A New Tool from the ICC – A Model Contract for Technology Transfer

(IPRinfo 2/2009)

Lauri Railas
Attorney-at-Law, LL.D
Krogerus Attorneys Ltd.

The International Chamber of Commerce (ICC) has prepared a model contract for international technology transfer.
It complements the ICC tools for international trade, which range from Incoterms 2000 and UCP 600 to a variety of model contracts and model clauses for particular issues.

The technology transfer model contract can be used as checklist but it also offers a complete agreement text with several options of choice. It will be published in April 2009 (No 674).

The term ”transfer of technology” covers a variety of situations, ranging from patent or know-how licenses to complex dealings involving the supplying of technical assistance and equipment. It is characteristic to this type of agreements that the package of the transferred information and the rights is more important than any exclusive right individually.

The licensee expects to obtain all the information, technical assistance and intellectual property rights that are necessary for manufacturing the contractual products to the quality standards of the licensor and with licensor’s technology. The individual elements are important only to the extent they are necessary for attaining this goal. The content, obviously, varies depending on the field of industry concerned.

Scope of the contract
The ICC model contract covers the situation where a company (licensor) manufacturing certain products gives to another company (licensee) a global package of information and intellectual property rights, which enable the licensee to manufacture certain products using the technology of the licensor. The products make the subject matter of the technology license.

Where the licensor manufactures products itself, licensing out will typically be an accessory activity with respect to its core business. This gives weight to the significance of contracting. Moreover, if the licensee is to manufacture the same products as the licensor, competition problems will be critical, as the licensor will, naturally, aim to protect its own market.

The model contract does not contain provisions on the supply of equipment or components. Neither does it provide for trademark licensing, nor a buy-back arrangement for products manufactured under the licensed technology. These matters have to be agreed on separately.

Licensing trademarks is problematic to both parties
When the parties wish to include a trademark in the package, 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, who will create a market for a trademark owned by another and given for use only for the duration of the trademark license.

Where the trademark is licensed, the licensor must control the quality of the licensed products thoroughly because of the risk to its reputation in case products not conforming to the licensor’s quality level are put on the market and, possibly, because of product liability implications.

The ICC has addressed trademark license issues in a separate model contract project, which is not, however, complementary to this model contract for technology transfer.

A ’buy-back’ option may be of interest for both parties: the licensor buys back the products manufactured by the licensee, usually using the licensor’s trademark. It may increase the output and thus reduce the costs of the licensee. Also, it may allow the licensor to delocalize part of the production in a country with lower manufacturing costs. The buy-back option may involve quantitative targets and sanctions to protect the licensee’s investments.

Conformity with the block exemptions in EU competition law
As a general rule, the model contract does not take into account specific mandatory rules of national laws and competition rules in different commercial areas, which might affect the drafting of various clauses. However, it does offer alternative contractual solutions conforming to the competition rules of the European Community.

Transfer of technology contracts in the EU are governed by Regulation (EC) No 772/2004, which grants a block exemption (pursuant to Article 81(3) of the EU Treaty) to all transfer of technology agreements that comply with certain conditions. The Regulation makes a distinction between agreements between competitors and undertakings not competing with each other.

General principles rather than national legislations
All ICC model contracts provide for the possibility that instead of some particular national law the contract may be governed by the principles of law generally recognised in international trade as appli¬cable to transfer of technology contracts (also called ’lex mercatoria’).

Thus, Article 18A of the model contract for technology transfer applies in a uniform way to licensors and licensees of dif¬ferent countries, without giving either party the advantage of applying that party’s national law or the law of a third country.

The possible disadvantages of applying rather flexible and general rules are counterbalanced by the greater certainty afforded by the recourse to contractual rules as well as by the reference to a set of general rules on contracts, such as the Unidroit Principles of International Commercial Contracts These offer a reasonably foreseeable legal framework for most issues that may arise.

The various sources of applicable law incorporated into the model contract are ranked in the following order: 1) contract clauses, 2) general principles of law, 3) trade usages, and 4) the Unidroit Principles.

Parties can also choose a national law
The parties have, however, a possibility to agree on a specific national law. This is particularly opportune when the parties refer the settlement of their contract disputes to national courts instead of arbitration. Nevertheless, the internationally mandatory rules cannot be evaded with a choice-of-law clause.

The parties are advised to take particular precautions regarding the tax treatment in their contract as the taxation of royalties varies from country to country depending on the definition as well.

In the current severe economic climate, technology transfer agreements, too, may be subject to claims for adjustment arising from changed circumstances. The model contract expressly incorporates the ICC Force Majeure and Hardship Clauses. The scope of the latter is more limited than Clause 6.2.2. of the Unidroit Principles in that it does not expressly give courts the right to adjust the contract due to changed circumstances.

Ready made texts with options – or just a checklist
Any model contract should be adapted to the circum¬stances of a specific case. In theory, the best so¬lution is to draft an individual con¬tract based on existing model forms, such as checklists. In this way all the spe¬cific re¬quirements of the parties to a particular transaction can be taken into account.

Often, however, the parties cannot prepare a spe¬cific contract. Therefore, they prefer to have recourse to a ready-to-use balanced model form that can be used as it stands, with¬out any need to make modifications or additions. The present model contract is an attempt to achieve a balance between these two possibilities. In many places, the model provides for options for the parties, there being a default rule in each case.

The ICC Model Technology Transfer Contract has been prepared in a Working Group under the ICC Commission Commercial Law and Practice (CLP). The Group was chaired by Professor Fabio Bortolotti from Italy. The participants represented major technology industrial companies and law firms specializing in this field, including the author of this article.

The model contract will become available from the ICC electronic bookstore and from each of the ICC national committees probably in spring 2009.

Commission on Commercial Law and Practice: ICC Model International Transfer of Technology Contract. ICC Publication No. 674, 2009 Edition.