Stimulating innovation through protecting intellectual property rights (IPRs) and safeguarding competition through implementing antitrust law are both important policies for the development of a modern economy. Overall, both policies share common goals, namely to promote competition and innovation, improve economic efficiency and safeguard the consumer and public interest. However, the paths to achieve these goals are different. The protection of IPRs requires the protection of exclusive rights of IPR holders to encourage innovation, promote industrial upgrading and enhance consumer welfare and social efficiency. On the other hand, antitrust requires a clear-cut objection against monopolistic behaviour to protect competition, including competition among different technologies, to promote technological progress, to protect consumer interests and social welfare.
Merely holding IPRs and legitimately exercising them would not violate antitrust law by themselves. However, the exercise of IPRs may, in certain circumstances, trump the technological innovation and fair competition environment, and even result in unfavourable consequences to competition. It would not only violate the basic purpose of the IPR system to encourage innovation, but also raise the concern of IPR abuse, which excludes and restrains competition.
The Anti-Monopoly Law (AML) enacted in 2008, the main legislation regulating antitrust violations in China, also sets out broadly in Article 55 that ‘this Law is applicable to undertakings' conduct that eliminates or restricts market competition by abusing their IPRs'. In other words, the rules set forth in the AML regarding reaching monopoly agreements, abuses of dominant market position and merger control also apply in the IP field. In practice, the three main AML enforcement authorities2 enact related regulations and guidelines, and the Supreme Court issues judicial interpretations, on specific issues in application of the AML. These regulations, guidelines and judicial interpretations constitute part of the antitrust regime in China.
This chapter will focus on the latest developments at the intersection of intellectual property (IP) law and antitrust law in China during 2016 and early 2017.
II YEAR IN REVIEW
i Legislative development in IP and antitrust field
In the past year, AML enforcement agencies decided to draft six sets of AML guidelines covering key aspects of enforcement matters, including relief commitments, leniency applications, exemption from agreements, fines calculation and application to the automotive industry and to the IP field. These guidelines assimilate experience from past cases in both China and other jurisdictions, and are expected to provide more clarity on the application of the AML.
AMC Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights
The Anti-Monopoly Commission of the State Council (AMC) entrusted the NDRC, SAIC, MOFCOM and the State Intellectual Property Office with the task of preparing their own draft IP and antitrust guidelines. After consolidating these drafts, on 23 March 2017, AMC released its integrated draft Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (the Guidelines) on its website and solicited public opinions.3
The Guidelines are formulated to provide guidelines for the application of the AML in cases of abuse of IPRs and to improve the transparency of legal enforcement by AML enforcement authorities. The Guidelines are composed of five chapters and 27 articles, basically covering the IP monopolies that occur most frequently and have the most obvious impact on competition in the market.
Chapter one illustrates several key principles and terms for the assessment process, such as ‘General Analytical Principles and Analytical Thinking', ‘Definition of Relevant Market' and the factors to consider when assessing anticompetitive effects.
The Guidelines prescribe that ‘an undertaking shall not be presumed to be dominant in the relevant market merely for the reason of holding the IP rights'.4 AML agencies are required to adopt the same regulatory standards for other property rights and follow the basic analytical framework of the AML, to take into account the characteristics of intellectual property rights and to consider the positive impact of behaviour on efficiency and innovation on a case-by-case basis. The Guidelines specify five conditions that should be satisfied simultaneously for the behaviour of an undertaking to produce a positive impact: (1) there is a causal link between the behaviour and promotion of innovation, as well as improvement to efficiency; (2) the behaviour has less effect to exclude or restrict market competition when compared with other behaviours that promote innovation and improve efficiency; (3) the behaviour would not seriously restrict competition in the relevant market; (4) the behaviour would not seriously impede innovation by other undertakings; and (5) consumers are capable of sharing the benefits brought by the promotion of innovation and the improvement to efficiency.5
The Guidelines provide that in addition to the relevant product market, it is also necessary to consider the relevant technology market when it is difficult to sufficiently assess the competition impact of a behaviour of IP abuse. The Guidelines stipulate that the relevant technology market should be the market formed by a group or a category of closely substitutable technologies. The Guidelines also list several factors that may be considered when defining the relevant technology market.6
Chapter two addresses main issues relating to monopoly agreements involving IPRs, including joint research and development, cross-licensing, exclusive grant-back arrangements, standards, no-challenge clauses and other restrictions. Additionally, the Guidelines set out the safe harbour rules: if an undertaking satisfies any of the specified conditions,7 the agreement involving IPRs reached by it would generally not be deemed a monopoly agreement; these conditions are (1) the share of the competing undertakings in the relevant market does not exceed 20 per cent in total; (2) the share of non-competing undertakings in any relevant market affected by the agreement involving IPRs does not exceed 30 per cent; or (3) if the share of undertakings in the relevant market is difficult to determine, or the market share cannot accurately reflect the undertakings' market position while there are four or more substitutable technologies in the relevant market under the independent control of other undertakings and that can be obtained at reasonable cost, apart from those under the control of parties to the agreement.
