China: SEPs and FRAND – litigation, policy and latest developments

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On 29 June 2023, the State Administration for Market Regulation (SAMR) of China issued its newly revised departmental rule ‘Provisions on Prohibiting the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition’ (hereinafter referred to as the 2023 Provisions), which came into effect on 1 August 2023. SAMR has assumed the duties of anti-monopoly law enforcement in China and may formulate its departmental rules within the scope of its responsibilities and limits of authority in accordance with the laws as well as the administrative regulations, decisions and orders of the State Council. This article will focus on the 2023 Provisions to introduce the anti-monopoly regulations in the field of intellectual property in China, particularly relating to standard essential patents (SEPs).

The following table shows the framework and main contents of the 2023 Provisions.

Clause numberOverview of main contents

Articles 1-4

General provisions, listing three types of monopoly behaviors (including reaching monopoly agreements, abuse of dominant market position, and concentration of business operators) and specifying the anti-monopoly law enforcement agencies in the field of intellectual property.

Article 5

Stipulating how to identify relevant market in the work of anti-monopoly relating to intellectual property.

Articles 6-7

Stipulating types of monopoly agreements prohibited from being reached, and safe harbour rules for vertical monopoly agreements.

Articles 8-14

Stipulating rules for determining dominant market position, as well as several typical behaviors of abusing dominant market position and how to identify them, including ‘licensing intellectual property rights or selling products containing intellectual property rights at an unfairly high price’, and implementing the following behaviors without any justifiable cause: ‘refusing to license’, ‘placing restraints on transactions’, ‘conducting tying sales’, ‘attaching unreasonable transaction conditions’ and ‘applying differential treatment’ during the exercise of IP rights.

Articles 15-16

Stipulating requirements of declaration and examination for concentration of business operators, and the restrictive conditions that can be attached in order to obtain approval for concentration of business operators.

Articles 17-19,
Article 21

Stipulating four special types of monopoly behaviours, including those behaviours relating to patent pool, formulation and implementation of standard, SEP and copyright.

Article 20,
Articles 22-23

Stipulating some common issues related to monopoly behaviors involving intellectual property, including considerations for identifying the aforementioned ‘justifiable cause’, analysis steps for identifying monopoly behaviour relating to intellectual property and considerations for determining the impact of the behaviours of business operators on the competition of the relevant market.

Articles 24-31

Stipulating enforcement procedures for monopoly behaviours, penalties for respective types of monopoly behaviours and treatment of illegal act of the staff of the anti-monopoly enforcement agencies and public officials.

Articles 32-33

Stipulating the connection of the 2023 Provisions with other anti-monopoly regulations and the effective date of the 2023 Provisions.

Among the four special types of monopoly behaviors in the field of intellectual property, article 19 of the 2023 Provisions directly relates to the abuse of dominant market position to eliminate or restrict competition relating to SEP.[11] The following behaviors in article 19 are more worthy of attention because they are newly added into the 2023 Provisions, including: (i) failing to timely and sufficiently disclose patent information in accordance with the regulations of standard-setting organisations during the standard formulation process; (ii) after a patent becomes a SEP, licensing the SEP at an unfairly high price; and (iii) requesting for injunction from a court or an administrative agency without negotiating in good faith during the process of licensing of the SEP. The specific regulations for these behaviours will be introduced below.

Timely and sufficient disclosure of patent information

In the earlier versions of the 2023 Provisions, namely, the 2015 and 2020 versions, the deliberate failure of a business operator with dominant market position to disclose the patent information to a standard-setting organisation is regarded as abusing its dominant market position to eliminate or restrict competition. In the 2023 Provisions, the previous expression of ‘deliberately failing to disclose its rights information to the standard-setting organization’ has been changed to ‘failing to timely and sufficiently disclose its rights information in accordance with the regulations of the standard-setting organization’. It shows that the 2023 Provisions specifically focus the requirements for disclosure of patent information on the aspects of timeliness and sufficiency. Meanwhile, the timeliness and sufficiency of patent information disclosure must be determined in accordance with the individual intellectual property policies of the standard-setting organisations. Different standard-setting organisations have independent regulations on the time and scope of intellectual property disclosure, thus the timeliness and sufficiency of disclosure of patent information to different standard-setting organisations cannot be regulated in a generalised way.

Licensing patents at unfairly high prices

Unfair prices include unfairly high prices and unfairly low prices. The 2023 Provisions regulates the issues related to unfairly high prices.

