Antitrust Aspects of “Unfairly High Patent Pricing” for Licensing Transactions in China

This guest blog has been written by Prof. HAO Yuan of  Tsinghua University School of Law.

 China is facing a pressing need to build its innovation-driven economy. To facilitate key features of an innovative economy Chinese anti-monopoly authorities, along with their worldwide peers, face a daunting challenge of transition from a static regime to a more dynamic one.  Several recent judicial and administrative disputes, including Huawei v. IDC, Shenzhen Intermediate People’s Court, Shen Zhong Fa Zhi Min Chu Zi No. 857 (2011); Huawei v. IDC, Guangdong High People’s Court, Yue Gao Fa Min San Zhong Zi No. 306 (2013); and the NDRC’s administrative investigation against Qualcomm, Administrative Penalty Decision [2015] No. 1, point out the need to better understand the IP and antitrust intersection, particularly with regard to controversial issues such as  “unfairly high patent pricing (不合理专利高价)”.   This blog summarizes my recent paper (available on SSRN) which addresses this important issue (upcoming 2020 in GRUR International (Journal of European and International IP Law)).

Chinese Anti-Monopoly Law (“AML”), in contrast to US law but not facially dissimilar to EU competition law, pays substantial attention to a dominant market player’s unilateral “exploitative” conduct. Specifically, section 17(1) of the AML (2008) forbids a dominant undertaking from “abusing its market position” by selling at “unfairly high prices”. However, neither the Law nor later enacted Judicial Interpretations clearly define “unfairly high price” in the anti-monopoly sense. Correspondingly, courts and enforcement agencies have significant discretion in characterizing a market price as “unfairly high”, thereby potentially exposing an undertaking to harsh penalties.

Despite perhaps a legitimate institutional intention, this ex post legal risk of being found “unfairly high” could seriously curtail business entities’ ex ante incentive to innovate in China. Meanwhile, lacking adequate legal and economic guidance, this institutional discretion would likely result in significant error costs. Such costs are likely to be even more severe in the context of patent-intensive industries, particularly those in China’s burgeoning high-tech sector.

Section 55 of the AML arguably provides an IP “safety harbor”, providing that a proper exercise of IPR shall be immune from the AML scrutiny, while “an abuse of IPR, excluding or restricting on competition” shall not. As pointed out elsewhere on this website, this provision remains essentially unchanged in a recently proposed revisions to the AML.

Despite this statutory framework, recent cases indicate that the IPR immunity approach has been largely ignored in practice. In the 2011 Huawei v. IDC action, both courts found IDC’s patent pricing to be “unfairly high” primarily on three grounds: one, the licensing royalties IDC offered to Huawei were “apparently higher” than “comparable licenses”, i.e. those royalties IDC charged other companies previously (though whether these licenses were truly comparable with licenses made to Apple, Samsung and others was worthy of serious discussion); two, “IDC’s act of charging unfairly high licensing fee to Huawei, will force Huawei to either quit the competition in the relevant end product market, or accept the unfair pricing conditions, which will render Huawei to increased costs and decreased profits in the relevant end product market, directly restricting its capability to compete”; and three, IDC required Huawei to give global patent grant-backs on a royalty-free basis, an arguable violation of both the Antimonopoly Law and the then-existing Administration of Technology Import/Export Regulations,. Similarly in the Decision against Qualcomm, the NDRC also disregarded Section 55 immunity, finding that Qualcomm’s licensing conditions were “unfairly high” due to these three factors: charging a flat fee for an ever-changing patent portfolio without proving the replenished patents are of equal value to expired ones; coercion for free grant-backs; and using the entire end product as royalty base. So far, Huawei v. IDC and Qualcomm have been the only two completed Chinese cases that entailed an extensive “unfairly high patent pricing” analysis.  Other currently ongoing cases include Iwncomm v. Apple (Beijing IP Court), Huawei v. Panoptics (Shenzhen Intermediate People’s Court), Xiaomi v. Sisvel (Beijing IP Court), and the anti-monopoly investigation by SAMR (China’s AML administrative enforcement authority) against Ericsson’s 3G/4G SEP licensing practices, etc..

It is true that both IDC and Qualcomm involved SEPs and  arguably an extra layer of FRAND commitment needs consideration, which may require additional law and policy analysis. For example, the courts might have looked to how to interpret FRAND in Chinese legal framework – is it a specific commitment to a SSO, or a general “principle (原则)” imposable by loosely grounded policy arguments? Will this FRAND interpretation affect an SEP holder’s anti-monopoly obligations in China?  And if so, how? Nevertheless, to a large extent these cases still reflected a practical departure from the statutory IPR immunity framework approach under Chinese law. Such an aggressive approach has also been reflected in Section 14 of the Anti-Monopoly Guidelines for IP Abuse (Draft for Comment 2017) as published by the Anti-Monopoly Commission of State Council. (Editors note: see the comments of the American Bar Association, as well as earlier drafts by enforcement agencies here). According to this rule-of-reason framework, “Business entities that enjoy dominant market positions may abuse their dominance by licensing intellectual property at unfairly high prices, excluding or restricting competition; while assessing whether such high pricing constitutes abuse of dominant market position, the following factors may be considered: (i) calculation method of license royalty, as well as the IP’s contribution to the value of goods; (ii) the business entity’s undertaking with regard to the IP licensing; (iii) the license history or comparable license standards; (iv) license conditions that may have led to unfairly high pricing, including territorial or product scope restrictions; and (v) whether a portfolio licensing includes expired or invalid IP”.

