SAMR Releases Antitrust Guidelines for SEPs

On November 8, 2024, China's State Administration for Market Regulation ("SAMR") released the Anti-Monopoly Guidelines for Standard Essential Patents ("Guidelines").

In alignment with China's Anti-Monopoly Law ("AML"), the Anti-Monopoly Guidelines for the Field of Intellectual Property Rights ("IP Guidelines") and the Provisions on Prohibiting the Abuse of Intellectual Property to Exclude or Restrict Competition ("IP Provisions"), the Guidelines build on the legislative efforts to reconcile the intellectual property rules and the antitrust rules, with the objective of promoting competition and innovation. Furthermore, the Guidelines provide additional clarification regarding the antitrust rules that pertain to the process of standard setting and implementation. 

From a procedural standpoint, the Guidelines establish a novel mechanism for "strengthening ex-ante and in-process supervision" and encourage "good conduct," with the objective of constructing a comprehensive supervisory system. From a substantive standpoint, the Guidelines strike a careful balance between the interests of Standard Essential Patent ("SEP") holders and those of SEP implementers, delineate the rules governing SEP-related monopoly agreements and abuse of market dominance, elucidate typical types of monopolistic conducts, and identify the factors to be considered in the process of the determination of monopolistic conducts. This article will explicate pivotal tenets of the recently published Guidelines, offering insights developed from our practical knowledge of SEP licensing and antitrust enforcement. 

In comparison to previous rules, the Guidelines have incorporated a provision entitled the strengthening of ex-ante and in-process supervision[1].

Specifically, the Guidelines stress the importance of antitrust compliance when setting and implementing standards, managing and operating patent pools, and licensing SEPs by standard setting organizations ("SSOs"), patent pools, SEP holders and SEP implementers. They are encouraged to report to the antitrust authorities upon discovery of any possible risk of exclusion or restriction of competition, and shall accept the antitrust authorities' supervision and guidance. We notice that the efforts made by undertakings to strengthen antitrust compliance have been acknowledged by enforcement authorities in certain cases as reflected through the imposition of a more lenient penalty for companies with a compliance system in place[2].

In addition, the Guidelines provide that, for any conduct which has the risk of excluding or restricting competition or which is suspected of having implemented monopolistic conduct, the antitrust authorities may strengthen ex-ante and in-process supervision by issuing reminders and arranging a regulatory interview for rectification, and requiring relevant parties to propose improvement or rectification measures[3]. The variety of supervisory measures that can be implemented by the antitrust authorities further fosters the construction of a multilevel antitrust supervision system in China. The system has been perfected through the incorporation of a regulatory interview mechanism promulgated in the AML[4] and the introduction of the "Three Letters and One Notice" system[5], and is applied to the SEP sector through the Guidelines. For example, recently SAMR has adopted the ex-ante and in-process supervision measures to intervene in potential monopolistic conducts regarding SEP licensing in the automotive wireless communication industry[6]. But the ex-ante and in-process supervision measures do not exclude the authorities from conducting in-depth investigations and imposing penalties[7].

In Chapter 1 General Provisions, the Guidelines stipulate that, in the determination of the abuse of SEPs to exclude or restrict competition, "the disclosure of information, licensing commitments, and licensing negotiation concerning the SEPs should be given full consideration[8]." In accordance with this fundamental tenet and having built on the relevant patent-related legislation and judicial practice, Chapter II of the Guidelines clarifies regulations pertaining to the disclosure of information, licensing commitments, and good faith negotiation in the antitrust context.

It is noteworthy that the Guidelines explicitly stipulate that "failure to engage in the good conducts does not necessarily result in a violation of the antitrust laws[9]." The provisions regarding the "good conducts" are not mandatory legal obligations; rather, they are recommendations. Despite that, "good conduct" provisions remain of considerable importance to companies engaged in the licensing of SEPs. The antitrust authorities consider whether the parties to a licensing arrangement have complied with the "good conduct" provisions when reviewing and determining whether there have been anticompetitive practices, such as setting an unfairly high price, refusing to license, tying and bundling, and so forth. Furthermore, failure to comply with the aforementioned conditions may result in an increased likelihood of exclusion or restriction of competition[10]. The demonstration of compliance with the "good conduct" guidance may serve as a partial defense or mitigating factor for companies under investigation or facing litigation that it has expended effort in antitrust compliance.

