Journal of Antitrust Enforcement Advance Access published June 16, 2015

Journal of Antitrust Enforcement, 2015, 0, 122

doi: 10.1093/jaenfo/jnv012
Article

IP and competition lawThe Chinese

perspective
Natalie Yeung*

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ABSTRACT
Recent case law and enforcement activities in China have begun to shed light on the
approach of Chinese courts and competition authorities towards the application of
competition law to issues involving intellectual property rights. This article considers
these developments against the backdrop of the prevailing European and US practices,
with particular focus on standard essential patents and how they relate to the issues of:
(i) compulsory licensing; (ii) use of injunctive relief to enforce standard essential pa-
tents; (iii) how a FRAND royalty rate should be determined; and (iv) tying or bun-
dling of licences. Although some of the principles applied by the Chinese courts and
authorities are broadly in line with those adopted in the European Union and the US,
the lack of a clear approach in areas such as compulsory licensing, the concept of will-
ing licensee and the determination of FRAND rates serves as a reminder that the regu-
lation of competition and intellectual property laws in China is a comparatively recent
endeavour and continues to evolve. The article concludes with a summary of competi-
tion enforcement activities in other areas of intellectual property rights and the lessons
that businesses should be aware of in China.
K E Y W O R D S Intellectual property, China, competition law
J E L C L A S S I F I C A T I O N S : K21

I. I NT RO D UCTI ON
It is widely recognized that intellectual property rights (IPR) and competition law
can work together to promote innovation and consumer benefits. However, the
abuse of IPR has been on the radar of European and US competition agencies for
some time.1 Recent cases have brought into the global spotlight certain areas of

* Partner with Slaughter and May. Email: Natalie.Yeung@SlaughterandMay.com. The views expressed in
this article are my own. I would like to thank and acknowledge the contribution of Mariko Tavernier and
Stephanie Tam, solicitors at Slaughter and May.
1
For example, in 1998, the European Commission began investigations into Microsofts refusal to provide
interoperability information to competitors and Microsofts bundling practices. This led to a decision in
2004 that Microsoft had abused its dominant position in the market for client personal computer operating
systems. More recently, in the area of standard essential patents, the European Commission opened an in-
vestigation in 2007 into the licensing practices of Qualcomm. This investigation was closed in 2009 follow-
ing the withdrawal of the complaints that prompted the investigation.

C The Author 2015. Published by Oxford University Press. All rights reserved. For permissions, please e-mail:
V
journals.permissions@oup.com

 1
2  Journal of Antitrust Enforcement

intersect between competition law and IPR, in particular as a result of the patent
wars between Huawei, ZTE, Apple, Microsoft, Nokia, Samsung, and Google/
Motorola, among others, in the field of telecommunications.
More recently, IPR issues have also come to the fore in China following a land-
mark ruling in which a Chinese court became the first court to set a fair, reasonable,
and non-discriminatory (FRAND) rate. This case has been followed by a surge of
interest in IPR-related investigations by the two non-merger competition enforce-
ment agencies in China, the National Development and Reform Commission (the

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NDRC) and the State Administration for Industry and Commerce (the SAIC).
These were likely prompted in part by concerns that IPR were being used as a tool
by Western multinational companies to undermine new market entry by Chinese
companies.2
However, the antitrust enforcement activities of Chinese regulators in relation to
IPR have generated concerns among other global regulators and companies in indus-
tries where IPR play a significant role, leading to criticism by members of the US
Federal Trade Commission (US FTC) that recent reports of activities suggest an en-
forcement policy focused on reducing royalty payments for local implementers as a
matter of industrial policy, rather than protecting competition and long-run con-
sumer welfare 3 and that the Chinese may be moving away from rather than to-
wards international norms.4 In a 2014/2015 position paper published by the
European Union Chamber of Commerce in China (the EU Chamber), the applica-
tion of Chinas Anti-Monopoly Law (the AML) with respect to IPRs was specified as
an area where further guidance is required from the Chinese authorities. In its assess-
ment of the business environment, the EU Chamber noted that . . . business oper-
ators in China keen to comply with the law will continue to face challenges due to
the lack of clear standards and guidance on enforcement methodology. Both from a
procedural and substantive view point, greater clarity and certainty are needed to fur-
ther provide a foreign investor-friendly environment.5 The significance attached to
such concerns is illustrated by the fact that US President Barack Obama is said to

