China’s SAIC Releases Provisions Regulating Anti-Competitive Conduct by Abuse of IP Rights

The recent spate of high-profile anti-trust cases involving technology firms as well as the increasing enforcement of China’s merger control regime are indications of the growing maturity of China’s Anti-Monopoly Law (the AML). On 1 August 2015, the long-awaited “Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition” (the Provisions) came into force. The Provisions promulgated by the State Administrations for Industry and Commerce (SAIC) are the culmination of 6 years of consultation and 8 drafts. The Provisions apply to the abuse of IPRs through anti-competitive agreements and the abuse of dominant market positions. Most of the provisions are in line with international practice but there are a few domestic elements.

The Provisions have been enacted by the SAIC and are binding only on the SAIC and the local AICs in administrative cases. The Courts, being part of the judicial system, are not technically bound by the Provisions. However, it is likely that the Courts will refer to the Provisions in cases involving the judicial enforcement of the AML.

The key provisions relate to:

• ƒƒThe prohibition against both horizontal and vertical agreements that restrict competition subject to a “safe harbour” relating to the market share of the relevant business operators;
• The introduction of an “essential facilities” doctrine which will require IPR owners with market dominance to licence their IPRs where the underlying IP “constitutes facilities necessary for production and other business activities”;
• The prohibition on dominant business owners from imposing specific contractual clauses on licensees without valid justification;
• ƒƒThe prohibition of certain conduct concerning patent pools in a dominant position without a valid justification; and
• The regulation of the conduct of dominant operators during the standards setting process.

Safe Harbour
Article 5 of the Provisions provides that certain agreements between competitors shall not constitute a violation of the AML:

• In the case of horizontal agreements: where the combined market share of the competing business operators does not exceed 20% of the relevant market, or where there are at least four other independently controlled alternative technologies, available at reasonable cost.
• In respect of vertical agreements: where none of the parties to the agreement has a market share that exceeds 30% of the relevant market, or where there are at least two other alternative technologies, available at reasonable cost.

However, the safe harbour will not apply if there is evidence to show that the agreement has the actual effect of eliminating or restricting competition. In other words, business operators would not be able to come into the safe harbour if their agreement, in fact, has an anti-competitive effect.

Also, similar to the approach taken in the EU, certain types of conduct set out in Articles 13 and 14 of the AML will not come within the safe harbour. These "hard-core restrictions" include price-fixing, output control, market sharing, limiting new technologies and resale price maintenance.

Refusal to Licence
Article 7 provides that where the IPRs of a business operator in a dominant market position constitutes "facilities necessary for production and other business activities", the business operator may not refuse, without a valid reason, to licence its IPRs on reasonable terms in order to eliminate or restrict competition. The factors to be considered in evaluating a refusal to licence are:

• ƒƒThe IPRs in question cannot be reasonably substituted and are necessary for other business operators to compete in the relevant market;ƒƒ
• The refusal to licence will have an adverse impact on competition or innovation in the relevant market and harm the interests of consumers or the public; andƒƒ
• Licensing the rights will not cause unreasonable damage to the licensor.

This has probably been the most controversial provision throughout the consultation as it appears to extend the “essential facilities” doctrine to the area of IPRs. Critics claim that introducing such a concept to IPRs will actually have a negative impact on innovation which will harm domestic businesses and consumers in the long run.

The doctrine traditionally applies to unique assets which are so “essential” that forced sharing would be in the public interest, e.g. fundamental facilities such as telecommunications, power or transportation networks. Many argue that, unlike a physical asset, an IPR would rarely constitute an essential facility since it is almost always possible to design around it. The most obvious possible exception to this would be the refusal to licence standard essential patents (SEPs). However, the Provisions deal separately with SEPs in Article 13 and, specifically, the refusal to licence (see below). This seems to indicate that the intention behind Article 7 goes beyond regulating SEPs to include other types of IP, e.g., those in the pharmaceutical sector.

Article 7 seems to set a relatively broader standard compared to the strict approach taken in Europe and the US. Concern remains that this article could be used to force IPR owners to licence their rights to other business operators. The Provisions do not define the key terms “necessary for production and other business activities” or “adverse impact” which makes it unlikely to assuage the anxiety of IPR owners. How Article 7 will be implemented in practice remains to be seen but it seems likely that the SAIC will take a cautious approach, given the judicial restraint exercised by international courts in the application of this doctrine.

Prohibition against Tying Arrangements

Article 9 prohibits a business operator in a dominant market position, without a valid reason, from forcibly tying or bundling different goods for sale in a manner that is contrary to normal trade practices or consumption habits, or without regard to the function of the goods, in order to eliminate or restrict competition. The tied sales must cause the dominant position of the operator in the tying product market, to be extended to the tied product market, thereby eliminating or restricting competition.

