The Intellectual Property and Antitrust Review: China
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 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 2019 and early 2020.
Year in review
i Legislative development in IP and antitrust fields
Anti-Monopoly Law revision
On 2 January 2020, the State Administration for Market Regulation (SAMR) released the Revised Draft of the Anti-monopoly Law (Draft for Comments) (Revised Draft) for public comments. The most prominent feature of the Revised Draft is that it aggravates the legal liabilities for violations of the AML, such as the upper limit of fines imposed on undertakings who fail to notify the law enforcement agency of the concentration goes from 500 thousand yuan to 10 per cent of the undertaking's turnover. Moreover, the Revised Draft leaves room for the introduction of criminal liabilities for violations of the AML. In addition, 'strengthen the fundamental position of competition policies' and 'fair competition review system' are included in the AML, with the aim of regulating government behaviours and preventing the introduction of policies that may eliminate or restrict competition. With respect to the field of IPRs, the provisions in the Revised Draft remain unchanged as the current AML; that is, the AML shall not apply to the acts of undertakings exercising their IPRs according to relevant IPR laws and regulations, but shall apply to the abuse of IPRs where the market competition is eliminated or restricted.
This is the first time that a revised draft of the AML has been published since the AML came into effect. The Revised Draft focuses on solving some urgent issues encountered in the law enforcement practice and reflects the law enforcement experience accumulated during the past 12 years. With the release of the Revised Draft, the first amendment to the AML can be expected soon.
Release of three department regulations
On 26 June 2019, approximately six months after the release of the corresponding drafts for comments, the SAMR officially published the Interim Provision on the Prohibition of Abuse of Dominant Market Position (Provision on Dominance Abuse), the Interim Provision on the Prohibition of Monopoly Agreements, and the Interim Provision on Prohibiting Acts of Abuse of Administrative Authority to Eliminate or Restrict Competition, three regulations that integrate and consolidate the relevant provisions from the State Administration for Industry and Commerce (SAIC) and the National Development and Reform Commission (NDRC). In contrast to the previous regulations that provide substantive and procedural rules in separate regulations, the three regulations adopt the structure of combining substantive and procedural rules in each regulation.
Summarising law enforcement experiences at home and aboard, the three regulations provide for more detailed reference to determine the prohibited behaviours set forth in the AML. Specifically, in addition to the detailed explanation of factors to be considered in determining market dominance as stipulated in the AML, the Provision on Dominance Abuse defines the specific factors to be considered when determining the market dominance of an undertaking in the IP sectors, which includes the substitutability of IPRs, reliance of the downstream market on the commodity using the IPRs, and the counterpart's ability to counter the undertaking in business transactions. The Provision on Dominance Abuse also, for the first time, explicitly provides in Article 17 that 'necessary for the protection of IPR' can be a justifiable reason for exclusive dealing behaviours.
Interim Provision on the Review of Concentration of Undertakings
On 7 January 2020, the SAMR released Interim Provision on the Review of Concentration of Undertakings for public comments (Draft Provision on Merger Review). The Draft Provision on Merger Review is composed of six chapters and 90 articles. In addition to the general provisions and supplementary provisions, the main chapters are 'Declaration of Concentration of Undertakings', 'Review of Concentration of Undertakings', 'Supervision and Implementation of Restrictive Conditions' and 'Investigation of Illegally Implemented Concentration of Undertakings'. Without major amendments, the Draft Provision on Merger Review mainly consolidates the existing rules and regulations concerning concentration of undertakings, including Draft Measures for the Review of Concentration of Undertakings released by the Ministry of Commerce (MOFCOM) in 2017. The restrictive conditions might be imposed to reduce the adverse effects of concentrations on competition that remain largely unchanged as current rules, namely, (1) structural conditions including divestiture of tangible assets, IPRs and other intangible assets or corresponding rights and interests; (2) behavioural conditions including granting access to such infrastructures as network or platform, licensing of key technologies (including patents, proprietary techniques or other IPRs), and termination of exclusive agreements; and (3) hybrid conditions that combine structural conditions and behavioural conditions. Once adopted, the new provisions are expected to replace the previous regulations and serve as the main guidance concerning the review of concentration of undertakings.
ii Major cases and investigations in 2019 and early 2020
Hytera v. Motorola
On 12 December 2019, Beijing Intellectual Property Court ruled in favour of Motorola against Hytera over the issue of Motorola's abuse of its dominant position in metro-specific wireless communication equipment market and dismissed all of Hytera's claims.