This laundry-list framework is not administrable. How these factors play out in a specific case, whether and how they would interact with each other, how much weight should be attached to each and every one of them, how to incorporate the pro-efficiency features into consideration … all these important practical questions remain unanswered. Facing such vague rules, patentees and other relevant market players would find it very hard to ascertain legal compliance. Vague rules combined with the high stakes often entailed in antitrust cases may lead to rent seeking and bad precedents, further upsetting a prior well-functioning market system, and harming market players’ confidence to  continuously invest in innovation.

One critical reason for this stark departure between the Law and enforcement may be the lack of an administrable test to differentiate “proper exercise” of patent right from “abuse”. Ambiguity lies in at least two aspects. First, due to the very mechanisms of patent regime in fostering innovation, even a proper exercise of right would necessarily restrict certain market competitions. Thus, it seems that an over-general standard of whether “to eliminate or restrict competition” cannot work as the ultimate test to differentiate abuse from legitimate exercise. Second, despite extensive use of “patent abuse” in the past decades worldwide, the exact contour of this concept remains elusive. Resorting solely to the various definitions and constructions in comparative law of sister jurisdictions, helpful as it is, would not solve these ambiguities adequately.

Mark Cohen, the editor of this blog, has also noted that one little-referenced basis for resolving the distinction between “proper exercise” and “abuse” is in fact found in Article 40 of the TRIPS Agreement, which creates a similarly vague dichotomy in permitting WTO members to provide remedies for abusive licensing practices.  Article 40 authorizes member states to address “licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.”   Article 40 also permits member states to control mandatory grant backs of the type address in Huawei v. IDC.  The ambiguities in China’s AML and TIER may in no small part be due to the ambiguities within Article 40 itself, which may have been an important resource for the drafting of Article 55 of the AML.  Furthermore, as Prof. Cohen has separately noted, the legislative history of  Article 55 suggests that it was intended to provide greater assurance that enforcement of IP rights would not by themselves violate the AML, see Harris et al, Antimonopoly Law and Practice in China (2011), at 55. Prof. Cohen’s latter point was well proved in the little referenced, but authoritative, Statute Interpretation and Legislative Reasoning of the Anti-Monopoly Law (hereinafter “Statute Interpretation”) (published by the Legislative Work Commission of the NPC), which noted that, “To restrict competition by the exercise of IP right, is permitted by law after its balance of distinctive interests; in other words, certain restrictions must be imposed on competition to further technological innovation and improve competitive capability. Thus, monopoly status resulting from IP right as well as the restriction on competition because of the exercise of IP right, are legal acts based upon the legal authorization. Other jurisdictions generally treat the legal exercise of IP right as an exception to the application of antitrust laws” ; but on the other hand,  “[I]f an IP right holder abuses its right by exceeding the scope of exclusive right, in acquiring or strengthening a monopoly position, such act will not be protected, and if it excludes or restricts competition, the AML shall govern here.”

Though not a binding document in itself,  the Statute Interpretation can work as a useful guidance, since it embodied important legislative intents and reasoning at the time, particularly when no other legislative reports are accessible to the public. Therefore, to assess “unfairly high patent pricing”, a crucial question is whether the alleged excessive pricing act falls within the scope authorized by patent law. If the answer is positive, then even if this “excessive” pricing would restrict certain competition in the relevant market, such static efficiency loss is a necessary cost we deliberately pay for sustainable innovation, i.e. section 55 immunity applies. If and only if on the other hand, the alleged pricing has been proved to exceed the legally authorized scope of such patent, section 55 immunity will then be stripped and the high pricing act will be examined under section 17(1) of the AML. In other words, to be stripped of the IP clause immunity and subject to “unfairly high patent pricing” scrutiny under the AML lens, the alleged pricing must be not only excessive enough to exclude competition, but also in a way that departed from what patent law has originally contemplated.

