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 2020 and early 2021.
Year in review
i Legislative development in IP and antitrust fields
Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition
On 23 October 2020, the State Administration for Market Regulation (SAMR) released the revised version of the Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition (the SAMR IP Provisions). Compared with the previous version released by the State Administration for Industry and Commerce in 2015 , the changes in the SAMR IP Provisions mainly cover the following aspects: (1) amending the name of the anti-monopoly law enforcement agency in light of the 'three-in-one' integration of the anti-monopoly law enforcement agencies; (2) updating the legal basis for anti-monopoly enforcement in the field of IPRs, to be consistent with other anti-monopoly regulations newly issued since 2019; and (3) removing the exclusion of price-related monopolistic behaviours to match the current anti-monopoly law enforcement agency's investigative authority. Basically, changes were only made to reflect the current anti-monopoly legal system and to provide a clear legal basis for anti-monopoly law enforcement in the field of IPRs.
Anti-Monopoly Guidelines of the Anti-Monopoly Committee of the State Council in the Field of Intellectual Property Rights
In September 2020, the Anti-Monopoly Bureau of the SAMR officially released the Anti-Monopoly Guidelines of the Anti-Monopoly Committee of the State Council in the Field of Intellectual Property Rights (the IP Guidelines). Previously, the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Exposure Draft) was issued in early 2017 for public comment.
The IP Guidelines have five chapters, including general provisions, monopoly agreements, abuse of dominant market positions, concentration of undertakings and other situations concerning IPRs. The general provisions briefly set out the principles and analytical approaches to determine whether a behaviour might be deemed as abusing IPRs to eliminate or restrict competition. The second chapter details some IPRs-related agreements that may eliminate or restrict competition, such as joint research and development, cross-licensing, setting of standards, exclusive granting-back and sole granting-back, no-challenge clauses and other restrictive agreements, and sets out the safe harbour principle for non-hardcore restrictions. The third chapter specifically enumerates the abuse of market dominance behaviours involving IPRs, including unfairly high-priced licences, refusal to licence, tying, additional unreasonable trading conditions and discriminatory treatment. The fourth chapter sets out some provisions on the review of the concentration of undertakings involving IPRs. The last chapter mainly analyses issues regarding patent pooling, standard-essential patents and copyright collective management organisations.
The IP Guidelines reflect the practical experience and latest research results of China's anti-monopoly law enforcement agency in the field of IPRs and are undoubtedly of great significance in terms of guiding future practices of enterprises.
Interim Provisions on the Review of Concentration of Undertakings
On 23 October 2020, the SAMR officially released the Interim Provisions on the Review of Concentration of Undertakings (the Provisions on Merger Review), effective from 1 December 2020. Based on the consolidation of the original four departmental regulations and two normative documents, the Provisions on Merger Review summarise the experience in the review of the concentration of undertakings, and reasonably learn from the advanced practices of other jurisdictions to form the first complete and systematic departmental regulations on the review of concentration of undertakings, covering both substantive and procedural regulations. 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 infrastructure as networks or platforms, 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.
Provisions of the Supreme People's Court on Several Issues Concerning the Application of Laws in the Trial of Civil Disputes Caused by Monopolistic Practices
On 29 December 2020, the Supreme People's Court published the revised Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Disputes Caused by Monopolistic Practices (2020 Amendment) (the Judicial Interpretation of Antitrust Civil Disputes), which aim to reflect the latest civil law revisions, stay consistent with relevant provisions of judicial interpretations and provide clear guidance on anti-monopoly civil litigation. The specific amendments mainly include, first, adjusting the scope of courts that have jurisdiction over the first instance of antitrust civil disputes. Article 3 of the Judicial Interpretation of Antitrust Civil Disputes provides that the first instance of antitrust civil disputes shall be under the jurisdiction of the intellectual property courts, the intermediate people's courts of the cities where the people's governments of provinces, autonomous regions and municipalities directly under the Central People's Government are located, the cities with independent planning and the Intermediate People's Court designated by the Supreme People's Court. To date, the four intellectual property courts throughout China, the Intellectual Property Courts in Beijing, Shanghai, Guangzhou and Hainan Free Trade Port, are entitled to hear antitrust disputes. Second, the amendments also include extending the period of limitation of actions for claiming for damages arising from monopolistic practices from two years to three years.
