-
compulsory
market power (power to raise prices or exclude competition in relevant market) and engages
in anti- competitive conduct designed to maintain or extend that power.4

The goal of competition law is not to prohibit monopoly. Instead, the goal is to prohibit anti-
competitive conduct. An industry that achieves a monopoly without entering into anti-
competitive conduct will not violate the principles of competition law at all.5 Competition
law recognizes that monopoly is not curse for market fair competition because it may arise
legitimately, and may reflect efficiencies and economies. Intellectual property rights confer
an exclusive legal right on the owner to exploit the patent, copyright, trademark or any other
IPR in question. Thus the IPR owner is able unilaterally to prevent unauthorized use of its
intellectual property and has a monopoly over whether to exploit it itself or through
licensing to third party.6 And the holder of Intellectual Property Rights has a near absolute
right to stop any third party exploiting the subject matter. Report of high- level committee
on competition policy (S.V.S Raghavan Committee report) also observed that there is
possibility of anti- competitive conduct in practice of Intellectual Property Rights.
Competition authority can restrict the abuse of Intellectual Property Rights to secure
competition in the market. Competition regulation aims at restricting attempts to extend
exploitation of an intellectual asset beyond the boundaries provided by IP law.

Intellectual Property Rights are right to exclude and it means that strong IP protection may
lead to both market expansion and market power effects. Stronger IPRs may enable the right
holder to charge monopoly prices. In exercise of intellectual property rights, the owners of
these rights impose conditions on their licensees that go beyond the limits of the rights

4
Hovenkamp Herbert, Mark D. Janis and Mark A. Lemley, IP and Antitrust- An Analysis of
Antitrust Principles Applied to Intellectual Property Law, Aspen Publishers, US, 2009, p. 1-
7

5
Kumar Pankaj, The Interface Between IPRs and Competition: Indian Scenario, Available at
http://www.slideshare.net/pankaj7379/the-interface-between-iprs-and-competition-law

6
Furse Mark, Competition Law of the EC and UK, Oxford University Press, 6th ed. 2008, p.
437
conferred on them by law and which conditions may reduce competition or eliminate
competition in the relevant market.7 These agreements possess certain restraint clauses
which may affect the competition in the market. Technology transfer agreements may also
be used for anti-competitive purposes, e.g. where two competitors use a licensing agreement
to share out markets between themselves or where an important license holder excludes
competing technologies from the market. In these circumstances Intellectual property rights
may limit the competition in the market. Whereas competition law aims to promote and
sustain competition in the market as well as protect the interests of consumers and also
ensure freedom of trade.

Any technology licensing agreements which lead to an abuse of a market position by

imposing unreasonable conditions or other than essential for protection of such IP rights
would be consider as anti- competitive, for example, for achieving and maintaining a
monopolistic position, may be considered as an anti-competitive practice under competition
law. For example, in the area of information and communication technologies where a
number of patents owned by different patentees are involved in one product, a patent pool
agreement may be sought by the patentees, which in turn may raise issues as to its effect on
competition.

Technology transfer agreements are obligated to fulfill technological needs that are
impossible to meet with local technical capabilities. Traditional devices of license transfer
often fall within the purview of antitrust scrutiny and are deemed anti-competitive practices
in general trade, as in the case of territorial restrictions in licensing. Antitrust laws, although
fit to evaluate general trade agreements, often fail to address intricate problems involving in
technology transfer agreements and therefore, lack the tools to adequately solve them.
Section 3(5) of the Indian Competition Act, 2002, talks about the rights of intellectual
property holder. It states that IP holder has all rights to protect his IP right but conditions
should be appropriate and essentially used for the right protection only. Unreasonable

7
Ramappa T, Competition Law in India- Policy, Issues, and Developments, Oxford
University Press NewYork, 2nd ed. 2009, p. 109
conditions are not covered in this section. The Competition Commission of India in FICCI
Multiple Association of India vs United Producers / Distributors clearly affirmed an
internationally recognized principle of competition law that any holder of any intellectual
property right (in the context of the case, copyright on films) may impose only such
conditions on buyers or consumers that are granted to him as rights under the intellectual
property right. It means the intellectual property right of an individual cannot be exercised in
such a manner so as to infringe upon any competition law right, if we may use the phrase,
of another individual.8

TECHNOLOGY TRANSFER AGREEMENTS

The European Commission has in its Draft Commission Notice specified technology as
covering patents and patent applications, utility models and applications for utility models,
design rights, software copyright, know-how and other similar IP rights.9 To be considered a
transfer the technology has to flow from one undertaking to another. This is normally
done by a transfer agreement which gives the transferee the right to use the licensed
technology and in return pay transferee fees. The transfer can also take the form of a
sublicensing, in which case the licensee licenses the technology to a third party with the
consent of the original licensor.

Technology transfer is the term used to describe the processes by which technological
knowledge moves within or between organizations. International technology transfer means
the movement of technological knowledge between countries. Importance of international
technology transfer becomes very much high because by this developing countries gain

8
FICCI Multiple Association of India vs United Producers / Distributors CASE NO. 01 OF
2009The intellectual property laws do not have any absolute overriding effect on the
competition law. The extent of non obstante clause in section 3(5) of the Act is not absolute
as is clear from the language used therein and it exempts the right holder from the rigors of
competition law only to protect his rights from infringement. It further enables the right
holder to impose reasonable conditions, as may be necessary for protecting such rights.

