Alexey V. Pustovit, counsel with Asters
September 2011 | The Ukrainian Journal of Business Law
Commercialization of technologies sometimes calls for their transfer to third parties. Technology transfer agreements may limit use of a technology by imposing territorial or other restrictions, such as the transferee’s obligation to maintain certain production volumes or stick to determined price corridors. Under the On Protection of Economic Competition Act of Ukraine (the Competition Act) such restrictive provisions may qualify as anticompetitive concerted practices, i.e. resulting in restriction or elimination of competition in a particular market.
The Competition Act generally prohibits anticompetitive concerted practices and identifies certain hardcore restraints as anticompetitive per se. Those include fixing prices or other sale terms, limiting production, dividing markets as per sale or purchase volumes, type of goods or territory and others.
Parties' omittance to verify the compliance of a particular agreement with the requirements of the Competition Act when negotiating the terms of a technology transfer arrangement creates substantial risks of penalization, especially in view of relatively high fines for such violation, reaching up to 10% of a company's turnover.
The criteria of anticompetitive concerted practices set in the Competition Act are very subjective and in many cases it is difficult to reach a satisfactory degree of certainty when determining whether a particular transfer technology agreement is restricting competition. At the same time, the parties do not necessarily have to do a complex analysis, sometimes a simple check whether any special exemptions are applicable to the agreement, particularly so-called IP rights transfer exemption, can be sufficient.
According to the IP rights transfer exemption, restrictions imposed on the transferee should not raise any competition concerns if such restrictions relate to the use of IP rights. Importantly, such restrictions may not be broader than the scope of IP rights enjoyed by the transferor.
The Competition Act also expressly permits setting territorial restraints or limiting the period of use of IP rights or the types of activities, sphere of use or minimum volumes of production under such technology transfer agreements.
Application of the IP rights transfer exemption may not be possible if a technology transfer agreements relate not only to IP rights. If, for instance, such agreement involves not only a patent license, but also provides for the supply of components not covered by the patent, restrictions related to the transfer of such components will not be covered by the IP rights transfer exemption.
This exemption is also limited by the scope of the IP rights. Should the transferor in a technology transfer agreement set restrictive rules for production or distribution of goods by the transferee and such restrictions go beyond the scope of the underlying patent, the relevant agreement affecting production or distribution of non-patented goods may not be covered by the exemption.
It is also important to understand that an agreement may disqualify from exemption as long as its provisions in fact affect the commercial activities of the transferee with respect to non-patented products. For example, such indirect restrictive influence may be identified in minimum stock requirements for the finished patented goods if such requirements impede production or dispatching of non-patented goods; the similar effect may be achieved by applying a formula for calculation of a royalty which would make the production of non-patented goods less economically attractive for the transferee.
Summarizing the above, when structuring technology transfer arrangements it appears expedient to verify the compliance of the underlying technology transfer agreements with the applicable competition protection rules. Should the agreement potentially raise any competition concerns and no statutory exemption may be applied to it, the carrying out of comprehensive analysis of its provisions is recommended. If, based on such analysis, it is still impossible to decide whether such a technology transfer agreement may qualify as restricting competition or application of IP rights transfer exemption is questionable, the parties may approach the Antimonopoly Committee of Ukraine and obtain relevant clarifications.