Introduction

In recent years, the term 'standard-essential patent' has become a buzzword in Chinese antitrust practice. Standard-essential patents raise numerous issues, including with regard to the application boundaries of the Anti-monopoly Law, the balance between public and private rights and the future direction of enforcement and judicial practice.

The question of how to assess standard-essential patent-related activities under the framework of the Anti-monopoly Law has attracted the attention of both the antitrust authorities and players in many relevant markets – especially those in the high-tech sector. The Anti-monopoly Commission (which operates under the State Council) has taken the lead in this area by publishing the Anti-monopoly Guidelines on the Abuse of Intellectual Property Rights, in the hope of providing more specific and targeted guidance regarding Anti-monopoly Law enforcement relating to standard-essential patents.

Anti-monopoly Law enforcement and judicial practice in the context of IP rights are complex matters; when issues relating to standard-setting activities (which cover wider fields and involve more complicated procedures) are added to the mix, they become even more sensitive and challenging. When an enterprise participates in the standard-setting process, it must spend significant human, material and financial resources on research and development, technical discussions, screening and evaluation, promotion and planning, among other things. If its technology is ultimately included in the relevant standards and can be applied more broadly, the enterprise can benefit immensely from its earlier investment and even make considerable profits. However, if the technology is ultimately not used in the standard setting, it may fail to recover the large investment that it made during the early stages. This makes participation in standard-setting activities commercially risky to some extent and not all enterprises have the capabilities and motivation to actively pursue this path. That said, the most advanced technologies which benefit the most consumers will be included in new standards only if more enterprises are encouraged to engage in the standard-setting process, so as to provide as many competing technologies as possible for comparison and selection. Once practical and feasible standards are established, they will help the entire industry to improve operational efficiency and increase the level of standardisation. Therefore, under normal circumstances, businesses should be encouraged to actively engage in standard-setting activities.

Some owners of standard-essential patents abuse their rights and the market dominance that comes with them; intervention under the Anti-monopoly Law is thus sometimes necessary in exceptional circumstances. Despite the indispensability of such patents, a reasonable balance should be sought between protecting the standard-essential patent owner's rights and upholding the Anti-monopoly Law. Legal intervention regarding the conduct of a standard-essential patent owner must be undertaken carefully and should not deviate from the realities of the relevant markets; otherwise, this will discourage businesses from actively innovating and participating in standard-setting activities.

This update covers the basics on standards, standardisation organisations and standard-essential patents, and summarises the anti-monopoly regulation system in China for activities relating to standard-essential patents. It also addresses several important issues concerning the application of law, including specific considerations and best-practice recommendations for businesses.

Standards and standard-setting organisations

A standard is a common set of characteristics for a particular good or service. Technology standardisation, for example, can promote compatibility and interoperability of products produced by different manufacturers, thus reducing costs, increasing efficiency and facilitating follow-up innovation.

In China, the administrative department for standardisation under the State Council sets certain national standards. For industries in need of a unified standard, the relevant administrative department under the State Council will be responsible for developing the standard. Where there is no national or industrial standard for an industrial product in terms of health and safety requirements, but a need to standardise such requirements within a province, autonomous region or municipality, the administrative department in charge of standardisation for the relevant province, autonomous region or municipality will be directly responsible for setting such local standards.

In many industries, standard-setting work is largely undertaken by standard-setting organisations comprising various entities, through cooperative mechanisms. Such standards are known as 'cooperative standards'. For example, in the communications sector, many different technologies were initially developed and applied at national and regional levels, leading to a high degree of incompatibility among communications devices. With the rise of globalisation and increasing consumer demand for interoperability and compatibility, the sector developed an urgent need to standardise the technology. As a result, international and regional standardisation organisations for this sector were established in quick succession and remain particularly active.

For example, the International Telecommunication Union, founded in 1865 and headquartered in Geneva, has set the international general rules governing telegraph, telephone, wireless and satellite communications services. The 3rd Generation Partnership Project (3GPP) was founded in 1998 and its members include the European Telecommunications Standards Institute (ETSI), the Association of Radio Industries and Businesses and the Telecommunication Technology Committee (both based in Japan), the China Communications Standards Association, the Telecommunications Technology Association of South Korea and the Alliance for Telecommunications Industry Solutions for North America. The 3GPP was responsible for formulating the Time Division Synchronous Code Division Multiple Access and Wideband Code Division Multiple Access (WCDMA) standards.

Standard-essential patents and competition concerns

Enterprises participating in the standard-setting process tend to apply for patents for their technologies in order to gain a competitive edge. Their patented technologies become standard-essential patents upon inclusion in the relevant standards.