The ‘unfairly high price’ refers to the behaviours of business operators with a dominant market position taking advantage of their position to set commodity prices at a level that cannot be achieved in normal competition, thereby eliminating or restricting competition. Normally, simply a high price will not increase the competitive advantage of the business operators, but will make other competitors in the relevant market gain relative price advantages or promote new market entry and ultimately promote competition. However, under certain circumstances, an unfairly high price may also lead to the elimination and restriction of competition. For example, a business operator with dominant market position may not only sell intermediate inputs to the counterparty at high prices in the upstream market, but also directly sell the terminal products obtained by using the intermediate inputs at low prices in the downstream market. This behaviour will inhibit the competition of business operators in the downstream market.

Article 9 of the 2023 Provisions stipulates that both factors related to research and development costs of intellectual property and factors related to IP licensing can be considered in determining unfairly high prices.[10]

There have been Chinese court cases that have determined whether there have been unfairly high price behaviours based on the behaviour of the patentee in the licensing process. In Huawei v InterDigital,[9] the Guangdong Higher People’s Court adopted the comparable historical licence fees as a consideration in determining the unfairly high price. In this case, the court first held that the patent licensing rate intended by the patentee to charge the implementer in this case was obviously unreasonably higher than the licensing rate charged for other implementers, so a high price existed in this case. On this basis, the court further discussed whether such a high price was justifiable and reasonable. Specifically, the court held that, in view that the sales volume of the products containing the related patent and the comprehensive strength of the implementer in this case was far behind those of other implementers, it is obviously unreasonable and unjustifiable for the patentee to charge the implementer in this case with a high licence fee. In addition, the court also considered the act of patentee's filing of relevant lawsuits in the United States and held that this act was, in fact, intended to threaten and force the implementer in this case to accept the excessive conditions of patent licensing and was not justifiable. Based on these factors, the court held that patentee in this case has constituted licensing the patent at an unfairly high price.

The methodology taken by the Guangdong Higher People's Court to identify unfairly high price is to first determine whether the proposed licensing rate is high based on the patentee's historical licensing agreements and then to determine whether such a high price is justifiable and reasonable. This methodology is also described in the ‘Guidelines of the Anti-Monopoly Committee of the State Council on Anti-monopoly in the Field of Intellectual Property Rights’ (the ‘State Council Anti-Monopoly Guidelines’)[8] and the ‘Working Guidelines on Adjudicating Cases of Disputes over Standard Essential Patents (Trial)’ promulgated by the Guangdong Higher People’s Court (the ‘Guidelines of Guangdong Higher Court’).[7]

Compared with the ‘State Council Anti-Monopoly Guidelines’ and the ‘Guidelines of Guangdong Higher Court’, the 2023 Provisions also take the research and development costs and payback period of intellectual property rights into account when determining unfairly high price to conduct a more comprehensive determination. However, the 2023 Provisions do not specify how to calculate the research and development costs and payback period, thus leading to some uncertainty in the implementation of the provisions. For example, in the process of development of standard relating technologies, whether the cost of technologies that have not been adopted into the standard can be incorporated into the research and development costs remains disputable. Therefore, it must be cautious when research and development costs is considered in determining the unfairly high price.

In the Supreme People's Court's case Hefei Medical and Pharmaceutical Co, Ltd v Yangtze River Pharmaceutical Group,[6] which was identified as one of the typical cases of anti-monopoly and anti-unfair competition in 2023 by the Supreme People's Court, the court ruled that when determining whether the patentee abuses its dominant market position, in addition to considering whether the price is high, it should also be considered whether such a high price has the effect of eliminating or restricting competition. The court held that if a high price does not have a clear effect of eliminating or restricting competition, nor does it clearly harm the welfare of consumers, it should not be simply identified as an abuse of dominant market position. The reason is that the lack of clear elimination or restriction of competition usually means that the market may only be temporarily out of order, and the high price can be corrected by the market itself. Moreover, the analysis and determination of unfairly high price is complicated and there is a certain risk of misjudgment. The legal analysis of high price needs to pay more attention to its actual or potential anti-competition effect and pay attention to avoid damaging the investment enthusiasm of incumbent operators and potential entrants in the market, which will lead to ‘chilling effect’ and reduce innovation, and ultimately harm the welfare of consumers. Therefore, the identification and regulation of unfairly high price should be particularly cautious. In this case, the court first analysed the market competition and innovation risk, and held that if the market competition is fiercer, the entry is more active, the market entry requires more investment or the innovation risk is higher, the analysis and judgment of the accused monopoly behaviour should be more cautious, and the innovation factors and long-term consumer welfare factors should be considered emphatically. Next, the court made an economic analysis of the accused behaviour of unfairly high price, including the analysis on the internal rate of return and the matching degree between price and economic value. If the patentee's quotation does not make it obtain an internal rate of return that obviously exceeds the reasonable level in the relevant fields, or if the patented technology is the main factor that determines the quality of the implementer's products and the patentee's quotation only accounts for a small proportion of the implementer's product price, it is difficult to determine that the patentee's quotation constitutes an unfairly high price. Finally, the court confirmed its conclusion from the aspects of competition effect and consumer welfare. For example, if the high price fails to reduce the sales or market share of the implementer, or does not increase the sales price of the product, it cannot be considered as an unfairly high price.

