Introduction

IP rights holders' refusal to license patents or copyrights to other undertakings under China's antitrust legal framework remains a perplexing issue, as it lies at the crossroads of IP law and antitrust law. It has been argued that refusal to license is a right inherent in patent rights or copyright, and that compulsory licensing based on antitrust law should be instituted only in exceptional circumstances. This issue also raises questions as to how these intersecting laws should be applied to disputes regarding refusal to license. In this regard, the high-profile antitrust case of Huawei v IDC – which concerned the licensing of standard-essential patents – is seen as the model in dealing with IP antitrust matters. However, there are caveats in applying this decision to similar cases.

Relationship between IP law and antitrust law

The purpose of antitrust law is to encourage competition in order to maximise consumer welfare by promoting lower prices, better quality and greater choice. This is achieved by imposing limits on the activities of enterprises with significant market power. The aim of IP law is to incentivise innovation by bestowing on inventors an exclusive right to use their intellectual property (eg, patents or copyright) for a limited period. Ultimately, the aim of IP rights is to advance consumer welfare by supporting dynamic competition. IP law and antitrust law therefore do not fundamentally conflict in light of their common goals.

The means by which IP law and antitrust law achieve their common targets are different and – in some instances – contradictory on the outset. It is thus unsurprising that conflicts between IP and antitrust law frequently arise, especially in disputes regarding refusal to license. However, IP and antitrust law are not fundamentally opposed, and the simple approach of contending supremacy of one over the other is short-sighted.

For example, a patent holder's refusal to license constitutes an acceptable exercise of patent rights and reflects not only the inherent need for patent right exclusivity, but also the fundamental doctrine of freedom of contract. Patent laws in most jurisdictions impose limits on the exercise of patent rights. The Chinese Patent Law imposes such limits through the following measures:

  • time limits for patent rights;
  • patent invalidity procedures;
  • patent exhaustion procedures;
  • exceptions to patent infringement;
  • promotion and application of the inventions of state-owned entities; and
  • compulsory licensing.

Therefore, as a general principle, patent holders have no obligation to license their patents. Compulsory licensing on antitrust grounds is therefore tolerated only in exceptional cases.

In assessing whether a specific scenario should be defined as 'exceptional circumstances', a comparative approach of weighing the pro and anti-competitive effects of refusal to license can be taken. However, the analytical approaches under the antitrust regime vary by jurisdiction.

Refusal to license under antitrust regime

The Anti-monopoly Law contains only one general provision addressing the application of antitrust law to IP rights. Article 55 of the law states:

"This Law shall not apply to the exercise of intellectual property by undertakings pursuant to the relevant laws and administrative regulations on intellectual property; however, this Law shall apply to the abuse of intellectual property by undertakings to eliminate or restrict competition."

Article 55 essentially establishes grounds for the application of the Anti-monopoly Law to IP-related activities. The exercise of IP rights in accordance with relevant laws and regulations should not necessarily be deemed a violation of the Anti-monopoly Law. However, the exercise of IP rights may violate the Anti-monopoly Law if two conditions are satisfied:

  • The relevant activity constitutes an abuse of IP rights; and
  • The relevant activity will have the effect of eliminating or restricting competition.

In other words, the simple abuse of IP rights is regulated not by the Anti-monopoly Law, but by IP law. The Anti-monopoly Law regulates only IP rights abuse which has the effect of excluding or restricting competition.

That said, abuse of IP rights which has the effect of eliminating or restricting competition does not necessarily violate the Anti-monopoly Law; rather, this is assessed on a case-by-case basis. As the Anti-monopoly Law does not provide a specific legal framework for IP-related activity, this assessment should be conducted under the same framework that regulates abuse of dominant position (as stipulated in Article 17 of the Anti-monopoly Law).

Article 55 of the Anti-monopoly Law is only a general provision and does not clearly state how provisions on abuse of dominance should be applied to IP-related activity. The State Administration for Industry and Commerce has enacted a supplemental antitrust regulation governing the abuse of IP rights – the Regulation on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights, which entered into force on August 1 2015. This regulation clarifies how Article 17 of the Anti-monopoly Law should be applied to issues regarding refusal to license. Article 7 of the regulation states:

"Where its [IP rights] constitute an essential facility for production and business operation, an undertaking in a dominant position shall not refuse to confer license to other undertakings to use such [IP rights] under reasonable conditions, without legitimate reasons. When determining whether an intellectual [IP right] constitutes an essential facility, factors that need to be considered include: (1) such [IP right] has no reasonable substitutes in the relevant market and is necessary for other undertakings to compete in the relevant market; (2) refusal to license will have a negative impact on competition or innovation in the relevant market, harm consumer welfare or social welfare; (3) licensing such [IP right] will not cause unreasonable harm to the [IP right] proprietor."