A 'standard-essential patent' refers to a patent that must be used to implement a technical standard. As cited in the ETSI IP Rights Policy, "where a standard can only be implemented by technical solutions, all of which are infringements of [IP rights], all such [IP rights] shall be considered essential". For example, a mobile phone that can connect to the WCDMA network must be equipped with the technologies (ie, patents) contained in the WCDMA standards. Therefore, manufacturers of mobile phones in compliance with WCDMA standards are bound to infringe the standard-essential patents contained in the WCDMA standards, unless they obtain licences from the patentees.

Despite the increased efficiency brought by standardisation, competition concerns frequently arise because there is no alternative to the relevant patented technology included in a standard. After the relevant patent has been included in a standard, the standard-essential patent owner may to a large extent file suit for patent infringement and seek compensation for damages. This not only unreasonably eliminates from the outset all competition with technologies relating to other standards, but also inhibits implementation of the standard, thus conflicting with the initial purpose of improving efficiency by setting standards and ultimately harming the interests of standard implementers and consumers.

Moreover, before or in the course of the standard setting, there may be multiple competing technologies that can achieve the same functions in the market; however, once the standard has been set and promoted – and there is no other competitive standard in the market – the standard-essential patent owner may obtain certain market power, or even market dominance. Such market dominance mainly comes from the standardisation, which intensifies and reinforces the 'essential' nature of the relevant patent. While promoting a standard, the relevant market entities may have invested substantial sunk costs in implementing it and are thus confined to producing products in line with the standard; if the relevant manufacturers intend to produce products in line with the standard, their only option is to obtain a licence from the standard-essential patent owner. After gaining market power, standard-essential patent owners may be motivated to eliminate or restrict competition and are likely to do so. For example, they may charge exorbitantly high patent fees, refuse to grant licences, practice tie-in sales or add unreasonable trading conditions to patent licensing.

In light of these competition concerns, a comprehensive analysis should be made under the framework of the Anti-monopoly Law with regard to the actual patent licensing situation, market competition status and other factors. Major international standard-setting organisations generally set their own IP rights policies, requiring their members to:

  • disclose in a timely manner the standard-essential patents that they or other parties own; and
  • grant licences based on fair, reasonable and non-discriminatory (FRAND) terms and conditions with respect to their standard-essential patents, so as to keep the abovementioned concerns from becoming actual barriers to competition.

Therefore, it is necessary to consider the realities of market competition as well as the implementation status and influence of the standard when assessing the legality of standard-essential patent-related behaviours under the framework of the Anti-monopoly Law; neither stiff anti-monopoly intervention based on speculative competition concerns nor disproportionate corrective measures should be taken. Otherwise, the intervention or correction will deal a severe blow to businesses in terms of innovation drive, weaken innovative competition and – in the long term – impede efforts to improve consumer satisfaction.

Standard-essential patents under anti-monopoly regulations

Although IP rights are legitimate monopoly rights granted to rights holders for a given period, IP rights-related acts have not been fully exempted from anti-monopoly laws in many jurisdictions, including China. Article 55 of the Anti-monopoly Law provides:

"This Law shall not be applicable to the exercise of intellectual property rights in pursuant to the laws and administrative regulations relevant to intellectual property rights; however, if an operator misuses its intellectual property rights in order to eliminate or restrict competition, this Law shall apply."

The Anti-monopoly Law neither denies the rights granted under IP laws and regulations, nor does it exempt IP rights from regulation. However, Article 55 draws a clear boundary for those IP rights-related acts subject to the Anti-monopoly Law. That is, the law applies not to the legal exercise of IP rights, but rather to the improper exercise (ie, abuse) of IP rights with the aim of eliminating or restricting competition. Therefore, whether an IP rights-related act eliminates or restricts competition is the key factor in deciding whether the Anti-monopoly Law should intervene in the relevant act.

In addition, the Anti-monopoly Law sets out no special rules for anti-monopoly regulation of standard-essential patent-related behaviours, so analysis should be undertaken within the law's general legal framework. The most common standard-essential patent-related behaviours are unilateral actions on the part of the standard-essential patent owner, subject to the relevant provisions of the Anti-monopoly Law on the abuse of market dominance.

A standard-essential patent owner will be deemed to have abused its market dominance if all of the following conditions are met:

  • The standard-essential patent owner holds a dominant position in the relevant market.
  • The standard-essential patent owner has committed an act of abuse in the sense of the Anti-monopoly Law.
  • There are no reasonable grounds for the abuse.
  • The abusive behaviour eliminates or restricts competition.

In determining whether withholding a licence constitutes abuse of market dominance, an additional condition applies: the standard-essential patent must constitute the essential facility. This is because, at the jurisprudential level, a patent right is a legitimate monopoly granted by law to the patentee, and its creator and investor may exclusively enjoy the relevant interests brought by the patent right for a certain period. In extremely exceptional cases, the owner of a facility that cannot be reproduced by the usual innovative approach and investment will – if market competition will be eliminated or restricted due to competitors' failure to acquire said facility – be required to share the facility with competitors. Most jurisdictions set strict standards for the recognition and application of essential facilities.

