Authored by Dr. Zhan Hao (zhanhao@anjielaw.com) and Li Xiang at AnJie Law Firm

Introduction

There is a joke in reference to the relationship between antitrust and intellectual property and the conflicts between them, which goes, “It is not easy to marry the innovation bride and the competition groom and some have argued that such a marriage will unavoidably lead to divorce.” Nowadays it is not a problem if there is an intrinsic conflict between them. In China, the principle that both of the two legal regimes serve the common purpose of promoting innovation and enhancing consumer welfare is broadly acknowledged.

Nonetheless, considering the “exclusionary” nature of IPRs, IP holders, especially those holding dominant positions in relevant markets may misuse their IPRs or perform abusive conducts involving IPRs in the name of exercising their legal rights. Compared with other approaches to abuse of dominance, the analysis of abuse in relation to IPRs may be more complicated. The application of IPRs to competition issues is one of the hotspots in the field of competition law. Although Chinese Anti-Monopoly Law (“AML”) is still in its infancy, the IP-related regulations by anti-monopoly law enforcement agencies are developing rapidly and there have appealed some IPR related competition litigations as well, such as the Huawei vs. IDC case. This paper will discuss China’s perspectives on the abuse of dominance in relation to IPRs.

Applicable Rules

At the legislative level, Article 55 of the AML offers a general framework regarding the application of competition law with respect to the exercise of IPR. It reads that if an undertaking misuses its IPR in order to eliminate or restrict competition, the AML shall apply to such conducts.

Furthermore, the recently released Provisions for the Industry and Commerce Administrations on the Prohibition of Abuse of Intellectual Property Rights for the Purpose of Eliminating or Restricting Competition (Draft for Comments)(“Draft Provisions”) by the State Administration for Industry and Commerce (SAIC)provides more specific and explicit provisions on IP-related issues in the context of anti-monopoly law. The Provisions have not yet taken effect and such rules will only apply to the investigations of the SAIC, however, it is a significant reference and it provides valuable guidance as to how the AML should be applied to the misuse of IPRs.

Besides, although China is not a common-law jurisdiction and therefore precedents have no binding effect, the court’s relevant judgment of cases still has impact on similar matters to some extent, especially those rulings made by higher-level courts.

Market Definition

Under the AML, there is no provision clearly defining relevant markets involving IPRs. In practice, the word “licensing market” frequently appears in the decisions of the agencies and the rulings of courts. For instance, in the conditional approval decision related to Microsoft’s acquisition of Nokia, MOFCOM defined the patent licensing market as one of the relevant markets. In the Huawei vs. IDC case, the relevant market is also defined as the market of licensing Standard Essential Patents (“SEPs”).

In accordance with the SAIC’s Draft Provisions, there are two types of relevant markets with respect to IP, respectively defined as the technology market and the relevant product market involving certain IPRs. The “technology market” refers to the market that is developed out of the competition between the different technologies involved in exercising IPRs and those currently available, substitutable, similar technologies.

Currently, in China, the words used by different enforcement agencies to define relevant markets involving IP have not been unified yet. From my own viewpoint, “technology market” is more appropriate and accurate. Though there may be no great essential distinction between this term and the term, “licensing market”, the scope of “technology market” seems wider—it not only covers the licenses of patented technologies but also the technologies unpatented yet.

Besides, in accordance with current rules (no matter if effective or not yet), the R&D competition has not been covered. The SAIC acts prudently to define the relevant markets regarding IP. The “innovation market” (which refers to the market formed by the competition of undertakings for the research and development of new technologies or products in a specific area) under the US Antitrust Law has not been applied in the current edition of the Draft Provisions. In view of China’s current scarce anti-monopoly enforcement resources, it is wise to give up the “innovation market” considering the predictable difficulty of accurately assessing the R&D capabilities of the market.

Market Power and Dominance

To evaluate the market power of participants in relevant markets, Articles 18 and 19 of the AML specify the factors that should be taken into consideration and certain market share thresholds that give rise to a presumption of dominance, which are applicable to IP-related markets as well.

Accordingly, the dominant market position of an undertaking shall be determined based on the following factors: (1) market share of the undertaking and the competition situation in the relevant market; (2) ability of the undertaking to control the sales market and/or the purchase market of the raw materials; (3) financial and technical conditions of the undertaking; (4) the degree of dependence on other undertakings; (5) the difficulty of entering the relevant market by other undertakings; and (6) other factors.