1. Information Disclosure

Article 6 of the Guidelines delineates the different disclosure obligations between operators engaged in standard-setting and/or revision and those which have not participated in such activities under the rubric of "good conduct." For operators engaged in the standard-setting and/or revision process, Article 6(1) of the Guidelines delineates three fundamental obligations for information disclosure: (i) it must align with the stipulations set forth by the SSOs; (ii) it must be prompt and comprehensive; (iii) corresponding supporting documents must be furnished. In contrast, Article 6(2) of the Guidelines establishes a less rigorous standard of information disclosure for operators not engaged in standard setting and/or revision. Such operators "may" disclose information in accordance with the stipulations set forth by the SSOs, and the information disclosure is not required to be "prompt and comprehensive." It is yet to be determined through further legal interpretation and jurisprudence how the specific obligations are to be operationalized in practice.

It is worth noting that the Guidelines have removed the requirement in an earlier draft that operators engaged in standard-setting and/or revision processes are "responsible for the truthfulness" of the supporting documentation they provide[11]. 

2. Licensing Commitments

Both SEP holders and the SEP implementers shall adhere to the Fair, Reasonable, and Non-Discriminatory ("FRAND") principle in their licensing negotiations. It is a fundamental principle that is widely recognized and adopted by SSOs domestically and internationally. 

Article 7 of the Guidelines provides that SEP holders shall, in accordance with the stipulations set forth by SSOs, explicitly declare that they agree to license other operators, on a FRAND basis, free of charge or for a royalty fee, to use their patents in the implementation of the standard. For patents bearing a licensing commitment based on the FRAND principle, when transferring the patent, the patentee shall inform the transferee in advance of the licensing commitment and ensure that the transferee agrees to be bound by the licensing commitment, i.e., the licensing commitment regarding SEPs shall have the same effect on the transferee. In practice, whether the SEP holder or its transferee violates the FRAND commitment is an important factor to be considered when assessing whether the practice at issue constitutes a monopolistic conduct such as licensing at an unfairly high price, refusal to license, tying and bundling, attaching other unreasonable trading conditions, or differential treatment without justifications.

3. Good-Faith Negotiation

Comparing to information disclosure and licensing commitments, good faith negotiation entails a more special status in the antitrust rules regulating SEPs. In addition to being encouraged as a "good conduct", good faith negotiation has also been incorporated as an element in the determination of abuse of remedies according to Article 18 of the Guidelines.

Article 8 of the Guidelines delineates the obligations for SEP holders and SEP implementers. Both parties must express their willingness to reach a license agreement and negotiate the specific terms and conditions in accordance with the FRAND principle, and are under the obligation to make an offer and to respond, respectively. The Guidelines have integrated long-standing experience and practices from the early antitrust enforcement and patent litigations of China. Specifically:

The rules on good faith negotiation span all aspects of business negotiations, including specific industry practice, economic analysis, specific circumstances of the parties to the licensing negotiations, and other factors. But there has not been much enforcement or judgement in China assessing or discussing the good faith negotiation rule regarding SEPs from the antitrust perspective.

4. Detailed Regulation on the Monopolistic Conducts Involved in Patent Pool

Article 10 of the Guidelines is dedicated to regulate antitrust risks associated with SEP patent pools. The adoption of a patent pool licensing model for SEPs could facilitate the combination of complementary patented technologies. By aggregating patents from multiple patent holders, a patent pool can offer comprehensive licensing service, streamline the licensing process, and significantly reduce search, negotiation, and enforcement costs. Nevertheless, as a patent pool unites undertakings with common strategic interests linked by a set of related patented technologies, it has the natural appearance of an alliance of competitors. 

