Asia’s antitrust regulators target IP

The innate tensions between monopoly-creating patent law and trust-busting competition law have come decisively to the fore of patent practice in recent years. This is especially true in Asia’s major patent jurisdictions – both developed and developing – where the regulators’ IP policies have become just as important a consideration as the applicable patent laws and the prevailing attitudes of the courts. In the standard-essential patent space especially, antitrust authorities in China, India, South Korea and Japan have all produced policy revisions or major investigative findings in the past year, seeking to bring clarity to a hitherto grey area of legal overlap. Could a consensus on these issues be emerging and, if so, what might this mean for patent owners?

The debate over standard-essential patents is taking place in parallel with a broader conversation on patent reform in the United States. But while the latest bid to introduce new patent legislation in the States may have stalled, there have been important developments on the standards front elsewhere. The major standards-setting organisations have been revising the conditions imposed on patent owners through their own internal governance processes – as seen recently when the Institute of Electrical and Electronics Engineers Standards Association (IEEE-SA) pushed through changes to its IP policy despite objections from major players including Ericsson, Nokia, Qualcomm and InterDigital. At the same time, says Thomas Cotter, professor at the University of Minnesota School of Law, key court decisions in the United States and Europe are potentially indicative of an emerging consensus that “a patent owner who has made a RAND (a/k/a FRAND) commitment is (generally speaking) precluded from seeking injunctive relief against a willing licensee, and that RAND royalties should not reflect hold-up value”.

But it is not strictly standard-essential patent holders which are greeting the tightened competition with alarm. Policies in South Korea and China, for example, suggest a real possibility that restrictions on licensing activities will be extended beyond formal standards administered by standard-setting organisations to cover licensing of so-called ‘de facto’ standards and other non-standard-essential patent patents. The worrying implication is that standard-essential patent policies could be used to restrict the enforcement of any technology if it becomes sufficiently widely adopted by competitors – even if the patent owner has not voluntarily contributed towards a formal standard.

All of this could have repercussions not just for the regional patent policies of major corporate players, but also for their global licensing strategies. As IAM has reported, the decline of US injunctions has led some licensors to pursue more geographically diffuse approaches – seeking court orders in one or two key overseas jurisdictions to encourage a settlement on global terms. But if government agencies take injunctions off the table in certain circumstances, this could put the brakes on the current rapid increase in patent litigation in countries such as China and India. This would necessarily prompt a rethink in many of the world’s most advanced IP departments.

As this article based on both on and off-the-record conversations with practitioners outlines, the pronouncements of both standard-setting organisations and national courts – and even the debate on US patent reform – are informing the regulatory position in in Asia. The watchdogs are naturally attuned to the concerns of major corporate players in their own countries, be they innovators or implementers of key technology – a political fact of life that has led to cries of protectionism from Western onlookers. To be sure, the regulators have taken cues from the West, particularly from their European counterparts; but they are clearly keen to show that Asian countries have the IP nous to plough their own furrow on such issues. As John Kim of Lee & Ko in South Korea puts it: “You’re seeing a lot of Asian agencies borrowing lessons learned from US and European authorities, and they’re doing their best to find a middle ground that includes the historical approach to IP rights within their own borders, while also acknowledging the rebalancing that’s happening across the board in Asian business.”

Kentaro Hirayama, of counsel, Morrison & Foerster

“Regulatory enforcement against abuse of IP rights in Japan has been quiet so far, but the new guidelines may change this trend, and the JFTC may become more active in this area in 2016”

China

When patent professionals talk about the challenges of antitrust law, China is often the first jurisdiction that comes to mind – not just in Asia, but anywhere. Since the introduction of the country’s Anti-monopoly Law in 2008, this has been one of the foremost issues facing corporate professionals in many fields, not just intellectual property. In the past year, however, patents have taken centre stage as the National Development and Reform Commission (NDRC) wrapped up its investigation of Qualcomm’s licensing practices and the State Administration for Industry and Commerce (SAIC) issued new guidelines for patent owners.