Chapter three stipulates that the AML shall apply to the identification of an abuse of a dominant market position involving IPRs. Article 13 gives a clearer explanation on identifying whether an undertaking holding IPRs has a dominant position in the relevant market. Except for Articles 18 and 19 of the AML, the following factors may also be specifically considered: (1) the possibility of transaction counterparties switching to alternative intellectual property rights or goods and the switching costs; (2) the dependency of the downstream market on the products provided by applying intellectual property rights; and (3) the capability of the transaction counterparty to restrict and balance the undertaking. In particular, to identify whether an undertaking holding a standard-essential patent (SEP) has a dominant market position, the following factors may be further considered: (1) the market value and the scope and degree of application of the standard; (2) whether there exists a substitutable standard, including the option to use a substitutable standard and the switching cost; (3) the dependency of the industry on the relevant standard; (4) the evolution and compatibility of the relevant standard; and (5) the possibility of substitution of the related technology that has been incorporated into the standard.8 Articles 14 to 18 further specify refusal to license, tying, attaching unreasonable transaction conditions, and discriminatory treatment related to IPRs.
Chapter four discusses concentration of undertakings involving IPRs. Because the concentration of undertakings involving IPRs has a unique character, this Chapter mainly addresses the circumstances that constitute the concentration of undertakings in transactions involving IPRs, examination considerations of undertakings involving IPRs, and additional restrictive conditions involving IPRs.
The final chapter mentions other circumstances involving IPRs that may constitute different types of monopolistic practices. The definitions and considerations to be assessed in relation to patent pools, injunctive relief and copyright collective administration organisations are then discussed in detail.
In a word, the Guidelines have brought more clarity and predictability to AML enforcement agencies.
Interpretations of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (II)
On 21 March 2016, the Supreme People's Court published ‘Interpretations of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (II)' (the Interpretation).
In accordance with the Patent Law, the Civil Procedure Law and other relevant laws and regulations, and in the light of judicial practices, Article 24 of the Interpretation is the first clarification from the Court on the legal application of SEPs, which has been a hot topic in the IP and antitrust fields recently. This Article only applies to national, industrial or local SEPs, but not to SEPs established by the International Standards Organization or other international standards-setting organisations. The Interpretation clarifies that the Court shall not uphold the defence made by an alleged infringer that its technical solution or design has been granted a patent and thus does not infringe the patent right involved in the case. And the Court generally does not support the patentee's allegation on ceasing enforcing the standards if (1) the patentee deliberately dishonours the obligations of fairness, reasonableness and non-discrimination (FRAND), thereby resulting in failure to enter into a patent licensing agreement; and (2) the accused infringer has no serious faults during negotiations.
The Interpretation, to a certain extent, avoids the possibility of patentees maliciously raising the threshold of patent licensing by applying injunctive relief, thereby reducing the likelihood of ‘patent holdup'.
Guidelines of the Higher People's Court of Beijing Municipality for Judging Patent Infringements
Following the Supreme People's Court's Interpretation, Beijing Higher People's Court formulated and published a new version of Guidelines for Judging Patent Infringements (the Patent Infringement Guidelines) on 20 April 2017, which is composed of 152 articles in total. The new Patent Infringement Guidelines provide comprehensive aspects for the determination of the scope of invention or utility model patent protection and infringement judgments, the scope of design patent protection and infringement judgments, the identification of infringement behaviour and patent infringement defences. The Patent Infringement Guidelines make further improvements by clarifying judicial rules regarding SEPs, based on existing cases in China and recent cases in other countries, and they are a helpful supplement to the existing Interpretation on SEP-related issues. Article 150 of the Patent Infringement Guidelines states that an infringer who requests a patentee to grant permission on a FRAND basis shall also negotiate in good faith. Article 153 further stipulates that the extent of the fault can be used to determine whether to approve injunctive relief; that is, in the course of the SEP licensing process, if both parties have a certain degree of fault, the court should assess which party bears the main responsibility, and should then determine whether to grant injunctive relief. Articles 152 and 153 provide details of patentee's FRAND obligations and SEP users' good faith obligations.
