IMPACT OF RECENT AML LEGISLATION ON THE IPR/ANTITRUST INTERFACE

This blog provides an update on recent legislative developments involving the interface between IP and China’s Anti-Monopoly law. On November 28, 2019, SAMR published the Anti-Monopoly Compliance Guidelines for Undertakings (Draft for Public Comment) (“Draft Compliance Guidelines”) 经营者反垄断合规指南(公开征求意见稿), which according to SAMR is specifically intended to “encourage undertakings’ compliance with China’s Anti-Monopoly Law” 鼓励经营者合规经营. Comments were due on February 12, 2019.  On January 2, 2020, SAMR issued the Draft Amendments to China’s AML (Draft for Public Comment)反垄断法”修订草案 (公开征求意见稿) (“Draft AML Amendments”). Comments were due on January 31, 2020. These documents, along with the changes from the government reorganization coming China’s three antitrust agencies into one, may suggest new approaches to antitrust regulation and enforcement in the future in China. 

The ABA’s Antitrust Law and International Law Sections submitted comments to SAMR on the Draft Compliance Guidelines as well as the Draft AML Amendments. We welcome receiving comments that other organizations submitted on these proposed laws to publish or link on this blog.

According to the NPC Observer, the Draft AML Amendments are on the State Council’s calendar for the 13th NPC Standing Committee Legislative Plan. It is a priority Class II Project. According to the recent government reorganization, it would otherwise be expected that Ministry of Justice would prepare a draft of the AML revisions for consideration by the State Council which would then forward on to the NPC for three readings. This Draft AML Amendments appear to be an effort to ‘test the water’ or perhaps ‘jump start’ the revision process, as it is drafted at an earlier stage than the NPC calendar might otherwise require. China’s National Copyright Administration undertook a similar effort with the long-stalled copyright law amendments, by publishing its own draft for public comment, which eventually became a State Council draft for public comment in June of 2014.

From an IP perspective, there are several items that are worth noting: 

The first one is that Article 55 of AML (Article 62 of the Draft) stayed unchanged and there is no new IP-related content added to this draft amendment. This article provides:

“This Law does not govern the conduct of undertakings to exercise their intellectual property rights under laws and relevant administrative regulations on intellectual property rights; however, undertakings’ conduct to eliminate or restrict market competition by abusing (or misusing) their intellectual property rights are governed by this Law.”

Article 55 has been the subject of considerable discussion among academics and practitioners and is ambiguous in its scope, including the relationship between the legitimate exercise of an IP right and an anticompetitive act, the relationship with Contract Law and proposed Civil Code provisions on monopolization of technology, the difference between “IP abuse” and “misuse”, the impact of administrative rules 行政法规 and AML guidelines on Article 55, and ultimately whether the AML creates some kind of safe harbor against charges of monopolization.   

An example of the unsure relationship between the legitimate exercise of IP rights and competition law might be price-based claims for securing a license to a patent, which arguably restricts certain competition in the market but would otherwise constrain a patentee’s rights to license or charge prices as it sees fit (see, e.g., Art. 28 of the TRIPS Agreement, Arts. 65, 68 of Chinese Patent Law). Most high pricing cases to date in China have involved standards essential patents, where a FRAND commitment may be involved that arguably mitigates against letting market prices fully determine patent values. However, these cases may not take into account the lawful rights authorized by Chinese IP law including the right to charge market prices and to seek an injunction when a right is infringed, which is also arguably within the scope of AML Article 55/revision Article 62.

In a similar vein, the notion of essential facilities is not mentioned in both drafts, which means China may not be ready to fully support an essential facility doctrine in national legislation at this time. However, companies that manage IP assets, particularly in the standardization context, may still need to pay attention to this issue to minimize their IP risk related essential facilities claims/abuse of market dominance, particularly as the essential facilities doctrine continues to have an active influence in administrative enforcement and policy making, as well as in policy decisions involving SEP’s.