Unique arrangement

One of the key features that make the Chinese regime unique is the unusual overlap of mandates among three different regulatory bodies. The Ministry of Commerce (MOFCOM) handles merger reviews, making it slightly less relevant to IP issues than its counterparts. The NDRC looks at pricing issues, while the SAIC oversees other conduct, including the tying or bundling of products and services (and licences). However, as those concerned about state protectionism frequently point out, both agencies are also to some extent tasked with implementing national economic policies and boosting domestic industry, leading to a possible conflict of interest.

This complex regulatory network poses obvious challenges to companies in ensuring compliance. As Benjamin Bai, a partner with Allen & Overy, wrote back in April: “The division of tasks between the NDRC and the SAIC creates a risk of conflicts or diverging interpretations between these agencies… The NDRC may follow the same set of principles as the SAIC, but there is no guarantee that it will do so.”

Complicating this further is the fact that the lines drawn around their specific mandates can often become blurred. As an example, Bai observes that the NDRC has publicly stated that it will focus on investigating companies seeking injunctions against willing licensees, even though that issue does not directly relate to pricing as such; meanwhile, the SAIC dropped draft provisions concerning injunctions and aggressive litigation strategies from its final set of guidelines.

The NDRC’s investigation of Qualcomm was undoubtedly the regulatory headline of 2015, and after years of build-up the $975 million fine imposed on the US company is now the high-water mark against which antitrust enforcement in the region is measured. In addition to the financial penalty, a number of conditions were imposed on Qualcomm’s licensing practices: rates were fixed at between 3.5% and 5% from a royalty base of 65% of net selling price, and the company was instructed to stop including expired patents in licensing packages and demanding grant-backs free of charge. The NDRC also made determinations in areas that are ostensibly part of the SAIC’s remit, declaring both the tying of standard-essential patents to non-standard-essential patents and the conditioning of chip sales on licence agreements to be illegal.

New guidelines

Shortly afterwards, in April, the SAIC released its own guidelines on what constitutes abuse of IP rights. Although the rules are not binding on other regulators or the judiciary, they are seen as an important step towards clarifying policy. There are numerous guidelines, but one provision in particular has raised red flags and drawn criticisms from patent practitioners for its overly broad scope. Article 7 provides for forced licensing in case of “essential facility” – meaning, in Bai’s words, that “IP owners within [its purview] do not have unfettered rights to refuse licensing, resulting in forcing dealing between an unwilling licensor and an arguably willing licensee”. Just how wide that purview is remains ambiguous. In the view of Bart Eppenauer, former chief patent counsel at Microsoft and now a partner at Shook Hardy & Bacon, “the broad and exceedingly vague and open-ended language…raises tremendous uncertainty and in general intrudes on the core exclusionary right of rights holders”. Bai agrees that this provision is worrying, but suggests that the other guidelines are probably not game-changers for sophisticated IP licensing businesses: “Those who do licensing for a living can handle this; it is likely to be more damaging for your typical brick-and-mortar businesses, which may not know how to deal with licensing requests, especially from competitors.”

There are ways for patent owners to mitigate the regulatory risks stemming from the newly elucidated policies of the SAIC. “You absolutely must have standard operating procedures for handling licensing inquiries,” urges Bai, “because the SAIC rules could potentially be used as an offensive weapon.” Basically, if a request for a licence is rejected, the spurned firm could potentially approach the SAIC and ask it to initiate an investigation. A careless response can have even more serious implications. “Emails sent by businesspeople without thinking could prove extremely damaging in the course of an investigation,” says Bai. “No responses to licensing inquiries should go out until legal has looked at them to minimise this risk.”

Risk assessment

At a more strategic level, companies should survey their market environment to assess the antitrust risks that they may face. “You have to assess your competitive positions, looking at your market share and how much of it comes from IP, and analysing the relevant technology market to determine if you have a dominant position,” advises Bai.

