- Case Summary
On August 3, 2015, the Korea Fair Trade Commission (“KFTC”) issued a corrective order against Dolby Laboratories Licensing Corporation and Dolby International AB (collectively “Dolby”) for using the following unfair transacting terms in regard to the licensing agreements for the technology adopted as a standard for digital-audio coding (Dolby possessed patents for the above technology and announced its intent to comply with the FRAND conditions to the relevant standards-setting organizations).
- Prohibiting licensees from challenging the validity or ownership of any Dolby patents and using transacting terms that permit termination of the licensing agreement if licensees challenge the validity of a patent.
- Using transacting terms that permit termination of the licensing agreement based merely on concerns over possible infringement or misuse of Dolby’s intellectual property.
- Using transacting terms that place the burden on the licensee to compensate for the damages and audit expenses even when the difference between the quantity reported by the licensee for royalty calculation and the quantity confirmed upon conclusion of an audit is only minor.
- Using contractual terms that restrict the disposal and exercise of rights, i.e., use inventions acquired by the licensee.
- Standard for Determining Illegality and Determination by the KFTC
The KFTC determined that the above acts of Dolby constituted an “imposition of disadvantages” (Article 23(1), Paragraph 4 of the Monopoly Regulation and Fair Trade Act (“MRFTA”)) by abusing Dolby’s superior transacting position as a form of prohibited unfair trade practice by the MRFTA.
According to the KFTC’s Guidelines on Unfair Trade Practices, the illegality of imposition of disadvantages is predominantly determined by considering whether the imposition of disadvantages infringe on the fairness of the transaction. Whether the fairness of the transaction is infringed is determined by comprehensively taking into account the following two inquiries: (i) whether the enterpriser holds a superior transacting position over the transacting counterparty and (ii) whether the established or modified transacting terms and disadvantages resulting from such terms are unreasonable.
In connection with the requirements to establish “superior transacting position” above, courts determined that such position may be sufficiently established so long as one party in the transaction holds a relatively superior position over the counterparty or at least a position that can substantially influence the transaction.
Moreover, with respect to the requirements to establish “unreasonableness” above, courts comprehensively consider the following factors when making such determination: (i) the intent and purpose of the relevant act, (ii) details leading up to the relevant act, (iii) contents and degree of disadvantages that may be suffered by the counterparty due to the relevant act, (iv) degree of limiting competition between the transacting parties, (v) transacting custom in the related industry, (vi) impact on the general competitive order and (vii) regulations under the relevant laws.
In the above case, the KFTC recognized the superior transacting position of Dolby based on the grounds that Dolby’s technology related to digital-audio coding was adopted as the standard technology and was a registered patent owned by Dolby. Meanwhile, in connection with the determination of unreasonableness in Dolby’s imposition of disadvantages, the KFTC used its own criteria, in addition to the above standard for determination presented by courts, as follows: (i) the standard established in the Guidelines on Unreasonable Exercise of Intellectual Property Rights (“IPR Guidelines”) was considered and (ii) the provisions in the Regulation of Standardized Contracts Act (“Standardized Contract Act”) were utilized as standards for determining unreasonableness in the contractual terms.
- Details of Corrective Order Issued by the KFTC
The KFTC issued a corrective order mandating that Dolby cease imposing disadvantages on its transacting counterparties based on establishing and maintaining unfair transacting terms. The KFTC further ordered Dolby to execute new licensing agreements with its licensees with the offending transacting terms amended or deleted.
- Significance of the Case
In principle, the IPR Guidelines were prepared to present a standard for determining whether the exercise of intellectual property rights constitute an abuse of market-dominant position or an unreasonable collaborative act (cartel) among multiple enterprisers. Therefore, if an enterpriser unilaterally exercises its intellectual property rights, the IPR Guidelines (IPR Guidelines, Section II.2.B) should only be applied when such enterpriser has market power. Despite such restrictive use indicated by the IPR Guidelines themselves, the KFTC found no issues in utilizing the IPR Guidelines as standards for determining unreasonableness in imposition of disadvantages based on the following grounds: (i) the IPR Guidelines were prepared in order to present a general principle in statutory application and a specific examination standard for the KFTC, and (ii) the logical structures of violations for abuse of superior transacting position and abuse of marketdominant position are similar in several aspects. Accordingly, companies with intellectual property, in particular, standard essential patents, should take note that the KFTC may utilize the IPR Guidelines as standards for determining illegality of unfair trade practices in addition to standards for determining illegality of abuse of market-dominant position. Additionally, companies should be mindful of the contents of the IPR Guidelines and the future regulatory trends of the KFTC.
Moreover, while the KFTC stated that the Standardized Contract Act was not directly applicable in the instant case, the KFTC may utilize the regulations of such Act as standards for determining unreasonableness in the licensor’s abuse of superior transacting position if the licensing agreement possesses characteristics of standardized terms and conditions. Therefore, multinational corporations that executed licensing agreements with Korean companies should also be mindful of such application of the Standardized Contract Act by the KFTC.