The Patent Infringement Guidelines have also explained a number of issues concerning SEPs that are not covered by the Interpretation, and therefore provide better guidance on the judicial trial of SEP cases.
ii Major cases and investigations in 2015
Qualcomm v. Meizu
On 24 June 2016, US company Qualcomm filed a complaint against Chinese smartphone manufacturer Meizu before the Beijing Intellectual Property Court. The complainant sought a ruling that the licensing terms it offered Meizu complied with China's AML and with the company's commitment to offer its essential technology on FRAND terms. The complainant also requested the court to make a judgment that these provisions for patent licensing constituted the main terms of the Qualcomm and Meizu patent licensing agreement. In addition, Qualcomm asked for compensation of around 500 million yuan. After arm's length negotiations for several months, the parties reached a patent licensing agreement under which Qualcomm grants Meizu a worldwide royalty-bearing patent licence to develop, manufacture and sell CDMA2000, WCDMA and 4G LTE (including ‘3-mode' GSM, TD-SCDMA and LTE-TDD) complete devices. The royalties payable by Meizu in China are consistent with the terms of the rectification plan submitted by Qualcomm to the NDRC. This agreement resolves all of the patent disputes between Qualcomm and Meizu in China.9
Apple v. Qualcomm
In January 2017, Apple filed two lawsuits against chip supplier Qualcomm before Beijing's Intellectual Property Court, claiming that Qualcomm had violated China's AML and abused its position in the market. In addition, Apple claimed that Qualcomm had failed to live up to its promises to license SEPs on FRAND terms. Although Apple attempted to reach a direct licensing agreement with Qualcomm on its SEP portfolios, Qualcomm continued to reject Apple's request and did not offer licence quotas consistent with FRAND obligations. In the abuse-of-market-dominance dispute case, Apple claimed economic losses of one billion yuan, and advocated a reasonable expenditure of 2.5 million yuan over the two cases. Qualcomm has been fined by the NDRC in China for alleged abuse of dominance in the relevant market in 2015, and accordingly Qualcomm set out new royalty rates and procedures for SEPs. Therefore, the outcome of this litigation will have a huge impact on patent licensing that had already been concluded by 2015. On the one hand, the outcome of the lawsuit will affect Qualcomm's previously submitted royalty rates and procedures; on the other hand, the result also has a far-reaching impact on the consistency of administrative determinations and judicial decisions related to IPR monopoly cases.
IWNCOMM v. Sony
On 22 March 2017, Beijing Intellectual Property Court decided a civil case relating to a SEP, in which plaintiff Xi'an Xi Dian Jie Tong Radio Network Co (IWNCOMM) claimed that defendant Sony Mobile Communications (China) Co, Ltd (Sony) had infringed IWNCOMM's SEP for a mandatory national WAPI standard. In the judgment, many critical issues regarding FRAND, injunctions, loyalty fees, damages and so on were involved, which appears to be of instructive significance in SEP practice. The court reasoned that a FRAND statement is only a commitment by the patentee, and the commitment does not indicate that it has issued a licence. As to injunctions, the court ruled that where both parties cannot reach an agreement during the patent licensing negotiation, the faults of both parties should be considered in deciding whether to grant an injunction. In this case, Sony's request for the plaintiff to provide the claim chart was unreasonable, thus it was Sony's default that caused the parties' failure to reach a licensing agreement.
According to the judgment, Sony Mobile was ordered to immediately cease the infringement of IWNCOMM's SEP found in 35 of Sony's mobile handsets and to pay damages of 8.6 million yuan and reasonable costs of 474,194 yuan. Although the current judgment may not be the final one for this infringement case, it is still significant as regards the manner in which SEP-related litigation is handled. Article 24 of the Supreme Court's 2016 Interpretation recognises injunctive relief in SEP litigation, and in IWNCOMM v. Sony the Beijing Intellectual Property Court confirmed that a permanent injunction is available against an accused infringer if it is seriously at fault during negotiations.
III LICENSING AND ANTITRUST
i Anticompetitive restraints
According to the SAIC Regulations, when exercising IPRs, undertakings with a dominant market position are prohibited from requiring trading counterparties to make transactions exclusively with themselves or with the undertakings designated by them without justifiable reasons if the transactions exclude or restrict competition.10
According to Article 11 of the Guidelines, restricting undertakings from using or providing competitive technologies or products in licensing of IPRs may also be considered infringement of the AML if they result in the exclusion of competition or have a restrictive effect on the relevant market. Specifically, the following factors may be considered: (1) the content, degree and manner of implementation of the restrictions; (2) the characteristics of products provided by applying IPRs; (3) the relationship between restrictions and licensing conditions of IPRs; (4) whether there are several restrictions; and (5) if the IPRs of other undertakings involve substitutable technologies, and whether other undertakings impose the same or similar restrictions.11
According to the SAIC Regulations, when exercising IPRs, undertakings with a dominant market position are prohibited from tying that is inconsistent with trade practices or consumption habits, or ignores the product function and enables the extension of the undertaking's dominant position in the tying product market to the tied product market.12 The extension of market dominance does not require that both tying and tied products have market dominance, but IP holders may utilise their dominance in the tying market to exclude or restrict competition in tied products.