Despite the vocal concerns raised over parts of China’s new regulatory policies, transactional activity appears to be continuing apace. “Aspects of the new SAIC policy have concerned a lot of people, but I am not aware of people killing deals or putting them on hold because of it,” confirms Bai. “These rules did not come out of the blue and, other than the section on essential facilities, everything else is about adopting international principles.”

One question that remains now that the NDRC has landed its big fish is whether the SAIC will seek out one of its own. “The Qualcomm case was the perfect opportunity for the NDRC to make an example out of someone,” says Bai. “The SAIC may well be looking for a similar situation where it investigates an offending company. But if it does apply the new rules, this shouldn’t be too controversial.”

John Kim, partner, Lee & Ko

“What will be difficult for a lot of Western companies to swallow is that, just like in China, there are some value-based judgements in terms of the activity that can go into the overall analysis”

South Korea

In recent years the Korea Fair Trade Commission (KFTC) has devoted more attention and resources to intellectual property – most famously, in the course of the fight between Apple and Samsung, in which it cleared the latter’s use of standard-essential patents in litigation against its US rival. Some observers are now warning that new guidelines issued at the end of last year signal a tough approach to investigating anti-competitive use of patents that goes beyond standard-essential patents in the telecommunications space.

Targeting NPEs and standard-essential patents

The KFTC’s new IP guidelines, published in December 2014, state upfront that they are aimed predominately at two categories of behaviour: abuse of patents by non-practising entities (NPEs) and abuse of standard-essential patents. In laying down rules on NPE activity, the KFTC takes a particularly strident tone (the title of the document uses the term ‘patent trolls’). “NPEs’ activities are highly likely to be held as unfair,” the guidelines say, “since NPEs…have a motive or ability to charge excessively high royalties.” The rules restrict operating companies from setting up NPE-like consortia under certain conditions and make clear that patent privateering is also a form of abuse if the recipient of a patent goes on to engage in activities categorised by the KFTC as abusive.

While South Korea is not currently a hotbed of NPE activity, some observers are concerned that the anti-NPE provisions in the guidelines will make it more difficult for all patent owners to realise the value of their assets. Eppenauer warns that the provisions “could ensnare major patent holders that look to monetise or derive value from their respective patent portfolios, but are not considered to be an NPE by any informed person”. If that were to happen, it is not hard to imagine the troubling effects it could have on the South Korean licensing market, as well as the value assigned to Korean patents.

Of greater concern, wrote Eppenauer in an article published by IP Watchdog, is that the definition of ‘standard-essential patents’ includes so-called de facto standards – unique technological features which could be considered dominant or essential even if they were not developed as a part of any standard-setting process. Examples mentioned in a recent Bloomberg article include Apple’s ‘slide to unlock’ feature and Microsoft’s calendar synchronisation software. Eppenauer described the reach beyond formal standard-essential patents as “an unprecedented and deeply troubling regulatory act that could have significant negative consequences on the advancement of differentiating technologies and the well-being of innovative companies, particularly for non-Korean companies that compete with major players like Samsung and LG”.

On that last note, it is worth asking what role the protection of Korean firms is playing in the KFTC’s patent policy. The guidelines themselves say that, “in particular, domestic companies are expected to be protected from the abuse of patents, as the amendment will provide a basis for effectively regulating global companies’ abuse of monopoly with patents”. For years, policymakers from official entities including the Korean Intellectual Property Office and the Bank of Korea have voiced concerns about the country’s IP royalty deficit – in 2014, Korean firms spent $6.2 billion more on foreign IP rights than they earned from the sale or license of their own rights. Against this backdrop, it is hard not to view such strict rules as an attempt to close that gap.

