–At the Juncture of the Supreme Court Judgment

At the onset of 2024, AnJie Broad’s antitrust team secured a pivotal second instance judgment from the Supreme People’s Court of China (“the Supreme Court”) in the rare earth antitrust litigation. The ruling completely overturned the first instance judgement rendered by the first instance court Ningbo Intermediate People’s Court (“the Ningbo Court”), holding that the conducts of AnJie Broad’s client Hitachi Metals did not constitute abuse of market dominance. The Supreme Court dismissed all claims brought by the four plaintiffs, four Ningbo rare earth magnets producers.

Reflecting on this case, it undoubtably encompasses several legal issues worthy of in-depth study and contemplation. The key controversies aroused in this case highlight some of the most cutting-edge issues prevalent in current antitrust litigation practice. The proceedings largely showcase the distinctive features of antitrust civil litigation in China. Notably, this case also garnered widespread attention both domestically and internationally.

On 27 April 2022, the Office of the United States Trade Representative (“USTR”) released its annual Special 301 Report (2022). The Report includes an expression relevant to this case:

“In 2021, a local intermediate court issued the first instance ruling declaring certain IP developed by foreign company to be an ‘essential facility’ and finding the company’s failure to license its IP to a Chinese plaintiff – notwithstanding existing licenses to other Chinese parties – to be an abuse of dominance. This decision raises concerns that China’s competition authorities may apply this approach to foreign patent holders for AML enforcement. The case is currently awaiting decision on appeal to the Supreme People’s Court. It is critical that China’s AML enforcement be fair, transparent, and non-discriminatory; afford due process to parties; focus only on the legitimate goals of competition law; and not be used to achieve industrial policy or other goals.”

As a matter of fact, the second instance judgment can clearly respond to the above “concerns” of the USTR’s Office, by displaying that China’s judicial ruling is strictly based on the proper application of the Anti-Monopoly Law (“AML”). Some case particularities are noteworthy and helpful to savour the significance of this millstone case.

I. A Case Lasted Nearly a Decade.

On December 11, 2014, four companies engaged in the production and sale of sintered neodymium-iron-boron (“NdFeB”) permanent magnet materials in Ningbo, namely Ningbo Ketian Magnet Co., Ltd., Ningbo Permanent Magnetic Industry Co., Ltd., Ningbo Tongchuang Strong Magnet Material Co., Ltd. and Ningbo Huahui Magnetic Industry Co., Ltd (collectively “the four plaintiffs”), initiated antitrust actions against Hitachi Metals with the Ningbo Court.

The cross-examination commenced for the first time at the Ningbo Court on September 21, 2015, followed by two subsequent hearings on December 18, 2015, and March 10, 2017, respectively, leading to the handing-down of the first instance judgment by the Ningbo Court on April 23, 2021. Then Hitachi Metals appealed to the Supreme Court.

The second instance was amid the hard pandemic period, and the Supreme Court organized the trial through an online hearing on November 23, 2021, with tens of thousands of people tuning to the live broadcast.

Near the ending of 2023, the Supreme Court rendered the final judgement by completely overturning the first instance judgment, and dismissing all claims made by the plaintiff. To this point, the rare earth antitrust litigation of China was finally brought to the conclusion, with the first and second instances in total spanning nearly a decade.

II. Both Parties Retained Expert Witnesses to Participate in the Trial.

In the first instance, Hitachi Metals engaged Professor Jiong GONG from the University of International Business & Economics as an economics expert, and Professor Jiemin SHENG from Peking University as an antitrust law expert, to participate in the trial. Furthermore, Hitachi Metals also presented an Expert Report issued by the above experts to the Ningbo Court.

For the other side, the four plaintiffs engaged an expert in the field of magnetic materials, Mr. Da MA, along with Mr. Yongwei CHEN and Professor Ming YANG from Peking University, to provide witness opinions from the perspectives of technology, economics and law, respectively.

In the second instance trial, Professor Jiong GONG, Dr. Vanessa Yanhua ZHANG and Professor Zhongwu LIU, engaged by Hitachi Metals, respectively issued the economic analysis and technical expert report for the appeal procedure.

Also, Dr. Vanessa Yanhua ZHANG and Professor Zhongwu LIU engaged by Hitachi Metals, and Mr. Da MA, engaged by the four plaintiffs, appeared in court to provide testimony on specialized issues, including the essentiality of the relevant technology, definition of the relevant market, determination of market dominance, development of upstream technology and competition of downstream products, conditions for the application of essential facilities doctrine, and the relationship between protection of intellectual property and antitrust, etc.

