Written by：Cheng Liu、Audrey Li、Nick Torres
Corporate & Commercial Group KWM Office
Recently, the Anti-Monopoly Guidelines for the Intellectual Property (“IP Guidelines”) was published in the Collection of Antitrust Regulations and Guidelines in 2019 released by the Anti-Monopoly Bureau of the State Administration for Market Regulation (“SAMR”). Previously, the National Development & Reform Committee (“NDRC”), Ministry of Commerce (“MOFCOM”), State Administration of Industry and Commerce (“SAIC”) and the State Intellectual Property Office were designated by the Anti-Monopoly Committee of the State Council (“AMC”) to prepare drafts of the anti-monopoly guidelines on the abuse of intellectual property. In February 2017, the Anti-Monopoly Guidelines on the Abuse of Intellectual Property (Draft for Comments) (“Draft for Comments”) was completed based upon the aforementioned four drafts and was issued for public comment. On January 4, 2019, with the approval of the AMC, the IP Guidelines was officially promulgated.
The IP Guidelines is divided into five chapters: general rules, intellectual property (“IP”) related agreements which may eliminate or restrict competition, IP-related abuses by owners holding a dominant market position, IP-related merger filings, and other situations involving IP-related issues.
In this article, we will analyze the IP Guidelines and focus on its key issues.
1. Principles of Analysis and Analytical Approaches of the IP Guidelines
The IP Guidelines clearly provides that although an IP right by its nature is an exclusive right, “an undertaking shall not be presumed to possess a market dominance in the relevant market merely for holding an IP right”.
Abusing IP rights itself does not constitute “a monopoly behavior”. Regulating abuses of IP rights should follow the same regulating methodologies as those of other forms of property rights within the basic legal analysis framework under the PRC Anti-Monopoly Law (“AML”), namely: (1) the characteristics and manifestations of the conduct; (2) definition of relevant markets; (3) the elimination and restriction effects of such conduct on market competition; and (4) the pro-competitive effects of such conduct on innovation and efficiency.
In addition, when determining whether an IP right constitutes a monopoly behavior, these two factors should be taken into account: “the specific features of the IP rights” (for example, the IP rights are vulnerable to being infringed upon in practice, etc.) and “the pro-competitive effects of relevant conduct on the efficiency and innovation”.
|Tips: For the “conditions to be met for a positive impact on competition”, the IP Guidelines puts forward clear standards, which include the following: (1) there should be a causal relationship between the conduct and the promotion of innovation and efficiency; (2) compared with other conduct within the scope business operators’ reasonable business choices and may also promote innovation and efficiency, the present conduct exerts less eliminating and restrictive effects on market competition; (3) the conduct will not eliminate or severely restrict market competition; (4) the conduct will not seriously hinder the innovation of other business operators; and (5) consumers can share the benefits generated by the innovation and efficiency promotions.
The above five conditions must be fulfilled simultaneously. This is a very strict requirement for business operators who bear the burden to prove their conduct’s positive impact on competition.
2. Definition of Relevant Technology Market
The IP Guidelines provides that, when determining an IP-related monopoly conduct, two types of relevant markets are to be defined, namely the relevant product market and the relevant technology market. A relevant technology market refers to a market comprised of a group or a class of technologies with relatively close substitutability from the consumer’s perspective. Moreover, the IP Guidelines details several factors in defining a relevant technology market, including technical properties, usages, licensing fee, degree of concurrent use, duration of the IP rights involved, and the possibility and the costs for its users to switch to other substitutable technologies, as well as the regional elements of IP rights.
Tips: As discussed in the Part 3, IP-related monopoly agreement is not an agreement that is expressly listed in Articles 13 and 14 of the AML and is not presumed to be anti-competitive. Therefore, it is necessary to define a relevant market before analyzing the eliminating or restrictive effects of an IP-related monopoly agreement. In addition, in cases arguing the pro-competitive effects of an IP-related monopoly agreements on efficiency and innovation, a relevant market should also be defined in order to demonstrate that such an agreement will not eliminate or severally restrict competition.