Essenese Obhan, founding partner, Obhan & Associates

“It’s still early days for the CCl, and it is trying hard to put things in place. It has certainly made an impact and made its presence felt”

Tread carefully

Foreign firms hoping to avoid falling foul of the KFTC should tread carefully and pay attention not just to the final terms of any deal, but also to the handling of the negotiations. “The regulatory process and analysis are incredibly fact intensive and it really does come down to seeing the full course of conduct, the actual negotiation documents and the patents themselves,” says Lee & Ko’s Kim. “As global regulatory authorities focus more attention on the quality and timing of the substantive offers and counter-offers, I would expect to see more cautious interaction in day-to-day licensing activities in terms of how offers are communicated during face-to-face negotiations, whether it’s the first round of talks or the tenth.” In light of the tough restrictions on NPEs, companies will also have to examine whether any of their monetisation relationships are likely to cause problems. “What will be difficult for a lot of Western companies to swallow is that, just like in China, there are some value-based judgements in terms of the activity that can go into the overall analysis,” adds Kim.

Following the recent approval of the Microsoft-Nokia deal after nearly two years of review, the biggest open question is what will result from the KFTC’s pending probe into Qualcomm. Reportedly, the KFTC has already concluded that the US semiconductor company has abused its dominant position. No one can say what the potential consequence will be, but a financial penalty is not unlikely. “The KFTC is not shy about issuing fines when it feels there has been a violation,” says Kim, noting that past penalties in non-IP cases have neared or exceeded the $100 million mark.

Where the KFTC next turns its attention will be telling. There are some indications that healthcare and pharmaceuticals may move into the spotlight. This year saw the debut of a patent-approval linkage system which is expected to strengthen patent rights and potentially lead to more disputes. “We have seen a lot more interest and activity in the area,” says Kim. “Pharmaceutical work has not hit the top line yet, but there are some cases percolating that deal with cutting-edge issues, such as refusals to deal and reverse payments, which will provide more guidance”.

Japan

While high-profile enforcement cases have been relatively rare, the Japan Fair Trade Commission (JFTC) has been mulling over IP issues for at least a decade. The JFTC has issued two IP-related documents: a 2005 policy on standardisation and patent pool arrangements, and guidelines for the use of intellectual property under the Anti-monopoly Act in 2007. Taken together, the two provide the basis for interpreting standard-essential patent issues under the act; but crucially, they address injunctions in only a limited manner.

Controversial amendments

To address this increasingly relevant area, the JFTC this year surveyed domestic industry on the subject of essential patents, and drafted amendments to its 2007 IP guidelines to include example cases of fair, reasonable and non-discriminatory (FRAND) encumbered patents. The draft amendments have generated considerable debate in a country with major companies on both sides of the innovator/implementer divide.

The draft amendments state that in certain circumstances, the refusal to grant a licence or the pursuit of an injunction against a willing licensee by a FRAND-encumbered patent holder violates the Anti-monopoly Act prohibition on unfair trade practices, even if it does “not substantially restrict competition”. The same practices may also constitute “Private Monopolisation” under the Anti-monopoly Act (a more serious offence), the document says. Defining a willing licensee, says the JFTC, should be “strictly judged based on the situation of each case”. But it makes clear that a challenge to the validity, essentiality or possible infringement of the patent in question is not in itself a reason to consider a party “unwilling”.

“Generally, the guidelines take a strict attitude towards standard-essential patent holders,” says Kentaro Hirayama, of counsel to Morrison & Foerster in Tokyo. Summing up the prevailing concerns, he reports that some have condemned the amendments as “too simple and over-restrictive of the rights of patent holders”. One issue is that the document offers little specific guidance or ground rules which would ensure compliance with the new policies. “The guidelines are not detailed at all and I know that some companies are requesting clearer, more concrete guidelines as to the conduct of negotiations,” he continues.

One overriding fear shared by all players in Japanese industry is the risk of potential infringement by other manufacturers, particularly in China and Taiwan. “An immediate concern among Japanese companies is that they cannot effectively enforce their patents against manufacturers in Asian countries, especially in the telecommunications field,” explains Hirayama. “Based on the current draft guidelines, it may become easier for such infringers to escape enforcement if Japanese standard-essential patent owners cannot request or enforce injunctions against these companies.”

