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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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