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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by International Chamber of Commerce (ICC)
The term “transfer of technology” may cover a variety of situations, ranging from patent and/or know-how licenses to more complex dealings involving the supply of technical assistance, equipment, etc.
This model covers the situation where a company (licensor), which itself manufactures certain products, licenses to another company (licensee) a global package of information and intellectual property rights in order to put the licensee in the condition to manufacture the products using the technology of the licensor.1
A characteristic of this type of agreement is that the package of transferred information and rights is more important than an exclusive right to any of them individually. In other words, the licensee expects to obtain all the information, technical assistance, intellectual property rights, etc. necessary for enabling it to manufacture the contractual products to the quality standards of the licensor and with the licensor’s technology: the individual elements put at its disposal are important only to the extent they are necessary for attaining this goal.
So, for example, it is typically the case that the licensee will not lose interest in the deal simply because a certain patent expires or part of the licensor’s knowhow is no longer secret, provided this does not prevent the manufacture of the products with the licensed technology.
Typically, therefore, the contract should be construed such that the early expiration or invalidity of a few non-basic patents in a licensed patent portfolio or the public disclosure of a relatively minor part of the know-how does not necessarily affect the validity of the licence or its consideration (except, of course, where the exclusivity obtained by the licensee through the patents or the secret know-how is the main reason for entering into the contract).
Since the technology transfer contract is a global package, its actual contents will vary substantially from case to case, depending on what the licensor has to offer and what the licensee actually needs.
In some cases, the licensor will license the right to manufacture specific products it has designed, which means that the licensee will obtain, in addition to the technology for the manufacture of the products, the detailed design of one or more specific products developed by the licensor. In other cases, the licensee will obtain only the technology for a product that it will develop itself or with the assistance of the licensor, but which will be manufactured with the licensor’s technology.
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Another aspect that may vary substantially from case to case is the supply (or assistance for the purchase) of equipment. In some cases, the licensor will limit itself to advising the licensee about the equipment needed to obtain the best results with the licensed technology. In others, the parties may agree that the licensor supplies certain equipment (e.g., special tools) to the licensee.
Note that this model does not contemplate the incorporation into the licence of a contract for the supply of equipment.
The licensor may also supply components to the licensee, particularly where the licensee wishes to implement the manufacture of the products gradually.
Finally, the licensor may also grant the right to use its trademarks. This is addressed below in Section 4.
It is important to note that this model is based on the assumption that the licensor is a company manufacturing the products that form the subject matter of the technology licence.
This situation raises a number of issues.
First, where the licensor itself manufactures such products, the licensing will typically be an accessory activity with respect to its core business. Consequently, the licensor may lack specific experience in licensing. moreover, its technology, mainly used for its own needs, will normally not be set out in a form readily transferable to a third party and may need to be adapted for the purpose of transmitting it to the licensee.
Second, if the licensee is to manufacture the same products the licensor manufactures, competition problems will be critical, as the licensor will aim to protect its own market from competition by the licensee. This may be achieved in different ways. For example, the licensor may license a product that is no longer up-to-date in its home market, but can be still successfully sold in the territory of the licensee. or the parties may agree that the licensee will not sell the licensed products in certain territories reserved to the licensor. of course, these problems will be far less critical if the licensed products are substantially different from those produced by the licensor, although made with the same technology.
In any case, to the extent that the licensor is sharing something that gives it a competitive advantage in the marketplace, the assessment of the possible competitive impact between the parties is of paramount importance when drafting the contract.
Though this model does not provide for it, the possibility of granting a trademark licence is an option that should be considered with the utmost attention.
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If this solution is chosen, the licensee will be able to benefit from the reputation of the licensor’s trademark, which may substantially facilitate the sale of the licensed products.
On the other hand, this may limit the future growth of the licensee, because the licensee will create a market for a trademark it does not own and that it has the right to use only for the duration of the trademark licence.
Where the trademark is licensed, the licensor must control the quality of the licensed products thoroughly because of the risk to its reputation if products not conforming to the licensor’s quality level are put on the market and, possibly, because of product liability implications.
