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 interests of consumers and the public. 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 calls for a clear-cut objection against monopolistic behaviour to protect competition, including competition among different technologies, to promote technological progress and 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, under certain circumstances, trump technological innovation and the fair competition environment, and may even result in unfavourable consequences for competition. It would not only defeat the basic purpose of the IPR system to encourage innovation, but also raise the concern of IPR abuse, which excludes and restrains competition.
As with many other jurisdictions, the interaction between antitrust and IPR has been noted and addressed by Chinese legislation. 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, AML enforcement authorities promulgate related regulations and guidelines, and the Supreme People's Court issues judicial interpretations, on specific Issues in application of the AML. These regulations, guidelines and judicial interpretations constitute part of the antitrust law regime in China. This chapter focuses on the latest interdisciplinary developments of intellectual property (IP) law and antitrust law in China during 2017 and early 2018.
II YEAR IN REVIEW
i Consolidation of three antitrust enforcement agencies into one
On 17 March 2018, China's National People's Congress passed legislation to consolidate three existing antitrust law enforcement bodies into a new regulator under the State Council. This marked the most significant institutional reform since the AML came into force 10 years ago. Currently, the power to enforce the AML is shared by the National Development and Reform Commission (NDRC), the Ministry of Commerce of the People's Republic of China (MOFCOM) and the State Administration for Industry and Commerce (SAIC). The NDRC is responsible for regulating pricing behaviour, and it shoulders the responsibility of investigating into and bringing enforcement actions against price-related violations of the AML. The MOFCOM is in charge of merger control, and the SAIC is responsible for other non-price-related violations of the AML. After the consolidation, the functions performed by these three agencies will be taken up by the State Administration for Market Regulation (SAMR), a newly established agency that also combines the SAIC, the General Administration of Quality Supervision Inspection and Quarantine (AQSIQ) and the China Food and Drug Administration (CFDA). It can be foreseen that the establishment of a unified AML enforcement agency will improve the efficiency and stability of AML enforcement, and resolve the inconsistency in the interpretation of the AML by different agencies, thereby further reducing administrative enforcement costs and compliance costs incurred by business entities. Meanwhile, an increasing number of antitrust investigations can be anticipated after the consolidation, because the SAMR will be equipped with more resources and staffed by more experienced officials.
ii Legislative development in IP and antitrust fields
Anti-Monopoly Law revision
In the past year, the AML was set to be amended for the first time in order to supplement the current law and to clarify certain areas that have caused confusions in enforcement. The main breakthrough in this revision is to establish competition policy as the foundation of AML and to legalise the fair competition review system, so as to curb the administrative monopoly behavior from its origin. Currently the amendments are still subject to additional research and discussion.
The MOFCOM's 'Measures for the Review of Concentrations of Undertakings'
In addition to the AML revision, another important development is the revised 'Measures for the Review of Concentrations of Undertakings' released by the MOFCOM for public comments (the Draft Measures). The Draft Measures provide in six chapters the criteria to determine the concentration of undertakings, methods to calculate the turnover, notification of concentration, review of concentration, etc. The Draft Measures specify that a business operator should notify the MOFCOM of concentration after an agreement is reached for this purpose but before parties start to perform. The party making such notification may offer proposals to the MOFCOM subjecting itself to a conditional approval for concentration. There are three categories of restrictive conditions: structural conditions involving divesting tangible assets and intangible assets such as intellectual property rights, behavioural conditions and comprehensive conditions. Once adopted, the new measures are expected to replace previous regulations concerning the review of concentration of undertakings and will be the main guidance on concentration of undertaking review.