The practice of bundling has already come under the scrutiny of the Chinese competition authorities. In the Huawei v Interdigital case, Interdigital was found by the Shenzhen Intermediate People’s Court to have abused its dominant market position by tying the licensing of its SEPs with non-SEPs during licensing negotiations. Also, in the recent ground-breaking decision involving Qualcomm, the National Development and Reform Commission (NDRC) found that Qualcomm had abused its dominant market position by tying SEPs for wireless communication to non-SEPs.

These cases were decided before the Provisions were finalised but should give some indication of the approach that will be taken by the authorities. The stipulation that the conduct of the dominant business operator must be without valid reason and that competition is actually restricted is a recognition that bundling can sometimes be justified. In the Qihoo v Tencent case, the court found that Tencent was justified in combining the installation of its instant messaging and security software. This is because Tencent’s action was beneficial to consumers since it improved the performance of their computers. There was also no evidence that the alleged tying actually excluded competition.

Prohibited Restrictive Conditions

Article 10 prohibits a business operator in a dominant market position from imposing unreasonable restrictive conditions without justification. Prohibited acts include:

• Requiring exclusive grant-backs of improved technologies;
• Prohibiting trading partners from challenging the validity of their IPRs;
• Continuing to exercise IPRs against their trading partners even after they have expired or have been held to be invalid; and
• Prohibiting trading partners from dealing with third parties.

Patent Pools

Article 12 addresses “patent pools” which is defined as an arrangement between two or more patentees to jointly licence their patents to third parties in a certain manner. There is a broad prohibition against members of a patent pool exchanging sensitive competition-related information to reach monopolistic agreements. The article also sets out a list of prohibited conduct applicable to patent pools in a dominant market position including:

• Restricting patent pools members from licensing their patents to parties outside of the patent pool;ƒƒ
• Restricting patent pools members or licensees from researching and developing competing technologies;ƒƒ
• Compelling licensees to grant back improved or developed technologies on an exclusive basis; and
• Forbidding licensees from challenging the validity of patents in the pool.

Standard Setting
The abuse of IPRs in the context of standards setting is another controversial area in China and internationally. The cases of Huawei and Qualcomm are both concerned with SEPs. The latest draft amendments to the Patent Law also specifically addresses SEPs including a provision that failure to disclose an SEP during the standard-setting process will result in a deemed grant of a licence over that SEP.

According to Article 13, a business operator in a dominant market position must not deliberately withhold information relating to its patent rights, or explicitly waive its patent rights during the standard setting process and then come back to assert its rights after the standard has been implemented. Moreover, the owner of an SEP cannot refuse to licence its patents, engage in tying or impose other unreasonable conditions, in violation of FRAND principles after the patent has become an essential patent of the standards.

Assessing the Operator’s Impact on Competition
Finally, it is noteworthy that Article 16 lays down the factors that the SAIC has to consider when assessing the impact of a business operator’s act on competition. These factors include:

• The market position of the operator and the counterparts;
• The concentration degree and the difficulty of entering of the market;
• The practices and the stage of development of the industry; and
• The impact on the development of innovation and technology promotion, the operator’s capability to innovate and the speed of technological changes.

Sanctions

Penalties under Article 17 include the confiscation of illegal income and fines of between 1% to 10% of the business operator’s preceding year’s turnover. With regard to monopoly agreements that have been reached but have not yet been implemented, the operator may be subject to a fine of no more than CNY500,000. The SAIC is given a discretion to determine the exact amount of the fine by considering the nature, circumstances, extent and duration of the illegal acts. The record fine of over CNY6 billion imposed in the Qualcomm case is an indication that fines for breaches of the AML will continue to increase.

Conclusion

The Provisions came into force on 1 August 2015, the 7th anniversary of the implementation of the AML. As China’s laws becomes increasingly aligned with international standards, business operators in China need to pay more attention to AML compliance. The regulatory regime is not easy to navigate. Businesses need to be aware of all relevant legislation which may impact on anti-competitive conduct. This includes not only the AML, but also the Contract Law, the Foreign Trade Law, the Judicial Interpretation on Technology Contract Disputes, the Patent Law, the Administrative Rules on National Standards Involving Patents, as well as the Provisions discussed in this article.

Different kinds of anti-competitive conduct will be handled by different bodies, e.g., the SAIC deals with non-price related anti-competitive conduct. Price-related infringements of the AML is the responsibility of the National Development and Reform Commission (NDRC). The merger control regime is the responsibility of the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM). Certain anti-competitive conduct may be subject to sanctions from more than one body.

Civil actions in the Courts may also be brought for private enforcement of the AML. It is not yet clear whether civil cases involving IPRs and the AML will be heard by the new IP specialist Courts.

As China’s economy matures, the legal tools used to regulate the market will be also mature. The use of anti-monopoly laws is common in developed economies and companies doing business in China must now also get to grips with AML compliance.

Key Contacts

Catherine Zheng

Partner | Intellectual Property

Email or call +852 2825 9617