China’s State Administration of Industry and Commerce has published new rules to reduce abuse of intellectual property rights. It is the first time that the Anti-Monopoly Law will be applied for this purpose. The rules will take effect on 1 August 2015. We expect that they will boost the enforcement efforts of Chinese antitrust authorities. Resulting from a legislative process that started as early as 2009, the rules show many similarities with regulations in the EU and US. But there is also one important difference: the “essential facilities doctrine” seems to apply not only to patents but also to all IP rights. We recommend that clients, especially those active in IP-sensitive industries in China, analyse the impact of the new provisions on their business and make sure that their licensing policies are compliant.

The main purpose of the new rules is to regulate non-price related anti-competitive conduct, such as monopolistic agreements and abuse of a dominant market position. This area of regulation falls under the jurisdiction of the State Administration of Industry and Commerce (SAIC). Price-related anti-competitive conduct is dealt with by the National Development and Reform Commission (NDRC) and falls outside the scope of the rules. Nonetheless, the record fine imposed by NDRC on Qualcomm last February seems to indicate that NDRC is also taking an interest in curtailing the abuse of IP rights and may perhaps issue its own set of rules.

Prohibited conduct and safe harbours

Whether a company is considered to have a dominant position is to be established under the Anti-Monopoly Law. In any event, a company is considered dominant if its market share exceeds 50%.

In line with EU and US practices, the new rules provide that the relevant market in which a company can have a dominant position can be either a technology market or a product market. Ownership of IP rights may lead to a dominant position, but other factors must be taken into account as well.

Similar to EU and US regulations, the new rules list prohibited conduct for companies with a dominant position in a certain market. This list includes refusal to license a standard essential patent (SEP) on reasonable terms, restrictive trading, forced bundling, closed patent pools, and discriminatory treatment. The list is non-exhaustive.

The new rules also include safe harbour provisions for:

  • horizontal agreements between parties with a combined market share below 20% in the relevant market, or where there are at least four independently controlled substitute technologies in the relevant market that can be obtained at a reasonable cost; and
  • vertical agreements between parties with a combined market share below 30% in the relevant market, or where there are at least two independently controlled substitute technologies in the relevant market that can be obtained at a reasonable cost.

Both safe harbour options are subject to the condition that there be no evidence of the agreement having the effect of eliminating or restricting competition. It is not clear whether agreements falling outside the safe harbour provisions are automatically illegal or subject to a rule of reason analysis.

Essential facilities

What is different from EU and US regulations, and probably the most controversial feature of the new rules, is that the “essential facilities doctrine” seems to apply to all IP rights rather than only to patents. The new provisions set out that a dominant company may not, in the absence of any objective justification, refuse to license its IP rights if:

  • the IP rights cannot reasonably be substituted and are essential for other companies to be active in the relevant market
  • not licensing the IP rights has a negative impact on competition, innovation, consumer interest or general public interest
  • licensing the IP rights does not cause unreasonable damage to the licensor

Although cumulative, these conditions seem to equip the SAIC with fairly accessible tools to force dominant companies to license their IP rights, even if the IP right does not qualify as an SEP. These tools are not that easily accessible to the SAIC’s counterparts in the EU and US. European courts have extended the “essential facilities doctrine” to IP rights other than SEPs only in very exceptional circumstances. The possibly far-reaching elements of the new rules pose a significant threat to multinational companies with important IP rights in a potentially dominant position. We hope that the SAIC will live up to its promise to be very cautious in enforcing these provisions.

Consistent with the current Anti-Monopoly Law, the new provisions give SAIC considerable discretion in determining sanctions, including fines ranging from 1% to 10% of the violating company’s annual sales in the previous year. Whether this includes only sales in China or sales abroad as well remains unclear.

The new provisions were released by SAIC on 7 April 2015 as Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (关于禁止滥用知识产权排除、限制竞争行为的规定).