The opinions of those expert witnesses are partly reflected in both the first and second instance judgments.

The first instance judgment states, “Mr. Da MA, an expert in the field of magnetic materials technology, conducted a comprehensive analysis of Hitachi Metals’ patent claims from a patent perspective. He systematically compared them with existing production processes and concluded that the defendant’s patent list includes a series (Class I and Class II patents) of essential patents for the production of sintered NdFeB.” “The economic analysis report provided by Prof. Jiong GONG, expert designated by the defendant, asserts that there is a certain degree of overlap in the applications of sintered NdFeB and bonded NdFeB. For instance, both are utilized in motor products, indicating the substitutability. In terms of product sales scale, the market for sintered NdFeB is significantly larger than that of bonded NdFeB, with the former being roughly six times or more than the latter. Additionally, in certain downstream applications such as speakers and wind power, there is substitutability to some degree between ferrite permanent magnetic materials and sintered NdFeB.”

The second instance judgment underlines that, Prof. Zhongwu LIU, expert designated by Hitachi Metals, provided a technical expert report and stated that the 15 disputed patents are not uncircumventable for sintered NdFeB. According to the data in the Economic Report provided by Hitachi Metals, among Hitachi Metals and the eight Chinese companies licensed to implement its patents, the combined market share of Hitachi Metals and seven Chinese licensees is 13.91%. Although the data for Beijing Thinova Magnet Co., Ltd., one of the eight licensees, was not provided in the Economic Report, its market share cannot exceed that of Beijing Zhong Ke San Huan High-Tech Co., Ltd.’s market share 6.07%. Therefore, the combined market share of sintered NdFeB produced by Hitachi Metals and the eight Chinese licensees in the Chinese market is not more than 20%, and their relevant market share in foreign markets was even lower. Therefore, it cannot be found that Hitachi Metals had a dominant market position in this case. (Certainly, apart from the disputed patents, Hitachi Metals also possesses numerous highly valuable patents.)

In sum, it can be observed from this case that expert witnesses play a significant role in current antitrust civil litigations of China, with the frequent presence of some overseas economists.

III. The First Time to Apply “Essential Facilities” Doctrine in China’s Antitrust Litigation.

The first instance judgment holds that the essential facilities doctrine could be applied as an analytical tool in this case. Its reasons include: such facilities are indispensable for sintered NdFeB enterprises to participate in competition; Hitachi Metals, as the intellectual property owner, has exclusive control of such facilities; competitors could not duplicate the same facilities using reasonable efforts; where the plaintiff raised clear requests for license and was willing to pay reasonable consideration, Hitachi Metals rejected the use of essential facilities; it would be feasible for Hitachi Metals to grant license; the refusal has no reasonable grounds, and the plaintiff, as a large-scale industry operator, is qualified to exploit the patent and has actively expressed its willingness to request a license.

In fact, the above arguments have aroused strong concerns and criticism in China and abroad. It must be pointed out, the essential facilities doctrine has a long history of controversies under antitrust law, lacking a clear and consistent application standard. Consequently, various jurisdictions have always maintained a very cautious and restraint approach to this doctrine. Specifically, this doctrine is usually deemed applicable only under very exceptional circumstances, leading to its limited application in practice. It is true that, before this case, there is not any precedent in China where an enforcement agency or a judicial organ applied the essential facilities doctrine to the behavior of refusing to license, which further underscores the cautious stance towards this doctrine. Although the Supreme Court in the second instance judgement did not explicitly comment on the application of the essential facilities doctrine, it has in essence negated the application of this doctrine by finding Hitachi Metals’ absence of dominant position in the relevant market. It should be recognized that this cautious approach employed by the Supreme Court is commendable.

IV. This Case Involves the Intersection of Anti-Monopoly Law and Intellectual Property Laws.

This case exemplifies the cross-application of antitrust law and intellectual property laws, carrying demonstrative significance in several senses.

The public and private enforcement of antitrust law in the intellectual property field is crucial and complex. It demands striking a proper balance and ensuring coordination between the dual objectives of safeguarding and promoting competition for one thing, and protecting intellectual property rights to stimulate innovation for another. Hence, the AML provides a principle that the AML does not apply to the lawful exercise of intellectual property rights by undertakings pursuant to relevant laws and regulations governing intellectual property rights; however, undertakings’ abuse of intellectual property rights to eliminate or restrict competition shall be still governed by the AML.