Article 20(6) of the Draft AML Amendments lists several types of abusive acts, including “discriminating among transacting parties on transaction conditions without justified reasons” (没有正当理由,对交易相对人在交易价格等交易条件上实行差别待遇).  The current AML additionally required that the discrimination arise from “identical circumstances” (or “an equal footing” in the MofCOM translation) as a condition to a claim of discriminatory pricing (Art. 17(6)). This may create additional uncertainty in IP licensing due to potential AML risks, because the reasons for removal of “identical circumstances” are unclear, the scope of what is a “justified reason” in a licensing transaction is also unclear, and IP licenses are typically not commodity or mass produced agreements but are custom-negotiated based on a range of factors including the role of any actual or threatened litigation, markets and market penetration, tax planning, any cross-licensing, etc. 

Article 14 of the Draft AML Amendments prohibits both horizontal and vertical agreements that “exclude or restrict competition” offers another possible distinction from the current AML.  Article 13 of the current AML requires a finding of “excluding or restricting competition” only with respect to horizontal monopoly agreements. While the courts have generally adopted a fact-based, rule of reason type approach to this issue, administrative agencies were more inclined to find such agreements vertical agreements illegal per se, subject to a few exceptions. This Draft AML Amendments clarify this issue, which could have an important impact on licensing transactions by requiring an analysis of competitive impact and would be more consistent with TRIPS Article 40, which regulates “licensing practices or conditions that … constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.” (emphasis supplied).

Two other provisions worth noting are Articles 18 and 21 of the AML Draft Amendments. Article 18 would tighten the requirements for receiving an exemption from an otherwise offending monopolistic agreement by requiring that it gives rise to efficiencies such as improving technology or improving research and development, that are “necessary” for the claimed efficiencies to be realized. The ABA has suggested that this language would require a “hindsight” type of analysis and that Article 18 be revised to soften this condition by requiring only that the agreement be “reasonably necessary” to achieve the claimed efficiencies.  

Article 21 lists factors that may be used to determine whether an undertaking has a dominant market position, and adds new additional factors for the Internet sector including network effects, economies of scale, lock-in effects, and data control and handling capabilities. The ABA has suggested that it is inappropriate to have industry specific legislation for the Internet sector, that these factors may equally apply to other industrial sectors, and that requirements of this type are best reserved for “implementing regulations or guidelines.” 

The Draft Compliance Guidelines, like other administrative rule makings are not mandatory and have no binding legal force. The Guidelines provide general guidance on anti-monopoly compliance of business operators. Most of its contents have already been stipulated in the previous Anti-Monopoly Law and related guidelines.   

Neither the AML Draft or Draft Compliance guidelines offer any specific guidance regarding management of patent pools, obtaining clearance from SAMR for a pool, or operation of a licensing regime.

The absence of more detailed consideration of IP issues in these two documents is rather surprising considering discussion in other venues. Although the US government complained about antitrust enforcement in China in the Section 301 investigation, noting that “several submissions asserted that Chinese AML authorities use the AML as a tool to advance industrial policy rather than to protect competition”, there were also no references to the AML in the Phase 1 Trade Agreement. Chinese courts have also been addressing issues regarding abuse of dominance and standardization through documents such as the Trial Adjudication Guidance for Standard Essential Patent Dispute Cases promulgated by Guangdong High People’s Court, and the Beijing High Court’s Guidance for Patent Infringement Determination. In addition, IAM has also recently reported that there is a significant increase in SEP-related litigation in China, including foreign vs. foreign and foreign vs. Chinese cases. China has also recently become an important venue for resolution of international SEP licensing disputes. Perhaps the wiser approach is to let these contentious cases be resolved one by one, rather than risk over-legislating in an evolving area where there has been considerable political attention.

Prepared by Mark Cohen and Xu Xiaofan

 

SIPO/IP Agencies to Be Reorganized and Consolidated

Several Chinese news agencies have reported on by the State Council, the proposed reorganization now being presented to the National People’s Congress, which will significantly rearrange all Chinese agencies, including IP agencies.

