KINDS OF RESTRICTIVE PRACTICES :
As discussed above, restrictive trade practices under the guise of intellectual property licensing can always be corrected by competition authorities. Following are some of the restrictive practices mainly used in the intellectual property licensing agreements.
1. Restrictions after expiration of Industrial Property Rights or Loss of Secrecy of Technical Know-how
The expiration of the term of patent in an intellectual property licensing agreement signifies that the knowledge and invention covered by such patent enters into public domain and any interested party can use such patent without any obligation. Where the supplier of the technology imposes any restriction after the expiration of the term of intellectual property rights, such restriction is deemed to be the restrictive trade practice.
The real problem arises in the case of package licensing, where the restrictions or payment obligations are artificially prolonged beyond the life time of the main patent by referring to the expiry of the last improvement patent or by basing restrictions on patents actually not exploited by the licensee. The problem may also arise when the secret know-how loses its secret character before the expiration of the agreement.
2. Restrictions after Expiration of Arrangements
The use of such clauses in intellectual property licensing will generally oblige licensee to pay royalties during the entire duration of manufacture of product or the application of the process involved, without specifying any time limit. Sometimes these clauses also contain restrictions to be continued even after the expiration of the agreement, for example, restrictions on competition, restriction on Research and Development activities and specially, the obligation of the licensee to keep secret and not to make use of the confidential information even after the expiration of the life of the arrangement.
3. Restrictions on Research and Development
Such restrictions generally involve limitations on the research and development policies and activities of the licensee. The use of such clauses affects directly or indirectly the possibilities for the technological development capabilities of the licensee. Such provisions also restrict the freedom of licensee to undertake its own Research and Development programmes. These restrictions also cover such provisions which are in direct competition with Research and Development activities of the licensor.
The restrictions on Research and Development activities of licensee company have also been declared as restrictive practice under the UNCTAD Code. The provisions of the code identified such clauses as restricting the licensee from undertaking R&D activities directly to absorb and adapt the transferred technology to suit local conditions or restriction on initiation of R&D programmes in connection with new products, processes or equipment.
4. Non-Competition Clauses
The Non-competition clause in intellectual property licensing includes the restriction on freedom of licensee company to enter into arrangements to use or purchase the competing technologies or products not furnished or designated by the company supplying technology. These clauses directly or indirectly affect the acquiring company’s capability of competition. Some of the non-competition clauses which may have direct effect, oblige the licensee company not to manufacture or sell competing products or not to acquire competing technology. Non-competition clauses which may have indirect effect, oblige the licensee not to cooperate with competing enterprises or to pay higher royalties if it sells or manufactures competing products.
5. Tie-in Arrangements
Tie-in clauses in an intellectual property licensing requires the licensee to obtain raw materials, spare parts, intermediate products for use with licensed technology, only from the licensor or its nominees. These clauses also oblige the licensee to use personnel designated by the licensor. The main reason behind the use of tie-in clauses by the licensor seems to be based on the fact that it wants to preserve an exclusive right to supply necessary processed or semi-processed inputs, to maintain quality control, and to expand their profit margin.
The tie-in clauses generally result in a monopoly control of the supply of equipment and other inputs by supplying enterprises, leading to “transfer pricing”, “transfer accounting” or “uneconomic output”. By virtue of this exclusive position, the licensor charges higher price than for comparable equipment and other inputs that could otherwise be obtained elsewhere. The use of tying clauses not only affects production costs through the overpricing of inputs but may have important indirect effect on the import substitution, export diversification and growth efforts of licensee.
6. Export Restrictions
Export restrictions may include conditions restricting or prohibiting the export of products manufactured by the transferred technology. These conditions restrict the export of such products to certain markets or permission to export to certain markets and requirement of previous permission for exports.
The restrictions having direct impact involve complete restriction on the export of products. In some cases the licensor imposes restrictions on licensee as to prohibit or permit the export to one or more specified countries or areas. These restrictions may also include prohibition or permission to export only specified goods.
Indirect export restrictions cover a wide rang of restrictions. Amongst others, the important indirect export restrictions include the prior approval of licensor to export the goods manufactured by the imported technology, including the requirement of primary responsibility for the domestic market or higher royalties on output designated for export. Such restrictions also require the licensee to export its product on predetermined prices or quality control. In some other cases obligations are imposed to sell its product exclusively to the licensor or to export only through licensor or its designated agents.
7. Price Fixing
Price fixing clause in an intellectual property license involves the practices where the licensor reserves the right to fix the sale or resale price of the product manufactured by the imported technology. The price-fixing clauses may cover the price determined by the licensor on goods produced with the help of transferred technology. Price-fixing may also involve horizontal price cartels between several technology suppliers or several technology recipients.
8. Restrictions on Field of Use, Volume or Territory
Restrictions on the field of use authorises licensor to restrict the use of the technology or reserve some uses of technology for self-exploitation or exploitation by third parties. The practices concerning the volume restrictions may consist of minimum production requirements or maximum output. The volume of production may also be controlled by higher royalties to be paid beyond a certain production quota or to produce by manufactured goods in a prescribed package with a certain weight. Therefore, such type of restrictions on the production may prevent the licensee company from producing enough for export.
The volume restrictions are generally used by the licensor to preserve its competitive position in a given market. Moreover, where the protected technology covers manufacturing rather than product itself, the licensee’s capability to compete in world market with the transferred technology may actually be hindered by the volume restrictions.
While licensing restraints such as territorial or field-of-use limitations appear restrictive of competition, they may in fact serve pro-competitive ends by promoting licensing, and thus the dissemination and more efficient exploitation of the technology. Licensing agreements containing such restraints do not normally fall within the scope of Competition law infringements because such restraints may not be viewed as restrictions of competition as such.
9. Grant-back Provisions
The grant-back provisions provide for flow of technical information and improvements to the licensor. These provisions oblige the licensee company to transfer to the licensor of technology, free of cost, any invention or improvement made in the imported technology. The grant-back provisions may be characterised as ‘unilateral’, ‘exclusive or non-exclusive’.
A unilateral grant-back provision establishes unilateral flow of technical information or improvement by licensee without any reciprocal obligation of the licensor. Therefore, such provisions oblige the licensee to provide to the licensor all future improvements made in the technology, on unilateral basis. While in the case of an exclusive grant back clause, though the licensee may be allowed to freely use the invention and improvement developed by it, yet the licensee is prohibited from transfering or licensing the same to the third party. Such clauses restrict the right of the licensee to license or transfer the invention developed through its own R&D activities.
The main reason behind the inclusion of grant-back provision appears to be rooted in the free of cost grant-back. Generally, the grant-back is not remunerated and thus, licensor has the advantage of securing access to all improvements made by the licensee. In this situation, the licensor receives the improved technology without sharing its risk or contributing in recipient’s financial burdens. Therefore, these provisions constitute an abusive use of the licensor’s dominant position and deprive the licensee of any possibility of improving its competitive position in the given market.
There are often pro-competitive reasons for including grant back provisions in an intellectual property licensing, and these generally do not pose competition concerns, especially where they are non-exclusive in nature. They may, however, have an adverse impact on competition, where they substantially reduce the incentives of the licensee to engage in R&D and thereby reduce innovation.
10. Exclusive Sales and Representation Arrangements
Such practices prohibit the freedom of the licensee company not only to organise its own distribution system, but also prohibit the licensee company from entering into exclusive sales or representative contract with any third party, other than the licensor or a party designated by the licensor. In other words, licensee company becomes handicapped and dependent on the licensor’s distribution channels.