1. Applicable rulesDoes competition law apply to the obtainment, grant, acquisition, exercise and transfer of intellectual property rights?
The Chinese Anti-Monopoly Law (AML), which took effect as of 1 August 2008, expressly applies to the transactions related to intellectual property rights (IPRs). Article 55 of the AML provides that if a business operator abuses its IPRs to eliminate or restrict competition, the AML shall apply to such conduct. As the term "abuse of IPRs" has not been defined, conduct that may constitute abuse of IPRs is unclear under the AML. However, the AML regulators and courts are likely to make a broad rather than a narrow interpretation of the term.
Since the enactment of the AML, there have been only a few cases, including the notable Qualcomm case, that addressed the intersection between IP and antitrust, which will be discussed and analysed in greater detail below. Nevertheless, the tension between the two bodies of law has attracted growing interests from the antitrust law community. The State Administration for Industry and Commerce (SAIC), one of the former AML enforcement agencies, started to legislate on antitrust matters involving IPRS from 2009 and issued the Rules on Prohibitions of Misuse of Intellectual Property Rights to Eliminate or Restrict Competition (SAIC IP Rules) on 7 April 2015, which took effect on 1 August 2015. Originally, the SAIC IP Rules would only apply to the investigations of the SAIC and would have no binding effects on the enforcement activities of the other former AML enforcement agencies (i.e., the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM)) or the judicial practices of courts. However, on 17 March 2018, the 1st Session of the 13th National People’s Congress of China approved the plan on institutional restructuring submitted by the State Council, which proposed to integrate the antitrust enforcement functions of SAIC, NDRC and MOFCOM into the new administration named State Administration for Market Regulation (SAMR). On 21 March 2018, SAMR was officially established and commenced operations on 10 April. Therefore, we understand that the SAIC IP Rules would be applicable to the enforcement activities of the integrated AML enforcement agency.
Moreover, in mid-2015, the Anti-Monopoly Committee of the State Council (AMC) initiated drafting projects of six guidelines, among which are anti-monopoly guidelines on abuse of IP rights. On 31 December 2015, the NDRC released Anti-monopoly Guidelines on Abuse of Intellectual Property Rights (Consultation Draft) (NDRC Draft Guidelines). On 4 February 2016, SAIC released Anti-monopoly Enforcement Guidelines on Abuse of Intellectual Property Rights (Seventh Draft, Consultation Draft) (SAIC Draft Guidelines). For easy reference hereinafter, the above two draft IP guidelines are collectively called Draft IP Guidelines. Besides, the AMC also asked MOFCOM and the State Intellectual Property Office to draft IP guidelines respectively. The AMC was reported to have reviewed and integrated the guidelines drafted by the above-mentioned four agencies. On 23 March 2017, the AMC released Anti-monopoly Guidelines on Abuse of Intellectual Property Rights (Consultation Draft) to seek public opinion (AMC Draft Guidelines).
The AMC Draft Guidelines cover both price and non-price related monopolistic conducts, which may serve as a reference for the AML enforcement agencies and the courts. For instance, in the Qihoo360 v Tencent case, the Supreme People’s Court specifically referred to the Guidelines in the Definition of the Relevant Market by the State Council’s Anti-Monopoly Committee (Market Definition Guidelines).
2. Competent authoritiesWhich authorities are responsible for the application of competition law to intellectual property rights? What enforcement powers do they have? Are there any special procedures for conduct that concerns intellectual property rights?
Parties are subject to both the administrative liabilities and civil liabilities under the AML. Previously, there were three government agencies designated by the State Council to fulfil the duties of enforcing the AML in China, that is, MOFCOM, the NDRC and the SAIC. MOFCOM was responsible for regulating merger control. The NDRC and the SAIC were granted the power to regulate monopoly agreements, abuse of dominance and abuse of administrative power. Specifically, the NDRC was responsible for price-related violations and the SAIC was responsible for non-price-related violations. As mentioned in question 1, on 17 March 2018, the National People’s Congress of China approved to vest the antitrust enforcement power into one government authority (ie, the SAMR), which commenced operation since 10 April 2018. Thereafter, SAMR started to take over the responsibility to regulate merger control, monopoly agreements, abuse of dominance and abuse of administrative power. There are no special regulators responsible for monopolistic conducts concerning the misuse of IPRs.
As far as civil actions are concerned, the Supreme People’s Court (SPC) has posed special venue requirements for the first instance of antitrust actions shall be adjudicated by the intermediate People's Courts in major cities, as well as the intermediate People's Courts and basic People's Courts designated or approved by the SPC. Within the competent People’s Court, civil actions against monopolistic conduct shall be tried by the Intellectual Property Division (IP Division). Moreover, in 2014, the Standing Committee of the National People’s Conference decided to establish special Intellectual Property Courts in Beijing, Guangzhou and Shanghai. According to the Notice of the Supreme People’s Court on Issues concerning the Jurisdiction of Intellectual Property Courts over Cases, which took effect on 1 January 2015, the Intellectual Property Court shall have jurisdiction over the first instance case regarding civil disputes over monopoly conducts within the jurisdiction of the city where the Intellectual Property Court is located; the Intellectual Property Court of Guangzhou shall have the right to exercise inter-regional jurisdiction over first instance cases regarding civil disputes over monopoly conducts in Guangdong Province.
