Nearly six years and a half since four Ningbo magnetic material manufacturers (“Plaintiffs”) brought lawsuits against Hitachi Metals, Ltd. (“HML”), China’s Ningbo Intermediate People’s Court (“Court”) finally entered its first instance rulings on 23 April 2021, in which the Court found in favour of the Plaintiffs and ruled that the refusal to license patents by HML constitutes an abuse of dominance, as the non-SEP patents owned by HML were held as ‘essential facility’ under the antitrust law scheme by the Court. In essence, the ruling required HML to license its patents to the Plaintiffs on FRAND terms while HML itself has never made any FRAND commitments in the past as its patents have never been considered as standard essential patents (“SEPs”). Currently, HML already has eight licensees in China.
- Relevant Facts
- The Beginning of the Story
In August 2013, an Alliance established by seven Chinese companies including the four Plaintiffs-i.e., Ningbo Tongchuangqiang. Magnetic Materials Co., Ltd., Ningbo Permanent Magnetic Industry Co., Ltd., Ningbo Ketian Magnetic Industry Co., Ltd. and Ningbo Huahui Magnetic Industry Co., Ltd., filed a complaint to the U.S. Patent Office against HML for invalidation of its core patents of sintered neodymium-iron-boron (“sintered NdFeB”), a type of rare earth magnets.
In May 2014, the Alliance and HML negotiated in San Francisco yet failed to reach an agreement; the seven companies have not obtained the relevant licenses. Therefore, the four Ningbo members sued HML at their base, Ningbo; the case was officially accepted on 11 December 2014.
- The Long Trial
The first hearing was held on 17 December 2015, and the second one on 10 March 2017. And then, the dormant case was back to life in early 2021, after four years of silence. The regional court handed down all four decisions on 23 April 2021, in favour of the Plaintiffs. The Court ordered partial damages for the Plaintiffs, for a total of RMB 142.6 million, and required HML to stop its refusal to license.
- Key Issues of the Rulings
In those lengthy 69-page rulings, upon citing the factual claims and legal arguments as well as evidence from both sides, the Court went on laying down its own findings and reasoning; key issues of the rulings are set below:
- Overstepping the Boundary between Antitrust and IPRs Protection
Intellectual property rights (“IPRs”) protection and antitrust regulations alike, is set to stimulate innovation, promote competition and consumer welfare. The existence of patents, serves the basic needs of IPRs protection by establishing a legal monopoly. Such monopoly is granted to an inventor to enable the inventor to exploit the benefits of his or her creativity. Therefore, antitrust law, in general, must respect the exercise of such monopoly power; interference is allowed, only under exceptional circumstances. As Article 55 of the Anti-Monopoly Law of China (“AML”) stipulates that, the AML is not applicable to undertakings who exercise their IPRs in accordance with the laws and administrative regulations on IPRs unless such undertakings eliminate or restrict market competition by abusing their IPRs. However, the Court seemed to believe that all IPRs related conducts are subject to the AML, that the “abuse of IPRs” is simply the summarisation of the anti-competitive effects of a given exercise of IPRs. Such an interpretation by the Court could render the clause of AML an empty shell, so as to jeopardise its protection of IPRs.
- The SEP Treatment for a Non-SEP and The Fabrication of ‘Essential Patents’
In the Guide of the Anti-Monopoly Committee of the State Council for Countering Monopolisation in the Field of Intellectual Property Right, it is clear that the definition of the relevant market in terms of IPRs related cases shall follow the ordinary approach thereof. And according to Guidance of the Anti-Monopoly Committee of the State Council for the Definition of the Relevant Market, the substitution analysis shall centre from the perspective of the demand side, and only where supply substitution constitutes similar competitive restraints on undertakings’ behaviours as demand substitution, supply substitution may also be taken into consideration. Therefore, in both Chinese and foreign practices, it is the SEPs relates to widely used standards that would usually be considered as constituting a separate relevant market; for non-SEPs, substitutability should be analysed.