Economic insights into the patent law jurisprudence of various jurisdictions, including China, US and EU, reveal that despite some rather subtle differences, all patent regimes promote innovation essentially through the instigation of dynamic competition. Specifically, the patent regime (1) bridges an innovator’s technological R&D to market demand: the better aligned a new technology is to consumer needs, the more valuable this “shell” of exclusive right would be in the marketplace, resulting in higher profit an innovator can harvest by excluding her imitating competitors (“competition by imitation” or “CBI”).  In addition, the patent regime enables innovators to signal potential “innocent” imitators utilizing mechanisms such as disclosure requirements, thereby reducing the amount of duplicative investment in innovation. See Edmund W. Kitch, The Nature and Function of the Patent System, Journal of Law and Economics, Vol. 20, No. 2 at 278; (2) with some caveats addressed in my full paper, by restricting CBI with reasonably tailored claims of the patent right coupled with disclosure requirements, the patent regime simultaneously induces social resources into “inventing around” activities, i.e. to provide better/cheaper substituting technologies, thereby encouraging competition by substitution (“CBS”).    In certain circumstances, the fruits of such CBS  may also be protectable with a new property (patent) right. For example, if a competitor’s “inventing around” technology is found sufficiently “inventive” or “non-obvious”, it would likely be entitled to a patent in itself.  See Robert P. Merges, Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents, 62 Tenn. L. Rev. 75 (1994); and (3) feeling the pressure of CBS, the earlier patentee/innovator would likely be incentivized to keep on her next run of “inventing around”, striving to stay a winner in the marketplace. In this way, a virtuous circle of dynamic competition could come into force.

On the other hand, a brief comb-through of the economic foundations and jurisprudential development of antitrust law suggests that this regime promotes innovation essentially through efforts to maintain an (optimally) heterogeneous competition ecosystem. Based on an understanding of both innovation-facilitating mechanisms, two insights are worthy of note here. First, a mutual ground shared by both patent and antitrust regimes in their disparate routes to innovation is the common facilitation of dynamic competition. And correspondingly, Chinese anti-monopoly law should respect the very patent mechanism, i.e. the instigation of dynamic competition, which pivots on the CBS precisely through efforts including a restriction upon CBI. Therefore, to put it in practical terms, if an alleged act at the intersection with anti-monopoly law, such as an accusation of “excessive” pricing, merely caused a restriction on CBI   as indicated in supra-competitive profits, AML must refrain from intervening. In other words, AML should not lightly disturb a well-functioning circle of dynamic competition, simply because under its lens CBI  or static efficiency seems restricted in a link, and local optimum seems not achieved – as a result, a supra-competitive profit enjoyed by a patentee should be found legal per se if static efficiency loss is the only proven harm. More importantly, the focus should be instead on whether the questioned act would not only restrict competition, but also in a way that departed from what the patent regime has contemplated, i.e. the restriction is to dynamic competition or CBS itself. As an example of the latter scenario, consider a joint agreement between two patentees owning substituting technologies or a patent pool consisting of competing technologies, with the patentees or pool members consenting to suppression of one technology in promotion of another (others).

Coming back to the context of patent pricing, is it possible for a high pricing to restrict dynamic competition, thereby constituting an abuse under the anti-monopoly lens? Maybe yes in theory. Arguably in exceptional circumstances, certain pricing may be so excessively structured to actually constitute a refusal to subsequent or follow-on innovators, or at least a significant “margin squeeze” for them, and such refusal or squeeze in theory may lead to foreclosure of the CBS itself or competition in downstream markets, thus frustrating the circle of dynamic competition.. A little more discussion on the interaction of patent and market competition may help here. In a nutshell, from the perspective of a patent law student, there often exist three tiers of market competition. Tier I is vanilla CBI, referring to those competing technologies with mere replication or insubstantial changes, the only advantage of which are their lower prices (mostly by saving duplicating R&D costs). Of course, CBI can be efficient and legal in those circumstances where patentee grants a license, but in most other cases, CBI is legitimately excludable under patent law and antitrust shall never interfere. Tier II, competition by improvement, is really a higher level of CBI, in that competing technologies here involve substantial improvements on the patented technology, though still falling into the scope of earlier claims. Note a caveat here – patent law is clever enough to give certain leeway to those competitors with own substantial improvement, for example by granting a new patent right if the improvement has been found to be “inventive” or “non-obvious”, so that these competitors would have stronger bargaining power to negotiate with the original patentee and harvest higher profits from the pair of sequential innovation. This power and resulting profit would further incentivize competitors to do follow-on improvements. This is actually the scenario of blocking patents. Generally speaking, the second tier only applies to those industries that are characterized with cumulative innovation. Despite the substantial improvements, Tier II is still legitimately excludable under patent law and antitrust shall not interfere. Tier III is CBS, referring to those technologies that are capable of truly substituting the earlier patented technology to fulfill consumer needs in the market. By their very name, in most circumstances Tier III is comprised of “inventing around” technologies that do not fall into the protected scope of earlier patent, thus there exists no serious risk of being excluded by the earlier patentee unilaterally. The theoretical worry can happen however, at the rare circumstance of tier II and III intersection: occasionally an infringing improvement could be so radical that it would truly substitute the commercialized earlier patent as a break-through technology.   A real-world example here is the long deadlock between the famous Marconi diode patent and the Lee De Forest triode patent during the early development years of radio technology. This kind of radical improvement, even though literally infringing on the pioneer patent, is precisely the type of “creative destruction” Schumpeter emphasized many years ago that fuels innovation in a most powerful way – an innovator’s descendants can actually become the instruments of his destruction, yet the society benefits in the long run.