All of this means that the inclusion of a trademark licence may imply substantial modifications to the licence contract.
If the parties agree to provide for a trademark licence, it should as a general rule be included in a separately negotiated agreement, which should of course be coordinated with this model.
A possible additional arrangement could involve the licensor purchasing some of the products made by the licensee, in which case it is likely that the licensor will request the licensee to put its trademark on such products (but this would of course not amount to a trademark licence, since the trademark would be used on behalf of the licensor). This “buy-back” option may be of interest for both parties, because it may increase the output and thus reduce the costs of the licensee and because it may allow the licensor to delocalize part of its production to a country with lower manufacturing costs.
As with a trademark licence, the parties may incorporate such a buy-back arrangement in a separate contract, which should be coordinated with this model.
As a general rule, the model does not take into account specific mandatory rules of national laws that might affect the drafting of the various clauses.
However, as regards competition rules of the European Community, which now apply in more than 25 countries, the model does offer alternative contractual solutions conforming to these rules.
In the European Community, transfer of technology contracts are governed by Regulation 772/2004 (the “Regulation”), which grants a block exemption pursuant to Article 81(3) of the Eu Treaty to all transfer of technology agreements that comply with the conditions set out in the Regulation.
The Regulation (annexed hereto as Appendix I) makes a basic distinction between agreements between competing undertakings and agreements between non-competing undertakings.
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Where the licensor and licensee are competitors, the block exemption applies only when the combined market share of both parties does not exceed 20% and provided the agreement does not contain any of the hardcore restrictions listed in Article 4(1) of the Regulation.
Where the licensor and licensee are not competitors, the block exemption applies when the market share of each of the parties does not exceed 30% and provided the agreement does not contain any of the hardcore restrictions listed in Article 4(2) of the Regulation (which are less strict than those applicable to the agreements between competitors).
In order to decide whether the parties are competitors, reference should be made to Article 1(j) of the Regulation, which defines competing undertakings as follows:
(j) competing undertakings’ means undertakings which compete on the relevant technology market and/or the relevant product market, that is to say:
(i) competing undertakings on the relevant technology market, being infringing each others’ intellectual property rights (actual competitors on the technology market); the relevant technology market includes technologies which are regarded by the licensees as interchangeable with or substitutable for the licensed technology, by reason of the technologies’ characteristics, their royalties and their intended use.
(ii) competing undertakings on the relevant product market, being undertakings which, in the absence of the technology transfer agreement, are both active on the relevant product and geographic market(s) on which the contract products are sold without infringing each others’ intellectual property rights (actual competitors on the product market) or would, on realistic grounds, undertake the necessary additional investments or other necessary switching costs so that they could timely enter, without infringing each others’ intellectual property rights, the(se) relevant product and geographic market(s) in response to a small and permanent increase in relative prices (potential competitors on the product market); the relevant product market comprises products which are regarded by the buyers as interchangeable with or substitutable for the contract products, by reason of the products’ characteristics, their prices and their intended use.
It is impossible to decide if the parties are competing undertakings without considering all the specific circumstances of the case.
Nevertheless, it is likely that in the most common situation (i.e., where the licensor is not active on the geographic market of the licensee and the licensee is not active on the licensor’s market), parties will be considered as non-competing undertakings on the product market. The answer might be different if we consider potential competition, though in most cases the licensor’s ability to directly produce or sell in the licensee’s geographic market will not be realistic. moreover, the definition of potential competition contained in Article 1(j)(ii) of the Regulation is rather restrictive.
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As regards the relevant technology market, competition between the parties can generally be excluded, except in the unusual case where the licensee is an active licensor of a competing technology.
Given this, the EC-compliant alternative clause of Article 5.1 B of the model assumes that the licensor and the licensee are non-competing undertakings and that consequently the rules on technology transfer agreements between non-competitors would apply.
However, should the parties have any doubt about a possible competitive relationship between them, they should consult an expert and verify the contract clauses in view of their compliance with the stricter conditions for competitive undertakings set out in Article 4(1) of the Regulation.
Parties often make the entry into force of the contract conditional upon certain events, some of which may be partly outside their control (e.g., government authorizations or bank guarantees).