In addition, the Supreme People's Court established the Intellectual Property Tribunal on 1 January 2019, which has exclusive jurisdiction over appeal cases against first-instance decisions and rulings issued by Intellectual Property Courts and Intermediate People's Courts in relation to antitrust disputes. That is, the appeals leapfrog a high people's court from an intermediate people's court to the Supreme People's Court. This not only helps to unify judicial standards, but also highlights the judicial policy and adjudication rules for antitrust cases at the highest judicial level in China.
Anti-Monopoly Guidelines for the Platform Economy Sector
On 7 February 2021, China issued the Anti-Monopoly Guidelines for the Platform Economy Sector (the Platform Economy Guidelines). The Platform Economy Guidelines are China's first official Guidelines in regulating competition among platform undertakings and signals that anticompetitive behaviours in the platform economies shall be one of the SAMR's regulatory priorities. The Platform Economy Guidelines take into account the characteristics of the platform economy and give specific guidance on the determination of monopolistic behaviours in the field of platform economy.
The Platform Economy Guidelines explicitly stipulate that data, algorithms and platform rules can be used in reaching horizontal or vertical monopoly agreements. For the first time, the Platform Economy Guidelines adopt the expression of 'hub-and-spoke agreement' and provide that competitive operators on a platform may reach a hub-and-spoke agreement with the effect of a horizontal monopoly agreement, by means of their vertical relationships with platform undertakings, or by way of organisation and coordination through platform undertakings. In addition, for 'choose one out of two' restrictions (where a platform undertaking requires its platform-based operators to choose one out of two competitive platforms or limits its transaction counterparts to entering into transactions only with it) that are commonly seen in the platform economy sector, the Platform Economy Guidelines specifically point out that these restrictions may constitute an abuse of dominance. The Platform Economy Guidelines also clarify that a concentration involving variable interest entity structure shall be subject to merger control review.
Two months after the Platform Economy Guidelines were published, on 10 April 2021, the SAMR released its penalty decision against Alibaba on the ground that Alibaba abused its dominant position in China's online retail platform market by imposing the 'choose one out of two' restriction on operators that operate online stores both on Alibaba and on its rival platforms. Alibaba was fined 18.2 billion yuan, which represents 4 per cent of its 2019 domestic revenue. In addition, the SAMR issued an administrative instruction to Alibaba, requesting that Alibaba carry out comprehensive rectification, improve its internal control and compliance system, and submit a self-examination compliance report to the SAMR before 31 December on a yearly basis for the next three consecutive years. This case is the first significant antitrust law case in the platform economy sector in China, indicating that the antitrust law enforcement in this sector has entered a new phase.
ii Major cases and investigations in 2020 and early 2021
Eight KTVs v. CAVCA
On 21 March 2019, the Beijing Intellectual Property Court heard the case of eight KTV enterprises from the Guangdong province versus the China Audio Video Copyright Association (CAVCA) for alleged abuse of dominant position. In this case, the plaintiffs of eight KTV enterprises claimed that CAVCA required them to sign licensing agreements with a CAVCA-designated agent, but the agent attached unreasonable conditions to the licence agreements. Therefore, the plaintiffs alleged that CAVCA engaged in abuse of dominant position.
In June 2020, the Beijing Intellectual Property Court made the first-instance judgment.2 The court defined the relevant market as 'licensing service market of movies or audio-visual products in KTV business'. The court held that the licensing market for IPRs can be subdivided based on the licence application in different scenarios. In this case, the Beijing Intellectual Property Court determined that CAVCA had a dominant position in relevant market by considering the following factors: (1) CAVCA is the only collective management organisation of the copyrights of cinematography works and audiovisual products in China; (2) the quantity of cinematography works and audiovisual products under CAVCA's management (over 110,000 units) is obviously significantly larger than the number of works owned by other copyright holders who did not authorise CAVCA to manage their works; (3) the reliance of downstream undertakings on CAVCA; and (4) the difficulty for other undertakings or organisations to enter into the relevant market.