Following this train of thought, if we temporarily leave the “unfairly high patent pricing” context and turn  to some of the classical NIE (New Institutional Economics) scholarly works in a more general sense, including the conventional hypothesis of patent “anti-commons” (Heller and Eisenberg 1998), worry of over-broad pioneer patents’ suppressing effect on follow-on innovation (Merges and Nelson 1990), and recent conjecture of patent hold-up and royalty stacking in the SEP context (Shapiro and Lemley 2007), arguably they all may be considered as embodying (more or less) such theoretical worries of patent foreclosure on dynamic competition.

Inspiring as these theories were, they, need to be tested in practice.  Curiously, decades of empirical research in various industries have showed little success in proving these theoretical worries happening in the real marketplace, at least on a macroscopic level. A specific concurrent example for this striking disintegration between theory and empirical results is the robust innovation and significant consumer benefits (as indicated in quality-adjusted prices) in the SEP intensive wireless communication industry, in the shadow of persistent “patent hold up and royalty stacking” predictions. See Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, Journal of Competition Law & Economics 11(3) (Aug. 2015); Jonathan Barnett, Antitrust Overreach: Undoing Cooperative Standardization in the Digital Economy, 25 Mich. Telecomm. & Tech. L. Rev. 163 (2019). There might be different explanations to this empirical difference. I give a rough quantitative analysis in my paper why the seemingly plausible theoretical worry of dynamic competition foreclosure is unlikely to happen in practice.  In addition, I argue that perhaps precisely because CBS  has always been a critical link pivoted by patent regime in its instigation of dynamic competition, throughout ages patent law has developed an implicit yet critical awareness to safeguard CBS from being foreclosed per se. This implicit awareness has been built into a wide variety of rules and principles of patent jurisprudence prevalent in many jurisdictions, such as the eligibility doctrine, inventiveness/non-obviousness and disclosure/enablement requirements in the granting phase, all-element rule and reverse doctrine of equivalents in infringement assessment phase, as well as in deeper principles underlying and threading these specific rules together. A good example for the latter is the proportionality principle well illustrated by Prof. Merges in his Justifying Intellectual Property (Chap. 6, 2011).  Surely these built-in mechanisms are not ironclad, but they may have worked in a more successful way than we give faith to, and the AML  should not overlook it.

Based on the above, I further propose that a patentee’s unilateral pricing act should be generally found legal per se in China; or at the very least, presumed legal under section 55 of the AML unless an agency/plaintiff can prove otherwise – that the alleged pricing constitutes an “abuse” in that it would disrupt dynamic competition. Specifically, a patentee’s unilateral pricing act should be immune from the “unfairly high pricing” scrutiny under Section 17(a) of the AML, unless an anti-monopoly plaintiff or enforcement agency can overcome all three following hurdles with concrete evidence, in addition to a persuading economic analysis: (i) the patentee enjoys a real dominant market position; (ii) such pricing constitutes a de facto refusal to deal, and (iii) the refusal would likely foreclose the very type of competition patent law has aimed to promote, i.e. dynamic competition. More specifically, the harm to dynamic competition can be proven in either one of the following two dimensions: i. In the same market of patented technology, a monopolist patentee’s constructive refusal to license would render radical all follow-on substitutes impossible to be developed (restriction on competition by substitution); or ii. In the circumstances of a vertically integrated monopolist patentee, the constructive refusal to license would foreclose the competition or subsequent innovation in downstream markets in which the patentee also competes.

True this burden seems high, but it is justified by three cumulative resources, (i) the above economic insights into the intersection of patent and antitrust; (ii) the prevalent non-interventionist attitude toward “excessive patent pricing” in sister jurisdictions; and (iii) the inevitable limitations of antitrust law, manifested in the error costs due to lack of proper information and economic analysis methodologies on dynamic efficiency. See Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1 (1984).

Despite existence of formal empowerments in some countries/regions, almost all jurisdictions with well-developed antitrust jurisprudence have exercised a very cautious attitude in condemning a market price as “unfairly high” in practice. Section 17(1) of the AML does not have a counterpart in conventional US antitrust jurisprudence, and despite the existence of a theoretical counterpart in EU (Art. 102(a) TFEU), it has been rarely invoked. When it comes to patent pricing, the EC has been taking a virtually non-interventionist approach. This non-interventionist approach may have originated from the Commission’s awareness that many general objections against exploitative excessive pricing actions, such as the danger of undermining investment incentives of new entrants as well as dominant firms, difficulty in assessing “excessiveness”, risk of improper price regulation, and undue space for political rent seeking etc., are particularly true in the context of patent-intensive innovative industries.

Antitrust is costly. As Judge Easterbrook pointed out many years ago, in reality judges and enforcement officials are always equipped with imperfect information about actual effects of the accused practice, and such costs of information and their corresponding actions are the limits of antitrust. Part of these costs comes from the judicial ignorance and inhospitality against business practices. Very often, if a poor defendant in an antitrust case cannot convince the judge that his practices promote competition, he is doomed. Unfortunately, “the gale of creative destruction produces victims before it produces economic theories and proof of what is beneficial.” Consequently, this unfortunate judicial inhospitality and ignorance would inevitably generate substantial positive costs in practice.

