ABA Comments on MIIT/EIPC Standards and IP Template

Four sections of the American Bar Association, including the Sections of Antitrust Law, Intellectual Property Law, Science & Technology Law, and International Law submitted comments on the  Draft Template for Intellectual Property Rights (IPR) Policies in Industry Standards Organizations (Draft Template) issued by the Electronic Intellectual Property Center (EIPC) of China’s Ministry of Industry and Information Technology (MIIT). The comments represent the view of the Sections and may not represent the view of the ABA as a whole.

While these comments commend EIPC for its efforts to offer a template for standard development organization (SDO) IPR rules, the Sections “respectfully recommend against issuance of a single template to serve for all SDOs and circumstances, particularly on highly disputed issues that are best left to individual SDOs and their members to decide. There are many complexities involved in SDO IPR rules, different views and interests involved, and many different approaches that a particular SDO might validly choose to take. In addition, and importantly, because several issues addressed by the Draft Template remain under active debate among policy makers, SDOs, and market participants in several jurisdictions around the world, there is a substantial risk of conflict that could deter innovation and the efficient operation and success of SDOs in China, undermining EIPC’s stated objective.” The Sections also raise concerns that this policy, by itself, may “unduly influence” standards setting organizations, as it would be promulgated by an institution sponsored by a government agency, namely the EIPC – highlighting the sometimes difficult situation faced by Chinese Government-Organized NGO’s.

This draft Template has been the subject of some controversy. I have been advised by an official at MIIT that this Template should not be construed as an MIIT policy.

A Quick Report on the EIPC MIIT Conference Including SAIC’s IP Abuse Rules, Patent Law Amendments, EIPC MIIT Standardization Policies, Standards and IP Abuse…

EIPC MIIT’s Conference on Intellectual Property Standards and Anti-Monopoly Law convened on December 10 and 11 in Beijing.  The conference brought together about 150 international and Chinese experts, including lawyers, judges, academics, diplomats, and other professionals to the Wanshou Hotel in the Haidian District, Beijing.  There were over over 30 speakers. The initial speakers set the tone for the conference by concentrating on one theme:  China’s anti-monopoly regime had entered a new phase from theory to enforcement.  Further, this transition period is characterized by the need to balance anti-monopoly law and IP rights, regulation and innovation.

One example of the struggle for balance is the debate over the prevalence and importance of holdouts, or the practice of standards implementers engaging in conduct intended to drive royalties down royalties for Standards Essential Patent (SEP) holders to lower than F/RAND levels.  Dina Kallay, Director of Intellectual Property and Competition at Ericsson Ltd.  argued the problem of hold outs was real.  David Wang, Director of Standards and IPR Strategy, Intellectual Property Rights Department of Huawei Technologies Co., argued that that there is no evidence of real life hold outs.  His opinion comes in light of Huawei’s recent litigation with IDC, in which a court ruled that IDC should compensate Huawei for excessive pricing and tying practices.

Many speakers addressed current and future reforms.  Yang Jie, Director of the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau at SAIC, explained new revisions to its forthcoming rules on abuse of dominance and exclusionary relief (presumably, SAIC’s IP Abuse guidelines or rules). Since August, SAIC has modified seven articles. First, Yang Jie said that SAIC has maintained the “essential facilities” doctrine in the new version, however with some modifications. The doctrine will apply when an intellectual property right cannot be easily substituted in the relevant market, other players want to be part of the market, a refusal to deal would restrict competition or innovation in the relevant market, it harms the public interest, and the licensing of the patent would not negatively or unreasonably harm the interests of the patentee.

Yang Jie also explained that SAIC has adopted a narrow interpretation of refusal to deal for players in a dominant position.  It will only apply when the intellectual property right constitutes an essential element for production.  Moreover, a violation only occurs when the behavior limits competition. Additionally, in abuse of dominance, “abuse” must be considered parallel to other elements and the behavior must harm the public interest or consumer behavior.

Concerning guidelines for the standard setting process, Yang Jie explained that the rules do not include a special provision for horizontal agreements in the standard setting process, because this is covered under the provision for anti-monopoly agreements.  Furthermore, Yang Jie divided monopolistic behavior in the standard setting into standard setting procedures – for instance if a firm fails to say something in a patent application – and standard implementation, which would include violations of F/RAND commitments.  Yang Jie said that the standards clarify the “what should have been known” standard for the standard setting process.  For standard implementation, the guidelines add the requirement of restricting or limiting competition.  Additionally, the new guidelines will treat intellectual property rights the same as other property rights. In other words, SEP holders are not automatically deemed to have market dominant positions. Instead, a case specific analysis must show that a firm is “dominant” within the meaning of relevant provisions of the Anitmonopoly Law.

