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!

 

 

 

 

IPR Abuse and Refusals to License

The US Chamber and American Chamber of Commerce (the “Chambers”) have recently made available its recent comments on the NDRC and SAIC drafts of the IP abuse guidelines to be promulgated by the Antimonopoly Commission of the State Council.  Here are the links: NDRC IP Abuse Guidelines Chinese; NDRC IP Abuse Guidelines English; SAIC IP Abuse Guidelines Chinese; SAIC P Abuse Guidelines English.  As there is no public database of comments received on most Chinese legislation, I will continue to try to make available comments by private entities here on this blog.

The NDRC and SAIC comments of the Chambers continue to focus on certain key areas of concern, including China’s endorsing of an essential facility doctrine without considering the pro-competitive aspects of licensing (or standards setting).  The Chambers have expressed concerns about “an approach that imposes restrictions on licensing because it is possible to imagine a license that creates more competition”, which (in my view) is essentially a state-management approach to licensing and intellectual property.    The Chambers also focus on burdens of proof – an increasingly important issue in IP cases generally, as well as extraterritorial authority based on “effect” on the Chinese market, without regard to substantiality or immediacy.  As I have noted elsewhere, concerns over extra-territorial issues have been of increasing concern bilaterally. 

The Chambers also support provisions to enable portfolio licensing, which may include expired patents and would otherwise need to be adjusted or renegotiated every time a patent expires or is found invalid.  The Chamber also takes issue with presumptions that cross-licenses and grant backs are anti-competitive.   The Chambers also address concerns about aggressive regulation of refusals to license patents, particularly those that are not encumbered by a F/RAND obligation (eg., Article 24, SAIC draft).

An important development on refusals to license in China has been noted by Benjamin Bai in a recent blog on a non-SEP refusal to license case now pending in China.  According to Benjamin:

Hitachi Metals At the time of writing, there is an ongoing litigation on whether a refusal to license non-essential patents constitutes IP abuse. Four Ningbo companies brought this case against Hitachi Metals in the Ningbo Intermediate Court. The dispute centers on neodymium-iron-boron magnets, which are widely used in the electric engineering, wind power, automotive, and high tech industries. About half of the global consumption of rare earth metals relates to this magnetic alloy, whose intellectual property rights are mostly held by Hitachi Metals. It owns more than 600 neodymium-iron-boron magnet patents globally but has only licensed selected patents to eight Chinese companies. Hitachi has refused to license to other Chinese companies.

 Hitachi’s refusal to license its patents to the plaintiffs is the basis for the suit. The accused abusive conduct includes refusal to license, bundling, etc. This is the first case in which plaintiffs have requested a Chinese court to license non-essential patents based on the notion of “essential facilities”. The plaintiffs argue that Hitachi’s patent portfolio on neodymium-iron-boron magnets should be considered as essential facilities for the industry because its patent portfolio cannot be substituted and avoided. The plaintiffs seek damages of RMB24 million (~USD3.4 million). A nine-hour hearing was held on December 18, 2015. The court has not yet issued any decision. This case will undoubtedly have a huge impact on the Chinese jurisprudence on refusal to license and IP abuse.

Benjamin concludes his blog by noting:

When it comes to non-essential patents, however, the rationale of Huawei v. InterDigital does not apply. Instead, the analytical framework laid out in Qihoo v. Tencent should be followed. According to the Chinese Supreme Court, market dominance refers to the position of an undertaking with the ability to control the price, quality of other transactional terms of products in the relevant market, or the ability to impede or affect the entry into the relevant market by other undertakings. The determination of market dominance is a multifaceted process. No single factor is necessarily outcome-determinative. A high market share in and of itself should not lead to a presumption of market dominance, especially where the high market share is due to high efficiency or better-quality products. Therefore, a high market share conferred by technology superiority might not lead to a finding of dominance.

Extension of essential facilities outside of the F/RAND context where a company may not have willingly abandoned certain rights in exchange for incorporation in a standard is problematic, as Benjamin notes. I believe there are also implications for China’s IP system.   Neither recent draft guidelines or court decisions to date recognize patents as a unique form of property which is based on a right to exclude offered in exchange for disclosure of an invention.   Aggressive antitrust enforcement could erode that incentive.  This can be of great concern in the non-SEP space, where a patentee may have a choice whether to disclose an invention or keep a proprietary method secret.  As disincentives to patenting continue to mount due to narrowing scopes of patentability, procedural changes making litigation more difficult and patents less stable, and/or increased antitrust enforcement, the technological “commons” created by patent disclosures, as well as the incentives that patents provide for investment and product development, may narrow. The dynamic efficiencies of the patent system, which frequently creates new technologies which is not even in current manufacture and “include[es] societal gains from innovation” (GAI comments on NDRC draft) could be placed at risk.

