In August 2020, the Anti-Monopoly Bureau of China's State Administration for Market Regulation released four long-awaited sets of anti-monopoly guidelines addressing issues relating to leniency, commitments, the automobile industry, and intellectual property rights. The subjects of this White Paper, the Anti-Monopoly Guidelines on Intellectual Property Rights ("IPR Guidelines"), are intended to provide more clarity and guidance on issues at the intersection of antitrust and intellectual property rights.
The IPR Guidelines cover five topics: (i) general principles for analyzing antitrust issues relating to IPR; (ii) IPR-related agreements that may constitute monopoly agreements prohibited under Articles 13 and 14 of the Anti-Monopoly Law of China; (iii) abuse of dominant market position involving IPR; (iv) concentrations of undertakings (i.e.,transactions potentially requiring premerger notification and antitrust review) involving IPR; and (v) other IPR-related issues, such as patent pools, standard-essential patents, and collective management of copyrights. This commentary highlights the issues in the IPR Guidelines that are most relevant to IP-intensive companies doing business in China.
The Anti-Monopoly Guidelines on Intellectual Property Rights (“IPR Guidelines”)1 recognize as a general principle that China’s State Administration for Market Regulation (“SAMR”) will not presume that an owner of intellectual property rights (“IPR”) has a dominant market position.2 SAMR will assess the com- petitive conditions in each relevant market, the specific con- duct involved (taking into consideration, inter alia, whether the relevant parties would be competitors or potential competitors in the absence of the conduct in question), and any procom- petitive effects related to innovation or efficiencies.
ASSESSMENT OF IPR-RELATED AGREEMENTS
The IPR Guidelines set forth SAMR’s criteria for assessing whether certain technology agreements, including those relating to joint R&D, cross-licensing, exclusive grant backs, no-challenge clauses, standard setting, and other restrictions on licensees, are “anticompetitive monopoly agreements” prohibited under Articles 13 and 14 of the Anti-Monopoly Law of China (“AML”).
Safe Harbor for Technology Agreements
The IPR Guidelines include several safe harbors within which SAMR presumes technology agreements are not anticompeti- tive monopoly agreements, absent evidence showing an anti- competitive effect.
- Agreements between competitors in which the combined share of the parties in the relevant market is no more than 20%.
- Agreements between non-competitors in which the share of each party in any relevant market affected by the tech- nology agreement is no more than 30%.
- If market share information is difficult to obtain or does not accurately reflect the market positions of the parties, where, apart from the technologies controlled by the parties, there are at least four additional substitutable technologies in the relevant market that are independently controlled by third parties and obtainable at reasonable cost.
SAMR will condemn agreements that fall outside of these safe harbors as unlawful only if there is evidence of a substantial anticompetitive effect.3 Of course, this treatment does not apply to “hardcore” cartel-like offenses identified in Articles 13(1)-(5) and 14(1)-(2) of the AML, i.e., price-fixing, market alloca- tions, and other cartel offenses, as well as resale price main- tenance, for which SAMR presumes an anticompetitive effect.
By comparison, in the EU, aside from “hardcore” cartel-like offenses, other restrictive IP licensing agreements are exempt as long as the parties meet the market share thresholds of the safe harbor.4 Similarly, in the U.S., the agencies will not chal- lenge practices that fall within its safe harbor “[a]bsent extraor- dinary circumstances.”5
Exclusive Grant Backs
Under the IPR Guidelines, exclusive grant backs refer to license provisions in which (i) only the licensor (or its desig- nee) or (ii) only the licensor and the licensee may exploit the licensee’s improvements to licensed IPR, but that prohibit the licensee from licensing the improvement to third parties.
According to the IPR Guidelines, exclusive grant backs are more likely to give rise to anticompetitive effects because they dis- courage licensee innovation. Despite this concern, SAMR does not treat exclusive grant backs as illegal per se. Instead, the IPR Guidelines set forth criteria under which antitrust enforcers will conduct further analysis. SAMR considers whether:
- The licensor provided substantive consideration for the grant back;
- Grant backs are reciprocal;
- The grant back will strengthen the market power of the licensor; and
- The grant back will dampen the incentive of the licensee to make improvements.6
In contrast, Chinese Contract Law7 and the Interpretation of the Supreme People’s Court regarding Several Issues on the Application of Laws to Disputes over Technology Contracts8 (“SPC Interpretation on Technology Contracts”) both take a harder line, prohibiting non-reciprocal exclusive grant backs as well as non-challenge clauses. Although the IPR Guidelines adopt a more permissive approach, at least in one sense, to exclusive grant backs, they merely state SAMR’s policy toward administrative enforcement, and therefore there is risk that PRC courts will find such provisions unenforceable.
