China’s antitrust regulator, the State Administration of Industry of Commerce (“SAIC”), issued its closely watched new rules, called the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (“the Rules”), on April 7, 2015. The Rules will come into effect on August 1, 2015.
The Rules address many of the complex and controversial issues at the intersection of antitrust and Intellectual Property Rights (“IPR”). The Rules are in some ways consistent with the approaches taken to certain issues by antitrust agencies in some other large economies. But, in a number of important respects, the Rules differ in ways that raise serious concerns about the extent to which the China Anti-Monopoly Law (the “AML”) may be used to lessen protections that patents and other IPR receive in most leading jurisdictions. The Rules bind not only SAIC, but also Chinese courts in their assessment of IPR-antitrust intersected issues in private litigation cases.
The Rules apply to both multi-firm conduct (e.g., patent pools) and single-firm conduct (e.g., abuses of dominance such as tying). This article highlights the major provisions of the Rules most likely to impact companies that depend on the legal protection of valuable patents and other IPR when doing business in China or with Chinese entities.
THE CONCERN OF COMPULSORY LICENSING
The Rules, for the first time in international antitrust practice, apply the so-called “essential facilities doctrine” to IPR in codified rules. A liberal application of that doctrine opens a door for compulsory licensing, which has been one of the major concerns raised by commentators during SAIC’s consultations on numerous draft versions of the Rules.
Under the essential facilities doctrine, a dominant firm (usually a monopolist) using or controlling a facility or infrastructure that is essential for its competitors’ activity in a downstream market may be required to grant them access to its facility. The doctrine is traditionally applied in natural monopoly sectors such as railways, telecommunications, and electricity power generation and transmission. In those cases, access to the facility is indispensable for a competitor to provide services in the downstream market. Duplicating such facilities (such as constructing a second network of railway infrastructure) is either infeasible or would require the expenditure of unreasonable costs. Refusal of access by the facility owner, which in many cases also provides services in the downstream market itself, will likely prevent all competition in the downstream service market. Thus, where there is no objective justification for such a refusal to grant the potential downstream competitor access to the facility, in very rare cases in the EU and some other jurisdictions, monopolist owners of such essential facilities have been compelled, by courts or agencies, to grant the downstream potential competitors access to their facilities, in exchange for reasonable compensation. Courts in Europe in recent years have extended the application of this doctrine in a few exceptional decisions to facilities involving intellectual properties, e.g., European Court of Justice’s Magill in 1995, Bronner in 1998, IMS Health in 2004 and the decisions of some member state courts in the pharmaceutical and media sectors in subsequent years, though aspects of all these decisions remain controversial. The U.S. Supreme Court has never applied the essential facilities doctrine, and criticized it severely in its decision in Trinko in 2004.
Under Article 7 of SAIC’s Rules, a dominant firm, unless otherwise justified, will have to grant its IPRs to its competitors where its IPRs constitute “an essential facility of manufacturing and business operation”. The Rules provide three factors that need to be considered together in assessing whether a refusal to license is reasonably justified under the AML, as follows:
- There is no reasonable alternative in the market and the IPR in question is indispensable for competitors to enter into the market,
- A refusal to license the IPR will cause a negative impact on competition and innovation in the relevant market, to the detriment of consumer welfare or public interest, and
- Licensing of the IPR in question will not cause unreasonable damage to the licensor.
Unfortunately, the Rules provide neither a definition nor examples of an essential facility and the threshold in the second condition (i.e., any negative impact) seems far lower than clearly defined, objective criteria such as those imposed in EU precedents. It is also unfortunate that this Rule applies to “dominant” entities, as opposed to only true monopolists. Under the AML, an entity is presumed to be dominant if it has in excess of a 50% share of the relevant market. Moreover, an entity will be presumed dominant if it is one of two or three firms with joint market shares that exceed 66.6% or 75%, respectively. Article 6 of the Rules makes it clear that these provisions of the AML apply to the determination of a presumption of a dominant market position in the application of the Rules, though it does state that there will be no presumption of dominance solely on the basis of the ownership of IPR.