The Beijing Intellectual Property Court made the judgment that although CAVCA had the dominant position in relevant market, the plaintiffs failed to prove that CAVCA engaged in abuse of its dominant position by imposing restrictions on transactions and attaching unreasonable conditions. Nonetheless, the Beijing Intellectual Property Court sent a letter of judicial advice to CAVCA in response to the relevant issues found in this case, and recommended that CAVCA pay attention to the orderly operation of the collective management organisation and effectively solve the potential disputes and issues arising from the licensing of the massive amount of work.
Huawei v. Conversant
On 25 January 2018, Huawei filed three lawsuits before the Nanjing Intermediate People's Court, requesting for non-infringement declaration toward three Chinese standard-essential patents (SEPs) owned by Conversant and a determination of royalty rates of all Chinese SEPs owned by Conversant based on the fair, reasonable and non-discriminatory (FRAND) principles. During the trial of the first instance, in April 2018, to counteract the case brought by Huawei, Conversant filed a SEP infringement lawsuit against Huawei before the Düsseldorf District Court in Germany, requesting an order that Huawei stop the infringement and pay damages.
On 16 September 2019, the Nanjing court issued the first-instance judgment, setting the royalty rates for the SEPs in dispute. Conversant appealed the first-instance judgment to the Intellectual Property Tribunal of the Supreme People's Court. During the trial of the Supreme People's Court, on 27 August 2020, the German court entered a first-instance judgment, finding that Huawei and its German affiliate infringed the European patents of Conversant, ordering that Huawei and its German affiliate be prohibited from providing, selling, using, importing or holding for this purpose, related mobile devices, and destroy and recall infringing products.
On the same day, Huawei filed a request for conduct injunction with the Supreme People's Court, requesting to prohibit Conversant from applying for enforcement of the German court judgment before the Supreme People's Court entered its final judgment. The Intellectual Property Tribunal of the Supreme People's Court granted the conduct injunction within 48 hours, on pain of a daily fine of 1 million yuan, which would continue to accumulate for each day from the date of violation.3
After the above ruling on this case, the parties on both sides conducted positive commercial negotiations and reached a global package of settlement, ending all parallel legal proceedings in multiple countries around the world. In this case, the Intellectual Property Tribunal of the Supreme People's Court made the first anti-suit injunction ruling in the field of IP, and pioneered the application of the daily fine measure to ensure the enforcement of the conduct injunction. Considering its significance in establishing and improving China's anti-suit injunction system, this case was selected as one of the Ten Model Cases Involving IPRs in Technology in 2020 by the Intellectual Property Tribunal of the Supreme People's Court.
Xiaomi v. IDC
After nearly five years of negotiation, on 9 June 2020, Xiaomi filed a lawsuit against IDC at the Wuhan Intermediate People's Court and requested for the conclusion of a global royalty rate for IDC's relevant SEPs. The concerned technologies involved SEPs related to 3G and 4G. On 29 July 2020, IDC requested for both preliminary and permanent injunctions with the Delhi High Court in India, alleging the infringement of the involved patents.
On 23 September 2020, the Wuhan Intermediate People's Court granted an anti-suit injunction requested by Xiaomi after Xiaomi paid 10 million yuan as a guarantee, ordering that during the case proceeding: (1) IDC shall withdraw or suspend any preliminary or permanent injunctions filed before the Delhi High Court; (2) IDC shall not file any application for preliminary or permanent injunctions before court in any other jurisdictions; (3) IDC shall not file any lawsuit against Xiaomi in any jurisdiction for concluding the relevant global royalty rates; and (4) if IDC fails to comply with this court order, it will be fined 1 million yuan per day.4 On 4 December 2020, Wuhan Intermediate People's Court rejected IDC's review application.
Following the Huawei v. Conversant case, this is the second time a Chinese court issued an anti-suit injunction for a SEP dispute involving parallel litigation in another jurisdiction.