3. Market definitionHow are markets involving intellectual property rights defined?
Under the AML and subsequent legislations, IPR can be implicated in the delineation of relevant product markets and relevant technology markets. For instance, when products are manufactured through patentable processes, the existence of process patents may play a role in assessing the supply substitutability of the products in relevant product market definition. The AMC Draft Guidelines also provides that when IPRs are direct objects of a transaction (eg, licensing of IPRs) or the mere analysis of relevant product markets is not sufficient to assess competitive harm, it is necessary to define relevant technology markets.
Under the article 3 of the AMC Draft Guidelines, a relevant technology market consists of a group or a category of closely substitutable technologies. The substitutability of technologies depends on a plethora of factors, including technical properties, purpose, license fee, compatibility, duration of the intellectual property rights involved, and the possibility as well as the costs for its users to switch to other substitutable technologies. In addition, technologies may be considered substitutable when products made by different technologies are substitutable. Lastly, both the current application fields and the potential application fields of technologies shall be taken into account in relevant technology market definition.
Over the years, there have been several landmark cases where the definition of markets involving IPRs were concerned.
In the Qualcomm case, the NDRC found that Qualcomm had dominant positions in two markets – the licensing market of standard essential patents (SEP) and the product market of baseband chips. In defining the SEP licensing market, NDRC found that because each SEP is irreplaceable to implement a technical standard for wireless communication and different standards are not substitutable with each other, the licensing market of each SEP constitutes a separate relevant market. For the baseband chip market, the NDRC found that basement chips compatible with different technical standards differ in terms of features, functions, etc. From the demand side, manufacturers of wireless communication terminal devices have to adopt baseband chips that support specific technical standards and they would not seek to purchase baseband chips that support other technical standards, even when the price of the original baseband chips increases. Moreover, from the supply side, R&D and manufacturing of baseband chips are highly technical processes and manufacturers of one type of baseband chip will not switch to the production of another type due to the change in demand or price level of the chips. In light of the above, the NDRC found that baseband chips that support different technical standards shall constitute separate relevant product markets.
Furthermore, in Huawei v IDC, the first judicial case concerning the interplay between SEP and antitrust, courts reached a similar conclusion in the definition of relevant markets. The first instance court held that the licensing market for each SEP should be regarded as an independent relevant market because the switching cost from one standard to another is very high and each SEP is essential to the implementation of a standard. The finding was upheld by the appellate court in its final judgment on 28 October 2013. Although China is not a common-law jurisdiction and precedents usually do not have binding effects, the decision of the Qualcomm case and the judgment of Huawei v IDC shred valuable light on the thinking of enforcement agencies and courts on the issue of relevant market definition involving IPR.
4. Acquisition and saleDoes competition law apply to the obtainment or grant and transfer or assignment of intellectual property rights?
As stated in question 1, the acquisition and sale of IPR are within the purview of the AML although there have been no administrative or civil cases. In addition, under certain conditions, the acquisition and sale of IPR may be notifiable for merger review. For more details, see questions 9 and 10.
5. LicensingHow does competition law apply to technology transfer and licensing agreements?
Technology licensing agreements could be treated as monopoly agreements or means of abusing market dominance based on the relevant provisions of the AML, the SAIC IP Rules and the AMC Draft Guidelines.
Abuse of dominance
The SAIC IP Rules prohibit business operators with a dominant market position from engaging in the following licensing practices that will eliminate or restrict competition, without justifiable causes during the course of exercising intellectual property:
- refusing to license the IPR, which constitutes an essential facility;
- restricting the trading counterparty to exclusively deal with the business operator or other designated business operators;
- conducting a tie-in arrangement;
- requiring the trading counterparty to grant back their improved technologies exclusively;
- forbidding the trading counterparty to challenge the validity of the IPR;
- restricting the trading counterparty from utilising competing products or technologies after the expiry of the term of the licensing agreement, where IPRs are not infringed;
- continuing to claim IPRs of which the protection term has already expired or has been determined to be invalid;
- prohibiting the trading counterparty from dealing with third parties;
- attaching other unreasonable conditions to trading partners; and
- applying discriminatory treatment to trading counterparties in equivalent conditions.