Though no agency or court decision under the AML to date has expressly applied the essential facilities doctrine, a few decisions have had similar consequences, requiring the sharing of IPR on terms other than those voluntarily negotiated between the licensor and the licensee. The Shenzhen Intermediate People’s Court issued a decision in 2013 in the Huawei v. InterDigital litigation, in which InterDigital was found to have abused its dominant market position as an owner of certain standard-essential patents (“SEPs”) for 2G, 3G, and 4G telecommunications technologies. SEPs are patents that are necessary to practice specific technologies under standards set by a standard-setting organization. Typically, and in the case of InterDigital’s SEPs at issue in the litigation, the IPR owner has agreed, as a condition of participating in the standard, that it will license any SEPs it owns that are essential to practice that standard on a fair, reasonable, and non-discriminatory basis (“FRAND” terms). The Shenzhen court’s finding of abuse was based on two actions of InterDigital: (i) tying its SEPs with non-SEPs during licensing negotiations; and (ii) seeking injunctive relief against Huawei before a court in the U.S. and before the U.S. International Trade Commission, while still in negotiations with Huawei, in which, the Shenzhen court found, InterDigital was demanding excessive royalties. In addition to these findings of violations of the AML, the court found that InterDigital had breached its promise to license the SEPs on a FRAND basis, by: (i) instituting injunction proceedings while demanding that InterDigital pay much higher royalties than those paid for licenses to the same SEPs by Apple and Samsung; and (ii) insisting that Huawei agreeing to cross-license to InterDigital all of Huawei’s patents obtained globally, on a royalty-free basis. The court then proceeded to determine that a FRAND royalty for InterDigital’s SEPs should not exceed 0.019% of the actual sales price of each product manufactured by Huawei that practiced any of the standards in question. Reportedly, this level of royalties is far lower than any rate InterDigital had negotiated, and which licensees agreed to, in other licenses. Therefore, InterDigital cannot refuse to license the patents in question and the royalty rate it ultimately charges must not exceed a specific level imposed by the court, amounting to a de facto compulsory license.
In the context of agency decisions, the Ministry of Commerce (“MOFCOM”) has, in several decisions approving mergers and acquisitions, imposed conditions on IPR owners that also, in effect, bear a resemblance to compulsory licensing. In its conditional approval of Microsoft’s acquisition of Nokia’s devices and services business, MOFCOM required Microsoft to license a stated list of patents that were not SEPs, and thus not subject to any FRAND promise, on terms and conditions comparable to those involved in a FRAND commitment.
The publication of the SAIC Rule does provide welcome guidance that neither NDRC nor MOFCOM has provided, regarding how SAIC will apply this doctrine in future cases. The lack of specific and objective criteria, however, leave companies unable to reliably predict whether refusing to grant a license in particular circumstances or on particular terms or conditions may be considered by SAIC or a court to be not “reasonably justified,” and thus a violation of the AML, potentially resulting in an order compelling it to grant a license under terms and conditions imposed by the court or agency.
Courts and agencies in other countries have recognized that the application of the essential facilities doctrine to IPR may do substantial harm to incentives to innovate, thus harming technological advancement. Hopefully, the approach that SAIC will take to its application of Article 7 will be “cautious,” as stated by an SAIC official in recent remarks during a program at the ABA Section of Antitrust Law Spring Meeting in Washington, DC.
It is also hoped that future decisions of SAIC applying the AML to IPR licensing practices will include clear and complete recitations of relevant facts, and a full explanation of the agency’s reasoning. The lack of such transparency in many AML decisions to date also makes it difficult for companies to adjust their conduct to ensure that it complies with the law.
CERTAIN IPR-SPECIFIC ABUSIVE CONDUCT
Article 9 of the Rules expressly prohibit certain types of IPR-related conduct, such as forced bundled sales or package licenses, or tying IPRs with other IPRs or other products to extend a company’s dominant position in one market into another market, or thereby restricting competition by other competitors in the market for the tying product.
Article 10 prohibits a dominant IPR licensor from engaging in certain specific types of conduct without proper justification, including the following:
- Requesting the licensee to grant back its improved technology exclusively to the licensor;
- Prohibiting the licensee to challenge the validity of the licensed IPR;
- Restricting the licensee’s use of a competing product or technology after the expiry of the licensing agreement; and
- Exercising its IPR that have expired, or after the intellectual property has been ruled as invalid;
- Prohibiting the licensee to deal with a third party.
Other general abuse of dominance conduct such as discriminatory trading terms is expressly prohibited unless the dominant firm has justification for such conduct. Similarly to the IPR-specific conduct above, an effect-based test will be applied to determine the legality of such conduct.
