China Releases Notice Regulating Intellectual Property Rights from a Competition Law Perspective


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The State Administration for Industry and Commerce (“SAIC”) issued the finalized Provisions on Prohibiting the Abuse of Intellectual Property Rights to Preclude or Restrict Competition (“the Provisions”) on April 7, 2015, which has been almost a year since the draft thereof was released for public opinion. The Provisions will be effective as of August 1, 2015.

The Provisions have deleted two articles since its draft, namely the “abuse of intellectual property rights by collective management organization of copyright” and the “abusively issuance of infringement warning letter”. Therefore, the Provisions now consists of 19 articles, and contains the following content:

(1) It specifies the objective and basis of the Provisions, which are to
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protect market fair competition, encourage innovation, and prevent operators from abusing the intellectual property rights to preclude or restrict competition. Meanwhile, it also makes necessary interpretations of certain concepts, such as the meaning of ‘abuse of intellectual property rights to preclude or restrict competition’, ‘relevant market’, and so on. It is also worthy to note that the Provisions further specifies it shares the same objectives with the anti-monopoly and the protection of intellectual property rights, and draws the line between exercising and abusing intellectual property rights. (Article 1 - 3)

(2) It prohibits operators from reaching monopolistic agreement during their exercise of the intellectual property rights. The Provisions also create safe harbors, which means the following situations are not deemed a “monopoly agreement” forbidden by the Anti-monopoly Law:
a. the aggregate market share of operators with competing relations in the relevant market affected by the operators' conduct does not exceed 20%, or, at least four substitutable technologies independently controlled by others may be obtained at reasonable costs in the relevant market;
b. neither the operator nor the transaction counterparty has a market share exceeding 30% in the relevant market, or, at least two substitutable technologies independently controlled by others can be obtained at reasonable costs in the relevant market. (Article 4 - 5)

(3) It prohibits operators exercising intellectual property rights from abusing their dominant position in the market to eliminate and restrict competition, and specifies how to determine and presume “the dominant market position” by stating a mere ownership of the intellectual property rights shall not be the only factor in determining if the said owner has the dominant market place. It also sets forth five common abusive conduct which are prohibited as well as determining factors thereof. This includes the refusal to license intellectual property rights, imposing transaction restrictions, tie-in sales, and/or attaching unreasonable restrictions and differential treatment. (Article 6 - 11)

(4) It provides for specific situations that may constitute a monopoly with respect to patent pool and the standard exercise of intellectual property rights. For example, restricting a member by not allowing it to license as an independent licensor outside the patent pool, among other situations, may constitute a “use of the patent pool to abuse the dominant market position to preclude or restrict competition”. As for stipulating and implementing the standard for the exercise of intellectual property rights, the Provisions gives circumstances that amount to “precluding or restricting competition”. (Article 12 - 13)

(5) It clarifies the analysis principle and framework of anti-monopoly enforcement in the field of intellectual property rights by the AIC organs. The Provisions sets forth five steps to be adopted when analyzing for abuse of intellectual property rights, such as determining the nature and form used when exercising intellectual property rights, the nature of the relationship between the operators, the relevant market involving the exercise of intellectual property rights, the operator’s market position, and the effect of the exercise of intellectual property rights on the market. It also provides factors to be taken into consideration when analyzing the effect on competition when exercising intellectual property rights, e.g. the market position of operator and the trading counterparty, the market concentration of the relevant market, and so on. (Article 14 - 16)

(6) It stipulates that the punishment for the abuse of intellectual property rights by entering into a monopolistic agreement to preclude or restrict competition is in accordance with the Anti-monopoly Law; which is the imposition of a fine amounting to more than 1% but less than 10% of last year’s sales, accompanied by an order to cease violation and for AIC to seize illegal gains. Even if such a monopolistic agreement has not been implemented, a fine amounting to 500,000 Yuan at most may be imposed. (Article 17)

Conclusion

In the past few years, China has reinforced its anti-monopoly enforcement not only in the field of price monopoly, but also in the field of administrative monopoly. The issuance of the Provisions is a signal of the importance of regulating over the abuse of intellectual property rights in the anti-monopoly enforcement.

Prior to the Provisions, Article 55 of the Anti-monopoly Law stipulated that “undertaking an exercise of intellectual property rights in accordance with laws administrative regulations related to the intellectual property rights shall not apply to this law; but undertakings amounting to an abuse of intellectual property rights to eliminate or restrict competition shall apply to this law”, however, the said Article is a principled provision and lacks operability. According to a scholar in the anti-monopoly field, the issuance of the Provision not only enhances the operability of the relevant laws, but also provides better protection for properly exercising intellectual property and a better environment for competition and innovation.

Appendix - Translation of the Provisions (MMLC Group)

Order of the State Administration for Industry and Commerce
No. 74
The Provisions on Prohibiting the Abuse of Intellectual Property Rights to Preclude or Restrict Competition, which have been deliberated and adopted by the executive meeting of the SAIC, is hereby promulgated and shall come into force as of August 1, 2015.