2
In December 2013, Xu Junqi, a director at the China Academy of Telecommunication Research at the
Ministry of Industry and Information Technology stated at a conference in Beijing that unfair patent licens-
ing practices are a major burden on Chinese companies and that the AML (as defined below) should be
used to intervene in the problem Chinese companies face with patent trolls. He is also reported to have
argued that Chinese companies face constant harassment in overseas markets from patent trolls. This senti-
ment has been echoed by: (i) Zhang Zhicheng, deputy chief of the Protection and Coordination depart-
ment at the State Intellectual Property Office, who has stated that Chinese companies should actively use
competition law when faced with problems over non-practising entities, and (ii) Zhang Ping, an intellectual
property professor at Peking University Law School who has stated that patent trolls threaten a momen-
tous upheaval in China and that Chinese companies are targeted overseas.
3
Edith Ramirez, Chairwoman, US FTC, Standard-Essential Patents and Licensing: An Antitrust
Enforcement Perspective, 8th Annual Global Antitrust Enforcement Symposium, Georgetown University
Law Centre, Washington, DC (10 September 2014) <http://www.ftc.gov/system/files/documents/pub-
lic_statements/582451/140915georgetownlaw.pdf> accessed 30 September 2014.
4
Maureen K Ohlhausen, Commissioner, US FTC, Antitrust Enforcement In China What Next?, Second
Annual GCR Live Conference, New York (16 September 2014) <https://www.ftc.gov/system/files/docu-
ments/public_statements/582501/140915gcrlive.pdf> accessed 30 September 2014.
5
EU Chamber of Commerce in China, European Business in China Position Paper 2014/2014, 8788,
<http://www.europeanchamber.com.cn/en/publications-position-paper> accessed 30 September 2014.
 IP and competition law in China  3

have raised the US Governments concerns about Chinese antitrust enforcement,

including the NDRCs investigation into Qualcomm, during a meeting with Premier
Li in Beijing in November 2014.6
The size of the Chinese market and the willingness of Chinese enforcers to take a
position at the forefront of competition enforcement in relation to IPR mean that
the Chinese perspective on the interplay between IPR and competition law under
the AML will have a significant impact for companies worldwide. The potential glo-
bal impact of Chinese antitrust enforcement activities is reflected in a statement by

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US FTC Chairwoman Edith Ramirez that enforcement activity that deprives patent
owners of a reasonable reward in one country can depress incentives to create tech-
nology for next-generation standards that will benefit consumers around the
world . . . because the incentives that drive these markets are established globally, re-
gional distortions can have a global impact.7 Indeed, the acknowledgement in 2014
by Microsoft that Chinese competition law enforcement is exerting a downward
pressure on royalties demonstrates that the effects of Chinese enforcement are al-
ready being felt.8
This article examines the interplay between IPR and competition law in China,
including the FRAND licensing of standard essential patents (SEPs), by examining
four key issues: (i) compulsory licensing; (ii) use of injunctive relief to enforce SEPs;
(iii) how a FRAND royalty rate should be determined; and (iv) tying or bundling of
SEP licences, in the context of recent developments in both the antitrust enforce-
ment and merger control spheres. It also looks at recent competition enforcement in
relation to other areas of IPR. In considering these issues, we will look at cases
involving each of the three Chinese competition agencies and the Chinese courts
and consider what lessons may be drawn from these and how this informs the IPR
climate in China more generally.

II. FRAND LICENSING OF SEPs

It is helpful to begin our examination of IPR and competition law in China by con-
sidering the area in which the balance between IPR and competition enforcement
has recently been most hotly debated around the worldthe licensing of SEPs.
SEPs have been drawn into the limelight as a result of the recent smart phone wars
that have extended across a number of jurisdictions worldwide since 2010.
SEPs are patents that read on an industry standard (detailed technical rules that
need to be complied with to ensure interoperability between products manufactured
by different producers). Such patents are essential when the standard cannot be