The NDRC's drug pricing guidelines
On 16 November 2017, the NDRC studied and formulated the Pricing Behaviour of Operators Dealing in Drugs and Active Pharmaceutical Ingredients in Short Supply (the Drug Pricing Guidelines) to further regulate the market pricing of drugs and active pharmaceutical ingredients in short supply to in order to maintain market price order. These are the first pricing guidelines for this specific industry since the implementation of the AML. The Drug Pricing Guidelines point out the probable unlawful price risks to operators in the course of production and sales of drugs and active pharmaceutical ingredients in short supply, and provides instructions for the evaluation of the legitimacy of different pricing behaviours of operators. According to the Drug Pricing Guidelines, a dominant business operator will be punished for trading at an unfairly high or low price and for refusal to deal. Operators are also prohibited from forming any monopolistic agreements. The Drug Pricing Guidelines also provide that in the enforcement, the authority shall strictly follow the 'prohibition + exemption' principles when handling monopolistic price agreement cases. The operators who apply for the exemption under Article 15 of the AML shall prove that the agreements reached fall within the circumstances set forth in Article 15, Paragraph 1 of the AML. The NDRC routinely pays attention to drug prices, especially the high prices of patent drugs. After the publication of the Drug Pricing Guidelines, pharmaceutical companies will be further challenged by stricter scrutiny for excessive pricing and refusal to deal.
iii Major cases and investigations in 2017
IWNCOMM v. Sony
On 28 March 2018, the Beijing High People's Court issued the final decision on the second instance case between Xi'an Xi Dian Jie Tong Radio Network Co (IWNCOMM) and Sony Mobile Communications (China) Co, Ltd (Sony). The decision rejected Sony's appeal and upheld the judgment of the first instance made by Beijing Intellectual Property Court, which ordered Sony 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.
Following the Beijing Intellectual Property Court's adjudication, Sony appealed to the Beijing High People's Court, which identified the following four issues in the second instance: (1) whether the relevant standards (GB15629.11-2003/XG1-2006) fully covered all the patent claims involved; (2) whether Sony's actions infringed IWNCOMM 's patent rights involved in the case; (3) whether Sony's defences were meritorious; and (4) Sony's civil liability for the infringement. Beijing High People's Court upheld the permanent injunction against Sony and the lower court's calculation of damages. On the second instance, the Beijing High People's Court held that although parts of Sony's arguments stood, they did not substantially affect the verdict of the case.
This case is of significance regarding the manner in which SEP-related litigation is handled. Article 24 of the Supreme People's Court's 2016 Interpretation recognises injunctive relief in SEP litigation, and in IWNCOMM v. Sony, the Beijing High People's Court held that a permanent injunction is available against an accused infringer if it is seriously at fault during negotiations.
Hytera v. Motorola
On 11 November 2017, Motorola Systems (China) Investment Co, Ltd, Motorola Systems (China) Co, Ltd, and Motorola Systems (China) Co, Ltd Beijing Branch (Motorola) were sued by China-based Hytera Communications Co, Ltd (Hytera) for abuse of dominant position in certain specific markets. There were three main points to be determined in this case, namely whether: (1) Motorola had a dominant position in the metro network communications market; (2) Motorola refused to open up its interoperability interface of the completed subway TETRA system with other product operators or provide other alternative solutions that had the same effect; and (3) Motorola restricted the metro company to deal only with Motorola or its designated suppliers. In its claim, Hytera petitioned for 60 million yuan in damages and 500,000 yuan for reasonable expenses.
Motorola is the world's largest network communications systems provider. As the world's second-largest and fastest-growing network communications company, Hytera is the most powerful challenger. Although this case is still pending, the final decision will definitely affect the chances for Chinese domestic subway communication equipment manufacturers to enter the relevant market, as well as the localisation of the corresponding relevant market products or accessories.
Huawei v. Samsung
On 11 January 2018, Shenzhen Intermediate People's Court finally ruled in favour of Huawei against Samsung over two standard-essential patents (SEPs) owned by Huawei. The court held that Samsung deliberately delayed the negotiation with Huawei and was obviously in violation of the FRAND (fair, reasonable and non-discriminatory) principle regarding the SEP licence. The court ordered Samsung to immediately stop manufacturing and selling its infringing products and to pay a small amount of court fees.
