China State Administration for Industry and Commerce’s essential facility doctrine in new regulation sends warning to patent holders

15 April 2015

MLex China, MLex Staff

China's antitrust watchdog, the State Administration for Industry and Commerce, has officially introduced a landmark regulation on antitrust enforcement in the intellectual property sphere, but the adoption of an essential facility doctrine could threaten multinational patent holders.

The SAIC announced today that it officially passed the long-waited "Regulation on the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition", which will take effect on Aug. 1.

"It is a monumental move as it is the first time for Chinese regulators to publish an antitrust regulation on scrutinizing the intellectual property area", said Zhaofeng Zhou, a partner at Bird & Bird in Beijing.

The regulation prohibits market players who are exercising intellectual property rights from entering into monopolistic agreements or abusing market dominance through methods such as forcible bundling, restrictive trading, requiring exclusive grant-back of licenses and asserting invalid patents.

While the new regulation shows the regulator's approach on intervening in the IP sector, some lawyers said it offers limited actionable guidance as there are still a lot of uncertainties on the scope of its 'essential facility' language, and it did not provide clarity on the definition of a 'willing licensee'.

Essential facility doctrine

Despite some objections, the SAIC introduced a tough compulsory licensing requirement on essential facilities that requires patent owners with market dominance to license their IP rights mandatorily when the intellectual property is an essential facility.

"The most contentious issue is there are a lot of uncertainties" concerning the broad scope of the essential facility requirement, said a second antitrust.

lawyer

He said the recent regulatory trend has highlighted the increasing dilemma regarding the balance of protecting IP rights and antitrust requirements.

Article 7 of the new regulation specifies the factors that determine what an essential facility is. First, there must be no reasonable replacement for that IP, and it is essential for other licensees to compete in the relevant market. Second, refusal to license could have an adverse impact on competition and innovation, and impair consumer welfare and public interest. Third, licensing such IP rights would not cause unreasonable damage to the licensor.

The tough language maybe good news for some licensees but could pose a threat to multinational corporations, particularly those in patent-heavy sectors such as technology and pharmaceuticals.

FRAND terms

Article 13 stipulates that companies' refusal to license standard essential patents, or SEPs, under fair, reasonable and non-discriminatory (FRAND) terms could constitute a violation of the Antimonopoly Law.

SAIC officials have said the regulator would place strict conditions on the application, so that refusal to license SEPs would only constitute an antitrust breach in limited circumstances.

The agency also publicized its approach to assessing a company's competition impact, such as the market power of the operator and its trading partner, the market concentration situation, market entry barriers, industry specialty and impact on innovation and technology.

SAIC removes requirement against injunctions

SAIC has removed an article on the use of injunctions after feedback from the legal and business community.

SAIC proposed in previous drafts to prohibit business operators with dominant market position from abusive issuance of IP infringement letters to seek injunctions.

It is not clear how the SAIC will tackle the use of injunctions. Its sister agency, the National Development and Reform Commission, has said it places its enforcement focus on companies that seek injunctions on SEPs against willing licensees.

SAIC has been working on the IP antitrust legislation since 2009. The legislation comes amid heightened scrutiny of antitrust in the IP area in China, and suggests that Chinese regulators will get tough on patent licensing.

SAIC is currently investigating Microsoft in relation to issues such as compatibility, bundled sales and file verification regarding Windows and Office software

The NDRC has also been very aggressive in antitrust enforcement in the IP area.

It has investigated technology companies such as InterDigital and Qualcomm, and is probing multiple US and EU-based patent assertion entities, such as Vringo and Dolby Laboratories.

This article was first published by MLex market insight on 13th April 2015.