The Pushmi-Pullyu  of Chinese Anti-Suit Injunctions and Antitrust in SEP Licensing

In the movies and story Dr. Dolittle, a “pushmi-pullyu” is a mythical double-headed llama-like animal that lives in Tibet. It has two heads so that it can climb up Mt. Everest with one head pointing forward and climb down Mt. Everest with its other head pointing down. One head may sleep while the other looks for predators.  The four-legged creature also exhibits an inherent potential for conflict if its two heads struggle in opposite directions. 

In China today, a kind of pushmi-pullyu exists in China’s efforts to reduce overseas patent royalty payments. The two “heads” are, antisuit injunctions and antitrust.  In late 2020, it appeared that civil antitrust in SEP matters was on the wane.  China was pushing ahead to be a global center for ASIs. Since that time, domestic resistance to China’s use of ASIs has increased. By default, if not by plan, China is being pulled in an antitrust direction.

ASIs are on the Wane

I first wrote about the downward slope of ASIs in an article slated for publication later this year.  Among the indicia: Wuhan’s nascent role as a global leader in expansive ASIs appears to have been shut down; a Shenzhen court that declined to grant an ASI in favor of a Chinese company (Lenovo v. Nokia) back in January 2021 finally saw its case made publicly available on March 9, 2022, on the website of the SPC. Several Chinese academics published articles in the Chinese press criticizing China’s approach to ASIs in SEP litigation.  Moreover, such policy reversals are not unusual in China’s highly experimental IPR regime.  China’s experimental efforts to thwart licensing practices of foreign SEP holders date back over 20 years. Experimentation has an additional benefit of often making it difficult to impose meaningful remedies in WTO disputes.  As Harvard Prof. Mark Wu has noted, WTO cases can be especially difficult when China pursues legal approaches where WTO remedies are inadequate or weaker.  WTO engagement in antitrust is certainly less comprehensive than in intellectual property.

I personally prefer calling Chinese ASIs “extra-territorial Chinese behavior preservation measures” in accordance with the relevant provisions of China’s Civil Procedure Law. Calling them ASIs suggests that they are functioning similarly to foreign ASIs. There are numerous differences between Chinese and foreign practice in granting ASIs. Foreign ASIs are typically drafted with a view to minimizing friction with other courts through considerations of comity.  ASIs in common law jurisdictions also arose out of long domestic traditions of using courts of equity to address jurisdictional conflicts with other domestic or foreign courts. China’s ASIs, by contrast, are a legal tool used by a non-independent Chinese judiciary at the urging of China’s political leadership. They are also used exclusively to address foreign litigation, are highly non-transparent, have a limited legislative basis, and have no domestic application. 

Antitrust Law Is Pulling China in a Different Direction

The recent passage of China’s revised Antimonopoly Law (AML), effective August 1, is one sign of a resurgence of Chinese antitrust agencies in SEP rate setting.  One working day after the AML was enacted, six new rules were also released for public comment: (i) Provisions on Merger Control Review (《经营者集中审查规定(征求意见稿)》); (ii) Rules on Merger Control Filing Thresholds (《国务院关于经营者集中申报标准的规定(修订草案征求意见稿)》); (iii) Rules on Prohibition of Abuse of Dominance (《禁止滥用市场支配地位行为规定(征求意见稿)》); (iv) Rules on Prohibition of Elimination and Restriction of Competition through Abuse of IP Rights (《禁止滥用知识产权排除、限制竞争行为规定(征求意见稿)》) (the “IPR Abuse Rules”) ; (v) Rules on Prohibition of Elimination and Restriction of Competition through Abuse of Administrative Power (《制止滥用行政权力排除、限制竞争行为规定 (征求意见稿)》); and (vi) Rules on Prohibition of Monopoly Agreements (《《禁止垄断协议规定(征求意见稿)》).  IPO has graciously shared its comments on the IP rules, available here.  By comparison, China has yet to announce drafts of its copyright and patent law implementing regulations. The patent and copyright laws were promulgated in the first half of 2021. Some commentators have mistranslated them as “Regulations.” Agency rules are of more limited legal effect than State Council Regulations. The enactment of these rules however suggests sudden, politically reactive shifts to use of the AML in dealing with a range of antitrust matters.

The new AML provides clues to what the future might look like for AML regulation of international SEP disputes under a new legislative regime. The revised AML gives new strength to China’s AML enforcement. AS IPO notes, the revised IP Abuse rules delegate considerable discretion to the State Administration for Market Regulation (SAMR), the antitrust enforcement agency.  In addition, the revised AML provides for increased maximum penalties to 10% of annual revenue, allows the procuratorate to pursue AML civil cases, imposes liability on individuals responsible for corporate AML violations, and allows for punitive damages of two to five times maximum penalties. A five-times multiplier could result in penalties of up to 50 percent of annual revenue.