The Guidelines outline the factors to be considered when determining whether SEP holders have used patent pools to reach monopoly agreements, including: (i) whether the patent pool has been used by the SEP holders to exchange competitively sensitive information such as price, production quantity, and market allocation; (ii) whether the entities managing or operating the patent pool have included competing patents in the patent pool; (iii) whether the entities managing or operating the patent pool restrict the SEP holders from licensing to others on their own; (iv) whether the entities managing or operating the patent pool organize or provide substantial assistance to SEP holders to conclude monopoly agreements[14]. Based on the principles in the Guidelines, we set out the following practical tips for patent pools to address antitrust risks:

(1) Avoiding exchange of sensitive information

Patent pools are patent aggregation platforms. During the operation of patent pools, pool members may have access to other parties' sensitive information (e.g., production and sales data may be required for calculating royalties). Given that pool members are likely to be competitors or potential competitors, the patent pool itself may serve as a vehicle for the exchange of information. In particular, if the patent holder is also a member of another competing patent pool, there might be exchange of sensitive information across competing pools.

Article 10 of the Guidelines cautions the antitrust risks that may arise from the exchange of sensitive information in the context of patent pools. In particular, exchanging competitively sensitive information may be construed as evidence that SEP holders have entered into monopoly agreements through the use of the patent pool. The antitrust enforcement authorities may then initiate investigations to examine the substance of the exchange of sensitive information and ascertain whether it is for the purpose of fixing prices and/or limiting the number of licenses, thereby producing the effect of excluding and restricting competition. Accordingly, when the exchange of sensitive information may occur during the process of formulating and operating patent pools, SEP holders should proceed with caution and implement necessary safeguards. Relevant measures may include the establishment of independent licensing administrators to manage information collected from pool members, the implementation of firewalls between pool members to block the exchange of sensitive information, and etc. 

(2) Paying attention to the substitutability of pool patents

It is commonly accepted that a patent pool comprising complementary SEPs can facilitate efficiency and reduce licensing costs, given that they are necessary to the same SEP implementer simultaneously. Since SEP implementers do not need to obtain multiple licenses for alternative SEPs, having alternative SEPs in the same pool takes away the opportunity for SEP implementers to evaluate the competitive features of different SEPs (such as royalty rates, patent suitability, follow-up services, and so forth) and choose one SEP to obtain license. Therefore, compared with patent pools comprising complementary SEPs, patent pools comprising alternative SEPs are more likely to eliminate the discrepancies among pool members in the aforementioned factors, diminish competition among members, and reduce social welfare, which is more likely to result in an anticompetitive outcome.

With regard to the substitution analysis of SEPs, Article 4 of the Guidelines merely suggests that, when defining the relevant product market of SEPs, the substitution analysis method should be adopted. However, no clear guidance is provided on how to analyze the substitutability between SEPs. In accordance with the IP Guidelines, an analysis of the substitutability between SEPs in the pool may be conducted by considering a number of factors, including technical attributes, purpose of use, royalties, compatibility, SEP term, and the possibility and cost for SEP implementers to switch to alternative technologies.

(3) Avoiding exclusive licensing

In the process of formulating and operating patent pools, a variety of exclusive licensing arrangements may be considered, including that the pool may agree to grant a license exclusively to only one SEP implementer within a certain period of time and geographical area, but not to any other SEP implementer the right to implement the patents within the time period and geographical scope; it may also include restriction on the SEP holders to grant bilateral licenses.