Lastly, the guidelines no longer include a specific provision targeting copyright collecting societies for abuse of dominance or restricting competition. Yang Jie explained that the provision was cut because there was no real evidence of copyright organizations abusing their position. That being said, enforcement agencies can still pursue copyright organizations as they are not otherwise exempt from the law.

Yang Jie also said that the official version has not yet been promulgated. The regulations have been submitted to relevant bodies within the State Council for review (note from Mark Cohen: it is unclear to me if this is registration with the State Council, or review by the Antimonpoly Enforcement Agencies, or another process.  If this document is an SAIC rule, then review by the State Council should be limited).

Zhang Yonghua, Deputy Director of No. 1 Division of the Legal Affairs Department of the State Intellectual Property Office of China (SIPO), provided details regarding the latest draft of the proposed patent law amendments.  The new draft empowers judicial and administrative bodies with the right of investigation and evidence collection. It also allows administrative agencies to effectively settle infringement issues by compensation.  Furthermore, the draft provides for punitive damages for severe infringements, a concept already employed in China’s trademark law. Additionally, protection for industrial design is extended to 15 years. The new draft also introduces a burden of proof shifting scheme in which the burden of proof shifts once the patentee has satisfied certain of its evidentiary burdens.

Zheng Wen, Deputy Director General of the Anti-Monopoly Bureau, focused on the need for improvement in the merger review process of MofCOM.  Zheng Wen said that MOFCOM had received over 1000 cases since August 2008 and had finished over 900, imposing sanctions in only 3% of the cases.  Zheng suggested that there was a need to impose more sanctions and to crack down on parties that illegally skipped merger review.  Since November, MOFCOM has been publishing notices of sanctions on parties that did not report their proposed merger but should have.  Zheng Wen also expressed the desire to set up a long term cooperation mechanism with the E.U. and U.S., especially for large scale transnational mergers.

Huang Yong, Vice Chair of the Expert Advisory Committee under the State Council Anti-Monopoly Commission, stated that allowing agencies the rights of investigation and suggestion would be a step in the right direction.

Concerning the new Specialized IP Courts, Jin Kesheng, Deputy Chief Judge of the IPR Tribunal and senior Judge of the Supreme Court said that we could look forward to a judicial interpretation regarding the role of the court’s “technology investigator” position.  Additionally, Zhang Xiaojin, Chief Judge of the Second Tribunal in the Beijing Intellectual Property Court, expressed serious concern over the new court’s ability to handle their large caseload. For instance, the Beijing specialized IP court has 100 staff in total, only 22 of whom are judges and the court is expected to receive 15,000 cases annually.  He expressed further concern over their ability to carry out judicial reform while so severely understaffed.

Finally, Shi Shaohua of EIPC MIIT spoke about feedback to EIPC MIIT’s own Template for IP Policies in Industry Standards Organizations, (which I previously wrote about here). Two criticisms were that the structure was too complicated and that courts do not have sufficient expertise to adjudicate F/RAND issues; injunctions and unwilling licensors;  and reference factors for unreasonable licensing, including factors such as the smallest component or device, the total aggregate royalties of all potential SEPs, the influence of standards on patents, and the extra value that standards bring to a patent.  EIPC MIIT also received comments concerning reciprocity requirements, for instance what standard should be employed and whether adding restrictions to SEP licensing will influence cross-licensing, market access, and reciprocity.

The conference also included presentations on Legal Issues of Competition in Internet Industry” and “Internet Based Information Security and Intellectual Property Protection” which unfortunately we were not able to cover.

Prepared by Marc Epstein of Fordham Law School with edits by Mark Cohen.   A special thanks to EIPC MIIT and Shi Shaohua for allowing a Fordham student to attend this important conference!  Please provide us with any corrections, additions or comments!  As always, these comments are the authors’ own.

Some Comments on MIIT’s Template for IP Policies in Industry Standards Organizations

Late last month, MIIT’s IP Center had released a Template for Intellectual Property Rights Policies of Industry Standardization Organizations for public comment. According to MIIT’s IP Center, this is not a government policy or regulation or standard, nor is it mandatory. However, it may offer useful and authoritative guidance for Chinese standards setting organizations in this complex area, particularly in the IT sector.