The above provision outlines the fundamental principles and stance of the AML regarding the relationship between intellectual property and antitrust, which could be interpreted from three aspects. First, the AML does not interfere with the lawful exercise of intellectual property rights by holders in accordance with intellectual property laws and regulations. Secondly, if the exercise of intellectual property rights amounts to abuse and results in elimination or restriction of competition, the AML shall apply. Thirdly, if the exercise of intellectual property rights constitutes abuse, but without causing elimination or restriction of competition, the AML will not apply; instead, such exercise of intellectual property rights will be regulated within the framework of intellectual property laws.

Jurisprudentially, intellectual property rights are fundamentally a type of private right, constituting a legal monopoly granted by law. The creator and investor of an intellectual property right have exclusive privileges within a specific scope and timeframe. The application of AML should come into play, only under exceptional circumstances when the “abuse of intellectual property rights” results in substantial harms to market competition. Thus, if the abuse of intellectual property rights by the holder does not cause significant harms to market competition, the regulation falls under intellectual property law, civil law, and other relevant statutes, rather than the AML.

Indeed, overapplication of the AML can stifle innovation and competition in the realm of intellectual property rights, contradicting the fundamental principle of freedom of contract and the legislative purpose of the AML. Freedom of contract is essential for a market economy and a prerequisite for fostering free competition. This freedom allows business operators to choose transaction partners and determine transaction conditions at their discretion. It also empowers operators to decline transaction requests from other counterparts for normal business purposes. Consequently, a business operator is generally not obligated to engage in transactions with other market players. The Court of Justice of the European Union expressed a similar viewpoint in the 1988 Volvo case, holding that “… an obligation imposed upon the proprietor of a protected design to grant to third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right.” Therefore, the application of the AML should not undermine the freedom of trade, which serves as the cornerstone of a market economy.

V. Definition of the Relevant Market is Fully Debated in This Case.

There is no divergence between the Ningbo Court and the Supreme Court on the time and geographic element of the relevant market, while different views exist on the relevant product market.

The first instance court holds that this case mainly involves disputes over the licensing of sintered NdFeB patent owned by the defendant. Therefore, the technology market most closely related is the market of patent licensing. Where the patent is a product or method patent for manufacturing a specific product, the market dynamics generated by consumers’ selection of products in the downstream product market will directly impact the supply and demand relationship in the upstream technology market. If the downstream product is easily substituted by other products, the competitive product should be taken into consideration not only in the downstream product market, but also in the upstream technology market. Consequently, when determining the substitutability of technologies, the substitutability of downstream sintered NdFeB products shall be first considered, to accurately define the substitutability of specific technology of sintered NdFeB and other magnetic materials technologies. Based on the evidence of the parties, the Ningbo Court concluded that whether from demand or supply substitution, sintered NdFeB and other magnetic materials are not substitutable, thus the downstream product market should be defined as sintered NdFeB product market.

The first instance court then further examined the upstream technology market. By having relied on the opinions of the technical expert engaged by the four plaintiffs, Hitachi Metals’ public statement and relevant statements in third-party reports, the Ningbo Court considered that licensing for sintered NdFeB patents owned by Hitachi Metals is essential. With respect to the scope of essential patents involved in this case, the Ningbo Court accepted the plaintiff’s expert witness’s patent list and its technical opinions.

In addition, the first instance judgment further emphasizes and clarifies that, since Hitachi Metals’ sintered NdFeB patents were not part of a standard, it did not qualify as a standard essential patent (SEP). To avoid ambiguities, the patents discussed in the instant case are referred to as sintered NdFeB “essential patents”, which refers to the Class I and Class II patents as classified by the plaintiff’s expert. In the end, the Ningbo court concluded that the relevant technology market in this case can be defined as the market for licensing the essential sintered NdFeB patents owned by Hitachi Metals.

In sum, the Ningbo Court defined two relevant product markets in this case: one is the market for licensing the essential sintered NdFeB patents owned by Hitachi Metals (upstream), and the other is the market for producing sintered NdFeB (downstream).

While, the Supreme Court dissented on Ningbo Court’s position in terms of the technology market definition, and its analysis of market definition in the second instance judgment is notably more well-knit, solid and appropriate.