As to the relevant technology market, we understand that it may include the licensed technology for producing goods, other technologies for producing such goods, as well as the technologies for producing other goods competitive with the goods. However, it is worth noting that anti-monopoly law enforcement authorities (“AMEA”) may define a licensed technology as a separate relevant market based on the specific conditions of such technology. In previous cases, for transactions involving research and development (“R&D”) of such new technologies as the unmanned feeder vehicles and pure electric passenger vehicles, the AMEA defines those technologies as separate relevant markets, respectively. Moreover, in an investigation against a globally well-known technology enterprise, NDRC, which undertook the function of monopoly agreement investigation before the establishment of SAMR, deemed that a wireless communications patent to be an standard essential patent (“SEP”), and thus excluded other competitive technologies for its uniqueness and non-substitutability.
The IP Guidelines does not clearly come forward with the concept of “innovation market”, which indicates a more cautious attitude towards such a controversial theory of “damaging innovation”. However, the IP Guidelines also points out that “the impact the related conduct may have on innovation, R&D and other aspects, can be considered on a case-by-case basis”. We have noticed in the past cases, the AMEA pays particular attention to the impact on the innovation, R&D, etc.
Case Analysis: In the merger deal between two world-renowned medical device companies in 2017, one of the merging parties was developing a new type of coarse needle biopsy device (“Project A“). This new type of coarse need biopsy device was also being used by the other merging party. MOFCOM considered that the post-merger entity had a reason to reduce the investment in Project A and delay the commercialization of its new products developed under Project A. Therefore, MOFCOM determined that the merging parties should split up Project A’s entire R&D line (including some IP rights and employees). Similarly, in a merger in the aviation industry in 2018, SAMR explicitly requested the companies to split up all their R&D projects on oxygen supply systems.
3. IP-Related Agreements that may Eliminate or Restrict Competition
3.1 Typical arrangements in the IP-Related agreement
Chapter II of the IP Guidelines enumerates some of the relatively common IP rights arrangements in practice that may constitute horizontal or vertical monopoly agreements, including:
- Joint R&D: The IP Guidelines acknowledges that joint R&D can usually save costs, and increase the efficiency, but it may also have an effect of eliminating or restricting market competition. The AMEA may consider the following factors in analyzing joint R&D arrangements: whether joint R&D restricts business operators in R&D through cooperation with third parties in fields irrelevant to joint R&D; whether joint R&D restricts business operators in subsequent R&D upon completion of joint R&D; and whether joint R&D restricts business operators in owning and exercising the IP rights involved in the new technologies or new products researched and developed by business operators in industries irrelevant to the joint R&D.
- Cross Licensing: Likewise, the IP Guidelines provides that cross licensing can generally reduce IP rights licensing costs and promote the implementation of IP rights, but it may also have an effect of eliminating or restricting market competition. The AMEA may consider the following factors: whether the cross licensing is sole licensing; whether the cross licensing constitutes a barrier to entry into the market for third parties; whether the cross licensing eliminates or restricts competition in the downstream market; and whether the cost of related products has increased.
- Sole Grant-Back and Exclusive Grant-Back: Grant-back can usually promote new achievements and investments into such achievements, but sole grant-back and exclusive grant-back may reduce licensee’s innovation motivation and have an effect of eliminating or restricting market competition. The IP Guidelines points out that generally, exclusive grant-back is more likely to eliminate and restrict competition than sole grant-back. In analyzing whether the sole grant-back and exclusive grant-back have an effect of eliminating or restricting market competition, the AMEA may consider the following factors: whether the licensor provides substantial consideration for such grant-back; whether the licensor and the licensee require mutual exclusive or sole grant-back in cross licensing; whether the grant-back leads to the concentration of the improvement or new achievements of a single business operator, which allows the said business operator to obtain control or strengthen its control over the market; and whether the grant-back impacts the motivation of the licensee to make improvement.
Case Analysis: In the investigation of a globally renowned technology company in the wireless communications technology industry, the NDRC considered that the company’s conduct of requiring the licensee to grant back the patent, without consideration, violated the provisions of Article 17(1) of the AML regarding excessively high price. The NDRC believed that it was not in violation of relevant provisions to seek grant-back of patents from the licensees, but the value of the patents held by the licensees was not taken into account. Its requirements of free grant-back constrained the motivation of the licensees for technological innovation, hindered the innovation and development of wireless communications technologies, and eliminated and restricted competition in the wireless communications technology market.
