This article was written by Susan Ning(parnter), Kate Peng (partner) and Weiqing Qiu (associate)
On April 7, 2015, the State Administration for Industry and Commerce (SAIC) officially published the Rules on Prohibition of Abuses of Intellectual Property Rights for the Purposes of Eliminating or Restricting Competition (SAIC IP Rules). This is the first set of rules to implement the general principles recognized by Article 55 of China’s Anti-Monopoly Law (AML) in the IPR sector. The SAIC IP Rules introduce a safe harbor mechanism which validates certain intellectual property right (IPR) related restraints.
During 2015, the Antitrust Committee under the State Council entrusted four authorities with drafting the Antitrust Guidelines regarding Prohibition of Intellectual Property Abuse (IP Guidelines). Amongst the four authorities, SAIC published its seventh version of draft IP Guidelines on February 5 2016 (draft SAIC IP Guidelines) and the National Development and Reform Commission (NDRC) published their second draft on December 31, 2015 (draft NDRC IP Guidelines). Both the SAIC and NDRC draft IP Guidelines set out an IPR sector safe harbor.
The Safe Harbor and Its Benefits
The safe harbor defines a set of market power thresholds, below which the antitrust agencies will not, in principle, intervene. As SAIC officials stated online, the safe harbor provides a certain level of foreseeability under the AML. IPR holders could take this opportunity to re-examine their IPR related practices and try to benefit from the safe harbor. The operators whose market share or substitutable technology does not exceed the thresholds may enjoy more legal certainty that their conduct is legitimate, while trying to expand their businesses.
Current Provisions in the SAIC IP Rules and draft IP Guidelines
The SAIC distinguishes agreements between competitors and those between non-competitors in its safe harbor provisions (Article 5 SAIC IP Rules). For agreements between competitors, if the aggregate market share of the operators does not exceed 20% in the relevant market, or if there are at least 4 other substitutable, independently controlled technologies which can be obtained at reasonable cost in the relevant market, such agreements will not be deemed anticompetitive agreements prohibited by Article 13.1.6 and Article 14.3 of the AML. The exception is where there is evidence to the contrary proving that such agreements have the effect of eliminating or restricting competition. For agreements between non-competitors, the threshold is 30% for each party or there are at least 2 other substitutable technologies.
The draft SAIC IP Guidelines have the same safe harbor provision as above, whereas the draft NDRC IP Guidelines are different. In section 2.3 of the draft NDRC IP Guidelines, the equivalent thresholds for exemption from Article 15 of the AML are 15% aggregate market share for competitors and 25% individual market share for non-competitors. However, section 2.3 of the NDRC IP Guidelines also provides that the safe harbor does not apply to anticompetitive agreements clearly listed by Article 13 and Article 14 of the AML, and the exemption will be disapplied if there is any evidence proving that such agreements do not meet the requirements of Article 15 of the AML.
The proposed safe harbors could have profound influence on market players by allowing them to self-assess their compliance. However, there remain issues to be clarified in practice.
Scope of the Safe Harbor – Exercising IPRs
It is important to define what kind of conduct may enjoy the benefit of the safe harbor. In the SAIC IP Rules, it only applies to the exercise of IPRs by operators. The draft SAIC IP Guidelines adopted the same standard. The draft NDRC IP Guidelines have a slightly different description of scope, namely relevant IPR agreements reached by operators. Also according to Article 55 of the AML, the exercise of IPRs pursuant to IPR laws and administrative regulations is not applicable to the AML, but if an operator misuses its IPRs in order to eliminate or restrict competition, the AML does apply. Thus, to enjoy the safe harbor, we understand that the operator’s conduct needs to at least involve exercising IPRs, whereas conduct only partially involving IPRs may not suffice. For instance, a machine manufacturer needs to authorize its distributors to use its logo within a certain scope to promote and sell its products, but if the manufacturer restricts the target territory or customers of its distributors, the licensing of the logo would not mean the safe harbor applied to these restrictions, because they are unrelated to the exercise of the trademark rights.
Scope of the Safe Harbor – Not Applicable to Hardcore Anticompetitive Agreements
The SAIC IP Rules, draft SAIC IP Guidelines and draft NDRC Guidelines do not apply the safe harbor to typical anticompetitive agreements, i.e. those expressly prohibited by Articles 13 and 14 of the AML. Therefore, only agreements which might fall into the category of Article 13.1(6) and Article 14(3) (often known as non-hard core restraints) could benefit from the safe harbor.