6
Chinas antitrust regulator says Qualcomm case to be settled soon Reuters (26 December 2014) <http://
www.reuters.com/article/2014/12/26/us-china-qualcomm-idUSKBN0K406B20141226> accessed January
2015.
7
Ramirez (n 3).
8
In its 2014 Form 10-K, Microsoft stated that: certain foreign governments, particularly in China and other
countries in Asia, have advanced arguments under their competition laws that exert downward pressure on
royalties for our intellectual property. Microsoft further noted that [b]ecause these jurisdictions only re-
cently implemented competition laws, their enforcement activities are unpredictable. Microsofts 2014
10-k filing is available at <http://www.sec.gov/Archives/edgar/data/789019/000119312514289961/
d722626d10k.htm> accessed 30 September 2014.
4  Journal of Antitrust Enforcement

implemented without infringing the patent. Consequently, the only way to manufac-
ture standard-compliant products without infringing the patent holders IPR is to ob-
tain a licence from the patent holder. Some competition authorities and courts have
found that certain owners of SEPs relating to important standards can have market
power or a dominant position since all producers require a licence to manufacture
standard-compliant products.
In a number of cases, owners of SEPs have been found to have abused their dom-
inant position. Standard setting organizations (SSOs) have long recognized the risk

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that SEP owners may undermine the standard by not licensing on fair and reasonable
terms. As a result, some SSOs systematically require companies which choose to par-
ticipate in a standard setting process to commit to licensing their SEPs on FRAND
terms.
We focus in this article on the cases involving SEPs, which has been at the centre
of the IPR/competition debate in recent years, but there have been recent concerns
regarding breaches of FRAND terms and other licensing commitments by licensors
with a strong market position based on non-SEPs (outside the context of an SSO).
There is a potential argument that such breaches involving non-SEPs (but nonethe-
less very important patents) have a similar effect as breaches involving SEPs.

I II . CO M P UL S O R Y LI C E NS I NG
IPR are generally considered to be pro-competitive due to their importance in incen-
tivizing innovation and investment in research and development of new technologies,
as well as their role in the development of open standards and interfaces, for ex-
ample, in the telecommunications industry. However, there remain certain areas
where there is a tension between the protection of IPR and the safeguarding of com-
petition in a marketone of these is the licensing of SEPs and the question of when
(if ever) compulsory licensing may be justified.
Patents confer upon their holders the right to determine by whom their IPR is
used (if anyone). A refusal to license IPR is a fundamental right of the IPR holder,
and therefore not, in general, a breach of competition rules.
The imposition of compulsory licensing as an enforcement tool cuts across this
fundamental right. It carries the risk of discouraging innovation and competition as it
acts as a disincentive to invest in new technologies and develop existing
technologies.
The conclusion of competition agencies in the USA and EU has, therefore, been
that compulsory licensing (outside of mergers) should be a rare beast9 and that
intervention is appropriate only where the survival of meaningful competition in a
particular market is at risk.10 Even in the context of standard setting, patent holders

9
Makan Delrahim, Deputy Assistant Attorney General, Antitrust Division, US Department of Justice,
Forcing firms to share the sandbox: compulsory licensing of intellectual property rights and antitrust,
speech at the British Institute of International and Comparative Law, London, England (10 May 2004)
<http://www.justice.gov/atr/public/speeches/203627.htm> accessed 30 September 2014.
10
Jurgen Mensching, Director, Information, Communication and Media, DG Competition, European
Commission, The Microsoft Decision promoting innovation, speech at the Sweet and Maxwell 4th
Annual Competition Law Review Conference (22 October 2004) <http://ec.europa.eu/competition/
speeches/text/sp2004_017_en.pdf> accessed 30 September 2014.
 IP and competition law in China  5

generally have a choice whether or not to make a FRAND commitment in respect of

their patents. If they choose not to make a FRAND commitment, the SSO can take
steps to prevent their technology from being included in a standard.
The importance of protecting IPR in ensuring innovation is also well recognized
in China. Mr. Zhu Li, a judge of the Supreme Peoples Court of China (the SPC) IP
Rights Tribunal, has previously noted that Innovation is more important, and com-
petition should make compromises for innovation.11 Statements by SAIC officials
are similarly supportive of views that compulsory licensing should be restricted to
the most exceptional circumstances.12