During the transition from  a planned regime to market economy, China needs to overcome all kinds of obstacles, ranging from formal restraints in laws and institutional infrastructure, to lingering outdated theories and prejudice that die hard and can still be quite powerful impeding the progress. On an institutional level for example, varied degrees of inertia may unavoidably exist on anti-monopoly agencies’ enforcement philosophy, especially when it comes to high pricing acts that seem to harm consumer interest (albeit short-term) on its face, and which had long been the subject of pervasive regulation through local pricing bureaus, even prior to the existence of the antimonopoly law.  In view of this potential institutional inertia, the likelihood of inhospitality a monopolist patentee, domestic or international, encounters in “unfairly high pricing” cases could be substantial.

Antitrust has two major analysis modes: per se rule and the rule of reason. If equipped with thorough information of market practices and perfect analysis methodologies, rule of reason is the route to precision and ultimate truth. Unfortunately, as discussed above, that is not the case in reality. One may contend that during the several decades after Judge Easterbrook’s seminal writing, rapid development of economic theories have provided more substantial guidance in many areas, but I am still reluctant to say that the improvement has been so significant to render his insight obsolete, particularly in context of dynamic efficiency and IP related issues. As such, an ambitious rule-of-reason framework as embodied in Section 14 of the Anti-monopoly Guidelines for IP Abuse, would inevitably generate significant error costs despite its good-willed intention.

Admittedly, our presumed legal per se framework is not cost-free. It may be conceivable that in exceptional circumstances, a monopolist patentee’s excessive pricing would disturb dynamic efficiency yet escape the law because the plaintiff simply cannot meet the high burden. On a systematic level however, I believe this possible negative error would be at least offset by the significant positive error costs avoided. A per se rule has always been used to condemn (or excuse) whole categories of practices, even though some of them are actually beneficial (or evil), and one cannot have the savings of decision by a particular rule without accepting its cost of errors.  When we choose which analysis mode to go, what really matters is the overall probability. In summary, we presume patent pricing to be legal per se, because both economic insights and comparative law already showed us that the happening chance of a real exclusionary excessive patent pricing would be extremely low (roughly estimated to be 1/100,000 – 1/100M in the paper), and partially confirmed by empirical studies so far. The exact reasons can be further explored, but the bottom line is clear – it seems that in a vast majority of circumstances, again the market mechanism coupled with strong patent protection has been functioning adequately well to facilitate innovation. Facing this extremely low probability of real foreclosure on dynamic competition, it would be unwise in every individual case to incur enormous administrative and error costs only to search a mere possibility. In a brief conclusion, if either way we are destined to make mistakes, we naturally choose the side with less cost.

In contrast to private law, anti-monopoly law is a much stronger form of interference with the market by government. Perhaps too many people today have omitted this (not only in China) – a blunt instrument as it is, antitrust law acquires legitimacy only in a minority of cases where market failure really happens, rather than a mere theoretical possibility. “The history of Chinese economic reform has clearly told us, whenever a market-oriented policy became dominant and market mechanisms were more frequently used to allocate resources, the quality and speed of Chinese economic development was better.”  Wu Jinglian, The Economic Development of China (The Great Encyclopedia Press 2018), at p. 3 (translation is my own). On the contrary, every time Chinese economic policy was influenced by the theories of planned economy, “both macroeconomic risks and microeconomic interests were affected deleteriously… … Therefore, to resolve the many problems we are confronted with during the economic reform process of China, the only answer is to insist and deepen our reform centering upon the confidence on market economy and rule of law, and further use the market mechanism to allocate resources; it should never be the pursuit of more state interferences.” Id. When stepping into the deep water of reform today, China should learn its historical lesson and be especially cautious with those legal instruments that potentially interfere with price mechanisms, the core feature of a market economy.

The author wishes to thank Hon. David Kappos, Prof. Robert Merges, Chief Judge Randall R. Rader (retired), and Prof. Mark Cohen for their editorial suggestions.  The opinions expressed herein are the author’s own.

 

 

Collaboration vs Litigation in IP Licensing in China: 2016 Update

A string of articles and deals in the patent licensing sector are highlighting the increasing importance of collaborative licensing practices for foreigners to attract licensees.  Is such a collaborative approach to licensing necessary due to development, culture or other reasons?   

Let’s review some of the news from 2016:  VIA licensing, a subsidiary of Dolby has reportedly signed up Lenovo . as its newest member of the pool operated by Via for Advanced Audio Coding (AAC) patents.  IAM’s Jacob Schindler, quotes Ira Blumberg, Lenovo’s vice president for intellectual property, who praises negotiators on the other side for “recognizing and flexibly addressing unique market circumstances applicable to China and other emerging markets”. Speaking with IAM, VIA president Joe Siino confirmed that his company is focusing on win-win collaboration opportunities.  Paul Lin of Xiaomi, which has a licensing agreement with Microsoft, has  observed that many Western companies make the mistake of  importing their usual licensing approach to China wholesale, and that a collaborative element needs to be introduced.  Also in 2016, former arch enemies Huawei and Interdigital entered into an  agreement,  announcing a multi-year, worldwide, non-exclusive, royalty bearing patent license agreement  to settle all proceedings.  The two companies (frenemies?)  put in place a “framework for discussions regarding joint research and development efforts”, including a “process for transfer of patents from Huawei to InterDigital”.