In March 2020, Oppo filed a lawsuit against Sharp at the Shenzhen Intermediate People's Court for: (1) Sharp's breach of FRAND principles during the licensing negotiation, including coercing Oppo into negotiation using infringement injunctions, overpricing and unreasonably delaying the negotiation; (2) determination of global royalty rates of Sharp's 3G, 4G and Wi-Fi SEP portfolios; and (3) compensation of 3 million yuan for Sharp's breach of its FRAND obligations.
In October 2020, the Shenzhen Intermediate Court dismissed Sharp's objection to jurisdiction and held that a Chinese court is competent to hear issues relating to the setting of global FRAND rates for SEP patents.5The Court was of the view that it was necessary to consider a wide range of factors when determining whether a court had appropriate jurisdiction over a case. The factors that the court considered included places where a patent was involved in licensing; places where a patent was implemented; and places where a licensing agreement was signed and fulfilled. In addition, the Court held that the two parties' willingness to negotiate, the FRAND principles and the principle of the most significant relationship should also be considered. In this case, Oppo is a Chinese company and its production and research and development activities take place in China. Sharp is a patentee of the Chinese patents and has property interests in China. Therefore, the Court held that the case is properly connected with China and thus the Shenzhen Intermediate People's Court has jurisdiction over this case. This is the first case worldwide that involves determination of global royalty rates for Wi-Fi SEPs.
At the end of 2014, Ningbo Ketian Magnet filed an antitrust complaint with the Ningbo Intermediate People's Court against Hitachi Metals for alleged abusive conduct. Ningbo Ketian Magnet claimed that Hitachi Metal is the recognised worldwide leader in the sintered neodymium iron boron (NdFeB) field as it holds a series of essential patents in relation to the sintered NdFeB, but Hitachi Metal abused its dominant market position by tying non-essential patents with essential patents and refusing to license its patents to the plaintiff. The plaintiff requested that Hitachi Metal grant the essential patent licence to the plaintiff in accordance with the FRAND principle and compensate the plaintiff for the damage of 7 million yuan.
In April 2021, the Ningbo Intermediate People's Court issued the first-instance judgment.6 The Court defined the relevant technology market as 'global patent licensing market for the essential patents of sintered NdFeB owned by Hitachi Metals', and defined the relevant commodity market as 'global sintered NdFeB product market'. The Court determined that Hitachi Metals has a dominant position in the relevant technology market considering the following factors: (1) Hitachi Metals has the ability to control price and other trading conditions in the relevant upstream market; (2) Hitachi Metals has the ability to exclude others from entering the relevant upstream market; (3) Hitachi Metals has obvious control over unauthorised producers; and (4) Hitachi Metals has a strong influence on the downstream market through the agreement relationship formed by the patent licence.
Regarding the determination of refusal to license, the court held that Hitachi Metals' patent portfolio of NdFeB magnets should be considered as essential facilities for the industry based on the following reasons: (1) the facilities are essential for other undertakings to participate in the competition; (2) the defendant, as the holder of IPRs, controls the facilities in dispute; (3) other competitors cannot duplicate the same facilities within a reasonable scope; (4) the defendants refuse to let a competitor use the facilities when the plaintiff has expressly requested a licence and is willing to pay reasonable royalties; and (5) it is possible for the defendant to grant the patent licence to the plaintiff, and there is no justifiable reason for the defendant's refusal to license. Therefore, the Court held that Hitachi Metals' relevant conduct constitutes refusal to deal under the AML.
This case is China's first case involving non-SEP holders abusing a dominant market position. Although the current judgment may not be the final one for this case, the outcome of this case will definitely have an impact on the domestic and global NdFeB market.
Licensing and antitrust
i Anticompetitive restraints
The AML provides in general terms that restricting trading counterparties to trading only with the undertaking with a dominant market position, or its designated undertaking, without justifiable reasons constitutes an abuse of dominant market position. The SAMR IP Provisions 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 18 of the newly published IP Guidelines, forcing trading counterparties to trade with third parties or prohibiting them from trading therewith, or restricting the conditions for trading counterparties to trade with third parties may be considered infringement of the AML if it has the effect of eliminating or restricting competition on the relevant market.
