Crossroads: Anti-monopoly and IP rights

Firstly, IPRs do not necessarily give their owners monopolistic positions. An IPR gives its owner a monopolistic right over the technology or product which the IPR covers. However, such technology or product is usually not irreplaceable in the relevant market as it's likely a substitutable technology or product will compete with that monopolised by the IPR owner. As a result, unless the relevant technology or product is the only one available in the relevant market, the IPR does not have a monopolistic or dominant position in such relevant market.

Secondly, the exercise of IPRs is not a monopolistic activity per se. IPRs are legitimate monopolistic rights created and protected by IP Laws. However, like other civil rights, the exercise of IPRs is subject to a boundary provided by laws. The AML is one of the laws that set out this boundary and unless the exercise of IPRs exceeds the boundary as specified by the AML, it will not be prohibited as a monopolistic act.

Nevertheless, the ownership of an IPR does not give the owner a shield against anti-monopoly claims. In other words, if an IPR owner is found to have conducted a monopolistic activity, it cannot defend itself merely by arguing that the asserted activity is an exercise of its IPR. This is because the exercise of an IPR can be a monopolistic act if it crosses the boundary set out by the law.

Without doubt, the application of the AML in an IPR context brings a challenging case to both legislators and practitioners. The line between the legitimate exercise of IPRs and a monopolistic act is often unclear and must be assessed on a case-by-case basis. Therefore, it is important for IPR owners to seek professional opinions on specific activities of exercising its IPRs.

Activities abusing IPRs

Article 55 of the AML provides that the AML governs the act of abusing IPRs which precludes competition. The term “abusing IPRs” is not defined in the AML, nor is it defined by any other law. There are two different views on what types of activities “abusing IPRs” means.

The first view is that the term “abusing IPRs” refers to the exercise of IPRs in breach of any law provision that has an anti-monopoly effect (such as Article 329 of the PRC Contract Law
(中华人民共和国合同法) as discussed in the next section). According to this view, if (i) an IPR owner exercises its IPR in a manner in breach of a law and (ii) such exercise of the IPR precludes competition, the AML will prohibit the owner from exercising its IPR in such manner.

The second view is that the term “abusing IPRs” refers to the exercise of IPRs in breach of the AML only. According to this view, the abuse of IPRs is not an additional monopolistic activity; rather it refers to any of the monopolistic acts provided for by the AML which involves IPRs, be it monopolistic agreements, abuses of dominant market position, or mergers having a monopolistic effect.

A Supreme People's Court (SPC) judge once said in a seminar that if an act of abusing an IPR is prohibited by any law other than the AML, such other laws should be cited to prohibit such abuse. It appears that the SPC is apt to accept the view that the term “abusing IPRs” be interpreted narrowly to include only those in breach of the AML. This view appears quite logical because Article 3 of the AML provides that the AML governs three types of monopolistic acts ( monopolistic agreements, abuses of dominant market position, and mergers having monopolistic effect) and, therefore, the exercise of IPRs should be beyond the scope of application of the AML if it does not fall into any category of the said acts.

Despite the different views on the scope of abuses of IPRs, the government and the courts are working towards the rules with respect to the following suspected abuses of IPRs:

(i) Extending monopoly to downstream or related markets

An IPR is considered a legitimate monopoly over a certain technology or product. It does not, however, allow an IPR owner to level its IPR to restrict competition in the downstream or related markets. In other words, an IPR owner must not extend its monopolistic power from the market where its IPR rests to other markets. The following three activities are typical examples of extending monopoly to downstream or related markets:

The first example is price discrimination. Here, an IPR owner unreasonably imposes different conditions (such as royalty rates) to different players in downstream or related markets. This activity will create unfair competition in such downstream or related markets and, thus, be considered abusing IPR. However, it is usually acceptable to impose a lower rate on consumers because consumers are not competitive with commercial buyers. For example, software licensed for family use may be less expensive than if licensed for business use.

The second example is tied sales. This is when an IPR owner unreasonably requires its licensee to acquire its other products or services when licensing its IPR to the licensee. This activity will preclude competition in the market of such other products or services. It is still controversial as to whether an IPR owner may require the licensee of its IPR to acquire its other products or services if it can prove that its IPR performs and functions best when working with such other products or services.