In the current case, having defined the downstream product market as the market for sintered NdFeB products, for lack of substitutability between NdFeB and other magnetic products, the Court decided that the relevant upstream market as the market for the licensing of the essential patents related to sintered NdFeB owned by HML, which means that HML is the sole market player in such a defined market. In reaching such conclusion, the Court mainly and solely relied on the opinions of the Plaintiffs’ witness that claimed a series of patents owned by HML are necessary for sintered NdFeB production, the marketing strategies of HML using words such as ‘critical’ and ‘essential’ to describe its patents, and the compliments and recognition of HML’s patents by customers and industry. Customers and industry analysis speak highly of HML’s patents because HML has a reputation for producing high-end sintered NdFeB products, which constitutes only a part of all sintered NdFeB products. For the same reason that HML prides on its quality and exaggerates in its marketing-a common commercial practice that most companies take; the indispensability test of a patent cannot be a subjective one as the duty to deal only arises from the commercial indispensability of the facility it controls. In addition, what the Court has chosen to ignore is the fact that Plaintiffs have, on many occasions, publicly declared that they had the independent production process and technology of sintered NdFeB, which did not infringe on HML’ patented technology. Although the Court recognised that the technology concerned is not the subject of any industry standard, it, nevertheless, acknowledged the so-called ‘essential patents’(‘必需专利’ in Chinese), made up by the Plaintiffs. As the name ‘standard essential patents’ speak for itself, a SEP refers to a patent that claims an invention that must be used to comply with a technical standard. Absent a standard, there would be no SEP. Even in practice, a de facto SEP is found, there must be a de facto standard at present. In the current case, the mere preference and recognition of the customers for a small part of the products is nothing close to what could be considered as a standard. But even so, the Court still managed to define some of HML’s patents to constitute an independent relevant market where they are replaceable with many other technologies owned by competitors. If such a decision and the reasoning behind were to prevail, valuable patent holders would tremble with fear for the uncertain fate of their own, even when the patents they hold are not SEPs.
- The Framed Monopoly
Given that the upstream market is defined by the Court as the licensing market for part of HML’s NdFeB patents, it readily concluded that HML has a dominant position in the market as it has 100% market share therein. In doing so, the Court pontificated that HML possesses the ability to set prices above competitive level and prevent others from launching effective competition. While in fact, China, the country that accounts for approximately 36.67% of global rare earth resources, provides the largest rare earth production worldwide. The eight Chinese licensees are all leading enterprises in the relevant industry; they have more advantages in the acquisition of raw materials as well as strong competitiveness and bargaining power. The reasonable licensing fees set by HML for the eight companies could well be an illustration of this. Yet the Court’s findings suggest that the assessment of whether the licensing fees set by HML are beyond competitive level has never been part of its six years’ headwork.
In addition, the Court also found market power of HML from its ‘control force’ over non-licensees since the latter are allowed to sell only outside HML’s licensing scope. It is exactly the ‘control force’ that lays down the foundation for patents, a type of intellectual property that gives its owner the legal right to exclude non-licensees from making, using, or selling an invention for a limited of time at the very land that the patent is granted.
- The Application of ‘Essential Facilities Doctrine’ to a Non-SEP
The essential facilities doctrine, an antitrust and competition law doctrine, refers to a duty imposed on a monopoly that controls access to an important resource “essential” or “bottleneck” facility to deal with its competitors by providing access to such a ‘facility’ that it controls and is deemed necessary for effective competition, at a reasonable price. Such doctrine applies in rare cases, with strict standards. An undertaking shall “freely to exercise his own independent discretion as to parties with whom he will deal”; antitrust and competition law ‘does not restrict the long-recognised right of trader or manufacturer engaged in an entirely private business’. Compulsive trading runs contrary to fundamental principle of freedom of contract.
Despite the usual strictness and prudence in applying the doctrine by the courts all over the world and the fact that by far, not a single Chinese court has used this doctrine in the refusal to license cases, the Court in this case, simply listed the test of essential facilities and concluded the following without providing any solid analysis. In his speech of ‘intellectual property and competition policy’, Joaquín Almunia, the vice president of the European Commission responsible for Competition Policy, specified that “the Courts have also made it clear that refusing to licence can be an infringement of competition law only in ‘exceptional circumstances’; that is, when a company needs access to the IPR to enter the market and effective competition would be eliminated if the license were not granted”. Article 7 of the Provisions on Prohibiting the Abuse of Intellectual Property Rights to Preclude or Restrict Competition (“IP Provisions”) lists the similar preconditions for the application of essential facilities: (1) the IPRs cannot be reasonably substituted, and it is necessary for other operators to participate in the competition in the relevant market; (2) refusal to license the IPRs will adversely affect competition or innovation in the relevant market and harm the interests of consumers or the public interest; (3) licensing the IPRs will not cause unreasonable damages to the right holders. The existence of many other independent patents, the rapid growth of the leading competitors with innovative products and technology, and the competitiveness in the market, all exclude the application of the essential facilities doctrine in the current case.
