The IPR Impact of China’s Anti-Monopoly Law: What more to expect?

Issue 20 By Dixon Zhang, Gordon Gao and Bingna Guo,[Anti-Monopoly]

On August 30, 2007, the National People's Congress adopted the long-awaited Anti-Monopoly Law ("AML") which will enter into force as of August 1, 2008. This law has 57 articles primarily intended to cover, among other things, monopolistic conducts having or being likely to have the effects of eliminating or restricting competition, such as monopoly agreements, abuse of dominant market positions and concentration of business.

It is noteworthy that Article 55 deals with monopolistic conducts abusing intellectual property rights ("IPR") to eliminate or restrict competition. Thus, this legislation has drawn wide attention from and poses great uncertainties to many IPR owners from China and abroad since it was promulgated. In this article, the authors discuss its possible impact on IPR from a comparative law study perspective.

Article 55 of the AML provides that "Where business operators exercise intellectual property rights pursuant to the laws and administrative regulations relating to intellectual property, this Law is not applicable. However, this Law is applicable to conducts by business operators that eliminate or restrict competition by abuse of intellectual property rights." Although Article 55 is rather short and concise, it deals with three basic, but very key legal issues, i.e.:

What is the relationship between the IPR law regime and AML regime;

What are the scenarios concerning the "abuse of intellectual property rights"; and

How to define "eliminating or restricting competition".

The relationship between the IPR law regime and AML regime

The first sentence of Article 55 defines the principled relationship between the IPR law regime and Antitrust Law regime. It states that, "Where business operators utilize intellectual property rights pursuant to the laws and administrative regulations relating to intellectual property, this Law is not applicable."

The above clause acknowledges that there are tensions between the AML and IPR laws, but if IPR is exercised within legal boundaries, the two legal regimes are complimentary. IPRs in essence are rights of exclusivity for certain duration. This time-limited monopoly right is created for innovators to protect their innovations and prevent free rides or unjust exploitation by imitators. It is ultimately aimed at creating incentives for innovation. AML, on the contrary, is aimed at discouraging monopoly and anti-competitive behavior. However, such punishment on exclusionary conduct is aimed at improving market accessibility for all competitors and thereby safeguarding innovation in the long run. The anti-monopoly legal system complements the IPR system by ensuring fair and reasonable use of IPR at product marketing and distribution stages. Moreover, the normative foundation of both anti-monopoly and intellectual property laws has been interpreted to raise efficiency, thus encouraging the production of higher quality products at lower costs.

Since enacting its first Patent Law in 1984, China has established a relatively comprehensive and sophisticated IPR law regime. In comparison, China's AML regime is still far from being mature. Even in the European Union ("EU") and the United States ("US") where there is a longer history of anti-monopoly law, balancing the relationship between anti-monopoly and IPR laws has never been an easy task. It will take a long time for the dust to settle before we can clearly see how these two legal regimes interact positively in China.

Scenarios of IPR abuse

In addition to the AML, the legal authorities for determining scenarios concerning IPR abuse can be found in many laws and regulations in China. These authorities primarily include:

1. International Treaties to which China is a member country:
(1) TRIPS (Agreement on Trade-related Aspects of Intellectual Property Rights);
(2) Paris Convention for the Protection of Industrial Property

2. Domestic legislation:
(1) The Contract Law  (Articles 329 and 343), which deals with technology contracts that are considered to "illegally monopolize technology and hinder technological development";
(2) The Interpretation of the Supreme People's Court Concerning Some Issues in the Application of Law for the Trial of Cases on Disputes over Technology Contracts  (Article 10), which further defines the types of unfair provisions in technology contracts that may be regarded as "illegally monopolize technology and hinder technological development;"
(3) The Foreign Trade Law  (Articles 30 and 32), the provisions of which are modeled on TRIPS and specifically prohibits three types of IPR abuse, i.e., covenants allowing no challenge of patent validity, exclusive grant-backs and forced package licensing in a license contract;
(4) The Regulations on Administration of Import and Export of Technologies  (Article 29), which lists restrictive provisions in technology import contracts that are prohibited;
(5) The Law of Unfair Competition   (Article 12), which regulates tied sales;
(6) The Patent Law  (Articles 48 and 49), which allows compulsory licensing as potential remedies for abuse of IPR.

