China’s State Administration For Industry & Commerce (the SAIC), one of China’s key competition enforcement agencies, has issued new guidelines relating to the enforcement of China’s competition law (the Anti-Monopoly Law) in relation to intellectual property rights (the SAIC Guidelines). The SAIC Guidelines are the culmination of several years of consultations with stakeholders. They reflect the SAIC’s approach to policing the exercise of intellectual property rights issues which – in some respects – will ring alarm bells for patent holders.
An overview of the new the SAIC Guidelines
The SAIC Guidelines seek to prohibit anti-competitive conduct in relation to the exercise of intellectual property rights (IPR). They are the first comprehensive set of guidelines to regulate IP agreements and other IP practices under the AML and signal a new dawn in antitrust enforcement as the Chinese antitrust authorities ramp up their enforcement
activities in relation to the exercise of IPRs. Indeed, the director of the National Development and Reform Commission’s (the NDRC) antitrust enforcement division, one of China’s other key competition enforcement agencies, recently stated that IPR related issues would be his agency’s antitrust enforcement focus.
The SAIC Guidelines include provisions on patent pools and identify various types of conduct which – absent an objective justification – may amount to an abuse of a dominant position, which is punishable by substantial financial penalties in China of between 1% and 10% of the company’s relevant turnover, as well as exposing the company to damages claims in private court actions.
In China, a single company is presumed dominant if it has a market share of 50% or more.
In the IPR field, and consistent with the approach of overseas antitrust authorities, the NDRC has recently held that each standard essential patent (SEP) is capable of constituting an independent relevant market in which the SEP-holder consequently holds a dominant position given it then has a 100% market share.
We set out below some of the key points of interest to companies from the new SAIC Guidelines.
Scope of the SAIC Guidelines – non-price related infringements
The guidance only regulates non-price related anti-competitive conduct given that the SAIC is tasked with the enforcement of the Anti-Monopoly Law in relation to non-price related anti-competitive conduct.
The non-exhaustive list of abusive conduct includes:
- a refusal to license IPRs which amount to “essential facilities”;
- imposing certain exclusivity restrictions;
- imposing unjustified tying and bundling requirements;
- attaching unreasonable trading conditions to an IP agreement, including inserting no-challenge clauses;
- engaging in discriminatory conduct; and
- engaging in practices which are inconsistent with FRAND (fair, reasonable and non-discriminatory) principles in relation to the licensing of SEPs.
The extent to which the NDRC – the agency responsible for the enforcement of price-related conduct under the Anti-Monopoly Law – will be influenced (if at all) by the SAIC Guidelines is unclear. This is likely to be a challenge for many companies given the NDRC’s current enforcement priorities. Indeed, the NDRC has just imposed the largest antitrust fine to date in China on a single company (approx. US$ 975 million on Qualcomm) for anti-competitive licensing practices in relation to SEPs and has, in April 2015, undertaken dawn raids at the Shanghai offices of two multinational companies in relation to their IPR licensing practices.
A potentially broad approach to refusal to licence: the need for alarm bells?
Possibly the most controversial aspect of the guidelines is the introduction of a potentially broad “essential facilities” doctrine in relation to IPRs and is not limited to SEPs. This appears to go beyond the scope of the approach taken in the EU and the U.S in relation to the licensing of IPRs.
In the absence of an objective justification, a dominant company is prohibited from refusing to license its IPRs on reasonable terms if such IPRs constitute “essential facilities”, which may be the case, according to the guidelines if:
- the relevant IPR is not “reasonably substitutable” and is essential for another company to be present in the relevant market;
- the refusal to license such IPRs will have an “adverse impact on the competition and innovation” in the relevant market which will, in turn, harm consumer interests; and
- the obligation on the company to license such IPRs will not cause unreasonable damages to the licensor.
These conditions are cumulative but the wording of the guidance appears to go far beyond the approach taken in the EU in relation to the licensing of IPRs in which a refusal to license by a dominant company will be found to infringe competition laws only in “exceptional circumstances”. Those “exceptional circumstances” have been deemed to arise where the refusal to license results in the prevention of the emergence of a new product for which there is potential consumer demand; where the refusal excludes competition on a secondary market; and where there is no objective justification for the refusal. The U.S. approach has been equally restrictive whereas the SAIC Guidelines appear to afford considerable discretion to the SAIC when considering refusals to supply in the IPR context.
Breaking new ground: a “safe harbour” for IPR agreements
The SAIC Guidelines establish market share thresholds to determine whether an IPR agreement can benefit from a presumption that it does not infringe the Anti-Monopoly Law. The market share thresholds are broadly aligned with the thresholds laid down in the European Union (the EU) in relation to technology transfer agreements:
- a combined market share of 20% for agreements between competitors or there are at least four other alternative technologies that can be obtained at reasonable cost in the relevant market; and
- that the market share of each of the parties does not exceed 30% on the relevant market(s) for agreements between non-competitors or there are at least two other alternative technologies that can be obtained at reasonable cost in the relevant market.
This is the first antitrust safe harbour of its kind in relation to arrangement between competitors and non-competitors under the Anti-Monopoly Law – whether this could be of broader application in the antitrust context in China remains to be seen.
Dominant companies seeking to prevent challenges to their IPRs will be deemed to be abusing their dominant position. Implicit in the SAIC’s approach is a recognition that it is in the interest of competition that invalid IPRs should be rendered unenforceable given that such invalid IPRs stifle rather than promote innovation.
While certain antitrust regulators historically treated “termination clauses” – whereby the licensor can terminate the agreement if the licensee challenges the validity of IPRs – more leniently than “no-challenge clauses”, it is uncertain that the SAIC would make such a distinction.
This approach is potentially of wide application and companies may wish to assess any such terms and conditions in their agreements.
Other unreasonable trading terms imposed by dominant companies
The SAIC Guidelines appear to prohibit any requirement to grant-back improvements of the technology made by the licensee to the IPR holder in the context of exclusive licences. Unlike the EU, no distinction is drawn between severable and non-severable improvements.
More generally, dominant companies must not impose “other unreasonable restrictive conditions” on the relevant counterparty. This is a broad provision – possibly influenced by the NDRC’s decision in the recent Qualcomm case in which Qualcomm was held to have imposed a wide range of unfair trading terms on licensees. In any event, in adopting this catch-all provision, the SAIC has preserved a wide margin of discretion consistent with its general approach under the Anti-Monopoly Law.
SAIC gives meaning to FRAND
The SAIC’s Guidelines also address standard setting and the implementation of standards. In particular, there are now guidelines on patent ambush: a company that intentionally conceals that it had patents and patent applications, which were relevant to the technology included in the standard, that subsequently claimed royalties for those patents, will be deemed to have abused its dominant position.
In addition, a SEP holder will infringe its FRAND obligations if it, among other things, refuses to licence the SEPs, bundles the SEPs (presumably with non-SEPs) or “imposes other unreasonable transaction conditions”.
Although the SAIC Guidelines do not expressly state that an SEP holder seeking injunctions in relation to its SEPs will be considered to have abused its dominant position, it is likely that such conduct would be considered by the new SAIC Guidelines to have this effect. Indeed, given the SAIC has drawn inspiration – in part – from recent EU and US developments in this area, it would be surprising if the SAIC were to take a different approach from that taken by the European Commission and US courts and agencies in the recent Motorola and Samsung cases whereby a SEP holder was deemed to have infringed its dominant position by seeking an injunction against a willing licensee.