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 eliminates and restricts 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 intellectual property (IP) field. In practice, the AML enforcement authority promulgates related regulations and guidelines, and the Supreme People's Court (SPC) issues judicial interpretations, on specific issues in the 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 IP law and antitrust law in China during 2018 and early 2019.
II YEAR IN REVIEW
i Institutional reform
A unified AML enforcement agency in the State Administration for Market Regulation
Since March 2018, three existing antitrust law enforcement bodies have been gradually consolidated into a unified AML enforcement agency: the Anti-Monopoly Bureau in the State Administration for Market Regulation (SAMR). This marked the most significant institutional reform since the AML came into force 10 years ago. In the past, the power to enforce the AML was 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). After the consolidation, the functions performed by these three agencies have been taken up by the SAMR, a newly established agency that also merges the SAIC, the General Administration of Quality Supervision Inspection and Quarantine and the China Food and Drug Administration. Also, the National Intellectual Administration, which is affiliated to the SAMR, has been re-established to provide more protection on IPRs and encourage innovation.
More importantly, to equip the AML enforcement agency with more resources and experienced staff, the SAMR has authorised market regulation departments for all provinces, autonomous regions and municipalities to handle anti-monopoly cases in their respective administrative areas. It can be foreseen that the establishment of a unified AML enforcement agency will improve the efficiency and stability in enforcement of the AML, and resolve the inconsistency in its interpretation by different agencies, thereby further reducing the costs incurred by business entities in administrative enforcement and compliance.
Establishment of the SPC Intellectual Property Tribunal
According to the Decision of the Standing Committee of the National People's Congress of 26 October 2018, the SPC established the Intellectual Property Tribunal, a permanent judicial organ, which commenced performance of its duties on 1 January 2019. If any party files an appeal against a judgment or ruling of first instance for an IP civil case involving invention patent, utility model patent, new plant variety, integrated circuit layout design, technical secret, computer software or monopoly, or for an IP administrative case involving patent, new plant variety, integrated circuit layout design, know-how, computer software or monopoly, this shall be heard by the Intellectual Property Tribunal. It can be foreseen that this move will help unify the judgment criteria for IP cases, and further strengthen the judicial protection for IP.
ii Legislative development in IP and antitrust fields
Anti-Monopoly Law revision
In 2017, 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 confusion in practice. The main breakthrough in this revision is to establish competition policy as the foundation of the AML and to legalise the fair competition review system, so as to curb the monopoly behaviour at its origin. Currently, the amendment is still subject to additional research and discussion.
In November 2018, Gan Lin, deputy director of the SAMR and the secretary-general of the Anti-Monopoly Commission of the State Council (the Commission), announced that the draft amendment of the AML had already completed. The Commission's office has also identified four principles in this AML revision project:
- to refine the legislative policy from the practical experience of implementing the AML;
- the necessity to conform to Chinese national conditions, adapting to the stage and level of China's economic development, and also reasonably learn from the mature practices and experiences of developed countries in Europe and the United States;
- to fully consider the uncertainty of the AML while maintaining the discretion of the AML enforcement agency and the flexibility of the law; and
- to focus the revision on solving the most critical problems encountered in enforcement practice.
In the meantime, according to Gan Lin's announcement, four anti-monopoly guidelines will be published soon, including the amended Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights.
Provision on the Prohibition of Abuse of Dominant Market Position
On 30 January 2019, the SAMR published the Provision on the Prohibition of Abuse of Dominant Market Position (Draft for Comment) (Draft Provision). In the Draft Provision, the SAMR integrates relevant provisions from the SAIC and the NDRC, to form a more uniform and clear guidance on the abuse of market dominance. Specifically, the Draft Provision provides that, when determining the undertaking's market dominance in the field of IPRs, the SAMR shall not only base this on factors such as the market share proposed in Article 1 of the Draft Provision, but also consider the relevant technology's substitutions and updates, as well as the standard's research and development (R&D) status.
Working Guidelines on the Trial of Standard-Essential Patent Disputes
For the purpose of appropriate adjudication of disputes concerning standard-essential patents (SEPs) in the field of communications, the Guangdong High People's Court formulated Working Guidelines on the Trial of Standard-Essential Patent Disputes (Trial Implementation) (the SEP Guidelines) in April 2018. All courts in Guangdong province, where several landmark SEPs cases were filed (such as Huawei v. Samsung 2 and Huawei v. IDC),3 shall follow the SEP Guidelines when dealing with SEP disputes.
