Antitrust/Competition Practice
APRIL 2015
China’s New Rules on Antitrust and Intellectual Property
Intersected Issues
China’s antitrust regulator, the State Administration
of Industry of Commerce (“SAIC”), issued its closely
watched new rules, called the Prohibition of Abuse
of Intellectual Property Rights to Eliminate or Restrict
Competition (“the Rules”), on April 7, 2015. The Rules will
come into effect on August 1, 2015.
The Rules address many of the complex and
controversial issues at the intersection of antitrust and
Intellectual Property Rights (“IPR”). The Rules are in
some ways consistent with the approaches taken to
certain issues by antitrust agencies in some other large
economies. But, in a number of important respects, the
Rules differ in ways that raise serious concerns about
the extent to which the China Anti-Monopoly Law (the
“AML”) may be used to lessen protections that patents
and other IPR receive in most leading jurisdictions. The
Rules bind not only SAIC, but also Chinese courts in
their assessment of IPR-antitrust intersected issues in
private litigation cases.
The Rules apply to both multi-firm conduct (e.g.,
patent pools) and single-firm conduct (e.g., abuses of
dominance such as tying). This article highlights the
major provisions of the Rules most likely to impact
companies that depend on the legal protection of
valuable patents and other IPR when doing business
in China or with Chinese entities.
The Concern Of Compulsory Licensing
The Rules, for the first time in international antitrust
practice, apply the so-called “essential facilities
doctrine” to IPR in codified rules. A liberal application
of that doctrine opens a door for compulsory licensing,
which has been one of the major concerns raised by
commentators during SAIC’s consultations on numerous
draft versions of the Rules.
© 2015 Winston & Strawn LLP
Under the essential facilities doctrine, a dominant firm
(usually a monopolist) using or controlling a facility or
infrastructure that is essential for its competitors’ activity
in a downstream market may be required to grant
them access to its facility. The doctrine is traditionally
applied in natural monopoly sectors such as railways,
telecommunications, and electricity power generation
and transmission. In those cases, access to the facility
is indispensable for a competitor to provide services
in the downstream market. Duplicating such facilities
(such as constructing a second network of railway
infrastructure) is either infeasible or would require the
expenditure of unreasonable costs. Refusal of access
by the facility owner, which in many cases also provides
services in the downstream market itself, will likely
prevent all competition in the downstream service
market. Thus, where there is no objective justification
for such a refusal to grant the potential downstream
competitor access to the facility, in very rare cases in
the EU and some other jurisdictions, monopolist owners
of such essential facilities have been compelled, by
courts or agencies, to grant the downstream potential
competitors access to their facilities, in exchange for
reasonable compensation. Courts in Europe in recent
years have extended the application of this doctrine
in a few exceptional decisions to facilities involving
intellectual properties, e.g., European Court of Justice’s
Magill in 1995, Bronner in 1998, IMS Health in 2004
and the decisions of some member state courts in
the pharmaceutical and media sectors in subsequent
years, though aspects of all these decisions remain
controversial. The U.S. Supreme Court has never
applied the essential facilities doctrine, and criticized it
severely in its decision in Trinko in 2004.
Under Article 7 of SAIC’s Rules, a dominant firm, unless
otherwise justified, will have to grant its IPRs to its
competitors where its IPRs constitute “an essential
facility of manufacturing and business operation”.
Antitrust/Competition Practice
The Rules provide three factors that need to be
considered together in assessing whether a refusal
to license is reasonably justified under the AML, as
follows:
1. There is no reasonable alternative in the market and
the IPR in question is indispensable for competitors
to enter into the market,
2. A refusal to license the IPR will cause a negative
impact on competition and innovation in the relevant
market, to the detriment of consumer welfare or
public interest, and
3. Licensing of the IPR in question will not cause
unreasonable damage to the licensor.
Unfortunately, the Rules provide neither a definition nor
examples of an essential facility and the threshold in
the second condition (i.e., any negative impact) seems
far lower than clearly defined, objective criteria such as
those imposed in EU precedents. It is also unfortunate
that this Rule applies to “dominant” entities, as opposed
to only true monopolists. Under the AML, an entity is
presumed to be dominant if it has in excess of a 50%
share of the relevant market. Moreover, an entity will
be presumed dominant if it is one of two or three firms
with joint market shares that exceed 66.6% or 75%,
respectively. Article 6 of the Rules makes it clear that
these provisions of the AML apply to the determination
of a presumption of a dominant market position in the
application of the Rules, though it does state that there
will be no presumption of dominance solely on the
basis of the ownership of IPR.
Though no agency or court decision under the
AML to date has expressly applied the essential
facilities doctrine, a few decisions have had similar
consequences, requiring the sharing of IPR on terms
other than those voluntarily negotiated between the
licensor and the licensee. The Shenzhen Intermediate
People’s Court issued a decision in 2013 in the Huawei
v. InterDigital litigation, in which InterDigital was found
to have abused its dominant market position as an
owner of certain standard-essential patents (“SEPs”)
for 2G, 3G, and 4G telecommunications technologies.