Besides the above-listed conducts, the AMC Draft Guidelines also prohibit business operators with a dominant market position from engaging in the following behaviour that eliminates or restricts competition: (i) licensing the IPR at excessively high prices, (ii) requiring the trading counterparty to cross-license IPR without offering reasonable consideration, (iii) restricting trading conditions between the trading counterparty and a third party.
Therefore, an IPR holder should be cautious in engaging in the above-mentioned licensing practices if it has a dominant position in the relevant market.
Horizontal and vertical monopoly agreements
Article 13 of the AML prohibits the parties from entering into horizontal agreements that fix or change the prices of a commodity, limit the production or sales volume of a commodity, divide the sales market or material procurement market, restrict the purchase or development of new technology or new equipment, boycott trading or (6) other monopoly agreements as identified by the AML enforcement agencies.
Moreover, article 14 of the AML prohibits vertical agreements between a business operator and its trading counterparty that fix the resale price of the commodity or restrict the minimum resale price, and other vertical monopoly agreements as identified by the AML enforcement agencies.
The AMC Draft Guidelines specifically listed the scenarios where horizontal monopoly agreements may be reached, including joint research and development, cross-licensing, exclusive grant-back, non-challenge clause and standardisation.
For vertical monopoly agreements, besides the resale price maintenance issue, the AMC Draft Guidelines also listed other types of vertical restraints that may cause competition concerns, including:
- requiring the licensee to grant back their improved technologies exclusively;
- forbidding the licensee to challenge the validity of the IPR;
- restricting the licensee from using the IPR within certain fields;
- restricting the licensee on the sales channels, scope of sales or transaction parties of the products that are produced by applying the IPRs;
- restricting the licensee on the quantity of products that are offered by applying the IPRs; and
- restricting the licensee from using competitive IPRs, or prohibiting the licensee from offering products competing with the licensor's products.
Exemptions, exceptions or safe harbours
According to article 15 of the AML, if a business operator can prove that the horizontal or vertical agreement is reached for any of the following purposes, it can be exempted:
- for the purpose of improving technologies, researching and developing new products;
- for the purpose of upgrading product quality, reducing costs, improving efficiency, the business operators unify product specifications or standards, or carry out professional labour division;
- for the purpose of enhancing operational efficiency and reinforcing the competitiveness of small and medium-sized business operators;
- for the purpose of realising public interests such as conserving energy, protecting the environment and providing disaster relief, etc;
- for the purpose of mitigating the severe decrease of sales volume or obviously excessive production during economic recessions;
- for the purpose of protecting the justifiable interests of the foreign trade or foreign economic cooperation; or
- other circumstances prescribed by the law or the State Council.
To apply the first five exemption categories, a business operator must also prove that such an agreement will not substantially restrict competition in the relevant market and the consumers are able to share the benefits from the agreement.
In addition, the SAIC IP Rules and the AMC Draft Guidelines also provide safe-harbour rules where, under the following conditions, the business operator’s behaviour would not be regarded as a monopoly agreement prohibited by article 13 (6) and article 14(3) of the AML, namely, other monopoly agreements confirmed by the AML enforcement agencies, except when there is evidence to the contrary proving that such agreement has the effect of eliminating or restricting competition.
The safe-harbour rules set forth in the SAIC IP Rules and the AMC Draft Guidelines are slightly different from each other. Under the SAIC IP Rules, safe harbour rules shall apply when:
- the aggregated market share of the business operators in a relationship of competition does not exceed 20 per cent in the relevant market that is affected by their conduct, or there exist at least four other substitutable, independently controlled technologies that can be obtained at a reasonable cost in the relevant market; and
- the market share of neither the business operators nor their trading counterparties exceeds 30 per cent in the relevant market, or there exist at least two other substitutable, independently controlled technologies that can be obtained at a reasonable cost in the relevant market.
Under the AMC Draft Guidelines, safe harbour rules shall apply when:
- the aggregated market share of the business operators in a relationship of competition does not exceed 20 per cent in the relevant market;
- the market share of business operators that are not in a competition relationship do not exceed 30 per cent in each of the relevant market affected by the IPR related agreement; and
- if the business operators’ market shares are hard to obtain or if the market share could not accurately reflect the business operators’ market position, there exist at least four other substitutable, independently controlled technologies that can be obtained at a reasonable cost in the relevant market.
6. Market power and dominanceIn what circumstances is the possession of intellectual property rights deemed to confer substantial market power on the holder such that the rules on unilateral conduct will apply?
The SAIC IP Rules set forth a general principle of how possession of IPR should be evaluated in determining an operator’s market power. According to the SAIC IP Rules, the fact that business operators possess IPRs can be a factor in determining whether the business operator have a dominant market position; however, market operators shall not be presumed to have market dominance in the relevant market merelydue to the possession of the aforementioned rights. In any event, the determination and presumption of the dominant market position shall be conducted in accordance with articles 18 and 19 of the AML.
