Antitrust assessment: portfolio cross-licensing agreements and patent pools

General antitrust framework in IP field

In China, the abuse of IP rights to exclude and restrict competition is not an independent monopolistic behaviour, but must follow the general analysis framework under China’s Anti-monopoly Law. It means that an IP rights-related arrangement will be determined based on whether it constitutes a monopoly agreement, an abuse of dominant market position or a concentration of undertakings that may exclude or restrict competition. Antitrust enforcement agencies have released the Provisions on the Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition (effective 2015, with minor amendments 2020) and, most recently, the Antitrust Guidelines of the Anti-monopoly Commission under the State Council for the Field of Intellectual Property Rights (effective 2019), which provide detailed factors in evaluating the anti-competitive effects of specific arrangements involving IP rights. The provisions and the guidelines also elaborate on cross-licensing agreements and patent pools, among other things.

It is rare to find publicised antitrust cases about cross-licensing and patent pools in China. One example was a case from 2015, where the National Development and Reform Commission – the anti-monopoly law enforcement agency at that time – disclosed that it was urging Dolby and HDMI to reach settlements with Chinese colour-television manufacturers regarding SEP licensing. The two companies operated patent pools involving audio and video technologies that were critical to China’s colour-television industry at the time.

Nevertheless, while still rare, the enforcement gap may soon be addressed. China is taking major steps to improve its IP rights-protection system. As China endeavours to climb up the supply chain, there will be increasingly more local IP rights holders rather than mere implementers. To illustrate, it is reported that in the communications industry four Chinese companies own 36% of 5G SEPs. Against the backdrop of China’s industrial upgrading, legal issues relating to cross-licensing and patent pools are expected to arise more often, including antitrust ones.

This chapter introduces readers to potential antitrust risks involved in portfolio cross-licensing and patent pools in China. Due to the lack of precedents, the discussion will focus the existing analysis framework pursuant to the Anti-monopoly Law and the relevant implementing rules. It is expected that cases from other jurisdictions will also have an impact and offer great reference value for China’s future enforcement practices where relevant.

Antitrust assessment of cross-licensing

Cross-licensing as a monopoly agreement

Across different jurisdictions, there are generally two regulatory standards for monopoly agreements:

• illegal per se; and
• rule of reason.

Illegal per se refers to an agreement that is anti-competitive in and of itself, which is usually applied in cartels. The rule of reason refers to a reasonable analysis of pro-competitive effects and anti-competitive effects in determining the legality of an agreement. Usually, cross-licensing is considered efficient and will not be treated as illegal per se, unless it becomes the means of a cartel agreement. For example, the US law enforcement agency adopted this stance in its Antitrust Guidelines for the Licensing of Intellectual Property (2017).

The cross-licensing approach in China is expected to be similar. Article 13 of the Anti-monopoly Law regulates cartels (ie, horizontal monopoly agreements between competitors (including price fixing, restricting output, dividing sales markets, jointly restricting new technologies and boycotting) and potentially catch-all items (such as, other monopoly agreements determined by antitrust enforcement agencies)). Other than the catch-all items, horizontal monopoly agreements are considered to severely restrict competition and the illegal per se rule therefore applies. Article 14 of the law regulates vertical monopoly agreements between upstream and downstream undertakings, including fixing resale prices, limiting minimum resale prices and catch-all items (ie, other monopoly agreements unrelated to resale price as determined by antitrust enforcement agencies). In China, antitrust enforcement agencies take a rigorous approach against fixing resale prices or limiting minimum resale prices, which is close to illegal per se. Therefore, if a cross-licensing agreement involves any horizontal or vertical monopoly agreement, the illegal per se rule applies. Otherwise, the rule of reason applies to the catch-all items under Article 13 or 14, including pure cross-licensing. The pro-competitive and anti-competitive sides of cross-licensing are further examined pursuant to Article 8 of the IP Rights Antitrust Guidelines.

As cartels among competitors are usually under stricter legal scrutiny across the globe, it is crucial to decide whether there is a competitive relationship between the parties involved in a cross-licensing agreement. In China, Article 5(2) of the IP Rights Antitrust Guidelines considers the competitive relationship as one of the factors in analysing anti-competitive effects. It points out that the determination of competitiveness may consider the actual or potential competitive relationship between undertakings in absence of the arrangement at issue. In addition, according to the practices of other jurisdictions, the relationship between the patented technologies involved is also important for the determination of competitiveness. Cross-licensing could be among either competing patents or complementary patents, which refer to patents that need to be licensed at the same time to be able to implement related technologies. Cross-licensing of complementary patents is often regarded as being prone to efficiency factors such as economies of scale and cost savings, while cross-licensing involving competing patents will inevitably bear higher risks.