The court considered two main issues in this case. The first issue was whether the two patents owned by Huawei were essential patents to the 4G standard, and the other issue was which party breached its FRAND obligation in the negotiation phase. As to the first issue, the court found that both patents (No. 201110269715.3 and No. 201010137731.2) owned by Huawei were essential to the 4G/LTE standard. Samsung used these two patents to manufacture and sell the corresponding 4G intelligent terminal products in China without Huawei's permission, and thus infringed Huawei's patent rights. For the second issue, the court found that Huawei acted in good faith to solve the cross-licence issue between the two parties. But Samsung maliciously delayed the negotiations and refused to arbitrate. Samsung's conduct constituted a violation of the FRAND principle commonly accepted in SEP licensing. On the other hand, the court held that Huawei made no obvious breach of the FRAND principle as it made conscious efforts to resolve the conflict through negotiation and arbitration. Although the judgment may not be final for this case, it is significant for the equal protection of the IPRs and interests of IPR owners by providing further guidance for, and clarification on, SEP disputes.
The NDRC fines two pharmaceutical companies 443,900 yuan for abuse of dominance
On 28 July 2017, the NDRC fined two pharmaceutical companies, Zhejiang Second Pharma Co, Ltd and Tianjin Handewei Pharmaceutical Co, Ltd, for alleged abuse of dominance in relation to isoniazid active pharmaceutical ingredients (APIs). The two companies were fined a total of 443,900 yuan for charging unfairly high prices for APIs and refusal to deal with drug manufacturers. According to the NDRC, the two companies have resumed pricing at normal levels and supplying to drug manufacturers. In recent years, the pharmaceutical industry has been under intense focus from China's antitrust enforcement authorities. These two cases were of guiding significance for regulating pricing behaviour in the API market and for maintaining a well organised market price environment.
III LICENSING AND ANTITRUST
i Anticompetitive restraints
The AML provides in general terms that restricting trading counterparties to trading only with the operator with dominant market position, or its designated operator, without justifiable reasons constitutes an abuse of dominant market position. Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition released by the SAIC (SAIC Regulations) also provide in Article 8 that 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.
According to Article 11 of the draft Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (the IP Guidelines) released in early 2017, restricting undertakings from using or providing competitive technologies or products in licensing of IPRs may be considered infringement of the AML if it results in the exclusion of competition or has a restrictive effect on the relevant market. Article 17 of the IP Guidelines stipulates that forcing transaction counterparties to trade with third parties, or prohibiting them from doing so, or restricting the conditions for transaction counterparties to trade with third parties may also be considered an infringement of the AML if it causes a negative impact on competition.
The SAIC Regulations stipulate that 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.2 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 IP 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.3
Article 17 of the IP 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.4
ii Refusals to license
To comply with 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.5 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 IP 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. To make the determination, 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.6
iii Unfair and discriminatory licensing
Unfairly high pricing
Generally speaking, according to Article 11 of the Provisions on Anti-Price Monopoly, to determine whether a price shall be deemed 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 in question with those that other undertakings charge to other trading counterparties under the same conditions. If the price in question is significantly higher than prices of other undertakings, it may be determined as unfairly high.
To give more clarification to this problem, Article 14 of the IP 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.7
The Drug Pricing Guidelines give more explanation regarding the pharmaceutical industry. Article 8 provides that to identify an 'unfairly high price' and an 'unfairly low price' set by drugs operators, the following factors may be considered: (1) whether the sales price or purchase price is apparently higher or lower than the prices of other operators that sell or purchase the same drugs and active pharmaceutical ingredients in short supply in the same period; (2) in the condition of a stable market environment and no apparent influence on costs, whether the sales price or purchase price is increased or decreased beyond the normal range; (3) whether the increase in the sales price of drugs and active pharmaceutical ingredients in short supply is obviously higher than the growth in costs, or the decrease in the purchase price of drugs and active pharmaceutical ingredients in short supply is obviously higher than the costs of the transaction counterpart; and (4) whether there is an excessive price difference upon price comparison of the same regional market and in different time segments, or of different regional markets in the same time segment.
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.
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.
Differentiating treatment of trading counterparties with similar conditions
Article 18 of the IP Guidelines defines how, in transactions involving IPRs, undertakings with a dominant market position may impose, without justifiable reasons, different licensing conditions on transaction counterparties with 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.8
Notably, grant back is covered in the Chinese AML Guidelines for the first time. According to Article 8 of the IP 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 challenges on the validity of IPRs
Prohibiting challenges on the validity of IPRs is also regulated in the IP Guidelines. Article 10 of the IP 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.9
Continuing to exercise IPRs whose protection period has expired or IPRs that are found to be invalid
According to the IP Guidelines, Article 17 prohibits undertakings with a dominant market position from 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 that it was unreasonable for Qualcomm to charge royalties for expired patents and that Qualcomm should give the licensees fair opportunities to negotiate to avoid paying royalties for expired patents.