Benjamin Bai, partner, Allen & Overy

“Aspects of the new SAIC policy have concerned a lot of people, but I am not aware of people killing deals or putting them on hold because of it”

Government fears

Some more unexpected objections have come from within the Japanese government itself. The Ministry of Economy, Trade and Industry is also said to be unhappy about the draft amendments, as it has invested substantial resources in supporting and encouraging local companies to participate in standard-setting activity both at home and abroad. If the draft guidelines take effect, the ministry fears that R&D-focused companies may become reluctant to engage with standard-setting organisations.

The JFTC guidelines appear to rely heavily on the 2014 IP High Court’s 2014 decision in Apple v Samsung. Hirayama observes that this is a departure from past practice: “In drafting the older version of IP guidelines in 2007, the JFTC mainly studied and relied on US and EU policy, so this was a bit surprising.” However, the IP High Court did look across the Pacific for guidance in its landmark ruling last year, which held that Samsung was not entitled to seek an injunction against Apple over a patent for which it had made a FRAND declaration. The case is important because it saw the court set a reasonable FRAND royalty rate – an issue that the JFTC chose to avoid altogether, leaving it to the bench. Hirayama says that the reasonably royalty rate in Apple v Samsung was reached using almost the same calculation method as the US ruling in the dispute between Microsoft and Motorola. It found the cumulative royalty rate to be 5% and declared the total royalty owed for iPhone 4 and iPad 2 Wi-Fi and 3G patents to be just Y9.6 million ($100,000).

Although the JFTC guidelines are only in draft form at this point, it looks as though Japan is one more jurisdiction in which life is about to get tougher for standard-essential patent owners. That said, if they do come under investigation, they may not have to worry so much about an especially severe penalty from the JFTC. Hirayama explains that the JFTC can choose to investigate companies either for private monopolisation or for unfair trade practices. While the former could potentially carry a hefty administrative or criminal fine, there is no penalty clause in relation to the latter. In its two IP-related investigations to date (of Qualcomm and Microsoft), the JFTC has taken the unfair trade practices route – perhaps to avoid a lengthy appeal process. So while Qualcomm, for instance, had to cease and desist certain licensing practices in Japan after a 2009 order, this bore no comparison to the shockwaves of the penalty imposed on the company by the Chinese NDRC in February. But as Hirayama cautions, “Regulatory enforcement against abuse of IP rights in Japan has been quiet so far, but the new guidelines may change this trend and the JFTC may become more active in this area in 2016, when I expect the final guideline will be promulgated”.

India

Two of India’s regulatory bodies are of particular importance to patent owners. The Competition Commission of India (CCI) has been the nation’s antitrust watchdog since its inception in 2009, while the Indian Patent Office (IPO) also plays a crucial regulatory role in its capacity to approve or reject applications for a compulsory licence.

Jurisdiction dispute

The CCI shows every indication of taking a proactive approach to the investigation of potential anti-competitive use of standard-essential patents in particular, but it is currently embroiled in dispute over whether it has the proper jurisdiction to do so. Meanwhile, the IPO’s Compulsory Licensing Division has by now considered several applications for compulsory licences in the pharmaceutical sector, with another brought before it this summer.

The CCI stepped into the standard-essential patent fray in the context of a series of lawsuits which Ericsson is pursuing in India. The Swedish company has waged a sustained campaign to get India’s domestic mobile phone makers to license its patents that are part of standards implemented in 2G, 3G and 4G handsets. After years of fruitless negotiations, Ericsson filed its first patent infringement suits in the Delhi High Court against Indian companies Micromax and Intex. Meanwhile, both defendants made separate complaints to the CCI, accusing Ericsson of abusing its dominant market position by seeking excessive royalties and engaging in a range of other activities alleged to be inconsistent with FRAND commitments. In opinions issued in late 2013 and early 2014, the CCI ordered a full investigation into each case, having found prima facie evidence of anti-competitive behaviour. Ericsson argued that the CCI did not have the authority to conduct such an investigation and persuaded the Delhi High Court to issue a stay in both cases, which will prevent the CCI from making any final determination until the question of jurisdiction is resolved. And there it stands today.

