On June 11, 2014, the State Administration for Industry and Commerce (the “SAIC) released a draft of the Provisions of the Administration for Industry and Commerce Prohibiting Intellectual Property Abuse to Eliminate or Restrict Competition to the public for comments (the “Draft”). The Draft cites the principal in Article 55 of the Anti-Monopoly Law, which states that the “Anti-monopoly Law shall apply where a business operator abuses intellectual property to eliminate or restrict competition.” If formally promulgated, the Draft will regulate in detail, and provide guidance on, the implementation of Anti-monopoly Law in the area of intellectual property. The main content of the Draft is set forth below.
The Draft prohibits business operators from reaching monopolistic agreements when using their Intellectual Property
Chapter two of the Anti-monopoly Law and the Provisions by the Administration for Industry and Commerce Prohibiting Acts Relating to Monopolistic Agreements stipulate in detail that business operators are prohibited from reaching monopolistic agreements when conducting economic activities. The Draft does not list in detail the types of monopolistic agreement that are prohibited in the area of intellectual property. Instead, the Draft only stipulates in general that business operators are prohibited from reaching monopolistic agreements when using their intellectual property and incorporates Article 13 and Article 14 of the Anti-monopoly Law for its application in practice.
Different from the provisions for economic activities in other areas, the Draft provides two specific acts involving the exercise of intellectual property that does not constitute monopolistic agreements: (i) the joint market share of the competing business operators in the relevant market affected by their acts does not exceed 20%, or there are least four other reasonably priced alternative substitutes of the technology available in the relevant market; (ii) the business operator and the counterparty’s respective market share in the relevant market in the transaction does not exceed 30%, or there are least two other reasonably priced alternative substitutes of the technology available in the relevant market.
Based on these two exceptions described above, it may be concluded that the two factors the Draft takes into consideration when determining whether an act falls within the realm of these two exceptions. These two factors are: (i) market share in the relevant market of the business operator in question and (ii) the availability of reasonably priced alternative substitutes for the technology in the relevant market and the number of these alternatives that exist.
Acts involving the abuse of a market dominant position through the use of Intellectual Property
The Draft prohibits business operators with a dominant market position from abusing such position to eliminate or restrict competition. The Draft clarifies that the possession of intellectual property by business operators does not create the presumption that the business operators have a market dominant position (i.e. possession of intellectual property is not “per se” a violation of the Anti-Monopoly Law). Rather, the possession of intellectual property by business operators is merely a factor in determining the existence of a market dominant position.
The Draft specifically regulates in detail several common acts where business operators use intellectual property to abuse a dominant market position, as follows.
Refusing to license intellectual property without providing valid reasons
While refusing to license its intellectual property is a lawful right of the business operator who owns a intellectual property, such refusal without valid reasons could strengthen the dominant market position of such business operator. In an attempt to create a balance between the need to encourage innovation and enforcing the Anti-Monopoly Law, the Draft stipulates that a business operator abuses its dominant market position only when it refuses to license intellectual property that is “indispensable” to the production and operation of counterparty. Article 7(2) of the Draft stipulates several factors that may be used to identify whether the intellectual property in question is “indispensable” to the production and operation of counterparty. The requirement that intellectual property be “indispensible” as a condition for determining abuse of market dominance with respect to the use of intellectual property may reflect a cautious attitude taken by the SAIC, which may have introduced this concept to avoid unnecessarily inhibiting innovation for competition reasons.
Restraints on trade are commonly used to eliminate competitors. Consistent with the Provisions by the Administration for Industry and Commerce Prohibiting Acts Relating to Abuses of Dominant Market Positions, the Draft categorizes restraints on trade into the following categories: (i) limiting a counterparty to trading only with the business operator; (ii) limiting the counterparty to trading only with business operators designated by the business operator; (iii) requiring a counterparty not to trade with the business operator’s competitors.
Tying the sale of goods
The Anti-monopoly Law and the Provisions by the Administration for Industry and Commerce Prohibiting Acts Relating to Abuses of Dominant Market Positions both cover, in general terms, tying in connection with a sale of goods. Since in the field of intellectual property, tying is possible to produce technical and economic positive effects, the Draft sets forth comprehensive restrictions on tying from three perspectives: (i) intent of the counterparties, (ii) the nature of the tying good and the tied good and relationships associated with the tying good and the tied good, and (iii) the influence of the tying transactions for the relevant market of tying good. These three perspectives shed light on what types of tying transactions cannot be implemented in the area of intellectual property.