Article 16 of the Guidelines is consistent with the SAIC Regulations, and it clearly states that a package of IPR licences may also be a form of tying. The factors generally considered in the analysis of tying involving other products shall also be considered in analysing whether tying involving IPRs constitutes an abuse of a dominant market position.
In the Qualcomm case, the NDRC determined that Qualcomm conducted tying of SEPs and non-SEPs. The NDRC held that non-SEPs and SEPs are different and that licensing them separately would not interfere with the application or value of them. Qualcomm's method of ‘settling a single licence fee and licensing as a single portfolio' constituted extension of its market dominance in the SEP market to the non-SEP market without justification.
Restricting use of competing products or IPRs after expiry of the licence
According to the SAIC Regulations, when exercising IPRs, undertakings with a dominant market position are prohibited from restricting trading counterparties from utilising competing products or technologies upon the expiry of licensing agreements, even in the event of non-infringement of IPRs.13
Article 17 of the Guidelines also prohibits undertakings with a dominant market position from attaching to transactions conditions that restrict transaction counterparties from claiming over expired or invalid IPRs, and the factors generally considered in analysing the attachment of unreasonable conditions shall also be considered when analysing whether such behaviour by undertakings constitutes an abuse of a dominant market position.14
ii Refusals to license
According to the SAIC Regulations, when exercising IPRs, undertakings with a dominant market position are prohibited from refusing to license the IPRs if the IPRs constitute essential facilities for production and business activities.15
The SAIC Regulations also provide three factors to identify IPRs that might constitute essential facilities: the availability of a reasonable substitute, the adverse impact of refusal on competition or innovation, and unreasonable harm caused to IPR holders.
The Guidelines confirm in Article 15 that refusal to license IPRs is a way an undertaking exercises IPRs. However, if an undertaking that has a dominant market position unjustifiably refuses to license IPRs, especially when its IPRs constitute essential facilities of production and operating activities, such behaviour may constitute an abuse of a dominant market position to exclude or restrict competition. During assessment, the following factors may be considered: (1) the commitments made by the undertaking as to the licensing of intellectual property rights; (2) whether it is necessary for other undertakings to obtain the licensing of the intellectual property rights for entry into the relevant market; (3) the impact of refusal to license intellectual property rights and degree thereof on innovation by the undertaking; (4) whether the refused party lacks willingness and capability to pay reasonable licence fees; and (5) whether the refusal to license intellectual property rights will damage the interests of consumers or the public.16
iii Unfair and discriminatory licensing
Unfairly high pricing
Generally, according to Article 11 of the Provisions on Anti-Price Monopoly, to determine an ‘unfairly high price', the following factors shall be considered: (1) whether the selling price of a commodity is remarkably higher than the same kind of commodity offered by other undertakings; (2) whether the increase in sale price of a commodity exceeds the normal range; (3) whether the increase in sale price of a commodity remarkably exceeds the increase of its costs; and (4) any other relevant factor to be considered.
However, it is difficult to apply the four-factor test to determine an unfairly high price. In practice, one of the possible approaches might be to compare the price with those the undertaking charges to other trading counterparties that have the same conditions. If the former is significantly higher than the latter, then the former price may be determined as unfairly high.
To give more clarity to this problem, Article 14 of the Guidelines provides that when analysing whether an undertaking has licensed IPRs at an unfairly high price, the calculation method for licensing fees, the contribution made by IPRs to the value of goods, the commitments made by the undertaking as to the licensing of IPRs and the record of previous licensing of IPRs need to be considered by enforcement agencies. With regard to SEPs, the overall licence fees borne by the products in line with the relevant standard and the impact on the normal development of related industries may also be considered.17
In Huawei v. InterDigital, the court compared the royalty rate InterDigital offered to Huawei with those InterDigital offered to other companies (Apple, Samsung, RIM, etc.) and found that the former was dramatically higher than the latter (the royalty rate for Huawei was 19 times the rate for Apple, and seven to nine times that for Samsung and RIM). The court ruled that the royalty rate for Huawei constituted an unfairly high price.18
In the Qualcomm case, the NDRC determined that Qualcomm charged unfairly high royalties because it charged for expired patents, required royalty-free grant backs, tied SEPs and non-SEPs, and based its royalties on the net sales price of the entire device as opposed to a percentage of the price of a smaller component part.