It is notable that so far no agreement has been found to violate Article 13.1.6 and Article 14.3 among the published SAIC and NDRC decisions. Although both the draft SAIC and NDRC IP Guidelines do not seem to directly identify any non-hardcore restraints as violating Article 13.1.6 or Article 14.3, both of them list certain vertical restraints including territorial restrictions, customer restrictions, exclusive grant-back, non-assertion clauses, restrictions on production or sales volume, restrictions on licensees obtaining or using competing IPRs and restrictions on licensees producing or selling competing products. Whether such kinds of restrictions can benefit from the safe harbor is subject to future enforcement. We hope this could be clarified in the final sets of IP Guidelines.
Substitutable Technology Thresholds
Unlike the SAIC IP Rules and the draft SAIC IP Guidelines, the draft NDRC IP Guidelines do not include a substitutable technology threshold.
It is notable that the U.S. Antitrust Guidelines for the Licensing of Intellectual Property (“U.S. Guidelines”) only apply an equivalent technology threshold if an examination of the effects on technology competition or in research and development is required, or if market share data are unavailable or do not accurately represent competitive significance. By contrast, the SAIC IP Rules and draft SAIC IP Guidelines do not specify such preconditions. It would therefore be helpful if the final IP Guidelines could expressly state that these preconditions do not apply.
Market Share Thresholds
Compared with the SAIC IP Rules and the draft SAIC IP Guidelines, the draft NDRC IP Guidelines have lower market share thresholds. The final version of these IP Guidelines should therefore clarify the thresholds and the relationship between these and any different thresholds.
Another technical issue in applying the market share thresholds will be the calculation of market shares, especially in the relevant technology markets. Will the average market share of the operator during a given time period be used to evaluate the applicability of the safe harbor? If using the market share of the products incorporating the IPR to calculate the operator’s market share in the relevant technology market, should it be based on production volume or sales value? Such clarifications would help operators self-assess their market shares.
Compatibility with Other Mandatory Laws or Regulations
Regarding the relationship between the AML and other related laws and regulations, the SAIC IP Rules and the draft NDRC IP Guidelines both state the principle of Article 55 of the AML: the proper and legal exercise of IPRs will not be subject to the AML, but IPR abuse which excludes or restrains competition will. Currently the following provisions could overlap with the SAIC IP Rules and future IP Guidelines.
A technology contract which illegally monopolizes technology, and therefore impedes technological progress, shall be null and void according to Article 329 of the China Contract Law. A list of such technology contracts (such as exclusive grand-back, restrictions on obtaining competing technology, restrictions on territory, customer, and volume of the licensed products) are provided in Article 10 of the Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Technology Contract Dispute Cases (“Supreme Court Interpretation”).
Both the Contract Law and the Supreme Court Interpretation were implemented before the AML and SAIC IP Rules came into effect, and there were no specific laws and regulations providing for antitrust issues back then. We understand that the AML, the SAIC IP Rules, and future IP Guidelines are likely to prevail when it comes to the legality of suspected IPR abuse which might exclude or restrain competition. As the Supreme Court made reference to the State Council’s Guidelines on Defining the Relevant Market, we understand that the future IP Guidelines are also likely to serve as an important reference to courts in antitrust related IPR abuse cases.
In a nutshell, the safe harbor provided in the SAIC IP Rules and the future IP Guidelines will certainly offer more certainty for IPR holders. However, they need to examine carefully whether they meet the market share or substitutable technology thresholds, and whether their behavior is included in the scope of the safe harbor. The current safe harbor provisions are still to be tested and we look forward to further clarity in the future IP Guidelines.
A complete list of such technology contracts includes: (i) restrictions on research and development in the licensed technology or using self-developed improved technology; non-reciprocal conditions for the exchange of improved technologies with each other, including requirements to gratuitously provide the improved technology, to transfer the improved technology non-reciprocally, to gratuitously and solely own or jointly own the intellectual property of the improved technology; (ii) restrictions on obtaining competing or similar technology from third parties; (iii) unreasonable restrictions on the quantity, varieties, price, sales channel or export market of the licensed technology for the licensee to produce products or to provide services in a standard manner; (iv) attached conditions dispensable for exploiting the technology, including purchasing dispensable technologies, raw materials, products, equipment, services or accepting dispensable persons, etc.; (v) unreasonable restrictions on the channels or origins for the licensee to purchase raw materials, parts and components, products or equipment, etc.; and (vi) prohibitions on the licensee from making objections to the effectiveness of the intellectual property of the licensed technology, or attaching conditions on the objections made.