The AIPLA Antitrust News – April 2015 Page 6 Antitrust Scrutiny in China of FRANDCommitted Standard Essential Patents1 Paul A. Ragusa Partner, Baker Botts LLP email@example.com S. Sam Li Partner, Wan Hui Da Law Firm firstname.lastname@example.org Introduction Technical standards can enable multiple companies and other organizations in a competitive field to collaboratively develop platforms for new products using contributions from multiple innovators. Standard setting organizations (SSOs) often foster such collaboration by enacting rules requiring participants to identify patent rights likely essential to the standard during the standard setting process, and to commit to license standard essential patents (“SEPs”) on fair, reasonable, and non- 1 By Paul Ragusa and S. Sam Li, Ph.D., J.D. Mr. Ragusa is a partner in the New York office of Baker Botts, LLP, where he practices all aspects of patent law, including counseling on SSO related activities, patent licensing and litigation. Mr. Li is a Senior Partner in the Beijing office of the Wan Hui Da Law Firm, where he practices Chinese competition law. Both authors would like to thank Christopher Morten, Ph.D., for his valuable contributions in preparing this article. The AIPLA Antitrust News – April 2015 Page 7 discriminatory (FRAND) terms.2 Standard setting is generally regarded as procompetitive, as standards can reduce costs, promote competition and follow-on innovation, expand output, and ultimately increase consumer welfare.3 However, SEPs can also invite attention from antitrust regulators, both in the United States and abroad. This article examines recent developments that have occurred in one important country, China. Background FRAND commitments can and do vary from one SSO to another, but some patterns have emerged. “Fair” licensing can be understood to mean that the patent holder should generally license on terms that are not anticompetitive and would not constitute an antitrust violation or patent misuse.4 “Reasonable” licensing can be understood to require that the royalty paid on a particular patent should generally be proportionate to 2 Some standard-setting organizations use the term “reasonable and non-discriminatory” (“RAND”) for the licensing obligations that attach to SEPs, rather than “FRAND”. “RAND” and “FRAND” are generally synonymous, and for simplicity we use the term “FRAND” throughout. 3 See, for example, Deborah Platt Majoras, Chairman, Fed. Trade Comm’n, Remarks Prepared for Standardization and the Law: Developing the Golden Mean for Global Trade, Recognizing the Procompetitive Potential of Royalty Discussions in Standard Setting 2 (Sept. 23, 2005), available at http://www.ftc.gov/sites/default/files/documents/publ ic_statements/recognizing-procompetitive-potentialroyalty-discussions-standardsetting/050923stanford.pdf/. 4 See David N. Makous & Mina I. Hamilton, Compulsory IP Licensing and Standards-Setting, Standard-Essential Patents and F/RAND, Aspatore (2014), 2014 WL 1234517; see also Am. Bar. Ass'n Comm. on Tech. Standardization Section of Sci. & Tech. Law, Standards Development Patent Policy Manual 22 (Jorge L. Contreras ed., 2007). the value of that patent to the standard and that the total royalties paid by a licensee to all SEP holders are not unreasonable in aggregate.5 “Non-discriminatory” licensing can be understood to generally mean that the SEP holder will treat all potential similarly situated licensees similarly and refrain from withholding licenses from new market entrants.6 Does a FRAND commitment change the rules of patent enforcement? On one hand, the right of a patent holder to bring suit for injunctive relief against an alleged infringer is a basic patent right. On the other hand, arguments have been made that a FRAND commitment should be construed as a promise by the patent holder to license the patent, which runs contrary to the right to enjoin others from practicing it. Some SEP holders have brought infringement suits against prospective licensees and, in certain cases, have sought injunctive relief. Some antitrust regulators have indicated that a FRAND commitment may prevent the patent holder from seeking injunctive relief, at least under some circumstances, and have gone so far as to charge SEP holders with violations for requesting injunctive relief on a FRANDencumbered patent.7 5 See Microsoft Corp. v. Motorola, Inc., C10- 1823JLR, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013) (“From an economic perspective, a [F]RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”) 6 Makous & Hamilton, supra. 