Although the IPR Guidelines appear to broaden the scope of potentially prohibited exclusive grant backs to include clauses that permit a licensee to exploit its own improvements, the IPR Guidelines adopt a “rule of reason” approach that is a fulsome analysis of competitive effects (including the bene- fits). This approach contrasts to the Contract Law and the SPC Interpretation on Technology Contracts that have held certain exclusive grant backs to be unenforceable.
The IPR Guidelines also set forth factors that SAMR uses to assess the competitive effects of non-challenge clauses. A non-challenge clause is an agreement that a licensee will not challenge the validity of the licensor’s IPR. These factors include whether:
- The non-challenge requirement applies to all licensees of the relevant IPR by the licensor;
- Royalties are charged for the licensing of the IPR associ- ated with the non-challenge clause;
- The IPR associated with the non-challenge clause may constitute an entry barrier in the downstream market;
- The IPR associated with the non-challenge clause may hinder the implementation of competing IPR;
- The licensing of the IPR associated with the non-challenge clause is exclusive; and
- The licensee may suffer material damage when challeng- ing the validity of the licensor’s IPR.
Although the IPR Guidelines take a rule of reason approach to non-challenge clauses, the IPR Guidelines are not legally binding on courts. Licensors therefore must be careful about using such clauses in Chinese licenses, because the Contract Law and SPC Interpretation on Technology Contracts prohibit such clauses.
Other IPR Restrictions
Under the IPR Guidelines, SAMR analyzes other restric- tions on licensed IPR, including restrictions on the scope of implementation; the quantity, sales channel, geographic scope, or customers of products provided using the licensed IPR; and restrictions on using competing technologies or sell- ing competing products under the rule of reason, considering the following factors:
- The specific contents of the restrictions, the degree thereof, and how they are implemented;
- The characteristics of the products provided using the licensed IPR;
- Whether, and to what extent, these restrictions are imposed as the conditions to the IPR licensing;
- Whether there are multiple restrictions; and
- Whether other undertakings with substitutable technolo- gies impose the same or similar restrictions.
Some of the restrictions above, such as restrictions on using competing technologies, also are per se unenforceable under the Contract Law and the SPC Interpretation on Technology Contracts.9 For example, in a 2007 case, the Beijing High People’s Court invalidated an IPR-related agreement that pro- hibited the licensee from using similar technologies from other sources because it violated Article 329 of the Contract Law.10
ABUSE OF DOMINANCE INVOLVING IPR
As mentioned above, the IPR Guidelines clarify that ownership of IPR itself does not constitute a dominant market position. Instead, SAMR establishes a dominant market position by con- sidering the series of factors in Articles 18 and 19 of the AML. The IPR Guidelines also set forth additional factors to consider for finding dominant market position that are specific to IPR:
- Existence of accessible alternative technologies or prod- ucts, including the cost of switching;
- Reliance on the products provided using the IPR in ques- tion in the downstream market; and
- Competitive restraints on the IPR owner from its counterparts.
Unfairly High Pricing
The IPR Guidelines outline five factors to consider when deter- mining whether licensing royalties imposed by a “dominant” licen- sor are “unfairly high” (thus violating AML Article 17(1)), including:
- How the royalties are calculated, and how much the IPR contribute to the value of the products;
- The commitments made by the parties as to the licens- ing of IPR (for example, fair, reasonable, and non-discrim- inatory (“FRAND”) commitments made in standard-setting processes);
- The licensing history of the IPR or any standard royalties that can be used as reference;
- Whether the royalties charged go beyond the geographic scope or scope of products covered by the IPR; and
- Whether the licensor charges royalties for expired or invalid patents.
Historically, China has been more willing than most other major jurisdictions to weigh in on whether royalties are “fair,” espe- cially when standard-essential patents (“SEPs”) are involved. For example, in the 2011 Huawei v. IDC case, the Guangdong High People’s Court found that the royalties charged by IDC to Huawei to be “unfairly high” in part because they were “sig- nificantly higher” than those IDC offered to other licensees such as Apple, Samsung, and RIM.11 Similarly, in its 2015 penalty decision against Qualcomm,12 NDRC found that Qualcomm charged unfairly high royalties for its wireless SEPs, because, inter alia, (i) the base for calculation of royalties was the whole- sale price of terminal wireless devices, which contained many parts not related to the licensed wireless SEPs; (ii) the licensed patents included expired patents; and (iii) Qualcomm required its licensees to provide free grant backs, and also did not con- sider the value of its licensees’ own patents cross-licensed to Qualcomm.
In contrast, the U.S. agencies have indicated that they will rarely, if ever, intervene with respect to the question of the proper price to be charged for intellectual property. However, in some cir- cumstances, it may be unlawful to collect royalties that extend beyond the scope of the IPR, or after the IPR have expired.
