DRAFT FTC LICENSING GUIDELINES

11/01/2000

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To facilitate the handling of disputes over tech-nology licensing agreements, the Fair Trade Commission (FTC) recently drafted the Guide-lines for Handling Technology Licensing-related Cases (the Guidelines). The main content of the draft Guidelines is as follows:

Definition of Terms

Technology licensing agreement means an agreement involving the licensing of patent, know-how, or a combination of the two.

Patent means an invention patent or a new utility model patent legally acquired under the Patent Law. Licensing agreements not involving ROC patents should be handled according to the cir-cumstances of the individual cases.

Know-how means a method, technique, manu-facturing process, formula, program, design or other information used in production, sales or business management, that meets the following criterion: (1) it is not known to persons versed in the type of information concerned; (2) it has ac-tual or potential economic value and such value is a result of its confidentiality; and (3) its owner has taken reasonable steps to maintain its confi-dentiality.

Product includes products and services.

Basic Principles for Handling Cases

When handling a technology licensing-related case, the FTC will not assume that a licensor has market power in a specific market based on the mere fact that he possesses patent or know-how.

Steps of Review and Analysis

When reviewing a case, the FTC will, pursuant to Article 45 of the Fair Trade Law (FTL), first review whether the acts in question are le-gitimate acts undertaken in enforcing rights under the Patent Law and other laws. If the acts go beyond the scope of legitimate en-forcement of rights, and go against the legis-lative intent of protecting the technology li-censing system, they shall be dealt with in accordance with the FTL and the Guidelines.

When reviewing a case, the FTC is not bound by the form or wording of the licensing agreement, but will focus primarily on the ef-fect or potential effect of the agreement in re-stricting competition or creating unfair com-petition in the following specific markets:

1.The product market, to which products or services manufactured or supplied using the licensed technology belong;

2.the technology market, the scope of which is defined by the use of other substituting technologies of an equivalent price; and

3.the innovative market, the scope of which is defined by the possible research and development of products or services.

When reviewing a case, in addition to consid-ering the reasonableness of the terms of the concerned agreement, the FTC will consider: (a) the market power of the licensor with re-spect to the subject matter of the licensing agreement; (b) the market position of the par-ties to the agreement in the specific market as well as conditions of the market; (c) the op-portunities for increased use of the technology as brought about by the agreement as well as the degree of the agreements effect of ex-cluding competition; (d) the ease of entry into and exit from the specific market; and (e) the duration of any restriction under the agree-ment.

Examples that do not violate the FTL

Terms included in a technology licensing agreement governing any one of the following matters shall not be considered in violation of the FTL related to restriction of competition or unfair competition, unless they are abused:

1.terms restricting the scope of the licensee's use of the technology for manufacture, use or sale;

2.terms limiting the duration of the agree-ment to the life of the patent; or terms lim-iting the duration of the agreement prior to a know-how's ceasing to be a trade secret and coming into the public domain through no fault of the licensor;

3.terms that, for ease of the calculation, roy-alties shall be calculated based on the quantity of the relevant final products thus produced or sold, the quantity of the re-quired raw materials or components used, or the number of times the know-how is used (where the licensed technology is re-lated to only part of a manufacturing process, or is related to component parts);

4.terms that the licensee shall continue to pay royalties for prior use of the licensed technology after the expiration of the patent term, or that in case the know-how is made public through no fault of the licensor, the licensee is obliged to continue payment for a certain period of time and in a certain manner of royalties determined based on free wills of the parties and that such pay-ment shall be made until the agreement ceases to be effective or is otherwise ter-minated (where royalties are paid in in-stallments or paid after practice of the technology);

5.terms that in case the licensee has com-pleted improvements to or new applica-tions of the licensed technology, the licen-see shall grant back a non-exclusive li-censing to the licensor;

6.terms that the licensee shall make his best efforts to manufacture and sell the licensed products;

7.terms that insofar as the know-how remains a trade secret, the licensee shall continue to keep it confidential even after the expira-tion of the licensing duration or the dura-tion of the licensing agreement;

8.terms that, for the purpose of ensuring a minimum royalty income for the licensor, the licensee shall guarantee a minimum production quantity (in case of a product patent) or a minimum number of uses (in case of a method patent), or a minimum quantity of product to be sold;

9.terms that, for purposes of assuring certain effects of the licensed technology and maintaining a certain level of quality of the licensed products, the licensee shall main-tain a certain level of quality with respect to the products, raw materials, components etc., that are associated with the patent or know-how;

10.terms that the licensee shall not assign or sub-license the licensed patent or the li-censed know-how to other persons; and

11.terms that, in case the licensed know-how remains a trade secret, the licensee shall not continue to practice the know-how after the agreement has expired.