7 See, e.g., Kenneth M. Frankel, International Antitrust Investigations of Injunctions Sought for Infringement of Standard-Essential Patents with FRAND Commitments, AIPLA Antitrust News, May The AIPLA Antitrust News – April 2015 Page 8 Compared to the U.S., China has a relatively short history of antitrust law. Most antitrust enforcement in China is conducted pursuant to the 2008 AntiMonopoly Law, and reported decisions are sparse. Thus, Chinese antitrust law remains in flux and continues to evolve. However, early indications suggest that China’s competition authorities and courts are inclined to scrutinize injunction seeking on FRAND-encumbered patents for potential antitrust violations. Chinese Courts May Not Recognize a Right to Seek Injunctions for Infringement of SEPs In 2008, the Supreme People’s Court of China, the nation’s highest court, published an advisory opinion on SEPs, which provides insight into the court’s position on injunction seeking on patents subject to FRAND commitments.8 The case involved a construction engineering standard promulgated by the Ministry of Construction, where the patent owner had participated in the standard setting effort. 2014; Geoffrey D. Oliver, Johannes Zöttl & Christian Fulda, Fast-Forward for FRAND Disputes in Europe, AIPLA Antitrust News, May 2013; Paul Ragusa & Brian Boerman, Acquisition of Standard Essential Patents: Issues to Consider Before Making the Deal, AIPLA Antitrust News, January 2013. 8 See Koren W. Wong-Ervin, Standard-Essential Patents: The International Landscape, ABA Intellectual Property Committee Newsletter, Spring 2014, available at http://www.ftc.gov/system/files/attachments/keyspeeches-presentations/standardessential_patents_the_intl_landscape.pdf, citing SPC Min San Ta Zi No. 4 (2008), “Letter re whether Chaoyang Xingnuo Corporation’s exploitation of a patent an industrial standard context constitutes patent infringement,” available in Chinese at http://www.chinaiprlaw.cn/show_News.asp?id=1365 1&key=%B1%EA%D7%BC. The court’s opinion, published as Min San Ta Zi No. 4, stated that because of the FRAND commitment, third party exploitation of technology covered by SEPs “does not constitute patent infringement” and that SEPs must be licensed at a rate “significantly lower than the normal license fee.”9 However, Dr. Zhipei Jiang, the former chief IP judge of the Supreme People’s Court at the time when the advisory opinion was issued, later opined that the opinion is limited to the specific case, is not a judicial interpretation and has no generally application.10 More recent indications from the Supreme People’s Court suggest that practicing SEPs without authorization constitutes infringement but injunctive relief may not apply: Regarding patents included in nonmandatory national, industrial or local standards, where an accused infringer contends non-infringement because implementing standards needs no authorization from the patentee, the people’s court generally should not support such a position. But, where a patentee violates the FRAND principle, and negotiates in bad faith the licensing terms for exploiting patent included in the standards, and henceforth if the accused infringer contends that it should be stopped from exploiting the patent, the people's court should generally support such a position. 9 Id. 10 Dr. Zhipei Jiang on the Reply of the Supreme People’s Court regarding Standard Patent: http://www.dgips.cn/qyzs_detail.asp?nid=430. The AIPLA Antitrust News – April 2015 Page 9 The licensing terms for standardsrelated patents should be negotiated between the patentee and the accused infringer. If an agreement cannot be reached after ample negotiation, they may request the people's court to make a determination. The people's court should determine the licensing terms in accordance with the FRAND principle and in consideration of the extent of inventiveness of the patent, its role in the standards, the technical field to which the standards belong, the nature of the standards, the scope for the implementation for the standards, relevant licensing terms and other factors. If other laws or administrative regulations have provisions on the patent of the implemented standards, those provisions should be observed.11 The State Administration of Industry and Commerce (“SAIC”), one of the antitrust enforcement agencies responsible for non-price enforcement, issued rules concerning IPR and antitrust earlier this year. One such rule provides that “[w]ithout justifiable reasons, operators with dominant market position shall not eliminate or restrict competition by refusing to license other operators to use their intellectual property on reasonable terms if such intellectual property constitutes an essential facility for 11 Interpretations of the Supreme People's Court on Certain Issues Concerning the Application of Law for the Trial of Patent Infringement Dispute Cases (II) (Draft for public comments), Article 27 (2014) business operation.” 