According to the plan, after the reform, the number of state-level ministries and commissions will be reduced by 8 and vice-ministerial agencies were reduced by 7.  State Councilor Wang Yong(王勇), who was formerly a Minister at AQSIQ (Administration for Quality Supervision, Inspection and Quarantine, 2008-2010) where he addressed tainted milk amongst other issues,  noted in introducing the changes to SIPO that “SIPO would be newly organized.  The creation, protection, utilization of IP will be strengthened as an important measure to speed up the establishment of an innovative economy.” The proposal includes combining trademarks and patents which are separately managed and have “redundant” enforcement authority.   These authorities will be combined with ASQISQ’s authority over Geographical Indications to establish a national State Market Supervision Adminsitration (国家市场监督管理总局) (“SMSA” for purposes of this blog).

Wang Yong’s statement in Chinese:

(九)重新组建国家知识产权局。强化知识产权创造、保护、运用,是加快建设创新型国家的重要举措。为解决商标、专利分头管理和重复执法问题,完善知识产权管理体制,方案提出,将国家知识产权局的职责、国家工商行政管理总局的商标管理职责、国家质量监督检验检疫总局的原产地地理标志管理职责整合,重新组建国家知识产权局,由国家市场监督管理总局管理。其主要职责是,负责保护知识产权工作,推动知识产权保护体系建设,负责商标、专利、原产地地理标志的注册登记和行政裁决,指导商标、专利执法工作等。商标、专利执法职责交由市场监管综合执法队伍承担。 

The creation of SMSA suggests that SIPO’s once lofty goal/dream of serving as an integrated IP agency, which was initiated by Dr. Gao Lulin when he was Commissioner, may have come to a temporary end.  At one time a stumbling block to this proposal may have been integrating the vast trademark enforcement resources of SAIC.  It appears that such an integration would likely be accomplished under the new SMSA.  Another legacy issue that may need to be addressed involves SIPO’s legacy authority over international IP which often overlapped with MofCOM’s authority over trade-related IP, which became especially important after WTO accession by China and may be even more challenging by the integration of SIPO into a bigger agency.  Noticeably absent from this proposal, however, are the copyright authority (under the National Copyright Administration), as well as trade secret protection (under SAIC).  Plant variety protection, already divided between two agencies (Agriculture, Forestries) with SIPO helping to support international engagement, is is also absent.  One view of these changes is that voices within China that look at IP (including patents) as an instrument of market regulation, including consumer protection, may have won out.  This approach was evident in the work of the National Leading Group Fighting IP Infringement and Substandard Products (全国打击侵权假冒办公室), as well as the increased activity of SIPO over the years in conducting market supervision actions involving false marking and patent infringements.  Indeed the wisdom of keeping this Leading Group within MofCOM in light of a new SMSA may be questioned; however, the Leading Group consists of many more agencies than SIPO, SAIC and AQSIQ.   Nonetheless the State Council had previously called for reducing redundancies in enforcing the market order, and it was also part of the yet to be adopted patent law revisions.  In that State Council opinion, which may be a guiding part of this reorganization, there is a call for  “the elimination of duplicative multilayered enforcement”, including territorial and subject matter overlaps. See: https://chinaipr.com/2014/07/16/state-councils-new-opinion-on-market-order/. 

The approach of creating a SMSA to address enforcement challenges is also distinct from the technology-oriented reforms of China’s judicial system in recent years, which have led to the creation of technology oriented IP courts as well as the creation of more autonomous IP  tribunals.  The incorporation of sui generis GI protection into SMSA agency also pits two sometimes rivalrous agencies with different perspectives on utilization of the trademark (private rights) system with a sui generis (more public rights oriented) system to protect GI’s.  Finally, it would also likely have the effect of elevating SIPO to a General Administration in the State Council structure, which is just below a Ministry-level agency.   This is somewhat more similar to the structure of the USPTO which is within the Department of Commerce in the United States.