The court considered two main issues in this case. The first issue was whether Motorola had a dominant position in the market and whether Motorola abused its dominance by restricting metro company to deal only with itself; the other issue was whether Motorola abused its dominance by refusing to open up its API interface of the completed TETRA system with other product operators. As to the first issue, the court held that the wireless communication equipment for metro network, the product concerned, was traded through bidding process. Because each bidding had its corresponding requirements, which shall determine the range of business operators that can participate in this specific competition, every bidding event created a separate market. Specifically, in the bidding of Chengdu metro lines 2, 3 and 4, it was a mandatory requirement that the new metro lines be interconnected to the existing metro lines. Owing to the fact that only switches of the same undertaking could be interconnected, this meant that Motorola, the winning bidder for the existing lines, would be the only competitor qualified for the new bidding, and thus was deemed to hold dominant position in the relevant market. But there was no clear evidence of Motorola restricting Chengdu Metro to trade only with itself. Therefore, Motorola's behaviours in question did not constitute exclusive dealing under the AML.
For the second issue, the court was of the view that the existing evidence on record could not prove that the API interconnection method had been used for direct interconnections between different manufacturers' equipment in metro lines, and the ISI method, terminal interconnection method and gateway interconnection method were all technically feasible and could serve as alternatives to the API solution. Therefore, the relevant accused behaviour did not constitute refusal to deal under the AML.
This is the first time that the definition of relevant market under a bidding model and the essential facility principle have been discussed in an anti-monopoly civil litigation in China. Although not much information has been revealed until now regarding the court's theory on the essential facility principle or the balance of IPR protection and regulation of refusal to deal, this case did give a clear opinion on the definition of relevant market where a bidding is concerned, and is of pioneering significance in this regard for future cases.
Xiaomi/Oppo v. Sisvel
After failed licensing negotiation and being sued by Sisvel for patent infringement in Europe in April 2019, Xiaomi and Oppo pressed charges against Sisvel in Beijing Intellectual Property Court and Guangzhou Intellectual Property Court separately, seeking fair, reasonable and non-discriminatory (FRAND) rates on all the standard-essential patents (SEPs) concerning wireless technology that Sisvel held in China and requesting Sisvel to cease its acts of monopoly infringement.
Xiaomi and Oppo are Chinese mobile phone manufacturers, and Sisvel is a company specialised in patent management and profits from patent licensing. Although rare in judicial practice in China, this is not the first case in which Chinese mobile phone manufacturers seek for the court to determine FRAND rates on SEPs. In Huawei v. IDC2, IDC's SEP royalty rate was determined as 0.019 per cent of the product price by Guangdong High People's Court, and in Huawei v. Conversant,3 Nanjing Intermediate People's Court defined the licensing conditions including royal rates for all Conversant's 2G, 3G and 4G China SEPs implemented by Huawei, with royal rate of single-mole 4G mobile terminal product being 0.00225 per cent and multi-mode 2G/3G/4G mobile terminal product being 0.0018 per cent.
The outcome of the case will definitely have an impact on future negotiations between major mobile phone manufacturers and Sisvel, and may also help to enrich the judicial practice in the field of SEP licensing and shed more light on unfairly high royalty rate that violates FRAND principles.
Investigation against Ericsson
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 were 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 antitrust law enforcement agency in the SEP market, with the first being the Qualcomm case4 in 2015.
Investigation against Tencent Music Entertainment Group
In August 2019, it was reported that Tencent Music Entertainment Group (TME) was under antitrust investigation by the SAMR over potentially anticompetitive exclusive-licensing agreements with Universal Music Group, Sony Music Entertainment and Warner Music Group. The SAMR suspected that TME's long-term possession of exclusive copyrights of the three top music groups and other music companies had jeopardised competition by restricting competitors such as NetEase Cloud Music, Alibaba's Xiami Music and China Mobile's Migu Music from accessing the world's most popular and valuable music resources, and may damage the market competition.
This is the first time that the antitrust law enforcement agency launched a formal investigation involving non-price vertical agreements since the AML took effect in 2008. Although it was reported in February 2020 that the SAMR had suspended the investigation without imposing any conditions, this investigation represents the concern of law enforcement agency on the exclusive licensing mode of digital music, and may contribute to the improvement of relevant legal systems in the intersection field of antitrust and copyright.