Yet, it was also apparent in 2016 that traditional, non-collaborative approaches, continue to have some vitality particularly where recalcitrant licensees are involved, such as the case Qualcomm brought against Meizu, a reported law suit by Dolby Labs against China’s Oppo and Vivo in India’s High Court of Delhi, or the SEP case brought by Wireless Future Technologies against Sony in Nanjing.  The high win rate for foreigners should also be acting as an additional incentive to use the Chinese litigation system, although foreigners continue to play a disproportionately small role of foreigners in IP litigation in China (about 1.3% of the docket).

There may, indeed, be greater incentives for foreign licensors to seek Chinese partners at this time.   One of these factors is of course the size of the Chinese market itself, including a greater reliance on the Chinese domestic market by potential Chinese licensees/infringers, which may provide incentives to licensors to find longer-term licensing mechanisms through close collaboration with a Chinese partner. In looking at IP-related partnerships, most Chinese companies have IP strategies that still tend to be inwardly focused, by having strong domestic portfolio supported by local subsidies, and thereby making them challenging adversaries for practicing foreign entities in domestic litigation.  At some point, these strong domestic portfolios may also encourage collaboration by a foreign company with a Chinese company as an effective way for the foreign company to boost its domestic Chinese portfolio.  Other factors include the greater intervention by the state in monetization of IP rights, which encourages development and ownership of core IP by Chinese companies, with state subsidies and banking support.  Another factor which encourages collaboration is the Technology Import/Export Regulations of China, which encourages related party licensing between the US and China to avoid mandatory indemnities and grant backs. 

There may also be disincentives for US companies from being too US-focused in conducting R&D and IP monetization at this time.  The AIA, legal uncertainties over the scope of patentable subject matter in the United States and changes in the litigation environment may also be weakening the value of patent rights and ultimately acting as a disincentive to investment in new IP-intensive enterprises.  At the same time, Chinese companies have been increasingly investing overseas, including within the United States, and have shown a willingness to bring law suits in the United States (such as Huawei’s suit against Samsung in California) and may have reciprocal needs for a US partnership, as they seek to license their rights in the United States and elsewhere.  Such a need may be at the heart of the Huawei/Interdigital deal, discussed above.

In my estimation, collaborative approaches to licensing are responses to market and legal challenges in China as well as part of China’s maturing engagement on IP issues, including its own talented labor pool and potential as an innovative economy.  Collaborative approaches to licensing are part of greater trends in collaborative IP creation with China.  In 2015, Qualcomm may have kicked off this current trend when it announced a 150 million USD investment fund in China around the same time as its settlement of its antitrust dispute with China.   In addition, we are seeing greater Chinese participation in cross border R&D.  The Global Innovation Index noted the increasing importance of such international collaboration to China last year and  that “the Chinese innovation system is now densely connected to sources of expertise everywhere.” (p. 93).  Chinese companies had “the 7th largest foreign footprint of all countries with 178 R&D centers set up or acquired outside China by year end 2015.”  USPTO data also shows greater co-inventorship in Chinese patent applications, there is also  greater Chinese participation in international standards setting, and greater Chinese co-authorship of scientific publications (now at about 15%). Hollywood is also seeing a high degree of collaboration, in the form of co-productions, investments, and other collaborative mechanisms.

Collaboration in IP creation is occurring in response to changing market circumstances – developmental, economic, legal and perhaps cultural.  It is no surprise that it is also appearing in licensing transactions.

Qualcomm’s ITC Action Against Meizu Instituted

 

According to a USITC press release, Qualcomm’s Section 337 case against Meizu was initiated  on November 15, 2016 (337-TA-1029).  The products covered by this investigation are electronic mobile devices that include hardware and software components within the mobile electronic devices, such as integrated circuits, cameras, RF transmitters, capacitors, and System-on-chips.  The Federal Register notice is found here. Qualcomm had announced on October 14, 2016 that it was filing a complaint with the United States International Trade Commission (ITC), filing a patent infringement action in Germany with the Mannheim Regional Court, and initiating an infringement-seizure action in France to obtain evidence for a possible future infringement action there.  Qualcomm had previously initiated litigation against Meizu in Beijing and Shanghai.

Qualcomm’s Litigation Strategies and Recent IP Developments in China

反者道之動。弱者道之用。 (, Chap. 40) (Return is the movement of the Dao. Yielding is the way of the Dao.  Daodejing, Chap. 40.)

To the uninitiated, Qualcomm’s licensing practices in China must appear confusing.  Since paying a fine of 975 million USD to NDRC – about 50,000 times average patent damages according to the CIELA database for its Standards Essential Patent licensing practices, Qualcomm has entered into approximately 100  licensing settlements with Chinese companies.  How can the weak become so successful, so soon?