9
Draft Commission Notice, guidelines on the application of Article 81 of the EC Treaty to
technology transfer agreements, p.46
access to technologies that are new to them. The sale and purchase of the exclusive rights to
a patented technology or of the permission to use a given technology or know-how, takes
place through legal relationships between the owner of the exclusive rights or the supplier of
the know-how, called the transferor, and the person or legal entity which acquires those
rights or that permission or receives that know-how, called the transferee.

"Technology transfer" means the transfer of technology from one sector of the economy to
another, including the transfer of military technology to civilian applications, civilian
technology to military applications, or technology from public or private research
laboratories to military or civilian applications.10

According to Article 1 (1) (b) of Technology Transfer Block Exemption Regulation11,

technology transfer agreement can comprise-

A pure patent20 licensing agreement,

A pure know- how21 agreement,

A pure software copyright license,

10
http://definitions.uslegal.com/t/technology-transfer/ (Last Accessed on 14th February 2013
at 17:25 pm)

11
Technology transfer agreement means a patent licensing agreement, a know-how
licensing agreement, a software copyright licensing agreement or a mixed patent, knowhow
or software copyright licensing agreement, including any such agreement containing
provisions which relate to the sale and purchase of products or which relate to the licensing
of other intellectual property rights or the assignment of intellectual property rights,
provided that those provisions do not constitute the primary object of the agreement and are
directly related to the production of the contract products; assignments of patents, know-
how, software copyright or a combination thereof where part of the risk associated with the
exploitation of the technology remains with the assignor, in particular 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, shall
also be deemed to be technology transfer agreements;
 A pure design license,

A mixed agreement, by which two or more of the above rights (patents, know- how,
software copyrights, design) are licensed together,

An agreement which comprises a license of one of the above rights.

Moreover, in international technology transfer there is a distinction between horizontal and

vertical transfers. Horizontal technology transfer consists of the movement of an established
technology from one operational environment to another (for instance from one company to
another). Vertical technology transfer, in contrast, refers to the transmission of new
technologies from their generation during research and development activities in science and
technology organizations, for instance, to application in the industrial sectors.

There are number of instances wherein IPR protected monopoly has been abused to curb
competition. Following instances of technology transfer agreement may be called anti-
competitive, such as: (1) Patent Pooling wherein two or more companies come together and
cross license the technology relating to a particular technology to each other so as to restrict
others to acquire it. (2) Tie in arrangements to tie a product with other product which is
patented so that the acquirer has to get the other product also from the patentee. (3)
Prohibiting licensee to use technology from rival company. (4) Prohibiting licensee from
challenging validity of IPR.

(5) Price-fixation for the licensee to sell the licensed product, etc. These types of clauses
imposed in the technology transfer agreements by the IP right holder or licensee are called
anti-competitive for the market, hence shall be void.
 ANTI COMPETITIVENESS IN TECHNOLOGY TRANSFER

AGREEMENTS

The key characteristic of the technology transfer license is the grant of a permission to the
licensee to exploit the technology in question; without such permission, no exploitation will
be possible. By virtue of an IPR, the holder can restrict exploitation and may dictate the
terms on which such exploitation may be made. Such restrictive provisions may qualify as
anti competitive concerted practices; i.e. resulting in restriction or elimination of
competition in a particular market.

Patentee may impose only such conditions on their licensees that are an exercise of their
rights granted under a patent issued to them and beyond that, patentees or owner of any
other intellectual property rights cannot directly or indirectly interfere with the competitive
process. But usually patentees resort to resale price maintenance and impose other restriction
on their licensees. Sometimes competitors also cross license their patents and allocate
territories among themselves and create entry barriers.12

Article 40 of the TRIPS13 addresses issues related to control of anti-competitive practices in

contractual licenses, specifying the approach to dealing with this issue, beginning with the
following point of understanding: Members agree that some licensing practices or conditions

12
Supra Note at 10

13
Article 40 of the TRIPS states- (1) Members agree that some licensing practices or
conditions pertaining to intellectual property rights which restrain competition may have
adverse effects on trade and may impede the transfer and dissemination of technology. (2)
Nothing in this Agreement shall prevent Members from specifying in their legislation
licensing practices or conditions that may in particular cases constitute an abuse of
intellectual property rights having an adverse effect on competition in the relevant market.
As provided above, a Member may adopt, consistently with the other provisions of this
Agreement, appropriate measures to prevent or control such practices, which may include
for example exclusive grant-back conditions, conditions preventing challenges to validity
and coercive package licensing, in the light of the relevant laws and regulations of that
Member.
pertaining to intellectual property rights which restrain competition may have adverse
effects on trade and may impede the transfer and dissemination of technology.

Article 101 of the Treaty on the Functioning of the European Union prohibits cartels and
other agreements that could disrupt free competition in the European Economic Area's
internal market. Article 101 states that any 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, shall be void.26

EXCLUSIVITY IN TECHNOLOGY TRANSFER AGREEMENTS

Competition law does not seek to prohibit exclusivity per se; it aims to prevent the misuse or
abuse of exclusivity in certain circumstances. This is evidenced by the prohibition of
exclusivity agreements only where enterprises in a vertical relationship enjoy market power
or where exclusivity arrangements are imposed by a dominant enterprise.