- No-challenge Clause: The no-challenge clause is a relatively common clause in IP-related transactions. However, the AMEA may analyze the impact on relevant market competition and consider the following factors: whether the licensor requires all licensees not to challenge the validity of its IP rights; whether the licensing of IP rights involved in the no-challenge clause is a paid licensing; whether the IP rights involved in the no-challenge clause may constitute a barrier to enter a downstream market; whether the IP rights involved in the no-challenge clause obstruct the implementation of other competitive IP rights; whether the licensing of IP rights involved in the no-challenge clause is sole licensing; and whether the licensee may suffer material losses if it challenges the validity of the IP rights of the licensor.
Case Analysis: In the investigation of a globally renowned technology company, the NDRC believed that the company, without justification, imposed unreasonable conditions to the sale of baseband chips, requiring the licensee not to challenge the patent licensing agreement concluded between them, which violated Article 17(5) of the AML regarding imposing unreasonable conditions.
- Standards Setting: Standards setting is conducive to realize the universality between different products, save costs, increase the efficiency and guarantee the product quality. The following factors could be considered in this analysis: whether certain business operators are excluded without justification; whether the relevant proposals of certain business operators are excluded without justification; whether there is an agreement between the parties not to implement competitive standards; and whether there is a necessary and reasonable constraint mechanism for the exercise of IP rights incorporated in the standards.
- Other restrictions: When the business operator licenses its IP rights, it might also restrict the fields in which IP rights are to be used, sales channel, scope, target or the number of the IP related products, or it might restrict other business operators to use competitive technologies or products. The IP Guidelines acknowledges that the abovementioned conduct are usually commercially reasonable and can promote the efficiency and the implementation of the IP. However, such conduct might also have an adverse effect of eliminating or restricting market competition. When the AMEA analyzes such conduct, the following factors could be considered: the content, degree, and approach of implementation of the restrictions, the characteristics of IP-related products, the relationship between the restrictions and the conditions of IP rights licensing, and whether there are several restrictions, and whether other business operators impose the same or similar restrictions if their IP rights involve substitutable technologies.
Tips: Although the IP Guidelines generally acknowledges that the aforementioned types of conduct are usually commercially reasonable and have pro-competitive effects, if the relevant arrangements impose excessive restrictions on the licensees (or the counterparties), they may still be deemed to be in violation of the AML. When making the above arrangements, companies should prudently consider their rationality and assess their impact on the market.
In addition, according to previous law enforcement cases in China, such arrangements as grant-back and the no-challenge clause were previously regulated under the framework of the abuse of dominant market position in Article 17 of the AML. The IP Guidelines, on the other hand, incorporates them into the scope of the review of monopoly agreements. We understand that this is to further detail the types of horizontal monopoly agreements provided in Article 13 of the AML and the vertical monopoly agreements provided in Article 14 of the AML from the perspective of IP rights. This also means that even if an IP right holder does not hold a dominant market position, it is still necessary to prudently consider the effects of adopting relevant arrangements on competition.
3.2 “Safe Harbor” Rule
It is particularly worth noting that the IP Guidelines establishes a safe harbor regime for the exercise of IP rights.
- The safe harbor rule establishes different thresholds for horizontal and vertical monopoly agreements. Specifically, for horizontal monopoly agreements, if the business operator’s market share does not exceed 20% in the relevant market, it may be presumed that the arrangement does not have the effect of eliminating or restricting competition, unless there exists contrary evidence. For vertical monopoly agreements, if the market shares of the business operator concerned in any of the affected relevant market do not exceed 30%, it may also be presumed that the arrangement does not have an effect of eliminating or restricting competition.
- In the event that it is difficult to obtain the market share information or the market shares cannot accurately reflect the market position of the business operator, if, except for the technologies jointly controlled by the parties, there are four or more substitutable technologies in the relevant market under the independent control of other business operators that can be obtained at reasonable costs, then it may also be presumed that the arrangement does not have the effect of eliminating or restricting competition.
- However, the safe harbor rule shall not apply to five types of horizontal monopoly agreements and resale price maintenance that are clearly listed under Articles 13 and 14 of the AML. Therefore, the “safe harbor” system only applies to agreements in forms other than core cartels and resale price maintenance. We understand that in practice, the safe harbor system may generally apply to the typical IP rights agreements (such as joint R&D, cross licensing, grant-back, establishment of the no-challenge clause and standards) as listed in 3.1 above.