Differing treatment of trading counterparties whose conditions are the same
Article 18 of the Guidelines defines how, in transactions involving IPRs, undertakings with a dominant market position may impose, without justified reasons, different licensing conditions on transaction counterparties that have substantially identical conditions, thus constituting discriminatory treatment. It also explains how to analyse such behaviour, including the transaction counterparties' conditions, the terms of the licensing agreement and the discriminatory treatment.19
Notably, grant back is covered in the Chinese AML Guidelines for the first time. According to Article 8 of the Guidelines, grant back is where the licensee agrees to grant the original licensor a licence for any improvement based on the licensed IPRs or on new outcomes obtained through application of the licensed IPRs. If only the licensor or a third party designated by it is entitled to implement the improvement or new outcomes granted back by the licensee, the grant back is exclusive. Generally, there is a high probability that an exclusive grant-back arrangement will have the effect of excluding or restricting competition in the relevant market.
Similarly, if the licensor requires the licensee to transfer the above-mentioned improvement or new outcomes to the licensor or a third party designated by it, the same factors mentioned above shall be taken into account in the analysis of whether this behaviour has the effect of excluding or restricting competition.
Prohibiting challenging the validity of IPRs
Prohibiting challenging the validity of IPRs is also regulated in the Guidelines. Article 10 of the Guidelines provides that a ‘no-challenge clause' refers to a clause in an agreement concerning the licensing of IPRs whereby the licensor requires the licensee not to raise challenges to the validity of the licensor's IPRs. The following factors may be considered in the analysis of the competition exclusion or restriction effect of a no-challenge clause on the relevant market: (1) whether the licensor requires all licensees not to challenge the validity of its IPRs; (2) whether the licensing of IPRs affected by the no-challenge clause is paid licensing; (3) whether the IPRs affected by the no-challenge clause may constitute a downstream market entry barrier; (4) whether the IPRs affected by the no-challenge clause obstruct the implementation of other competitive IPRs; (5) whether the licensing of IPRs affected by the no-challenge clause is exclusive licensing; and (6) whether the licensee may suffer material losses if it challenges the validity of the intellectual property rights of the licensor.20
Continuing to exercise IPRs whose protection period has expired or IPRs that are found to be invalid
According to the Guidelines, Article 17 prohibits undertakings with a dominant market position attaching to transactions conditions that restrict transaction counterparties from claiming over expired or invalid IPRs. The enforcement practice is also consistent with this standpoint. In the Qualcomm case, the NDRC found that while patents would inevitably expire over time, because the list of patents included in the licence was not disclosed the licensees were unable to assess the changes in fair market value of the licence at a given time. The NDRC held it was unreasonable for Qualcomm to charge royalties on expired patents and Qualcomm should give the licensees fair opportunities to negotiate to avoid paying royalties for expired patents.
The Guidelines define cross-licensing as the mutual licensing between undertakings of their own IPRs. Moreover, the following factors may be considered in the analysis of the exclusionary or restrictive effect of cross-licensing on competition in the relevant market: (1) whether the cross-licensing is exclusive licensing; (2) whether the cross-licensing constitutes a barrier to entry into the relevant market for third parties; and (3) whether the cross-licensing excludes or restricts competition in the relevant downstream market.
In Huawei v. InterDigital, the courts noted that InterDigital required Huawei to license back all of its global patents on a royalty-free basis (as of 31 December 2010, Huawei owned 31,869 Chinese patents, 8,892 PCT international patent applications and 8,279 overseas patents). This appears to be much harsher than a grant-back requirement and the courts took the view that this was contrary to FRAND principles.
iv Patent pooling
The SAIC Regulations define patent pooling in the context of China's antitrust regime as ‘agreement-based arrangements under which two or more patentees jointly license their respective patents to third parties through an equity joint venture established specifically for this purpose, or by entrusting management to a particular member of the patent pool or an independent third party'.21
The Guidelines hold the view that a patent pool can generally reduce transaction costs, improve licensing efficiency, and promote competition. However, a patent pool may also exclude or restrict competition. The Guidelines list several factors that may be considered in the specific analysis of a patent pool, including the undertakings' share in the relevant market and their control over the market; whether the patents in a patent pool involve substitutable technologies; whether members of the pool are restricted from independently licensing patents or researching and developing technologies out of the pool; whether undertakings exchange prices, output and other information on goods through the pool; whether undertakings reject substitutable technologies through the pool, to prevent other undertakings from entering the relevant market and so on.
IV STANDARD-ESSENTIAL PATENTS
The SAIC Regulations confirm that determination of a dominant market position shall follow the rules in the AML and specifically clarify that undertakings would not be presumed to have a dominant market position in the relevant market merely because of the ownership of IPRs.
