The SAIC bridges IP and competition

The State Administration for Industry and Commerce (SAIC) promulgated on 7 April 2015 the long-waited Provisions for the Prohibition of Acts of Abusing Intellectual Property Rights to Eliminate or Restrict Competition (Provisions) (关于禁止滥用知识产权排除、限制竞争行为的规定) which will enter into effect on 1 August 2015. The SAIC has come a long way to adopt this rule. The promulgation of the Provisions is a milestone in the development of Chinese antitrust laws and reflects the government's efforts in enforcing them in the complex interface of IP and competition.

The Provisions (i) detail the rules for prohibiting market position abuse and anti-competitive agreements in the context of abusing IP rights; (ii) set out special anti-monopoly rules in relation to abusing patent pools and standard and essential patents (SEPs); and (iii) impose revenue-linked penalties on those who breach the rules.

Applying the rules

Scope of the SAIC

The Provisions echo Article 55 of the PRC Anti-monopoly Law (AML) (中华人民共和国反垄断法) and apply to acts of IP rights abuse which have the effect of eliminating or restricting competitions. More specifically, the Provisions cover the abuse of dominant market positions based on IP rights and the abuse of IP rights in the form of anti-competitive agreements.

The Provisions do not govern price-related anti-competitive activities as these fall within the vires of the National Development and Reform Commission (NDRC). The Provisions do not deal with merger controls of IP-intensive companies since mergers and acquisitions (M&A) are subject to the scrutiny of the Ministry of Commerce (MOFCOM).

However, the NDRC, MOFCOM and SAIC's enforcement of anti-monopoly laws is not exclusive. For example, an anti-competitive act involving price discrimination between patent pool members and non-members may be subject to sanctions imposed by both the NDRC and SAIC.

Working with other laws

The Provisions are not the only legislation dealing with anti-competition issues involving IP rights. Others have regulated the abuse of IP rights in various ways.

Firstly, the AML contains high-level rules for regulating anti-monopoly activities. It specifically prohibits three types of monopolistic activities: (i) business concentration through M&A, (ii) abuse of dominant market positions; and (iii) monopolistic agreements. The Provisions are an enactment adopted under the AML, setting out detailed implementation rules in relation to market dominance and monopolistic agreements involving IP rights.

Secondly, the PRC Contract Law (中华人民共和国合同法) provides that restrictive clauses in technology contracts which monopolise technology or impedes technological development are 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) (Interpretation) further lists out six types of restrictive contract clauses. These listed clauses are included as anti-competitive under the Provisions and the party which imposes these may be subject to sanctions under the Provisions in addition to the liabilities under the Contract Law.

Thirdly, the Administrative Rules for Patents in State Standards (Standard Patent Rules) establishes a principle that patent owners who wish to include the technology covered by their patents into national standards must disclose the relevant patents and grant third-party users licenses to use the standard technology on fair, reasonable and non-discriminatory (FRAND) terms. This is also reflected in the Provisions, which set out penalties for failing to disclose the standard patents or to license them on FRAND terms.

Binding effect

The Provisions are a ministerial-level enactment. In theory, they bind the SAIC and its local AICs but do not bind the courts.

With regard to administrative enforcement, the AICs have the power to enforce the AML against abuses of market position and anti-competitive agreements. The Provisions are binding guidelines for AICs to determine activities that mount to market abuse and monopolistic agreements involving IP rights.

From a judicial perspective, since the Provisions are, in theory, not a formal source of law, they do not bind the courts in determining private anti-monopoly cases. In other words, violation of the Provisions is not necessarily a violation of the AML in civil cases, and vice versa. However, considering that the Provisions set out relatively comprehensive and detailed guidelines for determining anti-competitive agreements, the courts will likely refer to them when handling similar issues.

Preventing anti-competition

Besides business concentrations through M&A, the AML regulates two types of activities: anti-competitive agreements and abuse of market position. The Provisions expand on these rules from a perspective that conjoins anti-monopoly and IP rights.

Anti-competitive agreements

Articles 13 and 14 of the AML define the scope of anti-competitive agreements. The Provisions borrow the same definition for anti-competitive agreements involving IP rights but divide these agreements into two categories: (a) those considered anti-competitive regardless of whether one of the contractual parties has a dominant market position (hardcore restrictive agreements); and (b) those presumed not anti-competitive if neither contractual party has a dominant market position.

Similar to the hardcore restrictions under the EU Block Exemption Regulation, the hardcore restrictive agreements under the Provisions, which are presumed to be anti-competitive, include:

Between competitors:
(a) fixing prices;
(b) limiting the output or sales of products;
(c) dividing the sales market or the raw material procurement market;
(d) restricting the purchase of new technology or facilities or the development of new technology or products; and
(e) making boycott transactions,

Between upstream and downstream operators:
(a) fixing the price of products for resale to a third party; and
(b) restricting the minimum price of products for resale to a third party.

Other than the hardcore restrictive agreements, agreements between competitors will not be presumed anti-competitive if their aggregated market shares are 20% or less or there are four or more substitutable technology in the relevant market. Upstream and downstream operators' agreements are not anti-competitive if neither party has a share of 30% or more in the relevant market or there are four or more technology substitutes.

These agreements may be determined to be anti-competitive if rebuttal evidence proves their anti-competitive effects.

