China's NDRC to Issue Price-Focused Competition Rules Involving IP Transactions

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Looking at the recent SAIC competition law guidelines regarding IP transactions, and predicting what the NDRC is likely to refer to when it introduces its competition IP guidelines later this year.

China’s Anti-Monopoly Law of the People’s Republic of China came into effect in 2008 in the context of a growing competitive market economy. In principle, competition law has three main elements, including the prohibition of agreements or practices which seek to restrict free trading and competition between business, the banning of abusive behaviour by a dominant market player or anti-competitive
practices that lead to such dominant positions, and the supervision of mergers and acquisitions of large corporations, including joint ventures.

Competition law is a significant area; therefore such principles seek to ensure the protection of the interests of consumers as well as regulating over the market economy in order to safeguard entrepreneurship and the opportunity to compete. Furthermore, China’s Anti-Monopoly Law seeks to ensure such protection measures are not too excessive in order to encourage innovation, and to improve antitrust law enforcement and its transparency.

Anti-Monopoly Law Enforcement Authorities

The Anti-Monopoly Law establishes a two-tier enforcement structure, with an Anti-Monopoly Commission (AMC), established under Article 9, and the Anti-Monopoly Enforcement Authorities (AMEA), therefore creating a unifying body to coordinate enforcement activities, in which the AMC is responsible for organising and guiding competition and antimonopoly work, including the drafting of competition policies and guidelines and the coordination of administrative enforcement and investigations, and the AMEAs is responsible for the actual enforcement of the Anti-Monopoly Law.

The Anti-Monopoly Law is enforced by three agencies, including the Ministry of Commerce (MOFCOM), the State Administration for Industry and Commerce (SAIC), and the National Development and Reform Commission (NDRC). The MOFCOM is an executive agency of the State Council of China, and through the Anti-Monopoly Bureau, is responsible for reviewing merger and acquisitions transactions and other types of proposed business concentrations.

The SAIC is responsible for the enforcement of the Anti-Monopoly Law relating to monopoly agreements, abuses of dominant market position, abuse of administrative power to restrict and eliminate competition (excluding monopolistic pricing behaviours), and investigating and penalizing unfair competition, commercial bribery, smuggling and other economic related infringements in accordance with laws. Additionally, the Anti-Monopoly and Anti-Unfair Competition Bureau is established under the SAIC and charged with the above responsibilities

Finally, the NDRC, with its Price Supervision and Anti-Monopoly Bureau, is responsible for the enforcement of price-related conduct, including investigations of pricing practices by companies, price-related aspects of monopoly agreements, and company abuse of dominant market position to set or control prices.

Competition law meets intellectual property licensing

It is widely recognised that competition law and intellectual property law share a common purpose of promoting innovation and enhancing consumer welfare and are complementary instruments. Therefore, a balance between the two areas is necessary to ensure that while competition law promotes consumer welfare by prohibiting certain actions that may harm competition, intellectual property seeks to grant owners with exclusive rights to protect their interests and further incentivise innovation.

Recently as a result of the Qualcomm case, the NDRC has been directed by the AMC, the top antitrust supervisor, to draw up guidelines to cover monopolistic conduct and the abuse of intellectual property rights, due to the lack of detail and guidance contained in the Anti-Monopoly Law. The guidelines will apply to intellectual property rights products and service providers, which is a broad group including the information technology and telecommunications industries, the medical sector, the motor vehicle sector, the machinery and seeds for the agriculture sectors, and other technology-sensitive activities.

The guidelines will carry the authority of the AMC, and will be seeking to further complement the SAIC’s Provisions on the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (the “IP Guidelines”) in order to improve and refine principles and values already established. Therefore, the guidelines will be covering three major types of monopolistic conduct, including:
(a) intellectual property rights related price and non-price monopoly agreements;
(b) abuse of dominant market positions; and
(c) concentration of business operators.

While the proposed areas to which the guidelines will provide for are already under regulation, there is further scope to provide more detail and guidance in such important areas.

Intellectual property rights and monopoly agreements

On April 7, 2015 the SAIC issued the IP Guidelines, which will come into effect on August 1, 2015. The IP Guidelines provides for the restriction of horizontal and vertical monopolistic agreements related to intellectual property rights, the requirement of intellectual property rights owners with market dominance to license their patents under an essential facility doctrine, the regulation of conduct during standard setting processes, and the prohibition of patent pool members from undertaking certain activities.

The IP Guidelines prohibits operators from entering into horizontal and vertical monopolistic agreements when exercising their intellectually property rights by employing a safe-harbour provision, which provides under Articles 4-5 that under certain circumstances, certain kinds of conduct would not be considered as monopolistic and therefore can be exempted from penalties. These circumstances are as follows:
(a) the aggregate market share of operators with competing relations in the relevant market share does not exceed 20%, or, there are at least four other independently controlled substitutable technologies available at reasonable costs; and
(b) neither the operator nor the transaction counterparty has a market share exceeding 30% in the relevant market, or, there are at least two other independently controlled substitutable technologies available at reasonable costs.