In combination with the characteristics of IPRs, the Guidelines specify that the following factors may be considered: (1) the possibility of transaction counterparties switching to alternative intellectual property rights or goods and the switching costs; (2) the dependency of the downstream market on the products provided by applying intellectual property rights; and (3) the capability of the transaction counterparty to restrict and balance the undertaking.
To identify whether an undertaking that owns a SEP has a dominant market position, the following factors may be further considered: (1) the market value and the scope and degree of application of the standard; (2) whether there exists a substitutable standard, including the possibility to use a substitutable standard and the switching cost; (3) the dependency of the industry on the relevant standard; (4) the evolution and compatibility of the relevant standard; and (5) the possibility of substitution of the related technology that has been incorporated into the standard.
In the Qualcomm case, the NDRC found that Qualcomm had dominant market positions in a set of separate relevant product markets for the licensing of each wireless SEP held by it. When determining market position, the NDRC mainly focused on factors including Qualcomm's market share in each separate wireless SEP licence market, Qualcomm's control over the relevant market, downstream customers' reliance on Qualcomm's technology and barriers to entry into the relevant market.
The issue of whether holders of SEPs may seek injunctions has been heavily discussed in recent years. This issue is not addressed in the AML or the SAIC Regulations.
The SAIC Draft Guidelines mention that SEP holders' abuse of injunctions to force licensees to accept unreasonable licensing terms may constitute an abuse of dominant market position.22
In Huawei v. InterDigital, the court concluded that by seeking an injunction and forcing Huawei to pay much higher royalties than those paid by Apple and Samsung, InterDigital failed to comply with the FRAND commitments with which it encumbered its SEPs. The court stated that:
InterDigital failed to fulfil its FRAND obligations without regard to Huawei's good faith and willingness during licensing negotiations. It did not adjust its offer to a reasonable pricing; instead, it initiated a suit and sought injunctions in the US based on the essential patents. While InterDigital seemingly was exercising its legitimate litigation rights, it intended to coerce Huawei, through means of litigation, to accept excessive pricing and to pay consideration on top of the essential patents. This act lacks legitimacy
In addition, According to Article 24 of the Interpretation, as to those patents that have been disclosed as essential for the implementation of recommended national, industrial or local standards, the court shall, in general, not uphold injunctions sought by holders of such patents encumbered with FRAND commitments, when: (1) the patentee intentionally violated the FRAND obligations when negotiating with the accused infringer for licensing terms such that no agreement was reached; and (2) the accused infringer was patently not at fault during the negotiations. The Patent Infringement Guidelines enlarge the scope to include standards established by the International Standards Organization or other standards-development organisations on the basis of Article 24 of the Interpretation.23
iii Licensing under FRAND terms
The SAIC Regulations set forth the licensing obligations under FRAND commitments borne by SEP holders, stating that, ‘without justification, undertakings with dominant market positions shall not violate FRAND principles and refuse to license patents, engage in tying, impose other unreasonable conditions during transactions or commit other acts that exclude or restrain competition'.24
Article 24 of the Interpretation provides that where no consensus is reached after sufficient consultation, the parties concerned may request the competent people's court to determine exploitation and licensing conditions; in which case, the people's court shall, on fair, reasonable and non-discriminatory terms, take into comprehensive consideration the degree of innovation of the patent, the role of the patent in relevant standards, the technical field to which the standards belong, the nature and scope of application of the standards, relevant licensing conditions and other factors to determine the exploitation and licensing conditions. Based on the Interpretation, the Beijing Higher People's Court provides comprehensive aspects for the determination of FRAND obligations from Article 150 to Article 153. Generally, the patentee shall bear the burden of proof on the promised FRAND obligations and the patentee may use the following materials as evidence: (1) their declaration documents and patent disclosure documents submitted to the relevant standardisation organisations; (2) patent policy documents of related standardisation organisations and (3) the FRAND promise made and published by the patentee.25 If there is no evidence that the SEP patentee has deliberately violated the FRAND obligations, and the accused infringer is not obviously at fault in the licensing negotiation, the patentee's injunctive relief is generally not supported. However, in the following scenarios the patentee may be considered as being in voluntary breach of the FRAND obligations: (1) the patentee fails to notify the infringer of the infringement of the patent right in writing, and fails to specify the scope and ways of infringement; (2) the patentee fails to provide the patent information or provide specific licensing conditions in writing in accordance with business practices and trading practice, after the accused infringer has consented to negotiations; (3) the patentee fails to offer a reply period in accordance with business practice and trade practice; (4) the patentee obstructs or interrupts the licensing negotiation without reasonable justification; and (5) the patentee proposes unreasonable licensing conditions in the course of the negotiation, which results in the failure to reach a patent licensing agreement and other conditions. 26 Article 153 explains that if both parties are at fault during the negotiation, it is necessary to analyse the degree of the fault of both parties and judge which has primary responsibility to determine whether to support the patentee's injunctive relief. In Huawei v. InterDigital, the court found that InterDigital violated its FRAND commitments by engaging in the following acts:
- a InterDigital offered an unfairly high licensing rate to Huawei, in comparison with the rates it offered to Apple, Samsung, etc.;
- b InterDigital asked for a free licence for all patents owned by Huawei. The court further pointed out that Huawei has a big patent portfolio. The quantity and value of Huawei's patents far exceed those of InterDigital; and
- c InterDigital initiated a suit and sought injunctions in the United States against Huawei to force Huawei to pay much higher royalties than those paid by Apple and Samsung without regard to Huawei's good faith and willingness during licensing negotiations.