Chief Zhang Mao

April 7, 2015/4/14


The Provisions on Prohibiting the Abuse of Intellectual Property Rights to Preclude or Restrict Competition

(Promulgated by the No. 74 Order of SAIC on April 7, 2015)


Article 1 These Provisions are formulated in accordance with the Anti-monopoly Law of the People's Republic of China (“Anti-monopoly Law”) for the purpose of protecting market fair competition and encouraging innovation, and preventing operators from abuse of intellectual property rights to preclude or restrict competition.

Article 2 The objectives of the anti-monopoly and the protection of intellectual property rights are to promote competition and innovation, improve economical operation efficiency, and protect the interests of consumers and public interest.

The Anti-monopoly Law shall not apply to the exercise of intellectual property rights by operators in compliance with the provisions of laws and administrative regulations related to intellectual property rights; however, the Anti-monopoly Law shall apply to the abuse of intellectual property rights to preclude or restrict competition by operators.

Article 3 The “abuse of intellectual property rights to preclude or restrict competition” herein means an operator's exercise of the intellectual property rights to implement a monopolistic agreement, abuse of its dominant market position, and/or committing any other monopolistic conduct (excluding price monopoly), which are in violation of the Anti-monopoly Law.

The “relevant market” herein includes the relevant product market and the relevant geographic market, as defined in accordance with the Anti-monopoly Law and the Guide of the Anti-monopoly Committee of the State Council to the Definition of the Relevant Market and in consideration of the impact of intellectual property rights, innovation, and other factors. In enforcing the law against a monopoly involving intellectual property licensing, among others, the relevant product market may be the technology market or the product market containing particular intellectual property rights. The relevant technology market is the market formed by the competing technologies involved and its substitute technologies exercising intellectual property rights.

Article 4 Operators exercising intellectual property rights shall not enter into a monopolistic agreement prohibited by Article 13 or 14 of the Anti-monopoly Law, unless they can prove the agreement complies with Article 15 of the Anti-monopoly Law.

Article 5 Where an operator exercises intellectual property rights under the following circumstances, it may be determined that the relevant agreement is not a monopolistic agreement prohibited by Article 13.1.6 or Article 14.3 of the Anti-monopoly Law, unless there is evidence to the contrary that the agreement has an effect of precluding or restricting competition:

(1) The aggregate market share of operators with competing relations in the relevant market affected by the operators' conduct does not exceed 20%, or, at least four substitutable technologies independently controlled by others may be obtained at reasonable costs in the relevant market;
(2) Neither the operator nor the transaction counterparty has a market share exceeding 30% in the relevant market, or, at least two substitutable technologies independently controlled by others can be obtained at reasonable costs in the relevant market.

Article 6 An operator with a dominant market position shall not abuse its dominant market position, nor preclude, or restrict competition when exercising its intellectual property rights.

The dominant market position shall be determined or presumed in accordance with Articles 18 and 19 of the Anti-monopoly Law. Ownership of intellectual property rights may be a factor for determining a dominant market position; however, it shall not be inferred that an operator has a dominant market position in the relevant market based on its ownership of the said intellectual property rights alone.

Article 7 An operator with a dominant market position shall not refuse, without justification or to preclude or restrict competition, the licensing of other operators to use their intellectual property rights and its reasonable conditions of use, in the case the intellectual property rights thereof has constituted necessity for manufacturing and operation activities.

When determining the said activity above, the following factors shall be taken into consideration:
(1) The said intellectual property rights cannot be reasonably substituted in the relevant market, and is necessary for other operators to compete in the relevant market;
(2) The refusal to license the said intellectual property rights may result in an adverse effect on competition or innovation in the relevant market, and may cause damage to consumer and public interests;
(3) The license of the said intellectual property rights will not cause unreasonable damage to the operator.

Article 8 An operator with a dominant market position shall not, without justification or to preclude or restrict competition, impose restrictions on the following when exercising intellectual property rights:

(1) Requiring the transaction counterparty to trade exclusively with it;
(2) Requiring the transaction counterparty to trade exclusively with an operator designated by it.

Article 9 An operator with a dominant market position shall not, without justification or to preclude or restrict competition, conduct a tie-in sale meeting in the following conditions when exercising intellectual property rights:

(1) Force bundle sales or combination sales of different commodities against transaction practice, consumption habit and others, or in ignorance of the commodity function;
(2) Allow the tie-in sale to extend the operator's dominant position in the tying product or tied product market, to the preclusion or restriction of competition of other operators in the tying product or tied product market.

Article 10 An operator with a dominant market position shall not, without justification or to preclude or restrict competition, attach the following unreasonable restrictions when exercising intellectual property rights:

(1) Require the transaction counterparty to grant the technology improved by the said counterparty exclusively to the operator;
(2) Prohibit the transaction counterparty from questioning the efficiency of the operator’s intellectual property rights;
(3) Restrict the transaction counterparty from making use of a competitive commodity or technology, which does not infringe the intellectual property rights, after expiration of the license agreement;
(4) Continue to exercise expired or invalid intellectual property rights;
(5) Prohibit the transaction counterparty from trading with a third party;
(6) Attach other unreasonable restrictions on the transaction counterparty.