I also remain concerned about disproportionality between antitrust damages and a continuing low level of patent damages.  CIELA currently lists average patent damages in China at 419,366 RMB, based on a cohort of 511 cases where the plaintiff won its claim of patent infringement.  This is about 70,000 dollars, or about 1/10,0000 of the fine imposed on Qualcomm in its recent NDRC investigation.  Of course,  patent damages address harm to the rights holder and antitrust damages address harm to competition, making comparisons somewhat inexact.  A legal argument however is that, whatever the calculation of antitrust damages, China has an explicit international obligation to insure that patent infringement damages “constitute a deterrent to further infringements” (TRIPS Article 41).  WTO members may even impose criminal remedies for patent infringement where willful and on a commercial scale (Article 61).   The authorization for WTO members to address IP abuse under the TRIPS agreement is only to take “appropriate” measures (Art. 40).   In my view, overly aggressive antitrust enforcement in China when the IP system is fundamentally weak, is “inappropriate” for China, and could weaken market-based incentives to license and patent, as well as incentives for disclosure at a critical time in China’s quest to become an innovative economy.

 

 

ABA Comments on draft NDRC IPR Abuse Guidelines

Attached is the package submitted by the ABA Sections of Antitrust Law, IP Law, and International Law, commenting on the draft IP Misuse Antitrust Guidelines of the National Development and Reform Commission.

The comments of the Global Antitrust Institute of George Mason University were previously discussed here.

 

SAIC Announces Its Latest Draft of IP Abuse Guidelines

“[T]he word transparency [is] the ‘most opaque in the trade policy lexicon.’” Sylvia Ostry

On Feb. 4, 2016, SAIC published for public comment its draft Guidelines On Anti-Trust Enforcement Against IP Abuse, dated February 2, 2016,  <关于滥用知识产权的反垄断执法指南(国家工商总局第七稿>公开征求意见的公告> .  SAIC advises that this is their seventh draft. The deadline for SAIC’s receiving comments is February 23, 2016.   The draft is also accompanied by an explanation, which briefly reviews the earlier drafts and notes that the numbers of comments received throughout the commenting process, which was first initiated in 2009.

This guideline draft is in addition to the IP abuse rules that SAIC promulgated in 2015, with an effective date of August 1, 2015.  Unlike the guidelines, which will be adopted under the auspices of the Antimonopoly Commission of the State Council, the rules were adopted pursuant to SAIC’s own legislative authority.  It will be interesting to compare the guidelines with the rules.  If both rules and guidelines ultimately co-exist, and there are differences in wording and policy, there will inevitably be concerns over how these differences will be enforced.

I have previously discussed NDRC’s drafting process here, and on a non-public SAIC draft here.  In fact, my comments on the SAIC fifth draft go back nearly to the time this blog was established, in 2012. As noted in the book I co-authored with Steve Harris and others, Anti-Monopoly Law and Practice in China (2011), SAIC’s engagement on IP abuse dates back to 2004 – before the AML was itself enacted — when it published a paper “The Competition Restricting Measures of Multinational Companies in China and Counter Measures.”

SIPO is also reportedly involved in drafting or commenting on IP abuse guidelines.  As with SAIC, SIPO’s involvement goes way back.  SIPO’s 2009 IPR Action Plan specifically contemplated that it would “step up research on abuse of IP rights, and strengthen communication and negotiation with relevant foreign government authorities on this issue.”

When I wrote the chapter on IP for my book, in fact there were various copies of the IP Abuse Guidelines of SAIC circulating, but none had been made available for public comment.   Much has changed since then.  In recent years, many laws and regulations have been subject to multiple opportunities for commenting at different stages of legislative drafting. Along with copyright law amendments, these guidelines have been very long in the making with many such commenting opportunities.  As with the copyright law amendments, I also believe that comments on these IP abuse guidelines are not only intended to enhance the quality of the subject legislation, but also intended to show support for legislation that may be subject to claims of different agencies.