According to press accounts, Qualcomm has settled with the major cell phone manufacturers in China,  most recently with Chinese cell phone companies Vivo and Oppo.  Both deals came after Qualcomm decided to bring law suits against cell phone manufacturer Meizu in the Beijing and Shanghai intellectual property courts for damages that reportedly total about 520 million RMB.  The first law suit was filed by Qualcomm around June 23 at the Beijing Intellectual Property Court.   The complaint essentially sought to enforce an NDRC rectification plan imposed on Qualcomm against other infringers/potential licensees.  The original complaint, according to Qualcomm’s press release “requests rulings that the terms of a patent license offered by Qualcomm to Meizu comply with China’s Anti-Monopoly Law, and Qualcomm’s fair, reasonable and non-discriminatory licensing obligations.  The complaint also seeks a ruling that the offered patent license terms should form the basis for a patent license with Meizu for Qualcomm’s fundamental technologies patented in China for use in mobile devices, including those relating to 3G (WCDMA and CDMA2000) and 4G (LTE) wireless communications standards.”  Since that filing, Qualcomm filed 17 new complaints were filed in Beijing and Shanghai.

Given the risks to Qualcomm posed by seeking injunctive relief for standards essential patents, Qualcomm appears to have initially launched its litigation campaign against Meizu by enforcing the NDRC approved licensing terms against one hold out company who might thereafter be left with an unfair competitive advantage.   Qualcomm appears to be reducing its antitrust risks by first getting “immunized” by NDRC, and then enforcing the terms of the NDRC “rectification plan” and couching its patent infringement litigation in terms of promoting fair competition.  This in effect has turned the tables on recalcitrant licensees who have previously relied on Qualcomm’s FRAND commitments to reduce the risk of being sued by Qualcomm by threatening an antitrust counterclaim.  What remains to be seen, however, is the legal status the court affords the rectification plan given the often unclear relationships between judicial and administrative decision making.

Qualcomm’s GC, Don Rosenberg said Qualcomm is taking legal action out of a sense of fairness to other companies that are paying what they owe.  In addition, the case represents a vote of confidence by Qualcomm in the court system.  As Don Rosenberg noted “”We’re putting our faith in the court system there and we wouldn’t do that if we didn’t think we were in capable hands.”  Qualcomm may no doubt have been inspired by the success of its licensing program as well as the perfect or near perfect win rate in the sixty five infringement cases filed by foreigners in 2015 in the Beijing IP court.  As I have noted repeatedly on this blog, foreigners do win IP cases in China.

In China’s current legal environment,  where licensing is burdened by seemingly contradictory norms – e.g., where the Chinese government sets prices for license transactions in antitrust cases, restricts the freedom to negotiate of foreigners, provides tax incentives for licensing in to China for high tech enterprises, sets national goals for licensing transactions, and where the courts seem to have difficulty imposing damages based on actual or implied royalties, Qualcomm appears to be turning the 975 million dollars of “lemons” of the  NDRC fine, into a vat of lemonade.

Qualcomm’s vote of confidence in the courts in a high stakes case may also help set an important model for other foreign and Chinese rightsholders, potentially by highlighting such important issues as: Yes, foreigners win cases in China, the importance of actual or explicit license agreements for determining damages (already being tried in some jurisdictions, see: 江苏固丰管桩集团有限公司 vs 宿迁华顺建筑预制构件有限公司 (Jiangsu, 2015), and the respective roles of patent law,  antitrust law, the courts and administrative agencies, in obtaining SEP licenses in China.

Qualcomm and China both have a lot at stake in the handling of SEP issues.   A recent report by Thomson Reuters (The Evolving Landscape of Standard Essential Patents: Keeping What is Essential, Sawant and Oak), showed that Qualcomm owns 17% of the patent declarations before the European Telecommunications Standards Institute, followed by Nokia, Huawei, and InterDigital.   Decisions in Europe such as Huawei vs. ZTE may also have underscored the importance of looking at whether a putative licensee/infringer is in fact negotiating in good faith with a FRAND encumbered licensor.

Judges such as  Zhu Li of the SPC have noted some of these changes publicly.  As Zhu Li said in a recent blog:

…标准必要专利权作出FRAND承诺即自愿放弃了在任何情况下寻求禁令救济的选择,更不意味着其寻求禁令救济一定产生反竞争的效果。因此,作出FRAND承诺的标准必要专利权利人寻求禁令救济的反竞争效果仍然需要具体分析判断。

[T]he owner of standard essential patent FRAND commitment that is made voluntarily does not give up under all circumstances the choice of seeking injunctive relief.  Furthermore, it does not mean seeking injunctive relief must produce anti-competitive effects. Therefore, when a holder of a FRAND encumbered SEP seeks injunctive relief, the anti-competitive effects still need specific analysis and judgment。

The evolving practice appears to be that the evidentiary burden to demonstrate that the infringers have refused to pay a license fee is on the licensor and, as Zhu Li noted,  a monopoly is not necessarily constituted when an injunction is requested by SEP owners.