The AMC Draft Guidelines further provide that to evaluate a business operator’s market position, relevant factors concerning the IPR’s characteristics should also be taken into consideration. Specifically, the AMC Draft Guidelines stipulate that in light of the technical and economical characteristics of the IPRs, the following factors should be taken into account:
- the possibility and the cost for the counterparties to turn to substitutable technologies or commodities, etc;
- the degree of dependency of downstream market players on the goods offered by using the relevant IPRs; and
- the counterbalance ability of the trading counterparties against the business operators.
Moreover, the AMC Draft Guidelines also provide additional factors that can be considered when determining the market position of a business operator holding a SEP, which are as follows:
- the market value, application scope and degree of the relevant standards;
- the existence of substitutable standards (the possibility and the cost of switching to substitutable standards shall also be considered);
- the degree of dependency of the industry on the relevant standards;
- the evolution and compatibility of different generations of the relevant standards; and
- the possibility of substituting the related technology that has been incorporated into the standards.
The Interim Provisions on Prohibiting Abuse of Dominant Market Positions published by SAMR on July 1, 2019 also stated that in the determination of whether an operator has dominant market positions in the field of intellectual property rights, the substitutability of the intellectual property rights, degree of dependence of the downstream markets on the goods provided by the use of the intellectual property rights, and transaction counterparts' capacity of balancing the operator, and other factors may be considered.
In the Qualcomm case, the NDRC held that Qualcomm possesses the dominant market position in the relevant SEP licensing markets based on the following reasons:
- the company has a 100 per cent market share in the relevant market;
- the company has the capability to control the wireless SEP licensing market;
- manufacturers of wireless communication terminal devices rely highly on Qualcomm’s SEP portfolio; and
- it is relatively difficult for other business operators to enter into the relevant market.
In light of the above and in accordance with article 18 of the AML, the NDRC concluded that Qualcomm is in a dominant position in the relevant SEP licensing markets.
In addition, in Huawei v IDC, the court ruled that the determination of a dominant market position requires analysis of multiple factors, including the party’s market share, the competition status of the relevant market, market entry barriers, etc. In Huawei v IDC, the court found that as the only licensor of the concerned SEPs, IDC has 100 per cent of the market share in each relevant SEP licensing market, whereby, IDC has the power to prevent or hinder other business operators from entering the market. Moreover, as IDC does not engage in manufacturing, it is not subject to other SEP holders’ cross-licensing restraints. Therefore, there are no effective constraints on IDC’s market power. In light of the above, the court concluded that IDC has a dominant market position in the relevant SEP licensing market.
7. Unilateral conductIn what circumstances may unilateral conduct involving the exercise of intellectual property rights be deemed to be anticompetitive (monopolisation, abuse of dominance, etc)?
Article 17 of the AML prohibits business operators from engaging in the following abusive conducts:
- selling products at unfairly high prices or buying products at unfairly low prices;
- selling products at prices below cost without any justifiable causes;
- refusing to trade with a trading counterparty without any justifiable causes;
- restricting their trading counterparty so that it may conduct deals exclusively with themselves or with the designated business operators without any justifiable causes;
- implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes;
- applying discriminatory treatments on trading prices or other trading conditions to their trading counterparties with the same standing without any justifiable causes; or
- other forms of abusing the dominant market position as determined by the AML Enforcement Agency under the State Council.
As mentioned in question 5, the SAIC IP Rules and the AMC Draft Guidelines provide more detailed rules regarding abuse of dominance involving exercise of IPRs, which are introduced as follows.
Since the SAIC was mainly responsible for non-price AML enforcement, the SAIC IP Rules do not touch upon price-related violations. Nevertheless, the AMC Draft Guidelines address the excessive pricing issue.
When evaluating whether the business operators are licensing the IPRs at unfairly high prices that eliminate or restrict competition, the AMC Draft Guidelines list several factors to be considered:
- the calculation method of the royalties and the contribution of the IPRs to the value of the relevant goods;
- the licensing commitments made by the business operator;
- the licensing histories of the relevant IPRs, or comparable royalty standards;
- the licensing terms resulting in unfairly high royalty, including the restriction of licensing territories or the scope of commodities; and
- whether the royalties charged match with the contribution of the IPRs to the value of the relevant goods;
- the licensing commitments undertaken by relevant IPRs;
- the record of previous licensing of the relevant IPRs, or comparable royalty standards;
- whether the royalty charged is beyond the geographical scope or product coverage of the IPRs;
- for package licensing, whether royalty is charged on expired or invalid IPRs;
- whether there are terms resulting in unfairly high royalty in the licence agreement, such as cross-licensing and grant backs without reasonable consideration;
- whether improper practice is carried out to coerce the licensees to accept the royalty proposed by the licensors, such as abuse of injunctive relief and right of action, etc;
- when analysing and evaluating whether a SEP is licensed at an unfairly high price, factors as to the overall royalties borne by the products compatible with the relevant standards and the products’ impacts on the normal development of related industries can also be considered.