The IP 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 appeared to be much harsher than a grant-back requirement, and the courts took the view that this was contrary to the 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'.10
The IP 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 IP Guidelines enumerate 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 they 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 IPR, the IP 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 enter the relevant market.
The issue of whether holders of SEPs may seek injunctions has been heavily discussed in recent years. According to Article 24 of the 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), as to those patents that have been disclosed as essential for the implementation of recommended national, industrial or local standards, the court shall not, in general, 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.
Guidelines of the High People's Court of Beijing Municipality for Judging Patent Infringements (the Patent Infringement Guidelines) released on 20 April 2017 further elaborate on the point that where there is no evidence that the patentee wilfully violates its obligation for licensing on FRAND terms, where the accused party has no apparent fault in negotiation of licence, if the accused party provides the royalty claimed in a timely manner or a guarantee that is not less than its alleged royalty, the court should generally refuse the patentee's request for ceasing infringement. Where the patentee has not fulfilled its obligation for licensing on FRAND terms, and the accused party has serious fault in the negotiation, a people's court shall determine whether the patentee's request for ceasing infringement of a standard-essential patent should be supported, after analysing the degree of fault between the parties and assessment of which party is primarily responsible for the breakdown of the negotiation.
In the IWNCOMM v. Sony case, the Beijing High People's Court followed the Patent Infringement Guidelines and granted IWNCOMM an injunction against Sony on the ground that Sony had wilfully delayed the negotiation for approximately six years. Specifically, the court reasoned as follows:
A SEPs holder who has made a FRAND commitment shall perform relevant obligations under the statement, and an infringer who requests a patentee to grant permission on a FRAND basis shall also negotiate in good faith. When determining which party is responsible for the deadlock of the negotiations, the court shall take into account the negotiation process and substantive licensing conditions. An injunction request should be denied where a SEPs owner intentionally violates FRAND obligations that result in the breakdown of the negotiation, but not the alleged infringer. Conversely, when the patentee acts in good faith and the accused infringer has apparent fault in the negotiation, the injunction claim of the patentee should generally be supported. 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.
In Huawei v. Samsung, the court held that Huawei and Samsung had been negotiating for over six years since July 2011. Huawei proposed its offer under the FRAND principle and did not have apparent fault in the negotiation process. But Samsung committed obvious violations of its FRAND obligations in both procedure and substance. Therefore, the court elected to grant a SEP injunction against Samsung's future infringement.
However, it should also be noted that abuse of injunctions may constitute an abuse of dominant market position and a violation of the AML. The IP Guidelines state that
[i]njunctive reliefs are remedies to which the standard-essential patent owners are entitled according to law to safeguard their legitimate rights. However, if the standard essential patent owners of a dominant position apply for injunctive reliefs for the purpose of forcing the licensee to accept unfairly high license fee or other unreasonable licensing conditions, it may eliminate or restrict competition.
Article 28 of the the seventh draft of Anti-monopoly Enforcement Guidelines on Abuse of Intellectual Property Rights released by the SAIC (the SAIC Draft Guidelines) also provides that 'The following acts carried out in the process of standards setting and implementation by business operators with dominant market position will eliminate or restrict competition: . . . (4) After their patent becomes an essential patent for a standard, force the licensees to accept various unreasonable terms raised by them by abusing injunctive relief or right of action'.
