In review: licensing and antitrust issues in China - Lexology

2022-07-22 21:55:10 By : Ms. Zhang Nancy

Review your content's performance and reach.

Become your target audience’s go-to resource for today’s hottest topics.

Understand your clients’ strategies and the most pressing issues they are facing.

Keep a step ahead of your key competitors and benchmark against them.

Questions? Please contact [email protected]

Stimulating innovation through protecting intellectual property rights (IPRs) and safeguarding competition through implementing antitrust laws are both important policies for the development of a modern economy. Overall, both policies share common goals, namely, to promote competition and innovation, improve economic efficiencies and safeguard the interests of consumers and the public. However, the paths to achieve these goals are different. The protection of IPRs requires the protection of exclusive rights of IPR holders to encourage innovation, promote industrial upgrading, and enhance consumer welfare and social efficiency. On the other hand, antitrust action calls for a clear-cut objection against monopolistic behaviour to protect competition, including competition among different technologies, to promote technological progress and protect consumer interests and social welfare.

Merely holding IPRs and legitimately exercising them would not violate antitrust law. However, the exercising of IPRs may, under certain circumstances, trump technological innovation and the fair competition environment, and even result in unfavourable consequences for competition. It would not only defeat the basic purpose of the IPR system to encourage innovation, but also raise concerns of IPR abuse, which eliminates and restricts competition.

As with many other jurisdictions, the interaction between antitrust protection and IPRs have been noted and addressed by Chinese legislation. In article 55, the Anti-Monopoly Law enacted in 2008, the main legislation regulating antitrust violations in China, sets out that 'this Law is applicable to undertakings' conduct that eliminates or restricts market competition by abusing their IPRs'. In other words, the rules set forth in the Anti-Monopoly Law regarding reaching monopoly agreements, abuse of dominant market position and merger control also apply in the field of intellectual property. In practice, the State Administration for Market Regulation (SAMR), the anti-monopoly law enforcement authority promulgates related regulations and guidelines, and the Supreme People's Court issues judicial interpretations, on specific issues in the application of the Anti-Monopoly Law. These regulations, guidelines and judicial interpretations constitute part of the antitrust law regime in China. This chapter focuses on the latest interdisciplinary developments of intellectual property and antitrust law in China during 2021 and early 2022.

On 24 July 2021, SAMR imposed administrative penalties on Tencent Holdings Co Ltd for illegally implementing a concentration of undertakings in its acquisition of the equity of China Music Group (CMG) in July 2016.

In this case, the relevant market was defined as that for online platforms for playing music in China. SAMR's investigation showed that the market shares of Tencent and CMG were about 30 per cent and 40 per cent respectively in 2016. After the acquisition, the consolidated entity held more than 80 per cent of the exclusive music library resources. Since original music copyright is a core asset and key resource for operating online music platforms, SAMR believed that by gaining a higher market share through the merger than its major competitors in the market, Tencent would have the ability to reach more exclusive copyright agreements with its upstream copyright owners or request transaction conditions that are superior to those of its competitors, and it may have the ability to raise market entry barriers through copyright payment models, such as paying high upfront fees, which had or may have the effect of excluding or restricting competition in the relevant market.

In addition to imposing a fine of RMB 500,000, SAMR also ordered Tencent and its affiliates to take a series of measures to restore market competition, including terminating exclusive music copyright agreements within 30 days, discontinuing some payment methods such as high upfront fees, and not to demand that upstream copyright owners agree to conditions that would benefit Tencent without legitimate reasons.

This is the first case in which remedies were imposed on a closed merger to restore market competition since the implementation of the Anti-Monopoly Law, and is a milestone in China's review of concentrations of undertakings.

In March 2020, Oppo filed a lawsuit against Sharp at the Shenzhen Intermediate People's Court, alleging that Sharp breached fair, reasonable and non-discriminatory (FRAND) principles during licensing negotiations and the determination of global royalty rates of Sharp's 3G, 4G and Wi-Fi standard-essential patent (SEP) portfolios. On 19 August 2021, the Intellectual Property Tribunal of the Supreme People's Court of China issued its final ruling rejecting Sharp's appeal of objection to jurisdiction, upholding the ruling of the first trial.2

The Supreme People's Court considered the following facts in its ruling that Chinese courts have jurisdiction over the setting of global rates for SEPs in SEP licensing disputes:

This is the first time that the Supreme People's Court of China has clarified the rules governing the global licensing conditions of SEPs. According to the latest news on 8 October 2021, Oppo and Sharp have reached an agreement on global cross-patent licences, which ended all ongoing litigation between the two companies worldwide.