Requirements of good faith negotiations

Generally, a patentee can assert its rights by seeking an injunction. Regarding the special field of SEP licensing, the 2023 Provisions requires a patentee to negotiate in good faith before seeking injunction. However, the 2023 Provisions do not stipulate specific standards that patentees must meet to fulfil the requirements of good faith negotiations.

Through some Chinese courts' holdings on whether the patentee is obviously at fault in specific cases, it can be seen that some behaviours are considered to be incompatible with the requirements of good faith negotiations. For example, in Huawei v Samsung,[5] when evaluating whether the patentee is obviously at fault, the court considered the following behaviours: whether the patentee insists on bundling SEPs and non-SEPs for licensing, whether the patentee refuses to negotiate cross-licensing for SEPs, whether the patentee actively provides unilateral quotations, whether the patentee still refuses to provide a quotation after the implementer submits a request, whether the patentee actively makes counter-offers to the implementer's quotation, whether the patentee obstructs negotiations without a justifiable cause (for example, whether the patentee rejects the implementer's reasonable proposal for arbitration) and whether the patentee proposes a substantive mediation scheme when the court organises the two parties to negotiate through mediation. It can be concluded from this case that to meet the requirements of good faith negotiation, the SEP holder should at least pay attention to whether their actions in the above aspects will lead to the consequence of delaying the licensing negotiations.

The rules of determining whether the patentee is obviously at fault in the ‘Guidelines of Guangdong Higher Court’ can also be used to determine whether the patentee has negotiated in good faith.[4] The patentee's behaviours with obvious fault mainly include failure to send negotiation notice to the implementer, failure to list the scope of the patent rights involved, failure to provide patent information, such as exemplary patent list and claim chart, failure to respond within a reasonable time period and obstructing or interrupting negotiations. The ‘Guidelines for Determining Patent Infringement (2017)’ issued by Beijing Higher People's Court also has relevant provisions on determining whether the patentee intentionally violates the FRAND licensing obligations.[3]

The principle of good faith negotiation in the 2023 Provisions are only provisions on the patentee. There is also the possibility that the implementer does not negotiate in good faith in the process of patent licensing. For example, in Iwncomm v Sony,[2] the court held that the implementer's refusal to sign a confidentiality agreement after the patentee has expressed the willingness to consider providing a claim chart on the basis of signing this confidentiality agreement caused the delay of the parties entering into a formal negotiation process of patent licensing, which was at fault. Therefore, it is also necessary to refer to other laws and regulations to regulate the behaviour of implementers.

Identification of relevant market and determination of dominant market position

The identification of the relevant market is an important prerequisite for anti-monopoly enforcement. The accuracy of the identification will directly affect whether the patentee has dominant market position, which, in turn, will affect the holding of whether there is abuse of dominant market position.

In the field of anti-monopoly, relevant markets include relevant commodity markets and relevant geographical markets. In anti-monopoly cases relating to intellectual property rights, the relevant commodity market may include the technology market[1]. The relevant technology market is determined according to the substitutability of technology.

Specific to the field of SEP, the National Development and Reform Commission (NDRC) of China held in some administrative punishment cases that an SEP constitutes a related commodity market within its scope. The NDRC believes that from the perspective of substitution of demand, every SEP included in the relevant technical standards is indispensable and must be implemented. From the perspective of substitution of supply, there will be no actual or potential substitutive supply after the technical scheme involved in the SEP is adopted. Therefore, each SEP constitutes an independent relevant commodity market.

In Huawei v InterDigital, the Guangdong Higher People’s Court adopted similar analysis to determine the relevant market. The court held that from the perspective of substitution of demand, every SEP under each standard is unique and irreplaceable, and it is difficult for implementers to switch to other standards considering the upfront investment. From the perspective of substitution of supply, after the combination of patents and standards, the holder of the SEPs becomes the only supplier of the related technology market, and other business operators cannot become the operators of SEP through short-term reasonable investment. Therefore, each SEP is an irreplaceable commodity, and independently constitutes a relevant market in the anti-monopoly investigation.

