On April 7 2015 the State Administration for Industry and Commerce (SAIC) published China's first anti-monopoly regulation specifically aimed at the abuse of IP rights – the Provisions on the Prohibition of Abuse of Intellectual Property Rights for the Purpose of Eliminating or Restricting Competition – which will become effective on August 1 2015. The drafting of the provisions can be traced back to 2009, when the SAIC established a special taskforce to research and draft the Guidelines on Anti-monopoly Enforcement in the Intellectual Property Rights Field. Based on the draft guidelines, the SAIC issued the draft provisions for public consultation in June 2014. The official promulgation of the provisions marks a giant leap forward for the SAIC in terms of anti-monopoly legislation in the IP field.
The provisions fill the legislative gap in China's anti-monopoly regulations governing the IP field and aim to balance the lawful rights and interests of IP rights holders and other interested parties, while also further promoting innovation and market competition. In recent years, with ever-intensified conflicts arising between the IP and anti-monopoly fields, issues triggered by the abuse of IP rights have grown to be a major focus of anti-monopoly enforcement agencies. Prominent examples of such cases include the recent dispute between Huawei and IDC arising from the licensing of standard-essential patents and the whopping Rmb6 billion penalty issued by the National Development and Reform Commission (NDRC) against Qualcomm. Although the new provisions – as a ministry regulation issued by the SAIC – apply only to monopolistic cases within SAIC jurisdiction (they do not apply to price monopoly cases under the NDRC's jurisdiction or merger control filings supervised by the Ministry of Commerce (MOFCOM)), the principles embodied in the provisions provide valuable guidance for the NDRC, MOFCOM and even the judicial system. As such, the promulgation of the provisions will undoubtedly facilitate anti-monopoly enforcement and judicial practice in the IP field. For example, in March 2015 Zhang Handong, the head of the Price Supervision and Anti-monopoly Bureau of the NDRC, mentioned that China needs to strengthen its anti-monopoly enforcement over IP rights abuse while simultaneously increasing the emphasis on IP rights protection.
The provisions comprise 19 articles covering many timely and complex issues with respect to monopolistic conduct in the IP field. The provisions have changed little from the consultation draft published in June 2014, other than adopting some reasonable suggestions received during the consultation period and adjusting or deleting several controversial articles. The provisions enumerate conduct constituting abuse of dominant market position (eg, restrictive dealings, tie-in sales, imposing unreasonably restrictive conditions and discriminatory treatment of counterparties with the same conditions), conduct amounting to monopoly agreements and other conduct which constitutes abuse of IP rights. The provisions also define and elaborate on several significant anti-monopoly principles and theories for the first time, such as the safe harbour principle under monopoly agreements, the essential facility doctrine and theories regarding standard-essential patents.
Compared with the consultation draft, one conspicuous change is that the words "eliminating or restricting competition" have been added after certain relevant specific conduct, with the aim of emphasising the actual impact of the conduct on market competition. This indicates that eliminating or restricting competition constitutes an important element of the abuse of IP rights.
Article 14 of the consultation draft referred to regulations addressing the abuse of IP rights by copyright collective management organisations for the purpose of eliminating or restricting competition. However, this article was deleted during the final revision process, so the provisions include no regulations governing copyright collective management organisations – rather, they mainly focus on patents and know-how, with no particular articles referring to abuse of copyright and trademarks.
Monopoly agreements and safe harbour principle
Articles 4 and 5 of the provisions prohibit undertakings from entering into and concluding monopoly agreements through the exercise of IP rights. Further, as a significant change, the safe harbour principle has been enshrined in legislation – although certain types of agreement are in principle exempted under Article 15 of the Anti-monopoly Law. The safe harbour principle has never before been stipulated in legislation; nor has there previously been any mention of this principle in the implementing rules issued by Chinese anti-monopoly enforcement agencies. While horizontal monopoly agreements regulated by Article 13 of the Anti-monopoly Law have always been strictly illegal per se, according to the provisions they can now be exempted provided that the conditions under the safe harbour principle have been satisfied.
The provisions' prohibition against undertakings entering into or concluding monopoly agreements basically reiterates the relevant provisions under the Anti-monopoly Law, but the principle of safe harbour is an original feature. This principle means that under circumstances prescribed by law, certain kinds of conduct by the undertakings are not considered monopolistic and are therefore exempt from penalties. According to the provisions, the exercise of IP rights by such undertakings shall not be deemed as entering into or concluding monopoly agreements in the following situations:
- The combined market share of the competing business undertakings in the relevant market does not exceed 20% or at least four independently controlled substitutable technologies exist that are available at reasonable cost in the relevant market; or
- The respective market share of each of the business undertakings and their transaction counterparties in the relevant market does not exceed 30% or at least two independently controlled substitutable technologies exist that are available at reasonable cost in the relevant market.
