Authored by Dr. Zhan Hao (email@example.com) from AnJie Law Firm
On June 11, 2014, China’s State Administration for Industry and Commerce (SAIC) released the latest draft  of regulations designed to implement the Anti-Monopoly Law (AML) with respect to intellectual property rights—Rules of the Administration of Industry and Commerce on the Prohibition of Abuses of Intellectual Property Rights for the Purposes of Eliminating or Restricting Competition (Rules), to solicit public opinions. The Rules describe the authority’s enforcement policies, criteria of proof, and types of acceptable evidence in its analysis of suspected anti-competitive conduct involving IPR. The period of calling for public opinions will expire on July 10, 2014.
China is the world’s fastest-growing market for licensed goods. According to figures published by the International Licensing Industry Merchandisers’ Association, the Chinese licensing market grew from US$1.1 billion in 2005 to US$3.9billion in 2010, marking a 25% year-on-year growth. China has strengthened its commitment to R&D to support the government’s drive towards indigenous innovation. China has already been outdoing the U.S. in terms of patent and utility model filings since 2011. This has set China in fourth place in the table of Patent Cooperation Treaty (PCT) applications in 2012, with an overall share of 9.65%.
Nevertheless, these spectacular numbers do not mirror reality. While ZTE and Huawei occupied first and fourth place in the table of PCT filings in 2012 by the company, there were no other Chinese companies in the top 50.Moreover, it is reported that having been long exploited by powerful foreign patent holders, the average profit rate of the Chinese handset makers is merely 0.3% . The reality is that China remains heavily reliant on imported IP. According to Thomson Reuters, in 2012, China had are cord deficit in royalties and other license fees of nearly US$17 billion.
Against foresaid backdrop, the SAIC came up with the first draft of the IP Enforcement Rules in 2009 in the form of non-binding guidelines. However, the agency decided to switch to making Rules in March 2013，because the SAIC admitted, in its explanations about drafting the antitrust regulations for IP, that given the brevity of antitrust enforcement exposure and the lack of experience in implanting the AML in the field of IP, the time is not right for full-blown and properly tailored antitrust guidelines for China.
The previous drafts of the regulations were widely circulated and have received wide-ranging comments from both Chinese and international stakeholders, including relevant agencies of the central government, foreign antitrust enforcement agencies, well-known Chinese and foreign handset makers, and major patent holding companies.
After rounds of modifications and soliciting comments, the present draft of the Rules seeks to make clear the following points:
To begin with, the essential goal of prohibiting business operators from restricting and eliminating competition is to protect competition and incentivize innovation, which means that the exercise of IPR is not antithetical to the AML at all. Article 6reads that IPR may be a factor in determining whether an enterprise is dominant, but dominance will not be presumed solely based on IPR ownership
Secondly, business operators are barred from reaching monopoly agreements during the course of enforcing IPR.
Thirdly, apart from the general prohibition of abusing market dominance during the course of enforcing IPR, the Rules specifically provide for boycotts, refusal to license, tying and imposing unreasonable trading conditions.
Fourthly, the Rules also provide for some special types of anti-competitive behaviors involving IP, such as exclusive grant backs, certain patent pools, misleading a standards development organization, and sending nuisance IPR litigation threat letters. These conducts may have to do with both monopoly agreements and abuse of dominant market position, but are most related to the latter.
Fifthly, the draft administrative rules provide for safe harbor immunity from prosecution based on market share thresholds and where the SAIC cannot prove that an agreement actually restricts or eliminates competition. Horizontal agreements involving IP rights can benefit from a safe harbor where the combined market share of the undertakings involved is less than 20%, (or where there are at least four other undertakings with closely substitutable IP rights). The threshold for vertical agreements is 30% market share per undertaking, or at least two other undertakings with closely substitutable IP rights.
Last but not the least, the Rules set out the standards for evidence, the legal basis and principle of administrative investigations, and detailed punishments.
The Regulatory Nature of IP
Some scholars argue that IP is a form of market entry and price regulation. IP means that the government grants a favored party the legal right to exclude others from entering the market at all, from entering the market under certain terms and conditions via injunctions, or from entering the market without paying an entry tax in the form of a patent damage award. Modern IP is more like regulation than it is like property. In this vein of jurisprudence, if IPR does not arise out of natural rights but instead is an institution created to boost innovation, the creator, namely the government, bears the responsibility to correct the competition loopholes resulting from the failures of the IP markets.
Unlike the prior draft guidelines which are non-binding, the current draft of Rules will bind the SAIC but will not bind any other antitrust enforcement agencies. Although the SAIC will likely be the primary AML enforcer with regard to potential IPR abuses, some investigations will inevitably fall under the jurisdiction of MOFCOM (e.g., in acquisitions of IPR) or the NDRC (e.g., conducts relating to pricing or price). Clarification from these agencies would be beneficial as to whether they intend to follow the SAIC’s regulations, develop their own IPR guidelines or regulations, or follow another approach.
Under the current draft of Rules, some unilateral refusals to license violate the AML. Article 13 states that an undertaking possessing standard essential patents may not “unequally or discriminatively refuse to license its IPRs” but offers no guidance as to the meaning of the terms “unequally” or “discriminatively.” Nevertheless, it is clear that these provisions (1) limit a dominant IPR holder’s fundamental right to exclude, (2) limit the licensing terms dominant patent owners can use, and (3) require dominant patent owners to justify any differences in license terms with social welfare improvement standards.
 Chinese version is available at http://www.saic.gov.cn/gzhd/zqyj/201406/t20140610_145803.html.