The plaintiff AstraZeneca is a patent holder that filed a lawsuit against Jiangsu Aosaikang Pharmaceutical Co Ltd with the Nanjing Intermediate People's Court on 23 April 2019, alleging that the defendant's product infringed its patent.3 Upon the conclusion of a settlement with Aosaikang, AstraZeneca applied to the Supreme People's Court, the court of second instance, to withdraw the appeal it had filed. When reviewing the application, the Supreme People's Court held that the settlement agreement had the appearance of a 'drug patent pay-for-delay agreement',4 therefore, it was necessary to review whether it violated the Anti-Monopoly Law.

In its ruling, the Court clarified that the 'drug patent pay-for-delay agreement' was a commitment by the drug patentee to give direct or indirect compensation to a generic drug company. Such agreements include clauses in which generic drug companies promise to not challenge the validity of the related drug patent or agreements that delay the generic manufacturer's entry into the drug market. If such agreements have the effect of eliminating or restricting competition, they may constitute a monopoly agreement regulated by the Anti-Monopoly Law. In the event that a preliminary review identifies possible anticompetitive conduct, a court may decide to reject the withdrawal of a lawsuit and refer the case to the Anti-Monopoly Law enforcement agency for further action.

In determining whether a pay-for-delay agreement may eliminate or restrict competition in a relevant market, the Supreme People's Court compares the situation where the agreement has been signed and performed with a hypothetical scenario in which the agreement was not signed nor performed, with a focus on examining the possibility that the drug patent is deemed invalid due to the request for invalidation had the generic drug company not withdrawn its request.

The Supreme People's Court was of the view that the agreement between AstraZeneca and Aosaikang basically followed the format of a 'drug patent pay-for-delay agreement'. However, as the protection period of the patent in question had expired, there was no necessity or urgency to further investigate whether the settlement agreement involved in the case violated the Anti-Monopoly Law. Bistro Myers Squibb and Jiangsu Vcare PharmaTech Co Ltd, which were parties to the settlement agreement, did not participate in the litigation of this case.

As the Court was unable to investigate whether the Settlement Agreement may have violated the Anti-Monopoly Law, the court did not comment on this matter any further and allowed AstraZeneca to withdraw its appeal.

In February 2022, the Supreme People's Court rendered the final judgment in the monopoly agreement dispute between Wuhan Taipu Transformer Switch Co Ltd and Shanghai Huaming Electrical Equipment Manufacturing Co Ltd, reversing the judgment of first instance and determined that the mediation agreement at issue constituted a horizontal monopoly agreement, and the fact that Taipu owned and exercised the patent right could not exclude the illegality of the mediation agreement involved.5

The mediation agreement settled a patent infringement dispute between the two parties in 2015. Thereafter, Taipu sued Huaming twice, once in 2017 and again in 2018, for breach of the mediation agreement. In June 2019, Huaming filed a lawsuit with the Intermediate People's Court of Wuhan claiming that the mediation agreement was in violation of the Anti-Monopoly Law and should be rendered invalid.6

During the trial of second instance, the Supreme People's Court held that, with regard to the relationship between the mediation agreement involved in the case and the dispute over patent infringement, pursuant to Article 55 of the Anti-Monopoly Law, a rights holder exercising IPRs in accordance with the provisions of laws and administrative regulations would not violate the Anti-Monopoly Law in principle. However, a rights holder exceeding its exclusive rights and abuses IPRs to exclude or restrict competition, would be a violation of the Anti-Monopoly Law. In this case, the patent claim protected an off-circuit tap-changer with a specific structure of shielding device and did not involve a specific type or shape of off-circuit tap-changer. However, the mediation agreement classified the products by the type of off-circuit tap-changer, dividing them into 'cage types' and 'non-cage types'; in overseas markets, products were classified by the manufacturers of the off-circuit tap-changers and divided into switches produced by Taipu Associated Company, in which Taipu held a share, while the switches produced by other enterprises. Therefore, Huaming imposed restrictions on the production and sales of specific types of off-circuit tap-changers based on the above division. However, such restrictions had no substantive connection with the scope of protection of the patent rights concerned.