The provisions provide helpful guidelines for IP rights holders as to how to avoid violating the Anti-monopoly Law when exercising IP rights. However, the safe harbour principle may present a high degree of uncertainty in calculating specific market shares in practical applications, since the question of how to define the relevant markets affected, reasonable costs and the range of market shares and substitutable technologies remains to be answered through the actual practice of the enforcement agencies and the judicial system – especially when it comes to certain emerging fields (eg, the Internet and digital products). In particular, the boundaries between products and technologies have become blurred and defining relevant markets has thus become extremely difficult. It is also difficult to determine or evaluate the substitutability of certain new revolutionary technologies before the mass production stage commences.
The concept of an essential facility is not mentioned in the Anti-monopoly Law. Article 7 of the provisions introduces the doctrine of essential facilities, which originated in the competition laws of Western countries and is defined as anti-competitive conduct where an undertaking with dominant market position prevents other competitors in the market from acquiring and using certain essential facilities and further impedes other competitors from entering the market (to some extent this can be interpreted as a refusal to deal). However, the provisions' inclusion of intellectual property – especially patents – within the scope of essential facilities reaches far beyond the applicable scope of essential facilities in other jurisdictions.(1)
The provisions stipulate that without justifiable reasons, a business undertaking with a dominant market position shall be prohibited from refusing to license its intellectual property to other business undertakings under reasonable conditions in order to eliminate or restrict competition, where the intellectual property constitutes an essential facility in manufacturing or business operations. This article raised significant controversy during the consultation period and many Western scholars and practitioners in competition law take the view that it may suppress the motivation to conduct research and innovate, violating IP rights holders' justifiable pursuit of the core value of the intellectual property as an exclusive right. The article on essential facilities was ultimately retained in the final provisions, but with a limited scope within which the compulsory licensing clause could be applied. According to the provisions, the following factors should be taken into account when determining what constitutes an essential facility:
- the reasonable substitutability of the intellectual property;
- whether it is essential for other business undertakings to compete in the relevant market;
- whether the refusal to license will have adverse effects on competition or innovation in the relevant market and thereby harm consumers' or general public interests; and
- whether licensing the intellectual property will cause unreasonable damage to the rights holder.
Undertaking comprehensive analysis with all of these factors in mind would, to a certain degree, ease concerns over the unreasonable application of the doctrine of essential facilities.
Article 9 of the provisions clearly defines the conduct of tie-in sales when exercising IP rights. It comprises two elements:
- Compulsory tie-in activities or bundling sales of different products are undertaken which are inconsistent with trade practices or consumption habits, or ignore the product function; and
- The tie-in practices enable the rights holder to extend its dominant position in the tying product market to the tied product market, eliminating or restricting competition in the tying product market or the tied product market.
The provisions may have drawn reference from the interpretation regarding tie-in sales in Qihoo v Tencent, the well-known abuse of dominant market position case heard by the Supreme People's Court in 2014. The court elaborated on the elements of tie-in sales as follows:
- The tying product and the tied product are separate products;
- The undertaking possesses a dominant market position in the market for the tying product; and
- The undertaking imposed some kind of compulsory conduct on customers so that they would have no choice but to accept the tied product.
Further, tie-in sales lack legitimacy, are inconsistent with trade practices or consumption habits and ignore the product function. This sufficiently reflects the positive effect of anti-monopoly judicial practice on the legislation.
Imposing unreasonable restrictive conditions
Article 10 of the provisions lists common conduct which imposes unreasonable restrictive conditions in the IP field, such as:
- requiring the counterparties to submit to exclusive grant-back rights for their improvements to the licensed technology;
- prohibiting the counterparties from challenging the validity of the intellectual property; and
- continuing to exercise the expired intellectual property or intellectual property that has been declared invalid.
These are some of the illegal acts undertaken by Qualcomm as held by the NDRC in its recent investigation. As can be seen, the NDRC's assessment methods in the Qualcomm case have laid a solid foundation which serves as a practical reference for the SAIC to draft and revise the provisions.
Patent pooling arrangements
Article 12 of the provisions clearly defines possible specific monopolistic conduct arising from patent pooling arrangements. The provisions clearly set out what constitutes patent pooling arrangements and stipulate that members of patent pooling arrangements must not use the pooling arrangements to exchange competitively sensitive information (eg, output and market share) or enter into monopoly agreements. The provisions further provide a detailed list of all prohibitive conduct for patent pooling arrangements with dominant market position.
