15 May 2017 in Newsletter
China Is Formulating Guidelines for Anti-Monopoly Enforcement against Abuse of IPRs
Recently, the Anti-Monopoly Commission of the State Council of the People’s Republic of China released to the public “Anti-Monopoly Enforcement Guidelines on Abuse of Intellectual Property Rights” (hereafter, “Guidelines”), welcoming comments from March 23, 2017, to April 21, 2017. These Guidelines, drafted by the Anti-Monopoly Commission, are based on a prior proposal jointly contributed by the National Development and Reform Commission, the Ministry of Commerce, the State Administration for Industry and Commerce, and the State Intellectual Property Office. Because these Guidelines could affect foreign entities, especially large technology-intensive companies doing business in China, various foreign organizations, such as the American Intellectual Property Law Association (AIPLA), have actively submitted comments on the Guidelines to the Anti-Monopoly Commission.
Basically, the Guidelines follows the Anti-Monopoly Law’s (AML) structure with respect to the three major monopolistic conducts defined in Article 3 of the AML, i.e., monopolistic agreements among undertakings, abuse of dominant market positions by undertakings, and concentration of undertakings that have or may have the effect of excluding and restricting competition. Meanwhile, the Guidelines are intended to provide guidance for applying these concepts to situations in which abuse of intellectual property rights (IPRs) is involved, just as the Guidelines state in one of the analytical principles (Article 1): “[t]o analyze whether the undertaking abuses IPRs to exclude and restrict competition…the special characteristics of IPRs should be considered.” Moreover, two additional significant principles are set forth. One is the exclusion of a presumption that the undertaking has a dominant market position in the relevant market because it has IPRs, which is generally commendable; the other is the consideration of the positive impact of the relevant conduct on efficiency and innovation on a case-by-case basis. The latter, however, seems plausible only on the surface when one turns to Article 5, which sets a relatively high standard, comprised of five conditions to be met concurrently, for finding such a positive impact.
Following the map of the three major monopolistic conducts mentioned above, this article notes several outstanding provisions as follows.
Chapter 2: Monopolistic Agreements Related to IPRs among Undertakings
Articles 6–9 in this chapter address common practices in IP-related agreements, such as joint research and development, cross-licensing, exclusive grant-backs, and no-challenge clauses. Generally, these Articles look at restrictive conditions and terms in IP-related agreements, e.g., whether a cross-license is an exclusive license. The black-or-white-type wording, i.e., whether certain restrictions exist, may have the effect of treating any restrictions as negative while neglecting any pro-competitive benefits inherent in those restrictive conditions.
Important as development of the standard in the industrial world, it is also considered in a similarly negative fashion in the Guidelines in Article 10. Four factors are to be considered when analyzing possible abuse by standard developers, which look at whether other specific undertakings, relevant solutions thereof, and other competitive standards are excluded and whether there is a necessary, reasonable mechanism for the IPRs involved in exercising the standard. These factors may be problematic because they either fail to consider settings in which pro-competitive collaborative standards development can occur or discount the fact that existing standard-development organizations do not all have the same IP policy approaches.
Chapter 3: Abuse of Dominant Market Position Related to IPRs
The Guidelines commendably affirm “that undertakings relating to IPRs do not necessarily mean that they have a dominant market position,” bringing the Guidelines more closely into alignment with international norms of antitrust enforcement.
Article 14 highlights “unfairly high price” in IPR licensing practices but does not offer adequate guidance as to what constitutes an unfairly high price. This could hurt innovators’ confidence in rightfully pursuing reasonable returns on their investments when creating the IPRs. In addition, one consideration in this Article is whether a package license charges fees for expired or invalid IPRs, which may seem very impractical in the case of portfolio licensing if each individual patent of that portfolio is to be closely analyzed, as if no price could be agreed upon when the portfolio was evaluated as a whole.
Chapter 4: Concentration of Undertakings Related to IPRs
The Guidelines recognize the particularity of concentration of undertakings when IPRs are involved and emphasize the consideration of additional restrictive conditions, including structural conditions, behavioral conditions, and comprehensive conditions. In particular, Article 23 states that behavioral conditions may involve, among others, undertakings ensuring compliance with fair, reasonable, non-discriminatory obligations through specific arrangements. As AIPLA expressed in its comments on the Guidelines, it is concerned “about conditioning approval of a concentration on the parties’ agreement to agree to license their non-standard essential patents on FRAND terms and conditions, particularly if the transfer or assignment of those patents as part of the transaction does not raise any additional competitive concerns over the situation prior to the transaction. There should not be a requirement to comply with a FRAND or other commitment that the patent owner has not voluntarily made.”
In summary, the Guidelines have made a step toward a rule of reason standard compared with the prior proposal on the one hand; on the other hand, uncertainty remains in terms of how these Guidelines will play out in practice since in large proportions, they reflect artificial restrictions imposed on entities susceptible to anti-monopoly investigations.
Interestingly, the author notes that certain provisions of the Guidelines bear a significant resemblance to the reasons that the National Development and Reform Commission gave when providing a basis for the finding that Qualcomm violated the AML of China in 2015, for which Qualcomm was fined 975 million dollars. The reasons given were, for example, charging unfairly high patent licensing fees (Article 14), tying non-standard essential patent licensing without justification (Article 16, stating that “ackaging licensing of IPRs may also be a form of tying”), and additional unreasonable transaction conditions (Article 17). If the Guidelines are a “retrospective” justification and “prospective” consolidation of the rationale of the Qualcomm investigation, that investigation should at least be a lens through which we can expect to determine what the finalized Guidelines will look like and how they will be implemented.