A year after releasing an exposure draft (the “Draft Provisions”), the State Administration for Market Regulation (the “SAMR”) officially promulgated the Provisions on Curbing Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (the “SAMR IPR Provisions”) on June 29, 2023, to become operative on August 1. The SAMR IPR Provisions are aligned with the amended Anti-monopoly Law (the “amended AML”) in providing more regulatory tools for tackling IPR related monopolistic behaviors. It will supersede the current Provisions on Curbing Abuse of Intellectual Property Rights to Eliminate or Restrict Competition promulgated in 2015 and amended in 2020 (the “2020 Provisions”).
The SAMR also published an exposure draft of Anti-monopoly Guidelines in the Field of Standard Essential Patent (“Draft SEP Guidelines”) on June 30, which expand on the IPR antitrust framework in the context of antitrust compliance and enforcement relating to standard essential patent (“SEP”).
The SAMR IPR Provisions, along with the Draft SEP Guidelines (for referential purposes for the time being), have significant implications for companies active in IP-related (especially SEP-related) sectors in almost all aspects, ranging from dealings with customers, suppliers, competitors, M&A counterparties, trade associations, etc. We set forth below certain highlights.
1. “Safe Harbor” Rule for Vertical Restraint
The SAMR IPR Provisions provide that vertical restraints in connection with exercises of IPR can apply the “safe harbor” rule, which was newly introduced by the amended AML, subject to the thresholds prescribed in the State Council Anti-monopoly Commission Anti-monopoly Guidelines for the Field of Intellectual Property Rights (“IPR Guidelines”), i.e., 30% in any relevant market impacted by the IP-related vertical arrangements (incl. licensing agreements), or there exist at least four alternative technologies owned by other undertakings in the relevant market. However, it is unclear whether the 20% threshold prescribed in the IPR Guidelines may also apply to an IP-related horizontal agreement. In contrast with the final version of SAMR’s Provisions on Prohibition of Monopoly Agreements, which removed the 15% “safe harbor” threshold set out in its exposure draft, it appears that the SAMR may adopt a more flexible stance with respect to IP-related agreements. [Art. 7 of SAMR IPR Provisions]
The Draft SEP Guidelines generally stipulate that the amended AML and the IPR Guidelines shall apply in dealing with monopoly agreements involving SEP, without mentioning the “safe harbor” rule; nevertheless, issues such as SEP-related relevant market definition and market share evaluation remain to be further tested in practice.
2. Streamlined Approach in Dealing with Dominance-related Issues
The SAMR IPR Provisions expressly provide that while the status of IPR ownership can be factored in, no market dominance shall be presumed on account of such fact alone; instead, certain other factors can also be considered, including the relevant IPR’s substitutability, reliance of the downstream market on products utilizing the relevant IPR, and a trade counterparty’s countervailing power. Compared with the Draft Provisions, the SAMR IPR Provisions further delineates the issue of “substitutability of intellectual property” from demand substitutability perspective, stating that the “possibility and cost of switching to alternative technology or product” by the IPR implementers. If the IPR implementers can switch to alternative(s) without incurring substantial cost, such alternative(s) shall be included in the analysis of the relevant market. [Art. 8 of SAMR IPR Provisions]
The Draft SEP Guidelines states that a SEP holder will be generally regarded as having 100% share in the relevant SEP license market without any market competition. In terms of competition analysis, similar to the approach for dealing with other types of IPR, to assess the dominance of the SEP holder, the evolution, substitutability and switching costs of the corresponding standards may also be considered. [Art. 11 of Draft SEP Guidelines]
3. IPR-related Abuses of Dominance
(1) Licensing or Selling at Unfairly Excessive Price
Setting unfairly excessive price is the most prominent instance of abuse of dominance under the AML, while the 2020 Provisions did not specifically address unfair pricing in IPR sector, the SAMR IPR Provisions provide that a dominant undertaking shall not license IPR or sell products containing IPR at unfairly excessive price to restrict or eliminate competition, and set out the following relevant factors: the relevant IPR’s research and development cost and recouping period, calculation method of royalty and licensing terms, comparable historical royalty or criteria, commitments encumbering the relevant IPR, etc.. [Art. 9 of the SAMR IPR Provisions]