The SEP Guidelines mainly provide a judicial view of adjudicating SEP cases in three aspects, including: (1) injunctions related to SEPs; (2) methods used to determine the royalty rate; and (3) anti-monopoly disputes concerning SEPs. The SEP Guidelines basically share the same view on injunctive relief as that of previous practice (i.e., the decision to issue an injunction asserted by the SEP holder mainly depends on which party is responsible for the deadlock of the negotiations). It also provides several principles and methods to determine the royalty rate of SEPs, such as referring to comparable licensing agreements, analysing the market value of the SEPs asserted in the case, and referring to licence information in the comparable patent tool. Additionally, the SEP Guidelines analyse the SEP-related issue in antitrust cases and conclude that violation of fair, reasonable and non-discriminatory (FRAND) commitments by an SEP holder does not necessarily constitute abuse of market dominance, and a case-by-case examination is required to determine the effect of eliminating or restricting market competition.
iii Major cases and investigations in 2018 and early 2019
Huawei v. IDC
The Huawei v. IDC case provided the first opportunity for Chinese courts to rule on SEP royalty rates in the communication sector. On 6 December 2011, Huawei sued IDC in the Shenzhen Intermediate People's Court, accusing it of abusing market dominance, and violating its FRAND commitments. Huawei won the first instance in the Court, which ordered IDC to stop abusive behaviour and compensate Huawei with 20 million yuan. Also, IDC's SEP royalty rate was determined as 0.019 per cent of the product price, while IDC required a rate of 2 per cent. In March 2013, IDC refused to accept the first instance judgment and appealed to the Guangdong High People's Court. After seven months, the Guangdong High People's Court issued its judgment, which maintained the first judgment. Because the second judgment was final, IDC began petitioning the SPC to review and retry the case in 2014.
Finally, in December 2018, the SPC formally decided to retry the case.4 During retrial, the SPC produced a civil mediation document outlining the settlement reached by both parties. This means that the original judgment has been replaced by the civil mediation document, and the legal proceedings in the case officially ended after seven years.
Yunnan Big Star Company v. China Audio-Video Copyright Association5
The China Audio-Video Copyright Association (CAVCA) is the only audiovisual management organisation in China that is formally approved by the National Copyright Administration and registered by the Ministry of Civil Affairs. The CAVCA's business scope includes signing audiovisual copyright collective management contracts with members in accordance with the law, and, in accordance with the authorisation of the member and related laws and regulations, signing licensing contracts with copyright users to collect usage fees. The plaintiff, Big Star, is an influential karaoke establishment (KTV) based in Kunming. This case marked the first time a KTV undertaking has challenged the CAVCA in the name of anti-monopoly.
The CAVCA packaged all copyright together and further formulated a room-based licensing system to charge all KTVs; namely, each KTV room would be charged at a fixed daily fee. The plaintiff challenged the 'unreasonableness' of this pricing model and claimed the CAVCA abused its dominance in the audio-video copyright licensing market to conduct abusive behaviours, including unfairly high pricing, bundling, refusal to deal and differential treatment without justifiable reasons. The Kunming Intermediate People's Court recognised the legality of the CAVCA's licensing behaviour, although it acknowledged the CAVCA's dominance in the relevant market. Regarding the bundling allegation that the CAVCA required the plaintiff to pay for songs that are not used, the court was of the view that the package licensing is determined by reference to foreign copyright licensing practice and is helpful in reducing transaction costs and increasing transaction efficiency. On 7 May 2018, the Court ruled in favour of the CAVCA and dismissed all Yunnan Big Star Company's claims. Without any appeals from the involved parties, this judgment took effect.
Similarly, on 21 March 2019, the CAVCA was sued in the Beijing Intellectual Property Court by nine KTV companies from Guangdong province alleging the CAVCA had abused its market dominance in the licensing of copyright. With the emergence of more cases regarding the intersection between antitrust and copyright licensing, it can be expected that more light will be shed on this issue.
According to several public resources, the SAMR dawn-raided Ericsson's Beijing office on 14 April 2019, which indicates the SAMR formally initiating an investigation. Since 2018, many phone manufacturers in China have complained and litigated about Ericsson's potential abusive behaviour in the relevant markets of some SEPs. Given that Ericsson possessed approximately 49,000 patents by the end of 2018, most of which are SEPs, it is reasonable to presume that the SAMR is investigating Ericsson's violation of the AML in the SEP licensing market. Until now, the SAMR has not made any public announcement regarding this dawn raid. This is the second anti-monopoly investigation initiated by the AML enforcement agency in the SEP market, with the first being the Qualcomm case in 2015.6
III LICENSING AND ANTITRUST
i Anticompetitive restraints
The AML provides in general terms that restricting trading counterparties to trading only with the undertaking with dominant market position, or its designated undertaking, 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 eliminate or restrict competition.