Comments are due by November 30, 2014, and can be sent to shishaohua@infoip.org. The short time frame in providing comments is due to my only recently having become aware of this document. However, my experience of MIIT’s IP Center is that they have always been open to useful exchanges of information to improve their policies and practices. Moreover, they may have released this draft in advance of their Dec. 10 – 11 conference (https://chinaipr.com/2014/11/25/two-upcoming-conferences/), where I am sure this will be discussed.

Here are some general and personal observations that I have on this policy in four areas: Foreign-Related Issues; Licensing and Standards Development Organization (SDO) Conduct; Patent Type and Quality; and Copyright.

Foreign-Related Issues:

Article II: “Membership” is broadly defined. However, I am concerned about membership management rules that may not fully admit patent owners of all countries/nationalities, or require them to participate only as observers. This should be clarified, as FRAND obligations should be imposed only upon those who can fully participate in standards setting practices, otherwise patentees may unknowingly forfeit their rights to exclude.

As licensing agreements are also often global in nature, it would be helpful if this guidance also confirmed that foreign law could apply to license agreements, notwithstanding that the Template is explicitly governed by Chinese law.

Regarding cross-licensing (Article XII), it would be helpful if the Template recognized that due to restrictions imposed by local laws, it may occasionally be difficult to cross license on exactly comparable terms even when the patents are equal in value. For example, Chinese law requires indemnities against non-infringement for foreign licensors licensing to China. No similar specific provision applies to Chinese domestic licenses or Chinese outbound licenses. This additional cost to a foreign licensor (or benefit to the Chinese licensee) can legitimately result in additional demands imposed by the foreign licensor on the Chinese licensee in a cross-license arrangement that might otherwise be construed as a violation of any FRAND commitment (Ar. XI).

Licensing and SDO Conduct:

Some greater clarification might be helpful on what constitutes “failure to participate” in licensing negotiations, such as that FRAND licensing benefits may be forfeited (Art. X). “Participate” might be interpreted to merely suggest that showing up to licensing negotiations is enough, when good faith and non-prejudicial negotiations are what should be most critical. Clarification might consist of stating, that the prospective licensee “fails to conclude a licensing negotiation in a timely or good faith manner” or in a manner “that doesn’t prejudice the licensor”. Considering that China has a two year statute of limitations on patent infringement, if the parties do not conclude a license or agree to a suspension of the statute of limitations after two years, and the prospective licensor in fact risks loss of revenue or negotiating position due to the relevant statute of limitations, such conduct might be considered dilatory.

Another question is what is an “affiliate” (Article IV and definitional section) when the licensor/patentee is an SOE? Since “affiliate” includes “direct or indirect beneficial ownership” of stock, would an SOE be licensing on behalf of the Chinese government and other SOE’s, or perhaps on behalf of the State Assets Administration? I believe this may not have been what was intended.

Article XI picks up on the hot issue of what is a “smallest component” as a subject of licensing. However, I am sometimes personally bewildered by what might be a “smallest” unit and why this is a necessary concept. First, why “small”? Perhaps the intent is the least expensive and this is a euphemism? Why not the largest or most expensive, with perhaps a smaller royalty base – which might more fairly reflect the contribution of the patent? Moreover, why does it have to be a component, if for example, the R&D can easily be quantified to exact a royalty and it is a technology that is pervasively used in a given product? Also, what if the claims read on services or methods of operation, etc. and are not sold as a physical “component”?

Article XV: Licensors should not transfer Patents containing essential claims for “the purpose of” evading licensing obligations. I am unclear why willfulness (“for the purpose of”) is apparently required here. If a licensor participates or intends to participate in a standards setting organization, it probably should not transfer patents to licensing obligations which arise as part of its participation in the standards setting body. Perhaps a “should know” requirement can ameliorate this problem.

Article XXXVI: While the SDO can interpret the policy, it is unclear to me whether, under Chinese law, this type of policy is contractual in nature, a matter of corporate governance, a matter of governmental policy, and the legal mechanisms that may be available to challenge SDO policy.

Patent Type and Quality:

Although Utility Model Patents are subject to these rules, it would be useful to have some additional guidance. In view of the explosion in low quality, unexamined UMP’s, and the lack of adequate deterrence against their assertion, UMP holders might be required to first submit their UMP’s to examination prior to offering them to the SDO for licensing. Also, consideration should be given to situations where UMP’s are withdrawn in favor of an invention patent which describes a similar set of claims, such as be requiring that the counterpart invention patent be subject to the FRAND commitment. Consideration might also be given to different valuations for UMP’s in light of their more limited scope, limited duration, and lack of substantive examination.