4. IP-Related Abuse of Dominant Market Position
Chapter III of IP Guidelines firstly points out that when determining the IP-related abuse of dominant market position, it shall also be analyzed under the framework provided in the Article 17 of the AML, which first requires to define the relevant market and determine whether the business operator concerned has a dominant market position. After this initial determination, then the IP Guidelines secondly analyzes whether the specific conduct constitutes the IP-related abuse of dominant market position by eliminating or restricting competition.
The IP Guidelines pays special attention to five types of abuse of dominant market position: the licensing of IP rights at an unfairly high price, refusal to license IP rights, IP-related bundling, IP-related unreasonable additional transaction conditions, and IP-related discriminatory treatment.
We notice that the analyzing considerations regarding IP-related tying, imposition of unreasonable conditions, and differential treatment are similar to the general analysis of non-IP rights-related conduct. This article mainly explains the conduct of licensing IP rights at an unfair high price and refusing to license IP rights in combination with enforcement cases in the past.
- Licensing IP Rights at an Unfairly High Price: In analyzing whether licensing IP rights are priced at an unfairly high price, the following factors may be considered: the calculation method of licensing fee, and the contribution made by the IP right to the value of the products concerned; the record of previous licensing of the IP right, or the comparable license fee standards; licensing conditions that lead to the unfairly high price, including charging licensing fees beyond the territorial scope of the IP rights, or beyond the product scope covered by the IP rights; and whether the business operator charges license fees on expired or invalid IP rights when a package of licenses is granted.
Case Analysis: In the investigation of a globally renowned technology company, the NDRC determined that the license fees charged by the company under investigation were too high. The NDRC considered the following: firstly, while adhering to a relatively high license fee rate, the company used net wholesale price of the whole machine beyond the scope of the wireless SEP held by it as the basis of billing. Secondly, patents licensed to licensees included expired patents. Thirdly, it required the licensee to grant back for free.
In a case in 2013, where a technology company sued a renowned patent technology company, the Guangdong Higher People’s Court discovered that the quotations made by the patent technology company to the plaintiff were far more than its quotations to similar manufacturers. The quotations were 100 times higher at most and 20 times higher at least. Therefore, the court determined that the license fees charged by the patent technology company violated its FRAND obligations.
- Refusal to License IP Rights: The IP Guidelines acknowledges that generally, business operators are not obligated to trade with competitors or transaction counterparties. However, if a business operator with dominant market position unjustifiably refuses to license IP rights, such refusal may constitute the abuse of dominant market position. The AMEA may consider the following factors: the commitments made by the business operator as to the licensing of IP rights, whether it is necessary for other business operators to obtain the licensing of such IP rights for entering the relevant market, the impact of refusal to license IP rights and degree thereof on innovation by the business operator, whether party requesting the IP right lacks willingness and capability of paying reasonable license fees, whether the business operators have ever made a reasonable offer to the party requesting the IP right, whether the refusal to license IP rights will harm the interests of consumers or the public.
Case Analysis: The right to refuse to license IP to another company involves the most fundamental statutory right granted by IP law to IP right owners. Therefore, countries are inclined to take a more cautious attitude when determining whether an IP right constitutes “necessary facilities” and thus the right holder is obliged to license. For example, in a case in 2020 where a China communications corporation sued a U.S. technology enterprise for abuse of dominant market position, the plaintiff claimed that the defendant’s refusal to open the interconnection interface (e.g. API interface) without justifications eliminated or restricted the competition in the subway’s private network communications market. However, the Beijing IP Court held that the ISI method, terminal interconnection method, gateway interconnection method, etc., are alternatives to the API solution; and at the same time, although the defendant has a competitive advantage in switch interconnection, the defendant’s refusal to license the API interface did not eliminate or restrict competition. Therefore, the court decided that the defendant’s behavior did not constitute a refusal of licensing, which may have eliminated or restricted market competition.
5. IP-Related Merger Filings
Chapter IV of the IP Guidelines specifically addresses the special issues of IP-related merger filings, which include triggering events, the review of merger filings and additional IP-related conditions imposed upon merger filings.