The grant of exclusive licensee even bars the licensor to practice the invention unless he has
specifically reserved the right to do so. The grant of exclusive license precludes the licensor
from competing with the licensee in respect to the subject- matter of the license and
competition issue arises, particularly where the licensor and the licensee would be actual or
potential competitors but for the license.

There are two type of exclusivity in technology transfer agreements that may give rise to
competition concerns-

1. Exclusive licensing

2. Exclusive dealing

Exclusive Licensing

These are agreements which restrict the right of the licensor to license others and possibly
also to use the technology itself.30 When granting an exclusive license to a particular
licensee, the licensor gives up his rights to practice the technology as well as the right to
grant additional licenses. Generally exclusive licenses are given for a limited territory, field
of use or a particular group of customers.14

US and EU competition authorities looks up three circumstances in exclusivity of

technology transfer agreements. First, when exclusive licensing creates a market allocation
cartel between the licensor and licensee.32 In the case of Palmer vs BRG of Georgia33, both
parties were competitors in providing bar review courses in Georgia before concluding the
exclusive licensing agreement. The licensor gave the licensee an exclusive license to market
the licensors copyrighted materials in Georgia, and the licensee would not compete with the
licensor outside the state. The U.S Supreme Court held this agreement to be an illegal
allocation of markets, hence anti- competitive. Second is when exclusive license creates a
market division between licensees. The exclusivity clause restricted competition among
licensors and licensees. Third, when a licensee who has market power in the product or
technology market gains an exclusive license from the licensor in order to abuse its
dominant position. Such an exclusive licensing arrangement raises substantial barriers to
market entry and gives the licensee the power to exclude competition.34 In Tetra Pak vs
European Commission35 , Commission held that the acquiring of exclusive license by a
dominant firm for the only technology that competed with the one already belonging to that
firm is abuse of dominant position.

It is prohibited to oblige the licensee to grant an exclusive license to the licensor or a third
party for any own severable improvement and new application of the licensed technology
under EU Competition Law. It is also prohibited to restrict either party from competing with
the other party in respect of research and development, manufacture, use or sale of any own
developed product, improvement and new application of the technology in question.36

14
Supra Note, at 9, P. 99
Exclusive Dealing

In the technology transfer agreements, exclusive dealing or non- compete obligation occurs
when a technology transfer agreement prevents the licensee from using competing
technologies. It prevent the so called inter- technology free riding to assure the licensor
that the technology transferred to the licensee will not be used to benefit the licensors
competitors. Exclusive dealing may be anti- competitive by foreclosing the licensors
competitors or raising their costs of market entry. If a licensor establishes a network of
exclusive dealing, many licensees are restricted from dealing with competing technologies.
Then access to competing technologies owned by other licensor can be substantially
restricted by unavailability of licensees. In US vs Microsoft Corporation15, Microsofts
exclusive dealing arrangements with its partners regarding Microsofts Internet Explorer
were declared to be exclusionary, violation of abuse of dominant position. Those contents of
exclusive dealing arrangements which directly or indirectly are inconsistent with
competition in the market shall be void. US authority held that an owner of intellectual
property does not have absolute right to use property in any manner without restrictions. It
would violate the competition law if a company possesses monopoly power and there is
willful acquisition or maintenance of that power which an enterprise as distinguish from
growth or development as a consequence of superior product, business acumen or historic
accident.

NON-COMPETE CLAUSES

A non-compete obligation in the context of technology licensing is an obligation on the

licensee not to use third party technologies which compete with the licensed technology.
This type of clause clearly hinders inter-technology competition, though only in the presence
of significant market power. Therefore, the TTBE exempts non-compete obligations both

15
253 F.3d 34 (DC. Cir. 2001)
among competitors and among non-competitors up to the market share thresholds of 20%
and 30% respectively.16

Under the EU competition law it is prohibited to agree an exclusive supply agreement if the
buyer is dominant or to agree the exclusive supply of the ordered product if the supplier is
capable of producing the product in question without the know-how and the auxiliaries of
the buyer. Activities to forbid the competition by the buyer or the seller with their own
developed products, improvements or new applications of the technology in question in so
far as these are severable from the know-how of the supplied product.

Refusal to License:

Although a mere refusal to license cannot be an infringement of competition law because it

derives from the right to exclude. However in some circumstances refusal to license can be
in breach of competition law.42 According to EU approach, a refusal to license will violate
the competition law if the following four- requirement test is satisfied.

1. The indispensability of technology- the technology in question is indispensable for

activities in the downstream market; it must involve essential non- substitutable
technological input used to produce technological output.

2. The hindrance of the emergence of new products for which there is potential
consumer demand.

3. Competition elimination- the refusal excludes all competition in downstream

markets.

4. Non- justification- the right to exclude under domestic Intellectual property law
alone cannot justify the refusal.

16
Ritter Cyri, The New Technology Transfer Block Exemption under EC Competition Law,
Legal Issues of Economic Integration (2004), Vol. 31(3), p. 179. Available at See also EC
Guidelines of Technology Transfer Agreement.
Refusal to license in the case of patent pools, cross- licensing and concentration of patents
can hardly constitute a proper exercise of patent right, and if the business activities of the
other undertaking or newcomer are excluded by the refusal, it would amount to violation of
competition law.