Article 7 thus provides that a patent holder's refusal to license may be deemed a violation of the Anti-monopoly Law – and therefore constitute exceptional circumstances under the antitrust regime – ­only where the following conditions are all satisfied:

  • The patent holder has a dominant position in the relevant market;
  • The relevant IP right constitutes an essential facility (strict criteria for this are also provided in the regulation);
  • The patent holder has refused to license its IP rights;
  • There are no legitimate reasons for the refusal; and
  • The refusal has the effect of eliminating or restricting competition.

Although the legal framework for assessing refusals to license may seem relatively straightforward at first, additional issues frequently arise which make antitrust assessment more complex in practice – for example, questions regarding:

  • the definition of the relevant market in refusal-to-license disputes;
  • the calculation of the patent holder's market share;
  • legitimate grounds for refusal; and
  • the application of the essential facility doctrine.

Huawei v IDC

The Anti-monopoly Law was introduced in 2008 and as such has a short history in comparison with the US Sherman Act and its EU counterpart. As yet there are no completed cases involving refusals to license, although one is pending before the Ningbo Intermediate Court. However, the high-profile Guangdong High Court case of Huawei v IDC concerned the licensing of standard-essential patents. The case is frequently cited by parties which face or may potentially face an antitrust assessment of their IP-related activity.

Huawei is one of the largest telecommunications equipment manufacturers in China and worldwide. IDC is a non-practising entity holding a number of standard-essential patents related to 2G, 3G and 4G technology. In September 2009 IDC joined the European Telecommunications Standards Institute and committed to license its standard-essential patents on fair, reasonable and non-discriminatory (FRAND) terms.

In December 2011 Huawei filed a complaint against IDC and its subsidiaries before the Shenzhen Intermediate People's Court, accusing IDC of:

  • abusing its dominant market position;
  • requesting discriminatory royalty rates; and
  • tying the licensing of standard-essential patents to that of non-standard-essential patents.

The Shenzhen court supported Huawei's allegations, finding that IDC had abused its dominant market position by tying standard-essential patents to non-standard-essential patents and initiating investigations in the United States with the aim of preventing Huawei from using the standard-essential patents. Moreover, the Shenzhen court held that IDC had failed to comply with its FRAND commitments in connection with its standard-essential patents.

IDC appealed to the Guangdong High People's Court. In October 2013 the Guangdong court upheld the first-instance decision. However, it found that the bundling of standard-essential patents and non-standard-essential patents could be justified on efficiency grounds; therefore, IDC's tying practice did not violate the Anti-monopoly Law.

Huawei v IDC marks the first time that the Anti-monopoly Law has been applied to the exercise of IP rights and the court's approach to defining relevant market and dominant position in the case was considered advanced and novel. However, some of the court's positions remain controversial. For instance, the Guangdong court confirmed Huawei's definition of the relevant market as every licensing market for each standard-essential patent which constitutes an independent relevant product market, while each country in the relevant product market constitutes an independent relevant geographical market. The Guangdong court reached this conclusion based on the theory that each standard-essential patent is unique and non-substitutable, and should not be replaced by other technologies, but did so without assessing competition standards. It has been contended that the licensing of specific standard-essential patents should not be deemed as being undertaken in independent relevant product markets where competing standards exist (ie, where the standard-essential patent is substitutable with standard-essential patents of competing standards).

Caveats for assessing refusal to license

Huawei v IDC serves as strong precedent, as parties have been inclined to apply the views of the Huawei court to their own specific cases and make certain inferences based on Huawei when dealing with non-standard-essential patent cases. In order to avoid improper application of the Huawei judgment in the context of an antitrust assessment of a refusal to license, several caveats apply:

  • The approach used to define the relevant market in Huawei is controversial and specific to standard-essential patent cases, and should not be directly employed in non-standard-essential patent cases.
  • In general, standard-essential patent holders have the obligation to license, while non-standard-essential patent holders do not. Therefore, refusal to license a standard-essential patent may constitute abuse of dominance under Article 17 of the Anti-monopoly Law, while refusal to license a non-standard-essential patent – even by a patent holder with a dominant market position – will not typically be considered abuse.
  • Non-standard-essential patents usually do not constitute an essential facility whereas standard-essential patents frequently do, as they are usually indispensable for others to compete in the relevant market.
  • Refusal to license a non-standard-essential patent will generally not be detrimental to consumer welfare because non-standard-essential patent licensing usually promotes only competition by imitation, which is excluded by IP rights and at any rate will not substantially enhance consumer welfare or encourage innovative competition.

For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email (zhanhao@anjielaw.com or songying@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?

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