The template should also further clarify its coverage over foreign patents and patent applications, which appear to be covered by these practices in the appendix on licensing terms.

Copyright:

Article VIII and others: I was glad to see copyright-related issues in standardization being addressed. The non-exclusive license of copyright for purposes of making a draft standard granted by the licensor, – that is, the licensor’s retention of copyright interests – may be in conflict with Article XIX which requires that “no Member shall publish or distribute a Draft Standard” and additionally is conflict with the provision that grants the SDO the copyright in the standard itself. Put simply, what rights does the licensor retain?

Past experience in piracy of standards also suggests that the SDO should have clear obligations regarding publishing the standard and protecting the copyright in the standards against piracy.

I am also unclear what rights a Member that is a “reference implementer” software developer retains under the terms of the provisions which grant royalty free rights to an implementer to use the software. (Art. XXI). Might the draftors have better intended an open-source type arrangement, where subsequent improvements may be made available at least to the licensor? Art. 16 of the Computer Software Regulations already grants software licensees the rights to make alterations to the software. This might make a grant back of any improvements by the licensee an equitable adjunct to this provision. If software is being made available, I presume it is being made available in object code format, although this is also unclear. In sum, these terms should be coordinated with the already robust research exemptions available under China’s Software Copyright Protection Regulations (esp. Arts 16, 17), to insure that incentives to developing relevant software remain in place. 第十七条 为了学习和研究软件内含的设计思想和原理,通过安装、显示、传输或者存储软件等方式使用软件的,可以不经软件著作权人许可,不向其支付报酬.

These are my personal observations. I welcome comments/corrections from others who may be more familiar with some of these practices, especially in China!

Qualcomm Subject of AML Investigation – Other Developments on the Way

China’s use of the Antimonopoly Law to deal with pricing for royalties may have taken another turn with recent launch of an Antimonopoly Law investigation by the National Development and Reform Commission against Qualcomm. Although the exact basis for the investigation is unknown, the press reports speculate that the investigation is related to the forthcoming launch of TD-LTE by China Mobile in early 2014 as well as negotiations on chip and licensing pricing between Qualcomm and China-based companies.

Qualcomm announced the case on Monday November 25. The investigation has been covered in several articles in Reuters as well as other press sources, including the Chinese press. An NDRC spokesperson was quoted in China’s official press on Sunday November 24 that China’s AML authorities would focus on six areas of technology and pharmaceuticals. Some observers have also tied the case to the impactful recent Huawei-Interdigital case(https://chinaipr.com/2013/10/29/huaweiinterdigital-appeal-affirms-shenzhen-lower-court-on-standards-essential-patent) adjudicated in Guangdong, which also involved standards and royalties.

In separate developments, at a conference sponsored by China’s Ministry of Industry and Information Technology that I attended in Beijing on November 13, it was announced that the State Administration for Industry and Commerce will be revising its rules on AML and Intellectual Property. Last August a draft revision to its IPR enforcement guidelines was floated selectively for public comment(https://chinaipr.com/2012/08/26/a-quick-read-of-the-aml-ipr-enforcement-guidelines-fifth-draft/). Additionally, at this November 13 conference, the Supreme People’s Court noted that it would be looking into revising its judicial interpretation on patent infringement regarding availability of injunctions, presumably to make injunctions less automatic (or presumably, denied) in the case of standards-essential patents.

There are some areas where there appear to be less momentum, at least for now. I am unaware of any public initiative to deny orders stopping infringement in the case of standards-essential patents and administrative patent enforcement. In addition, I am unaware of any public request to date for an administrative compulsory license of patents through the State Intellectual Property Office for an antitrust violation or a refusal to license. To judge by the recent MIIT conference, there is also no active discussion on patent “hold-out” for refusal of a licensee to take a license under a standards-essential patent, and what that would mean in the Chinese context, where damages are low in litigation, injunctions are almost always granted, the state plays an active role in standardization, the statute of limitations is short and China’s equities as a patent holder and manufacturer are in flux. Also, noticeably absent from the November 13 program was Ms. Dai Hong from the Standards Administration of China, who had been active on these issues for SAC – an agency which had been relatively active on these issues some years ago. Please send in your comments if you know of other developments.

Overall, China’s ramp-up on AML is not unlike its ramp up for other disruptive economic laws, such as the bankruptcy law. Frequently these laws are enacted for “trial implementation” or alternatively they are not actively enforced until after regulators and the public have had time to become familiar with the laws and their implications and/or the political timing is “ripe.” It will be very interesting to observe future developments.