Antitrust Alert: China Publishes Guidelines on Application of the Anti-Monopoly Law to Intellectual Property Rights
After years of discussions, China's State Administration for Industry and Commerce finally has released its guidelines on the application of the PRC Anti-Monopoly Law ("AML") to intellectual property rights ("Guidelines"). The Guidelines will come into force on August 1, 2015.
The Guidelines are published amid widespread concerns that the AML is increasingly used in ways that favor Chinese licensees of intellectual property rights in their disputes with foreign licensors. In the Huawei/Interdigital case, the courts came to the conclusion that Interdigital's licensing practices amounted to an abuse of a dominant position, notably by tying standard-essential patents and non-essential patents but also because the royalty rate was too high. In the Qualcomm case, the National Development and Reform Commission ("NDRC") concluded that Qualcomm's licensing conditions of its patent portfolio constituted an abuse of a dominant position and imposed a fine of close to USD 1 billion.
The new Guidelines are unlikely to assuage these concerns, even though they formally recognize that intellectual property and competition law share the same goal of encouraging competition and innovation. The Guidelines also recognize that firms should not be presumed to have a dominant position only because they own intellectual property rights. Perhaps most importantly, the Guidelines forego bright-line rules in favor a confirming a "rule of reason" approach to be taken towards issues involving intellectual property rights under the AML.
In addition, revisions to the PRC Patent Law currently under discussion also include provisions relating to abuses of intellectual property rights. Similarly, the PRC Supreme Court is currently considering the adoption of a Judicial Interpretation dealing with preliminary injunctions in disputes involving intellectual property and competition law issues.
The Guidelines have been issued as "Rules" of the SAIC. This means that they technically will only be binding on SAIC but not on courts or on NDRC, one of the other agencies enforcing the AML.
Safe harbor for technology agreements
The Guidelines provide that agreements between competitors shall not constitute a violation of the AML, where those competitors' combined market shares is lower than 20 percent or there are at least four other independently controlled substitutable technologies available at reasonable cost. The same applies to agreements between firms in a vertical relationship, where neither of the parties to the agreement has more than 30 percent market share or where there are at least two other substitutable technologies.
However, the safe harbor has an important caveat. It will not apply when there is evidence showing that the agreement actually has the effect of eliminating or restricting competition. As a result, the safe harbor may in fact be of limited value, as firms will still need to determine whether their agreement potentially has anticompetitive effects.
Essential facilities
The AML prohibits firms in a dominant position to refuse to deal with rivals that need those facilities to compete. The provision in the Guidelines applying that principle in the intellectual property context was the subject of a heated debate during the discussions surrounding the adoption of the Guidelines.
The Guidelines provide that a dominant firm may not refuse without due justification to license its intellectual property rights under reasonable terms if these rights constitute an essential facility and the refusal has anticompetitive effects. They further state that the following factors also must be considered when evaluating such a refusal to license:
- the intellectual property rights cannot be reasonably substituted and are necessary for other undertakings to compete in the relevant market,
- refusal to license will cause negative impact on competition or innovation, harming consumers' or the public interests, and
- licensing the rights will not cause unreasonable harm to the licensor.
These conditions seem to impose a very low standard for imposing liability on an unwilling licensor, certainly lower than in the European Union where refusals to license intellectual property rights require the existence of exceptional circumstances that have only be found to exist in a handful of cases or in the United States where the threshold for relief for a refusal-to-deal is very high.
We will closely watch how SAIC will apply this provision in practice and in particular how high they will set the bar for forcing dominant firm to license their intellectual property.
Specific prohibited contractual clauses
The Guidelines list a series of contractual clauses that a dominant firm cannot impose on its licensee, absent a valid justification or a lack of anticompetitive effects, including exclusive grant-back of improvements to the technology by the licensee, preventing the licensee from challenging the validity of the intellectual property rights, preventing the licensee from using competing products after the expiry of the license agreement or from developing technologies in a way that does not violate the intellectual property rights, the licensor's continuing to exercise its rights after their expiration, exclusive dealing, and other unreasonably restrictive conditions.
Patent pools
The Guidelines include a list of conduct that is prohibited for patent pools with a dominant position, absent a valid justification, in case they limit or restrict competition. This includes prohibiting the pool participants to license outside of the pooling arrangement, preventing the participants to the patent pool to develop technologies competing with the pool, forcing the licensees to exclusively grant back technology to the pool, prohibiting the licensee from challenging the validity of the licensed patents.
Standard setting
The licensing of standard-essential patents has raised significant issues in China over the last year, notably with the Huawei/Interdigital and Qualcomm cases, as well as in remedies imposed in several recent merger reviews including the Microsoft/Nokia and Google/Motorola transactions.
The Guidelines contain a specific provision dealing with issues in the standard setting context. They prohibit a dominant firm from intentionally withholding information about intellectual property rights from the standard setting organization, and from asserting patent rights in violation of a commitment not to assert these rights. In addition, the holder of a standard essential patent cannot refuse to license its patents, engage in tying or impose other (undefined) unreasonable conditions, in violation of FRAND principles.
Conclusion
The Guidelines, read in context with recent cases as well as with revisions to the Patent law, seem to reinforce the view that in China the enforcement of intellectual property rights can be defeated by the application of competition law. This is particularly worrisome but in large part will depend on how SAIC will in practice apply its own Guidelines.
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Peter J. Wang Yizhe Zhang Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter. Please visit our Publication Request form to add your name to our distribution list.
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