The Supreme People's Court also held that Huaming and Taipu had a competitive relationship in the off-circuit tap-changer market. The mediation agreement divided the off-circuit tap-changer market, thereby imposing restrictions on the sales prices, production quantity, sales quantity, sales categories and geographic sales areas of the off-circuit tap-changers, eliminating and restricting normal competition among business operators. Therefore, the Supreme People's Court deemed that the core of the mediation agreement was not designed to protect patent rights, but to pursue the effects of dividing the sales market, restricting the production and sales quantity of products, and fixing prices under the cover of exercising patent rights. Such abuses of patent right constituted excluding or restricting competition and therefore violated the provisions of the Anti-Monopoly Law.

Eight karaoke bar enterprises from Guangdong province filed a lawsuit against the China Audio-Video Copyright Association (CAVCA) for alleged abuse of dominant position. In June 2020, the Beijing Intellectual Property Court held in the first-instance judgment that although CAVCA had dominant position in relevant market, the plaintiffs had failed to prove that CAVCA engaged in abuse of its dominant position by imposing restrictions on transaction and imposing unreasonable conditions.7

In March 2022, the Supreme People's Court issued its judgment of second instance, rejecting the karaoke bars' appeals.8 The Supreme People's Court's opinions regarding whether CAVCA had carried refused to deal, as alleged by eight karaoke bars, were as follows:

Therefore, the Court held that CAVCA had already met some of the contract conditions proposed by the karaoke bars, and that some of the proposed conditions were unreasonable. Therefore, the Supreme People's Court held that there was insufficient evidence to prove that CAVCA had refused to deal.

In general terms, the Anti-Monopoly Law provides that, without justifiable reasons, restricting trading counterparties to trading only with dominant undertaking or its designated undertaking constitutes an abuse of dominant market position. Also, Article 8 of the revised version of the Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition (the IP Provisions) provides that when exercising IPRs, undertakings with a dominant market position are prohibited from requiring trading counterparties to make transactions exclusively with themselves or with designated undertakings without justifiable reasons, if the transactions eliminate or restrict competition.

According to Article 18 of the Anti-Monopoly Guidelines of the Anti-Monopoly Committee of the State Council in the Field of Intellectual Property Rights (the IP Guidelines), forcing a trading counterparty to trade with (or prohibiting trade with) a certain third party, or restricting a counterparty's conditions of trade with a third party may be considered a violation of the Anti-Monopoly Law, if it eliminates or restricts competition in the relevant market.

The IP Provisions stipulate that when exercising IPRs, undertakings with a dominant market position are prohibited from tying if it is inconsistent with trade practices or consumption habits, or ignores the product's function and enables the undertaking to extend its dominant position in the tying product market to the tied product market.9

In line with the IP Provisions, Article 17 of the IP Guidelines explicitly states that package licensing may also be a form of tying. In addition, the IP Guidelines specify the factors to be considered when analysing whether tying involving IPRs constitutes abuse of market dominance. These factors include:

According to the IP Provisions, when exercising IPRs, undertakings with a dominant market position are prohibited from restraining the transaction counterparties from making use of the competitive commodities or technologies in cases of non-infringement of IPRs after the expiration of a licence agreement.10 Article 18 of the IP Guidelines also considers an undertaking with a dominant market position claiming rights to IPRs that have expired or have been declared null and void as behaviour that might eliminate or restrict competition.11

To comply with the IP Provisions, when exercising IPRs, undertakings with a dominant market position are prohibited from refusing to license IPRs if the IPRs constitute essential facilities for production and business activities.12 The IP Provisions also provide three factors to identify IPRs that might constitute essential facilities:

In Article 16, the IP Guidelines confirm that refusal to license IPRs is an expressive form of an undertaking's exercise of IPRs, and that under general circumstances, no undertaking assumes an obligation to trade with competitors or trading counterparties. However, if an undertaking with a dominant market position unjustifiably refuses to license IPRs, it may constitute an abuse of dominant market position that eliminates or restricts competition. The IP Guidelines consider the following six factors in analysing whether a refusal to license is an unjustifiable abuse of a dominant market position:

In the Four Magnetic Material Companies v. Hitachi case,14 Ningbo Intermediate People's Court held that Hitachi Metals' essential patent portfolio of sintered NdFeB magnets should be considered as an essential facility for the industry, due to the following reasons:

Generally, according to Article 14 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position, to determine whether a price is an 'unfairly high price', the following factors must be considered:

To provide clarification on this problem, Article 15 of the IP Guidelines outlines five factors to be considered when determining whether licensing royalties constitute an abuse of a dominant market position:

Article 19 of the IP Guidelines defines how in transactions involving IPRs undertakings with a dominant market position may impose, without justifiable reasons, different licensing conditions on transaction counterparties with substantially identical conditions, behaviour that constitutes discriminatory treatment. It also explains how to analyse this behaviour, including the conditions on counterparties' transactions, the terms of the licensing agreement, and the discriminatory treatment.16

Compared with the draft IP Guidelines, which only address exclusive grant-backs, Article 9 of the IP Guidelines also pays attention to sole grant-backs (i.e., where only the licensor, or a designated third party and the licensee, have the right to implement improvements or new achievements). Grant-backs can usually promote new achievements and investments into such achievements, but sole grant-backs and exclusive grant-backs may reduce licensees' motivation to innovate and have an effect of eliminating or restricting market competition. In addition, the IP Guidelines point out that, generally, exclusive grant-backs are more likely to eliminate and restrict competition than sole grant-backs.

In analysing whether a sole grant-back or an exclusive grant-back has the effect of eliminating or restricting market competition, the IP Guidelines provide the following factors to be considered:

The IP Guidelines also regulate challenges to prohibit the validity of IPRs. Article 10 of the IP Guidelines provides that a 'no-challenge clause' refers to a clause in an IPR licensing agreement, in which the licensor requires the licensee to not raise challenges to the validity of its IPRs.

The following factors may be considered when analysing the competition exclusion or restriction effect of a no-challenge clause on the relevant market:

Article 18 of the IP Guidelines prohibits undertakings with a dominant market position from attaching transaction conditions that restrict counterparties from making claims over expired or invalid IPRs. Enforcement practice is consistent with this viewpoint.

The IP Guidelines define 'cross-licensing' as the mutual licensing of their own IPRs between undertakings. The IP Guidelines point out that cross-licensing can normally reduce the costs of IPR licensing and promote the implementation of IPRs, but may also have the effect of precluding or restricting market competition.

The following factors may be considered when analysing any exclusionary or restrictive effect of cross-licensing on competition in the relevant market:

The IP Provisions define 'patent pooling' in the context of China's antitrust regime as:

The IP Guidelines state that patent pooling can generally reduce transaction costs, improve the efficiency of licensing and promote competition. However, it may also eliminate or restrict competition. The IP Guidelines enumerate several factors that may be considered when analysing a patent pool, including:

The IP Provisions confirm that determination of a dominant market position shall follow the rules in the Anti-Monopoly Law, and specifically clarify that undertakings are not presumed to have a dominant market position in the relevant market merely because of ownership of IPRs.

In combination with the characteristics of IPRs, in order to identify whether an undertaking that owns IPRs has a dominant market position in the relevant market, the IP Guidelines specify that the following factors may be considered:

The following factors may also be considered:

The issue of whether standard-essential patent (SEP) holders may seek injunctions has been heavily discussed in recent years. According to Article 24 of the Interpretations of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases (II), as to those patents that have been disclosed as essential for the implementation of recommended national, industrial or local standards, the court shall not, in general, uphold injunctions sought by holders of such patents encumbered with fair, reasonable and non-discriminatory (FRAND) commitments when the patentee intentionally violated FRAND obligations when negotiating with the accused infringer for licensing terms such that no agreement was reached and the accused infringer was not at fault during the negotiations.

Under the IP Guidelines, an anticompetitive effect would be created if a SEP holder with a dominant market position requested a court (or a relevant department) made or issued a judgment, ruling or decision forbidding the use of the relevant IPRs in order to force a licensee to accept unfairly high licensing fees or other unreasonable licensing conditions.

The IP Guidelines indicate that the following factors may be considered when analysing the competition effect of such injunction applications:

On 20 April 2017, the Guidelines of the High People's Court of Beijing Municipality for Judging Patent Infringements (the Patent Infringement Guidelines), released comprehensive guidance on the interpretation of the FRAND obligations for the first time.

