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 email@example.com. 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.
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.
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!