In June 2020, China's national enforcement authority, the State Administration for Market Regulation ("SAMR") published a book titled the 2019 Compilation of Antitrust Regulations and Guidelines. Remarkably, the book disclosed four antitrust guidelines that were officially introduced by the State Council's Anti-monopoly Commission on January 4, 2019 but never released ever since, namely the Antitrust Guidelines for Intellectual Property Right Sector ("IPR Guidelines"), the Antitrust Guidelines for the Automobile Industry, the Guidelines on the Application of Leniency in Horizontal Monopoly Agreement Cases, and the Guidelines on the Undertakings' Commitments in Antitrust Cases.
This article will discuss the role of the IPR Guidelines in practice and illustrate what the IPR Guidelines means for market players. Dating back to March 2017, a draft of the IPR Guidelines was released to solicit public comments by State Council's Anti-monopoly Commission, which is the policy-making body now merged into SAMR. After that, SAMR's officials mentioned the promulgation of these guidelines in several occasions, but the specific progress was not known to the public until publication of this book. Comparing with the draft three years ago, the final IPR Guidelines inherits the general framework and analysis approaches, but also makes some material modifications. Technically, the IPR Guidelines is not a binding law or regulation, but serves more like an enforcement manual for authorities. However, it can still present a very useful tool for companies in evaluating their behavior of exercising IPRs.
I. Roadmap of Enforcement Approach in IPR area
Chapter I of the IPR Guidelines provides general principles and the framework to analyze whether IPRs are misused to eliminate or restrict competition. The IPR Guidelines starts with an acknowledgment that antitrust law and IPR protection share the same purpose to preserve competition, incentivize innovations, promote efficiency of economics, and protect consumer interests and social welfare. It also recognizes the legitimate rights of IPR holders. It is explicit in Article 1 Paragraph 2 that the IPR Guidelines is intended to guide the application of the Anti-Monopoly Law ("AML") to IPR misuses instead of creating any separate monopolistic behaviors, and to promote the transparency of antitrust enforcement.
The analyzing framework contains four steps and can be applied to all monopolistic behaviors related to IPR.
- The first step is to analyze the characteristics of the behavior in question and accordingly to decide what kinds of monopolistic behaviors it may constitute.
- Second, it is to define the relevant market. The characteristics of IPRs shall be taken into consideration in defining relevant product market and, depending on a case-by-case analysis, relevant technology market may be defined in addition to relevant product market. Moreover, innovation market may also be considered where relevant.
- The third step is to find the theory of harm. Article 5 states that it includes two aspects – status of market competition and analysis of specific behavior – and further specifies factors in assessing the two aspects.
- The final step is to review the pro-competitive effect on innovation and efficiency. The behavior at issue has to satisfy all the five conditions set out in Article 6: (i) there is a causal relationship between the behavior and pro-competitive effect; (ii) it is the least restrictive option in achieving pro-competitive effects comparing to other reasonable alternatives; (iii) it will not eliminate or severely restrict market competition; (iv) it will not severely impede innovation; and (v) consumers can share the benefits therein. While it is not easy to prove the five conditions, at least it provides a well-rounded checklist for IPR holders to evaluate competitive effects in decision-making.
II. Behavior-specific Implications for Market Players
Safe harbor for certain horizontal and vertical restrictions. The IPR Guidelines provides detailed rules of safe harbor. For horizontal restrictions that are not enumerated in Article 13 of the AML (the provision targeted at cartels), competitors with a combined market share not exceeding 20% could fall within the safe harbor provision. For vertical restrictions that are not enumerated in Article 14 of the AML – i.e. vertical restrictions not related to price – the safe harbor threshold is the trading parties' market share not exceeding 30% respectively. When market share data is unavailable, the IPR Guidelines also provides an alternative test – whether there are four other substitutable technologies available in the market. It gives more flexibility to market players in applying safe harbor. In addition, because safe harbor is only applicable to the horizontal and vertical restrictions other than hard core cartels and resale price maintenance, it means to cover most agreements listed in Chapter II of the IPR Guidelines, such as joint R&D, cross-licensing, grant-backs, no-challenging, and standard-setting.