Under the revised law and proposed IPR Abuse Rules, SAMR can also now seek to penalize or enjoin companies that seek to use foreign courts in parallel litigation with Chinese entities.  According to Article 16 of the IPR Abuse rules:

A business operator with a dominant market position shall not engage in the following acts during the formulation and implementation of standards to exclude or restrict competition: …

3) In the process of licensing standard-essential patents, violate the commitment of fair, reasonable, and non-discriminatory licensing, and without a good faith negotiation procedure, unfairly request the court or relevant department to make or issue a judgment, ruling, or decision prohibiting the use of relevant intellectual property rights, forcing the licensee to accept unfairly high prices or other unreasonable restrictions….

In addition, Articles 21 and 22 of the IP Abuse rules permit the granting of an administrative order to cease perusing a judicial or administrative remedy, which would be an administrative ASI:

Where an operator abuses intellectual property rights to exclude or restrict competition to constitute a monopoly agreement, the anti-monopoly law enforcement agency shall order the cessation of the illegal act…

As with China’s behavior preservation remedies,  it is unlikely that a Chinese administrative agency will issue an ASI to a Chinese court. China’s lack of separation of powers ensures that neither the executive nor judicial branch is superior to each other, nor can they issue orders to each other in areas committed to their extensive respective discretion.  Conflicts between administrative agencies and the courts in IP are traditionally managed through coordinating bodies.  Article 11 of the revised AML also newly obligates administrative agencies and the judicial branch (which includes the procuratorate) to improve their coordination mechanism. 

There are nonetheless adequate regulatory, statutory, and historical bases for SAMR to impose extra-territorial anti-suit orders. Unlike China’s Civil Procedure Law, China’s AML already contemplates extra-territorial jurisdiction. Both the newly revised AML (Art. 2) and its predecessor govern “monopolistic acts outside the People’s Republic of China that have the effect of eliminating or restricting competition in the domestic market.”  Chinese antitrust agencies have also imposed extraterritorial remedies in the past, particularly in merger decisions. The lack of reference to an extraterritorial authority in the IP Abuse Rules is not determinative of the authority of SAMR to issue an extraterritorial order. China’s behavior preservation remedy in its Civil Procedure Law similarly fails to distinguish between domestic and foreign actions. An effort by SAMR to enjoin foreign court or administrative proceedings could become a fraught exercise, but it is also not an inconceivable one. 

What the Future Holds

I do not know what China’s leadership was thinking when it decided to reinforce its AML regime in this way. However, the regulatory “choreography” of rapid-fire rulemaking by SAMR after AML enactment suggests that enhancing AML enforcement in IP and related areas is a major priority for China.

China’s potential utilization of the AML in lieu of ASIs in FRAND rate setting also has certain strategic advantages over IP causes of action. Territoriality is less of a concern in antitrust. China’s AML emphasizes economic effects.  Although most countries have antitrust laws, an antitrust regime is not a prerequisite of the WTO or the TRIPS Agreement. As SEP litigation continues to spill over into smaller or developing markets, such as Indonesia, Brazil, and India, antitrust enforcement can be a potent asymmetrical tool that can be used to impose penalties against countries with weaker antitrust regimes or smaller markets. As noted, WTO disciplines on antitrust activity are also relatively vague and have hardly been used by WTO members. These disciplines are confined primarily to IP and certain general principles set forth in the TRIPS Agreement, particularly TRIPS Article 40. Considerations of validity or value of overseas patents are also less likely to be a factor if the Chinese agency has determined that the foreign licensor is acting in bad faith. Institutionally, Chinese AML authorities have also continued to show great willingness to take on complex and provocative international antitrust cases and make accused parties pay disproportionately higher damages in antitrust matters than are available in judicial IP disputes. In preparation for this article, I asked Dr. Deng Fei from Charles River Associates if she thought that ASIs were on the wane and the AML is ascending. With respect to the former question, she agreed that “Chinese courts are very cautious now towards SEP issues.” She also noted that “ …. with the newly revised AML and draft rules, there seems to be some revived enthusiasm (at least from private parties), but it is yet to be seen how that translates into actual actions by courts or by the administrative agency.”  Given the current legislative landscape, it is not inconceivable that foreign licensors may face an even more potent remedy than ASIs when they bring China-related SEP litigation outside of China soon. If a  Chinese court has determined that the foreign litigants were not acting in good faith, as determined by the Chinese court itself, the revised AML legislation offers the possibility of highly deterrent and punitive remedies against such activity and a further expansion of China’s administrative state into the regulation of IP rights.  

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