In the Qualcomm case, the NDRC held that Qualcomm charged unfairly high royalties based on the following three considerations:
- Qualcomm refused to disclose its patent list and included expired patents in its patent portfolio licensed to Chinese licensees;
- Qualcomm requested that Chinese licensees grant back their patents free of charge, and refused to deduct the value of such patents from royalty fees or to pay for such patents in other ways;
- Qualcomm tied licensing of SEPs with licensing of non-SEPs; and
- Qualcomm unreasonably used the net sale price of the complete mobile device that is beyond the coverage of Qualcomm’s SEPs as the base for its royalty fees.
The foregoing considerations were different from the considerations of the court in Huawei v IDC, where the court placed significant weight on the licensing histories of the relevant IPRs, ie, the relatively low royalties that IDC charged other mobile device manufacturers such as Apple and Samsung compared to Huawei. In addition, when determining whether IDC engaged in excessive pricing, the court also considered factors including grant-back and application of injunctive relief in the course of negotiation. The two cases show that courts and enforcement agencies will take a case-specific approach in excessively licensing fee cases and may consider different factors depending on the specifics of individual cases.
Refusal to deal
In relation to refusal to deal under article 17(3) of the AML, the SAIC IP Rules and the SAIC Draft Guidelines have adopted the “essential facility doctrine”, providing that the holder of an IPR that constitute an “essential facility” shall not refuse to license its IPR, without justifiable reasons.
In applying the above rules, the SAIC IP Rules provide that when accessing the legality of the refusal to license conduct, the following factors need to be considered:
- the concerned IPR cannot be reasonably substituted in the relevant market and is necessary for other business operators to compete in the relevant market;
- the conduct of refusal to license such IPR will have an adverse effect on competition or innovation in the relevant market, whereby it will harm the consumers’ welfare and public interests; and
- the licensing of such IPR will not cause unreasonable harm to the IPR holder.
The AMC Draft Guidelines do not explicitly adopt the “essential facility doctrine”. Nevertheless, it acknowledges that if a business operator with dominant market position refuses to license the relevant IPRs without justifiable causes, such conduct may eliminate or restrict market competition and harm consumers’ welfare and public interests. Furthermore, when determining whether the business operator has justifiable causes in refusal to license, the following factors can be taken into consideration:
- the licensing commitment made by the business operator;
- whether the relevant IPRs are necessary for entering into the relevant market by other business operators;
- the influence and degree on business operators’ innovation by refusing to license the relevant IPRs;
- whether the refused party is lack of willingness and capability of paying reasonable royalties;
- whether the refused party is lack of necessary quality or technology support to ensure the proper use of IPRs, or product safety and performance; and
- whether the refusal to license IPRs will harm consumers’ or public interest.
In the case that the refusal to license is regarded by the AML enforcement agencies or the courts as abusive in nature, the relevant IPR may be subject to compulsory licensing. Whether to demand a compulsory licence will be determined by the State Intellectual Property Office (SIPO) upon the application of the potential licensee based on the relevant decision of an AML regulator or a court.
According to article 8 of the SAIC IP Rules, during the course of exercising IPRs, a business operator in a dominant market position shall not engage the following exclusive dealing conduct, without justifiable reasons, to the effect of eliminating or restricting competition in the relevant market:
- restrict its trading counterparty to exclusively deal with it; or
- restrict its trading counterparty to exclusively deal with the business operators designated by it.
Tie-in sales involving IPRs refer to the circumstances that a business operator conditions grant of licenses to some IPRs on the counterparty’s accepting of the licenses to other IPRs or products against the counterparty’s volition.
Both the SAIC IP Rules and the AMC Draft Guidelines state that a business operator with a dominant position may eliminate or restrict competition by engaging in the above-mentioned behaviour without justifiable reasons. Moreover, the AMC Draft Guidelines also point out that package licensing of IPRs could be a form of tie-in sales.
According to the AMC Draft Guidelines, when analysing whether the tie-in sales involving IPRs constitute an abuse of dominant position, the relevant factors for consideration are generally the same as those for analysing tie-in sales of other commodities.
In addition, the SAIC IP Rules list the following factors that need to be considered when assessing tie-in sales:
- whether the business operator forces to sell different products or IPRs in a bundle or package that is against trading customs, consumer habits or that ignores product functionalities; and
- whether, by implementing the tying conduct, the business operator extends its dominant market position in the tying product market to the tied product market, thereby eliminating or restricting competition among other business operators in the tying product market or tied product market.
