The Conflict in Licensing between Intellectual Property Rights and the Antitrust Regime
How China is regulating competition law aspects of intellectual property licensing.
In 2008, the Anti-Monopoly Law of the People’s Republic of China (the “AML”) was published in recognition of China’s efforts in promoting a fair competition market and decreasing monopoly activities. However, the creation of the Anti-Monopoly Law created a conflict with fundamental intellectual property laws, including the Patent Law of the People’s Republic of China (the “Patent Law”).
While intellectual property laws seeks to encourage new innovations in the form of technologies, artistic expressions and inventions by bestowing exclusive rights to the intellectual property and preventing others without a license, the AML’s purpose stated in Article 1 includes restraining monopolistic conducts and protecting fair competition in the market. Despite this, the AML and intellectual property laws have mutual goals, including enhancing economic efficiency, safeguarding the interests of consumers and social public interest, and promoting the healthy development of the socialist market economy.
Application of the Anti-Monopoly Law with Intellectual Property Rights
The AML provides a general provision to address the application of antitrust laws to intellectual property rights in Article 55, which states that the AML does not govern the conduct of business operators to exercise their intellectual property rights under laws and relevant administration regulations on intellectual property rights; however, business operators’ conduct to eliminate or restrict market competition by abusing their intellectual property rights shall be governed by this Law.
Therefore, Article 55 fundamentally provides an exemption from the application of the AML for intellectual property rights holders, who therefore are not subject to scrutiny for merely exercising their intellectual property rights consistent with the relevant laws and administration regulations. However, this exemption is conditional upon the fact the intellectual property rights holders do not seek to eliminate or restrict market competition by the abuse of their intellectual property rights.
Unlike AML’s specific legal framework providing for and regulating the abuse of dominant positions under Article 17, the AML does not provide the same for intellectual property related behaviours. Therefore, Article 55 is merely a general provision and does not clearly interpret how provisions on abuse of dominance should be applied to intellectual property related behaviours.
Recently, however, the State Administration on Industry and Commerce enacted the Regulation on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights (the “Regulations”) on August 1, 2015, which clarifies how Article 17 of the AML may apply to issues surrounding the abuse of intellectual property rights, including the refusal to license, exclusive dealing, the imposition of unreasonable conditions, discriminatory treatment, and the practice of tying.
Refusal to License under China’s Anti-Monopoly Law
In particular, Article 7 of the Regulations provides that where its intellectual property rights constitute an essential facility for production and business operations, an undertaking in a dominant position shall not refuse to confer license to other undertakings to use such intellectual property rights under reasonable conditions without legitimate reasons. Additionally, Article 7 provides three factors to be taken into account when determining what constitutes an essential intellectual property right, including:
(a) the intellectual property right has no reasonable substitute and is essential for other undertakings to compete in the relevant market;
(b) refusal to license the intellectual property right will cause an adverse impact on competition or innovation in the relevant market, leading to the impairment of consumer or public interest; and
(c) licensing the intellectual property right will not cause unreasonable damage to the licensor.
There is controversy surrounding the factors in that they limit the scope of essentiality to an extent, therefore setting a low standard for imposing liability on an unwilling licensor, and potentially discourage motivation for research and innovation due to the violation of the intellectual property holder’s core rights of exclusivity. Furthermore, although the provision is similar to the European Union’s antitrust law, the Regulations have failed to include the additional qualifying factor, which states the licensee must use the licensed intellectual property right to bring a new product to the market, rather than copying the licensor’s existing product.
However, the Regulations fill the legislative gap by decreasing the legal uncertainty surrounding the tension between intellectual property rights protection and competition in that they provide guidelines and factors to take into account when evaluating dominant positions and potential abuse in relation to intellectual property related behaviours, therefore enhancing and complementing relevant currently existing laws.
Case Study: Huawei v IDC
The Huawei case involves the application of the FRAND principle (fair, reasonable, and non-discriminatory terms) for standard essential patents (SEPs) and the rules and regulations of the AML. The Huawei case is significant as it is a case in which a SEP holder assumed civil compensation liabilities under the AML for violating the FRAND principle.
Huawei, the plaintiff, is a major global supplier of telecommunication equipment, and IDC, the defendant, holds a large number of essential patents and patent applications under 2G, 3G and 4G standards in wireless communications, including those in the United States and in China.
In December 2011, Huawei filed a complaint against IDC before the Shenzhen Intermediate People’s Court accusing IDC of abusing its market dominant position by reporting that the amount of royalties IDC demanded from Huawei were significantly higher than those offered to other companies, such as Apple and Samsung, therefore imposing discriminatory rates; and giving Huawei global non-exclusive licenses for which royalties must be paid for all of IDC’s patents, rather than just the SEPs for 2G, 3G and 4G, therefore tying the licensing of SEPs with non-SEPs.
In determining the relevant market, the court took into account the definition included in the AML, which states that the relevant market means the range of commodities for which, and regions where, business operators compete with each other during a given period of time for the specific commodities or services, therefore covering a relevant commodity market and a relevant regional market. In SEP FRAND licensing, technologies protected by each SEP constitute an independent relevant market. Therefore, in this case, it was held that every essential patent licensing market under the China 3G wireless communication standard for IDC is unique and irreplaceable, therefore constituting many independent markets.
According to the AML, a dominant market position is a market position giving the business operator the power to control product pricing, quantity, and other transaction conditions, or to hinder or affect the entry of other business operators into the relevant market. Therefore, factors such as the business operator’s market share in the relevant market, and the competition conditions of the relevant market, are taken into account.