Tying Arrangements:

Tying arrangements, in which a party agrees "to sell one product but only on the condition
that the buyer also purchases a different product, or at least agrees that he will not purchase
that product from any other supplier, have also been held as anti-competitive and in
violation of antitrust laws in various jurisdictions.

Tying is also popular anti- competitive clause incorporated into technology transfer
agreements in high-tech industries. There are five basic points should be taken into
consideration for declaring anti- competitive arrangement of technology transfer agreement.

1. The tying technology or technology embodied product and tied product are separate.

2. The undertaking concerned is dominant in the tying technology market

3. The undertaking concerned does not give buyers a choice to obtain the tying
technology without the tied product.

4. Tying forecloses competition

5. Tying is not objectively justified.

A license may be required to acquire particular goods solely from the patentee, thus
foreclosing the opportunities of other producers. Although tying may harm competition both
in the main technology market and the tied product market, but prime consideration of
competition should be focused in the tied product market, which most adversely affects
competition in the markets.
Under section 3 (4) (A)44 of the Competition Act, 2002 such tie in agreements are anti-
competitive. Such tie in agreements are very much prone in the products wherein the main
product is protected by patent and has considerable market capitalization and the tying
product in different markets, in respect of production, supply, distribution storage, sale or
price of, or trade in goods or provision of services, including (a) tie-in arrangement; (b)
exclusive supply agreement; (c) exclusive distribution agreement; (d) refusal to deal; (e)
resale price maintenance, shall be an agreement in contravention of sub-section

(1) if such agreement causes or is likely to cause an appreciable adverse effect on

competition in India has its substitutes in market but the illegal extension of patent protected
monopoly restricts the consumers to use the substitutes of the tying product.

Tying coupled with effective foreclosure can deny consumers access to the variety of
downstream products that they could obtain with unbundled access. For example, Microsoft
which has a dominant position in computer operating system also take its word processing
program MS word. The result will not be necessarily be that Microsoft can charge a higher
price for the OS / word combination than it could under separate sales. Further it would be
much more difficult for developers of competing word processing programs to find market
access, and some of them might even be forced to quit the market altogether. Alternatively,
it could deny them sales, which could increase their per unit development costs, thus forcing
them to charge higher prices for their product and this would make Microsofts product
relatively more attractive in the market.17

TERRITORIAL RESTRICTIONS:

Territorial restrictions imposed in technology transfer agreements, using to allocate

customers or market are anti competitive and would be a per se violation of competition

17
Supra Note, at 4, p. 21-23
law.18 IP holder should avoid territorial restrictions in the license agreement with its
competitors because they can appear to be an allocation of markets.19

PATENT POOLING:

In the patent pooling arrangements two or more patent owners agree to waive exclusive
rights under their respective patents so as to grant each other rights and / or to jointly grant
rights to others under their respective patents. Patent pooling is a restrictive practice under
competition law. This happens when the firms in a manufacturing industry decide to pool
their patents and agree not to grant licenses to third parties, at the same time fixing quotas
and prices. By pooling they may earn supra- normal profits and keep new entrants out of the
market. Meaning is that if all the technology is locked in a few hands by a pooling in
technology transfer agreement, it will be difficult for outsiders to compete.

CROSS LICENSING:

This is interchange of intellectual property rights between two or more enterprises.

Competition concern comes if the technology licensed is substitute rather than
complimentary in nature. The validity of these licenses depends upon many factors like as,
the nature of technology license, the behavior of enterprises, effect on market and structure
of royalty payment. It can also be used by entities to face tacit collusion. Tacit collision
refers to an implicit agreement to keep prices high or quantities low, which can disturb the
market equilibrium. The most often menace of cross license is increased prices, cutbacks in
production and reduced innovation. Probability of this is more likely to happen when the
cross license is between competing entities because in that case, the competition between
those entities will no longer exist and together, they will get market power. And when the
number of competitors in the market is less, cross licensing may result into abuse of
monopolization in the market.

18
Timken Roller Bearing Co. vs United States (1951) 341 US 593 (598-99)

19
Supra Note, at 28, p. 198
In Hartford- Empire co. United States competitors cross- licensed amongst themselves their
patents relating to the manufacture of glass making machinery, and as a result of the
monopoly acquired through these patents, others were excluded from a fair opportunity to
freely engage in commerce in such machinery and in the manufacture and distribution of
glass products. All the patents had, by cross- licensing agreements, merged into a pool that
effectually controlled the industry. 94% of the glass containers manufactured in the country
on feeders and farmers were made on machinery licensed under the pooled patents. The US
Supreme Court confirmed that there was violation of anti- trust laws.20

GRANT- BACK CLAUSE:

A technology transfer agreement with grant- back clause is likely to augment the market
power of the licensor in an unjustified and anti- competitive manner. A licensee may require
to grant back to the licensor any knowhow or IPR acquired and not to grant licenses to
anyone else. This is likely to augment the market power of the licensor in an unjustified and
anti-competitive manner.