Article 12 of the Rules expressly prohibits the exchange of competitively sensitive information through the implementation of a patent pool unless the pool members can prove that an agreement that resulted from such exchanged information satisfies the specific exemption rules set out in Article 15 of the AML.
In addition, an organization managing a patent pool with a dominant market position is prohibited, unless justified by legitimate reasons, from engaging in the following types of conduct to eliminate or restrict competition:
- Restricting a member to license its IPRs individually to a third party outside the pool;
- Restricting a member or licensee from independently researching or developing competing technology, either individually or jointly with a third party;
- Forcing a licensee to grant exclusive grantback licenses to technology improved or developed by the licensee back to the pool administrator or pool members exclusively;
- Prohibiting licensees to challenge the validity of the pooled IPRs;
- Discriminating by applying different trading conditions to members of the pool or licensees in the same contracting in differential trading terms with equally situated members or licensees in the same market.
The Rules incorporate a commonly seen catch-all clause to leave room for SAIC to include other conduct into the abusive use of IPR. Patent pool under SAIC’s Rules does not include cross-licensing.
STANDARD ESSENTIAL PATENTS (“SEPS”) AND STANDARD-SETTING
In addition to concerns about SEP licenses posed by the version of the essential facilities doctrine set out in Article 7, Article 13 provides that patent-holders that have a dominant market position are prohibited, unless otherwise justified, from engaging in the following types of conduct to eliminate or restrict competition:
- During the standard-setting process, if a patent-holder intentionally does not disclose information on its IPR to the standard-setting organization or expressly gives up its rights, it cannot assert its patent rights if such patents are incorporated into the standards; or
- If a holder of SEPs refuses to license or imposes tying or other unreasonable trading terms on a license for SEPs, it violates the FRAND principle applicable to SEPs.
Article 5 of the Rules provides a set of safe harbors for multi-firm conduct (agreements). Exemption is granted:
- In a case where the parties compete, if the combined market share of the parties does not exceed 20%, or if there are at least four alternative technology options controlled by independent third parties in the market which can be obtained at reasonable cost; or
- In a case where the parties do not compete, if the market share of each party does not exceed 30%, or if there are at least two alternative technology options controlled by independent third parties in the market which can be obtained at reasonable cost.
It should be noted, however, that certain kinds of conduct, such as price-fixing, output control, market sharing, bid-rigging, or resale price maintenance cannot be exempted. The exemption is based on the assumption that most agreements between companies with an insignificant combined market share do not cause a substantial anti-competitive effect in the market. However, this assumption can be rebutted. If evidence shows that the agreement between the parties does have the effect of eliminating or restricting competition in the market, then the exemption does not apply.
Article 15 of the Rules sets out five steps for assessment of anti-competitive conduct as follows:
- To determine the form and nature of the conduct;
- To determine the relationship of parties;
- To define the relevant market;
- To determine the market position of the IPR holder;
- To assess the impact on the relevant market.
For the fifth step, “assessment of the impact on the relevant market,” Article 16 of the Rules provides a list of non-exhaustive criteria:
- The market positions of the parties;
- The degree of market concentration;
- The ease of market entry;
- Industry customs, industry growth, and trends;
- The duration and scope of effectiveness of the restraint from the perspective of capacity, territory, and consumers;
- The impact on the encouragement of innovation and the dissemination of technology; and
- The innovative capacity of the IPR holder and the speed of changes in the technology.
These assessment steps and criteria provide a welcome degree of clarity on SAIC’s review mechanism and enables parties to better respond to SAIC’s inquiries in enforcement cases.
The Rules address only non-price-related abuses of IPR, consistent with SAIC’s jurisdiction over non-price-related antitrust violations. It leaves open the question of whether the National Development and Reform Committee (“NDRC”), the price-related antitrust regulator, may issue its own IPR/AML rules. NDRC has been actively investigating antitrust cases in the IPR fields over the past few years, including the InterDigital and Qualcomm investigations. Recent reports on NDRC’s investigation of patent pool organizations, patent assertion entities, and licensing practices in various sectors of the economy indicate that NDRC is committed to continuing its enforcement in the IPR field. This jurisdiction issue once again goes back to the long-debated question of whether China’s three antitrust enforcement agencies should merge into a single agency that would apply a single uniform set of rules.