Guidelines on Certain Subcontracting Agreements between Non-competitors
(1) Subcontracting agreements which can be concluded between undertakings of different sizes and which enable work distribution between those undertakings
contribute to the development of, particularly, small and medium sized undertakings.
Thanks to the work distribution achieved through such agreements, small and
medium sized undertakings become capable of improving themselves as an outcome
of their production using the technology and equipment provided by big companies.
During their production using the aforementioned technologies, those undertakings
often find the opportunity to develop these technologies. Thus, on one hand, use and
creation of new technologies are encouraged thanks to the said agreements, and on
the other hand, thanks to the work distribution achieved, specialization of firms is
facilitated and lowering of costs becomes possible through increased efficiency.
(2) The Competition Board (the Board), during the period since it became operational in 1997, has taken a series of decisions setting out its approach
concerning the assessment of subcontracting agreements, which are defined below,
under the Act on the Protection of Competition (Act No. 4054) dated 07/12/1994 and
numbered 4054. The purpose of these Guidelines is to inform those who are
concerned, on the approach of the Board in relation to the application of Article 4 of
the Act No. 4054 to subcontracting agreements, taking into account its past decisions
and the legislation of reference. While subcontracting agreements provide
opportunities for the development of, particularly, small and medium sized
undertakings, it should be stated that the principles set by this Communiqué apply
irrespective of the size of the undertakings which are party to the aforementioned
agreements.
(3) For the purposes of these Guidelines, subcontracting agreements refer to agreements under which an undertaking (subcontractor) commits to produce goods,
provide services or perform work on behalf of or for another undertaking (the
contractor) in line with that undertaking’s instructions. In this context, whether the
production of goods, provision of services or performance of work under the said
agreement is upon the request of a third party or not does not matter. Subcontracting
agreements under these Guidelines are of vertical nature.
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(4) Under certain subcontracting agreements, the subcontractor may have to make use of the technology or equipment to be provided by the contractor, to be able
to fulfill the requirements of the agreement. Generally, under these circumstances, to
protect the economic value of the said technology and equipment, the contractor
imposes the condition that they may be used by the subcontractor solely for the
purposes of the agreement. In such cases, the uncertainty arises as to whether the
subcontracting agreements are caught by Article 4 of the Act No. 4054 or not. In
order to rule out such uncertainties, it would be appropriate to take account of the
explanations below which have been made also in consideration of the purposes of
subcontracting agreements.
(5) The prohibition under Article 4 of the Act No. 4054 shall not be applicable to the provisions contained under subcontracting agreements whereby:
- the technology or equipment provided by the contractor may not be used
except for the purposes of the subcontracting agreement,
- the technology or equipment provided by the contractor may not be made
available to third parties,
- goods produced, services provided or work performed using such technology
or equipment may be supplied only to the contractor or to a person to be indicated by
the contractor, or may be carried out only on behalf of the contractor,
provided that such technology or equipment is necessary for the subcontractor to
produce the goods, provide the services or perform the work in accordance with the
contractor’s instructions and under reasonable conditions. Prohibition under Article 4
of the Act No. 4054 shall not be applicable in so far as the said technology or
equipment is necessary. Necessity of the technology or equipment provided by the
contractor means that, in the absence of the subcontracting agreement, the
subcontractor would be unable to produce the goods, provide the services or perform
the work concerned by the contract, as an independent provider.
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(6) The condition that the technology or equipment be necessary will be deemed satisfied, and thus the provisions contained in the previous paragraph will
not be considered to fall under the prohibition under Article 4 of the Act No. 4054
where it is necessary for the subcontractor to make use of:
- industrial property rights owned by or at the disposal of the contractor in the
form of patents, utility models, designs protected in a registered or an unregistered
manner or other rights, or
- secret knowledge or know-how owned by or at the disposal of the contractor,
or of
- studies, plans or documents accompanying the information given which have
been prepared by or for the contractor, or
- dies, patterns or equipment, tools and accessory equipment that are
distinctively the contractor’s,
which, even though not covered by industrial property rights nor containing any
element of secrecy, allow for the production of goods that differ in form, function or
composition from other goods produced or supplied on the market.
Provisions included in subcontracting agreements for the subcontractor to
obtain inputs such as raw material to produce goods or to purchase substances to be
used in the provision of services or performance of work, in line with the instructions
of the contractor, from the contractor itself or a person to be indicated by the
contractor, are not restrictive of competition provided that they are necessary for the
said goods, services or work to be carried out with a defined feature, standard or
quality. The contractor may also demand that subcontracting agreements include
provisions about objectively reasonable safeguards to ensure that the goods to be
produced, services to be provided or work to be performed has a defined standard or
quality.
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(7) The restrictions under paragraph 5 shall not be justifiable where the subcontractor has at its disposal the technology and equipment needed to produce
the goods, provide the services or perform the work, or where it becomes clear that it
could obtain those from other resources under reasonable conditions. This is
generally the case when the contractor provides no information other than the
general information merely describing the work to be performed. Under such
circumstances, these restrictions may restrain the subcontractor from developing its
own business in areas related to the agreement.