12 It remains to be seen how this rule will be used in future enforcement efforts. Chinese Antitrust Authorities and Courts Have Prohibited Injunction Seeking on SEPs There is some early indication that Chinese antitrust authorities are considering action to prevent SEP holders from seeking injunctive relief. On two recent occasions, the Chinese Ministry of Commerce (MOFCOM) has conditioned approval of high tech acquisitions on promises to refrain from seeking injunctions. In 2014, MOFCOM conditioned approval of Microsoft’s acquisition of Nokia’s Devices and Services business on a proviso that Microsoft would honor all existing FRAND terms on Nokia’s SEPs and “refrain from seeking injunctions over such SEPs against smartphones produced by Chinese producers.”13 In 2012, MOFCOM conditioned approval of Google’s acquisition of Motorola Mobility on a promise that “Google shall continue to fulfill the FRAND (fair, reasonable, and nondiscriminatory terms) obligations of Motorola Mobility regarding the latter’s patents.”14 A plausible interpretation of 12 Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Exclude or Restrict Competition (SAIC Order 74, 2015), Article 7(1). 13 See Becky Koblitz, Microsoft-Nokia: China’s MOFCOM Quietly Slips Into the Debate about Injunctive Relief for FRAND-Encumbered SEPs, Antitrust Law Blog, Apr. 23, 2014, available at http://www.antitrustlawblog.com/2014/04/articles/art icles/microsoft-nokia-chinas-mofcom-quietly-slipsinto-the-debate-about-injunctive-relief-for-frandencumbered-seps/. 14 Announcement No. 25, 2012 of the Chinese Ministry of Commerce – Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google, The AIPLA Antitrust News – April 2015 Page 10 these orders is that injunctive relief for an SPE is in fact permissible under Chinese law, and thus the orders are spelling out, as part of a merger decision, a commitment to give up that remedy. Moreover, in the recent Huawei v. IDC case, a Chinese court found that a SEP owner had abused its patent rights and thereby violated Chinese antitrust law by seeking an injunction in a U.S. court against an alleged infringer. In 2011 InterDigital (IDC), an American patent licensing company, brought suit against Huawei, a Chinese smartphone manufacturer, in the District of Delaware as well as the U.S. International Trade Commission (ITC).15 In both fora, IDC requested injunctions against Huawei for alleged infringement of seven SEPs owned by IDC.16 Huawei subsequently sued IDC in China, alleging an antitrust violation, and the Chinese trial court in Shenzhen found for Huawei, holding that IDC’s injunction seeking in the United States was an abuse of dominance and a misuse of IDC’s patents.17 The trial court ordered IDC to resume available at http://english.mofcom.gov.cn/article/policyrelease/do mesticpolicy/201206/20120608199125.shtml. 15 Florian Mueller, InterDigital Sues Huawei, ZTE and Nokia Over 3G Patents, Foss Patents, Jul. 26, 2011, available at http://www.fosspatents.com/2011/07/interdigitalsues-huawei-zte-and-nokia.html. 16 Id. 17 Michael Han & Kexin Li, Huawei v. InterDigital: China at the Crossroads of Antitrust and Intellectual Property, Competition and Innovation, Competition Policy International Asia Column, Nov. 28, 2013, available at https://www.competitionpolicyinternational.com/hua wei-v-interdigital-china-at-the-crossroads-ofantitrust-and-intellectual-property-competition-andinnovation/. licensing negotiations, placed a cap on the royalty rate IDC could receive from Huawei, and awarded Huawei ¥20M CNY in damages (approximately $3.2M USD).18 IDC appealed, and in October 2013 the trial court’s decision was affirmed by the Guangdong Higher People’s Court.19 The court characterized IDC’s attempt to seek an injunction as a patentee negotiation tactic: Given that IDC breached its FRAND duties; IDC filed actions against Huawei in Delaware court and ITC to seek injunction remedy for its SEPs while the two parties were still in negotiating stage, requesting Huawei to stop using its SEPs; Huawei was in good faith during the whole negotiation process, while the goal for IDC to file these actions was to force Huawei to accept the unreasonably high royalty rates; SEP holders may not force a good faith negotiating party to accept terms for using SEPs; IDC’s conduct therefore constitutes abusing its dominant market position. 20 18 Id. 19 Id.; for the text of appellate court’s decision (in Chinese), see http://www.gdcourts.gov.cn/gdcourt/front/front!conte nt.action?lmdm=LM43&gjid=201404170309021586 89. 20 Huawei Technology Ltd. v. InterDigital Technology Corporation, Yue Gao Fa Min San Zhong Zi 306, (Guangdong Higher People’s Court, 2013), p. 57, para 1. The AIPLA Antitrust News – April 2015 Page 11 Conclusion Antitrust law in China is rapidly evolving. However, the evidence to date suggests that both Chinese antitrust enforcers and Chinese courts may impose antitrust scrutiny on SEP holder conduct in negotiating license agreements and seeking injunctive relief. SEP holders should take caution to ensure a good faith negotiation process occurs before taking enforcement action. Even going to court in another country to request an injunction against a Chinese defendant for alleged infringement outside of China may be subject to antitrust scrutiny within China, as evidenced by the Huawei v. IDC case. This area will remain an important one to watch in the months and years to come.