How do the other IP agencies shake out?  It is too soon to know.  The Ministry of Culture is merging with the Tourism Administration.  Will the National Copyright Administration remain within the General Administration of Press and Publications/State Administration for Radio Film and Television structure? Also, there are some reports that the Ministry of Science and Technology is also being reorganized to absorb the State Foreign Experts Bureau and the China National Science Foundation.  Finally, the Legislative Affairs Office of the State Council is reportedly moving to the Ministry of Justice.    The SCLAO has exercised a tremendously important role over the years in crafting IP legislation.  The impact of some of these changes will also likely depend on personnel shifts within the agencies.  In addition, it could impact or accelerate efforts already in place by these agencies.  For example, will the change in the SCLAO structure affect long-overdue proposed revisions to China’s copyright law, which reportedly are once again the subject of active discussion? Similarly, it is unclear to me at this stage what impact there will be on the China Food and Drug Administration (reorganized in 2013), in light of other changes to health-oriented agencies and SIPO, and if this will affect, or perhaps accelerate, efforts to reform IP administration by SFDA, such as through a patent linkage regime.  

These proposed changes elicit more questions than answers; we will need to see how they are enacted and implemented in the coming months.  We welcome corrections and additional information from readers!

Update of March 14: Fu Yiqin at Yale has put together a useful summary of proposed State Council reorganizations.  Here is the link: https://yiqinfu.github.io/posts/state-council-reform/.  Fu Yiqin notes that the State Food and Drug Administration and antitrust enforcement agencies will be combined in the State Market Supervision Administration (where SIPO, et al will also be located).  SARFT is maintained as a separate agency in this chart.  Other news has SARFT being restructured: http://deadline.com/2018/03/china-abolish-sapprft-media-authority-consequences-xi-jinping-1202336724/.  Clearly we need some more dust to settle on some of these issues. Hypothetically if antitrust and IP are combined into one agency (perhaps including copyright), and if IP enforcement also is combined into that agency, the problem of the inherent conflict of interests between IP grants, IP enforcement and controlling for IP abuse would be heightened.  However, if SFDA is also combined with SIPO/other IP agencies, there is also the possibility for greater coordination on pharma-related IP issues, such as linkage. I will be updating this as more information becomes available.  Note that in a prior blog, I abbreviated SMSA as GAMA – I am following the nomenclature of Fu Yiqin.

Update of May 7, 2018:  Here is a thoughtful article by the Anjie law firm on the government restructuring which points to the increased supervisory role of the new agency over SIPO’s formulation of IP strategy, as well as the new role of the Ministry of Justice in reviewing legislation.

 

 

 

Comments on Draft Guidelines on Disgorgement and Fines in AML Matters

Attached are comments of the ABA Sections of Antitrust and International Law  (ABA) and the George Mason University Global Antitrust Institute (GAI) on the draft guidelines of the National Development and Reform Commission on Disgorgement and Fines in Antimonopoly Law matters. The ABA comments are bilingual and have the complete text of the draft guidelines included in the package that is being made available here.  The guidelines were published for public consultation on June 17, 2016.

The two sets of comments offer two slightly nuanced approaches in their understanding of the final drafting responsibilities for these guidelines.  The ABA comments are nominally  directed to the Antimonopoly Commission of the State Council, while the GAI’s Comments are more directed to the National Development and Reform Commission which released this draft for eventual adoption by the Antimonopoly Commission.  The relationship between these drafts and an official adoption by the AMC is not clear to me, as the NDRC announcement of the draft states that the drafting of the guidelines are in the work plan of the Antimonopoly Commission, and that NDRC undertook the research and drafting (根据国务院反垄断委员会的工作计划,我们研究起草了《关于认定经营者垄断行为违法所得和确定罚款的指南》(征求意见稿),现面向社会公开征求意见.). It does not explicitly say that this research and  drafting was undertaken on behalf of the AMC.  Moreover, comments are to be delivered to the Pricing Bureau of NDRC, not the NDRC itself, which may suggest that this is indeed a research project (发送到国家发展改革委(价监局).  It is my view that considering the continuing battle of drafting responsibility by Antimonopoly enforcement agencies + SIPO,  in the IP Abuse guidelines, which the State Council has recently said is the responsibility of these four agencies and the State Council Legislative Affairs Office, final drafting  responsibility for an interagency antimonopoly law guideline may not be easily assumed at this time.  If others in the antitrust community have more specific information, I welcome them posting it here.