The SAMR IP Provisions 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 17 of the IP Guidelines is consistent with the SAMR IP Provisions, and it explicitly states that package licensing may also be a form of tying. In addition, the IP Guidelines specify the factors to be considered when analysing whether tying involving IPRs constitutes abuse of market dominance, which include: (1) whether it is contrary to the willingness of the trading counterparty; (2) whether it conforms to trading practices or consumption habits; (3) whether it ignores the differences in the nature of or the interrelationship between relevant IPRs or commodities; (4) whether it is reasonable and necessary, for example, as measures inevitable to achieve technical compatibility, product safety and product performance; (5) whether it eliminates or restricts the trading opportunities of other undertakings; and (6) whether it restricts consumers' right of choice.
Restricting use of competing products or IPRs after licence expiry
According to the SAMR IP Provisions, when exercising IPRs, undertakings with a dominant market position are prohibited from restraining the transaction counterparts from making use of the competitive commodities or technologies in the case of non-infringement of IPRs after the expiration of the licence agreement.8 Article 18 of the IP Guidelines also considers it a behaviour that might eliminate or restrict competition if an undertakings with a dominant market position claims rights to IPRs that have expired or have been declared null and void.9
ii Refusals to license
To comply with the SAMR IP Provisions, 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 SAMR IP Provisions 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 16 that refusal to license IPRs is an expressive form of an undertaking's exercise of IPRs, and under general circumstances, no undertaking assumes the obligation to trade with competitors or trading counterparties. However, if an undertaking with dominant market position unjustifiably refuses to license IPRs, it may constitute an abuse of dominant market position to eliminate or restrict competition. The IP Guidelines consider the following six factors in analysing whether a refusal to license by a licensor is an unjustifiable abuse of a dominant market position:
- the commitments made by the undertaking as to the licensing of IPRs;
- whether license of the IPRs in question is necessary for access to the relevant market;
- the impact of the refusal to license on competition and innovation in the market, and the degree thereof;
- whether the party subject to refusal lacks the willingness and capacity to pay reasonable royalties;
- whether the undertaking ever made a reasonable offer to the party subject to refusal; and
- whether the refusal to license relevant IPRs would harm consumers' interests or social public interests.11
In the Hytera v. Motorola case in 2020, the Beijing Intellectual Property Court held that the existing evidence on record could not prove that Motorola's application programming interface (API) interconnection method had been used for direct interconnection between different manufacturers' equipment in metro lines, and the interoperable self-installation method, terminal interconnection method and gateway interconnection method were all technically feasible and could serve as alternatives to the API solution. Therefore, the Court declined to find that Motorola engaged in an abuse of dominance by refusing to license its IPR.
iii Unfair and discriminatory licensing
Unfairly high pricing
Generally, according to Article 14 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position, to determine whether a price shall be deemed an 'unfairly high price', the following factors shall be considered:
- 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;
- whether the selling or purchasing price is significantly higher or lower than the price of the goods sold or bought by a same undertaking in other regions with the same or similar market conditions;
- whether the increase in sale price of a commodity exceeds the normal range when the cost is basically stable;
- whether the increase in sale price of a commodity remarkably exceeds the increase of its costs; and
- any other relevant factor to be considered.
To give more clarification on this problem, Article 15 of the IP Guidelines outlines five factors to be considered when determining whether licensing royalties constitute abuse of a dominant market position:
- the licence fee calculation method and contribution of IPRs to the value of the relevant commodities;
- the commitment made by the undertaking to licensing IPRs;
- the IPR licensing history or comparable licence fee standards;
- the licensing conditions resulting in unfairly high prices, including licence fees charged that go beyond the geographic scope of IPRs or the scope of commodity covered by IPRs; and
- whether royalties are charged for expired or invalid IPRs at the time of package licensing.12
Differentiating treatment of trading counterparties with similar conditions
Article 19 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 this behaviour, including the transaction counterparties' conditions, the terms of the licensing agreement and the discriminatory treatment.13
Compared with the draft IP Guidelines, which only address exclusive grant-back, Article 9 of the IP Guidelines also pay attention to sole grant-back, that is, only the licensor or any third party designated thereby and the licensee have the right to implement the improvements or new achievements. Grant-back can usually promote new achievements and investments into such achievements, but sole grant-back and exclusive grant-back may reduce licensees' innovation motivation and have an effect of eliminating or restricting market competition.