Articles 152 and 153 of the Guidance states that in the following scenarios, a patentee may be considered in voluntary breach of the FRAND obligations if the patentee:

If any of the following acts are committed, the accused infringer may be found at fault during the necessary patent licensing consultation process:

In the Qualcomm case,24 the issue of whether it was appropriate for Qualcomm to charge royalties based on the net sale price of whole devices was discussed. The National Development and Reform Commission mentioned in its decision that:

It seems that the Commission did not conclude whether it was appropriate for Qualcomm to use the net sale price of whole devices as the royalty base, and only regarded the royalty base as one factor in determining Qualcomm's unfairly high pricing.

Mergers involving transfers of IPRs may enhance the market power of undertakings and make it more difficult for competitors to enter into the relevant markets. in Chapter Four, the IP Guidelines stipulate that a concentration of undertakings dealing with IPRs has a unique character; this unique character is mainly reflected in aspects such as the circumstances that constitute the concentration of undertakings, considerations for review and additional restrictive conditions.

Article 20 of the IP Guidelines provides that where an undertaking obtains control over another undertaking or is capable of exerting decisive influence on an undertaking through IPR transactions, it may constitute a concentration of undertakings. The IP Guidelines set forth three factors to consider when determining whether an IPR transfer or licensing constitutes concentration of undertakings:

According to the Interim Provisions on the Review of Concentration of Undertakings, the antitrust law enforcement agency can impose the following additional restrictive conditions on mergers to alleviate adverse impacts of the transfer of IPRs on competition:

Articles 22 to 25 of the IP Guidelines give a specific interpretation of restrictive conditions involving IPRs, which includes structural conditions, behavioural conditions and comprehensive conditions. Generally, undertakings may propose structural restrictive conditions (e.g., divesting IPRs or businesses involving IPRs) or propose behavioural conditions (e.g., IPR licensing, fulfilling FRAND obligations or charging reasonable licence fees) to address concerns of the enforcement agency. In addition, undertakings may combine structural conditions with behavioural conditions, and put forward suggestions on comprehensive restrictive conditions involving IPRs.

In the State Administration for Market Regulation's (SAMR) decision to administer an administrative penalty on Tencent for illegally implementing a concentration of undertakings in its acquisition of the equity of China Music Group, in order to restore market competition SAMR ordered Tencent and its affiliates to terminate exclusive music copyright agreements within 30 days, discontinue payment methods such as high upfront fees, and not to demand conditions of upstream copyright owners that were superior to their competitors without legitimate reasons

Regarding anticompetitive settlements of IPR disputes, China's Anti-Monopoly Law enforcement agency, learning from EU and US experience, has paid attention to the 'pay-for-delay' agreements between pharmaceutical companies whereby manufacturers of brand-name drugs might buy off or settle with manufacturers of generics so that the former can continue to enjoy monopolistic pricing after their patents have expired. Such conduct may be regarded as reaching horizontal monopoly agreements that 'split the market' or 'restrain development of new products' under the Anti-Monopoly Law.25

In AstraZeneca v. Aosaikang, The Supreme People's Court held that in determining whether a relevant pay-for-delay agreement is suspected of eliminating or restricting competition in the relevant market, this can generally be determined by comparing the situation where the agreement was signed and performed with a hypothetical scenario of the agreement not being signed or performed, focusing on examining the possibility that the drug patent would be deemed invalid due to a request for invalidation, had the generic drug company not withdrawn such a request.

In Taipu v. Huaming, the Supreme People's Court was of the view that the mediation agreement involved in this case classified the products by the type of off-circuit tap-changer, and divided them into 'cage' and 'non-cage' types, which was not in line with the protection scope of the patent rights concerned. Therefore, the core of the mediation agreement was to divide the sales market, restrict the production and sales quantity of products, and fix prices under the cover of exercising patent rights. Such an abuse of patent right constituted the act of excluding or restricting competition and therefore violated the provisions of the Anti-Monopoly Law.

In recent years, the Anti-Monopoly Law enforcement agency has been paying closer attention to enterprises' abusive behaviour in relation to IPRs. With the amendment of the Anti-Monopoly Law and formal release of relevant guidelines, many of the Anti-Monopoly Law's IPR-related issues are expected to gain greater clarity and certainty, and IPR-abusive behaviour will be subject to more stringent regulation. Predictably, we may see a better balance between promoting domestic innovation and protecting IPR holders' interests.

If you would like to learn how Lexology can drive your content marketing strategy forward, please email [email protected] .

© Copyright 2006 - 2022 Law Business Research