The State Administration for Industry and Commerce Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Exclude or Restrict Competition stipulate that the following conditions must be met in order for IP rights to be recognised as essential facilities:

  • There are no other reasonable substitutes for the intellectual property in the relevant market and the intellectual property is essential for other operators to participate in the relevant market.
  • Refusal to license the IP rights will have an adverse impact on competition or innovation in the relevant market, and will harm consumer interests.
  • Licensing the IP rights will not cause unreasonable harm to the operator.

Application of law

Whether a standard-essential patent owner necessarily holds a dominant market position

In Huawei v IDC the Guangdong Higher People's Court held that each standard-essential patent licensing market of IDC in its 3G wireless communication technology standards (in both China and the United States) constituted a separate relevant market. When IP rights and standards converge, if a manufacturer wishes to produce products that meet the standards, using the standard-essential patent is essential and unavoidable; thus, the standard-essential patent owner may come to hold a level of market dominance which exceeds that envisaged for patent owners. IDC – as the only supplier in the relevant standard-essential patent licensing market – had full market share in each standard-essential patent licensing market for 3G standards, so it definitely had the ability to impede the entry of other operators into the relevant markets. It therefore held a dominant market position in the relevant standard-essential patent licensing markets.

However, with Huawei v IDC in mind, is it correct to conclude that standard-essential patent owners inevitably hold a dominant market position in each standard-essential patent market?

This conclusion is problematic. As mentioned above, the Anti-monopoly Law contains no special rules governing IP rights and the definition of the relevant market must be undertaken with regard to supply and demand substitution, in accordance with the Guidelines of the Anti-monopoly Commission under the State Council on the Definition of Relevant Markets. For example, even if a patent is indispensable to meeting certain standards, it should not constitute a separate relevant market if one or more competitive technical standards exist on the market. If the relevant standards have smaller market shares or if there is little market demand for them, the standard-essential patent owner should not be considered as holding a dominant market position.

Where a standard-essential patent constitutes a separate relevant market, the patent owner may not hold a dominant market position due to certain other factors. First, in a set of technical standards, there are often hundreds or even thousands of patents, but the importance of each can vary considerably. In general, it is difficult for a patentee to obtain a dominant market position by virtue of a patent which is of lesser technical importance to the standards and downstream products.

Second, the speed of the evolution of standards varies from industry to industry. If existing standards in a certain industry are replaced by a new generation of standards relatively quickly, the owner of a standard-essential patent relating to the existing standards will be restricted by potential innovative competition to a large degree, and it will therefore be difficult for the patent owner to obtain a dominant market position by virtue of the standard-essential patent.

Third, the realities of patent protection and licensing may also make it impossible for the standard-essential patent owner to obtain a dominant market position. Technology relating to standards is open to the public and, in practice, a number of standard implementers have long produced standard-compliant products without permission. However, the high cost of patent rights enforcement, the general procedural restrictions on injunctive relief, potential licensors' delaying tactics and other practical factors often create a sort of 'reverse patent hold-up'.

Fourth, the possibility of cross-licensing among competitors (among other factors) may also restrict the exercise of the standard-essential patent owner's rights.

Bearing these limitations in mind, it becomes apparent that standardisation does not necessarily equate to a dominant position. When assessing whether a standard-essential patent owner holds a dominant market position in accordance with Anti-monopoly Law enforcement and judicial practice, a variety of factors should be considered, including:

  • the substitutability of the relevant standards and patented technology;
  • the speed of the evolution of the relevant standards;
  • the possibility and difficulty of a standard implementer turning to other technical standards;
  • the realities of patent protection and licensing; and
  • the feasibility of a patent owner exercising its rights.

Abusive patent licensing

Article 17 of the Anti-monopoly Law provides that business operators which hold a dominant market position are prohibited from engaging in the following abusive practices:

  • selling commodities at unfairly high prices or buying commodities at unfairly low prices;
  • selling commodities at a price lower than their cost without justified reasons;
  • refusing to trade with relevant trading counterparts without justified reasons;
  • restricting trading counterparts to trading only with said operator or its designated operator without justified reasons;
  • conducting tie-in sales without justified reasons, or adding other unreasonable conditions to the trading;
  • discriminating against trading counterparts of the same qualifications with regard to transaction price (or other factors) without justified reasons; and
  • other practices determined by the Anti-monopoly Law enforcement authorities under the State Council to constitute abuse of dominant market position.