(8) It has been seen that under subcontracting agreements, the subcontracting firm is imposed certain restrictions in relation to the technology provided by the
contractor. In considering whether these restrictions are caught by Article 4 of the Act
No. 4054, it would be appropriate to take account of the explanations below:
- imposing an obligation on either one of the parties, not to disclose knowledge
of secret nature provided by the other party during the negotiation process of the
agreement or performance of the agreement, unless they become public knowledge,
is a legitimate provision for protecting the value of the said information and shall not
bring the relevant subcontracting agreement under Article 4 of the Act No. 4054.
Among such knowledge of secret nature are production processes first and foremost,
as well as other elements which may be characterized as know-how, whereas it is
not possible to give a restrictive list. What is important is that the knowledge
transferred be confidential – in other words, not known or easily accessible by
everyone. For instance, where the knowledge transferred under the subcontracting
agreement is covered by the definition of know-how contained in the Block
Exemption Communiqué on Vertical Agreements No. 2002/2, adopted by the
Competition Board and published on the Official Gazette dated 14/07/2007 and
numbered 24815, imposing a non-disclosure obligation on the party to whom the
know-how is transferred shall be deemed justifiable.
- imposing an obligation on the subcontractor not to make use of the
manufacturing processes of secret nature, or of other elements which may be
characterized as know-how, transferred to itself during the currency of the
agreement, even after the expiry of the agreement, unless they have become public
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knowledge is aimed at protecting that knowledge and preventing unjust utilization of
that knowledge, therefore such a restriction will not be considered in violation of
Article 4 of the Act No. 4054.
- the subcontractor may be imposed an obligation to pass on to the contractor
the technical improvements it has made during the currency of the agreements on a
non-exclusive basis. Without such an obligation, the contractor may refuse to make
the subcontracting agreement whereby it is to pass on its technology. Owing to the
obligation to pass on the technical improvements on a non-exclusive basis, the
contractor will be more willing to make a subcontracting agreement since it will be
able to obtain the improvements relating to its technology, and the subcontractor,
provided that it does not disclose it, will not only be able to make use of the
knowledge of secret nature passed on to itself, it will also be able to make it available
to somebody else other than the contractor. Furthermore, having these possibilities
will be reflected positively on the subcontractor’s incentive to make improvements on
the technology passed on to it.
Similarly, where the subcontractor makes a patentable invention during the
currency of the agreement, while using the contractor’s technology, imposing an
obligation to grant non-exclusive licenses to the contractor in respect of that invention
for the term of the patent held by the contractor, shall not fall under the prohibition of
Article 4 of the Act No. 4054. While the invention of the subcontractor may concern
the improvements on the contractor’s invention, it may also concern the new
applications of the contractor’s invention.
However, where it is not possible for the improvements and inventions made
by the subcontractor during the currency of the agreement to be used independently
from the know-how or patents passed on by the contractor, the obligation imposed on
the subcontractor to pass on the improvements or to grant licenses in respect of the
invention may be in the form of exclusive licenses.
However, an obligation relating to the results which the subcontractor have
attained through its own research and development activities and which may be used
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independently, may render the said subcontracting agreement restrictive of
competition under Article 4 of the Act No. 4054.
(9) Where the subcontractor is authorized by the subcontracting agreement to use a specific trademark, trade name or get up, outlook, or package, the contractor
may restrict the use of these elements solely to goods, services or works which are
covered by the agreement.
(10) Where a vertically characterized subcontracting agreement falls under Article 4 of the Act No. 4054, it shall be able to qualify for exemption provided that it
fulfills the requirements under Article 5 of the said Act. As for whether these
agreements fall under the Communiqué No. 2002/2, it would be appropriate to refer
to the explanations under the said Communiqué, especially Article 2 titled “Scope”,
paragraph two, and under the Guidelines on the Explanation of Block Exemption
Communiqué No. 2002/2 regarding Vertical Agreements, section titled “1.2. Vertical
Agreements Involving the Use of Intellectual Rights.” To summarize the said
explanations very briefly, it is stated that where the vertical agreements involving the
transfer of intellectual property rights to the buyer, or the use of them by the buyer
fulfill the other specified conditions, they may benefit from the Communiqué No.
2002/2; however, under subcontracting agreements, the know-how required for
production is generally transferred by the contractor, who is in the position of buyer,
to the subcontractor, who carries out the production and is in the position of provider,
therefore such agreements cannot qualify for the block exemption conferred by the
said Communiqué. However, despite not explicitly provided for under the
Communiqué No. 2002/2 and the Guidelines published in relation to that
Communiqué, the subcontracting agreement concerned may be able to qualify for
the block exemption provided by the said Communiqué where the contractor, who is
in the position of buyer, passes on to the subcontractor, who is in the position of
provider, the detailed specifications whereby the products or the service to be
provided is described.
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