SEPs are patents that are necessary to practice specific
technologies under standards set by a standard-setting
organization. Typically, and in the case of InterDigital’s
SEPs at issue in the litigation, the IPR owner has
agreed, as a condition of participating in the standard,
that it will license any SEPs it owns that are essential to
© 2015 Winston & Strawn LLP
practice that standard on a fair, reasonable, and nondiscriminatory basis (“FRAND” terms). The Shenzhen
court’s finding of abuse was based on two actions
of InterDigital: (i) tying its SEPs with non-SEPs during
licensing negotiations; and (ii) seeking injunctive relief
against Huawei before a court in the U.S. and before
the U.S. International Trade Commission, while still in
negotiations with Huawei, in which, the Shenzhen
court found, InterDigital was demanding excessive
royalties. In addition to these findings of violations of
the AML, the court found that InterDigital had breached
its promise to license the SEPs on a FRAND basis, by:
(i) instituting injunction proceedings while demanding
that InterDigital pay much higher royalties than those
paid for licenses to the same SEPs by Apple and
Samsung; and (ii) insisting that Huawei agreeing to
cross-license to InterDigital all of Huawei’s patents
obtained globally, on a royalty-free basis. The court
then proceeded to determine that a FRAND royalty
for InterDigital’s SEPs should not exceed 0.019% of the
actual sales price of each product manufactured by
Huawei that practiced any of the standards in question.
Reportedly, this level of royalties is far lower than any
rate InterDigital had negotiated, and which licensees
agreed to, in other licenses. Therefore, InterDigital
cannot refuse to license the patents in question and
the royalty rate it ultimately charges must not exceed a
specific level imposed by the court, amounting to a de
facto compulsory license.
In the context of agency decisions, the Ministry of
Commerce (“MOFCOM”) has, in several decisions
approving mergers and acquisitions, imposed
conditions on IPR owners that also, in effect, bear a
resemblance to compulsory licensing. In its conditional
approval of Microsoft’s acquisition of Nokia’s devices
and services business, MOFCOM required Microsoft to
license a stated list of patents that were not SEPs, and
thus not subject to any FRAND promise, on terms and
conditions comparable to those involved in a FRAND
commitment.
The publication of the SAIC Rule does provide welcome
guidance that neither NDRC nor MOFCOM has
provided, regarding how SAIC will apply this doctrine
in future cases. The lack of specific and objective
criteria, however, leave companies unable to reliably
predict whether refusing to grant a license in particular
circumstances or on particular terms or conditions may
be considered by SAIC or a court to be not “reasonably
2
Antitrust/Competition Practice
justified,” and thus a violation of the AML, potentially
resulting in an order compelling it to grant a license
under terms and conditions imposed by the court or
agency.
Courts and agencies in other countries have recognized
that the application of the essential facilities doctrine to
IPR may do substantial harm to incentives to innovate,
thus harming technological advancement. Hopefully,
the approach that SAIC will take to its application of
Article 7 will be “cautious,” as stated by an SAIC official
in recent remarks during a program at the ABA Section
of Antitrust Law Spring Meeting in Washington, DC.
It is also hoped that future decisions of SAIC applying
the AML to IPR licensing practices will include clear
and complete recitations of relevant facts, and a full
explanation of the agency’s reasoning. The lack of
such transparency in many AML decisions to date also
makes it difficult for companies to adjust their conduct to
ensure that it complies with the law.
Certain IPR-Specific Abusive Conduct
Article 9 of the Rules expressly prohibit certain types of
IPR-related conduct, such as forced bundled sales or
package licenses, or tying IPRs with other IPRs or other
products to extend a company’s dominant position in
one market into another market, or thereby restricting
competition by other competitors in the market for the
tying product.
Article 10 prohibits a dominant IPR licensor from
engaging in certain specific types of conduct without
proper justification, including the following:
1. Requesting the licensee to grant back its improved
technology exclusively to the licensor;
2. Prohibiting the licensee to challenge the validity of
the licensed IPR;
3. Restricting the licensee’s use of a competing product
or technology after the expiry of the licensing
agreement; and
Other general abuse of dominance conduct such as
discriminatory trading terms is expressly prohibited
unless the dominant firm has justification for such
conduct. Similarly to the IPR-specific conduct above,
an effect-based test will be applied to determine the
legality of such conduct.
Patent Pool
Article 12 of the Rules expressly prohibits the exchange
of competitively sensitive information through the
implementation of a patent pool unless the pool
members can prove that an agreement that resulted
from such exchanged information satisfies the specific
exemption rules set out in Article 15 of the AML.