Practices such as setting excessive licensing fees, conducting mandatory tie-in sales and adding unreasonable trading conditions to patent licensing often cause controversy. Compared to traditional markets, the patent licensing market is more complex; in terms of reducing the likelihood of patent disputes, as well as transaction costs and other internal costs, patent licensing practices must have a higher degree of flexibility. Therefore, in assessing whether licensing practices constitute abuse under the Anti-monopoly Law, the rule of reason should be applied to take full account of their special nature.

Charging excessive licensing fees is the most common issue in Anti-monopoly Law enforcement and judicial practice relating to standard-essential patents. Implementers of technical standards, driven by the intrinsic motivation to minimise costs, often challenge standard-essential patent owners' use of terminal equipment as the calculation base for licence fees; instead, the standard implementers often propose to use the smallest sellable practising patent unit (SSPPU) as the basis for calculating licence fees. However, careful analysis should be undertaken when determining whether calculating the licensing fee using the SSPPU is practicable and reasonable, with particular regard to the following factors:

  • The SSPPU of a standard-essential patent may not always be clearly defined. For example, the technical innovation contained in a standard-essential patent (especially those for communications technologies) may have added value to multiple components or even the interface between different entities – if the SSPPU is defined as a component in such cases, the value of the standard-essential patent may be underestimated or reduced.
  • To reduce transaction costs, patentees often grant licences for an entire patent portfolio, which may include hundreds of patents. In such cases, defining the SSPPU for each patent not only entails an enormous workload for the patentee, but may also – where the patent contributes value to multiple constituent parts of products – trigger disputes between the licensor and the licensee and decrease efficiency.
  • As long as the patent licence fee is fair and reasonable, the standard-essential patent owner's calculation method should not be restricted. Standard-setting organisations often require their members to grant standard-essential patents on FRAND terms; the Anti-monopoly Law also prohibits operators with a dominant market position from selling goods at unfairly high prices. However, both the terms set by standard-setting organisations and the Anti-monopoly Law relate to the final licence fee, rather than the calculation thereof.
  • When using government authorities to assess the reasonableness of a licence fee, care should be taken to avoid their undue influence on market competition. Simply speaking, law enforcement and judicial organs are not operators in the relevant markets; as they cannot fully understand the perspective of market operators, their assessment of fair prices can have negative, distortive effects.

Therefore, in assessing whether use of complete equipment as the calculation base for the licence fee violates the Anti-monopoly Law, full consideration must be given to the particularities of the relevant licensing practices, the legitimate grounds for their use and the competition situation in the relevant market.

Vigilance against expanded scope of standard-essential patents

As the name implies, a standard-essential patent is based on the existence of a specific standard; since the relevant patent is required to implement the standard, it becomes a necessity for potential standard implementers. In other words, no matter how important competitors believe a patent is, it should not fall under the regulation of the Anti-monopoly Law if it is not integral to implementing such a standard. This is because – given the essential attribute of patent rights as private rights – deciding whether to trade, with whom to trade and on what conditions to trade is a legitimate right of the patentee and should not be subject to restrictions in principle.

However, when a technology is developed into a standard, competition concerns may arise. For example, the standard-essential patent owner may unreasonably raise patent licence fees in order to earn monopoly-grade profits, resulting in an ex post patent hold-up. Based on such competition concerns, standard-essential patent owners are usually required to license their patents on FRAND terms.

A patentee may independently choose whether to include a patent in a standard; in deciding to do so, the patentee will be subject to various restrictions and accompanying inconveniences. Even if the patent is very important, the patentee is nonetheless still within its rights not to include the patent in the standard; the Anti-monopoly Law enforcement and judicial organs have no right to intervene in this decision.

Potential licensees have a natural motivation to expand the scope of standard-essential patents to maximise their commercial value and importance. In law enforcement and judicial practice in China, Europe, the United States and other major jurisdictions, antitrust law is most commonly applied to IP rights in relation to standard-essential patent-related behaviours. Expanding the scope of standard-essential patents at will and applying antitrust regulations to non-standard-essential patents are ultimately detrimental to IP rights protection; from a long-term perspective, such actions may inhibit innovation and efficiency, and ultimately damage general public welfare. Therefore, further expansion of the scope of standard-essential patents should be strictly avoided.

Comment

Despite a degree of natural conflict between antitrust law and IP law, both regimes aim to promote competition and innovation, increase efficiency and safeguard the interests of consumers and general public welfare. Excessive and improper application of the Anti-monopoly Law curbs IP innovation and competition, which conflicts with the fundamental principle of freedom of contract and the legislative intent of the Anti-monopoly Law. Therefore, Anti-monopoly Law enforcement and judicial organs should take particular caution with respect to standard-essential patent-related behaviours. Rational analysis should always be undertaken in assessing each case, with particular regard for the competition situation in the relevant market, among other factors. At the same time, calls to expand the scope of standard-essential patents should be fiercely opposed, so as to prevent the Anti-monopoly Law from becoming a means for competitors to gain undue advantages.

For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.?

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