One of the best tools for foreign companies to enter the German market are cooperation agreements. The term, as used in this article, encompasses a wide variety of joint ventures that go beyond a mere distributorships but fall short of forming a partnership in the legal sense. Frequently such agreements will incorporate licenses.

This article wants to highlight some of the most important points a foreign company should be aware of when entering such agreements. Special emphasis is given to questions of EU Competition Law.

I.Cooperation Agreements

Foreign companies are most comfortable with agreements that are governed by their own law. However, this goal cannot always be achieved and might sometimes not even be that desirable. Furthermore, even if the foreign law is chosen, German courts will apply
mandatory German rules in highly public policy related areas like intellectual property rights, competition and anti-trust law.

Special caution has to be applied in drafting the contract. German law puts a particular emphasis on the so-called “Objectively Determinable Interest of the Parties” and is a lot more likely to disregard the actual wording if it conflicts with said “Interest” than for instance USlaw. Furthermore, statutory rules will be applied unless their application is clearly excluded in the contract. Thus, not only the obligations a party is willing to take on but also the obligations a party is not willing to take on have to be clearly defined in the contract. Otherwise, under certain circumstances, a German court could for instance apply the German
law of partnership to a cooperation, even though no partnership was intended.

The same applies to the available remedies in case of breach of contract. Otherwise one could be left with the right to rescission and a claim for compensatory damages, even though his real interest went to enforcing specific performance of the contract.

Finally, special attention should be given to the termination of indefinite term contracts and the premature termination of fixed term contracts. This is the only way to insure that the parties will only have to take on those post contractual obligations that they actually intended to.

II.License Agreements

In license agreements the extent of the license should be meticulously defined to avoid disputes and secure one’s own position in case a dispute arises. This is also the only way to prevent the risk of the license being expanded later on beyond what was originally intended due to a liberal construction of the contract by the courts.

The same applies to additional obligations of the licensor beyond the mere grant of the license. A precise definition of what support, in which form and at what point in time is owed by the licensor to enable the licensee to make full use of the granted license is the best way to avoid future disputes.

Finally, the issue of post contractual obligations has to be given particular consideration, especially in cases of “know how” licenses. The “know how” which is covered by such licenses, is usually not protected by any other independent intellectual property rights and
remains with the licensee even after the termination of the agreement. Therefore it is important to make clear in the contract which use he may or may not make of the said “know how” after the agreement runs out.

III.Competition Law

Of particular importance with regard to all cooperation and especially license agreements is the EU-Competition law. As such agreements are intended by nature to have a limiting effect on competition, which generally will have an effect on the trade between the states within the common market, they will be prohibited as anti competitive by Article 81 (1) of the EU Treaty unless they satisfy the conditions of Article 81 (3) of the EU Treaty for an exemption.

As of now, if the combined market share of the parties involved exceeds a certain level – 10% for competitors and 15 % for non-competitors – all agreements covered by Article 81 (1) of the EU Treaty have to be notified to the EU-Commission for a case by case decision on whether an exemption under the Article 81 (3) of the EU Treaty applies. As this notification regime proved to be impractical and unduly burdensome to the EU-Commission, it was changed by the Council of the European Union through enacting Council Regulation (EC) No. 1/2003 of December 16, 2002.

According to this regulation, which will go into effect May 1, 2004, all agreements covered by Article 81 (1) of the EU Treaty that do not satisfy the conditions of Article 81 (3) of the Treaty are prohibited and all such agreements which do satisfy the conditions of Article 81 (3) of the Treaty will not be prohibited. In other words, starting May 1, 2004 Article 81 (3) of the EU Treaty will apply directly. This will lead to less bureaucracy but by the same token more uncertainty for companies doing business within a common market.

Even before the now enacted radical change the notification system had shown its imminent problems and undergone modifications. To limit the number of notifications and increase a legal certainty the EU-Commission, based on a grant of authority by the EU-council, enacted several block exemption regulations for certain industries and types of transactions, which declare Article 81 (3) of the EU Treaty as generally applicable to such transactions, which based on the block exemption do not have to undergo the notification process. Of particular interest with regard to cooperation and license agreements are the block exemption on certain
vertical agreements (Commission Regulation [EC] No. 2790/1999 – here in after Vertical-BE) and the technology transfer block exemption (Commission Regulation [EC] No. 240/96 – herein after TT-BE).

All block exemption regulations contain a black list of agreement provisions, which infringe on the core principals of free competition within the common market and are therefore per se anti-competitive. Inclusion of such provisions leads to the non- applicability of the block exemption. Such black lists are largely industry or agreement type specific. However, they all prohibited at least two things:

on the one hand price fixing, if it exceeds the mere recommendation of sale prices;
on the other hand the market allocation which is directly aimed at preventing trade between the states within the common market

The Vertical-BE applies to agreements for the purchase, sale and resale of goods and services between market participants that belong to different levels of the production and distribution structure with regard to the goods and services concerned. Its application is excluded, if the market share of the supplier or for of exclusive supply contracts the costumer exceeds 30 %.

The TT-BE applies to licenses for the use of patents and “know how” as well as sales thereof, if the risk of economic success remains with the seller. It also applies to licenses for other intellectual property rights, if such licenses are combined with a patent or “know how” license. However, the block exemption does not apply, if the market share of the licensee exceeds 40 %.

Both regulations do not apply, if specific provisions of agreement violate the black list provisions. Under Article 29 of the new Council Regulation (EC) No. 1/2003 the Commission or, if only one the member state is concerned, the member state can withdraw the benefit of the block exemption, if an agreement has effects which are incompatible with Article 81 (3) of the EU Treaty.

IV. Conclusion

This Article could only give a brief overview of the complex legal issues arising when entering into a cooperation or license agreement and did not intend to do more. Cooperation agreements, whether they include licenses or not, are many times an excellent and a highly recommendable tool to enter the German market. The legal implications can effectively be managed by obtaining competent counsel.