As the FRAND obligation requires SEP holders to grant licenses to all willing implementers on equal terms, the first type of exclusive licensing arrangements may be perceived as excluding and restricting other undertakings from implementing the patents. The second type of exclusive licensing arrangement is currently the subject of antitrust enforcement. Article 10 of the Guidelines explicitly lists such exclusive licensing arrangement as a factor to be considered in the determination of monopoly agreements involving SEP patent pools. In practice, even after joining patent pools, SEP holders are still bound by the FRAND commitment they have made to provide bilateral licenses. Pool licensing only represents another licensing model which should not pose any obstacle to bilateral licensing. It is therefore recommended that, in practice, patent pools with high market shares and fewer alternative technologies should exercise greater caution before concluding any exclusive licensing agreement.

To determine the dominant market position of SEP holders, the Guidelines have considered the distinctive attributes of SEPs, and proposed an evaluation criteria that places particular emphasis on the market share of the SEP holders, with other market characteristics serving as supplementary considerations[15].

In general, when there is no alternative standard, the SEP holder would be presumed to have a 100% market share in the licensing market of the SEP it holds, except when there is sufficient evidence to rebut such presumption. Based on judicial practice, the uniqueness and irreplaceability of SEPs could be sufficient reasons for the court to conclude that the SEP holder has a 100% market share in the relevant market. In H Co. v. I Corp.[16], since Corporation I owns the SEPs for WCDMA, CDMA2000, and TD-SCDMA standards in the 3G wireless communication field, and each SEP of the 3G standard is unique and irreplaceable, the court found that Company I holds a dominant market position in each relevant market. 

If the antitrust authority has found that the SEP holder holds a dominant market position, its next focus would be on whether the SEP holder has abused the dominant market position created by technological advantages to reap monopoly profits, or engendered undue competitive advantages or disadvantages for certain SEP implementers, resulting in an imbalance of interests between SEP holders and SEP implementers, or among SEP implementers. Based on the Guidelines and current trade practices in patent licensing, we have summarized the business models that have potential antitrust risks of being determined as SEP-related abuse of dominant market position as follows: 

1. Charging Unfairly High Royalties

The Guidelines recognize that under normal circumstances, reasonable royalties could ensure that SEP holders obtain returns for their R&D investment and technological innovation. However, if SEP holders utilize their market advantages to charge unfairly high royalties, it may lead to an imbalance of interests between SEP holders and SEP implementers. For example, SEP implementers may be forced out of the relevant end-product market or be forced to accept unfair pricing terms, which increases their costs and reduces their profits in the relevant end-product market, directly restricting their ability to compete effectively.

The determination of royalty rates depends on not only the patent itself, but also the negotiation status and business performance. Therefore, royalties are usually calculated based on the licensing and rate conditions of the patent, rather than implementing a flat rate. On such basis, the Guidelines provide some useful indicators for the determination of the reasonableness of the royalties: comparison with historical royalties or royalties of other undertakings; whether the royalty includes expired or invalid SEPs or non-SEPs; whether the royalty rate will be reasonably adjusted based on the number of patents, etc. [17]The Guidelines specifically points out that royalties should reflect the value of patents, and this determination method is consistent with the common business practices of patent licensing.

2. Strict Grant-Back Provisions

In principle, non-exclusive grant-back licensing provisions generally have the effect of promoting competition and investment into and application of new technology. However, sole grant-back license and exclusive grant-back license may reduce the innovation incentives of licensees and have exclusionary and restrictive effects on market competition, and thus may garner the attention of the antitrust enforcement authorities.

In addition, the Guidelines provides a determination method for grant-back license for free or with unreasonable consideration. If a SEP holder with dominant market position sets free grant back license or grant back license with unreasonable consideration as a precondition for licensing SEPs, which results in increased transaction costs and lessened innovation incentives, it may constitute an act of attaching unreasonable transaction conditions[18]. Such determination is supported by antitrust enforcement precedents. In the case of Company G's abuse of dominant market position, the authority found that Company G incorporated the grant-back obligation of the SEP implementer in the licensing terms, forcing the SEP implementer to grant back license for free. Regarding the free grant-back clause, the authority held that the grant-back clause is not illegal per se, but the free grant-back license is an "unreasonable transaction condition[19]."