There may be more clauses in the technology transfer agreements between high- tech
industries, which may affect competition or may harm the fair market situation. Undue
restriction on licensee's business could be anticompetitive. For instance, the field of use of a
drug could be a restriction on the licensee, if it is stipulated that it should be used as
medicine only for humans and not animals, even though it could be used for both. Limiting
the maximum amount of use the licensee may make of the patented invention may affect
competition. A licensee may be coerced by the licensor to take several licenses in
intellectual property even though the former may not need all of them. This is known as
package licensing which may be regarded as anti-competitive.

20
Supra Note, at 10, p. 112
 TEST FOR VALIDITY OF TECHNOLOGY TRANSFER AGREEMENT

Competition concerns arise when arrangements of the agreement harms competition among
entities that would have been actual or likely potential competitors in a relevant market in
the absence of the agreement. There are two basic principles to determine anti competitive
effects or likely to adverse effect in the market. First is Per Se approach and second is
Rule of Reason approach.

PER SE APPROACH:

Under per se approach it should be taken in consideration that restraints nature and
necessary effect of the agreement is so plainly anti- competitive that it would be treated
unlawful per se, without an elaborate inquiry into restraints likely competitive effect. There
may be some clauses in technology transfer licensing, which directly harm potential
competition, and same can be declared void through per se rule.

Rule of Reason Approach:

Under this approach authority inquires whether the restraints imposed in agreement are
likely to have anti- competitive effects and if so, whether those restraints are reasonably
necessary to achieve pro- competitive benefits that outweigh those anti competitive effects.
The rule of reason approach requires the fact finder to weigh all of the circumstances of a
case in deciding whether a restrictive practice should be prohibited as imposing
unreasonable restraint on competition.

Technology transfer may limit use of a technology by imposing territorial or other

restrictions such as the transfers obligation to maintain certain production volumes or stick
to determined price corridors. Sometimes conditions imposed in technology transfer
agreements originate adverse effect in the competitive market.

TECHNOLOGY MARKET:

Technology markets consist of the intellectual property that is licensed and its close
substitutes, i.e. other technologies which customers could use as a substitute. The
technology market consists of the licensed technology and its substitutes. Substitutes is
defined from a customer perspective. If a customer could use another technology as a
substitute, it falls within the same technology market. Once the market definition is made,
the market shares can be assessed. In relation to the technology market, the market share
shall be calculated on the basis of the sales of the licensor and all his licensees of products
incorporating the licensed technology and this for each relevant market separately. All sales
are taken into account.21

PRODUCT MARKET:

The TTBER uses market definitions when assessing the competitive effects of license
agreements. Two markets must be defined, the relevant goods and service market (product
market) and the technology market. The product market is defined in Article 3 of the
TTBER. It refers to the relevant goods and service markets in both their geographic and
product dimension.

TRIPS OBLIGATION FOR TECHNOLOGY TRANSFERS

The TRIPS under Article 4022, permits member states to prevent abuse of Intellectual
Property through anti-trust legislations. The Article states the recognition of member states
that certain licensing practices or conditions relating to intellectual property rights that
restrain competition may have adverse effects on trade and may impede the transfer and
dissemination of technology. Members are free to bring in legislation specifying what
licensing practices or conditions may in particular cases constitute an abuse of IPRs having
an adverse effect on competition in relevant market. Section 140 of The patents Act, 197055
prohibits terms in technology transfer agreements, such as tying- in, exclusive dealing,
exclusive grant- back, coercive package licensing.

21
Johansson Camilla, Licensing in the perspective of EC Competition Law, available at,
http://gupea.ub.gu.se/bitstream/2077/1945/1/200532.pdf

22
Article 40 of the TRIPS states- (1)
The potential outcome of Trade Related Aspects of Intellectual Property Rights is that
stronger IPR protection strengthens the market power of Foreign Transnational
Corporations, which may lead to reduced sales and higher prices, and which can limit the
extent of technology diffusion. In addition enhanced market power may restrict entry and
can lower the rate of innovation. Enhanced market power through stronger IPR protection
may facilitate other forms of anti-competitive behavior, including selling practices and
licensing restrictions. These include:

1. The cartelization of potential competitors through cross licensing agreements that fix
prices, limit output or divide markets;

2. The use of IPR-based licensing agreements to exclude competitors in particular

markets by raising entry barriers through tie-in sales or restrictions on the use of
related technology;

3. The use of IPR protection to predate competitors by threatening or initiating bad

faith litigation and opposition proceedings, which may raise market entry barriers
particularly for new and small enterprises. 23

APPROCH OF DEVELOPED COUNTRIES

US APPROACH

In the US, the Department of Justice and the FTC have issued the Anti- trust guidelines for
the licensing of intellectual property 1995, which states their anti- trust enforcement policy
with respect to the licensing of intellectual property protected by patent, copyright and trade
secret law, and know- how. The guidelines are intended to assist those seeking to know the

23
Rod Falvey and Foster Neil, The Role of Intellectual Property and Technology Transfer
and Economic Growth: Theory and Evidence,
http://www.unido.org/fileadmin/import/60030_05_IPR_rights_in_technology_transfer.pdf
approach these two agencies would adopt in evaluating a practice for its ant- competitive
nature. Admittedly, the matter will have to be ultimately decided by the courts.24

After many years of controversies resulting from the so-called antitrust revolution of the
1980s, the antitrust law enforcement authorities of the USA have issued Guidelines for

Licensing of Intellectual Property, which are based on general principles set forth by Federal
Trade Commission and Department of Justice of US25 , which taken together, affirm the
legitimacy of a wide variety of IP licensing terms and arrangements:

1. Intellectual property is regarded as being essentially comparable to any other form of

property; therefore no particular rules should apply to IPR-related restraints of
competition.

