Several of my recent posts have focused on the third prong of standard and SEP analysis: the competition law aspects (see e.g. Back to Basics – An Overview of Competition Law, Standard Development and Standard Setting). The Chinese government also has been contemplating how SEP related issues should be addressed under the competition laws and has just released new Anti-Monopoly Guidelines for Standard Essential Patents (Notice of the State Administration for Market Regulation on Printing and Distributing the Anti-Monopoly Guidelines for Standard Essential Patents – “Guidelines”) along with an Interpretation of the Anti-Monopoly Guidelines for Standard Essential Patents (Interpretation of the Anti-Monopoly Guidelines for Standard Essential Patents – “Interpretation”).[1]
Although these Guidelines are “not mandatory,” they are a significant indication of how the Chinese competition authorities and courts will view certain behaviors. They evidence an increased focus by the Chinese government on using the competition laws to regulate standard setting and SEP licensing behavior.
According to the Interpretation, there is an “urgent need to protect fair competition in the market” and to “prevent and stop the abuse of SEPS.” In order to do so, the government released the new Guidelines with the goals of “enhancing the pertinence and operability of the system, enhancing the stability and transparency of anti-monopoly supervision and law enforcement, regulating and guiding fair competition in the industry, and forming a policy and institutional environment that encourages innovation.” The Guidelines seek to balance the interests of SEP holders and implementers by establishing a “whole chain” system that regulates behavior before, during and after standard setting.
The Guidelines contain 22 chapters. What follows is an overview of what is included.
Increased Oversight of SSOs and Patent Pools
The Guidelines make clear that the Chinese government intends to increase oversight of the standard development and adoption process, as well as certain down the line processes such as patent pools. Article 5 of Chapter 1 is titled “Strengthening supervision before and during the process.” It emphasizes that standard setting organizations and operators of patent pools (among others) need to self-police to guard against monopoly risks. If there is a risk of excluding or restricting competition, such operators should report their concerns to the antitrust agencies and accept supervision and guidance. Regardless of acceptance of such supervision, however, the antitrust authorities can step in to “propose improvement measures” and to supervise pre-event and during event behaviors. The Article also emphasizes that everyone has the right to report potential anti-competitive behavior to the antitrust authorities.
Article 9 of Chapter III is titled “Monopoly agreements in the process of standard formulation and implementation.” It contains a list of the types of behavior that may incur increased scrutiny (or intervention) from the competition authorities during development and adoption of a standard. These include:
Exclusion of entities from development without legitimate grounds;
Exclusion of proposals without reasonable grounds;
Agreements not to implement other, competitive standards; and
Unjustified restrictions on certification and testing of implementation.
Article 10 of Chapter III is titled “Monopoly agreements involving joint operation of standard essential patents.” It relates to patent pools and also contains a list of the types of behavior that may incur increased scrutiny from the competition authorities (or intervention) if undertaken by different SEP owners in the pool or by the pool’s management. These include:
Sharing of “sensitive information related to competition” such as price or output volume or an attempt to engage in market segmentation by SEP owner(s);
Restrictions on which SEP holders can participate in the pool or on which SEPs can be licensed through the pool;
Restrictions on independent licensing by SEP holders who participate in the pool; and
Entry by the pool management into non-FRAND agreements or help from the pool’s management to enable pool participants to enter into such agreements.
Requirements for Disclosure, and Good Faith FRAND Licensing, of SEPs
Chapter 2 (Articles 6 – 8) focuses on disclosures and good faith negotiations. The chapter has very few hard and fast rules. Instead, it has a number of conditions that need to be considered to determine whether the competition laws have been violated, e.g. it is akin to guidelines for something like a rule of reason or equitable balancing analysis. These factors include whether and to what extent a SEP owner has disclosed the relevant patents to the SSO; whether the SEP owner has undertaken to negotiate on FRAND terms; whether a SEP owner who has assigned its SEPs to another entity has disclosed to them the FRAND requirements and whether that entity has undertaken to license on FRAND terms.
Article 8 of the Guidelines include parameters on what a SEP owner and standard implementer has to do in order to be considered to have negotiated in good faith (e.g. to be what in European terms would be called a willing licensor and willing licensee). These procedures include but are not limited to:
The SEP owner making a clear offer to the implementer which should include the list of SEPs, an infringement chart against the standard for a “reasonable” number of such SEPs, a rate and the method and basis for calculating such rate. The offer must give the implementer a reasonable response period.
The implementer must express a good faith intention to obtain a license within a reasonable period of time or give justifiable reasons why it will not.