In summary, the above legal sources essentially deal with the following acts of "abusing intellectual property rights":
Price restrictions;
Quantity restrictions;
Geographical restrictions;
Cross license and patent alliance arrangements;
Exclusive provisions (exclusive grant-backs, covenants allowing no challenge of patent validity and forced packaging);
Restrictions on resale price;
Tied sales.

In addition, the Antitrust Law gives a broad and general definition of dominant market position and abuse of dominant market position. They could potentially be interpreted to equate IPR with market power and punish certain uses of IPR as "abusing dominant market position." For example, Article 18 provides that an undertaking's "technical condition" may be a factor for determining dominant market position. Also, Article 17 enumerates the prohibited abuses of dominant market position, and one such prohibited exclusionary conduct, for example, is "refusing to trade with the other party without justification." This provision could be interpreted as applicable to refusals to license patented technology.  

Defining "eliminate or restrict competition"

Neither the newly promulgated Antitrust Law nor any other Chinese laws and regulations provide an interpretation or lay down any definition for the phrase "eliminate or restrict competition by abuse of intellectual property rights". The competition laws and policies of the EU and U.S. may provide some clues on how China might deal with this issue:

EU Stipulations

The EU competition law provisions are embodied in Articles 3, 81, 82, 85 and 86 of the European Union Treaty. The more specific rules on IP licensing are the Technology Transfer Block Exemption Regulation promulgated in 1996 and the Commission Regulation (EC) No 772/2004 of April 27, 2004 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements (the "Regulation 772/2004").

Articles 81 and 82 of the EC Treaty contain competition provisions that govern the use and potential abuse of IPR. Article 81 prohibits agreements that adversely affect trade between member states through restriction of competition. It is intended to prevent alliances that may preclude the entrance or viability of other market players. In analyzing the impact of IP licensing on competition, EU law simultaneously looks at IPR itself and the effect of its licensing. Article 82 of the EC Treaty prohibits abuses associated with those who have already achieved dominant market positions. It may be found that the refusal to license an IPR constitutes an abuse of dominant position within the meaning of Article 82 of the EC Treaty. When an EU Courts or the European Commission finds a business is liable to license an IPR, what is referred to is Article 82(b) of the EC Treaty, which states that it is an abuse, and accordingly prohibited, for a dominant company to "[limit] production, markets or technical development to the prejudice of consumers". Thus, protecting the interests of consumers seems to be the primary concern of Article 82 of the EC Treaty.

However, the EU Courts have also made it clear that companies have the freedom to deal or not to deal, as they see fit, and that it is only in exceptional circumstances that a refusal to deal, in its own right, constitutes an abuse of a dominant position and accordingly is prohibited under Article 82 of the EC Treaty. In applying this principle, which has come to be known as the "exceptional circumstances test", EU courts will consider the following factors in determining whether a legitimate IPR owner with dominant market position who refuses to license is regarded to abuse such a position: (1) whether he is found to be the exclusive holder of a raw material or input essential to running a certain business on the market and such input is not duplicable; (2) whether his behavior prevents the entry of a product into the market for which there is potential consumer demand; (3) whether the refusal to license has any legitimate business justification; (4) whether his behavior deliberately pursues the goal of reserving to himself a downstream market by foreclosing competition to other potential rivals.

US Stipulations

The US uses both IPR statutes and antitrust law to curb IPR abuse. The major antitrust laws applicable to IPR include the Sherman Act, the Clayton Act and the Federal Trade Commission Act. In addition, most states have antitrust laws which are patterned, to varying degrees, upon the federal antitrust laws. To facilitate analyzing antitrust concerns in IPR, the Department of Justice has issued the Antitrust Guidelines for the Licensing of Intellectual Property (the "Antitrust Guidelines"). It includes general statements of enforcement intent, intended modes of analyzing licensing arrangements, statements regarding specific licensing practices, and discussions of hypothetical fact scenarios. Although the Antitrust Guidelines do not have binding force, they reflect analytical principles refined from existing case law. 