The third example is the refusal of a licence. This occurs when an IPR owner unreasonably refuses to license its IPR to players in the downstream or other related markets if such IPR is necessary for the operation in such downstream or other related markets. This refusal will exclude competition in these markets. Some government officials and judges take the view that compulsory licences, rather than remedies under the AML, is the right measure to deal with the refusal of licences. Others suggest that strict conditions should be imposed on the compulsory licences or other remedies applicable for the refusal of licences because the right to decide whether to allow a third party to use its IPR is the fundamental right of an IPR owner.

(ii) Acquisition of competing IPRs

Similar to merger control rules, some academics suggest that government scrutinise important acquisitions of competing IPRs. If the acquisition is aimed to improve existing technology or optimise intellectual property assets, the acquisition should be encouraged. However, if the acquisition is aimed to remove a competing IPR from the market and, thus, preclude competition, the government should reject such acquisition.

Notwithstanding, said suggestion is beyond the current framework of the AML. It is believed that the merger control rule will not extend to the acquisition of IPRs in the near future. However, if an acquisition meets the current merger control threshold, the factor of acquiring competing IPRs may be considered when determining whether the approval for such acquisition will be granted.

(iii) Excessively high price

It is highly controversial as to whether it is an abuse of an IPR for its owner to impose excessively high prices on the licence of its IPR and how high the price has to be to be considered “excessively high”. Some academics take the view that laws should not interfere with commercial issues, such as price. However, the prevailing view is that, if a certain IPR is included in an industrial standard or is otherwise the only choice for players in a downstream or related market, the price for a licence of such IPR must not be excessively high so as to deprive the players of reasonable profits.

Economists appear supportive of this view. They demonstrate that IPR owners are allowed to have monopolistic profits in the market where its IPR rests, but that they are not allowed to impose an excessively high price to “steal” reasonable profits from other related markets. Otherwise, the excessively high price will restrict development in such other markets. For example, if the price for computer chips is too high, computer assemblers and manufacturers of other computer components cannot enjoy reasonable profits and, therefore, they will not have the incentive and capacity to develop their own industries.

Application of the AML and IP Provisions with
AM effects

In addition to the AML, some intellectual property law provisions also have an anti-monopoly effect. For example, the PRC Patent Law (中华人民共和国专利法) has provisions on compulsory licences, the Technology Contract Section of the Contract Law has provisions dealing with contractual provisions which “monopolise technology and impede technical progress”, and the draft Interim Regulations on the Administration of Formulating and Revising National Standards Including Patents (涉及专利的国家标准制修订管理规定》（暂行）（征求意见稿）) has provisions dealing with patents contained in national technical standards. Some other laws, such as the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法) and the PRC Protection of the Rights and Interests of Consumers Law (中华人民共和国消费者权益保护法), although not directly related to anti-monopoly issues, also prohibit monopolistic activities that distort competition or otherwise impact consumer interests.

Since August 2008, when the AML came into effect, the courts have completed the trials of more than 20 private anti-monopoly suits. According to an SPC judge, in most of the private anti-monopoly suits, the plaintiffs would have a better result had they chosen to base their case on the ground of laws and regulation other than the AML, especially the IP Provisions with AM effects.

(i) Fewer conditions

It is usually very difficult to establish a claim under the AML. A plaintiff needs to prove the “monopolistic effect” or “dominant market position” (depending on the specific claim) to establish an anti-monopoly claim. However, a claim based on IP Provisions with AM effects often requires fewer or less complicated conditions.

For example, according to Article 329 of the Contract Law, a provision in a technology contract which “monopolises technology and impedes technology progress” is invalid and unenforceable. The Judicial Interpretation on Technology Contract Disputes (关于审理技术合同纠纷案件适用法律若干问题的解释) promulgated by the SPC further set out six types of arrangements which are considered monopolising technology and impeding technology progress, such as imposing unreasonable conditions on licensing and prohibiting the licensee from acquiring competing technology. These six types of contractual arrangements partially overlap the acts of abusing dominant market position as set out in the AML. A plaintiff only needs to prove that a contract provision falls into any of the six arrangements listed by the SPC interpretation to invalidate such provision under the Contract Law. It does not need to prove the existence of the dominant market position as required for the establishment of a claim under the AML. As a practical hint, an SPC judge suggested that a plaintiff consider claims under IP Provisions with AM effects before seeking remedies under the AML.