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However, notwithstanding the stated intentions of the SAIC, an examination of
the SAICs draft Regulation on the Prohibition of Abuses of IPR for the Purposes of
Eliminating or Restricting Competition (the Draft IP Regulation) published on 11
June 2014 casts some uncertainty over the approach that will be taken by the SAIC
in practice.13
The Draft IP Regulation covers the use, licensing, assignment and enforcement of
patents, trade marks, copyright, and trade secrets. It addresses both anti-competitive
agreements and abuse of dominance.
Most controversially, Article 7 of the Draft IP Regulation appears to raise the
spectre of compulsory licensing in the context of any IPR that is considered to be an
essential facility (whether a SEP or not) by stating:

An undertaking with a dominant market position shall not refuse without justi-
fications to license other undertakings to use its intellectual property rights on
reasonable terms in the circumstance that such intellectual property rights con-
stitute essential facilities for manufacturing and operating activities.

Article 7 goes on to list the following broad factors that may be considered when
determining whether IPR are essential facilities: whether there are reasonable substi-
tutes to such intellectual property rights in the relevant market; whether such intel-
lectual property rights are essential for other undertakings to participate in
competition in the relevant market; whether refusal to license such intellectual prop-
erty rights will bring adverse impact on the competition or innovation in the relevant

11
Yan Wei and Li Ma, Protecting Innovation and not Competition: IPR Does Not Hinder Anti-Monopoly
Investigations (People.cn, 9 August 2013) <http://ip.people.com.cn/n/2013/0809/c136655-22501107.
html> accessed 30 September 2014.
12
Yang Jie, division director of the SAIC is reported to have stated in September 2013 that: We are under-
taking a more rigorous design of the constitutive requirements to ensure that only in certain circum-
stances, refusal to licence IP rights would constitute a violation of the Antimonopoly Law through abuse
of dominance.
13
The Draft IP Regulation was not yet finalized by the time this article was submitted for publication, al-
though it is expected that the final version will be available by the end of 2014. Originally formulated as
guidelines (which would be non-binding but apply across the board if issued together by the SAIC, the
NDRC, and MOFCOM), these are now presented in the form of a regulation, which will be binding only
within the SAICs jurisdiction, ie the rules will not directly apply to price-related conduct that is regulated
by the NDRC. Notwithstanding their non-binding nature in respect of the NDRC and MOFCOM, the
SAIC has sought input from the other agencies in drafting the regulation. The Draft IP Regulation may,
therefore, be taken as indicative of the three agencies joint views.
6  Journal of Antitrust Enforcement

market; whether the licensing of such intellectual property rights will result in unrea-
sonable damage to such undertakings, etc. However, this leaves significant uncer-
tainty as to how Article 7 will be interpreted as it falls short of setting out a defined
test and potentially sets a relatively low threshold for the application of the essential
facilities doctrine.
The inclusion of this essential facilities doctrine in the Draft IP Regulation has
sparked concern among foreign competition agencies and companies (both Chinese
and Western), many of whom have responded to the SAICs consultation to voice

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their concerns.
By comparison, the essential facilities doctrine is viewed sceptically in the USA,
where, in the words of US FTC Commissioner Maureen Ohlhausen, it has faced ser-
ious criticism.14 In 2004, the US Supreme Court indicated its hostility to the doc-
trine in Trinko, noting that the doctrine had been crafted by some lower courts and
that the Supreme Court itself had never recognized such a doctrine.15 It is similarly
controversial in the EU, where the application of the doctrine has been narrowed
through the decision of the European Court of Justice (the ECJ) in Bronner v
Mediaprint16 and subsequent cases, such that it applies only in exceptional
circumstances.
US FTC officials have suggested that Chinese regulators have misinterpreted the
US position on compulsory licensing. In a speech made in June 2013, Commissioner
Ohlhausen, noted:

Recently, I was in China attending a conference and meeting with Chinese

competition officials. At the conference, I heard people claim that the United
States has a well-established essential facilities doctrine, which is not exactly
correct. In addition, it was suggested that when read in light of this doctrine,
the FTCs Google decision implies that a SEP is an essential facility and an un-
reasonable refusal to license that SEP constitutes monopolization. It was fur-
ther suggested that the best remedy for monopolization with a SEP would be
compulsory licensing because permitting more parties to use the SEP would fa-
cilitate competition.
This is not a correct reading of relevant U.S. law or, in my opinion, of the
FTCs decision in Google. This sort of misinterpretation is troubling on two
levels. First, it undercuts the value of intellectual property rights and gives our
counterparts abroad the misperception that we support wide application of
compulsory licensing, which is completely incorrect. Second, if these misper-
ceptions about our SEP enforcement actions here in the U.S. are actually im-
plemented elsewhere in the world, the resulting harm to patent rights would
create serious disincentives for investment in research and development and
harm innovation.17

14
Ohlhausen (n 4).
15
Verizon Comms., Inc. v Law Offices of Curtis V. Trinko (2004) 540 US 398.
16
Case C-7/97, Oscar Bronner GmbH v Mediaprint Zeitungs [1998] ECR I-7791.
17
Maureen K Ohlhausen, Commissioner, US FTC, Recent Developments in Intellectual Property and
Antitrust Laws in the United States, speech at George Washington University Law School (17 June
 IP and competition law in China  7

The need for robust economic analysis when considering the interplay between com-
petition law and IPR was recently emphasized by US FTC Commissioner Joshua
Wright, who called for a clear analytical framework involving rigorous economic ana-
lysis to assist emerging jurisdictions such as China in developing their own policies:

There is in some quarters a growing concern about some antitrust regimes

around the world using the antitrust laws to further nationalistic goals at the
expense of IPR holders, among others. This has evoked an important discus-

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sion about the appropriate role for antitrust in limiting IPR rights, especially in
young and emerging antitrust regimes, and most notably in China. There is no
doubt that certain business arrangements involving IPRs harm competition.
However, as China and other emerging jurisdictions craft their own approach
to applying antitrust principles to IPRs it is critically important that the mes-
sage coming from the actions and words of the global antitrust community,
including the FTC and DOJ, is that promoting competition and consumer wel-
fare as understood through the lens of rigorous economic analysis is the best
and most intellectually coherent approach.18

Notwithstanding the concerns that have been raised, and the SAICs own stated in-
tention that compulsory licensing should have only limited application in China, the
essential facilities doctrine will remain in the final version of the Draft IP Regulation
when it is published. On 23 September 2014, the SAIC stated at an IPR and
Standards Development Forum that there have been significant changes to the Draft
IP Regulation, but Article 7 has been retained. In response to the comments received
during the public consultation, the SAIC has sought to limit the application of the
doctrine by inserting two new conditions, namely: (i) the conduct must restrict and
eliminate competition and (ii) to be an essential facility, the refusal to license must
harm consumer welfare and the public interest. It, therefore, appears that the essen-
tial facilities doctrine will stay with us in China for the foreseeable future.
Therefore, although there remains much uncertainty as to how the SAIC would
enforce any compulsory licensing and apply the essential facilities doctrine in prac-
tice, the current situation in China suggests that patent holders may in future face
the imposition of compulsory licensing, where a claimant is able to argue successfully
that a licence of the patent in question is essential to enter a market or produce a cer-
tain type of productpotentially, even where a voluntary FRAND commitment has
not been given by the patent holder.

I V . US E O F I N J U N C T I V E R EL I E F W I T H S E P S
Another key issue in relation to SEPs, and one that has dominated the competition
debate emerging out of the smart phone patent wars, is the question of when the
2013) <https://www.ftc.gov/sites/default/files/documents/public_statements/recent-developments-
intellectual-property-and-antitrust-laws-united-states/130617intellectualpropertyantitrust.pdf> accessed
30 September 2014.
18
Joshua D Wright, Commissioner, US FTC, Does the FTC Have a New IP Agenda?, 2014 Milton
Handler Lecture: Antitrust in the 21st Centry, New York City Bar Association, New York (11 March
2014) <https://www.ftc.gov/public-statements/2014/03/does-ftc-have-new-ip-agenda-remarks-2014-
milton-handler-lecture-antitrust> accessed 30 September 2014.
8  Journal of Antitrust Enforcement

pursuit of injunctive relief against a potential licensee becomes anti-competitive. In

giving a FRAND commitment, it is arguable that a patent holder has already agreed
to license out its SEP. It follows that an injunctionwhich deals with the question
of whether or not the licensee may use the licenceis, therefore, inappropriate as
the only issue which could properly be in dispute is the terms (including royalty
rate) on which the licence should be given. As such, the pursuit of injunctive relief
(among other things, such as excessive pricing) may constitute an abuse of a domin-
ant position if it is threatened by patent holders to extract higher royalties or more

