China’s New Antitrust Guidelines: Implications for Foreign Business and SEP Strategy

Summary:

●     China’s regulatory authorities have proven their ongoing attention to determining how standard essential patents (SEPs) interact with a well-functioning market system by issuing the Guidelines
●     New Guidelines cover points including supervision, definition of market dominance and patent pool evaluation
●     Issues including injunctive rights and levels of license are also covered
●     Overall, the Guidelines increase legal certainty and facilitate compliance efforts in the SEP field, but businesses will need to take steps to promote good conduct in SEP activities

On November 8, 2024, the State Administration for Market Regulation of China (“SAMR”) unveiled the Anti-Monopoly Guidelines for Standard Essential Patents (the “Guidelines”) (标准必要专利反垄断指引), signifying a milestone in the evolution of the nation's intellectual property antitrust framework.

In the previous year, SAMR enacted the Provisions on Prohibition of the Abuse of Intellectual Property to Exclude or Restrict Competition (the “Provisions”)（禁止滥用知识产权排除限制竞争规定）, complementing the Anti-Monopoly Law (“AML”) and establishing a robust legal framework for intellectual property-related antitrust issues. This strategic move underscores China's commitment to a harmonized approach that respects both innovation incentives and fair competition, aligning the doctrines set forth by the Antitrust Committee of the State Council in its Anti-Monopoly Guidelines for the Field of Intellectual Property Rights (“IP Guidelines”)（国务院反垄断委员会关于知识产权领域的反垄断指南）dated January 4, 2019.

However, as emerging industries such as telecommunications, the Internet of Things, and electric vehicle thrive in China, and the business landscape shifts from a 'license-in' to a 'license-out' model, the focus of Chinese regulatory bodies has zoomed in on the nuanced aspects surrounding standard essential patents (“SEPs”) and their interaction with a well-functioning market system. Against this background, SAMR initiated its drafting of guidelines on antitrust issues concerning SEPs to clarify its stance on pressing practical matters.

Throughout the drafting process and the solicitation of public comments, the Guidelines have been at the epicenter of intense debate among various stakeholders. By drawing on historical comparisons, foreign businesses can gain insights into how Chinese authorities regulate SEP-related antitrust issues, both from the text itself and from a broader perspective.


1.       Mechanism further ensuring supervision in advance and in-process
Article 5 of the Guidelines introduces a mechanism aiming at ensuring supervision in advance and in-process by allowing SEP holders, patent pool operators, SDOs and parties implementing the standard to report relevant matters to SAMR for supervision and guidance before potential competitive concerns materialize; highlighting a soft enforcement where SAMR will issue a Remind and Prompt Letter or arrange regulatory discussions for rectification to/with relevant undertakings, to indicate the competitive concerns associated with their business conduct and to propose improvement and rectification measures to address such concerns properly; as well as reassuring parties involved that any entity and individual should be entitled to report to SAMR the existence of a competitively risky situation or suspected monopolistic behaviors. Specifically, the application of any of the above measures will not preclude SAMR from initiating formal enforcement against conducts suspected of being monopolistic.

This enforcement trend suggests that the Chinese regulatory body is cautious and arguably overly prudent when considering launching formal enforcement actions in situations which are on the borderlines of SEP practices; this must be considered in the context of the economic downturn and intertwined interests and expectations of both domestic industries and foreign investors. In addition to consulting the U.S. DOJ under the business review procedure, foreign businesses are now encouraged to engage in similar consultations with Chinese regulating bodies to obtain greater legal certainty and alleviate compliance risks when adopting new business modes.

2.       Market definition and dominance evaluation
The AML prohibits certain conduct by undertakings with dominant market position in the relevant market, thus imposing differentiated compliance burdens on undertakings which are differently situated. Therefore, a vital prerequisite step for foreign business seeking to precisely evaluate their market position is to accurately and pragmatically define the relevant market. This will allow them to establish redlines or limitations in their operations in China.

In accordance with the Provisions, the Guidelines explain the SAMR’s general approach to define respectively the relevant technology market and the aftermarket of product and service where such technology is employed. Furthermore, the Guidelines clarify that the definition of the relevant technology market must take into account the inter-substitutability “between different standards, between different SEPs, between SEPs and non-SEPs, and between SEPs and non-patented technologies”, thereby superseding the traditional approach of deeming SEP itself as the relevant market.

This shift in understanding stems from recent judicial practice where the Supreme People’s Court found, in an abuse of dominance suit, that the challenged SEPs were inter-substitutable with certain non-patented technologies in the actual manufacturing process. The SPC thus overruled the lower court’s decision finding the defendant’s dominance in relevant market.

Despite the aforementioned breakthrough in market definition approach, the Guidelines still presume that SEP holders enjoy dominance in the relevant market unless there exist competing standards, or other opposing evidence is introduced. With these developments in mind, foreign businesses are still advised to stay cautious when defining the relevant market and evaluating their market power therein.

3.       Patent pool regulation
Patent pool regulation has been the focal point through the drafting and revising process of the Guidelines, due to the controversies which arose earlier this year surrounding the 5G patent pool introduced by Avanci (SAMR issued a Remind and Prompt Letter to Avanci regarding its 5G patent pool business on June 6, 2024). Compared to the draft version, the final version of the Guidelines extended the scope of application from “SEP holder” to “SEP holder and related right holders”, thereby encompassing patent pool operators who manage the licensing conduct but are not SEP holders themselves.

Article 10 of the Guidelines specifies scenarios where patent pools might give rise to anticompetitive effects under the prohibition of monopolistic agreement rules. While the draft version considers only exchange of competitive sensitive information and fixing of licensing fees, the final version echoes how SAMR examined Avanci’s business model and its potential competitive concerns. It eliminates the item relating to “fixing or altering SEP licensing fee” to dispel any notion regarding patent pool as bare restrictions under horizontal monopolistic agreements. Instead, it incorporates patent pool specific concerns such as “inclusion of competitive SEPs”, “restrictions on external licensing”, and “risks related to hub-and-spoke agreements”.

“Though not explicitly expressed, the Guidelines never preclude the possibility of patent pool activities constituting abuse of dominance”

“Any foreign business that plans to operate a patent pool in China should pay attention to updates from both within and beyond Chinese borders”

“ Article 19 of the Guidelines reiterates that a “transaction between undertakings involving SEPs might constitute concentration of undertakings” ”

“The Guidelines introduce new mechanisms that increase legal certainty and facilitate compliance efforts for foreign businesses related to SEPs.”