The IP Guidelines provides that a company could acquire control or become capable of having decisive influence over another company by virtue of IP transfer or sole licensing, and the transaction could thus trigger a filing obligation. When assessing whether the aforementioned IP transfer or licensing could trigger the filing obligation, the AMEA may consider: (i) whether such IP constitutes an independent business; (ii) whether the IP generates the turnover that can be calculated independently in the previous fiscal year; and (iii) the term for sole licensing of such IP.
|Tips: We understand that, IP-related merger filings may involve two circumstances:
IP-related merger filings may also result in a conditional approval for IP rights, such as the following two types of conditional approvals:
- Structural conditions: i.e., the divestiture of the IP-related business. In previous merger filing cases, MOFCOM/SAMR has imposed such restrictive conditions (e.g., the divesture of research and development projects/products).
- Behavioral conditions: such as compulsory licensing IP, maintaining independent operation of relevant IP business, imposing conditions in IP licensing (e.g. FRAND principles, no bundling), and charging reasonable licensing fees. In some previous M&A cases in the electronics industry, MOFCOM has also imposed behavioral conditions on the relevant patents license.
6. Other IP-Related Conduct
In addition to the abovementioned provisions, Chapter V of the IP Guidelines specifically stipulates the issues on patent pool and SEP, which is of great importance for patent operating companies. Moreover, Chapter V also discusses the possible anti-monopoly issues involved in copyright collective management, which also reflects the increasing concern over the increasing number of such cases in recent years.
The IP Guidelines is the first anti-monopoly guideline in the IP field in China. Since the implementation of the AML, AMEA has conducted IP-related antitrust investigations on a few scientific and technological companies. In the context of current economic environment and international situation, China’s law enforcement is focusing on IP-related anti-monopoly activities and conduct. We foresee that with the rapid development of global communications industry, whether there exists anti-competitive behavior in the IP field or not, Chinese regulators will pay more attention during their antitrust investigations. The promulgation of the IP Guidelines indicates there will be a higher regulatory requirement for anti-monopoly conduct in the IP field.
 See The IP Guidelines, Article 2.
 The proposed merger of Becton, Dickinson and Company and C. R. Bard, Inc., MOFCOM Announcement 2017 No. 92, see http://fldj.mofcom.gov.cn/article/ztxx/201712/20171202691390.shtml
 United Technologies Corporation’s equity acquisition of Rockwell Collins, Inc., see http://www.cqn.com.cn/zj/content/2018-11/24/content_6502272.htm
 See The IP Guidelines, Article 7 to 11.
 The differences between exclusive grant-back and sole grant-back: In an exclusive grant-back arrangement, only the licensor and its designated third party has the right to implement the improvement or new achievement of the grant-back. By contrast, in a sole grant-back, in addition to the licensor and its designated third party, the licensee also has the right to implement the improvement or new achievement of the grant-back.
 For Qualcomm’s case of abuse of dominant market position, see Decision of NDRC  No.1.
 See The IP Guidelines, Article 12.
 See The IP Guidelines, Article 13.
 Qualcomm’s case, supra note 6.
 Case of Abuse of Market Position, Huawei Technologies Co., Ltd. v. InterDigital Technology Co., InterDigital Communications, Inc. and InterDigital, Inc., (2013) Yue Gao Fa Min San Zhong Zi No. 305.
 Case of Abuse of Dominant Market Position, Hytera Communications Co., Ltd. v. Motorola System (China) Investment Co., Ltd., Motorola System (China) Co., Ltd., Motorola System (China) Co., Ltd. Beijing Branch (https://www.thepaper.cn/newsDetail_forward_5568294).
 E.g., The proposed merger of Becton, Dickinson and Company and C. R. Bard, Inc., United Technologies Corporation’s equity acquisition of Rockwell Collins, Inc., see supra note 2 and note 3.
 E.g., Microsoft’s acquisition of Nokia’s equipment and services business (MOFCOM, No.24 of 2014, http://www.MOFCOM.gov.cn/article/b/e/201404/20140400542508.shtml); Nokia’s equity acquisition of Alcatel-Lucent (MOFCOM, No.44 of 2015, http://fldj.mofcom.gov.cn/article/ztxx/201510/20151001139743.shtml)