No universally accepted definition for"abuse of IPRs"

Issue 21 By Peter Corne & Steve Yu,[Unfair Competition]

There is no universally accepted definition for "abuse of IPRs". However, there are a number of different types of conduct that are normally regarded as misuse of IPRs. For example, setting unfair licensing terms that go beyond what is necessary to protect the legitimate interest of the licensor; tying or bundling of other technologies or products together without objective justification; charging an unfair royalty at prices above economic value, etc.

Conduct that is deemed to have the effect of eliminating market competition normally includes cartel agreements between competing technology licensors on royalty rates; group boycotts by licensors, resale price maintenance by licensors which requires licensees to re-sell licensed products at certain prices; requiring a licensee not to deal with competitors of the licensor; etc.

However, the reality is that no jurisdiction has been able to draw a clear dividing line between fair exercise of IPRs and abuse of IPRs. This area has been changing and developing all the time through case law and administrative practice. As many commentators correctly point out, it is always an "old battle, new field". 

For example, courts in the United State have now started to generally accept that the refusal to license by a patent holder is not abusive even if the intention is to disadvantage competitors.  This legal rule only emerged after decades of legal battles between competing antitrust philosophies. Nowadays, many jurisdictions no longer assume that IPR creates market dominance for antitrust purposes.   

Worries of foreign enterprises in China

The AML (Anti-Monopoly Law), on one hand, declares in its Article 55 that it is not applicable to conduct by undertakings exercising their legitimate intellectual property rights. On the other hand, it vaguely states that abuse of intellectual property rights to restrict or limit competition is governed by this AML. There are concerns (not necessarily true) that this loosely drafted clause may be used in a discriminatory fashion against foreign companies who are technology-driven and have a relatively large market share in certain sectors in China. 

We think the true reason that this clause has, as you said, aroused the concerns of many foreign companies is that it came into the PRC Anti-Monopoly Law without any detailed narratives. For example, what types of market behavior should be deemed as abuse of IPRs? Will refusal to license be deemed as abusive? Are there any "safe zones" or block exceptions? These are all important questions that are not answered by the law.

Concern is therefore spreading because people are guessing. The Chinese legislators should publish guidance and implementing rules as soon as possible. This is very important for the enhancement of the predictability of the emerging anti-monopoly legal regime in this country.

AML trigger revisions to IP laws and regulations

IPR-related anti-monopoly issues have already been addressed by Chinese law on a piece-meal basis. We have seen the principles and provisions in the Contract Law, Patent Law, Foreign Trade law, Technology Import and Export Regulations, etc. The promulgation of the Anti-Monopoly Law is a good opportunity for China to streamline its existing regulations and utilize the experience, as well as lessons of other countries in this area.

There is one thing for which we must give the AML credit - experts from the international legal and business communities were all invited to submit comments in the drafting and consultation period of the AML. As a result, the AML is very closely in line with international competition law standards. We have found that it reflects many recent developments and the new antitrust philosophy in Europe and the United States. We hope that this good and successful practice will continue to be followed in China's process to enact the AML implementing rules and the IP related anti-monopoly guidance.

Definition of "abuse of IPR" in Europe

The European Commission does not have a definition of "abuse of IPR" specifically. Instead it fits within the framework of EC competition rules, which are as follows:

Article 81(1) of the EC Treaty, which prohibits agreements between undertakings, decisions by associations of undertakings or concerted practices which may affect trade between EU member states and which have as their object or effect the prevention, restriction or distortion of competition within the EU.

Article 82 of the EC Treaty, which prohibits the abuse by one or more undertakings of a dominant market position within the EU (or a substantial part of it) in a way which may affect trade between EU member states.

Ownership of IPRs confers a legal monopoly right that enables the holder of the IP right to prevent third parties from manufacturing, selling or performing other specified acts in relation to goods or services that make use of the IP. Where the holder is a dominant firm, the Commission considers whether the exercise of the right by the holder of IP rights may constitute an abuse under Article 82. China might therefore find it useful to understand the way the Commission approaches Competition Law in general before applying it to IP.

Law enforcement organizations of the AML

Under the AML, a new Anti-Monopoly Commission will be set up under the purview of the State Council, but it will only play a coordination and advisory role. The routine responsibilities will be assumed by an antitrust enforcement agency to be designated by the State Council.

The creation of a single enforcement authority has been one of the most heavily debated issues in the preparation of the AML. It is likely that this issue will be finally determined by China in the context of the proposed restructuring of its central administrative body.

We are of the view that it is preferable to confer the application of competition law and policy exclusively to a single agency. This will help to promote efficiency, consistency and predictability in enforcement, and will foster the development of institutional knowledge and a unified body of case law in this very complex area.

Microsoft's case concerning anti-trust

It is not the case that only competitors are affected by Microsoft's behavior and not consumers.  The reason for the Competition Law is to encourage a dynamic business environment in which companies can get their goods and services to market efficiently and effectively, so that consumers can benefit from a broad choice of products at competitive prices.

In Microsoft's case, the Commission adopted a decision finding that Microsoft had abused its dominant position in particular in the market for client PC operating systems by refusing to supply interoperability information between Windows software and non-Microsoft work group server operating systems. As well as the fine, Microsoft was obliged to provide licensing arrangements to allow competitor companies the ability to obtain, if they wished, the interoperability information. Competitors would not receive the information for free but would still have to pay royalty. By opening the market in this way, consumers benefit by preventing them from being tied to just one product and one provider.

The US Court of Appeals reversed the finding that Microsoft had attempted to monopolize the internet browser market and found that integrating a browser and an operating system may be a sign of an efficient, pro-consumer innovation rather than anti-competitive behavior.

The key finding for the U.S. was in pro-consumer innovation, whereas for the EU it was anti-competitive behavior. The case implies that the antitrust laws of the U.S. and the competition laws of the EU are interpreted and enforced in different ways and with a different emphasis. 

The U.S. Court of Appeal has not supported the EU's findings and thus companies must be prepared to face different findings between the EU and the U.S. This case has proved that winning in one jurisdiction affords no protection from a legal action in another. The key issue going forward is that of the international coordination and compatibility between the antitrust authorities.

About the author:
    Peter Corne is the Managing Director of Eversheds LLP Shanghai Office.
    Steve Yu is a senior lawyer in the China Practice Group of Eversheds LLP.

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