Moreover, whether cross-licensing is exclusive will also make a difference for risk assessment. Pursuant to Article 8 of the guidelines, exclusivity is explicitly listed as one of the factors in assessing the anti-competitive effects of cross-licensing. Article 8 also mentions as a factor whether it constitutes a barrier for third parties to enter the market. For exclusive cross-licensing, undertakings that do not participate in the cross-licensing cannot have access to the patents involved in the agreement, creating entry barriers may therefore increase antitrust risks to a certain extent.

Cross-licensing as abuse: when SEPs are involved

If one of the parties in the cross-licensing has a dominant position in the relevant market, the cross-licensing may also constitute an abuse of market dominance and therefore violate the Anti-monopoly Law. The IP Rights Antitrust Guidelines list “requiring the transaction counterparties to cross-license without offering reasonable consideration” as an unreasonable trading condition involving IP rights. The National Development and Reform Commission’s penalty decision against Qualcomm’s abuse of market dominance in 2015 mentioned that Qualcomm forced certain licensees to license their non-SEPs to Qualcomm or to grant reverse license for free, which constitutes abuse of dominance.

The prerequisite for triggering the risks of dominance abuse is that one patentee has a dominant position in the relevant market, which in turn is based on the precise definition of the relevant market. Article 4 of the guidelines provides three sequential options for market definition:

• relevant product market;
• relevant technology market; and
• innovation market.

These defining approaches are also consistent with other major jurisdictions. According to Articles 18 and 19 of the Anti-monopoly Law there are multiple considerations when it comes to determining dominant market position, although in practice market share is often the overwhelming factor. For SEP owners, it generally means that the involved standard or technology cannot be substituted and associated patents therefore have 100% market share. This proved to be true for both Qualcomm and InterDigital, who are considered to have a dominant market position in China in their respective cases. During cross-licensing arrangements, patentees of a dominant market position must pay attention to the reasonableness of licensing conditions, such as the consideration of cross-licensing and whether it is exclusive or constitutes exclusive dealing or a refusal to deal, among other things.

Antitrust assessment of patent pools

Patent pools as a monopoly agreement

Similar to cross-licensing, a patent pool is also an arrangement in which different patentees jointly conduct licensing that:

• reduces transaction costs;
• improves licensing efficiency; and
• has the effect of promoting competition.

Therefore, when analysing the antitrust risk of the patent pool, some of the factors considered are similar to the above analysis of cross-licensing. In general, the rule of reason applies to a patent pool unless its members collude through the patent pool to prevent the entry of new competitors or to fix prices, therefore implementing a per se illegal monopoly agreement.

Regarding patent pool analysis, Article 26 of the IP Rights Antitrust Guidelines specifically stipulates such factors as:

• market share number;
• the substitutability of patented technologies;
• the restrictions on members;
• any information exchange through the pool; and
• licensing conditions of the pooled patents.

Again, some of the considerations are similar to the cross-licensing analysis. For example, the relationship between the technologies involved (eg, whether the patents in the patent pool involve competing or substitutable technologies) is mentioned specifically. Exclusivity is also considered (ie, whether members of the pool are restricted from independently licensing patents or R&D technologies to others).

To improve the efficiency of law enforcement and provide clear expectations for market players, Article 13 of the guidelines establishes safe harbour rules. An IP rights-related arrangement is presumed not to have the effect of excluding or restricting competition as long as it does not constitute a hardcore violation under Articles 13 or 14 of the Anti-monopoly Law, if:

• the aggregate market share of all the involved competing undertakings in the relevant market does not exceed 20%;
• the market share of upstream and downstream undertakings in any relevant market does not exceed 30%; or
• where the market share is inaccessible or unreliable, there are four or more substitutable technologies in the relevant market that are independently controlled by other undertakings and can be obtained at reasonable costs.

The safe harbour rules are equally applicable to cross-licensing and patent pools. For patent pools that have a low market share due to the existence of alternative standards or other reasons, the safe harbour rules provide relevant operating entities with certainty and predictability of law enforcement.