Article 13 of the provisions specifically defines 'standard-essential patent' and sets out the obligations of standard-essential patent holders. In particular, the provisions clarify the FRAND principle (fair, reasonable and non-discriminatory terms) in patent licensing, which has been adopted in previous enforcement practices.
Article 13.2(1) prohibits undertakings with dominant market position, without justified reason, from:
- intentionally refusing to disclose information on their rights to the standards-setting organisation during the standard-setting process; or
- after explicitly waiving their rights, asserting their patent rights against the standard implementers after the patents have been included in a standard.
In the previous consultation draft, the prerequisite for undertakings to assume such obligations was "under the condition of knowing that their patents may be incorporated into relevant standards". However, this prerequisite has been revised in the final provisions to "during the standard-setting process"; thus, the prerequisite for undertakings to assume obligations has become more objective, guiding undertakings to observe the law in a more definite way but also making it easier for anti-monopoly enforcement agencies to conduct investigations and collect evidence in specific cases.
Over the past few years, the most common form of IP abuse worldwide has been the abuse of standard-essential patents. Disputes arising from standard-essential patents between Qualcomm and relevant cell phone manufacturers, between Apple and Samsung and between Huawei and IDC have repeatedly triggered anti-monopoly lawsuits and investigations. The official promulgation of the provisions undoubtedly provides a legal basis and guidance for both theoretical research and judicial practices globally with regard to standard-essential patents.
Deletion of article regarding abuse of infringement warning letters
One commendable improvement to the provisions was the deletion of Article 15 of the consultation draft, which elicited widespread controversy. This article provided that:
"A business undertaking with a dominant market position shall not abuse its right of issuing infringement warning letters to exclude or restrain competition on the relevant market under any of the following circumstances:
(1) where the protection period of its IP has expired or its IP are invalid; or
(2) where other parties have provided sufficient evidence to prove that no IP infringement is constituted."
Although it is understandable that the purpose of this clause was to prevent false infringement warning letters, the real cause of concern was the difficulty in determining what constitutes abuse in issuing infringement warning letters and in defining 'sufficient evidence'.
Because of the complexity in determining whether IP rights have been infringed, IP rights holders claiming their legitimate rights against possible infringers by way of warning letters before further damages take place is justified and shall not be excessively intervened on by legislation. Therefore, the deletion of this article reflects the SAIC's willingness to take external advice.
Analysis and considerations
Articles 15 and 16 of the provisions summarise the analytical steps to be taken when determining abuse of IP rights and the factors to be considered when determining the impact of illegal conduct on market competition.
With respect to the analytical steps, the nature and form of the exercise of the IP rights in question must first be determined. The relevant market as well as the dominant market position must then be defined and ultimately the impact of the conduct on competition must be analysed. In analysing this impact, conventional factors should be taken into account, such as:
- the market positions of the business undertakings and counterparties;
- the degree of concentration of the relevant market;
- the degree of difficulty in entering the relevant market; and
- customary industry practices and the stage of industrial development.
Factors relevant to the IP field – such as the impact of exercising IP rights on innovation and technology promotion, business undertakings' innovation capabilities and the speed of technological change – must also be considered.
The legislative intent of the IP laws and the Anti-monopoly Law are essentially the same – to facilitate innovation and the advancement of technology. However, IP rights abuse is likely to restrict or eliminate fair competition in the market and further impede innovation and technological advancement, and thus requires regulation and enforcement under the Anti-monopoly Law. Within the framework of the Anti-monopoly Law and based on the SAIC's particular anti-monopoly function, the provisions lay down the basic analytical methods and standards to address the abuse of IP rights for the purpose of eliminating or restricting competition.
The SAIC conducted a useful exploration into this challenging area where the IP laws and the Anti-monopoly Law overlap, introduced the safe harbour principle into legislation, adopted the advice and suggestions from all sources and carefully worked out solutions for certain complex issues, benefitting the regulation of innovative and competitive market conditions in general.
The implementation of the provisions is believed to have immediate directive effect over cases involving IP rights abuse, such as the SAIC's pending investigation of Microsoft and Tetra Pak. In the meantime, other anti-monopoly enforcement agencies and judicial authorities handling similar cases can also benefit from the provisions. In light of the April 2015 public consultation on draft amendments to the Patent Law, IP legislation is gradually being improved and perfected. From a legislative perspective and considering previous enforcement practices, superior and comprehensive anti-monopoly regulation over IP rights abuse is keenly awaited.
For further information on this topic please contact Michael Gu at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.
(1) For example, in the United States the doctrine of essential facilities generally applies to monopolistic conduct in the field of public infrastructure (eg, railways, electricity and communication), rather than intellectual property.
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