The SEP owner must propose FRAND licensing terms including the term of license, scope of use and geographical scope. Article 11 makes clear that licenses that include restrictions on price, quantity, geographical scope or quality of products or which restrict implementers from developing competing technologies may be considered to be monopoly (e.g. non-FRAND) agreements.
The implementer must accept the offer in a reasonable period or propose alternative FRAND licensing terms.
Market Dominance by SEP Holders, Unfair and Discriminatory Licensing Practices
Chapter IV (Articles 12 – 16) describes licensing practices that may constitute an “Abuse of Market Dominance” by SEP holders. Article 12 describes how to determine whether a SEP holder has a dominant position in the relevant market. The focus of Article 12 is primarily on the standard itself and the role of the standard and the role SEPs play in the standard rather than on the individual SEP holder.
"Under normal circumstances, when there is no substitute for the standard itself, the SEP owner occupies the entire market share in the SEP licensing market held by the standard, unless there is sufficient evidence to overturn it . . . [Another factor is] The degree to which the downstream market is dependent on SEPs. It mainly includes the evolution of the corresponding standards, substitutability and conversion costs. [You should also consider] the degree of difficulty for other patentees to enter the licensing market. It mainly includes the possibility of substitution of SEP technology, etc."
In other words, if the downstream market is dependent on a standard, if it is hard to substitute the patented technology in the standard for different technology and if there is no currently viable substitute for the standard or it would be expensive or difficult to switch, it is likely that every SEP holder will be considered to have a dominant position in the relevant market.
Once a SEP holder has been determined to have a dominant position in the relevant market, the SEP holder must abide by anti-monopoly practices. The remainder of the Chapter describes varies types of monopoly practices.
Article 13 emphasizes that getting or demanding unfairly high licensing fees may, in and of itself, be considered to be anti-competitive behavior. Article 14 states that absent justification, a refusal to license “any standard implementer who is willing to obtain a license” may constitute unfair practices. In other words, China has come down squarely on the side that the FRAND obligation requires SEP holders to license at all levels of the value chain. Article 15 says that tying a SEP license to a non-SEP license can be anti-competitive.
Article 16 is a grab bag of behaviors that may constitute monopoly behavior by a SEP holder. These include:
Requirements for the implementer to cross-license their patents, particularly if no compensation is given by the SEP holder;
Restrictions on challenging validity and essentiality;
Restrictions on dispute resolution mechanisms or geographical locations of dispute resolution;
Restrictions on development of competing technology; and
Unreasonable requirements for the implementer to disclose confidential information that is not relevant to the licensing issues.
Finally, Article 17 makes clear that the “Non-Discrimination” aspect of the FRAND commitment has some bite, at least in China. Article 17 provides that SEP holders may, in some circumstances, offer different license terms based on the “actual situation of the implementer, the trading habits of the region, and the level of economic development.” But, differential treatment may constitute an abuse by a SEP holder of its dominant market position if the differential treatment is “without justifiable reasons.” The circumstances that will be considered without justification may include differential treatment of similarly situated implementers or whether “the differential treatment has a significantly unreasonable impact on the participation of the standard implementers in market competition.”
Oversight of the Patent Acquisition Market
Chapter V (Articles 19 and 20) deals with “Concentration of undertakings involving standard essential patents.” Although a bit hard to understand in translation, the gist of this Chapter is that transactions in which SEPs change hands will be scrutinized under the Anti-Monopoly Law. Such transactions may require a declaration to the authorities in a similar manner as for company mergers or acquisitions if they result in a “concentration of undertakings.” If a declaration is not made or not approved, the transaction may not go forward.
The Guidelines also state that a declaration may be required even if the transaction does not meet the notification requirements of the Provisions of the State Council on the Criteria for Notification of Concentration of Undertakings if it has the effect of eliminating or restricting competition.
Conclusion
The Guidelines indicate an increased willingness by the Chinese regulatory authorities to exam standard development and SEP licensing issues much more closely. I expect we will see even more focus and more activity around these issues from China as the courts and regulators start to apply these new Guidelines. Whether or not one agrees with the substance of the Guidelines, it is clear that China accurately understands that these are critical issues to Chinese businesses and that they must be addressed in order to protect and grow the Chinese economy.
[1] I have used Google translate to obtain an English language version. I also looked at this translation: Notice of the State Administration for Market Regulation on Issuing the Anti-monopoly Guidelines for Standard Essential Patents_State Council Department Documents_China Government Network. My quotes and titles of sections are from these sources but, of course, these are informal translations and caution should be exercised if a precise translation is needed.