In the Qualcomm case, the NDRC found Qualcomm’s practice of tying its SEPs with non-SEPs as illegal. One of the counterarguments raised by Qualcomm is that licensees may be subject to patent litigation if they only obtain a licence for SEPs, as it is difficult to distinguish SEPs from non-SEPs. However, the NDRC did not think this argument could justify the tying arrangement. The NDRC found that SEPs and non-SEPs can be separately licensed and it is a common practice in the industry to specify SEPs in the licensing agreements. Even though licensing SEPs and non-SEPs separately may entail certain costs and may increase the complexity of negotiation, licensors should, nonetheless, provide such option to licensees. The NDRC’s concern is that forcing licensees to license non-SEPs from Qualcomm will deprive substitutable technologies of the opportunity to compete with Qualcomm’s non-SEPs, and, thus, would eliminate or restrict the competition in the relevant markets.
Imposition of unreasonable trading conditions
According to the SAIC IP Rules and the AMC Draft Guidelines, the following terms may be considered as unreasonable trading conditions under article 17(5) of the AML:
- requiring a trading counterparty to exclusively grant back their improved technologies;
- forbidding a trading counterparty from challenging the validity of the IPR, or from instituting IP infringement lawsuit;
- restricting a trading counterparty from utilising competing products or technologies;
- continuing to claim IPRs whose protection term has already expired or has been determined to be invalid;
- prohibiting a trading counterparty from dealing with third parties, or forcing the trading counterparty to trade with a third party;
- imposing restrictions on the trading conditions of the trading counterparties with third parties;
- requiring the counterparty to cross-license without offering reasonable considerations; or
- attaching other unreasonable conditions to trading partners.
The above list, as demonstrated by the last catch-all item, is not exhaustive.
In the Qualcomm case, the NDRC found that Qualcomm, availed of the dominant position in the baseband chip markets, threatened to refuse selling baseband chips to Chinese enterprises if they do not sign patent licensing agreements containing unreasonable terms or ever challenge such unfair licensing agreements. The NDRC were concerned that such practice would restrict the right of the licensees to initiate legal actions against the unreasonable licensing terms and that licensees who refused to accept Qualcomm’s unfair conditions would be excluded from the downstream mobile device market, whereby competition in the said market would be eliminated or restricted.
The SAIC IP Rules and the AMC Draft Guidelines stipulate that in the course of exercising IPRs, a business operator with a dominant market position shall not apply discriminatory treatment/licensing terms to its trading counterparties with equivalent conditions, without justifiable reasons, to eliminate or restrict competition in the relevant market.
The AMC Draft Guidelines further provide the following factors that may be considered when evaluating whether the discrimination constitutes an abuse of dominance:
- to determine whether the licensees are with substantially the same conditions, the protection scope of the relevant IPRs and whether the products or services provided by different licensees by using the relevant IPRs are substitutable may be considered;
- whether the licensing terms, including the licensing volume, territory and duration, are substantially different. In addition to the analysis of the terms of the licensing agreement itself, the impact on the licensing conditions by other business arrangements reached between the licensor and the licensee is also required to be comprehensively considered; and
- whether the participation of the licensee in the competition in the relevant market would be adversely affected.
8. Patent settlementsIn what circumstances may patent settlements be deemed to infringe competition law?
According to publicly available information, to date, there have not been any investigations or civil actions triggered by settlements of patent disputes under the Chinese antitrust regime.
There are no specific provisions under the AML, the SAIC IP Rules or the AMC Draft Guidelines that regulate patent settlement. With that being said, patent settlement may be scrutinised and analysed according to articles 13, 14 and 17 of the AML, depending on the circumstances.
9. Merger control (jurisdiction)In what circumstances will the transfer of intellectual property rights constitute a merger for the purposes of competition law?
Under the AML and the related rules and regulations, a transaction should be notified to SAMR for merger control review before implementation, if it is a “concentration of undertakings” as defined under article 20 of the AML and it meets the turnover thresholds.
As defined in the AML, a “concentration of undertakings” will be established in cases of a merger, an acquisition of control of other undertakings by equity or assets acquisition and an acquisition of control or decisive influence over other undertakings by contract or other means. Therefore, assuming the turnover thresholds are met, transfer of IPR may constitute a notifiable concentration in the following two situations.
Article 19 of the AMC Draft Guidelines recognises that an undertaking can, by transferring or exclusively licensing IPRs, obtain control or decisive influence over other undertakings. When conducting the analysis, the following factors can be considered:
- whether the IPR can constitute a stand-alone business;
- whether the IPR independently generated accountable turnover in the previous fiscal year; and
- the exclusive licensing term of the IPR.
10. Merger control (substantive)In what circumstances will a merger involving intellectual property rights be deemed anticompetitive? Are there any special considerations for mergers involving intellectual property rights or innovation markets?
The AMC Draft Guidelines provide that if the arrangement involving IPRs constitutes substantial part of the concentration or is important to the realisation of the transaction purpose, factors as listed in article 27 of the AML, including the market share in the technology market, the concentration degree, the difficulties for entering the technology market, etc, and the characteristics of the IPRs should be considered during the evaluation of the concentration.