iv Royalty base
In the Qualcomm case, the issue of whether it was appropriate for Qualcomm to charge royalties based on the net sale price of whole devices was discussed. The NDRC mentioned in its decision that ‘[Qualcomm] has insisted on using a relatively high royalty rate, at the same time that it has charged royalty on the basis of entire devices in excess of the coverage of its wireless SEPs, which is manifestly unfair and has resulted in excessive royalties'. It seems that the NDRC did not conclude whether it was appropriate for Qualcomm to use the net sale price of whole devices as the royalty base, but only regarded the royalty base as one of the factors in determining Qualcomm's unfairly high pricing. The NDRC Draft Guidelines seem to concur with this analysis. Article 3.2.1 stipulates that ‘the following factors may be considered in analysing and determining whether undertakings license IPRs at unfairly high prices: […] (4) whether the undertakings charge licensing fees beyond the geographical scope of, or the product scope covered by, the IPRs involved'.
V INTELLECTUAL PROPERTY AND MERGERS
Mergers involving transfers of IPRs may enhance the market control of undertakings and make it more difficult for other undertakings to enter into the relevant markets. Therefore, MOFCOM will scrutinise the above effect of the transfer of IPRs in its merger review. The Guidelines stipulate in chapter four that the concentration of undertakings dealing with IPRs has a unique character; this unique character is mainly reflected in aspects such as the circumstances that constitute the concentration of undertakings, examination considerations and additional restrictive conditions. Chapter IV of the AML shall apply to the examination of the concentration of undertakings dealing with IPRs. Article 19 lists three considerations in analysing whether undertakings obtain control over other undertakings or whether undertakings impose a decisive impact on other undertakings by the transfer and exclusive licensing of intellectual property rights: (1) whether the intellectual property rights constitute independent business; (2) whether the intellectual property rights produce turnover that can be calculated independently in the previous fiscal year; and (3) the duration of the exclusive licensing of intellectual property rights. Articles 22 to 24 give a specific interpretation of restrictive conditions involving IPRs, including structural conditions, behavioural conditions and comprehensive conditions. Undertakings may propose restrictive conditions to divest IPRs or business involving IPRs. Undertakings generally need to ensure that the licensees of IPRs have the necessary resources and capabilities, and are willing to participate in market competition by applying the stripped IPRs or engaging in the business involved. The stripping should be made in an effective, feasible and timely manner, to avoid the competition in the relevant market being affected. Behavioural conditions in relation to IPRs are determined depending on individual cases. Suggestions on restrictive conditions may involve the following content: (1) the licensing of IPRs - the licensing usually is exclusive, and does not include the use area or geographic restrictions; (2) keeping independent operation of intellectual property rights-related business - the related business should have the condition of effective competition in a certain period; (3) fulfilling FRAND obligations - undertakings usually ensure that they fulfil the obligations through specific arrangements; and (4) charge reasonable licence fees - undertakings shall generally specify in detail the calculation method and payment terms of licence fees, as well as fair negotiation conditions and opportunities and other matters. In addition, undertakings may combine structural conditions and behavioural conditions, and put forward suggestions on comprehensive restrictive conditions involving IPRs.
Furthermore, MOFCOM issued the Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation) on 4 December 2014, which took effect on 5 January 2015. According to this regulation, MOFCOM can impose the following additional restrictive conditions on mergers to alleviate the adverse impact of the transfer of IPRs on competition: (1) structural conditions requiring the divestiture of IPRs; (2) conditions requiring undertakings to license key technologies (including patents, proprietary technologies or other IPRs); and (3) comprehensive conditions that combine (1) and (2).