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 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.5
Article 16 of the IP Guidelines is consistent with the SAIC Regulations, and it explicitly 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.
Article 31 of Working Guidelines of the Guangdong High People's Court on the Trial of Standard-Essential Patent Disputes (Trial Implementation) (the SEP Guidelines), release in April 2018, further elaborates on this point that, 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,6 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 transaction counterparties from utilising competing products or technologies upon the expired licensing agreements, even in the event of non-infringement of IPRs.7
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 of undertakings constitutes an abuse of a dominant market position.8
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.9 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 with 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.10
iii Unfair and discriminatory licensing
Unfairly high pricing
Generally speaking, according to Article 14 of the Provision on Dominance Abuse, 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 price of same kind of commodities offered by other undertakings under the same or similar market conditions; (2) whether the selling or purchasing price is significantly higher or lower than the price of the goods sold or bought by a same operator in other regions with the same or similar market conditions; (3) whether the increase in sale price of a commodity exceeds the normal range when the cost is basically stable; (4) whether the increase in sale price of a commodity remarkably exceeds the increase of its costs; and (5) any other relevant factor to be considered.
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.11
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,12 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,13 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.14
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.15
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,16 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,17 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'.18
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.
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 Provision on Dominance Abuse complements this with several specific factors to be considered when it comes to the IP field, including the substitutability of IPRs, reliance of the downstream market on the commodity using the IPR, and the counterpart's ability to counter the undertaking in business transactions.
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,19 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: the patentee intentionally violated the FRAND obligations when negotiating with the accused infringer for licensing terms such that no agreement was reached; and 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,20 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,21 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,22 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.23 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.24
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: refusing to enter into the non-disclosure agreement without justifiable reasons, resulting in the discontinuation of the negotiation; and 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,25 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,26 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.
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. 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, according to the Provisions of the Ministry of Commerce on Imposing Additional Restrictive Conditions on the Concentration of Undertakings, 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,27 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,28 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. In addition, 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).
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.29
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, Chuang Zhang and Aoying Cen for their valuable assistance in preparing this chapter.
2 (2013) Yue Gao Fa Min San Zhong Zi Di, No. 305, Guangdong High People's Court, judgment of October 2013.
3 (2018) Su 01 Min Chu, Nos. 232, 233 and 234, Nanjing Intermediate People's Court, judgment of September 2019.
4 NDRC Administrative Penalty Decision No. 1, 2015.
5 Article 9 of the SAIC Regulations.
6 NDRC Administrative Penalty Decision No. 1, 2015.
7 Article 10.3 of the SAIC Regulations.
8 Article 17 of the IP Guidelines.
9 Article 7 of the SAIC Regulations.
10 Article 15 of the IP Guidelines.
11 Article 14 of the IP Guidelines.
12 (2013) Yue Gao Fa Min San Zhong Zi Di, No. 306, Guangdong High People's Court, judgment of October 2013.
13 NDRC Administrative Penalty Decision No. 1, 2015.
14 Article 18 of the IP Guidelines.
15 Article 10 of the IP Guidelines.
16 NDRC Administrative Penalty Decision No. 1, 2015.
17 (2013) Yue Gao Fa Min San Zhong Zi Di, No. 305, Guangdong High People's Court, judgment of October 2013.
18 Article 12 of the SAIC Regulations.
19 NDRC Administrative Penalty Decision No. 1, 2015.
20 (2017) Jing Min Zhong, No. 454, Beijing High People's Court, judgment of March 2018.
21 (2016) Yue 03 Min Chu, Nos. 816 and 840, Shenzhen Intermediate People's Court, judgment of January 2018.
22 (2013) Yue Gao Fa Min San Zhong Zi Di, No. 306, Guangdong High People's Court, judgment of October 2013.
23 Article 152 of the Patent Infringement Guidelines.
24 Article 153 of the Patent Infringement Guidelines.
25 (2016) Yue 03 Min Chu, Nos. 816 and 840, Shenzhen Intermediate People's Court, judgment of January 2018.
26 NDRC Administrative Penalty Decision No. 1, 2015.
27 MOFCOM Decision No. 44, 2015.
28 MOFCOM Decision No. 31, 2018.
29 Articles 13.2 and 13.4 of the AML.