Why IP owners should worry about the new licensing rules

The State Administration for Industry and Commerce (SAIC) published the long-awaited Provisions for the Prohibition of Acts of Abusing Intellectual Property Rights to Eliminate or Restrict Competition (Provisions) on April 7. The rules are aimed at preventing anti-competitive behaviour through the abuse of IP rights and will take effect on August 1 this year.

The SAIC issued the Provisions after years of public consultations from stakeholders. They expand upon Article 55 of the PRC Anti-monopoly Law (AML), which relates to IP and competition and had been left open to interpretation. This is the first time the SAIC has enforced the AML in the use of IP rights.

Compulsory licensing

Article 7 of the Provisions has sparked the most controversy as it expressly requires dominant market players to license their IP on reasonable terms to other business operators in the "relevant market" for “necessary” purposes. The general terminology used could potentially include the market in which the dominant firm is itself active.

“There may be concern among IP holders that some companies may rely on this provision to seek access to valuable IP rights, the fruit of many years of investment,” said Ninette Dodoo, who co-heads Freshfields' China antitrust practice.

The threshold for compulsory licensing has been set lower than that of the EU and US, and some believe IP rights owners in China may be negatively affected by the comparatively watered-down and broad set of conditions.

“What's particularly striking about Article 7 is that it refers to essential facilities,” said Dodoo. She noted it was unusual because more sophisticated jurisdictions usually associate the term with infrastructure and utilities that are critical to have access.

necessary for production and other business activities






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Standards and patent pools

Article 12 of the Provisions defines the term 'patent pool' and sets out restrictions against anti-competitive behaviour for pool members in a dominant market position.

The rules also address how standards should be set. While industry players have their own ways to decide on the creation of standards, whether antitrust laws should impose constraints on how they negotiate is the subject of global debate. Article 13 of the Provisions requires dominant companies to disclose that they have a specific patent during discussions with competitors (or the standard setting organisation) on the adoption of standards. If all agree, the rights holder is presumed to be dominant and is forced to license the patent.

Safe harbour breakthrough

“Another useful reference or tool provided by the rules is the safe harbour rule,” said Ma. The introduction of this principle shows that China is trying to catch up with the US and EU in the AML game.

Article 5 states that agreements between competing companies with a combined market share of under 20%, or under 30% for non-competing parties, are not considered to be monopolistic. “These companies won't need to worry about antitrust investigations, though the development fits into the overall environment of the many ongoing and coming probes,” he said.

Adjusting to the environment

Companies will need to revise their internal procedures on IP rights execution. “IP-heavy companies with entire departments dedicated to suing infringers should tread with caution before suing and even before discussing licensing,” said Waha. “Negotiation tactics should be adapted for licensing arrangements.”

Firms should also look at existing agreements to ensure full compliance. Situations may arise where the licensor chooses to terminate an agreement if the licensee seeks to challenge the IP rights covered by the contract. “Companies will need to carefully assess whether the terms and conditions of the no-challenge clauses are in line with the rules,” said Dodoo of Freshfields.

There has been much speculation of whether these ongoing IP and antitrust developments in China will eventually topple (or are aimed at toppling) the dominant foreign players in the market. “But at the end of the day, if a company has good technology that works or a drug that is respected, all the investigations and regulations will not shift the market dynamic so significantly,” said Ma.


By Katherine Jo