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.

 

 

The Widening Impact of China’s Publication of IP Cases

I recently had the opportunity at the Fordham IP Conference to discuss the potential impact of the continuing publication of court decisions by China’s courts since 2014, including their wide-ranging impact on legal research, China IP strategies, and trade.  China’s publication of court cases has had a dramatic impact on political science, legal research and IP strategy.  Here is an extended version of my presentation:

A good starting point for understanding these developments is the important paper of Profs. Benjamin Liebman, Margaret Roberts, Rachel Stern, and Alice Wang on the China Judgements Online Database (CJO) entitled Mass Digitization of Chinese Court Decisions: How to Use Text as Data in the Field of Chinese Law (June 13, 2017) (21st Century China Center Research Paper No. 2017-01; Columbia Public Law Research Paper No. 14-55).  This team looked at 20,321 land use administrative court judgments in Henan Province. The authors critical approach to CJO is summarized below:

First, it is critical to take missing cases into account, rather than succumbing to the temptation to treat even a very large sample as an accurate reflection of reality. … Second, viewing millions of court decisions provides an unparalleled wide-angle perspective on courts’ daily activity, and exposes underlying patterns… Scholars must remember that court judgments provide only one, often limited, view of actual practice. Third, a migration toward treating text as data in the field of Chinese law will require a multi-method approach that combines expertise and insights from law, the social sciences, and computer science.

Their article also discusses motivations for transparency (including reducing corruption), and motivations for individual courts to disclose cases. They note as well that an “incentive bias” now exists which includes making judicial decisions available at the end of the calendar quarter before court evaluations (p. 16).

Moving from the use of the CJO to look at legal issues generally to IP, an important recent study on foreign participation in China’s IP system has also recently been-published by Berkeley JSD Candidate Bian Renjun. Her provocatively-entitled articleMany Things You Know About Patent Infringement in China are Wrong  is scheduled to appear in the Berkeley Technology Law Journal. Ms. Bian uses CJO to analyze 1,663 patent infringement judgments decided by local courts in 2014. Her research provides a much-need supplement to the scholarship of Brian Love, Xuan Thao Nguyen, as well as this blog, about foreign “win” rates in the Chinese courts.

Ms. Bian observes that foreigners asserting invention patents are not underrepresented in the courts. The proportion of invention patents granted by SIPO to foreigners was roughly equivalent to the proportion of foreign invention patent cases decided to overall invention patent cases in court (7.16%/6.92%). The gross number of decisions however was only 115 cases. During that year foreign win rates were higher compared to domestic litigants (84.35%/79.84%), as were injunction rates (92.78%/90.05%) and damages (201,620.45 RMB/66,217.93 RMB).  In sum, Ms. Bian provides a more compelling narrative of the probability that foreigners win in patent litigation in China than predecessors such as Brian Love. However, she does not address how to consider issues involving validity in overall success rates, as has been attempted by such databases as Darts IP, nor does she include metrics to assess any differences in the quality of the patents being asserted, for which additional research would be required.

The third article to look at judicial practices in IP, including the IP databases is Max Goldberg’s promising paper Enclave of Ingenuity: The Plan and Promise of the Beijing Intellectual Property Court (May 2017). Mr. Goldberg is a 2017 graduate of Yale College. His paper won an award as the best student paper in East Asian Studies during the year he graduated.

Mr. Goldberg draws from the work of Martin Dimitrov in suggesting that China’s administrative enforcement system is more politically reactive and less independent. He shares the view of this author and others that the Guiding Cases System of the Supreme People’s Court has had limited uptake by the courts, while the precedent system of the Beijing IP court (BJIPC) appears to have been more widely adopted by judges and practitioners of that court in part due to the releative ease of introducing this system into one highly trained court in an affluent city. Mr. Goldberg offers a reply to the concerns of Benjamin Liebman et al. over the large number of “missingness’” in court cases, by noting that while “the phenomenon of sensitive cases’ omission from government databases in China is well documented, lapses of this size are “much more likely the result of a lack of attention and resources than deliberate censorship.” He bases this part on the more comprehensive reporting rate of IP House at 94.25% based on the docketed numbers of cases at the BJIPC, while CJO had only about 50% of the cases from the same period in 2015.

Mr. Goldberg also focuses on specific judicial policy developments, many of which have been little noticed in the West. For example, he notes that “BJIPC opinions are 40-50% shorter than the decisions of more traditional IP tribunals, despite the fact that the BJIPC jurisdiction specifically includes the most technical cases.” He also notes that the court is also interested in soliciting the opinions of third parties, in a manner akin to an amicus brief. Amicus briefs have been advocated for some time by the US-China IP Cooperation Dialogue, with some important experiments, of which this author is a member. Mr. Goldberg also notes that the Beijing IP Court permits dissenting opinions and that the courts have held open “adjudication committee” meetings, which is an important new innovation. Finally, he notes, that the courts are more actively engaged in use of precedent. The court also had an administrative decision revocation rate of administrative decisions of 17% and a withdrawal rate (where complainant withdraws a case before final decision) of only 7%, which suggests the court is acting to reverse administrative decisions and that litigants have enough confidence in the court that they are willing to pursue cases to their final determination.   Many of these innovations were described in an IP House report previously discussed on this blog, but Mr. Goldberg adds a useful gloss to these developments.