In practice, it is still difficult to fully consider all of these factors in determining whether an undertaking holds a dominant market position and there is no specific objective quantitative standard. Therefore, Article 19 states that undertakings that have any of the following conditions can be assumed to hold a dominant market position: (1) a market share of one undertaking in relevant market accounts for more than 1/2; (2) a joint market share of two undertakings as a whole in relevant market accounts for more than 2/3; (3) a joint market share of three undertakings as a whole in relevant market accounts for more than 3/4.

In essence, IPRs may create a barrier to entry in the relevant product or technology market, and if the barrier is high, then an undertaking with a substantial market is likely to be in a dominant position. The existence of IPRs does not necessarily mean that the owner has a dominant position. In line with that, Article 6 of the Draft Provisions sets forth a general principle that the ownership of IPRs of an undertaking may be a factor in establishing market dominance; however, an undertaking shall not be directly presumed to hold a dominant market position in the relevant market through the mere possession of the IPRs. Besides, it is noteworthy that having a dominant position itself is not illegal. Only the abuse of such a status falls into the scope of the jurisdiction of the AML.

Abuse

Article 17 of the AML provides a principle which prohibits undertakings with a dominant position from engaging in certain abusive conducts, such as charging unfair prices, refusing to trade, attaching unreasonable restrictions, implementing tying-in sales, or applying discriminatory treatments, etc.

Under the Draft Provisions by the SAIC, there has been a refinement to the rules that prohibits the undertakings with market dominance from engaging in certain types of conduct in respect to the exercise of their IP rights; this provides a full picture regarding IP-related abuse of dominance. Accordingly, the following behaviors may constitute abuse of dominance positions:

Refusing to license IPRs which are essential facilities for manufacturing and operating activities;

Restricting the counterparts to merely conduct transactions with themselves or undertakings designated by them, or restricting the counterparts from conducting transactions with their competitors;

Tying behaviors against the counterparts’ wills, including tying products that are distinguished from the tied products in terms of both nature and trade practice, which enables such undertakings to extend their dominant positions in the tying market into the tied product market;

Imposing unreasonable restrictions such as (1) requiring the counterparts to exclusively grant back their improved technologies; (2) forbidding the counterparts from challenging the validity of their IPRs; (3) restraining the counterparts from manufacturing, using or selling competing products, or developing or using competing technologies without infringement upon their IPRs, after the expiration of the licensing agreement; (4) requiring the counterparts to continue to pay royalties on IPRs that have already expired; (5) forbidding the counterparts from engaging in transactions with any third party;

Discriminatively treating counterparts on the same conditions;

Misusing patent pools such as (1) restraining members of the pool from licensing patents independently; (2) restraining members or the licensees from developing competing technologies; (3) requiring the licensees to exclusively grant back their improved technologies; (4) prohibiting the licensees from challenging the validity of the pooled patents; providing differential treatment; (5) taking advantage of patent pools to exchange competition-related sensitive information;

Excessively issuing infringement warning letters after the expiration or invalidation of the counterparts’ IPRs or in the circumstance that non-infringement is sufficiently proved;

Misusing the (potentially)essential IPRs integrated into the standards including (1) refusing to disclose the information on their rights or expressly abandoning their rights and asserting such rights after the patents become certain, particular, mandatory standards; (2) violating the FRAND (fair, reasonable and non-discrimination) principle.

Last but not least, only in the condition that the abovementioned abusive behaviors eliminate or restrict the competition in the relevant markets will such behaviors constitute the abuse of dominance.

Issues in Practice: Huawei vs. IDC case

Considering the fact that the AML has just entered its sixth year, it is not surprising that there are only a limited number of cases regarding IP abuse in practice now, no matter how many private litigations or agency investigations. In view of the published cases and information, at this stage, issues relevant to SEPs are the main focus of Chinese anti-monopoly agencies and courts, which are currently the hotspots in the antitrust area worldwide. Huawei vs. IDC case is the first litigation in respect to an abuse of SEPs in China. This case undoubtedly has referential significance, which may help us to clarify how the rules are applied and what problems still exist during the application process.

Background

In December 2011, Huawei filed the complaint against IDC and its subsidiaries before the Shenzhen Intermediate People’s Court. Huawei accused IDC of abusing its market dominant position by requesting discriminatory, high royalty rates and tying the licensing of SEPs with non-SEPs. Additionally, Huawei requested the court to determine an appropriate royalty rate under the FRAND terms, and sought damages of 20 million RMB from IDC.