In addition, an organization managing a patent pool with
a dominant market position is prohibited, unless justified
by legitimate reasons, from engaging in the following
types of conduct to eliminate or restrict competition:
1. Restricting a member to license its IPRs individually to
a third party outside the pool;
2. Restricting a member or licensee from independently
researching or developing competing technology,
either individually or jointly with a third party;
3. Forcing a licensee to grant exclusive grantback
licenses to technology improved or developed by
the licensee back to the pool administrator or pool
members exclusively;
4. Prohibiting licensees to challenge the validity of the
pooled IPRs;
5. Discriminating by applying different trading conditions
to members of the pool or licensees in the same
contracting in differential trading terms with equally
situated members or licensees in the same market.
The Rules incorporate a commonly seen catch-all clause
to leave room for SAIC to include other conduct into the
abusive use of IPR. Patent pool under SAIC’s Rules does
not include cross-licensing.
4. Exercising its IPR that have expired, or after the
intellectual property has been ruled as invalid;
5. Prohibiting the licensee to deal with a third party.
© 2015 Winston & Strawn LLP
3
Antitrust/Competition Practice
Standard Essential Patents (“SEPS”) And
Standard-Setting
In addition to concerns about SEP licenses posed by
the version of the essential facilities doctrine set out
in Article 7, Article 13 provides that patent-holders that
have a dominant market position are prohibited, unless
otherwise justified, from engaging in the following types
of conduct to eliminate or restrict competition:
Assessment Methodologies
Article 15 of the Rules sets out five steps for assessment
of anti-competitive conduct as follows:
1. To determine the form and nature of the conduct;
2. To determine the relationship of parties;
3. To define the relevant market;
4. To determine the market position of the IPR holder;
1. During the standard-setting process, if a patentholder intentionally does not disclose information
on its IPR to the standard-setting organization or
expressly gives up its rights, it cannot assert its
patent rights if such patents are incorporated into
the standards; or
5. To assess the impact on the relevant market.
2. If a holder of SEPs refuses to license or imposes
tying or other unreasonable trading terms on a
license for SEPs, it violates the FRAND principle
applicable to SEPs.
2. The degree of market concentration;
Safe Harbors
Article 5 of the Rules provides a set of safe harbors for
multi-firm conduct (agreements). Exemption is granted:
1. In a case where the parties compete, if the combined
market share of the parties does not exceed 20%,
or if there are at least four alternative technology
options controlled by independent third parties in the
market which can be obtained at reasonable cost; or
2. In a case where the parties do not compete, if the
market share of each party does not exceed 30%, or
if there are at least two alternative technology options
controlled by independent third parties in the market
which can be obtained at reasonable cost.
It should be noted, however, that certain kinds of
conduct, such as price-fixing, output control, market
sharing, bid-rigging, or resale price maintenance
cannot be exempted. The exemption is based on the
assumption that most agreements between companies
with an insignificant combined market share do not
cause a substantial anti-competitive effect in the market.
However, this assumption can be rebutted. If evidence
shows that the agreement between the parties does
have the effect of eliminating or restricting competition
in the market, then the exemption does not apply.
© 2015 Winston & Strawn LLP
For the fifth step, “assessment of the impact on the
relevant market,” Article 16 of the Rules provides a list
of non-exhaustive criteria:
1. The market positions of the parties;
3. The ease of market entry;
4. Industry customs, industry growth, and trends;
5. The duration and scope of effectiveness of the
restraint from the perspective of capacity, territory,
and consumers;
6. The impact on the encouragement of innovation
and the dissemination of technology; and
7. The innovative capacity of the IPR holder and the
speed of changes in the technology.
These assessment steps and criteria provide a welcome
degree of clarity on SAIC’s review mechanism and
enables parties to better respond to SAIC’s inquiries in
enforcement cases.
Other Questions
The Rules address only non-price-related abuses of IPR,
consistent with SAIC’s jurisdiction over non-price-related
antitrust violations. It leaves open the question of whether
the National Development and Reform Committee
(“NDRC”), the price-related antitrust regulator, may issue its
own IPR/AML rules. NDRC has been actively investigating
antitrust cases in the IPR fields over the past few years,
including the InterDigital and Qualcomm investigations.
Recent reports on NDRC’s investigation of patent pool
organizations, patent assertion entities, and licensing
practices in various sectors of the economy indicate that
NDRC is committed to continuing its enforcement in the
IPR field. This jurisdiction issue once again goes back
to the long-debated question of whether China’s three
antitrust enforcement agencies should merge into a single
agency that would apply a single uniform set of rules.
4
Antitrust/Competition Practice
Key Contacts
Steve Harris
Mabel Lui
Partner, Washington, D.C.
[email protected]
Partner, Hong Kong
[email protected]
Jingwen Zhu
Partner, Hong Kong
[email protected]
Winston & Strawn LLP is a global law firm with offices in Asia, Europe, and the United States. Winston & Strawn has
multi-jurisdictional legal practices in Asia with legal professionals in Shanghai, Beijing, Hong Kong, and Taipei.
These materials have been prepared by Winston & Strawn LLP for informational purposes only. These materials do not constitute legal advice and cannot be relied
upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Receipt of this information does not create an attorney-client
relationship. No reproduction or redistribution without written permission of Winston & Strawn LLP.
© 2015 Winston & Strawn LLP
5