According to Article 11 of the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Exposure Draft) (the IP Guidelines) released in early 2017, restricting undertakings from using or providing competitive technologies or products in the 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.7
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 when analysing whether tying involving IPRs constitutes an abuse of a dominant market position.
Based on Article 31 of the SEP Guidelines, the court shall analyse three factors to determine the existence of tying: whether the SEP holder's licence package is compulsory, the reasonableness and necessity of relevant patent portfolios, and whether the SEP holder's behaviours eliminate or restrict competition.
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 an extension of its market dominance in the SEP market to the non-SEP market without justification.
Restricting use of competing products or IPRs after licence expiry
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 expired licensing agreements, even in the event of non-infringement of IPRs.8
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.9
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.10 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 its 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 dominant market position to eliminate 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 IPRs; (2) whether it is necessary for other undertakings to obtain the licensing of the IPRs for entry into the relevant market; (3) the impact of refusal to license IPRs 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 IPRs will damage the interests of consumers or the public.11
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. SAMR's Draft Provision also acknowledges the above factors, while adding another: that of whether the selling price is remarkably higher than the price of commodity offered by the same undertaking in another region of the same or similar market conditions.
To give more clarification on 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.12
The Guangdong High People's Court points out in Article 30 of the SEP Guidelines that the court should analyse whether the SEP holder's behaviour of requesting an unfairly high royalty fee would lead to the effect of eliminating or restricting competition. In a case-by-case analysis method, the court may consider several factors, including, but not limited to, the past licence contracts signed by the SEP holder, the status of royalty fee deviating from the normal market prices and the relevant negotiation processes.
In Huawei v. IDC, the court compared the royalty rate IDC offered to Huawei with those IDC 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.13
Notably, grant-back is covered in the 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 the 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 eliminating 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 eliminating 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 9 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 an entry barrier for downstream market; (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 IPRs of the licensor.14
Continuing to exercise IPRs whose protection period has expired or 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 eliminates or restricts competition in the relevant downstream market.
In Huawei v. IDC, the courts noted that IDC required Huawei to license back all of its global patents on a royalty-free basis (as at 31 December 2010, Huawei owned 31,869 Chinese patents, 8,892 Patent Cooperation Treaty 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'.15
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 eliminate 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; and
- whether undertakings reject substitutable technologies through the pool, to prevent other undertakings from entering the relevant market.
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. The SAMR's Draft Provision complements this with three factors to be considered when it comes to the IP field: substitutions for the relevant technology, updates to the relevant technology and the standard's R&D status.
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 IPRs or goods and the switching costs; (2) the dependency of the downstream market on the products provided by applying IPRs; and (3) the capability of the transaction counterparty to restrict and balance the undertaking.
To identify whether an undertaking that owns an 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 it held. When determining market position, the NDRC mainly focused on factors including Qualcomm's market share in each separate wireless SEP licence market, its control over the relevant market, downstream customers' reliance on its technology and barriers to enter the relevant market.
The issue of whether SEP holders 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), 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 an SEP 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,16 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 faults 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 faults in the negotiation process. However, Samsung committed obvious violations of its FRAND obligations in both procedure and substance. Therefore, the court elected to grant an SEP injunction against Samsung's future infringement. Following the Huawei v. Samsung case, the Guangdong High People's Court also adopts the same framework in analysing the issue of injunctions in the SEP Guidelines.
However, 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.
In Huawei v. IDC, the court held that, in the negotiation process, IDC initiated a suit and sought an injunction against Huawei in the United States, which did not constitute a refusal to deal in nature, but constituted a measure aimed at compelling 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 Articles 152 and 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 result in the failure to reach a patent licensing agreement and other conditions.17 If any of the following acts are 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.18
The SEP Guidelines share a similar framework in analysing the good faith of the parties in the negotiation process. In comparison with the Patent Infringement Guidelines, the SEP Guidelines further elaborate on two scenarios where the implementer shall be deemed to be at obvious fault: (1) refusing to enter into the non-disclosure agreement without justifiable reasons, resulting in the discontinuation of the negotiation; and (2) failing to give a substantive reply, within a reasonable period of time, regarding the patent information, such as the sample patent list and the claim charts provided by the patentee of the SEP.