The model, however, provides in Article 3.1 that the agreement enters into force on the date of signature and that events of the kind indicated above are conditions only with respect to the commencement of the contract.
Accordingly, the main obligations under the contract arise only at the commencement date, which takes place if and when the events listed in Annex 2 occur.
As regards the events which are necessary for the contract’s effectiveness, the drafters prefer not to use the word “condition”, since certain events (such as the provision of an advance payment by a party) are not “conditions” in the legal meaning of the word within some jurisdictions. In order to avoid possible disputes that this might cause, a more neutral term (event) has been used.
Annex 2 sets forth a list of possible options for the parties to consider.
The model, in Article 15, incorporates by reference the ICC Force majeure Clause 2003, the ICC hardship Clause 2003 and the ICC Confidentiality Clause.
As with all ICC model contracts, this one provides in Article 18 A for the possibility that it will not be governed by a particular national law, but, rather, by the provisions of the contract itself and the principles of law generally recognized in international trade as applicable to transfer of technology contracts (also called lex mercatoria). Thus, the model applies in a uniform way to licensors and licensees of different countries, without giving either party the advantage of applying its national law or the law of a third country.
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Note that this solution, while avoiding the particularities of national laws, gives a broad discretionary power to national courts or arbitrators in the case of disputes, since it is based (at least for matters not expressly governed by the contract clauses) on very general principles.
The drafters are of the opinion that the possible disadvantages of applying rather flexible and general rules are counterbalanced by the greater certainty afforded by recourse to contractual rules and by the reference to a set of general rules on contracts, like the unidroit Principles of International Commercial Contracts (the “unidroit Principles”), which offer a reasonably foreseeable legal framework for most issues that may arise.
Note, though, that Article 18 A provides that the unidroit Principles apply only to the extent that they do not conflict with general principles and trade usage, as Article 18 A ranks the various sources of applicable law incorporated by reference into the model in the following order: contract clauses, general principles, trade usages and the unidroit Principles.2
In any case, if the parties wish to have their contract governed by a specific national law, they can use the alternative set forth in Article 18 B. In such cases, they should check carefully whether any provisions of this model form violate mandatory provisions of the national law they have chosen.3 Choosing an applicable national law is preferable where parties submit the contract to the jurisdiction of ordinary courts instead of arbitration, since national courts may be disinclined to consider general principles, lex mercatoria and the like as the governing law of a contract.
If the parties have chosen an applicable law other than that of their respective countries, they should check whether any mandatory rules of the licensee’s or licensor’s country may nevertheless be applicable.
If these rules are simply “internally mandatory”, the choice of a foreign law will be effective, and the rules of the law chosen by the parties will apply instead of those of the licensee’s or licensor’s country.
If, on the other hand, such rules are “internationally mandatory”, i.e., rules that must be respected even if a contract is submitted to a foreign law, the parties should carefully consider this issue.
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In such cases, contractual clauses that do not conform to the internationally mandatory rules of the licensee’s or licensor’s country will not be effective in that country (and will in principle be disregarded by the local authorities).4
Since this model is a set of uniform contractual rules, avoiding (as far as possible) the direct application of domestic legislation, it is appropriate that possible disputes be solved by a uniform dispute resolution system organized on an international level.
Thus, the best solution may be international commercial arbitration, as provided for in Article 17.2 A, which permits a truly international approach and avoids the risk of national bias that could arise in the case of recourse to domestic courts.
If, however, the parties prefer recourse to national courts, they may choose Article 17.2 B. As noted in Section 10 above, this solution should be avoided if reference is made to lex mercatoria, general principles, etc.
Many countries levy a withholding tax on cross-border royalty payments when paid to non-resident licensors. however, the term “royalties” covers a wide range of payments under domestic law in different jurisdictions that may be subject to a different tax treatment. It generally refers to payments for the use of, or the right to use, intellectual property, know-how or copyrights. In several jurisdictions, technical service fees are considered royalties.
