Vertically challenged? Watch for changes ...

The text has been adopted for a new Commission Regulation on the application of Article 101(3) [formerly Article 81(3)] of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. This is another "block exemption" Regulation, which spares you the inconvenience and the worry of falling foul of European competition rules if you structure your deals so as to fall within its parameters.

Replacing Regulation 2790/1999 with effect from 1 June 2010, with a one-year transitional period for pre-existing agreements that meet the conditions of the old Regulation, the new version confirms that the "safe harbour" threshold of 30% will apply to both the market share of the supplier and the market share of the buyer. Additional guidance is provided as to the circumstances in which restrictions imposed on the use by retailers and distributors of the internet will amount to hard core restrictions on competition.

So what does this all have to do with intellectual property? Plenty. Let the Guidelines on Vertical Restraints explain:

"(31) Article 2(3) ... includes in its application vertical agreements containing certain provisions relating to the assignment of IPRs to or use of IPRs by the buyer and thereby excludes from the ... Regulation all other vertical agreements containing IPR provisions. The... Regulation applies to vertical agreements containing IPR provisions when five conditions are fulfilled:

– The IPR provisions must be part of a vertical agreement, i.e. an agreement with conditions under which the parties may purchase, sell or resell certain goods or services;
– The IPRs must be assigned to, or licensed for use by, the buyer;
– The IPR provisions must not constitute the primary object of the agreement;
– The IPR provisions must be directly related to the use, sale or resale of goods or
services by the buyer or his customers. In the case of franchising where marketing
forms the object of the exploitation of the IPRs, the goods or services are distributed by the master franchisee or the franchisees;
– The IPR provisions, in relation to the contract goods or services, must not contain
restrictions of competition having the same object as vertical restraints which are not exempted under the ...Regulation.

(32) These conditions ensure that the ... Regulation applies to vertical agreements where the use, sale or resale of goods or services can be performed more effectively because IPRs are assigned to or licensed for use by the buyer. In other words, restrictions concerning the assignment or use of IPRs can be covered when the main object of the agreement is the purchase or distribution of goods or services.

(33) The first condition makes clear that the context in which the IPRs are provided is an agreement to purchase or distribute goods or an agreement to purchase or provide services and not an agreement concerning the assignment or licensing of IPRs for the manufacture of goods, nor a pure licensing agreement. The ... Regulation does not cover for instance:
– agreements where a party provides another party with a recipe and licenses the other party to produce a drink with this recipe;
– agreements under which one party provides another party with a mould or master
copy and licenses the other party to produce and distribute copies;
– the pure licence of a trade mark or sign for the purposes of merchandising;
– sponsorship contracts concerning the right to advertise oneself as being an official sponsor of an event;
– copyright licensing such as broadcasting contracts concerning the right to record
and/or broadcast an event.

(34) The second condition makes clear that the... Regulation does not apply when the IPRs are provided by the buyer to the supplier, no matter whether the IPRs concern the manner of manufacture or of distribution. An agreement relating to the transfer of IPRs to the supplier and containing possible restrictions on the sales made by the supplier is not covered by the ...Regulation. This means in particular that subcontracting involving the transfer of know-how to a subcontractor does not fall within the scope of application of the ... Regulation .... However, vertical agreements under which the buyer provides only specifications to the supplier which describe the goods or services to be supplied are covered ....

(35) The third condition makes clear that in order to be covered ... the primary object of the agreement must not be the assignment or licensing of IPRs. The primary object must be the purchase, sale or resale of goods or services and the IPR provisions must serve the implementation of the vertical agreement.

(36) The fourth condition requires that the IPR provisions facilitate the use, sale or resale of goods or services by the buyer or his customers. The goods or services for use or resale are usually supplied by the licensor but may also be purchased by the licensee from a third supplier. The IPR provisions will normally concern the marketing of goods or services. This is for instance the case in a franchise agreement where the franchisor sells to the franchisee goods for resale and in addition licenses the franchisee to use his trade mark and know-how to market the goods. Also covered is the case where the supplier of a concentrated extract licenses the buyer to dilute and bottle the extract before selling it as a drink.

(37) The fifth condition signifies in particular that the IPR provisions should not have the same object as any of the hardcore restrictions listed in Article 4 ... or any of the restrictions excluded from the coverage of the ... Regulation by Article 5.

(38) Intellectual property rights which may be considered to serve the implementation of vertical agreements within the meaning of Article 2(3) ... generally concern three main areas: trade marks, copyright and know-how.

Trade mark
(39) A trade mark licence to a distributor may be related to the distribution of the licensor's products in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution.

Copyright
(40) Resellers of goods covered by copyright (books, software, etc.) may be obliged by the copyright holder only to resell under the condition that the buyer, whether another reseller or the end user, shall not infringe the copyright. Such obligations on the reseller, to the extent that they fall under Article 101(1) at all, are covered by the ... Regulation.

(41) Agreements, under which hard copies of software are supplied for resale and where the reseller does not acquire a licence to any rights over the software but only has the right to resell the hard copies, are to be regarded as agreements for the supply of goods for resale for the purpose of the ... Regulation. Under this form of distribution the licence of the software only takes place between the copyright owner and the user of the software. This may take the form of a "shrink wrap" licence....

(42) Buyers of hardware incorporating software protected by copyright may be obliged by the copyright holder not to infringe the copyright, for example not to make copies and resell the software or not to make copies and use the software in combination with other hardware. Such use-restrictions, to the extent that they fall within Article 101(1) at all, are covered by the ... Regulation.

Know-how
(43) Franchise agreements, with the exception of industrial franchise agreements, are the most obvious example where know-how for marketing purposes is communicated to the buyer. Franchise agreements contain licences of intellectual property rights relating to trade marks or signs and know-how for the use and distribution of goods or the provision of services. In addition to the licence of IPR, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance, such as procurement services, training, advice on real estate, financial planning etc. The licence and the assistance are integral components of the business method being franchised.

(44) Licensing contained in franchise agreements is covered ... if all five conditions listed in paragraph 31 are fulfilled. This is usually the case, as under most franchise agreements, including master franchise agreements, the franchisor provides goods and/or services, in particular commercial or technical assistance services, to the franchisee. The IPRs help the franchisee to resell the products supplied by the franchisor or by a supplier designated by the franchisor or to use those products and sell the resulting goods or services. Where the franchise agreement only or primarily concerns licensing of IPRs, such an agreement is not covered ..., but the Commission will, as a general rule, apply to it the principles set out in this ... Regulation and these Guidelines.

(45) The following IPR-related obligations are generally considered to be necessary to protect the franchisor's intellectual property rights and are, if these obligations fall under Article 101(1), also covered by the ... Regulation:
(a) an obligation on the franchisee not to engage, directly or indirectly, in any similar business;
(b) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking such as would give the franchisee the power to influence the economic conduct of such undertaking;
(c) an obligation on the franchisee not to disclose to third parties the know-how provided by the franchisor as long as this know-how is not in the public domain;
(d) an obligation on the franchisee to communicate to the franchisor any experience
gained in exploiting the franchise and to grant it, and other franchisees, a non-exclusive licence for the know-how resulting from that experience;
(e) an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers;
(f) an obligation on the franchisee not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise;
(g) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor's consent".

Says the IPKat, please adjust your licences accordingly.