By Susan Ning, Huang Jing and Angie Ng, King & Wood’s Competition Practice

We understand that the SAIC is currently working on draft guidelines (the guidelines) which will shed light on how Article 55 of the Anti-Monopoly Law (AML) will be enforced. It has been reported in the press that the SAIC has published a 4th draft of these guidelines and are currently consulting with the relevant stakeholders (we understand that these drafts are not publicly available).

 Article 55 of the AML deals with the intersect between intellectual property (IP) law and antitrust law (see also a previous article entitled “The intersect between intellectual property law and competition law – implications for China”).

Specifically, Article 55 of the AML carves out conduct amounting to the “exercise of intellectual property” from the AML, except when the said conduct amounts to an “abuse of intellectual property to exclude or restrict competition” by businesses.

The issue of the intersect between IP law and antitrust law is not new to China. There has been case law from the Chinese courts, which have dealt with this issue. A prime example is the case of Tsum (Shanghai) Technology Co Ltd vs Sony Corporation (2004) (the Tsum-Sony case).
The following are some salient pointers to do with this case:

  • In 2004, Tsum (Shanghai) Technology Co Ltd (Tsum) a manufacturer and supplier of batteries alleged that Sony Corporation (Sony) sold digital cameras which were not compatible with any other brands of batteries but Sony batteries and that this was in breach of Articles 2 and 12 of the Anti-Unfair Competition Law.
  • Article 2 of the Anti-Unfair Competition Law states that entities must abide by the principle of voluntariness, equality, impartiality, honesty and good faith, and also adhere to public commercial “morals” in respect of their business transactions. Article 12 of the Anti-Unfair Competition Law states that entities are prohibited from selling commodities attached with “unreasonable conditions” or force consumers to by tied commodities.
  • Tsum alleged that Sony has “tied” Sony digital cameras with Sony batteries. Sony has “tied” these products by ensuring that other batteries were not compatible with Sony digital cameras. Tsum further alleged that Sony has “locked out” competing businesses (involved in the manufacture and supply of batteries) by undertaking the above mentioned conduct.
  • Sony denied that it was seeking to “lock out” its battery competitors. Sony explained that they had to install a certain “digital key” in their cameras which rendered other batteries incompatible with Sony digital cameras – due to safety considerations. Sony further explained that when other brands of batteries were being used in Sony digital cameras, there were reports of “smoke, explosions and burning” – resulting in users and property being damaged.
  • Sony’s digital key was patent protected – and Sony claimed that they had the right to exercise their intellectual property rights by making use of this digital key, without having to worry about the encroachment of antitrust principles and law.
  • Tsum alleged that Sony’s usage of its digital key was unreasonable and harmful to consumers as companies like Tsum had to spend a lot of money (approximately more than RMB1million) to decipher how to ensure their batteries are compatible with Sony’s digital cameras and that this would result in higher prices (in relation to batteries) for consumers.
  • On 20 December 2007, the Shanghai No. 1 Intermediate People’s court ruled in favour of Sony and denied Tsum’s claims.
  • The court held that Sony’s digital key was necessary in Sony cameras to ensure that there was “necessary communication” between the battery and the camera. The court also held that there was insufficient evidence to show that Sony made use of its digital key to foreclose competition in relation to its battery competitors.

We expect to see many more actions like the Tsum-Sony case, now that Article 55 of the AML is in force. It is likely that Article 55 actions will commence soon after the SAIC publishes their guidelines (so Plaintiffs are clear on the sorts of arguments and evidence they would need to launch a successful Article 55 case).