Regardless of which agency is the lead, the sharing of drafts with this website and others helps to increase our understanding of the overall process through sharing of different commenters’ positions, for which I am grateful.  I hope that over time Chinese agencies will also make all non-confidential comments publicly available.

GAI’s recommendations include that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law.  In the alternative, and at the very least, the NDRC should expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

GAI also urges the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty.  According to GAI, economic analysis should determine the total optimal penalties, which includes any disgorgement and fines.  When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine.  If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Finally, GAI recommends that the Anti-Monopoly Enforcement Agencies (AMEAs) rely on economic analysis to determine the harm caused by any violation.  When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation.  This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation.  To that end, GAI recommends that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data.  When the calculation of illegal gain is unclear due to lack of relevant information, GAI strongly recommends that the AMEAs refrain from seeking disgorgement.

These comments are broader than IP-related antitrust.  One common theme they share with IP damage issues is the low utilization of economic calculations to determine damages, and unclear sensibility of when damages are adequate, deterrent or punitive.

The comments also do not address the relationship, if any, between low IP damages and high antitrust damages for IP abuse, except in the broadest sense that excessive damages may create over deterrence.  The Chinese government and academics are also increasingly focused on the problem of low IP damages, including possibilities of providing for punitive damages and higher compensatory damages,  the availability of discovery for damage calculations, such as in the trademark law and with experiments in increasing statutory damages or relying on alternative calculations such as actual or implied royalties such as occurred last year in Jiangsu (See 江苏固丰管桩集团有限公司诉宿迁华顺建筑预制构件有限公司侵害发明)专利权纠纷一案[(2015)苏知民终字第00038]), where an implied royalty was used for perhaps the first time in a patent case. The issue is also actively being discussed by academics. See, e.g., 刘自钦 , 著作权惩罚性赔偿制度在中国大陆的具体运用, Macau Law Review, No. 10, at p. 123 (Liu Zichen, Substantial Application of the Punitive Compensation System for Copyright in Chinese Mainland – Based on American Experience and the Chinese Reality).

­The current reality is that IP damages remain too low and non-deterrent.  To me this suggests a possible issue of disproportionality between IP protection and antitrust enforcement for IP abuse, or as I have often said one cannot have IP ‘abuse’ without having IP ‘use.’   On June 7, 2016 I had the pleasure in my official capacity of testifying before the House Judiciary Committee, where I discussed the issue of the large disparity between high antitrust damages and low patent infringement damages.   My testimony is also on the PTO website.  I recently calculated that the current ratio of average patent damages as determined on the www.ciela.cn database and the Qualcomm damage imposed by NDRC is about 50,000 to 1 (18,000 USD to 975 million USD); it is only somewhat lower if other databases are used.  As I noted in my testimony, antitrust damages and patent damages address different issues and thus may not always be directly comparable.  However, if the ratio is wildly disproportionate the ecosystem for innovation and technology transfer could erode.  Many companies already do not want to transfer technology to China, for fear that their IP will not be adequately protected.  As I have noted, the data already suggests that China is an under-licensed market.  Some companies may also now be avoiding China because damages are too low and/or antitrust risks are too high.  If antitrust damages become be too high in relationship to the actual value of a patent, incentives to disclose patentable inventions may erode – which itself may erode competition in the long run.  Moreover, China will suffer as it may not be able to obtain leading-edge technology.  I personally believe that antitrust and IP damages should not be wildly disproportionate, which should be another factor in antitrust damages, IP damages and in China’s efforts to become an IP “strong country.”

This blog remains my academic, personal and non-official observations and should not be construed as the opinion of the US government, or any former client or third party or even any academic institution with which I am affiliated.  Corrects and comments in English or Chinese are most welcome!