 The current AML policy environment is also suggestive of the type of IP environment that Martin Dimitrov outlined in his book Piracy and the State: The Politics of Intellectual Property Rights in China, where he attributed China’s inconsistent enforcement to campaign based, redundant approaches, responsive to external pressures, and unduly complex.  I previously blogged that one important step might be for the State Council to take a more active role in this area, consistent with current plans to reform China’s legislative process.  Another, small positive first step might be for the AML-related agencies to publish an annual report which outlines their policy and enforcement mechanisms, much as is currently done for other areas, such as intellectual property, and which forces a degree of coordination.

I hope to post comments from others on this draft later on this blog.

Another positive note: SAIC has also made it site available in large type and with audio accompaniment for those who have visual impairments.

Updated: 2/8/2016

 

 

GAI’S Comments on NDRC’s IP Abuse Guidelines

 “[T]he code is more what you’d call “guidelines” than actual rules” (Barbossa, Pirates of the Carribean, The Curse of the Black Pearl).

Attached find the comments of the Global Antitrust Institute of George Mason University (GAI) on the recently released public comment draft of NDRC’s IP Abuse Guidelines.

GAI’s excellent comments suggest that NDRC adopt a more compliance-based approach to ensure predictability to commercial actors.  In its view, the Draft Guidelines do not explain the significance of each of four factors enumerated by NDRC or how they will be weighed in Anti-Monopoly Law (AML) agencies’ overall decision-making process.  This approach allows the AML agencies broad discretion in enforcement decision-making without providing the guidance stakeholders need to protect incentives to innovate and transfer technology that could be subject to AML jurisdiction.  GAI also recommends that the NDRC include throughout the Guidelines examples similar to those found in the U.S. antitrust agencies’ 1995 Antitrust Guidelines for the Licensing of Intellectual Property to illustrate how the AML agencies will apply the basic principles.  GAI also provided specific line-edit proposed edits on four provisions: general analysis, charging “unfairly high” royalties, discriminatory treatment, and injunctive relief.

Anyone keeping a list of all the legislative activity in this area is likely to be bewildered.  I have previously released other comments of the GAI, including their recent comments on SAIC’s draft of the IP Abuse Guidelines, and an earlier draft of the NDRC IP Abuse Guidelines.  I also commented on NDRC’s questionnaire regarding the guidelines, and published the ABA’s comment on the questionnaire.  Activity on IP Abuse guidelines now stretches back several years.  Indeed. there were already SAIC several drafts when I helped author a chapter on IP and China’s antimonopoly region in Antimonopoly Law and Practice in China  (2011).   Additionally, the AML itself is reportedly under consideration for revision by the NPC, and related legislation, a draft of the Anti-Unfair Competition Law, has reportedly recently been submitted to the State Council for its consideration (it was listed for preparatory work in the State Council’s 2015 legislation plan).

One saving grace: the final guidelines would likely need to be adopted by the Antimonopoly Commission which, according to the AML itself, is in charge of “organizing, coordinating, and guiding anti-monopoly work.” In the interim, the large number of drafts by different administrative agencies, lack of clear legislative or judicial guidance, the overhang of active enforcement activities and large damage/international administrative and judicial decisions (such as Qualcomm and Interdigital), the “exporting” of AML cases overseas (such as in Huawei vs. ZTE), SIPO’s effort to address standardization issues in the patent law revision, etc., all suggest that a situation where agencies could be using rulemaking to both address voids in legislation but also enhance their position in a multi-agency turf battle.

During my trip to China last week, I also repeatedly heard concerns expressed about current practice of Chinese agencies drafting legislation that may be used to enhance their administrative power or enhance their influence, with calls for greater direct legislation by the State Council or National People’s Congress (here’s one article on this topic involving educational legislative work).  Despite the heavy work load of the State Council, it seems to me that the IP Abuse Guidelines are increasingly becoming more ripe for the already planned consideration by the Antimonopoly Commission or the State Council Legislative Affairs Office itself.

(Updated Jan. 21, 2016)

GAI Comments on SAIC IP Abuse Guidelines, NDRC’s Up For Comment

Attached are the comments in English of the Global Antitrust Institute on SAIC’s draft IPR Abuse, as well as the Chinese Translation)  (received January 14 here at chinaipr.com)

NDRC’s comments are also up for comment, with a due date of January 20, 2016.

SIPO is also reportedly preparing its own draft, according to some media sources.

(updated January 17, 2016).

 

GMU Comments on Questionnaire of China University of Politics and Law on AML Revisions

roosevelt-and-the-trusts

Although the ink has not yet been fixed on guidelines for IP abuse in antitrust matters in China, the preparatory work on revisions to China’s Antimonopoly Law (AML) are always underway.   In that connection, the Global Antitrust Institute (GAI) at George Mason University School of Law submitted the attached response to the Questionnaire on AML Revisions  that had been prepared by the China University of Political Science and Law.