Refusals to License
During the drafting of the IPR Guidelines, some commentators expressed concerns that the guidelines would require compul- sory licensing by prohibiting refusals to license, or through use of the “essential facilities” doctrine.13 The U.S. agencies have confirmed that “antitrust liability for mere unilateral, uncon- ditional refusals to license patents will not play a meaning- ful part in the interface between patent rights and antitrust protections.”14 In Europe, the European Commission may con- sider a refusal to license to be an abuse of a dominant posi- tion under certain exceptional circumstances.15
Under the IPR Guidelines, SAMR considers the following six factors in analyzing whether a refusal to license by a licensor is an unjustifiable abuse of a dominant market position:
- The commitments made by the parties as to the licensing of IPR;
- Whether license of the IPR in question is necessary for entry into the relevant market;
- The impact of the refusal to license on competition and innovation in the market, and the degree thereof;
- Whether the party refused a license lacks the willingness and capability to pay reasonable royalties;
- Whether the licensor has proposed a reasonable offer to the party seeking a license; and
- Whether the refusal to license will damage the interests of consumers or the public.
Despite the potential concerns suggested by this treatment in the IPR Guidelines, it appears that in practice the Chinese antitrust enforcement agencies and courts have been very cautious about finding IPR to constitute an “essential facility.” There are no reported cases in which SAMR or the PRC courts invoked the essential facilities doctrine or other principles to impose a duty to license IPR. For example, in the Hytera v. Motorola case in 2020, the Beijing IP Court declined to find that Motorola engaged in an abuse of dominance by refusing to license its IPR because there were other alternative tech- nologies available in the market.16
CONCENTRATIONS OF UNDERTAKINGS INVOLVING IPR
Finally, the IPR Guidelines provide that certain technology transactions may constitute “concentrations”—and thus are potentially subject to PRC pre-merger notification and antitrust review—if the licensee or grantee thereby obtains control, or the ability to exert decisive influence, over another business.
The IPR Guidelines set forth three factors to consider when determining whether an IPR transfer or license is a reportable concentration:
- Whether the relevant IPR constitutes an independent business;
- Whether the relevant IPR generated independent and cal- culable turnover in the last fiscal year;
- The type and duration of the licensing agreement.
The IPR Guidelines also specify potential remedies for trans- actions involving IPR that raise competitive concerns, includ- ing the divestiture of the relevant IPR, the imposition of FRAND licensing, or non-tying obligations.
The IPR Guidelines represent the first time that SAMR has clar- ified in writing that licensing agreements may be subject to merger review in China.17 So far, we are not aware of any pub- lished precedent in which parties submitted a merger filing in China for a licensing agreement. Nevertheless, companies should carefully assess potential merger filing requirements for their licensing, IPR transfer, and other technology agreements.
The IPR Guidelines set forth a number of additional factors that SAMR will consider when analyzing whether a SEP holder has a dominant market position. These factors add to the gen- eral factors identified in the AML and the abuse of dominance section of the IPR Guidelines:
- The market value and the scope and depth of application of the relevant standard;
- Existence of substitutable standards or technologies, and the accessibility and switching costs thereof;
- The degree of reliance on the relevant standard in the industry;
- The evolution and compatibility of the relevant standard; and
- The possibility of replacing the SEPs for the relevant standard.
According to the IPR Guidelines, SAMR is likely to find an anticompetitive effect if a SEP owner with a dominant mar- ket position seeks an injunction to force licensees to accept unfairly high royalties or other unfair conditions. The IPR Guidelines indicate that SAMR will consider the follow- ing factors when analyzing the competition effect of such injunction applications:
- How the parties behaved during the negotiation, and their true intention reflected by their behavior;
- Commitments attached to the relevant SEPs (e.g., the FRAND commitments);
- Terms of licensing proposed by the parties in the course of negotiation;
- The impact of the motion for injunction on the licensing negotiation; and
- The impact of the motion for injunction on competition in the downstream market and the interest of consumers.
In practice, the Chinese courts analyze the negotiation pro- cess and substantive licensing conditions of the parties to determine if the SEP holder has fulfilled its FRAND commit- ments in licensing, or was “clearly at fault” during the negotia- tion. For example, in the 2016 Huawei v. Samsung case,18 after examining the extensive record of the licensing negotiations between Huawei and Samsung, the court held that Samsung had deliberately “delayed the negotiations” and was “clearly at fault.” Based on an assessment of the royalty rates that each party proposed, the court also held that Huawei’s offer to Samsung was consistent with FRAND terms, but Samsung’s offer was not. Based on above findings, the court granted Huawei’s request for an injunction.