3. Package Licensing

The SEP holder may adopt a package licensing model, which naturally has the appearance of tying and bundling. While Article 15 of the Guidelines states that "an SEP holder may abuse its dominant market position to exclude or restrict competition by forcing SEP implementers to accept package licensing … without reasonable justifications", it also preserves some room for justification regarding the package licensing model that "can reduce the overall transaction costs and improve the efficiency of standard implementation".

Current judicial opinions tend to consider the package licensing of SEPs as legitimate, while considering the package licensing of non-SEPs as an abuse of dominant market position. In H Co. v. I Corp., the Guangdong High People's Court differentiated between package licensing of SEPs and that of non-SEPs[20]. Given that non-SEPs are generally substitutable, the package containing non-SEPs will lead to a leverage of market power from the SEP licensing market to the non-SEP market, thereby hindering or restricting market competition. However, for the SEPs, since they are inherently unique and lack substitutability, the package licensing containing only the SEPs is not only efficient, but also will not leverage market power in the SEP market to restrict competition in other relevant non-SEP markets.

4. No-Challenge Requirement

According to Article 16 of the Guidelines, the no-challenge requirement may constitute an act of "attaching other unreasonable transaction conditions". The "unreasonableness" of the no-challenge clause lies in its potential harm to technological innovation and market competition. In theory, intellectual property rights suspected of invalidity should be challenged as much as possible, so as to exclude the invalid ones from the protection scope of intellectual property law, because the invalid ones will interfere with the normal operation of intellectual property law and policies and restrict beneficial technological innovation. In terms of the challenging entity, the implementer of a patented technology is often the party with the most capacity and incentives to challenge the validity of the patent. Therefore, the no-challenge clause prevents the most appropriate party from raising legitimate and reasonable challenges about the validity and essentiality of the SEPs. Enhanced regulation over such no-challenge clause will help protect effective competition in the technology market.

In the case of Company G's abuse of dominant market position, Company G's licensing terms stipulated that if the licensee attempted to challenge the validity of the licensor's patents and initiated any patent invalidation request or litigation against the licensor, the licensor shall be entitled to terminate the subsequent chip supply. The authority determined this clause to be an implicit "no-challenge clause" and found that it constituted an attachment of unreasonable transaction conditions[21].

Article 18 of the Guidelines clarifies that, under normal circumstances, if the patent rights of the SEP holder are infringed upon, the SEP holder is entitled to request the court or relevant authorities to render or issue an injunctive judgment, ruling or decision to cease the infringement of the relevant patent rights. Meanwhile, the Guidelines also regulate behaviors of the SEP holders which abuse the above remedies in violation of the FRAND principle to force the SEP implementers to accept their unfairly high royalties or other unreasonable transaction conditions, without negotiating in good faith, and resulted in excluding or restricting competition.

Elements of SEP-related abuse of remedies include: (i) violation of FRAND principle; (ii) failure to engage in good-faith licensing negotiations; (iii) abuse of remedies to force the SEP implementers to accept unfairly high royalties or other unreasonable transaction conditions; and (iv) the conduct has the effect of excluding or restricting competition in the relevant market. In practice, the compliance with the FRAND principle and "good-faith negotiation" are often inseparable. In H Co. v. I Corp., Guangdong High People's Court had considered the FRAND principle and the good-faith negotiation elements in its reasoning. Specifically, the court pointed out that Company I had failed to comply with its obligations to license under the FRAND terms and ignored the sincerity and good faith of Company H in the licensing negotiation process. Company I not only failed to reasonably adjust the offer, but also filed a lawsuit requesting injunctive relief in the United States. Under the disguise of exercising the legitimate right to assert remedy, its true intend was to threaten Company H to accept the unfairly excessive licensing terms by means of litigation, and to force Company H to pay consideration for factors other than the SEPs. Therefore, this behavior was not legitimate[22].

Thanks to intern Yuan Haiyin for contribution to this article.

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封面图源：洪流 · Tillian Reeves, 2017