The State Council’s recent opinion on how China should become a “strong” IP country, also highlighted how China needs to draft rules on standard essential patents that are based on FRAND licensing and “stopping infringement” (Art. 38) (with the involvement of AQSIQ, SIPO, MIIT, and the Supreme People’s Court) and that encouraging standardization of Chinese patents also remains a priority (Arts. 61, 71).

As I indicated elsewhere, a key question for China is “What circumstances exist to suggest that a prospective licensee is engaged in patent hold-out, i.e., refusing to license in good faith which might suspend the licensor’s F/RAND obligation…”  Hopefully China is beginning to ask the better questions that are suitable for its licensing environment and its efforts to become a “strong” IP economy.

What are you observing in this hot area? Please post your comments and corrections!

The preceding is the author’s personal opinion only.

lemonade

WIPO, SIPO and USPTO: US-China Patent Filing Trends

Chinese Activity at WIPO

A WIPO report released on March 19 noted that Huawei, with 3,442 published PCT applications, overtook Panasonic as the largest applicant in 2014. Qualcomm was the second largest applicant in 2014, with 2,409 published applications. ZTE Corp. took third place with 2,179 PCT applications.

These top three applicants have similar patent filing profiles, with digital communication accounting for the bulk of their total filings.

The report highlights some weakness amongst Chinese academic institutions: among the top 25 educational institution filers, there were only two Chinese academic institutions – Peking University (no. 19) and Tsinghua (no. 23).

United States Activity at SIPO

SIPO’s 2014 Statistical Report (no. 164), analyzes filing trends from foreign countries, including the United States that further underscores the competition amongst Qualcomm, Huawei and ZTE and in the ICT sectors.

United States China invention patent applications with SIPO amounted to 135,138 pieces over the previous five year period analyzed.   The annual growth rate during this period was 8.3%. In 2013 United States patent applications were 29,992, about 1.4 times 2009.

According to SIPO, the following companies from the United States filed more than 3,000 patents from 2009-2013: Qualcomm (6,029); GE (5,875); General Motors (5,697); Microsoft (3,957) and IBM (3,293). Also of note during this period, Apple’s patent filings have increased rapidly, while Microsoft’s decreased after 2011 to 327 in 2013, falling to 11th place among US applicants.

SIPO’s description of Qualcomm’s role in communication technologies underscores highly competitive relationships in China:

Over the five year period of this survey, Qualcomm’s 5-year filings have ranked amongst the top three United States applicants. Chinese enterprises have also substantially increased their communication invention patents, and this substantial growth has a number of advantages. However, in key areas such as mobile phone chips, Qualcomm still owns core IP. It provides licenses to patented technology to Chinese communications equipment and consumer electronics equipment enterprises, and uses this technology to charge exorbitant license fees.

What about Chinese activity in the US?

USPTO’S Fiscal Year Report (ending September 30, 2014), provides partial data on Chinese filing trends in the United States. In 2013, there were 15,496 patent applications from China, having nearly doubled from 8,358 in 2010. Patent grants to Chinese residents more than doubled from 2010-2014 from 3,059 to 7,717.

Additional data is necessary to compare Huawei and ZTE’s filing trends in the United States and whether they reflect similar competitive trends in PCT filings and in China.

Zhang Xinzhu Dismissed from AMC Expert Committee

Xinhua reported on August 12 2014 that  the State Council Antimonopoly Commission today fired Chinese Academy of Social Sciences researcher Zhang Xinzhu 张昕竹as a member of its expert advisory panel.  The official reason given was violating AMC expert advisory committee discipline. Zhang claimed the real reason was that he was speaking for foreign firms. Subsequent press reports have identified the relevant conflict of interest rules that Zhang is alleged to have violated. The relevant ethical code (enacted September 2008) is said to be “In order to protect the reputation of the experts committee, members cannot participate and effectuate activities conflicting with the interests of the experts committee; without the consent of the experts committee, they cannot use their title as a member of the experts committee to engage in activities unrelated to the work of the work of the experts committee” 《国务院反垄断委员会专家咨询组工作规则》第三章工作纪律中,第十三条规定了专家咨询组成员工作守则,其中第(三)项明确规定:“维护专家咨询组的声誉,不得从事与履行专家咨询组职责利益冲突的活动;未经国务院反垄断委员会同意,不得以专家咨询组成员身份从事与履行专家咨询组职责无关的活动。The conflict of interest appears to be that Zhang is identified as the second listed author of an AML report “Concerning Economic Evidence of Qualcomm’s Licensing Prices” “关于高通许可定价的经济学证据.”

This issue also continues to play out in the Chinese media and the facts remain unclear. Fortunately thus far it appears to me to be unrelated to efforts to rectify the Chinese Academy of Social Sciences from foreign influence. In early August, the South China Morning Post, reported that Zhang Yingwei, head of the party’s discipline inspection office at CASS, said the academy had been “infiltrated by foreign forces” and “was conducting illegal collusion at politically sensitive times”. At the same time, no information has been provided about other ethical issues arising in AML investigations or whether this type of activity had otherwise been tolerated if, as Zhang might be suggesting, it had been conducted on behalf of a Chinese company despite any specific ethical rule.

 

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.