Prohibited restrictive acts

The AML has a general provision prohibiting the abuse of a dominant market position. The Provisions elaborate on determining market abuse by levelling on IP rights. Specifically, they state that operators with dominant positions based on their IP rights must not:

(a) refuse to grant licenses to third-party users whose operations rely on their IP rights;
(b) restrict transactional counterparties to only transact with them;
(c) tie sales of other commodities and services in which they do not have IP rights so as to expand their “dominant” positions to such other commodities and services; and
(d) include “restrictive” clauses in agreements, such as:
(i) requirement of assignment or licensing-back of licensees without fair considerations;
(ii) prohibition on challenging on IP rights;
(iii) restrictions on using competing technology or products; and
(iv) charging royalties for expired or invalidated IP rights.

These are not entirely new. The prohibition on refusal to grant licenses is one of the conditions for applying for compulsory licenses of patents under the PRC Patent Law (中华人民共和国专利法). Other prohibitions are largely the same as the restricted contract clauses prohibited under Article 10 of the Interpretation. Consequently, if an operator conducts any of these restrictive activities, in addition to the remedies under the Patent Law (i.e., compulsory licenses) and those under the Interpretation (i.e., the relevant restrictive clauses being held invalid and unenforceable), it may also be subject to sanctions under the Provisions if it holds a dominant market position.

Additionally, although the Provisions do not deal with price-related anti-monopoly cases, the NDRC and SAIC may likely refer to each other's rules and cases in determining market abuse involving IP rights. An obvious example is the NDRC's decision on Qualcomm's monopolistic activities which was rendered before the promulgation of the Provisions. Qualcomm was found to abuse its patents by requiring the licensees to exclusively license its rights in their improvements on the licensed patents, which reflects the same rule under the Provisions. Moreover, Qualcomm's argument that the requirement to surrender improvements had been considered in determining the price for the licenses was held to be an insufficient defence against the assertion of market abuse. There is no reason why the AICs would not follow the same approach when dealing with similar issues.

Abuse of patent pools

A patent pool is a special type of patent licensing arrangement where patent owners cross-license their IP rights to each other. Obviously, anti-competitive agreements in the form of these arrangements are prohibited under the Provisions, which also prohibit patent pool organisers from:

(a) restricting patent pool members from granting licenses outside of the patent pools;
(b) restricting patent pool members from developing competing technology;
(c) requiring patent pool members to exclusively license improvements to the patent pools;
(d) prohibiting patent pool members from challenging the validities of IP rights in the patent pools; and
(e) discriminating other members of the patent pools or licensees in the same market.

These prohibitions largely follow the Guidelines for the EU Technology Transfer Block Exemption Regulation (EU Guidelines). However, the Provisions make no distinction between patent pools comprising exclusively essential patents and those containing non-essential patents, the former of which was considered by the EU Commission to be pro-competition.

Abuse of SEPs

Standard essential patents (SEPs) are used for technologies necessary to meet an industrial standard. As stated in the decision of the Huawei v InterDigital case, “with the combination of technology patents and technological standard, the monopolistic effect of patents is enlarged by the compulsoriness of the standard.” Therefore, in addition to the anti-monopoly rules above, owners of SEPs are strictly required to grant licenses to any third party to use their SEPs on FRAND terms.

In 2014, the Standard Patent Rules established that patent owners who wish to include the technology covered by their patents in national standards must disclose the relevant patents and commit to grant licenses to third parties on FRAND terms. The Provisions echo this requirement and further prohibit owners of SEPs from:

(a) exercising IP rights which they fail to declare or declare to “waive” during the establishment of the standard containing their IP; and
(b) refusing to grant licenses with respect to their SEPs on FRAND terms.

The Provisions does not further explain the criteria for FRAND terms. In the Huawei v InterDigital decision, the court suggested that, when determining whether the terms of licensing agreements satisfy the FRAND standard, the court would:

(a) compare the disputed licensing terms with the terms for licensing the same or similar SEPs to other parties; and
(b) assess the commercial reasonableness of the terms in the given business sector by taking into account the value of the licensed technology and reasonable profit margin in the relevant business sector.

The AICs could determine FRAND standards in a similar manner.

Penalties can chip away profit

The Provisions impose revenue-linked penalties, a concept familiar to western ears, on operators who abuse their IP rights and breach the AML. In addition to the liabilities of ceasing their abusive acts, those operators who abuse their IP rights to eliminate competition will also be subject to administrative liabilities of:

(1) confiscation of illegal income; and
(2) administrative fines between 1% and 10% of their annual revenues.

The AICs have the discretion to determine fines imposed on the operators which abuse their IP rights by taking into account the nature of the abuse, the damages caused by the abuse, the duration of the abuse and the malice of the operator. The amount of penalty could be high if the operator has a large turnover. Taking the NDRC's Qualcomm decision as a reference, the penalties on Qualcomm for its abuse of patents is 8% of its annual revenue, i.e., Rmb6.09 billion. However, the AICs are not obligated to take the NDRC's decision as a precedent.

Careful navigation between IP and competition

The promulgation of the Provisions reflects the government's efforts to address the relationship between the exercising of IP rights and the prohibition of anti-competitive activities. The SAIC and it local counterparts will more actively enforce the anti-monopoly laws involving IP rights.

These rules remind businesses to review their operations and to rectify any anti-competitive activities as penalties could take a significant slice of their revenue.

In particular, companies doing business in China should review their template IP agreements to ensure that these agreements do not breach the Provisions. Before the promulgation of the Provisions, many companies included “restrictive clauses” in their template IP agreements under the assumption that the worse consequence is that these clauses might be found to be too restrictive to be enforceable. However, under the Provisions, in addition to civil liabilities (i.e., the relevant clauses being declared invalid as well as damages), the administrative penalties for including these restrictive clauses could be linked to a percentage of annual revenue and, therefore, quite substantial.


Xun Yang, Simmons & Simmons, Shanghai