The Draft SEP Guidelines also deal with “unfairly excessive price” involving SEP. Considerations in finding unfairly excessive price in SEP sector include: whether the parties have carried out good-faith negotiation, whether the royalty is significantly higher than the R&D cost, historical royalty or comparable criteria, whether the royalty is beyond the territorial scope or the product scope of the SEP, whether the SEP holder charges royalty on expired, invalid SEP or non-SEP, whether it has reasonably adjusted the royalty in light of the changes in quantity and quality of its SEPs or has repeatedly charged royalty through a non-practicing entity (NPE). The considerations provided in the Draft SEP Guidelines are generally consistent with the SAMR IPR Provisions with some customized factors for SEP antitrust enforcement practice. [Art. 12 of the Draft SEP Guidelines]
Compared with the 2020 Provisions and Draft Provisions, the SAMR IPR Provisions has removed the concept of “essential facilities”, without altering draft provisions on specific factors to be considered in assessing refusal to license. For example, the factor that “such IPR cannot be viably substituted on the relevant market and is essential to other undertaking(s) in order for them to compete on the relevant market” may give rise to the argument for the “essential facility” nature of the IPR concerned. [Art. 10 of the SAMR IPR Provisions]
The Draft SEP Guidelines also list relevant factors in determining refusal of license but in the specific context of SEPs, including: whether the parties have conducted good-faith negotiation, whether the harms caused by SEP infringement can be remedied by a license that complies with the FRAND commitment, whether the implementer has the capability to pay reasonable royalty, whether the implementer has a bad credit record or is experiencing deterioration in operation, thereby affecting transaction security, whether a license fails to be granted on objective grounds such as force majeure, the impact and extent of refusal to license on market competition and innovation, and whether the refusal to license will harm the interests of consumers or the public. [Art. 13 of the Draft SEP Guidelines]
Compared with the 2020 Provisions and Draft Provisions, the SAMR IPR Provisions further illustrate the IP-related tying behaviors such as “violate trading practices of the industry or field, consumption habit, or disregarding the functions of products”, and delineate two typical tying conducts: “coercing, or coercing in a disguised manner, a licensee to purchase other unnecessary products at the time of IPR licensing” and “coercing, or coercing in a disguised manner, a licensee to accept portfolio licensing at the time of IPR licensing”. [Art. 12 of the SAMR IPR Provisions]
The Draft SEP Guidelines also address the issue of SEP-related tying practices. The factors to be considered largely mirror those set out in the IPR Guidelines but are also expanded to address SEP-related features, such as whether the parties have conducted good-faith negotiation, whether it is feasible to disaggregate the portfolio licensing and whether it will entail unreasonable standard implementation costs to the SEP implementer , whether the SEP implementer can autonomously choose the portfolio to be licensed or the products to be purchased, etc. [Art. 14 of the Draft SEP Guidelines]
(4) Imposing Unreasonable Trade Terms
While the 2020 Provisions only lists “sole grant-back” as an example of imposing unreasonable trade terms, the SAMR IPR Provisions further expand the scope to “requiring exclusive or sole grant-back, or requiring the counterparty to grant cross-license in the same technical field without providing reasonable consideration”. In addition, regarding the other typical instances, the SAMR IPR Provisions have removed the following wording: “continuing the exercise of any of its IPR where its protection period has expired or it has been found to be invalid” (which was included in both the 2020 Provisions and Draft Provisions), as well as the wording “prohibiting counterparties from dealing with third parties” (which was added in the Draft Provisions). [Art. 13 of the SAMR IPR Provisions]
Under the Draft SEP Guidelines, exclusive grant-back, sole grant-back and royalty-free cross-license are factored in assessing typical practices of imposing unreasonable trade terms; other factors to be considered include: “whether the licensing parties have conducted good-faith license negotiation”, “whether it prohibits the implementer from objecting to the essentiality, validity, etc. of the SEP”, “whether it continues to claim the SEP right that has expired or has been declared invalid ”, “whether the implementer is prohibited or restricted from selecting dispute resolution measures”. [Art. 15 of the Draft SEP Guidelines]
4. Concentration of Undertakings Involving IPR
The SAMR IPR Provisions expressly require pre-merger notification with SAMR if a contemplated concentration involving IPR reaches the filing thresholds. If IPR licensing constitutes a stand-alone business, a change in control might constitute concentration of undertakings, and if the revenue generated from the IPR at issue reaches the filing threshold, then such IPR related transaction will trigger the filing obligation in China. According to the IPR Guidelines, in addition to IPR transfer, exclusive license may also constitute a concentration of undertakings, subject to further analyzing the method and term of license to the IPR at issue. [Art. 15 of the SAMR IPR Provisions]