Can it be true that India’s antitrust watchdog has no authority to investigate IP rights abuses? “The bigger question is not whether the CCI has any role,” suggests Essenese Obhan, founding partner of Obhan & Associates, “but rather what is the extent or scope of that role.” According to Obhan, the CCI’s mandate is only to determine whether there has been an abuse of dominant position, and its findings and relief in this case may have exceeded this mandate. Given the fact that the Delhi High Court has not been unfriendly to standard-essential patent owners in the recent past, it is tempting to see this as a contest between two branches of government with different views on the question. “Many will suggest that this is a turf war, but it’s really not,” argues Obhan. “I do not think there is a difference in philosophy. It is really a question of slowly but steadily getting the process right.”

Regardless of how the jurisdictional fight pans out, the CCI has clearly announced its intent to play an active role in regulating the IP space. Despite the court’s stays of previous efforts, in May the CCI ordered yet another investigation into Ericsson on broadly similar grounds, this time at the request of a company called iBall. The Swedish company again appealed the order, the results of which are yet to be seen. “It’s still early days for the CCl and it is trying hard to put things in place,” comments Obhan. “It has certainly made an impact and made its presence felt.”

Compulsory licences

The other regulator, the IPO’s Compulsory Licence Division, may also have a role to play. Thus far, the only applications for compulsory licences have been in the pharmaceutical industry. But according to Obhan, there is no reason why a potential licensee could not try the same tactic. “If you can show that you have asked for a licence, it has been refused and industry in India is being affected as a result, then you have the grounds to go to the IPO,” he says. Under the Patents Act, the IPO has the authority to step in and determine a FRAND rate in such circumstances. To Obhan, “it’s kind of surprising that these defendants have not yet invoked this”.

The IPO has come in for more criticism over compulsory licences than perhaps any other issue in recent years, at least from outsiders. It issued the first such order in 2012 for Bayer’s cancer drug Nexavar, a decision that the Supreme Court upheld in December last year. Other applications have so far been rejected by the IPO. But given how recently the Supreme Court ruled definitively on the practice and recent attempts at the World Trade Organisation to allow the export of drugs produced under such a licence, pharmaceutical companies are still deeply concerned. So far, however, this has not become the runaway problem for rights holders that some have predicted. “I do not think the IPO or Intellectual Property Appellate Board has been at all unreasonable in its compulsory licensing orders. They have set down their reasons and they are difficult to dispute,” remarks Obhan. The latest test will be the July application by generics producer Lee Pharma to produce AstraZeneca’s diabetes medication Onglyza.

Licensor rethink

For those who see the system moving in a patent-friendly direction, the Ericsson cases are Exhibit A and offer lessons to companies on both sides of licensing transactions. Despite Ericsson’s early struggles to license, it has enjoyed a run of successes, including injunctions (and interim royalty arrangements) against Micromax and Intex (and, for a time, Xiaomi). The Micromax and Intex orders, says Obhan, “have made it clear that parties cannot horse around and stretch negotiations on indefinitely. Conduct during negotiations is playing a major role, and the conduct of Intex was a big factor in how the court decided the matter”. At the same time, Obhan suggests that licensors will also have to rethink some of their practices. “Standard-essential patent owners may no longer be able to use some of the strong-arm tactics”, including demanding royalties on the entire value of a phone – a practice singled out by the CCI as prima facie discriminatory and leading to excessive royalties for some models.

As in other areas of intellectual property, expect India to forge a patent regulatory regime along its own path. “They certainly are looking at what has happened overseas,” notes Obhan, “but ultimately this will come down to what they sense as being fair.” For those who have long called for more efficiency and predictability in the system, the inauguration of new commercial courts within the high court system may offer some promise. Obhan guesses that “eventually, these matters will come regularly before the new commercial benches and we will see a more consistent approach which will be more consistently followed by the CCI”.