At first instance and on appeal in the Guangdong High People’s Court, it was found such criteria for a relevant market was satisfied due to the SEPs’ uniqueness and irreplaceability, and that IDC had abused its dominant market position by applying discriminatory rates. However, the practice of tying SEPs with non-SEPs was later held justified on efficiency grounds; and therefore not in violation of the AML.
The case is significant because it demonstrates a range of factors in the determination of FRAND terms and the application of the AML regarding SEPs, including principles such as:
(a) the holders of SEPs have a duty to license patents to implementers under the FRAND principle;
(b) where an implementer cannot reach an agreement with a SEP holder regarding licensing terms, it can seek assistance from the court to determine a reasonable rate under the law;
(c) the court may consider factors such as quantity, quality, the value of the SEPs, the relevant licensing situations in the industry, and the share of the Chinese SEPs among all the SEPs of the holder, when determining reasonable royalties; and
(d) if, during negotiations with the implementer of the patent, the patent holder abuses its market-dominant position, it will bear the legal consequences under the AML, including ceasing monopolistic conduct, and compensating the implementer’s loss due to its monopolistic conduct.
Furthermore, the court provided factors for determining the amount of damages, including:
(a) the reasonable expenses the plaintiff paid for deterring the defendant’s monopolistic conduct, including attorney fees in both China and the United States;
(b) the competing interest losses;
(c) the nature of the defendant’s infringement;
(d) the level of subjective mistakes; and
(e) the severity of damage caused to the plaintiff.
Case Study: Qualcomm Inc.
Qualcomm Inc., one of the world’s biggest chipmakers and is the owner of many significant SEPs, was recently fined U.S. $975 million and is a significant milestone in anti-competition law enforcement, not only because of the imposition of the highest fine to date in China, but also because of the imposition of uncommon intrusive behavioural remedies.
In its decision, the NDRC found that Qualcomm held a dominant market position for its SEPs by virtue of its large market share and ability to control pricing. Subsequently, the NDRC analysed a number of alleged anti-competitive practices and found that Qualcomm charged excessive royalties by:
(a) requiring licensees to cross-license their patents to Qualcomm and its customers free of charge;
(b) bundling SEPs and other patents;
(c) imposing patent rates based on the net wholesale price of the device;
(d) failing to disclose complete lists of patents to other market participants; and
(e) not modifying royalties upon expiry of a patent.
Furthermore, it was found Qualcomm violated Article 17 of the Anti-Monopoly Law by virtue of bundling SEPs and non-SEPs without any justification, and by imposing certain restrictions on its licensees, such as a covenant not to challenge the license agreement.
Consequently, the remedies imposed on Qualcomm include, but are not limited to:
(a) offering licenses to its current 3G and 4G essential Chinese patents separate from licenses to its other patents;
(b) refraining from bundling SEPs with non-essential patents;
(c) refraining from imposing non-challenge clauses or other unfair clauses in licensing agreements;
(d) providing patent lists during the negotiation process;
(e) providing fair consideration to any rights if Qualcomm seeks to cross-license from another licensee as part of an offer;
(f) providing its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China;
(g) lowering its royalties by 35%, though Qualcomm is still entitled to base the calculation of its royalties on the net wholesale price instead of the value of the smallest saleable unit, therefore potentially allowing Qualcomm to preserve some elements of its royalties formula and avoid a duty to license at the chip level; and
(h) committing not to charge wireless communication device markers within mainland China for expired patents.
Case study: Japanese Auto Parts Makers
In August 2014, China levied a record of U.S. $200 million combined fine against ten Japanese auto-parts and bearings makers for antitrust activities, a move made more dramatic by the fact that it was a market dominated by foreign companies. It was found by the NDRC that eight Japanese auto-parts makers and four bearings manufacturers colluded over prices in China, including companies such as Denso Corp., Aisan Industry Co., Mitsubishi Electric Corp., Mitsuba Corp., Yazaki Corp., Furukawa Electric Co., Sumitomo Electric Industries Ltd., NSK Ltd., JTEKT Corp., and NTN Corp.
By colluding over auto-parts prices, car prices and bearings prices, the interests of downstream manufacturers and consumers were affected, hence the severity of the fine. Furthermore, China is a bustling market for auto-parts, an industry dominated by foreign companies; therefore the price of the fine was also influenced by China’s eagerness for a fair environment where innovation and honesty is encouraged.
There is an inherent conflict in relation to licensing due to the right of exclusivity inherent in patents rights or copyright, and the compulsory licensing based on antitrust law, however, China has implemented many laws and regulations, including the Anti-Monopoly law and its various intellectual property laws in relation to this issue to minimise confusion, and to provide for economic growth by encouraging innovation and the maximisation of consumer welfare.
ABOUT THE AUTHOR: Matthew Murphy
Matthew has over 20 years of China and Asia Pacific legal and business experience, focusing on Intellectual Property, Mergers & Acquisitions (including anti-trust) and International Trade. Matthew has been listed as a leading corporate/IP lawyer by various publishers such as Euromoney, Chambers and the Legal 500 and is an arbitrator with the Hong Kong International Arbitration Centre, the Beijing Arbitration Commission, and an arbitrator and mediator with the Kuala Lumpur Regional Centre for Arbitration. Matthew is a regular contributor of articles on Chinese and IP law to major journals, and regularly teaches international IP and technology law at the post-graduate level at a number of leading universities.
Matthew would like to thank Joyce Chng for her valuable contributions to this article.
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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.