The second instance judgment holds that, the evidence at hand is insufficient to prove existence of an independent market for licensing of the essential sintered NdFeB patents, let alone a smaller market for licensing the essential sintered NdFeB patents only owned by Hitachi Metals. The main grounds of the Supreme Court are set out as follows.

Firstly, there are two inconsistent or contradictory claims and facts in this case. On the one hand, the plaintiff held that the relevant patented technology of Hitachi Metals encompasses “essential patents” or important technology for manufacturing sintered NdFeB. On the other hand, some manufacturers such as the plaintiff, who hope to be granted the license by Hitachi Metals, meanwhile claimed that their production did not infringe Hitachi Metals’ patent.

Secondly, the fact regarding sintered NdFeB and the development of its production technology objectively demonstrated that the argument that “Hitachi Metals’ sintered NdFeB patents are essential patents” lacks supporting evidence. Meanwhile, in recent years, China has made a rapid progress in sintered NdFeB patent applications, production, and exports. Sintered NdFeB and their production technology are non-standardized products and non-standardized technologies, with increasingly frequent updates and iterations of technology.

Thirdly, Hitachi Metals used to hold more than 600 patents of sintered NdFeB worldwide. It had expanded its patent portfolio globally in an early time, applying for patents in the United States, Europe, China and other countries. In China, Hitachi Metals used to hold 90 Chinese patents, and only licensed eight companies to implement sintered NdFeB patents to produce and sell sintered NdFeB materials worldwide except in Japan. However, companies that did not obtain a license from Hitachi Metals still produced and sold sintered NdFeB materials in China and exported to Europe and other countries except the United States and Japan.

The Plaintiff further argued in the second instance that the essentiality of the involved patents does not arise from technology but rather stems from Hitachi Metals’ abusive tie-in sales, litigation threats, and exclusive arrangements. This further indicated that the plaintiff’s allegations are lack of sufficient factual basis and were more likely a misjudgment or misconception about the facts.

In summary, the Supreme Court maintained that the definition of the relevant market in this case shall be conducted in accordance with case-specific circumstances, using objective and authentic data and with the aid of economic analysis methods. The Plaintiff claimed that the sintered NdFeB patent of Hitachi Metals was irreplaceable and constituted an independent relevant market. However, it was inconsistent with the actual production, sales and relevant technical development of sintered NdFeB products. It also failed to provide sufficient evidence to prove its claims, especially did not provide evidence to prove why and how the sintered NdFeB patent of Hitachi Metals was technically irreplaceable. Therefore, the plaintiff should bear the adverse consequences for which it was unable to bear the burden of proof.

Take the analysis above into consideration, the Supreme Court concluded that: since the evidence in this case is insufficient to prove that the sintered NdFeB patent of Hitachi Metals technically irreplaceable, and in accordance with the demand-side substitutability of the production technology of sintered NdFeB materials, the relevant product market in this case should be defined as the production technology market of sintered NdFeB materials, including both patented technology and non-patented technology with close substitutability. The first instance court’s market definition lacked factual and legal basis, hence the Supreme Court amended accordingly.

In antitrust civil litigations, especially where abuse of market dominance involves, market definition is not always necessary (this view is also reflected in the latest Draft Judicial Interpretation issued by the Supreme Court). That said, in the specific cases, market definition in most times is still fundamental and a prerequisite step. This is because that definition of the relevant market decides the competitive analysis path and the debate starting point for both parties, further directly affects the judgment. In particularly, the definition of the relevant market is vitally important for antitrust cases involving intellectual property rights.

This rare earth antitrust case was finally brought to its conclusion after nearly a decade. During this long but intriguing journey, as Hitachi Metals’ counsels, we are very privileged to have come across and handled those most cutting-edge issues. We are also very delighted to witness the meticulous and rigorous attitude of all the plaintiff’s counsels, expert witnesses, and the collegial benches of the first and second instances.

The counsels and expert witnesses of both parties, as well as the first and second instance court demonstrated a high level of expertise and professionalism in the whole proceedings. This has led to very in-depth debates and discussions on those key disputed issues between the parties, fully mirroring the technical nature of antitrust litigations. In antitrust civil litigations, for both the parties’ counsels and the adjudicating judges, the complexity of cases and the application of relevant legal theories pose significant challenges. Perhaps, it is precisely the technicality and challenge that make antitrust litigations rather fascinating and charming.