Imposing Unreasonably Restrictive Conditions
Given that the intellectual properties and intellectual goods have special characteristics compared to normal goods, the Draft specifies six acts that constitute the imposition of unreasonable conditions when business operators with a dominant market position exercise their intellectual property rights without providing valid reasons. The first four are specific to the field of intellectual property, and are as follows: (i) requiring counterparties to exclusively grant-back improvements to the intellectual property to the business operator; (ii) prohibiting counterparties from questioning the validity of the intellectual property; (iii) in the absence of an actual infringement by the counterparties, preventing counterparties from manufacturing, using, selling goods in competition with the business operator or developing, using technologies in competition with the business operator after the expiration of the license agreement; (iv) requiring counterparties to continue to pay royalties for intellectual property whose protection has expired or intellectual property that has been affirmed to be invalid.
We believe the SAIC identified these acts as restricting competition due to the SAIC’s belief that they strengthen the dominant market position of business operators and because they inhibit technical innovation and are antithetical to intellectual property protection.
The Provisions by the Administration for Industry and Commerce Prohibiting Acts Relating to Abuses of Dominant Market Positions already contains stipulations on discriminatory treatment. The Draft does not add much additional detail in this regard, only generally stipulating that business operators with dominant market positions are prohibited from discriminating equivalent counterparties when exercising their intellectual property rights without providing valid reasons.
The Draft’s regulation of four other particular acts pertaining to Intellectual Property
In addition and as a complement to regulations on monopolistic agreements and abuses of dominant market positions, the Draft also contains regulations on four other acts pertaining to intellectual property, which involve (i) patent pools, (ii) the formulation and implementation of patent standards, (iii) the activities of collective copyright management organizations, and (iv) arbitrary issuances of cease and desist letters pertaining to intellectual property rights.
Patent consortiums, namely patent pooling may give rise to monopolistic agreements or abuses of market dominant positions during the course of their operation. Article 12 of Draft stipulates that where members of a patent pool exchange sensitive information with each other regarding competition such as price, production volume, market division, then such acts may constitute a monopolistic agreement prohibited by Article 13 and Article 14 of the Anti-monopoly Law. In addition, the following acts constitute an abuse of a market dominant position if such acts are done by members in a patent pool with a dominant market position or by the administration of a patent pool without providing valid reasons: (i) restricting members of the patent pool from licensing patents independently to any third parties outside the patent pool, (ii) restricting members of the patent pool or licensees from conducting research on technology that competes with the patents in the patent pool, either independently or jointly with any third parties, (iii) requiring licensees to conduct exclusive grant-backs of improvements in the technology to members of the patent pool, (iv) prohibiting licensees from questioning the validity of patents in the patent pool, or (v) imposing discriminatory treatment on members of the patent pool or on licensees.
In practice, patent pools may be the most likely component in the field of intellectual property to raise competition issues. In addition to the specific regulations on patent pools described above, the patents in the pool and their relationship with each other, the judgment of whether a patent is necessary for the pool by independent experts and the determination of license fees may all influence the analysis of whether a patent pool will raise competition issues. However, the Draft does not address these additional issues more specifically. Presently, patent pooling is not common in the Chinese market. The few patent pools that do exist were established with policy support from the Chinese government. Accordingly, it remains to be seen how often the Draft will be applied to patent pools.
Article 13 of the Draft introduces the international “FRAND” principle, which stands for “fair, reasonable and non-discriminatory” for patents. Specifically, business operators who have a dominant market position are deemed to have conducted acts restricting competition in violation of competition laws where they prevent other business operators from using standard essential patents under reasonable conditions, or they license standard essential patents with unfair conditions, or they conduct tying transactions when licensing patents.
Article 14 of the Draft prohibits collective copyright management organizations from abusing their intellectual property and gives several examples when such abuse occurs. They include imposing unreasonable limits on membership or territorial reach through monopolistic agreements and other acts relating to dominant market positions such as refusing to issue licenses, imposing discriminatory treatment, requiring licensees to adopt unwanted licenses, or restricting members from exiting the organization.
Article 15 of the Draft prohibits business operators who have a dominant market position from issuing cease and desist letters pertaining to purported intellectual property infringement where the intellectual property in question has expired or be affirmed as invalid, or if others have provided sufficient evidence showing that the targeted party has not infringed on the intellectual property in question.
Steps used to analyze and identify Intellectual Property abuses that eliminate or restrict competition, the procedures and legal consequences associated with such acts
Different levels of Administration for Industry and Commerce are the enforcement agency for intellectual property abuses that eliminate or restrict competition, and they are entitled to launch investigations of suspicious acts associated with such intellectual property abuses.
Article 17 and Article 18 stipulate the procedures the enforcement agency is required to follow and the factors it is required to consider when analyzing and identifying intellectual property abuses that eliminate or restrict competition. Article 19 of the Draft stipulates the legal consequences associated with reaching monopolistic agreements and abusing dominant market positions in the field of intellectual property. These legal consequences correspond with the relevant stipulations in the Anti-monopoly Law.
The Draft provides substantial guidance on the standards used to evaluate whether acts in the field of intellectual property eliminate or restrict competition as stipulated in the Anti-monopoly Law. We will keep track of further modifications or updates of the Draft, as well as its formal promulgation into law.