Particularly, according to article 27 of the AML, examination of the concentration of business operators shall take into account, among other things, the impact of the concentration on market entry and technological advancement. If a transaction substantially raises the technology barrier and economic scale requirements for a new entry, SAMR may consider the transaction to have the effect of eliminating or restricting competition. SAMR will also analyse whether any improvement of the technology would be restricted as a result of the concentration.
Article 6 (2) of the Guidelines for the Notification Documents of Concentration of Operators (Documentation Guidelines) requests the notifying parties to illustrate whether there is any restriction arising from intellectual property on market entry, and the parties shall disclose information of concentrated parties being the licensors or licensees of relevant IPRs in relevant markets. Article 8 of the Documentation Guidelines requests the notifying parties to to provide the analysis on the impact of the concentration on technology advancement.
In China, there are several merger cases involving IPRs that have been reviewed by MOFCOM (the former AML enforcement agency having the authority to review merger control cases) as having potential anticompetitive effects and which were, therefore, cleared with conditions. These cases concern the establishment of JV by GE China and China Shenhua Coal Oil Chemical Co, Ltd (date of decision: 10 November 2011), Google’s acquisition of Motorola Mobile (date of decision: 19 May 2012) and the establishment of JV by ARM Holdings, plc, Giesecke Devrient GmbH and Gemalto NV (date of decision: 6 December 2012), Microsoft’s acquisition of the service and device business of Nokia (date of decision: 8 April 2014), etc.
The most recent case is Nokia’s acquisition of Alcatel Lucent, which was approved by MOFCOM on 19 October 2015, with conditions. In that case, the two companies have horizontal overlaps in three markets (radio access network, core network systems and network infrastructure services). After assessment, MOFCOM concluded that the proposed acquisition would not restrict and eliminate competition in these markets. However, MOFCOM also analysed the potential impact of the proposed transaction on the licensing market of the telecommunication technology standard essential patents (SEPs), where both companies were members of several international standard-setting organisations (SSOs) and held many SEPs of 2G, 3G and 4G standards. MOFCOM is concerned that the concentration would increase the concentration degree in the market of telecommunication technology SEPs, whereby the gaps between Nokia (ranked number one) and Qualcomm (ranked number two) would be increased in the 2G and 3G market and Nokia would be ranked number one in the 4G market. In consideration of the fact that SEPs are the major barriers for the downstream market entry, licensees are highly dependent on SEP licensing and lack effective counterbalance power, and that Nokia's potential unreasonable alteration to its patent licensing strategy may affect Chinese markets of mobile terminal devices and wireless telecommunication network equipment, MOFCOM decided to approve the transaction with the following conditions:
- subject to reciprocity, injunctions relating to SEPs must not be enforced to prevent the implementation of a standard encumbered with FRAND commitment, unless a patent holder has made a FRAND licence available and the prospective licensee has been unwilling to enter into such FRAND licence or to comply with its terms;
- after Nokia transfers SEPs to a third party in the future, it must promptly inform its existing Chinese licensees and any Chinese company that is in the process of actively negotiating a licence with Nokia about the assignment, in particular providing the name and address of the assignee, the effective date of the assignment and specifics regarding the rights that were assigned;
- whenever Nokia transfers SEPs to a new owner in the future, Nokia will pass on the FRAND undertakings with respect to the SEPs to the new owner, by only assigning the SEPs subject to the existing FRAND undertakings given by Nokia to SSOs; and
- MOFCOM has the right to monitor Nokia's compliance with the above commitments.
11. StandardisationHow, in general, does competition law treat the development of standards in standard-development organisations (SDOs), and the exercise of intellectual property rights for technology that may be essential to a standard?
Generally speaking, standardisation is encouraged under Chinese law. According to the Standardisation Law of the People’s Republic of China, standardisation could be conducive to an efficient use of the country’s resources, a wider utilisation of scientific and technological gains and the enhancement of economic returns; it could also increase the universality and interchangeability of products, and, therefore, make it technologically advanced and economically rational. Besides, article 15 of the AML lists "unifying specification and standard of product” as a situation under which participants to a monopoly agreement may be exempted, subject to the fulfilment of other conditions. In this sense, the AML not only does not prohibit standardisation, but also admits it as having a pro-competitive effect.
At the same time, it is recognised by the AML enforcement agencies and courts that the abuse of IPRs that are essential to a standard may have adverse effects on competition. The SAIC IP Rules and the AMC Draft Guidelines prohibit business operators from using the standard setting process and implementation of standards to engage in conduct that eliminates or restricts market competition in the course of exercising IPRs.
Generally speaking, both monopoly agreements and abuse of dominance conducts may arise in the standard setting process and enforcement of standards, which will be introduced in more detail in questions 12 and 13.