In Huawei v. IDC, the court held that in the negotiation process, IDC initiated a suit and sought injunction against Huawei in the United States, which did not constitute refusal to deal in nature, but it constituted a measure aimed to compel Huawei to accept excessive pricing.
iii Licensing under FRAND terms
The Patent Infringement Guidelines for the first time provide comprehensive guidance for the interpretation of the FRAND obligations in Article 152 and Article 153. In the following scenarios, the patentee may be considered in voluntary breach of the FRAND obligations if the patentee: (1) 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) 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) fails to offer a reply period in accordance with business practice and trade practice; (4) obstructs or interrupts the licensing negotiation without reasonable justification; and (5) proposes unreasonable licensing conditions in the course of the negotiation, which results in the failure to reach a patent licensing agreement and other conditions.11 If any of the following acts is committed, it may be found that the accused infringer has a clear fault in the necessary patent licensing consultation process: (1) failing to diligently respond within reasonable time after receiving written notification of infringement from the patentee; (2) failing to diligently respond within reasonable time on whether to accept licence conditions of the patentee; or refusing to accept specific conditions proposed by the patentee but failing to propose new conditions, after receiving specific conditions of licence from the patentee; (3) obstructing, delaying or refusing to participate in the licence negotiation without adequate reasons; (4) proposing an apparently unreasonable condition during negotiation that results in failure to reach a licence agreement; and (5) the accused infringer has any other serious faults in the negotiation.
In Huawei v. Samsung, the court found that Samsung employed delay tactics in the cross-licence negotiation and violated its FRAND obligations both in procedure and in substance. From the procedural perspective, Samsung: (1) insisted on bundling together both the SEPs and non-SEPs, which delayed the procedures; (2) did not respond to claim charts provided by Huawei in a timely way and thus delayed the technical discussion; (3) was passive in licence offering and delayed counter offer; (4) rejected Huawei's proposal to submit the licensing dispute to a natural arbitration without justified reasons; and (5) deliberately postponed the court-organised mediation by not submitting a substantial solution proposal. From the substantive perspective, the rate proposed by Samsung was not reasonable and was in violation of the FRAND principles.
iv Anticompetitive or exclusionary royalties
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.
In Huawei v. Samsung, the court reasoned that the industry's reasonable profit factor should be considered in determining whether the licensing fee of SEPs is in line with the FRAND principle. The court reviewed a large number of documents and held that Huawei's offer was based on its own patent strength, and would not result in cumulative royalty rates exceeding industry-recognised royalty rate levels for 3G and 4G SEPs, and Huawei still left some room for further negotiation. Therefore, the court held that the royalty rate proposed by Huawei complied with its FRAND obligations.
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, the MOFCOM scrutinises the above effect of the transfer of IPRs in its merger review. The IP 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. 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, which includes 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 that they 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 the 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, the MOFCOM issued the Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Business Operators 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, the MOFCOM approved the acquisition of Alcatel by Nokia with the condition that Nokia honoured the following commitments under supervision of the MOFCOM: (1) Nokia shall not seek injunctions on SEPs unless it has provided licensing conditions conforming to the FRAND principles but the potential licensee has neither entered into the licensing agreement conforming to the 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 itself to the FRAND principles.12
VI OTHER ABUSES
With regard to sham or vexatious IP litigation, the SAIC Draft Guidelines mention several unjustified transaction conditions for transactions related to IPRs held by a dominant undertaking, including conditions: (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.13
VII OUTLOOK AND CONCLUSIONS
Overall, the interplay of the AML and IPR is still at its early stage and has long way to go. In recent years, the AML enforcement agencies have been paying closer attention to enterprises' abusive behaviour in relation to IPR. With the amendment of the AML and formal release of these relevant guidelines, many issues of the AML in terms of IPR are expected to gain greater clarity and certainty, and IPR-abusive behaviour will be subject to more stringent regulation. Predictably, we may see a better balance between promoting domestic innovation and protecting IPR holders' interests.
1 Zhaoqi Cen is a partner at Zhong Lun Law Firm. Special thanks go to Xu Xiaoyu and Guo Huiyang for their valuable assistance in preparing this chapter.
2 Article 9 of the SAIC Regulations.
3 Article 10.3 of the SAIC Regulations.
4 Article 17 of the IP Guidelines.
5 Article 7 of the SAIC Regulations.
6 Article 15 of the IP Guidelines.
7 Article 14 of the IP Guidelines.
8 Article 18 of the IP Guidelines.
9 Article 10 of the IP Guidelines.
10 Article 12 of the SAIC Regulations.
11 Article 152 of the Patent Infringement Guidelines.
12 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.
13 Article 13.2 and 13.4 of the AML.