When a tax treaty is applicable, it usually limits the domestic definition to payments for the use of, or the right to use, intellectual property. As royalty income is essentially a payment relating to the usage of intangible assets, a capital payment for the purchase of intellectual property will not normally be a royalty. Similarly, technical assistance fees are generally excluded from the definition of royalties in tax treaties and are consequently not subject to withholding tax.
When royalties are taxable, the tax is usually collected by the licensee out of the payment made to the licensor, either on the gross payment with no current expense deduction or on a net basis. The net amount may be computed with an expense deduction based on a flat rate derived from an estimated fixed percentage or on the actual expenses incurred.
Since the technology being transferred under this model contract is a global package, there is a significant risk that a withholding tax or customs tariffs may be levied on the full amount of the royalty even if part of it (e.g., in relation to technical assistance and/or supply of manufacturing equipment) is not liable to such a tax. In order to avoid such an issue, the parties may find it useful to provide in the contract a specific remuneration in respect of the components of the royalty that are not subject to withholding tax or customs tariffs.
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When a foreign licensor is involved, it is common for a contract to permit the licensee to make payments of withholding tax to the tax authorities from royalties otherwise due to the licensor, subject to providing the licensor with evidence of such withholding to enable the licensor to make submissions to its own tax authorities for appropriate tax relief (tax credit).
Alternatively, the parties may agree that all taxes assessed at source in the licensee’s country, on the income of the licensor, with respect to the agreement shall be borne by the licensee. however, the parties should be warned that the legal validity of such clauses may be questionable in certain jurisdictions.
Finally, parties should note that assistance given by licensor in the licensee’s territory may be construed by tax authorities in that territory as the creation of a permanent establishment on the part of the licensor.
Parties are strongly advised to consult with qualified tax counsel before entering into this agreement in order to avoid unanticipated complications.
Any model contract should, to the greatest extent possible, be adapted to the circumstances of the case in question.
In theory, the best solution is to draft an individual contract based on existing model forms in order to take account of all the specific requirements of the parties to a particular transaction. however, the parties are often not in a position to prepare a specific contract and prefer to have recourse to a readyto- use balanced model form that can be used as it stands, without any need to make modifications or additions.
The present model is an attempt to achieve a balance between these two possibilities.
ICC has tried to work out a single solution for every issue. Where this has not been possible (e.g., Articles 5.1, 10.1, 12.2, 14.1, 16.4, 17.2 and 18), alternatives have been suggested.
Such alternative solutions have been presented side by side under the letters A and B, in order to highlight the fact that parties must select one of them.
Therefore, before signing the contract, the parties must decide which of the alternative solutions they prefer, and then delete the alternative they do not want to apply.
In any event, the model form provides in Articles 20.8 and 20.9 that, if the parties do not make a choice by cancelling one alternative, one of them will automatically apply.
It is recommended that users of this model contract seek the advice of legal counsel before finalizing the contract.
1 This situation arises frequently in the mechanical industry. In other industries, such as the chemical industry, succesful transfer of technology may be much more dependent on the validity of patents.
2 This solution takes into account that a limited number of provisions of the unidroit Principles may not actually reflect the expectations of international trade. This may be the case with respect to certain rules that protect a disadvantaged party to an extent that goes beyond the standards that are usual in business-to-business relations. See, for instance, para. I of Article 3.10 on gross disparity, where reference is made to “the improvidence, ignorance, inexperience or lack of bargaining skill” of a party in order to justify contract avoidance, and the rules on hardship contained in Articles 6.2.1-6.2.3, particularly with regard to the rule authorizing courts to modify the contract terms. With respect to such rules, general principles of law and trade usages will prevail over the unidroit Principles. of course, parties may also expressly exclude the application of specific provisions of the unidroit Principles that they consider inappropriate. In any case, there is an express reference to the ICC hardship Clause 2003 (see Article 15.2).
3 Even if no choice of a national law has been made, internationally mandatory rules (i.e., rules that would be applicable independently from the applicable law, so-called “lois de police”) of a national law that is closely connected to the contract may be applicable in certain circumstances.
4 This aspect may be very important where the transfer of funds (e.g., for payment of royalties) must be authorized by the local authorities of the licensee’s country