Richard Lloyd

There has been much focus recently on both the opportunities and challenges that IP owners face in China. The creation of specialist courts, for example, has been welcomed as a sign that the country is becoming much more committed to strong IP rights. But at the same time, there’s no doubt that major patent-owning businesses face myriad challenges in ensuring that their rights are not infringed and that they receive a fair return on their IP. You only need to look at the recent ups and downs of Qualcomm to see just how daunting licensing can be in the Middle Kingdom.

In a guest post for this blog, Winston & Strawn antitrust partner Steve Harris spells out the challenges that companies have faced as China’s antitrust authorities have issued a number of decisions that go against the typical approach to IP rights in almost every other country. And the climate could become even tougher if proposed guidelines on the application of competition law to IP come into effect.

That should be a concern for a lot of Western businesses, but as Harris concludes, the new guidelines also present an opportunity for China to move beyond its protectionist inclinations. Korea’s recent antitrust evolution, he suggests, offers a good model for the Chinese to follow. Here’s what he has to say:  

We can’t ignore the rising trend in Asia where foreign governments are using competition law to target foreign businesses’ innovations and intellectual property in order benefit local companies. A series of recent competition law decisions by Chinese antitrust authorities contradict common practices governing intellectual property rights by almost every other country in the world and pose significant challenges to both non-Chinese business interests and the future of innovation.

It is the widely accepted international norm that competition law should compel licensing of intellectual property only in rare cases where access to these rights is essential to market competition. In the US and most other countries, compulsory licences of patents are so rare as to be all but nonexistent outside the context of public health emergencies like the HIV/AIDS epidemic.

Steps taken in China however, signal a more aggressive stance where antitrust regulation of intellectual property is used as a tool to benefit domestic Chinese manufacturers at the expense of foreign businesses. We’ve already seen a growing number of cases – from Qualcomm to InterDigital to Microsoft to Nokia – where Chinese courts and antitrust agencies have worked in coordination to target foreign businesses’ innovations under Chinese Anti-Monopoly Laws (AML) in order to bolster a Chinese competitor. This misuse of competition law to appropriate foreign innovation is a growing trend in Asia, and China is currently drafting regulatory guidelines that will potentially force innovators to hand over proprietary technology for domestic competitors to copy in their own products.

The proposed guidelines on the application of competition law to intellectual property, which are being drafted by the National Development and Reform Commission (NDRC), suggest potentially aggressive intrusions of antitrust regulators into business negotiations over patent licensing terms and conditions (the draft guidelines along with ABA comments on them can be found here). 

Current drafts indicate that a number of common practices found in countless licensing agreements around the world - from cross licensing, grant backs, non-assertion clauses (prohibiting challenges to the validity of the licensed IP), as well as territorial, channel, and quantity restrictions - may violate Chinese anti-monopoly laws. Rather than providing guidance that would enable businesses to determine whether their licensing practices violate the law, the draft guidelines provide little additional clarity or business certainty and allow regulators to decide whether a company’s practices violate the law on a case by case basis, leaving the door open to inconsistent application of the law targeting foreign companies. The result is that the guidelines remain vague as to the details of what conduct will be deemed illegal under antitrust law, enabling discriminatory enforcement – stripping foreign companies of the much-needed predictability they need in order to conduct business in China.

While the misuse of competition law for protectionist policies enabling local competitors to copy foreign-owned technology without having to negotiate a licence or pay market rates is a troubling trend, there’s also room for cautious optimism. In Korea, the most recent guidelines removed several controversial provisions that would have forced companies to license proprietary technologies to their competitors. The most problematic of these was a provision declaring any widely-used product or technology as a “de facto” standard that would be deemed essential to competitors, allowing the antitrust agency to regulate the terms and conditions on which they were licensed. Fortunately, the Korea Fair Trade Commission (KFTC) decided to remove this provision from the Review Guidelines on Unfair Exercise of Intellectual Property Rights. This positive change will help to ensure fair and consistent enforcement of antitrust law, restores the guidelines to traditional antitrust norms, and provides clear rules of the road for businesses to navigate. For non-Korean companies, this provides a much- needed level of clarity and a responsible avenue to do business.

The misuse of antitrust to benefit domestic companies – rather than to ensure a level playing field and fair competition -- is a significant and growing concern, especially as it appears that US companies are disproportionately targeted for investigation and enforcement actions relating to IP. Unless this trend is reversed, these protectionist policies will set a harmful precedent that will encourage a race to the bottom that undermines both innovation and international trade. The draft guidelines being developed in China present an opportunity to right past mistakes and make a better long-term economic bet. The end result of imposing intrusive terms that are out of sync with every other market is to stymie the collaboration and good business development that benefits more businesses and more consumers. Certainly, that’s the logic we saw from the Korean government as it corrected its early overreach of applying antitrust to undermine intellectual property. This is the approach that should be taken as a model for China.