All of the significant issues, such as the definition of the relevant market, the findings of market dominance, and abuse of dominant market position are involved in this case. But before the analysis, it is necessary to understand two concepts: SEPs and FRAND. SEPs are patents essential to the implementation of a specific industry standard. Normally, the standards are agreed upon by standard-setting organizations such as ETSI (European Telecommunications Standards Institute) in which patent holders and manufacturers of standard-compliant products participate. In this context, a SEP holder is committed to license the SEP on FRAND (fair, reasonable and non-discriminatory) terms.

Issues of the case

A. Definition of Relevant Product Market

The judge of the last instance defined the relevant product market, that is, every licensing market of each SEP constitutes an independent relevant product market. Such a conclusion was made based on the theory that every single SEP is unique and non-substitutable and cannot possibly be replaced by other technologies.

In principle, there is no essential difference between the two approaches of defining an intangible technology (or licensing) market and to define a tangible product market. In this case, IDC argued that the terminal products could not be manufactured simply with IDC’s SEPs. Hence, the SEPs possessed by IDC could not constitute the relevant market. That argument is weak considering the basic theory that the definition of the relevant market mainly depends on the substitutability of the commodity or service market.

B. Market Power and Dominance

According to the ruling, the judge is of the opinion that the uniqueness and non-substitutability of the SEPs implies that IDC is the only supplier, holding 100% market share in every SEP licensing market. IDC owns the ability to block or affect other undertakings entering into relevant markets. Furthermore, since IDC just licenses its patents and does not engage in any substantial production, Huawei could not restrict IDC through cross-licensing SEPs. Hence, the court affirmed that IDC had a dominant market position in the relevant market.

C. Abuse

In order to assess whether the behaviors of IDC constitute abuse of IPRs, the judge first compared the terms and conditions of several different license agreements entered between IDC and its other licensees, such as Apple, Samsung, RIM and HTC and drew the conclusion that Huawei was charged obviously higher licensing fees by IDC. It is a lack of reasonability for IDC to charge the obviously high licensing fees of Huawei. Besides, IDC compelled Huawei to license all of its patents freely. However, both the number and the value of Huawei’s patents are much more and much higher than IDC’s patents, which further exacerbate the unfairly high price. Finally, IDC failed to meet its FRAND commitment, attempting to force Huawei to accept the unreasonable licensing terms through making use of injunctions.

iii. Comments

The current rules, no matter whether or not they have been effective, do not specifically stipulate how to define a relevant market regarding SEPs. From the basic principle of defining relevant markets, it is reasonable to state that every licensing market of each SEP constitutes an independent relevant product market.

However, in my opinion, merely being included in a standard does not necessarily mean the market power and dominance.

Firstly, due to the specific nature of IPRs, such as exclusivity and intangibility, it is complicated to assess the dominant position of patents holders in relevant markets. The principle that being awarded a patent is not the same as being awarded market power is widely accepted by antitrust agencies in different jurisdictions. As mentioned, Article 6 of the Draft Provisions by the NDRC sets forth the general principle that the ownership of IPRs may be a factor in establishing market dominance; however, an undertaking shall not be directly presumed to hold a dominant market position in the relevant market through the mere possession of the IPRs.

Secondly, according to the courts’ analyses, it seems that an SEP holder naturally holds a dominant position in the technology licensing market for that SEP. That would significantly lower the barriers that an antitrust plaintiff would face in order to establish the element of dominance in SEPs or other similar cases. Once the SEP holder conducted the abusive behaviors mentioned above, it may face high risks of violating the AML.

As we all know, standards bring benefits to consumers, undertakings and industries in terms of interoperability and innovation. It is therefore important that the standardized technologies should be accessible to all interested parties. In order to ensure that, the SEP holders are required to license their patents on FRAND terms. However, there is no agreement on what are FRAND terms in practice, even in US or EU where antitrust law has been developed into maturity. The courts of Huawei vs. IDC case believed that SEP holders held 100% market share and subsequently held a dominant position, and according to that, any alleged abusive conducts will be dangerous. It seems that the court’s ruling broadens the scope of FRAND terms and imposes a heavier burden on the SEP holders.

Conclusion

China apparently is paying more attention to IP-related issues. In the antitrust area, the relevant adjustment mechanism has been established gradually. Huawei vs. IDC as the landmark case also offers a series of important issues at the intersection between antitrust law and IP. However, the development process also highlighted some issues especially related to SEPs and FRAND terms. It is necessary to further discuss how to well balance the rights of an IP holder and the values of competition.