Boundaries between fair use and abuse of IP rights

By Zhao Ping and Frank Liu, Jincheng Tongda & Neal
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The legislative intent of intellectual property (IP) law is to encourage and protect innovation, and confer legal rights on IP rights owners to restrict others from using their IP, as well as charge a licence fee. However, it may impede fair competition and technological innovation if we go beyond these boundaries to exercise these rights. As for IP rights owners, a question worth considering is how to identify the boundary between proper exercising of rights and abuse of rights, and how to appropriately and fully exercise their rights.

ZHAO PING Senior, Partner, Jincheng Tongda & Neal
ZHAO PING
Senior Partner
Jincheng Tongda & Neal

In recent years, it’s noticeable that China has strengthened its protection of IP rights, and many of the major laws have been amended several times, or are under continuing revision. However, there are few regulations or rules that specifically target abuse of IP rights. In addition to IP provisions under the Anti-Monopoly Law (AML), the effective law concerning abuse of IP rights is the State Administration for Industry and Commerce’s (SAIC) Pro-visions on Prohibiting the Abuse of Intellectual Property Rights to Preclude or Restrict Competition.

There are other laws not yet in force, including the Guidelines on Anti-Monopoly against Abuse of Intellectual Property Rights (Draft for Soliciting Opinions) drafted by the National Development and Reform Commission (NDRC) and the Guidelines on Anti-Monopoly Enforcement Against Abuse of Intellectual Property Rights (seventh draft of the SAIC).

Currently, AML enforcement agencies mainly include the SAIC, NDRC and Ministry of Commerce (MOFCOM). The SAIC mainly supervises monopolistic conduct, not involving price, that abuses dominant market position to implement tie-in sales or impose other unreasonable conditions. The NDRC supervises monopolistic conduct involving price, and MOFCOM mainly monitors concentration of business operators. In practice, there are overlaps concerning the law enforcement authority of these three agencies.

In terms of IP rights, enterprises may need to pay more attention to the SAIC and its authorized provincial administrations for industry and commerce. The main reasons are: (1) the SAIC has extensive experience in handling IP cases, for historical reasons; (2) the provisions, the existing effective IP law, are formulated and implemented by the SAIC; and (3) in terms of the most influential IP cases, investigation of the pending Microsoft case and Tetra Pak case was initiated by the SAIC.

DEFINITION OF RIGHTS ABUSE

According to the provisions that are already implemented, and the guidelines that have not yet been implemented, abuse of IP rights refers to the behaviour of IP rights owners that go beyond the boundaries and purposes of their rights, and improperly exercise these IP rights, thus harming the interests of others as well as public interests. In principle, administrations for industry and commerce analyze and determine the behaviour in accordance with the provisions concerning monopoly agreements and abuse of dominant market positions under the AML.

FRANK LIU, Partner, Jincheng Tongda & Neal
FRANK LIU
Partner
Jincheng Tongda & Neal

But in practice, full account is taken of the particularity of IP, for example, technical and economic characteristics of IP, whether it is likely to generate a beneficial impact on innovation and efficiency, the cost and degree of difficulty of alternative IP, and whether IP is the necessary facility for relevant business operators to enter into the downstream market.

It’s noteworthy that the “safe harbour rule” concerning monopoly agreements is established under the provisions. IP licensing is very common in the market, but blind licences under large market share circumstances may become monopoly agreements under the AML.

In terms of specific judging criteria, safe harbour rules set 20% and 30% of market share for horizontal and vertical agreements, respectively, and specify the areas of concern of law enforcement authorities, which enables IP rights owners to make preliminary judgments on business compliance and guides them to avoid exercising rights that have significant adverse impact on competition.

Exemption of monopoly agreements and mitigation of punishment are very important means of relief when IP rights are suspected to go beyond their legitimate scope. Moreover, the principle of essential facility and standard-essential patents (SEPs), and other new principles under the provisions, are also worthy of attention.

ABUSE CASES

The Qualcomm case (closed). In February 2015, the NDRC adjudicated that Qualcomm abused its market dominance, and imposed a penalty of RMB6.088 billion (US$912 million), which set the record for the largest anti-monopoly fine in China to date.

  1. Abusive behaviour included: abusing the dominant market position and charging unfairly high patent royalty fees (including charging royalty fees for expired SEPs and requiring free cross-licensing of the patent); tying the SEPs with the non-SEPs without justification; and imposing unreasonable trading conditions (articles 9 and 10 of the provisions)
  2. The penalties: illegal behaviour of abuse of market dominance to cease; and a fine imposed of 8% of Qualcomm’s total turnover in 2013.

The Microsoft and Tetra Pak cases (under investigation). The investigations of both cases were initiated by the SAIC in 2013, and both cases were involved in monopolistic and dominant behaviour, as well as behaviour to restrict market competition. The two cases may relate to article 9 of the provisions.

Enterprises need to consider many more aspects on how to fully exercise their rights and avoid possible cross-border issues as well. Apart from fully understanding the key industries and IP fields that law enforcement authorities are mainly concerned with, enterprises should be familiar with the considerations and judging procedures of law enforcement authorities in terms of ruling on the behaviour of abuse of IP rights to preclude or restrict competition, proactively seek professional support when legal risk appears, and make full use of safe harbour rules and special provisions on IP rights to actively seek exemption, mitigation or remission of punishments, thus ensuring maximum protection of interests.

Zhao Ping is a senior partner and head of the Shanghai office at Jincheng Tongda & Neal; Frank Liu is a partner at the firm

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