On 7 April 2015, the State Administration for Industry and Commerce (“SAIC”) published the long awaited Regulation on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights (the “Rules”), which will come into effect on 1 August 2015. The Rules are the first set of regulations in China specifically dealing with the application of the Anti Monopoly Law (“AML”) to IP practices. There are several controversial provisions and critics have noted that the Rules could, potentially, lead to a weakening of the protection of IPRs and dampen incentives to innovate.
It is important for companies to take into account the new Rules when drafting license agreements and to check existing agreements for compliance. Comments from officials suggest that the Rules may herald a period of active enforcement, particularly focusing on the technology, internet and pharmaceutical sectors.
- Market share safe harbours: (i) 20% parties' combined market share for agreements between competitors; and (ii) 30% individual party market share for agreements between non-competitors.
- Rule of reason analysis?: The Rules include wording that each type of abuse must be shown to have the effect of eliminating or restricting competition, in line with Article 55 of the Anti Monopoly Law (“AML”). This suggests the SAIC is likely to adopt a “rule of reason” approach in assessing abuses of IPR.
- Market definition and dominance: The relevant product market can be a technology market or product market. Ownership of an IPR will be one factor determining a dominant market position but there will be no presumption of dominance solely as a result of ownership of an IPR.
- Essential facilities: Controversial adoption of an essential facilities doctrine to IPRs potentially leading to compulsory licensing.
How did we get here?
Drafting of the Rules begun in 2009 and eight previous draft versions were released. The Rules are published in the context of significant changes to the IP regulatory environment in China and a greater focus on the abuse of IPRs in China. For example:
- On 1 April 2015, the State Intellectual Property Office released the draft amendments to the Patent Law for public consultation. The proposed amendments include a new broadly-worded general provision requiring the exercise of patent rights to abide by the principle of good faith, not to harm public interests, not to improperly eliminate or restrict competition and not to impede technological advancement.
- There have also been seminal court decisions and regulatory investigations focusing on alleged antitrust-infringing IP practices. For example, in October 2013, in a case involving two leading technology companies, a Chinese court determined a FRAND royalty rate relating to standard essential patents (“SEPs”) for the first time. The NDRC has also launched a number of high-profile investigations into major technology companies suspected of abuse of dominance, through excessive pricing and abuse of IPRs. Most notably the NDRC imposed a USD 1 billion fine on Qualcomm in March 2014. NDRC enforcement activity is ongoing as reportedly it has just dawn raided two flooring companies for suspected abuse of IPRs.
The Rules prohibit conduct of a business operator which eliminates or restricts competition through the exercise IPRs in violation of the AML. While various provisions share commonalities with restrictions under existing law affecting technology contracts, a number of new legal concepts are introduced. Significant uncertainties remain in the text of the Rules providing the SAIC with wide, interpretative discretion and leaving companies with challenges for compliance with the Rules.
The Rules contain the following key changes from the draft issued in June 2014:
- The Rules now include in the description of each type of abuse that the act shall have the effect of eliminating or restricting competition, suggesting the SAIC should adopt a “rule of reason” analytical approach;
- The Rules explicitly exclude acts relating to price as such acts fall under the jurisdiction of the NDRC. Nevertheless, the Rules follow extensive consultation with MOFCOM and the NDRC. Hence although the Rules do not bind the NDRC, they may be indicative of the NDRC's proposed analytical approach in future investigations;
- Deletion of the provision on copyright collective management organisations; and
- Deletion of the provision prohibiting business operators with a dominant market position from issuing infringement warning letters where the IPRs have expired, are invalid or where third parties have provided sufficient evidence of non-infringement.
We set out below an overview of the key provisions.
The Rules provide "safe harbors" for certain business operators namely for:
- Horizontal agreements: if the combined market share of the competing business operators is less than 20% in the relevant market, or there are at least four other independently controlled substitutable technologies that can be obtained at reasonable cost in the relevant market; or
- Vertical agreements: if the market share of each of the business operator and its trading counterpart does not exceed 30% in the relevant market, or there are at least two other independently controlled substitutable technologies that can be obtained at reasonable cost in the relevant market;
- provided there is no evidence that such an agreement has the effect of eliminating or restricting competition.
Essential Facility Doctrine
Article 7 of the Rules controversially adopts an essential facilities doctrine to IPRs by stating that "where its intellectual property constitutes a facility essential for production and business operations, a business operator in a dominant market position shall not, without legitimate reasons, refuse to license other business operators to use its intellectual property under reasonable conditions to eliminate or restrict competition". The following factors will be taken into consideration at the same time: (i) the IPR cannot be reasonably substituted and is necessary for other business operators to compete; (ii) the refusal to license will have a negative impact on competition or innovation to the detriment of consumer welfare or public interest; and (iii) licensing such IPR will not cause unreasonable harm to the business operator.