In the Nokia/Alcatel case, MOFCOM decided to approve the acquisition of Alcatel by Nokia conditionally on Nokia's fulfilment of the following commitments under supervision by MOFCOM: (1) Nokia shall not seek injunctions on SEPs unless it has provided licensing conditions conforming to FRAND principles but the potential licensee has neither entered into the licensing agreement conforming to FRAND principles in good faith nor complied with the licensing agreement; (2) the licensees are entitled to notification of Nokia's SEP transfers to third parties, as well as negotiation and renegotiation with Nokia on royalty rates during or after the transfers; and (3) when Nokia transfers its SEPs to a new owner in the future, Nokia shall make the transfer on the condition that the new owner agrees to be subject to FRAND principles.27
VI OTHER ABUSES
With regard to sham or vexatious IP litigation, the SAIC Draft Guidelines mention that SEP holders' abuse of litigation rights to force licensees to accept unreasonable licensing terms may constitute an abuse of a dominant market position.28 The Guidelines further spell out several unjustified transaction conditions for transactions related to IPRs: (1) requiring transaction counterparties to offer exclusive grant back; (2) prohibiting transaction counterparties from challenging the validity of their intellectual property rights, or from lodging proceedings for infringement of intellectual property rights against their undertakings; (3) restricting transaction counterparties from using competitive technologies or products; (4) claiming rights over expired or invalid intellectual property rights; (5) requiring transaction counterparties to provide cross-licensing without paying reasonable consideration; and (6) forcing or prohibiting transaction trade between counterparties and third parties, or restricting the conditions for transaction counterparties to trade with third parties. The factors generally considered in analysing the attachment of other unreasonable conditions shall also be considered when analysing whether the above behaviour of undertakings constitutes abuse of a dominant market position.
Regarding anticompetitive settlements of IPR disputes, China's antitrust enforcement authorities, learning from EU and US experience, have paid attention to the ‘pay-for-delay' agreements between pharmaceutical companies whereby manufacturers of brand-name drugs might buy off or settle with manufacturers of generics so that the former can continue to enjoy monopoly pricing after their patents have expired. Such conduct may be regarded as reaching horizontal monopoly agreements that ‘split the market' or ‘restrain development of new products' under the AML.29
VII OUTLOOK AND CONCLUSIONS
In recent years, the AML enforcement agencies have been paying closer attention to enterprises' abusive behaviour in relation to IPRs. The Guidelines are supposed to enhance the clarity and practicability of the AML in terms of IPRs. Therefore, it could be reasonably expected that, with the formal release of the Guidelines, IPR abusive behaviour will be subject to more stringent regulation. In addition, AML law enforcement will be further strengthened with the improvement of the IP and antitrust regime, which in turn puts forward new challenges to corporate compliance.
1 Zhaoqi Cen is a partner at Zhong Lun Law Firm.
2 There are three main AML enforcement authorities in China: the National Development and Reform Commission (NDRC), in charge of price-related monopoly conduct; the State Administration for Industry and Commerce (SAIC), in charge of non-price-related monopoly conduct; and the Ministry of Commerce of the People's Republic of China (MOFCOM), in charge of merger control.
4 Article 1 of the Guidelines.
5 Article 5 of the Guidelines.
6 Article 3 of the Guidelines.
7 Article 12 of the Guidelines.
8 Article 13 of the Guidelines.
10 Article 8 of the SAIC Regulations.
11 Article 11 of the Guidelines.
12 Article 9 of the SAIC Regulations.
13 Article 10.3 of the SAIC Regulations.
14 Article 17 of the Guidelines.
15 Article 7 of the SAIC Regulations.
16 Article 15 of the Guidelines.
17 Article 14 of the Guidelines.
18 Huawei v. InterDigital, Yue Gao Fa Min San Zhong Zi, 305, judgment by Guangdong High People's Court (2013). In this case, Huawei requested the court to order InterDigital to cease abusing its dominant market position in the SEP licence market and pay an amount of 20 million yuan in damages.
19 Article 18 of the Guidelines.
20 Article 10 of the Guidelines.
21 Article 12 of the SAIC Regulations.
22 Article 23.6 of the SAIC Draft Guidelines.
23 Article 24 of the Interpretation.
24 Article 13 of the SAIC Regulations.
25 Article 151 of the Patent Infringement Guidelines.
26 Article 152 of the Patent Infringement Guidelines.
27 Announcement  No. 44 of the Ministry of Commerce - Announcement on the Decision of Conditional Approval upon Anti-Monopoly Review of the Concentration of Business Operators by the Acquisition of the Equity of Alcatel Lucent by Nokia Oyj, available at: http://fldj.mofcom.gov.cn/article/ztxx/201510/20151001139743.shtml.
28 Article 23.6 of the NDRC Draft Guidelines.
29 Article 13.2 and 13.4 of the AML.