In addition, the IP Guidelines point out that generally, exclusive grant-back is more likely to eliminate and restrict competition than sole grant-back. In analysing whether the sole grant-back and exclusive grant-back have an effect of eliminating or restricting market competition, the IP Guidelines provide the following factors: (1) whether the licensor provides substantial consideration for this grant-back; (2) whether the licensor and the licensee mutually require exclusive or sole grant-back in cross licensing; (3) whether the grant-back leads to the concentration of the improvements or new achievements in a single undertaking to enable it to obtain or strengthen the control over the market; and (4) whether the grant-back impacts the motivation of the licensee to make improvement.14
Prohibiting challenges on the validity of IPRs
Prohibiting challenges on the validity of IPRs is also regulated in the IP Guidelines. Article 10 of the IP Guidelines provides that a 'no-challenge clause' refers to a clause in an IPR licensing-related agreement, by which the licensor requires the licensee not to raise challenges to the validity of its 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:
- whether the licensor requires all licensees not to challenge the validity of its IPRs;
- whether royalties are charged for the licensing of the IPRs associated with the no-challenge clause;
- whether the IPRs associated with the no-challenge clause may constitute an entry barrier for the downstream market;
- whether the IPRs associated with the no-challenge clause may hinder the implementation of other competitive IPRs;
- whether the licensing of IPRs affected by the no-challenge clause is exclusive licensing; and
- 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 declared to be invalid
According to the IP Guidelines, Article 18 prohibits undertakings with a dominant market position from attaching transactions conditions that restrict transaction counterparties from claiming over expired or invalid IPRs. The enforcement practice is also consistent with this standpoint.
The IP Guidelines define cross-licensing as the mutual licensing between undertakings of their own IPRs. The IP Guidelines point out that cross-licensing can normally reduce the costs of IPR licensing and promote the implementation of IPRs, but it may also have the effect of precluding or restricting market competition. 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: whether the cross-licensing is sole licensing; whether the cross-licensing constitutes a barrier to entry into the relevant market for third parties; whether the cross-licensing eliminates or restricts competition in the relevant downstream market; and and whether the cost of related products has increased.
iv Patent pooling
The SAMR IP Provisions 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'.16
The IP Guidelines hold the view that patent pooling can generally reduce transaction costs, improve licensing efficiency and promote competition. However, patent pooling 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 patent pooling;
- whether undertakings conduct cross-licensing, exclusive grant-back or sole grant-back, execute no-challenge clauses or otherwise impose restrictions, among other things, through patent pooling; and
- whether undertakings license patents, conduct tying sales, impose unreasonable transaction conditions or apply differential treatment, among other things, through patent pooling. 17
The SAMR IP Provisions confirm that determination of a dominant market position shall follow the rules in the AML, and they specifically clarify that undertakings would not be presumed to have a dominant market position in the relevant market merely because of the ownership of IPRs.
In combination with the characteristics of IPRs, the IP Guidelines specify that the following factors may be considered: the possibility of transaction counterparties switching to alternative IPRs or goods and the switching costs; the dependency of the downstream market on the products provided by applying IPRs; and the capability of the transaction counterparty to restrict and balance the undertaking.
To identify whether an undertaking that owns a SEP has a dominant market position, the following factors may be further considered:
- the market value and the scope and degree of application of the standard;
- whether there exists a substitutable standard, or technology, including the possibility to use a substitutable standard or technology and the switching cost;
- the dependency of the industry on the relevant standard;
- the evolution and compatibility of the relevant standard; and
- the possibility of substitution of the related technology that has been incorporated into the standard.18
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.
