Attached are the English and Chinese comments of George Mason’s University Global Antitrust Institute (GAI) on the draft NDRC Guideline on Abuse of Intellectual Property Rights.  The comments were prepared by Koren W. Wong-Ervin, Professor Joshua Wright, Judge Douglas Ginsburg, and Professor Bruce Kobayashi.

I previously distributed on this blog the GAI’s response to the NDRC questionnaire here. Overall, these additional comments of GAI urge the NDRC to recognize throughout its Draft Guideline an IPR holder’s core right to exclude as a “legitimate” or “legal” use of IPRs, and to incorporate the “but-for” approach taken by the U.S. antitrust agencies of comparing the competitive impact of the IPR use against what would have happened in the “but for” world in the absence of a license.

The GAI’s comments also focused on the issues of applying “unfairly high price” prohibitions on IPR royalties. The GAI asked the NDRC to 1) explicitly recognize that “reasonable” compensation should reflect the risk-adjusted break-even price; and (2) state that, in determining whether a particular royalty is “unfairly high,” the NDRC will calculate a reasonable royalty as a minimum floor baseline using the hypothetical negotiation framework from U.S. patent damages law. The patentee should have the opportunity to prove, in addition, its lost-profits as part of its damages, which would seem to be equal to the profits denied by the “unfairly high” pricing provision.  GAI emphasized that the goal of a reasonable royalty calculation is to replicate the market reward for the invention in the absence of infringement, and explained that comparable licenses are often the best available evidence of the market value of the patent. The comments also discuss use of the “Georgia-Pacific” methodology to help determine minimum rates for what a willing licensee and a willing licensor would otherwise have negotiated if an unfair pricing calculation is to be applied.

The comments also consider complex portfolio licensing by urging NDRC not to unduly take into account whether some expired patents are included in a portfolio. The commenters suggest that it would be impractical, if not impossible, for portfolio owners to constantly renegotiate licenses (or provide updated patent lists) every time an IPR in a licensed portfolio expires or, conversely, every time new IPR is added to the portfolio, both of which occur commonly.  As GAI notes, portfolios include patents with a variety of expiration dates and the parties to the license take the variety of expiration dates into account when negotiating a price.   Moreover, patent claims may change due to reexaminations, court and administrative proceedings, which can affect how they read on a particular technology over time.   In my own experience, most licensees are seeking freedom to operate from parties asserting patents, rather than a technical solution found in the patent itself.  Indeed, former Chief Judge Rader at a recent conference hosted by SIPO noted that one of the biggest differences he saw between being a judge and a private practitioner is that judges (and enforcement agencies) may look at litigation as patent-based or even claim-based, while the real commercial world is concerned with portfolios and freedom to operate considerations  I would add one other factor that the comments don’t mention involving licensing expired patents – the patents may still have some litigation value and considerable commercial value post expiration if relevant statute of limitations have not expired. In many cases, such as pharma patents, the principal value is to be found towards the end of the patent term. Moreover, if global licenses are entered into, longer statute of limitations in countries like the United States, (six years versus two years in China, and ten years in many other countries) should necessitate that Chinese licensees actively consider taking licenses on expired patents up until the relevant statute of limitations’ expiration.

The drafters also suggest rejecting that a refusal to license constitute an abuse of IP, noting that a patent exhaustion doctrine could also make refusals to license difficult to apply since licensors may choose to license its patents to a manufacturer, user or distributor.

The comments also suggest a cautious approach, using an effects analysis, in looking at discriminatory analysis. My own personal perspective is that China’s regulatory regime insures that non-discriminatory licensing is almost impossible to universally achieve. More specifically, there will likely be a certain amount of discriminatory licensing, as foreign licensors to Chinese licensees have to provide indemnities, non-mandatory grantbacks and access to markets under Chinese law which they will not need to provide elsewhere, or which Chinese licensors do not need to provide in their own domestic market or to foreign licensees.

The commenters also suggest that that “the NDRC not impose an AML sanction for merely seeking injunction relief” when a standards essential patent is involved, or at worst only deny injunctive relief when the licensor seeks “supra-competitive” royalties, i.e., is engaged in patent hold-up by seeking royalties that are not consistent with prior commitments by the SEP holder. Finally, the commentators direct NDRC to consider as a last alternative adopting a rule similar to the European Court of Justice decision in Huawei vs. ZTE. That case would provide a safe harbor for an SEP holder seeking an injunction that (1) prior to initiating an infringement action, alerts the alleged infringer of the claimed infringement and specifies the way in which the patent has been infringed; and (2) after the alleged infringer has expressed its willingness to conclude a license agreement on FRAND terms, and presents to the alleged infringer a specific, written offer for a license, specifying the royalty and calculation methodology.  The ECJ would then put the burden on the alleged infringer to “diligently respond” to that offer, “in accordance with recognized commercial practices in the field and in good faith,” by promptly providing a specific written counter-offer that corresponds to FRAND terms, and by providing appropriate security (e.g., a bond or funds in escrow) from the time at which the counter-offer is rejected and prior to using the teachings of the SEP.  This approach is necessary to take into account the conduct of both the patentee and the accused infringer when considering whether to impose an AML sanction and is especially useful in the Chinese context where the data suggests there is a high degree of under-licensing.

The GAI also provided comments on numerous other provisions, such as refusals to license, the essential facilities doctrine, bundling, cross-licensing, grant backs, and no-challenge clauses.

Thanks to GAI for making these comments publicly available. Distributing comments such as these, when affected parties may be unaware of the opportunity to comment, and in order to encourage more informed public discourse.