2. There is no presumption that intellectual property by itself creates market power.

3. Generally licensing agreements, concluded between competitors (or at least actual-

potential competitors), harm competition not otherwise.

4. Unless the combined market shares of the parties to a license agreement exceed 20
% of the relevant markets, the antitrust authorities will not intervene (so called safe
haven).

EU APPROACH

On 1 May 2004, the new EU Regulation on Technology Transfer Agreements entered into
force. This Regulation is the result of the EUs overhauling and modernizing its entire
enforcement system as well as reconsidering its policies vis- a-vis horizontal and vertical
cooperation, and, in particular, its policy vis- a-vis licensing agreements. By a more
economic approach the Regulation clearly distinguishes between licensing agreements

24
Supra Note, at 10, p. 116

25
Supra Note, at 28, pp. 190- 191
concluded between competitors and those between non-competitors. A broadly defined
(automatic) block exemption is granted, for competing undertakings, where the combined
market share of the undertakings party to an agreement does not exceed 20% of the affected
relevant technology and product market. For non-competing undertakings, the automatic
block exemption is granted where the market share of each of the parties to the agreement
does not exceed 30% of the affected relevant technology and product market. Above these
market shares even horizontal agreements would still benefit from a broad rule of reason
analysis of each individual case, the more economic approach being oriented toward an
efficiency test similar to that applied in the U.S. A further requirement is that the agreement
does not fall under one of the specifically listed hardcore restrictions. Finally, the Regulation
provides for the possibility to refuse the block exemption to individual obligations in
otherwise exempted agreements.26

MARKET SHARE THRESHOLD: SAFE HARBOR

The Block exemption Regulation of European Treaty does not exempt vertical agreements
containing restrictions which are likely to restrict competition and harm consumers or which
are not indispensable to the attainment of the efficiency-enhancing effects. In particular,
vertical agreements containing certain types of severe restrictions of competition such as
minimum and fixed resale-prices, as well as certain types of territorial protection are
excluded from the benefit of the block exemption established by this Regulation irrespective
of the market share of the undertakings concerned.

Article 3 of the TTBER27 of EU law provides that the block exemption applies on condition
that specified market share thresholds are not exceeded on affected technology and product

26
Infra Note, at 66

27
Market-share thresholds- (1) where the undertakings party to the agreement is competing
undertakings, the exemption provided for in Article 2 shall apply on condition that the
combined market share of the parties does not exceed 20 % on the affected relevant
technology and product market. (2)Where the undertakings party to the agreement is not
competing undertakings, the exemption provided for in Article 2 shall apply on condition
that the market share of each of the parties does not exceed 30 % on the affected relevant
technology and product market.
markets. Where the parties are competitors the relevant market share is 20% and where the
parties are non competitors the relevant market is 30%. So this provision set out the market
share thresholds which provide the safe harbour28

The market share threshold applies both to technology markets and markets of products
incorporating the licensed technology. If the applicable market threshold is exceeded on an
affected relevant market, the block exemption does not apply to the agreement for that
relevant market. For instance if the license agreement concerns two separate product
markets or two separate geographical markets, the block exemption may apply to one of the
markets and not to other. If the parties of the agreement are competitors then combined
market share should be taken in consideration and in the case of non- competitors it is the
market share of each of the parties that is relevant.29

FRAND COMMITMENT

FRAND is a legal term that stands for "Fair, Reasonable, and Non-Discriminatory" and is
typically used to describe patent licensing terms. It is normal for companies to have to agree
to licensing a patent in FRAND terms before it will be accepted to become part of a
standards body approved technical standard. FRAND reflects the license conditions that
should be respected by dominant patent holders. These commitments are promises by
holders of patents that are technically essential to an industry standard that they will grant
licenses to such patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms.
Standard-setting organizations commonly have rules that govern the ownership of patent
rights that apply to the standards they adopt. One of the most common rules is that a patent
that applies to the standard must be adopted on "reasonable and non-discriminatory terms"
(RAND) or on "fair, reasonable, and non-discriminatory terms" (FRAND). The two terms
are generally interchangeable; FRAND seems to be preferred in Europe and RAND in the
U.S

28
Jones Alison and Brenda Sufrin, EU Competition Law- Text, Cases and Materials, Oxford
University Press, NewYork, 4th ed. 2011, p. 740

29
Ibid, p. 741
For example, if Phillips typically licenses all its DVD patents under FRAND terms to DVD
reader manufacturers, but then suddenly decides to charge Apple 100% more to make their
own DVD reader drives, a court may force Phillips to license those patents to Apple under
terms that are less discriminatory.