SEP pooling as abuse

A patent pool is usually operated through the establishment of a company or a trusted a third party, so the operating entity is independent of its members. Different from cross-licensing, a patent pool aggregates a large number of patents for a certain technology or product, so that it is likely to attain dominant market position, especially when the patent pool involves a standardised technology.

In the case of SEPs, if a standard at issue is widely used (eg, by becoming an industry standard or even an international technical standard), associated patents will acquire a lock-in effect. SEP owners naturally occupy a dominant position in their patent licensing market, inflating their value. In China, abuse by SEP owners has resulted in multiple cases, although they have not necessarily involved SEP pools. In a 2013 case InterDigital Communications v Huawei Technologies Co Ltd, the court compared InterDigital’s licence fees for different licensees and determined that it had abused its dominant market position by charging Huawei particularly unfair and high prices. It is possible for licensees to lodge a complaint with enforcement agencies to trigger an administrative investigation, as in the US Qualcomm case handled by the National Development and Reform Commission. Similarly, if pooled patents are essential to implement a certain standard or technology that lacks substitutability, the patent pool operator will confront the same antitrust risk as InterDigital or Qualcomm.

The FRAND commitment is often the baseline for handling SEP cases. It requires that SEP owners, including SEP pools, should not refuse to license without justification, charge excessive fees or discriminate among similarly positioned licensees. In practice, in China, one of the references for measuring the risk of abuse is whether the FRAND commitment is complied with. In the Interpretations of the Supreme People’s Court Concerning Certain Issues on Application of Law for Trial of Cases on Disputes over Patent Infringement (II), Article 24 clearly provides that if a patentee intentionally violates its FRAND commitment, resulting in the failure to conclude the licensing agreement, and the alleged patent infringer has made no evident error during the negotiation, in general the competent court will not issue a cease and desist order against the infringer.

In addition, the use of judicial injunctive relief may also constitute abuse and its rising prevalence is becoming clear throughout the world. In China, Article 27 of the IP Rights Antitrust Guidelines stipulates that if an SEP owner with a dominant market position forces a licensee to accept unfairly high licence fees or other unreasonable licensing conditions through a judicial injunction, it may exclude or restrict competition. For example, on 25 December 2020, the Wuhan Intermediate People’s Court granted Samsung an anti-suit injunction against Ericsson, prohibiting Ericsson from, among other orders, applying for or enforcing the injunctions related to its 4G and 5G SEPs against Samsung anywhere in the world. Meanwhile, Ericsson applied for a temporary injunction and an anti-intervention injunction in the Eastern District of Texas on 28 December 2020, prohibiting Samsung from enforcing the Wuhan Intermediate People’s Court’s ruling or from further applying for any similar proceedings in any foreign court. The competing jurisdictions among courts of different countries should also be kept in mind for operators of SEP pools.

Potentiality of non-SEP pooling as abuse

Some patent pools may operate non-SEPs. To assess whether a non-SEP pool runs the risk of abusing market dominance, the definition of a relevant market must be considered and market power must be examined. China has no typical case involving non-SEP pools; however, there have been cases in which non-SEPs have been identified as abusing market dominance.

In the 2021 case Ningbo Ketian Magnetic Industry Co Ltd v Hitachi Metal Co Ltd, although the patents in the patent pool involved did not constitute an SEP, the court interpreted the patents involved as “essential facilities” and held that Hitachi Metals had abused its dominant market position by a “refusal to deal”. The court reasoned that the defendant Hitachi Metals held the dominant market position due to its ability to exclude others from entering the market, its ability to control prices and other trading conditions, its obvious control over unauthorised manufacturers and the substantial impact on the downstream market through its patent licensing agreement. The court applied the ‘essential facilities’ doctrine and determined that the defendant’s patents constituted essential facilities. It also held that the defendant’s refusal to license to the plaintiff Ketian, who actively sought licences under reasonable conditions on numerous occasions, amounted to abuse of dominance. This case indicates the possibility of non-SEP licensing as abuse, foreshadowing future risks in China.

Comment

The recent enactment of the IP Rights Antitrust Guidelines helps provide effective compliance guidance for patent owners engaged in cross-licensing arrangements and patent pool operations. As the policies at the intersection of IP rights and antitrust are not consistent worldwide, market players may encounter difficulties where they cannot formulate general compliance rules in different jurisdictions. However, considering the current highlights of China’s IP rights protection work and recent trade frictions, the public enforcement of antitrust law in the IP rights field may provide a step up. For China, IP rights will become a focal point of international disputes, as well as a core factor for competitiveness on the international stage.