I have summarized below some of the key IP-related concerns:

  • Deleting References to Use of Non-Competition Factors in Competition Analysis. The GAI recommended that references to non-competition goals such as “promoting the healthy development of the socialist market economy” be deleted.  This request reflects similar efforts made by the US government in the Strategic and Economic Dialogue where an outcome was the mutual recognition that “the objective of competition policy is to promote consumer welfare and economic efficiency, rather than to promote individual competitors or industries, and . . . enforcement of its competition law should be fair, objective, transparent, and nondiscriminatory.”
  • Deleting Exemptions for State-Owned Enterprises (SOEs). The GAI recommended that SOEs be fully subject to the AML, including liability and fines.  I have often wondered what the effect of additional competition would be on content creators who rely on state-owned entities such as China Film Group (for imports) or China Mobile and China Unicom (for music ring tones). Possibly due to weak competition, a study cited by IFPI noted in that in 2012 in China the estimated total value of the digital music sector in China at RMB30 billion (US$4.9 billion), but the study estimated that a very small share of that revenue (less than 3 per cent) was being shared with the copyright holder.
  • Deleting the Prohibition on Charging “Unfairly High” or Purchasing at “Unfairly Low” Prices. The GAI recommended that this prohibition be deleted in its entirety or, at the very least, revised to explicitly provide an exception for matters involving intellectual property rights.  Among other things, the GAI explained that price regulation risks punishing vigorous competition and government imposed prices that are too high or too low encourage misallocation of resources, soften incentives to engage in efficient conduct, reduce incentives to innovate, and distort markets. These risks are especially acute for IPR’s, because “the very purpose for which nations create and protect IPRs is to induce investment in risky and costly research and development. To achieve a balance between innovation and the protection of competition, monopoly prices should only be unlawful if they are the result of conduct that is unlawful on other grounds.” The most recent 2015 JCCT also specifically requires that China should “take into account the pro-competitive effects of intellectual property,” which arguably also suggests some degree of caution should be exercised in looking solely at prices charged for licensing IP rights.
  • Limiting the Prohibition on Refusals to Deal to Conduct that Creates or Maintains a Monopoly. The GAI explained that, without such a limitation, the prohibition could be interpreted to impose an antitrust-based duty to deal on firms, to micromanage the terms of trade between firms, and to require courts and agencies to administer a burdensome remedy with substantial risk of causing more harm to competition and to consumers than benefits.  Apart from consistency of forced licensing with the Paris Convention, TRIPS and other agreements, through erosion of the right to exclude inherent in a patent, the competition law IP risks to licensors are also underscored by GAI: “potential inventors may be less likely to undertake the research and development that lead to an invention if the inventor’s reward for its efforts is reduced by having to share its technology or goods. Conversely, if businesses know they can easily gain access to the goods or technology of other firms, then they have less incentive to innovate and more incentive instead to free-ride on the risky and expensive research of others.”
  • Specifying that the Legitimate Use of Intellectual Property Rights Includes the Right to Exclude. The GAI has suggested revising Article 55 of the AML, which deals with abuse of IP as follows:

 This Law [the AML] is not applicable to undertakings who exercise their intellectual property rights in accordance with the laws and administrative regulations on intellectual property rights, which includes the right to exclude; however, the Law shall be applicable to undertakings who eliminate or restrict market competition by abusing their intellectual property rights. This Article does not create a standalone violation for the abuse of intellectual property rights. Conduct will only be found to violate this Law if it constitutes a violation of Articles 13 or 14.

As GAI notes “If the government is too willing to step in and appropriate the gains from innovation and dynamic competition, then potential innovators anticipating such interventions will have weak incentives to risk investment in new inventions. Likewise, if the laws governing abuse of IPRs is uncertain or unpredictable (which they would be if the prohibition of “unfairly high pricing” is applied to IPRs), potential innovators will also have weak incentives to innovate.” As I previously noted in addressing NDRC’s IP abuse drafting effort: “the starting point of that discussion … is the incentive afforded by the patent system to disclose technology in order to exclude others and ultimately contribute to the public domain of technology when the patent lapses.”

 A special thanks to Koren W. Wong-Ervin, Director, Global Antitrust Institute, George Mason University School of Law, for sharing these comments and her summary which I have adopted in light of my knowledge of some of the  IP issues in Chinese antitrust enforcement.