In some cases, product injunctions, or exclusion orders, may be incompatible with a patent
holder's FRAND commitment to a standards-setting body. A patent holder may, for
example, wield an injunction "to reclaim some of its enhanced market power over firms that
relied on the assurance" that the FRAND patents would be available for reasonable licenses.
But injunctions may still be appropriate in cases where the target company refuses to take a
license or pay royalties on a FRAND patent, or when the target company is outside U.S.
jurisdiction. There must be "caution" in the use of injunctions in FRAND patent cases.
"Department of Justice and US Patent and Trade Mark Office strongly support the
protection of intellectual property rights and believe that a patent holder who makes a
FRAND commitment should receive appropriate compensation that reflects the value of the
technology contributed to the standard. It is important for innovators to continue to have
incentives to participate in standards-setting activities and for technological breakthroughs
in standardized technologies to be fairly rewarded.30

Once the patents that are essential to the standard have been identified, the relevant
patentees are required to give a commitment to license those patents on FRAND terms to all
would be users of that standard, whether competitors or not. To comply with competition
law, the patentees commitment must be irrevocable and provided in writing prior to
adoption of the standard. The patentee must also ensure that any company to which it
transfers the patent, including the right to license it, will be bound by the commitment. This
ensures that any manufacturer adopting the technology embodied in the standard is protected
from the start and continues to protect.31

30
http://www.infoworld.com/d/the-industry-standard/uspto-doj-injunctions-frand-patents-
can-be-anticompetitive-210399

31
www.mayerbrown.com/Files/.../Frand_Smartphone_Sproul.pdf (Last accessed on 22nd
February, 2013 at 05:00 PM)
In latest case of Motorola v. Microsoft, Motorola wanted to ban the Xbox 360, among other
things. The International Trade Commission agreed that Microsoft's products infringed.
Microsoft claimed that Motorola wanted too much money to license the so-called standards-
essential patents, and attempted to fight the ban. Now, two weeks after a trial kicked off in
Seattle, common sense appears to have prevailed. US District Court Judge Robart has agreed
to dismiss Motorola's attempts for injunctive relief based on its fair, reasonable and non-
discriminatory (FRAND) patents, effectively saying that Motorola will have to pursue
money (in the form of royalties) rather than attempt to ban products.

The order suggests that the court may not be friendly to attempts to use FRAND patents to
ban products at all. The entire idea behind FRAND is that companies which participate
agree to license standards-essential patents to other companies at a fair rate to spur their
wide adoption, and many (including FTC chairman Jon Leibowitz) are concerned that if
companies simply turn around and sue using those patents, such standards won't take off.
Judge Robart decided that "because Motorola cannot show irreparable harm or that
monetary damage would be inadequate; the court agrees with Microsoft that injunctive relief
is improper in this matter and grants Microsofts motion.32

OTHER REGIONAL AGREEMENTS

Other regional agreements, such as the North American Free Trade Agreement (NAFTA),
oblige Parties to take appropriate action against anticompetitive practices; they are also not
IPRs-specific, but of a general character. Likewise, the Mercosul/r rules apparently are of a
general nature and are not fully implemented.

32
http://www.theverge.com/2012/11/30/3713016/motorola-vs-microsoft-frand-ruling-
district-court (Last Accessed on 26th February, 2013 at 12:00 AM)
 INDIAN APPROACH

ADEQUACY OF SECTION 3 (5) OF THE COMPETITION ACT, 2002

Competition Commission of India (CCI) established by the Competition Act, 2002 is

mandated to prohibit anti-competitive agreements that cause or likely to cause appreciable
adverse effects on competition in markets within India and also prohibits abuse of
dominance by enterprises. Under Section 3(5) (a) to (f), technology holder has every right to
measures to restrain the infringement of any of his rights or impose reasonable conditions
only necessary for the protection of any of his Intellectual property right. It clearly states
that conditions other than necessary to protect IP right cannot be imposed by technology
holder if those conditions adversely affect the market. Agreements that fix prices or allocate
territories may be treated as per se illegal and others may be examined under the rule of
reason.33

Some of arrangements described above in technology transfer agreements are likely to affect
adversely the prices, quantities, quality or varieties of goods and services will fall within the
contours of competition law as long as they are not in reasonable juxtaposition with the
bundle of rights that go with IPRs. Therefore the unreasonable conditions are not covered
under the protection given by Section 3 (5) of Indian Competition Act and therefore
Competition Commission of India may be called upon to take note of anti-competitive
agreement under Section 19 of the Act and such agreements can be declared void.

Penalty

The Commission is empowered to inquire into any unreasonable conditions imposed in the
technology transfer agreements and CCI can impose penalty upon each of such right holder
or enterprises which are parties to such agreements or abuse, which shall be not more than
ten percent of the average turnover for the last three preceding financial years.34 In case of

33
Supra Note, at 10, p. 114
34
Section 27 of the Competition Act, 2002. Where after inquiry the Commission finds that
any agreement referred to in section 3 or action of an enterprise in a dominant position, is in
abuse of dominant position under section 4 by virtue of an IPR by an enterprise, in addition
to the above penalties, the Commission has the power to order division of enterprise under
section 28.69

CONCLUSION AND SUGGESTIONS

Technology transfer can be understood as licensing between two unconnected firms, which
is directly related to the production or assignment of the technology.