Clarifying non-price vertical restrictions in IPR sector. Together with another newly released guideline – the Antitrust Guidelines for the Automobile Industry, which includes very detailed rules on regulating non-price vertical restrictions – the IPR Guidelines as well sets out main non-price vertical restrictions. Based on our experience, non-price vertical restrictions seldom raised authorities' attention considering the lack of regulations or guidelines for antitrust enforcement. It will be another story in IPR sector after the IPR Guidelines. In addition to the restrictions frequently used in IP licensing, such as cross-licensing, grant-backs and no-challenging, Article 12 lists restrictions on the field to apply IPR, on sale or distribution channel of licensed products, on quantities of licensed products provided, or on the adoption of competing technologies or products. Such restrictions might be driven by commercial rationality, but still may have the effects of eliminating or restricting competition depending on careful analysis. This provision will be of great value for companies that cannot avail of safe harbor to make self-assessment.
IPR by itself not conferring dominance. When it comes to abuse of dominance, the presumption of market dominance shall not be applied merely due to the possession of IPR, even if in the circumstance of standard essential patent ("SEP"). The IPR Guidelines clarifies the factors to consider in determining the dominance of IPR holders as follows: (1) the possibility and cost to switch to alternative technologies or products; (2) the reliability of downstream markets on the products based on the IPR; (3) the countervailing power of the trading party. Article 27 further clarifies additional factors concerning the standards to determine the dominance of SEPs, such as the standard's value and scope of application, its evolution and compatibility, substitutable standards if any, or possibilities of substitutable technologies adopted in the standard, etc.
Double risks for certain IPR exercising activities. As we can see, some activities, such as grant-backs, no-challenging, restriction on competing IPRs, cross-licensing, etc., can be found both in the monopoly agreement chapter (Article 8, 9, 10,12) and abuse of dominant position chapter (Article 18). It means that these activities will not only constitute abuse of dominance, but may face double risks. Therefore, even if an IPR holder possesses market share below 50% but beyond the safe harbor, it should be cautious about these IPR exercising activities.
SEP holders' right to apply for an injunction. Comparing with the previous draft, the IPR Guidelines has consolidated the rules of SEP injunction with the dominance determination of SEP holders. It becomes a stand-alone article named specific issues concerning SEP. The IPR Guidelines clearly states that the SEP holders in a dominant position may apply for an injunction to compel the licensees to accept unfair loyalty or other licensing terms and therefore eliminate and restrict market competition. The injunction application by SEP holders shall be reviewed according to the factors enumerated in Article 27 on a case-by-case basis, including negotiation process, parties' willingness during the process, proposed offers, and SEP holders' commitments. In this regard, it reminds SEP holders to be prudent in injunction application in China, and an antitrust assessment before the application becomes indispensable.
Merger control triggered by IPR related transactions. Chapter IV of the IPR Guidelines is specifically about merger control regime. It explicitly provides that one company may acquire the control of another company through an IPR-related transaction (notably an IPR transfer or license), thus triggering merger review. So far, neither merger control rules nor publicized cases have been clear about how change of control might be triggered in such scenario. The IPR Guidelines clearly states that factors under consideration should include: whether the relevant IPR constitutes an independent business; whether it generates independent and calculable turnover in the lasting fiscal year; and in case of license, the types and terms of license. In addition, Chapter IV also lists structural and behavioral remedies that are frequently used in IPR-related conditional clearance cases.
III. Looking Forward
The IPR Guidelines has absorbed authorities' past enforcement experience and will provide more clear guidance for their future enforcement activities. Considering the highlights in IPR protection in China at the current stage and recent background of trade friction, the antitrust enforcement in the IPR area may be reinforced. And this is equally for International patent giants or Chinese rising patent holders. With not entirely consistent policies throughout the world on the intersection of IPR and antitrust, the market players, especially IPR holders, are caught in a predicament that they cannot have universal compliance rules in different jurisdictions. China is one of the major jurisdictions that cannot be overlooked. Therefore, the IPR Guidelines bears significant reference value for companies in helping navigate the murky water of IPR policies and practices in view of antitrust perspective in China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.