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 royalties 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 power of undertakings and make it more difficult for competitors to enter into the relevant markets. Therefore, the Anti-Monopoly Bureau scrutinises the above effect of the transfer of IPRs in its merger control 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, considerations for review and additional restrictive conditions. Article 19 lists three considerations in analysing whether undertakings may obtain control over other undertakings or whether undertakings may impose a decisive impact on other undertakings by the transfer and exclusive licensing of IPRs: (1) whether the IPRs constitute an independent business; (2) whether the IPRs produce turnover that can be calculated independently in the previous fiscal year; and (3) the duration of the exclusive licensing of IPRs.
Furthermore, the MOFCOM issued the Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Undertakings on 5 January 2015. According to this regulation, the enforcement agency 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) behavioural conditions requiring undertakings to license key technologies (including patents, proprietary technologies or other IPRs); and (3) comprehensive conditions in combination of structural conditions and behavioural conditions.
Articles 22 to 24 of the IP Guidelines give a specific interpretation of restrictive conditions involving IPRs, which includes structural conditions, behavioural conditions and comprehensive conditions. Generally, undertakings may propose structural restrictive conditions, such as divesting IPRs or businesses involving IPRs, to address concerns of the enforcement agency. Undertakings also need to ensure that the licensees of IPRs have the necessary resources, capabilities and willingness to participate in market competition by exercising the divested IPRs or engaging in the business involved. The divesture 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 on an individual case-by-case analysis. 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 the businesses relating to IPRs, and the businesses should be able to participate in effective competition in a certain period; (3) fulfilling the FRAND obligations – undertakings usually ensure that they fulfil the obligations through specific arrangements; and (4) charging 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.
In the Nokia/Alcatel case,19 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 in accordance with the FRAND principles, and the potential licensee did not intend to sign the licensing agreement conforming to the FRAND principles or abide by these licence terms in good faith; (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.
In the Bayer/Monsanto case,20 the MOFCOM finally approved this acquisition with remedies involving structural divestitures of IP. Specifically, the MOFCOM requires Bayer to globally divest its vegetable seed business, non-selective herbicide business (glyphosate business) and its corn, soybean, cotton and canola traits business. The divesture includes relevant facilities, personnel, IP (including patents, know-how and trademarks) and other tangible and intangible assets. Also, behavioural conditions concerning the IPR are imposed in this case (i.e., based on FRAND terms, allowing all Chinese developers of agricultural applications to connect to the newly merged digital agricultural platform and allowing all Chinese users to register and use this platform within five years of the date the digital agriculture products of all the parties involved entered the Chinese market).
VI OTHER ABUSES
Regarding anticompetitive settlements of IPR disputes, China's AML enforcement agency, learning from EU and US experience, has 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 monopolistic 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.21
VII OUTLOOK AND CONCLUSIONS
Overall, the interplay of the AML and IPR is still at an early stage and has a long way to go. In recent years, the AML enforcement agency has been paying closer attention to enterprises' abusive behaviour in relation to IPR. With the amendment of the AML and formal release of relevant guidelines, many of the AML's IPR-related issues 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 Huiyang Guo, Xiaoyu Xu, Yue Zhang and Yu Jiang for their valuable assistance in preparing this chapter.
2 (2016) Yue 03 Min Chu, Nos. 816 and 840, Shenzhen Intermediate People's Court, judgment of January 2018.
3 (2013) Yue Gao Fa Min San Zhong Zi Di, Nos. 305 and 306, Guangdong High People's Court, judgment of October 2013.
4 (2014) Min Shen Zi Di, No. 677, Supreme People's Court, judgment of December 2018.
5 (2017) Yun 01 Min Chu, No. 1782, Kunming Intermediate People's Court, judgment of May 2018.
6 NDRC Administrative Penalty Decision No. 1, 2015.
7 Article 9 of the SAIC Regulations.
8 Article 10.3 of the SAIC Regulations.
9 Article 17 of the IP Guidelines.
10 Article 7 of the SAIC Regulations.
11 Article 15 of the IP Guidelines.
12 Article 14 of the IP Guidelines.
13 Article 18 of the IP Guidelines.
14 Article 10 of the IP Guidelines.
15 Article 12 of the SAIC Regulations.
16 (2017) Jing Min Zhong, No. 454, Beijing High People's Court, judgment of March 2018.
17 Article 152 of the Patent Infringement Guidelines.
18 Article 153 of the Patent Infringement Guidelines.
19 MOFCOM Decision No. 44, 2015.
20 MOFCOM Decision No 31, 2018.
21 Article 13.2 and 13.4 of the AML.