12. Standardisation and anticompetitive agreementsHow do competition law rules on agreements, concerted practices, etc, apply to the standardisation process?
In general, article 13 of the AML prohibits competitors from entering into cartel agreements that fix or change the prices of a commodity, limit the production or sales volume of a commodity, divide a sales market or material procurement market, restrict the purchase or development of new technology or new equipment, or boycott trading, etc. If competitors reach any cartel agreements mentioned above during the standardisation process, article 13 shall apply.
Cartels are, per se, illegal under the AML, meaning they are presumed to have anti-competitive effects unless it is proved otherwise. On the other hand, article 15 of the AML sets forth exemption clauses to article 13. According to article 15, article 13 shall not be applicable if participants to a cartel can prove that the relevant agreement is concluded for the purpose of "unifying specifications and standards of products". However, to enjoy immunity under article 15, the operators must also prove that the agreement in question does not seriously restrict competition in the relevant market and that it could enable consumers to share the benefits therefrom.
Nevertheless, in practice, it is very difficult for operators to justify cartel agreements by invoking article 15.
In particular, the AMC Draft Guidelines point out that standardisation can assist in realising the interoperability between different products, reducing cost, increasing efficiency, ensuring product quality and improving social well-being. However, competing business operators jointly developing standards may also eliminate or restrict competition. When conducting specific analysis, the following factors can be considered:
- whether certain business operators are foreclosed;
- whether relevant plans of certain business operators are foreclosed;
- whether it is agreed not to implement other competing standards; and
- whether there is any necessary and reasonable restraint mechanism for the implementation of the IPRs covered by the standards.
13. Standardisation and unilateral conductHow do competition rules on unilateral conduct apply to the exercise of intellectual property rights for technology that may be essential to a standard?
The general approach in analysing abuse of IPRs, as mentioned above, shall also apply to IPRs for technology that may be essential to a standard, provided that the business operator is holding a dominant market position.
Besides the above-mentioned abusive conducts, the AMC Draft Guidelines also point out that a SEP holder with dominant position runs afoul of the AML if it abuses the injunctive relief to force licensees to accept unfairly high royalties or other unreasonable licensing conditions. When conducting the analysis, the following factors may be considered:
- the true will as expressed and reflected during the parties’ negotiation process;
- the commitment in relation to injunctive relief undertaken by relevant SEPs;
- the licensing conditions raised by the parties during the negotiation process;
- the impact of applying for injunctive relief on the licensing negotiation; and
- the impact of applying for injunctive relief on the downstream market competition and consumers’ benefits.
14. Recent cases and other developments
On 19 December 2013, the Administrative Provisions on National Standards Involving Patent (Interim) (the Interim Provisions) were jointly issued by the Standardisation Administration of the People's Republic of China (SAC) and the SIPO. The Interim Provisions adopt the concept of FRAND, providing that a patent can be incorporated into a relevant standard only when its holder commits to granting licence under the FRAND obligation. The Interim Provisions also require that the IPR holder who makes a FRAND licensing commitment shall have the assignee of IPR agree to be bound by such statement.
On 7 April 2015, SAIC officially published the long awaited SAIC IP Rules, which took effect as of 1 August 2015. Moreover, in mid-2015, the AMC of the State Council initiated drafting projects of six guidelines, among which one is anti-monopoly guidelines on abuse of IP rights. The Guidelines intend to cover both price- and non-price-related monopolistic conduct.
The Supreme People’s Court has issued Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (Interpretation (II)) on 21 March 2016, which provides certain clarifications in regarding injunctive relief for SEP holders. According to article 24 of Interpretation (II), under the following conditions, the court would generally not support the explicitly disclosed and FRAND-encumbered SEP holder’s application of injunctive relief: (i) when the SEP holder and the alleged infringer conduct negotiation on the licensing terms, the SEP holder intentionally violates its FRAND commitment, which results in the failure to conclude a patent licensing contract, and (ii) the alleged infringer is not obviously at fault in the process of negotiation. Furthermore, the Interpretation (II) also provides that where the patent holder and the accused patent infringer fail to reach a consensus through negotiation, the parties may respectfully request a people's court to make a ruling; in determination of the licensing terms, the people’s court shall, according to the principle of fair, reasonable and non-discriminatory, take account of the degree of innovation of the patent and the role of the patent in the standards, the technical fields of the standards, the nature of the standards, the application scope of the standards, relevant licensing terms and other factors.
According to publicly available information, the NDRC has investigated several abuse of market dominance cases involving IPRs, including the investigations into Qualcomm and IDC. As for the judicial practice, the People’s Court has heard and ruled on several IP-related antitrust cases, among which is the Huawei v IDC case. For details of NDRC’s investigation against Qualcomm and the court’s adjudication on the Huawei v IDC case, see above.