However, the safe harbour principle does not apply where there is evidence of the agreement precluding or restricting competition, therefore parties will first have to determine any anti-competitive effects of their agreements. This is complicated in application as it will be difficult to calculate specific market share, the range of substitutable technologies available and its reasonable costs, especially with certain emerging fields such as the Internet or the field of digital products where new technologies are being produced and released constantly.

Therefore, there are gaps in the provision for monopolistic agreements as it is unclear whether agreements falling outside the safe harbour provision may be per se illegal under the Anti-Monopoly law, or they may still be defensible following a rule of reason analysis. The NDRC, in its draft of the guidelines, should seek to provide further guidance and clarity of such issues over intellectual property rights and monopolistic agreements.

While the IP Guidelines addresses two categories of intellectual property rights related anti-competitive conduct, namely, monopolistic agreements and the abuse of market dominance, it does not have any applicability on price-related monopolistic conduct, which the NDRC has jurisdiction over and have previously published two sets of implementing rules detailing the enforcement against price-related conduct, effective since February 1, 2011.

Price-related aspects of intellectual property licensing

On 9 February 2015, the NDRC issued an Administrative Sanction Decision against US semiconductor giant Qualcomm with a record penalty of RMB 6.088 billion and a set of remedies around the company’s patent licensing practices. NDRC’s investigation into Qualcomm was first prompted by complaints by several competitors and industry associations, which resulted in simultaneous dawn raids at Qualcomm’s offices in Beijing and Shanghai.

The Qualcomm case is a significant milestone in anti-competition law enforcement, not only because of the imposition of the highest fine to date in Chia, but also with the imposition of intrusive behavioural remedies and therefore shedding some light on the interpretation of NDRC’s relevant regulations in relation to price-related conduct.

In the decision, NDRC found that Qualcomm holds a dominant market position for its standard essential patents (SEPs) by virtue of its large market share and ability to control pricing. Subsequently, 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 are likely to a set a groundbreaking precedent, and perhaps act as a base for NDRC to create their guidelines from. The remedies imposed 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.

Some of the remedies imposed may have a major impact, such as the requirement for SEP licensors to pay a reasonable rate for the cross-licenses of patents, and the restriction on a cross-license of non-SEPs as a condition for a SEP license. Therefore, these are some examples of what may be included in the NDRC’s guidelines, and further it illustrates NDRC’s willingness to expand its reach in the imposition of remedies in order to ensure the strict regulation and enforcement of price-related conduct that may amount to anti-competitive activity.

Abuse of dominant market positions

The IP Guidelines include further detailed guidance in regard to the abuse of dominance by operators when exercising intellectual property rights, addressing practices such as forcible bundling, restrictive trading, refusal to license intellectual property rights that constitute an essential facility, imposition of unreasonable restrictive conditions, and differentiated treatment towards counterparties with the same conditions.

Although the IP Guidelines provides more guidance in relation to this area, certain issues that are prominent in the scheme include the essential facility doctrine, which is where operators exercising their intellectual property rights are prohibited from abusing their dominant market position to eliminate and restrict competition by requiring, effectively, for patent owners to mandatorily license their intellectual property rights when the underlying intellectual property constitutes an essential facility. However, the broad language raises practical uncertainties, including the criteria for determining whether the compulsory licensing would cause ‘an unreasonable damage to the licensor’, which remains unclear and may pose a threat to multinational corporations in patent-heavy sectors.

Furthermore, article 12 prohibits certain conduct by participants in patent pools, including the exchange of competitively sensitive information for the purpose of facilitating monopoly agreements, and from engaging in certain activities if the pool collectively has a dominant market position and the conduct seeks to eliminate or restrict competition such as restricting members of the pool from independently licensing their patents, restricting members from researching and developing technologies that compete with pooled patents, forcing licensees to grant exclusively their improved or developed technologies back to the members, prohibiting licensees from challenging the validity or effectiveness of the pooled patents, carrying out differential treatments to the members or licensees in the same relevant market under same conditions, and other abuse of dominant market position. However, patent pools are more widely used by foreign investors and less so in China, therefore the IP Guidelines should ensure the suitability of its provisions with the relevant foreign investors.

With regards to the issues in the current regulations of the area of abuse of dominant market positions, the NDRC should seek to clarify unresolved issues or further detail any guidance where there is none provided in the IP Guidelines, such as defining the essential facility doctrine so as to clarify its scope of application to avoid the doctrine being misused, and provide for any foreign investors to ensure its relevance and applicability to both users in China and potential international users, therefore striking a balance between encouraging innovation and protecting competition.

The initiative taken for the NDRC to draw up guidelines that will provide for three areas which are prominent in anti-competition law, namely, the regulation of intellectual property rights and monopolistic conduct especially in relation to price-related conduct; the abuse of dominant market positions; and the concentration of business operators in an industry or activity, is highly commended due to the importance of these areas in relation to China’s economy and the international market, to look at a broader focus. Therefore, an overall scheme to further provide detailed guidance and clarity and resolve any issues in each area will ensure the maximum protection of the interests of consumers, and further advance the protection of competition in China.

ABOUT THE AUTHOR: Matthew Murphy
Matthew Murphy would like to thank Joyce Chng and Xia Yu for their valuable contributions to this article. 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.

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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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