Jacob Schindler

As we reported earlier this month, the Anti-Monopoly Commission of China’s State Council will release a major set of IP and antitrust guidelines in their final version before the end of 2017.

The guidelines are a big project that has been several years in the making. All of the major antitrust and IP-related agencies – NDRC, SAIC, Ministry of Commerce and SIPO – are collaborating this time around, whereas in the past they have issued their own IP-related rules. That means that the final version of the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights will be China's most definitive policy to date across a range of important issues impacting patent owners.

IAM spoke with a number of China-focused lawyers and in-house IP executives about what the major live issues are as the commission puts the guidelines into their final form.

Clarity and balance

Patent owners generally welcome the idea of unified guidelines. The web of different IP or IP-adjacent regulators creates some uncertainty around key issues. Of course, there is a risk that on topics like essential facilities (discussed below) it will be clarity of a sort that may harm the interests of some patent owners. But at least the market will know where things stand.

The overall observation based on previous drafts is that the guidelines are making a good attempt at balancing the interests of various sides of the market. One representative from a foreign patent owner commented that having discussed various objections at length with officials throughout the drafting process, he has come away convinced that any shortcomings are due to complex input and a steep learning curve, rather than any effort to privilege domestic industry. Recent FRAND instructions issued by the Beijing Higher People’s Court seemed very similar to the ECJ’s Huawei v ZTE decision, with a bit more of a tilt toward implementers. That may be about the type of balance to expect from the guidelines.

Future of SEP injunctions

The core of China’s growing prominence as a patent litigation venue is the ability to secure an injunction covering its massive consumer and manufacturing market. This year saw the Beijing IP Court demonstrate in Iwncomm v Sony that, at least in some cases, SEP owners too can obtain this remedy. Recent Beijing Higher People’s Court guidelines further clarified the circumstances in which SEP injunctions may be granted – though these do not, officially, have nationwide legal effect. In an area which is fast developing in the courts, it will be instructive to see how much regulators decide to intervene. The current draft’s Article 26 creates possible AML liability for dominant SEP holders seeking an injunction. In public comments, the Global Antitrust Institute at George Mason University strongly urged against making injunctive relief grounds for possible sanction, but at the very least called for the provision of a safe harbour from liability similar to that adopted by the ECJ in Huawei v ZTE.

Effect on big portfolios

For licensors with large portfolios, one concern about the most recent draft is in Article 14, which lists several factors which may be considered in determining whether a dominant market position is being abused. One of those factors is whether the licensor collects licensing fees on expired or invalid patents. As one large licensor explained, it is simply impractical to renegotiate a large portfolio licence every time a single patent expires. To do so, they say, would drive up the costs of reaching a deal considerably. Negotiations with the commission have entailed explaining just how the portfolio licensing process works in practical terms, including how differing expiration dates across a portfolio are accounted for in price. One potential improvement that has been suggested has been the potential for the commission to add language to the effect that a company is only in breach if it ‘knowingly’ charges for expired or invalid patents.

Patent pools

Any company with a stake in a patent pool, and that is quite a large swathe of big tech, will be keenly interested in how this issue will be addressed in the guidelines. Article 25 states upfront that patent pools “generally reduce patent costs, increase licensing efficiency and have the effect of promoting competition”. In considering whether a pool restricts or eliminates competition, however, the first factor listed by the guidelines is the pool’s market share. But as one licensing executive argues, patent pools make licensing more efficient precisely because they can offer a ‘one-stop shop’ in a certain technology area. Rather than presuming harm based on market share, patent pools are looking for the Chinese guidelines to adopt an effects-based approach.

Essential facilities

It is still very much in question where the final guidelines will land on the essential facilities doctrine, which could open the door to compulsory licensing of so-called de facto standards. The result could also shed some light on which agency has managed to get its preferred policies into the final document. The SAIC issued rules effective in 2015 which seemed to embrace the doctrine. But the NDRC’s various draft proposals have not. In the most recent draft, the SAIC appears to have won out on this issue, as the guidelines interpret refusal to license an “essential facility” as a potential breach of the Anti-Monopoly Law. Former Microsoft patent chief Bart Eppenauer summed up the concerns of many IP owners on this issue, saying: “The broad and exceedingly vague and open-ended language of SAIC’s IPR Rules raises tremendous uncertainty and in general intrudes on the core exclusionary right of IPR holders." So attention will be not only on whether the provision survives in the final document, but also on how narrowly it is written.

Enforcement

The most important lesson from the guidelines will be how they are enforced, and which agency takes the lead in doing this. I’m also curious about whether they might affect some ongoing cases. For example, I believe the litigation I first wrote about back in March 2016 – between four Chinese companies and Japan’s Hitachi Metals – is still ongoing in Ningbo. The Chinese companies are arguing that Hitachi’s refusal to license them patents related to neodymium-iron-boron magnets (for which no formal standard exists) violates China’s Anti-Monopoly Law – a test of the essential facilities doctrine. Several China-focused lawyers I have spoken with suspect that the judge is not particularly excited at the prospect of ruling one way or the other in the high-stakes and somewhat political case, and wants to compel a settlement. Perhaps the publication of these guidelines will move the needle.