Although it is considered that each SEP individually constitutes a relevant market, it cannot be directly concluded that the SEP holder has a dominant market position. Whether the SEP holder has a dominant market position should be comprehensively investigated with reference to other factors. For example, the 2023 Provisions stipulates the considerations for dominant market position[0], including factors such as the possibility and transfer costs of the transaction counterparty in the relevant market to switch to substitutive technologies or products, the dependence of the downstream market on the products provided by using the intellectual property rights, the transaction counterparty's ability to check and balance the business operator, etc.

When determining whether the patentee has a dominant market position, the NDRC not only considers the SEP holder's 100 per cent market share in the relevant market, but also whether the SEP holder can control the patent licensing market for relevant standards (eg, the ability to control the patent licence fee and licensing conditions, etc), the dependence of terminal equipment manufacturers on the patentee's SEP portfolio, the difficulty for other business operators to enter the relevant market and other factors.

In Huawei v InterDigital, in addition to confirming that each SEP has the entire share in the respective licensing market, the court also considered the transaction counterparty's ability to check and balance, such as whether the patentee conducts any substantive production activity and whether the implementer can check and balance through cross-licensing of SEPs.

On 30 June 2023, SAMR issued the ‘Guidelines on Anti-monopoly in the Field of Standard Essential Patents (draft for comments)’, which provides more specific rules on anti-monopoly relating to SEP and the collection of comments from public ended on 29 July. The Guidelines have more detailed provisions on the disclosure of SEP information, licensing SEP at an unfairly high price, good-faith negotiation of SEP licensing, the identification of relevant market and the determination of dominant market position. It is expected that the final version of the guidelines will provide a clearer and more detailed guide to the SEP licensing negotiation process, to normalise the competition order and promote industrial development.


Notes

[1] Article 19 of the 2023 Provisions:

An operator with a dominant market position shall not engage in the following acts in the process of formulating and implementing standards to eliminate or restrict competition:

  1. When participating in the standard formulation process, failing to timely and sufficiently disclose its rights information in accordance with the regulations of the standard-setting organization, or explicitly waived its rights, but claiming the patent rights against the standard implementer after the patent being involved to the standard;
  2. After its patent becomes a standard essential patent, in violation of the principle of fairness, reasonableness and non-discrimination, licenses at an unfairly high price, refuses to license without a justified cause, sells products in tying or attaches other unreasonable transaction conditions, implements differential treatment, etc;
  3. During the licensing process of standard essential patents, in violation of the principle of fairness, reasonableness and non-discrimination, without good faith negotiation, request the court or other relevant departments to make a judgment, ruling or decision prohibiting the use of relevant intellectual property rights, forcing the licensee to accept unfairly high prices or other unreasonable transaction conditions;
  4. Other behaviors that abuse dominant market position as identified by the State Administration for Market Regulation.

The standard-essential patent mentioned in the present Provisions refer to the patent that is indispensable for the implementation of the standard.

[2] Article 9 of the 2023 Provisions:

Business operators with dominant market position shall not, in the process of exercising intellectual property rights, license intellectual property rights or sell products containing intellectual property rights at unfairly high prices to eliminate or restrict competition.

The following factors may be considered in determining the conduct referred to in the above-mentioned paragraph:

  1. The research and development cost and payback period of the intellectual property;
  2. The calculation method of license fee and the licensing conditions for the intellectual property rights;
  3. The comparable historical license fee or license fee standards of the intellectual property right;
  4. The business operator’s commitment to the licensing of the intellectual property;

[3] Guangdong Higher People’s Court, (2013) YueGaoFa MinSanZhongZi No. 306.

[4] Article 15 of ‘State Council Anti-Monopoly Guidelines’: Licensing intellectual property rights at unfairly high prices:

Business operators with a dominant market position may abuse their dominant market position to license intellectual property rights at unfairly high prices to eliminate or restrict competition. To determine whether it constitutes an abuse of dominant market position, the following factors can be considered:

  1. The calculation method of license fees and the contribution of the intellectual property to the value of related commodities;
  2. The business operator's commitment to intellectual property licensing;
  3. Licensing history or comparable standards of license fee of the intellectual property rights;
  4. Licensing conditions that lead to unfairly high prices, including charging license fees beyond the geographical scope of intellectual property rights or the scope of commodities covered by the intellectual property;
  5. Whether to charge license fees for expired or invalid intellectual property rights in a package license.

To determine whether business operator licenses standard essential patent at an unfairly high price, the overall license fee borne by the product that meets the relevant standard and its impact on the normal development of related industry can also be considered.