The SAMR IPR Provisions also provide that a merger review shall take into account the characteristics of IPR, and the merger remedies may include divesting the IPR or the business involving the IPR, hold-separate operation of the business concerning the IPR, committing to license IP on reasonable terms and etc. [Art. 16 of the SAMR IPR Provisions]
The Draft SEP Guidelines generally echo the SAMR IPR Provisions, but further provide that a below-threshold transaction involving SEP may need to be notified if the pertinent facts and evidence show that it has or may have the effect of eliminating or restricting competition, and a failure-to-notify could trigger an investigation from the SAMR. [Art. 18 of the Draft SEP Guidelines]
5. Antitrust Issues Related to Patent Consortium
Compared with the Draft Provisions, the SAMR IPR Provisions amended provisions concerning patent consortium by making reference to the IPR Guidelines, adding “restricting the scope of use of a patent consortium member or a licensee without justifiable cause” and “compulsory portfolio licensing of competing patents, or compulsory portfolio licensing of non-essential patents, expired patents and other patents without justifiable cause” as abusive conducts by a dominant patent consortium. Also, the SAMR IPR Provisions list a dominant patent consortium’s conduct of “prohibiting a licensee from challenging the validity of the pooled patents without justifiable cause” as an antitrust violation. [Art. 17 of the SAMR IPR Provisions]
The Draft SEP Guidelines confirm that a patent consortium may reduce licensing and other transaction costs, enhance licensing efficiency and the standard implementation stability, and has pro-competitive effect, but also provide that various SEP holders may reach a monopoly agreement by utilizing the patent consortium, thereby eliminating or restricting competition. [Art. 9 of the Draft SEP Guidelines]
6. Specific SEP-related Issues
(1) Cartels through Standard Setting and Implementation
With respect to cartel concerns in connection with standard setting and implementation, the SAMR IPR Provisions have added a separate article on conclusion and implementation of monopolistic agreement, setting out the relevant factors of “preclud[ing] specific undertaking from participation in the formulation of standards or to preclude specific undertaking from the technical solutions of relevant standards jointly with a competing undertaking”, “preclud[ing] other specified operators from the implementation of relevant standard jointly with a competing undertaking” and “agree[ing] with a competing undertaking not to implement other competing standards”. [Art. 18 of the SAMR IPR Provisions]
The Draft SEP Guidelines provide examples of joint-conducts such as “restrict implementing the standards from conducting testing based on the standards, obtaining certification, etc. without justifiable cause” in connection with formation and implementation of standards; additionally, it aligns with the Amended AML by addressing a “hub-and-spoke” cartel, i.e., organizing the SEP holders to reach a monopoly agreement or providing substantive assistance for the SEP holders to reach a monopoly agreement. [Art. 8 of the Draft SEP Guidelines]
(2) Abuse of Injunctive Relief
The Draft Provisions deal with abuse of injunctive relief, providing that where a SEP holder “in the course of licensing standard essential patent, in violation of the FRAND commitment, improperly request a court or the relevant authority to make or issue a judgment, ruling or decision prohibiting the use of the relevant IPRs, or coerce the licensee to accept unfairly excessive price or other unreasonable restrictive conditions, without going through a course of good-faith negotiation, in violation of its FRAND commitment”; however, the SAMR IPR Provisions have removed the word “improperly” in the final version, thereby giving more room for a prospective licensee to allege abuse of injunctive relief. [Art. 19 of the SAMR IPR Provisions]
The Draft SEP Guidelines has a separate clause dealing with SEP injunctive relief. While stating that a SEP holder is generally entitled to request the court or a relevant authority to make or issue a judgment, ruling or decision prohibiting the practice of the relevant patent right, it also points out that a SEP holder may abuse the aforesaid relief measure to demand that the implementer accept unfairly excessive price or other unreasonable trading terms. In the analysis of a specific case, whether the licensing parties have conducted good-faith negotiation shall be taken into account, and other factors provided in the IPR Guidelines may also be considered. [Art. 17 of the Draft SEP Guidelines]
(3) Information Disclosure involving SEPs
The Draft Provisions provided that, if a dominant undertaking participating in the development of a standard intentionally withholds information about its patent rights to the standard-setting organization (“SSO”) but asserts the patent right against an implementer after the standard is promulgated, such conduct constitutes a form of abuse of dominance. However, the SAMR IPR Provisions has removed the word “intentionally”, thereby heightening the burden of proof on the SEP holder.