Although in some countries like South Korea and Taiwan, there are some immunity relating
IPRs, or some relaxation is granted to some extent. Section 3 (5)(i) of Indian Competition
Act of 2002 provides protection to an IPR holder to impose reasonable conditions as may be
necessary to protect any of his/ her rights , which have been or may be conferred upon him
under Indian IP Act. Technology transfer licenses in high-tech industries that impose
unreasonable restrictions are not come under the protection given by section 3(5) of the

contravention of section 3 or section 4, as the case may be, it may pass all or any of the
following orders, namely: (a) direct any enterprise or association of enterprises or person
or association of persons, as the case may be, involved in such agreement, or abuse of
dominant position, to discontinue and not to re-enter such agreement or discontinue such
abuse of dominant position, as the case may be; (b) impose such penalty, as it may deem fit
which shall be not more than ten per cent. of the average of the turnover for the last three
preceding financial years, upon each of such person or enterprises which are parties to such
agreements or abuse: [Provided that in case any agreement referred to in section 3 has been
entered into by a cartel, the Commission may impose upon each producer, seller, distributor,
trader or service provider included in that cartel, a penalty of up to three times of its profit
for each year of the continuance of such agreement or ten per cent. of its turnover for each
year of the continuance of such agreement, whichever is higher.] (c) [Omitted by
Competition (Amendment) Act, 2007] (d) direct that the agreements shall stand modified to
the extent and in the manner as may be specified in the order by the Commission; (e) direct
the enterprises concerned to abide by such other orders as the Commission may pass and
comply with the directions, including paymentof costs, if any: (f) [Omitted by Competition
(Amendment) Act, 2007] (g) pass such other [order or issue such directions] as it may deem
fit. [Provided that while passing orders under this section, if the Commission comes to a
finding, that an enterprise in contravention to section 3 or section 4 of the Act is a member
of a group as defined in clause(b) of the Explanation to section 5 of the Act, and other
members of such a group are also responsible for, or have contributed to, such a
contravention, then it may pass orders, under this section, against such members of the
group.]
competition Act, 2002. Therefore in India it is clear that Competition law would be attracted
if there is abuse in the exercise of the rights protected and granted under IP statutes.
Competition Commission of India has power to scrutinize any unreasonable conditions
incorporated in licensing agreements, which are regarded as adversely affecting competition
in the markets.

The TRIPS agreement sets global minimum standards of IP protection. But there must be
general guidelines for better application of domestic competition law in technology transfer
in 69 Section 28 of the Competition Act, 2002- (1) The [Commission] may, notwithstanding
anything contained in any other law for the time being in force, by order in writing, direct
division of an enterprise enjoying dominant position to ensure that such enterprise does not
abuse its dominant position. (2) In particular, and without prejudice to the generality of the
foregoing powers, the order referred to in sub-section (1) may provide for all or any of the
following matters, namely: (a) the transfer or vesting of property, rights, liabilities or
obligations; (b) the adjustment of contracts either by discharge or reduction of any liability
or obligation or otherwise; (c) the creation, allotment, surrender or cancellation of any
shares, stocks or securities; (d) [Omitted by Competition (Amendment) Act, 2007] (e) the
formation or winding up of an enterprise or the amendment of the memorandum of
association or articles of association or any other instruments regulating the business of any
enterprise; (f) the extent to which, and the circumstances in which, provisions of the order
affecting an enterprise may be altered by the enterprise and the registration thereof; (g) any
other matter which may be necessary to give effect to the division of the enterprise. (3)
Notwithstanding anything contained in any other law for the time being in force or in any
contract or in any memorandum or articles of association, an officer of a company who
ceases to hold office as such in consequence of the division of an enterprise shall not be
entitled to claim any compensation for such cesser.

India. Having a well-drafted guideline is extremely useful and provides a level of legal
certainty for businesses. Business executives want to know, in simple terms, whether they
are allowed to include certain terms in their technology transfer agreements and how those
terms should be drafted to avoid ant- competitive practices under Indian competition law
concern.
There is a need to have distinct guidelines in Indian competition law like US Antitrust
Guidelines and EC Technology transfer Block Exemption Rules. Under section 66 of the
Competition Act CCI has power to make regulation in this regard. Researcher is suggesting
a slab of prohibiting action and allowed actions for technology transfer agreements in high-
tech industries. A category system can be developed so that industries would be able to
determine the thin line between reasonable and unreasonable conditions under technology
transfer agreements. For better understanding technological aspect in competition law, there
must be clear definition of three sets of markets- product market, technology market and
R&D markets.
BIBILIOGRAPHY

Primary Sources:

Statutes:

1. The competition Act, 2002

2. Trade Related Aspect of Intellectual Property Right (TRIPS)

3. Technology Transfer Block Exemption regulation (TTBER)

4. The Patents Act, 1970

Secondary Sources:

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Tu Thanh Nguyen, Competition Law, Technology Transfer and the TRIPS Agreement-
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Herbert Hovenkamp, Mark D. Janis and Mark A. Lemley, IP and Antitrust- An Analysis of
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ABA Section of Antitrust Law, Intellectual Property and Antitrust Handbook (2007)

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Yi Shin Tang, The International Trade Policy for Technology Transfers- Legal and
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Jones Alison and Brenda Sufrin, EU Competition Law- Text, Cases and Materials, Oxford
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Valentine Korah, Cases and Materials on EC Competition Law, Hart Publishing, USA, 3rd
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University Press NewYork, 2nd ed. 2009

D.P Mittal, Taxmanns Competition Law and Practice, Taxmann Allied Services Pvt. Ltd.
Delhi, 2008

Steven D. Anderman, The Interface between Intellectual Rights and Competition Law,
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