[5] Article 30 of ‘Guidelines of Guangdong Higher Court’:

To determine whether the SEP holder has abused its dominant market position to license at an unfairly high price, it shall be examined that whether the SEP holder obviously unfairly asks for excessive license fee without justifiable reasons, thereby causes the result of eliminating or restricting competition. In individual cases, in order to determine the influence of related behaviors on market competition, the followings can be comprehensively considered: the signing of the historical license agreement of the SEP holder, the deviation of the license fee from the normal market price, the relevant negotiation process and the overall license fee borne by the relevant products, etc.

[6] Supreme People's Court, (2020) ZuiGaoFa ZhiMinZhong No.1140.

[7] Shenzhen Intermediate Court, (2016) Yue 03 Minchu No. 816.

[8] Article 13 of the ‘Guidelines of the Guangdong Higher Court’:

13. The following conducts can determine that the standard-essential patentee has violated the obligation of fairness, reasonableness and non-discrimination, and has obvious faults:

  1. Failure to issue a negotiation notice to the implementer, or although a negotiation notice is issued, the scope of the patent rights involved is not specified in accordance with business conventions and transaction practices;
  2. After the implementer clearly expressed its willingness to conduct patent license negotiations, failure to provide the implementer with patent information such as an exemplary patent list and claim chart in accordance with business conventions and transaction practices;
  3. Failure to provide the specific licensing conditions and the claimed calculation method of license fee to the implementer, or the licensing conditions proposed are obviously unreasonable, resulting in the failure to reach a patent implementation licensing agreement;
  4. Failure to respond within a reasonable period;
  5. Obstructing or interrupting negotiations without justifiable causes;
  6. Other conducts with obvious fault.

[9] Beijing Higher People's Court, Guideline for Determining Patent Infringement (2017)

152. If there is no evidence to prove that the patentee of the SEP intentionally violates the licensing obligation of fair,reasonable,and non-discriminatory, and the accused infringer has no obvious fault in the negotiation of the license for the implementation of the SEP, if the accused infringer submitting the license fee it claims to the people's court in time or providing a guarantee not less than this amount, the patentee's claim to stop the implementation of the standard is generally not supported.

Under any of the following circumstances, the patentee may be deemed to have intentionally violated the fair, reasonable and non-discriminatory licensing obligations:

  1. Failing to notify the accused infringer of patent infringement in written form, and failing to specify the scope and specific ways of patent infringement;
  2. Failing to provide patent information or specific licensing conditions to the accused infringer in written form according to business practices and trading habits after the accused infringer clearly expressed its willingness to accept patent licensing negotiation;
  3. Failing to give a time limit for reply to the accused infringer in line with business practices and trading habits;
  4. Obstructing or interrupting the licensing negotiation without justifiable reasons in the process of negotiating the licensing conditions;
  5. Advocating obviously unreasonable conditions in the process of negotiating the licensing, leading to the failure to reach a patent implementation license agreement;
  6. Other obvious fault behaviors of the patentee in licensing negotiation.

[10] Beijing Higher People's Court, (2017) Jingminzhong No. 454.

[11] Article 5 of the 2023 Provisions:

The relevant market referred to in the Provisions, including the relevant commodity market and the relevant geographical market, shall be identified in accordance with the Anti-monopoly law and the ‘Guidelines of the Anti-Monopoly Commission of the State Council on the Identification of Relevant Markets’, taking into account the influences of factors such as intellectual property rights, innovation, etc. In anti-monopoly enforcement related to intellectual property licensing and other matters, the relevant commodity market can be a technology market or a product market containing specific intellectual property rights. The relevant technology market refers to the market composed of competition between technologies involved in the exercise of intellectual property rights and similar technologies that can be substituted for each other.

[12] Article 8 of the 2023 Provisions:

Operators with dominant market position shall not abuse their dominant market position to eliminate or restrict competition in the process of exercising intellectual property rights.

Dominant market position is determined and presumed in accordance with the ‘Anti-monopoly law’ and the ‘Provisions on Prohibition of Abuse of Dominant market position’. The possession of intellectual property rights by an operator can be one of the factors that determines its dominant market position, but it cannot be concluded that it has dominant market position in the relevant market solely based on its possession of intellectual property rights.

To determine whether an operator with intellectual property rights has dominant market position in the relevant market, the possibility and transfer costs of the relevant market transaction counterparty to switch to alternative technologies or products, the dependence of the downstream market on the products provided by using the intellectual property rights involved, the transaction counterparty's ability to check and balance the operator, etc. can also be considered.

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