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favourable terms than would otherwise be negotiated.
The consensus that has emerged in both the EU and the USA is that the assertion
of IPR through the courts is not itself abusive, as this would undermine the funda-
mental rights granted under IPR.19 That said, the pursuit of injunctive relief for IPR
essential to a standard may be abusive if asserted against a willing licensee (ie a li-
censee that is willing to take a FRAND licence). This is based on the principle that a
willing licensee should be given a safe harbour from injunctions.20 However, in
practice, this leads to the difficult question of what constitutes a willing licensee (as
further discussed below).
In China, the Draft IP Regulation published by the SAIC omits any reference to
potential licensees being obliged to negotiate in good faith or being a willing licen-
see. SEP holders are expressly prohibited from taking advantage of the standard set-
ting process to engage in anti-competitive conduct under the draft Article 13, but no
corresponding obligation is imposed on potential licensees to negotiate in good faith
with the SEP holders.
In addition, a draft Article 15, which has reportedly since been deleted, would
have undermined the rights of all patent holders to enforce their rights through the
courts and thereby potentially place the onus to initiate licence negotiations squarely
on the patent holder. Article 15 stated:

Undertakings with dominant market positions shall not, upon the

expiration or invalidation of their intellectual property rights or in the circum-
stance that sufficient evidence has been provided by the other party to prove
the relevant act does not constitute infringement of intellectual property rights,

19
The European Commission Google/Motorola decision confirms that: the seeking or enforcement of in-
junctions on the basis of SEPs is also not, of itself, anti-competitive. In particular, and depending on the
circumstances, it may be legitimate for the holder of SEPs to seek an injunction against a potential licensee
which is not willing to negotiate in good faith on FRAND terms. See Case No COMP/M.6381, Google/
Motorola Mobility, para 126.
20
The European Commission has expressly recognized that SEP-based injunctions should be available
when there is an unwilling licensee. See Antitrust decisions on standard essential patents (SEPs) -
Motorola Mobility and Samsung Electronics - Frequently asked questions (Europa.eu, 29 April 2014)
<http://europa.eu/rapid/press-release_MEMO-14-322_en.htm> accessed 30 September 2014. A joint
report issued by the US Department of Justice and US Patent & Trademark Office also sets out the view
that . . . if a putative licensee refuses to pay what has been determined to be a F/RAND royalty, or re-
fuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate
see Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND
Commitments (8 January 2013) <http://www.uspto.gov/about/offices/ogc/Final_DOJ-PTO_Policy_
Statement_on_FRAND_SEPs_1-8-13.pdf> accessed 30 September 2014.
 IP and competition law in China  9

excessively issue infringement warning letters to eliminate or restrict

competition.

Article 15 introduced considerable uncertainty for SEP holders (and patent holders
generally) as to when they would be justified in issuing infringement letters, as it is
unclear what would be considered sufficient evidence . . . to prove that the relevant
act does not constitute infringement. Its subsequent deletion by the SAIC (as dis-
cussed at an IPR and Standards Development Forum and reported on 23 September
2014) is a positive step in protecting the rights of IPR holders in China.

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Furthermore, this is consistent with past NDRC and MOFCOM decisions, discussed
briefly below. These decisions indicate that the concept of willing licensee is not
without relevance in China.

NDRC investigation into InterDigital

The NDRC appears to be particularly concerned to ensure that licensees are not
forced through litigation into accepting unreasonable terms. This is evidenced by the
settlement it reached with InterDigital in May 2014, which included undertakings by
InterDigital to:21

i. cease tying 2G, 3G, and 4G wireless mobile standard patents during patent
licensing and to respect fully the choice of Chinese companies;
ii. comply with FRAND principles when licensing its 2G, 3G, and 4G wireless
mobile standard patents to Chinese companies;
iii. cease requiring Chinese companies to cross-license their patents for free;
and
iv. give Chinese companies the option to use arbitration as a means to settle
the royalty rate and other disputes before bringing infringement lawsuits,
and cease using litigation as a means to pressure Chinese companies into
accepting unfair licensing conditions.