Whilst concessions to the previous draft Rules have been made, companies with extensive IP portfolios may be concerned that the revisions do not go far enough and clarify that a request for access to IPRs can only be justified in exceptional circumstances, where, for example, access to the IPR is indispensable and results in the elimination (not just restriction) of competition. Arguably the standard adopted is lower than the threshold advanced by European and US courts. Critics of the Rules claim that the criteria will incentivise business operators to use the legal process to access competitor's IPR and free ride on IP owner’s products rather than by competing on merits by innovating. There are also concerns that an SAIC antitrust infringement decision on a patentee can also lead to an application for compulsory licensing under the Patent Law.
Unreasonable Trading Conditions
Under Article 10, dominant IPR holders are prohibited from, without legitimate reasons, agreeing to the following licensing conditions:
- requiring exclusive grant-backs for improved technology;
- prohibiting trading partners from challenging the validity of their IPRs;
- continuing to exercise their IPRs after the protection term has been expired or the IPRs have been held to be invalid;
- restricting trading partners from using competing goods or technologies after the expiry of the term of the licensing agreement;
- prohibiting trading partners from dealing with third parties; or
- attaching other unreasonable restrictive conditions to trading partners.
Again, whilst critics argue that the Rules curtail the contractual freedom of IPR holders, the conditions are relatively unsurprising given that they echo similar prohibitions under the current rules relating to technology contracts.
Article 11 prohibits discriminatory treatment to trading partners by dominant IPR holders without legitimate reasons. However, the Rules do not explicitly recognize pro-competitive reasons or provide examples of legitimate reasons for the differential treatment of customers by a dominant firm.
Article 12 of the Rules concerns patent pooling arrangements. This includes a broad prohibition on information exchange between members of the patent pool. It also provides a list of conduct prohibited by organisers of a patent pool without reasonable justification, namely:
- restricting members from becoming independent licensors to license patents outside the pool;
- restricting members or licensees from independently, or in cooperation with a third party, developing technology that competes with the pooled patents;
- forcing licensees to grant exclusive grant-back of technology improved or developed by them to the organization managing the patent pool or the members;
- prohibiting licensees from challenging the effectiveness of the pooled patents; and
- applying differential treatment relating to trading conditions to members or licensees in equivalent conditions.
However, the provision does not clarify explicitly the type of conduct that would not restrict competition; distinguish between pro- and anti-competitive patent pools and/or include any safe-harbours.
Article 13 states that when participating in a standard setting process a dominant IPR holder cannot deliberately fail to disclose information on its right to the standard setting organization or give up its right and then later assert its patent against users of the standard. A dominant IPR holder cannot, after its patent has become a SEP, engage in conduct restricting competition, such as, refusing to license, tying products or attaching other unreasonable trading conditions. It is worth noting that similar requirements on disclosure and commitment to license on FRAND terms are set out in China's national standard setting provisional regulations issued in December 2013.
Other Restrictions/ Requirements
The Rules also impose a number of other restrictions/ requirements on dominant IPR holders. In particular, dominant IPR holders are prohibited from, without legitimate reasons:
- restricting trading partners to exclusively dealing with itself or designated business operators;
- tying or bundling different types of goods contrary to trade customs and consumption habits or without regard to the functionality of the goods, where the implementation of such conduct can cause their dominant position to extend in the tying product market into the tied product market eliminating or restricting competition.
Market Definition and Dominance
The relevant product market can be a technology or product market containing specific IPRs. The relevant technology market is the market where the technology involving the exercise of IPRs competes with technologies of the same type that are substitutable.
The Rules clarify that assessment of a dominant market position should be conducted in accordance with Articles 18 and 19 of the AML. The Rules note that ownership of an IPR may constitute one of the factors in determining a dominant market position. However, a presumption of dominance will not arise solely because of its ownership of an IPR.
What it means for you?
While the finalised Rules have tried to address the concerns of IPR holders by making it an express condition that an IPR abuse should have the effect of eliminating or restricting competition, and suggesting the adoption of a "rule of reason" approach in assessing abuse, it remains to be seen how the SAIC will interpret and enforce the Rules in practice, and how the existing compulsory licensing framework under the PRC Patent Law may be utilized in tandem.
Compared to the Chinese courts, administrative enforcement generally presents greater uncertainties due to regional differences in the interpretation and application of law between local AICs. Although the SAIC has reportedly said that they would be extremely cautious in implementing the Rules, enforcement activity in this area may still be perceived as weakening IPR protection in China, with the potential impact of discouraging innovation and competition.
Companies operating in sectors which have been cited as potential targets for future investigations, such as technology, internet and pharmaceutical companies, are strongly advised to review their IP transactions in China and assess their risk exposure under the Rules. In particular, we suggest:
- Assessing whether you are potentially dominant in any technology or product market.
- Reviewing your licensing arrangements in China to ensure compliance with the Rules. Be prepared to re-negotiate licensing terms if necessary.
- Assessing your risk exposure and devising contingency plans.
- Monitoring SAIC’s enforcement and further legal developments in this area.