Below are three general principles that underlie the antitrust enforcement policies of the Department of Justice and Federal Trade Commission:

(1) Intellectual Property will generally be afforded the same antitrust treatment as other forms of property and "is thus neither particularly free from scrutiny under the antitrust laws, nor particularly suspect under them."

(2) Intellectual property rights in themselves do not necessarily give rise to a presumption of market power in the antitrust context; and

(3) Intellectual property licensing is generally regarded as pro-competitive. 

Consistent with the view that IPR is generally pro-competitive, the U.S. enforcement agencies intend to evaluate the "vast majority" of licensing arrangements under the "rule of reason" analysis. Under this approach, if the defendant's conduct has both anti-competitive and pro-competitive effects, the court will weigh the economic efficiencies of the defendant's conduct against the actual anti-competitive costs of the conduct. Nonetheless, the agencies will apply the "per se rule" to arrangements that are unlikely to generate "an efficiency-enhancing integration of economic activity" and are of the type that have historically been afforded per se treatment. For such a conduct, the court will conclusively presume it to be unreasonable. Such typical per se practices include naked price-fixing, output restraints, and market division among horizontal competitors, as well as certain group boycotts and resale price maintenance. However, it is worth noting that in the past 30 years or so, U.S. courts moved more toward the "rule of reason" analysis. 

Based upon the above comparative law analysis, it is expected that China's future legislation would add some certainty to the process of predicting what kind of behavior may result in an anti-monopoly challenge against IPR owners.

What More to Expect

Through the above analysis, we may draw a preliminary conclusion that the AML is seemingly far from being mature and thus gives little practical guidance. Thus, unfortunately, a market player may have to struggle with a lot of uncertainties when litigating a case based on Article 55 of the AML and may be unfairly disadvantaged to be the first to test the practical application of this rule. In order to make the law more practical, future legislation is expected to address the following issues at a minimum:

(1) Administrative liabilities
       Articles 46, 47, 49, 51 and 52 of the AML set forth administrative liabilities against business operators employing monopolistic conducts by monopoly agreement, dominant market position and concentration of business. These administrative penalties include monetary fines, revocation of business registration, and orders for ceasing violations. However, it is interesting to note that the current law itself does not provide any administrative penalties for violation of Article 55. Although theoretically, IPR abuse may be subject to administrative penalties in cases where they are considered abuses of dominant market position, the fact that Article 55 is a separate provision stipulated in "Supplemental Provisions" of the law makes it unclear whether the relevant enforcement authorities will apply it in this way.

(2) Civil liabilities
       Article 50 of the law provides that "business operators with monopoly conducts shall bear civil liabilities should losses be caused to others whereby". In other words, civil remedies with respect to violations of Article 55 are available in principle under the AML. Under the General Principles of Civil Law, civil liabilities generally include: (1) cessation of infringement; (2) removal of obstacles; (3) elimination of danger; (4) return of property; (5) restoration of original condition; (6) repair, reworking or replacement; (7) compensation for losses; (8) payment for breach of contract damages; (9) elimination of ill effects and rehabilitation of reputation; and (10) extension of apology. Despite this, how China's future legislation delineates specific civil liabilities will remain an interesting issue that many IPR law practitioners desire to know.

(3) Evidence Rules
       Historically, through issuing judicial interpretations or guidelines from time to time, China's Supreme People's Court laid down evidence rules for various types of civil and administrative cases. In particular, at present there is a need for the Supreme People's Court to promulgate burden of proof rules. It is expected that in the future, China's Supreme People's Court will lay down some detailed guidelines on evidence rules for cases concerning violations of Article 55 of the ALM for parties in disputes to follow when filing a case with the competent people's court.
The Chinese government has been advocating and implementing an ambitious plan for building the country into an "Innovation & Knowledge-Based Country." In the context of China's continued economic growth and further integration into the world's economic system, the impact that the Antitrust Law may have on IPR is expected to be very significant. Hopefully, future legislation will clarify the issues discussed above.

About the authors:
    Dixon Zhang, Gordon Gao, and Bingna Guo are lawyers at Fangda Partners.

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