(ii) Additional remedies

The remedies available under the AML are mainly damages and injunctions. The former aims to compensate the plaintiff against the losses it suffered from the asserted monopolistic acts and the latter is designed to prohibit monopolistic acts. If neither of the two remedies is satisfactory to the plaintiff, the plaintiff may consider remedies under the IP Provisions with AM effects.

For example, the Patent Law provides for compulsory licences. If a patent owner conducts monopolistic acts or, otherwise, the conditions set out in Chapter 6 of the Patent Law (Compulsory Licences for the Implementation of Patents) are met, a third party may apply to the State Intellectual Property Office (Sipo) for a compulsory licence. This gives such third party a better position than it may get by bringing a suit under the AML.

Different views on outstanding issues

Since the promulgation of the AML, the application of AM Laws in an IPR context has been a controversial topic among practitioners, industrial participants, judges, and government officials. Below, three issues are set out which attract intensive discussions and have not been fully addressed in the current legal framework.

(i) Abuse of IPRs contained in technical standards

A technical standard for an industry embodies a set of technical features which the products in that industry must possess. The necessity of such technical features, plus the exclusivity in these technical features give the relevant IPR owners monopolistic position in the relevant industry. The users of such technical features (usually manufacturers) often complain that IPR owners abuse their IPRs in relation to the technical features and argue that the AML should help prevent such abuses. However, this argument is very controversial.

Firstly, IPR users complain that the licence fee for using the IPRs in a technical standard is too high to be affordable. On one hand, quite a number of SPC judges and government officials agree on the complaint. They are studying the possibility of enacting a rule to limit the royalty amount that can be charged for using IPRs contained in the technical standards. On the other hand, courts and the government hesitate to interfere with the pricing between private entities because it is difficult for an outsider to judge what price is reasonable.

Secondly, IPR users complained that some owners of the IPRs contained in technical standards ask for a “catch-all” royalty fee calculated on all products manufactured by using the relevant IPRs regardless of in which jurisdiction these products are sold. In other words, IPR owners charge a royalty fee for sales to areas where the relevant IPRs do not exist. The IPR users complain that this arrangement is unfair because IPR owners extend their monopoly into jurisdictions where the IPRs do not exist. However, the IPR owners argue that this arrangement helps reduce their administrative costs for monitoring product flow and, in turn, result in a lower royalty fee. Currently, there is no clear prohibition on this arrangement under the AML or other IP Provisions with AM Effects.

(ii) Determination of “relevant market” where IPRs are involved

The determination of “relevant market” is a pre-condition for the determination of dominant market position. A company has a dominant position if there is no material competition in the relevant market. In addition to the normal rules for determination of a relevant market, the following two issues need to be considered where IPRs are involved:

First, with respect to a certain product, there are two separate but related markets: one is the product market, and the other is the market of the technology used in the products. If products supplied by different suppliers use the same technology owned by one IPR owner, the IPR owner will likely be considered to have a dominant market position in the technology market with respect to such product. On the contrary, if manufacturers can choose technology licensed from different IPR owners, these IPR owners will be considered competing with each other with respect to the technology market.

Secondly, an IPR owner may receive competition from owners of potential technology, including those under development and those, although developed, that have not yet been implemented. Even though the products in a market largely use technology owned by one IPR owner, the existence of potential technology may prevent the IPR owner from having a dominant position.

(iii) Reasonableness tests in determination of abuses of IPRs

Generally speaking, if an IPR owner commits an activity which, on the surface, falls into the scope of monopolistic acts provided for by the AML or IP Provisions with AM effects, it will not be considered committing a monopolistic act if such activity can be justified by commercially reasonable grounds.

There is no clear rule regarding what constitutes “commercially-reasonable” grounds. Usually the protection of public interests and the promotion of technology progress are considered reasonable grounds. IPR owners want to have a broad scope of reasonable ground and try to argue that the protection of IPRs also constitutes a reasonable ground. Without doubt, IPR users object to this argument because there is no clear line between the abuse of IPRs and the protection of legitimate interest arising from IPRs. A judge from the SPC suggests that whether a ground is reasonable be determined on a case-by-case basis. However, there is no precedent so far that fleshes out the rules on how courts exercise their discretion in determining the reasonableness with respect to an asserted abuse of IPRs.

Xun Yang, Freshfields Bruckhaus Deringer, Hong Kong