The Draft SEP Guidelines further delineate the antitrust concerns regarding information disclosure involving SEP. It requires that a SEP holder or applicant participating in a standard setting shall follow the rules of the relevant SSO, timely and sufficiently disclose the patent at any standard setting stage, and may disclose other relevant patents it is aware of. Where a SEP holder fails to disclose the patent information timely and sufficiently in accordance with the SSO rules, or waives the patent right but subsequently asserts such right against an implementer after the standard is promulgated, such circumstances are important factors in determining whether an anti-competitive behavior is established. [Art. 5 of the Draft SEP Guidelines]
The Draft SEP Guidelines emphasize that SEP holder and implementer shall follow the fair, reasonable and non-discriminatory (“FRAND”) principle. Whether the SEP holder or its assignee has violated the FRAND commitment is an important factor in finding of a specific monopolistic conduct, such as licensing at an unfairly excessive royalty, refusing to license its SEP without justifiable causes, tying products, imposing other unreasonable trade conditions or engaging in discriminatory treatment. [Art. 6 of the Draft SEP Guidelines]
In China’s antitrust legislative and enforcement practice, we wish to note that FRAND principle is no longer limited to SEP-related sector, but has been applied in many other scenarios. For instance, under the Anti-monopoly Guidelines for the Platform Economy Sectors, a counterparty’s failure to comply with the platform rules on FRAND basis may serve as one of the justifiable reasons for a dominant platform operator’s refusal to deal; pursuant to the Administrative Guidance Letter issued by the SAMR to Alibaba and certain other platform giants, they shall cooperate with undertakings within the platforms by adhering to the FRAND principle. Further, in a number of conditional clearance decisions, the SAMR required the merged entities to maintain supply to Chinese customers on FRAND terms.
(5) Good-Faith Negotiation on SEP License
Article 7 of the Draft SEP Guidelines provides that “[g]ood-faith negotiation regarding a SEP is an exemplification of the FRAND commitment. A SEP holder and implementer shall conduct good-faith negotiation on licensing terms such as royalty rate, quantity and duration, etc., so as to reach licensing terms that are FRAND”, and further list procedural and substantive factors for both SEP holders and implementors. “Good faith” entails obligations on both the SEP holder and implementer. On the one hand, the SEP holder shall fully disclose the necessary information in its offer, including information on the SEP involved (e.g., SEP list and the claim chart of the SEP against the standard), royalty proposal and reasonableness of license conditions. On the other hand, both implementer and SEP holder shall act in good faith in the process of negotiation by responding to offer/counteroffer actively and in a bona fide manner, clearly expressing intentions within a reasonable time, and fulfilling their confidentiality obligations on any trade secrets or other confidential information acknowledged during the negotiation. Notably, these good faith requirements are similar to the negotiation procedures provided in the Good Faith Negotiation Guidelines for Standard Essential Patent License by the Ministry of Economy, Trade and Industry of Japan. [Art. 7 of the Draft SEP Guidelines]
Good-faith negotiation also serves as a consideration in determining SEP-related abuse of dominance. In this respect, the absence of good-faith negotiation will likely be factored in by the SAMR in evaluating abusive violations. It appears that the SAMR aims to strike a balance on the issues of “hold-up” by SEP holder and “hold-out” by SEP implementer. Before the Draft SEP Guidelines were published, the IPR Guidelines provide that “the manifested behaviors of both parties in the course of negotiation and their respective true willingness reflected thereby” could be considered in finding abusive conducts by a SEP holder, and Guangdong High People Court’s Working Guidelines for Adjudicating Standard Essential Patent Cases also introduces the concept of “good-faith implementer”. In practice, the determination of “good faith” will still likely be made in light of the specific case circumstances, so comprehensive assessment of both the procedural and substantive aspects of a licensing negotiation needs to be conducted to evaluate whether the “good faith” criteria have been met.