Article 11 An operator with a dominant market position shall not, without justification or to preclude or restrict competition, treat transaction counterparties under the same trade conditions discriminatorily when exercising intellectual property rights.

Article 12 An operator shall not take advantage of a patent pool to preclude or restrict competition when exercising intellectual property rights.

Members of a patent pool shall not, by using the patent pool to exchange sensitive information related to competition, such as production, market division etc., enter into a monopolistic agreement prohibited by Articles 13, 14 of the Anti-monopoly Law.

A patent pool management organization with a dominant market position shall not, without justification or to preclude or restrict competition, use the patent pool to abuse the dominant market position in the following way:

(1) Restrict its members to license as an independent licensor outside the patent pool;
(2) Restrict its members or its licensee to develop, independently or with a third party, technology that competes with the patent pool;
(3) Force the licensee to grant the developed or improved technology exclusively to the patent pool management organization or its members;
(4) Prohibit the licensee from questioning the efficiency of the patent pool;
(5) Treat the patent pool members or licensees in the same relevant market discriminatorily with respect to the transaction conditions;
(6) Any other abuse determined by the SAIC.

The patent pool herein means an agreement arrangement to co-license patents owned by two or more patentees respectively to a third party through certain ways. The form thereof may be establishing a joint venture for the said purpose, or entrusting management on a patent pool member or an independent third party.

Article 13 An operator exercising intellectual property rights shall not stipulate and/or implement standards (including mandatory requirements of the national technology regulation, as below) that preclude or restrict competition.

An operator with a dominant market position shall not, without justification or to preclude nor restrict competition, do the following when stipulating and implementing standards:

(1) The operator intentionally does not disclose the right information to the standard stipulating organization, or claims patent right to executors of a standard involving the said patent right after the operator explicitly gave up its right;
(2) On its patent becoming a standard essential patent, the operator violates the fair, reasonable and non-discrimination principle, and precludes or restricts competition by refusing licensing of the patent, any tie-in sales, or attaching unreasonable trade conditions to the patent.

The standard essential patent herein shall mean a patent that is essential to implement a standard.

Article 14 Where an operator is suspected of abusing intellectual property rights to preclude or restrict competition, the AIC administrative organs shall investigate in accordance with the Anti-monopoly Law and the Provisions on the Procedures for the Administrative Departments for Industry and Commerce to Investigate and Handle Cases of Monopolization Agreements and Abuse of Dominant Market Position.

Article 15 When analyzing an operator suspected of abusing intellectual property rights to preclude or restrict competition, the following steps may be adopted:

(1) Determine the operator’s nature and form of using the intellectual property rights;
(2) Determine the nature of the relationship between the operators who exercise intellectual property rights;
(3) Define the relevant market that involves the exercise of the intellectual property rights;
(4) Recognize the operator’s market position who exercises the intellectual property rights;
(5) Analyze the effect of the operator’s exercise of the intellectual property rights on the competition in the relevant market.

In analysing and recognising the nature of the relationship between the operators, the characteristics of exercising intellectual property rights is to be taken into consideration. In an intellectual property rights licence agreement, the operators are in a trading relationship, whereas a licensor and a licensee both making use of the intellectual property rights to manufacture products are in a competing relationship. However, if the parties are not in a competing relationship at the time the license agreement was signed, but form a competing relationship after signing the agreement, such agreement shall not be deemed as an agreement between the competitors, unless the said original agreement is changed fundamentally.

Article 16 When analyzing the effect of an operator’s exercise of intellectual property rights on competition, the following factors shall be taken into consideration:

(1) The market position of the operator and the trading counterparty;
(2) The market concentration of the relevant market;
(3) The accessibility of entering the relevant market;
(4) The industry practice and the industry development phase;
(5) The time and scope of restrictions on the production, area, consumers and others;
(6) The effect on promoting innovation and technology;
(7) The operator’s innovative ability and speediness on technology upgrades;
(8) Other factors relating to analysing the effect of an operator’s exercise of intellectual property rights on competition .

Article 17 Where an operator abuses its intellectual property rights by entering into a monopolistic agreement to preclude or restrict competition, the AIC administrative organs shall order to cease such violation, seize illegal gains, and impose a fine amounting to more than 1% but less than 10% of last year’s sales; and where a monopolistic agreement has not been implemented, it may impose a fine amounting to 500,000 Yuan at the most.

Where an operator’s use of its intellectual property rights effectively constitutes an abuse on the market dominant position to preclude or restrict competition, the AIC administrative organs shall order to cease such violation, seize illegal gains, and impose a fine amounting to more than 1% but less than 10% of last year’s sales.

The AIC administrative organs shall take into consideration factors such as nature, situation, degree and duration etc., when determining the specific amount of the fine.

Article 18 The Provisions herein shall be interpreted by the State Administrative for Industry and Commerce.

Article 19 The Provisions herein shall become effective on August 1, 2015.

ABOUT THE AUTHOR: Fei Dang
Fei Dang is an Associate in the Beijing office of the MMLC Group.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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