Behind the circumspect practices of courts from different jurisdictions is respect to transaction freedom and the foundation of the intellectual property system. Should mandatory licensing become commonplace, innovation would come to an end.
- The Accused of Violating FRAND Principles and Imposing ‘Non-Challenge’ Clause
While the absence of evidence proving the anti-competitive effects of HML’s conducts by the Plaintiffs seems to suggest that they failed to fulfil their burden of proof, the Court, nevertheless, voluntarily pointed out that HML did not act in accordance with FRAND principles and restricted the Plaintiffs’ assess to the downstream market without comprehensive competition analysis. However, as a non-SEP holder, HML has never made any FRAND principles in any form nor should it need to. Similarly, the Court viewed HML’s termination of negotiation when the Plaintiffs brought litigation against HML as a demand of a, de facto, “non-challenge” clause and further accused HML of attaching an unreasonable trade condition of such a ‘non-challenge clause’, another abusive behaviour under the AML. However, these clauses refer to clauses that set ‘direct or indirect obligations not to challenge the validity of the licensor’s intellectual property, without prejudice to the possibility, in the case of an exclusive licence, for the licensor to terminate the technology transfer agreement in the event that the licensee challenges the validity of any of the licensed technology rights’. It is, essentially, preventing a licensee from ‘biting the hand that feeds it’. In the current case, such a licensing agreement is absent.
As mentioned above, according to the IP Provisions, adverse competition effects to competition or innovation in the relevant market and harm to consumers or the public could not be circumvented in finding an abuse of dominance under Article 17 of the AML
In fact, in the concerned sintered NdFeB product market, there are more than 200 companies competing in China alone. HML’s refusal to license does not hinder the emergence of new products; by seeking licensing from HML, the Plaintiffs were only trying to produce and sell the same sintered NdFeB products. The licensing practices of HML have not changed the market structure in the past years and the product market remains extremely competitive; undertakings including the Plaintiffs, have seen an increasing turnover every year.
- The Unbearable Heaviness on A Non-SEP Holder
In its decisions, the Court compelled HML to license its non-SEP to the four Plaintiffs, so these four Ningbo manufacturers could sell in some part of the relevant geographic market. If such decisions become the common practice of the Chinese courts, every single non-SEP holder will face the possibility of being forced to hand over their fruits of painstaking labour to all of their non-licensees.
Furthermore, such a ruling may lead to significant inefficiency as a result. For one, if HML is imposed on the obligation to license to any market player in the downstream market, the transaction cost and monitoring cost would be a huge burden to HML and will disturb its operation of normal business. For another, as the rulings did not specify the licensing terms between HML and the plaintiffs, which means, if HML and the Plaintiffs cannot agree on the licensing terms, the ruling is hard to be enforced in practice. Further disputes on this issue will lead to inefficiency as well.
In addition, the Court allowed partial damages for the Plaintiffs in the case. By its nature, HML was held liable for its unauthorisation. If such decisions become the common practice of the Chinese courts, every single valuable non-SEP holder will face the possibility of having to compensate all of its non-licensees. The floodgate of litigations will inevitably be open, attracting slackers or rent-seekers who are not enthusiastic about innovation, but to seek ‘compensation’ and plunder the fruits of others.
And then there is none, under the patent system in China.
Admittedly, the HML rulings by the Ningbo Court is a case of many firsts. Unlike in Huawei v InterDigital, it is the licensing practices of a non-SEP holder in the current case that are found as abuse of dominance; it is the first case of its kind. The unprecedented application of essential facilities raises many questions, questions now left with the Supreme People’s Court of China (“SPC”). Clarifications are needed to assure millions of non-SEP holders, who now have to worry whether they will be compelled to give away their critical intellectual property assets if they ever say no to a Chinese competitor seeking licensing.
 For example, Unwired Planet International v Huawei,  EWHC 711; Huawei v IDC (2013) Yue Gao Fa Min San Final Instance No. 306.
 United States v Colgate, 250 US 300, 39 S. Ct. 465 (1919).
 Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52014XC0328(01)&from=EN.