Mr. Goldberg’s article is another important indicator of how China is “crossing the rule of law river by feeling the IP stones.”  Importantly, Mr. Goldberg focuses less on whether foreigners’ win and more on whether procedures compatible with an advanced legal system are being put in place.

Adela Hurtado, one of my former students at Fordham law School has also recently written a useful note in the Fordham Intellectual Property Law Journal that, like Mr. Goldberg’s article, looks at the use of judicial and administrative remedies, including criminal procedures, in addressing rampant infringement. Ms. Hurtado believes that reactive, politically motivated administrative enforcement brings few sustainable results. In her view, foreign companies should consider using the civil system, with its relatively high win rates (as reflected in the new databases) and look to models of successful law enforcement campaigns in the United States which provide for more interagency coordination and sustained efforts to address specific problems. She uses data drawn from Walt Disney’s use of civil and administrative campaigns, comparing Disney’s actions in China with its use of civil remedies in the United States to suggest that Chinese IP enforcement campaigns by Disney should similarly return to greater reliance on civil remedies. Ms. Hurtado may be the first author to look at company specific behavior in different markets by using both Chinese and US databases and thereby highlights another future area of inquiry.

There have been several other efforts that look to China’s legal databases as analytical and research tools. Among other recent scholarship, Susan Finder has also recently written an excellent article on the evolving system of precedent in China in the Tsinghua China Law Review. For those individuals and scholars craving analytics, IP House has also begun publishing important analytic studies on trends in the courts. Topics covered include patent and health, motion picture and television industry and analyses of the decisions of the Beijing IP Court.  Another important application of China’s new databases is in development of course materials on China’s IP system.  In this respect, Profs. Merges and Seagull Song’s forthcoming book on Transnational Intellectual Property Law Text and Cases  (April 2018), comparing US, Chinese and European cases in the full range of IP law with a view towards their importance in developing global strategies, is also a promising step towards incorporating Chinese jurisprudence into the global discussions of IP issues.

China’s decisions to make cases more widely available  also has important consequences for trade-related discussions on IP. Approximately 13 years ago, a TRIPS “Article 63.3” transparency request was made by the United States, Japan and Switzerland at the WTO of China. This request demanded “clarifications regarding specific cases of IPR enforcement that China has identified for years 2001 through 2004, and other relevant cases.” The US delegation, of which I was a part, requested the cases to better analyze developments in China’s IP environment since WTO accession and to prepare for a forthcoming dispute. China refused to produce these cases either in the response to the request or during the dispute.  During the ensuring IP enforcement dispute (DS/362), the WTO itself refused to demand that China produce cases relevant to the outcomes of two claims – one involving copyright, and the other involving criminal thresholds. Indeed, rather than make an adverse inference from China’s unwillingness to produce cases, the WTO panel found that the United States failed to make out a prima facie case with respect to a claim that Chinese criminal thresholds failed to satisfy WTO requirements.

With the benefit of hindsight, one could argue that the WTO established a lower standard in DS/362 for analytical research on Chinese case law than China has since established. Additionally, DS/362 may also stand for the proposition that certain cases may be ahead of their time, particularly in light of China’s own commitments to innovation and development of its IP system.  But that is a topic for another blog….

 

SIPO Publishes Proposed Revisions to Patent Examination Guidelines

On October 27, 2016, the State Intellectual Property Office (SIPO)  published the  Draft (For Public Comment) of Revisions to the Patent Examination Guidelines.  The Chinese text is available here. Comments on the draft should be submitted before November 27.

 In the important area of post filing data supplementation for pharmaceutical inventions, the proposed revisions clarify that such supplementation is permissible where “the technical effect to be proved by the supplemental experimental data shall be that which can be obtained in the contents of the [original] application disclosure by one who is ordinarily skilled in the art.” 对于申请日之后补交的实验数据,审查员应当予以审查。补交实验数据所证明的技术效果应当是所属技术领域的技术人员能够从专利申请公开的内容中得到的。

 The examination guidelines also loosen the standards for obtaining business method patents if there is a technical element to the novel business method.  Presumably these inventions were previously denied patentability on the basis that they were intellectual rules or methods under Article 25 of the Patent Law.  The proposed guidelines state:

 Claims related to business methods that contain both business rules and methods and technical characteristics, shall not be excluded from the possibilities of obtaining patent rights be Article 25 of the Patent Law. 涉及商业模式的权利要求,如果既包含商业规则和方法的内容,又包含技术特征,则不应当依据专利法第二十五条排除其获得专利权的可能性。

The examination guidelines also appear to loosen the standards for obtaining software enabled inventions:

In the second line of Part II, chapter IX, section 5.2, paragraph 1, the third sentence of the Patent Examination Guidelines are amended from, “and describe in detail which parts of the computer program are to be performed and how to perform them” to provide that “The components may not only include hardware, but may also include programs. 将《专利审查指南》第二部分第九章第5.2节第1段第3句中的并详细描述该计算机程序的各项功能是由哪些组成部分完成以及如何完成这些功能修改为所述组成部分不仅可以包括硬件,还可以包括程序”.

Postscripts (Nov 18 and 28, 2016):

1.  Here’s Jacob Schindler’s October 31, 2016 commentary in IAM on this blog, and  here’s another blog comparing US and Chinese software patent developments. 

2.  Here are AIPLA’s comments on the proposed revisions to the patent examination guidelines (Nov. 25, 2016 – bilingual).