Under the IP Guidelines, it is likely to find an anticompetitive effect if a SEP holder with a dominant market position requests that a court or relevant department makes or issues a judgment, ruling or decision on forbidding the use of the relevant IPRs to force the licensee to accept the unfairly high licence fees or other unreasonable licensing conditions. The IPR Guidelines indicate that the following factors may be considered when analysing the competition effect of such injunction applications:
- the behavioural performance of both negotiating parties in the process of negotiation and the true intention reflected by their behaviour;
- relevant commitments related to relevant SEPs;
- the licensing conditions put forward by both negotiating parties in the process of negotiation;
- the impact of requesting that the court or relevant department makes or issues a judgment, ruling or decision on forbidding the use of relevant IPRs on licensing negotiation; and;
- the impact of requesting that the court or relevant department makes or issues a judgment, ruling or decision on forbidding the use of relevant IPRs on the competition in the downstream market and consumers' interests.
iii Licensing under FRAND terms
The Guidelines of the High People's Court of Beijing Municipality for Judging Patent Infringements (the Patent Infringement Guidelines), released on 20 April 2017, 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.19 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.20
iv Anticompetitive or exclusionary royalties
In the Qualcomm case,21 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
i Transfer of IP rights constituting a merger
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 20 of the IP Guidelines provides that where an undertaking obtains control over other undertaking or is capable of exerting decisive influence on this through IPR-involved transactions, it may constitute concentration of undertakings. The IPR Guidelines set forth three factors to consider when determining whether an IPR transfer or licensing constitutes concentration of undertakings: whether the IPRs constitute an independent business; whether the IPRs produce turnover that can be calculated independently in the previous fiscal year; and the method and period of IPR licensing.
ii Remedies involving divestitures of intellectual property
According to the Provisions on Merger Review, 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 such as divestiture of IPRs; (2) behavioural conditions such as opening up its infrastructure such as network or platform, licensing key technologies (including patent, know-how or other IP), terminating an exclusive agreement; and (3) comprehensive conditions that combine structural conditions and behavioural conditions.
Articles 22 to 25 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, or propose behavioural conditions such as IPR licensing, fulfilling the FRAND obligations or charging reasonable licence fees, to address concerns of the enforcement agency. In addition, undertakings may combine structural conditions and behavioural conditions, and put forward suggestions on comprehensive restrictive conditions involving IPRs.
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.22
Outlook and conclusions
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 Jinxiang Huang for their valuable assistance in preparing this chapter.
2 (2018) Jing 73 Min Chu, Nos. 774, 775, 776, 777, 779, 780, 781, Beijing Intellectual Property Court, judgment of June 2020; (2019) Jing 73 Min Chu No. 188, Beijing Intellectual Property Court, judgment of June 2020.
3 (2019) Zui Gao Fa Zhi Min Zhong Nos. 732, 733, 734, Intellectual Property Tribunal of the Supreme People's Court, judgment of August 2020.
4 (2020) E 01 Zhi Min Chu No. 169, Wuhan Intermediate People's Court, judgment of September 2020.
5 (2020) Yue 03 Min Chu No. 689, Shenzhen Intermediate People's Court, judgment of October 2020.
6 (2014) Zhe Yong Zhi Chu Zi Di No. 579, Ningbo Intermediate People's Court, judgment of April 2021.
7 Article 9 of the SAMR IP Provisions.
8 Article 10.3 of the SAMR IP Provisions.
9 Article 18.4 of the IP Guidelines.
10 Article 7 of the SAMR IP Provisions.
11 Article 16 of the IP Guidelines.
12 Article 15 of the IP Guidelines.
13 Article 19 of the IP Guidelines.
14 Article 9 of the IP Guidelines.
15 Article 10 of the IP Guidelines.
16 Article 12 of the SAMR IP Provisions.
17 Article 26 of the IP Guidelines.
18 Article 27 of the IP Guidelines.
19 Article 152 of the Patent Infringement Guidelines.
20 Article 153 of the Patent Infringement Guidelines.
21 NDRC Administrative Penalty Decision No. 1, 2015.
22 Articles 13.2 and 13.4 of the AML.