Examples that Violate the FTL

Any contract, agreement or arrangement be-tween/among parties to a technology licensing agreement who are in a competitive relation-ship, to jointly determine the price of a li-censed product, or limit quantities, trading counterparts, geographical trading areas, fields of research and development etc., which is mutually binding on the business activities of the parties and can affect the functions of a specific market, violates Article 14 of the FTL;

Where a technology licensing agreement con-tains any one of the following terms, that can restrict competition or impede fair competi-tion in a specific market, this violates Item 6, Article 19 of the FTL:

1.terms that restrict the ability of the parties or their associated businesses to engage in competition by developing, manufacturing, using or selling competing products;

2.terms that, in order to segment clientele, require the use of a specific marketing method, or restrict the scope of use of the technology by the other party to the li-censing agreement or his trading counter-parts;

3.terms that require the licensee to purchase, accept or use a patent or know-how that he does not need;

4.terms that require the licensee to grant back to the licensor an exclusive right with re-spect to improvements made by the licen-see based on the licensed patent or know-how;

5.terms that limit the free use by the licensee of the technology in question, or require the licensee to pay royalties, after the licensed patent has extinguished or the know-how becomes publicly known through no fault of the licensee;

6.terms that prohibit the licensee from pro-ducing, using or selling competing prod-ucts or adopting competing technology af-ter the license agreement has expired;

7.terms that restrict the price of the licensed products manufactured or produced by the licensee, at which the licensee may sell to third parties;

8.terms that limit the licensee in raising ob-jections against the validity of the con-cerned patents; and

9.terms that allow the licensor to refuse to disclose to the licensee the content, scope, duration etc. of the licensed patent.

Where either of the parties to a technology licensing agreement is a monopoly enterprise, when determining whether the acts listed above violate Article 10 of the FTL, consid-erations shall be made based on the merits of the individual case.

Examples that May Violate the FTL

Where the terms of a technology licensing agreement limit competition or impede fair competition in a specific market, they may violate Item 6, Article 19 of the FTL:

1.terms that, during the patent duration, re-strict the geographical scope of the licens-ing within the ROC; or know-how licens-ing terms that, prior to the licensed know-how being made public and ceasing to be a trade secret through no fault of the licensor, restrict the geographical scope of the licensing;

2.terms that impose restrictions unrelated to the field of application, but limit the scope of sale by the licensee or on his trading counterparts, or the field and scope of the practice by the licensee of the licensed technology;

3.terms that provide upper limits on the quantity of products to be manufactured or sold by the licensee, or on the number of times of using the patents or know-how;

4.terms that require the licensee to sell products through the licensor or through persons designated by the licensor; or

5.terms that require the licensee to pay roy-alties based on the quantity of a particular product manufactured or sold, regardless whether the licensee has used the licensed technology or not

Where the licensor requires the licensee to purchase from the licensor or from a person designated by the licensor raw materials, component parts etc., beyond what is neces-sary to ensure that the licensed technology achieves a certain efficacy, maintains the commercial reputation of the licensed prod-ucts or maintains the confidentiality of the know-how, which may restrict competition or impede fair competition in a specific market, such agreement may violate Item 1 or Item 6, Article 19 of the FTL.

If, without legitimate grounds, a licensing agreement discriminates against the licensee with respect to trading conditions, royalties, etc., which may restrict competition or impede fair competition in a specific market, such agreement may violate Item 2, Article 19 of the FTL.

Supplementary Provisions

In case the terms of a technology licensing agreement are not among the examples stated in the Guidelines, they shall be reviewed based on the facts of the individual case in accordance with the provisions of the FTL.

The FTC plans to hold a public hearing to solicit opinions and suggestions from the public, in order to complete the drafting of the Guidelines. We will continue to follow developments and keep readers informed.