Although there is no published decision by the NDRC to shed light on its views,
it is notable that InterDigital is required in its undertakings to refrain from seeking
injunctive relief or litigating its patents only if the Chinese Manufacturer accepts
InterDigitals binding arbitration offer or otherwise enters into an agreement with
InterDigital on a binding arbitration mechanism.

Microsoft acquisition of Nokia

Similar conclusions may be drawn from MOFCOMs conditional clearance of
Microsofts acquisition of Nokias Devices & Services unit on 8 April 2014. In this
decision, MOFCOM concluded that Microsoft and Nokia could each restrict compe-
tition in the Chinese smart phone equipment market through the use of related

21
See InterDigital press release, Chinas NDRC Accepts InterDigitals Commitments and Suspends Its
Investigation (22 May 2014) <http://ir.interdigital.com/releasedetail.cfm?ReleaseID849959> accessed
30 September 2014.
10  Journal of Antitrust Enforcement

patents which are essential and irreplaceable and could restrict competition in down-
stream smart phone manufacturing markets.
Clearance was granted subject to commitments from Nokia and Microsoft to ad-
dress MOFCOMs concerns. In particular, the undertakings accepted from Nokia
state that:

On an equal footing, Nokia will not enforce injunctions against SEPs to pre-
vent the implementation of the standard with the FRAND commitment. This

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applies unless the patentee has provided permissive conditions in accordance
with FRAND while the potential licensee does not have good will to sign a
FRAND license and obey these license terms. (Emphasis added)22

A similar commitment given to MOFCOM by Microsoft is not limited to cases

where there is a willing licensee, which is consistent with Microsofts pre-existing pol-
icy that it does not seek injunctions on the basis of SEPs.23 In this, Microsoft com-
mitted to not seek an injunction or exclusion order on the basis of those SEPs
against smart phones made by smart phone manufacturers within the territory of
China.24
This commitment is, however, subject to reciprocity, meaning that it applies only
to entities that have agreed to be bound by the same principles in relation to their
own SEPs which are subject to FRAND commitments. Therefore, Microsofts com-
mitment to MOFCOM not to seek injunctions applies only to other SEP holders
that have similarly committed not to seek injunctions in respect of their SEPs.
However, by not including an exception in the case of unwilling licensees, these com-
mitments leave open the question of whether Microsoft would be prevented from
seeking an injunction where it faces potential licensees who are not willing to engage
in good faith negotiations.
A reference to good faith licensees was, however, included in the equivalent com-
mitment Microsoft gave regarding its non-SEPs: Microsoft will only seek injunctions
on non-SEPs after having concluded that a potential licensee is not negotiating in
good faith for a License.25
Nevertheless, the Nokia undertaking recognizes that a SEP holder should be able
to enforce injunctions against SEPs where a potential licensee will not enter into
good faith negotiations for a FRAND licence and demonstrates that, at least in prin-
ciple, MOFCOM is open to the concept that a SEP holder should be free to enforce
its IPR through the courts against an unwilling licensee.

22
Full decision in Chinese (2014) <http://fldj.mofcom.gov.cn/article/ztxx/201404/20140400542415.
shtml> accessed 30 September 2014.
23
Microsoft, Microsofts Support for Industry Standards (8 February 2012) <http://www.microsoft.com/
about/legal/en/us/IntellectualProperty/iplicensing/ip2.aspx> accessed 30 September 2014.
24
Microsoft, Microsoft Commitments to MOFCOM Related to the Acquisition of Nokias Devices and
Services Business (10 April 2014) <http://www.microsoft.com/en-us/news/download/docs/0414chi-
naannouncement.pdf> accessed 30 September 2014.
25
ibid.
 IP and competition law in China  11

What is a willing licensee?

The European Commission, US authorities, and the NDRC have all adopted similar
approaches to resolving the question of what constitutes a willing licensee, although
the precise definition of willing is still somewhat vague.
In Europe, the European Commission approached this question by setting out in
its recent Motorola26 and Samsung27 decisions a safe harbour for licensees that are
willing to have a court or arbitrator adjudicate the terms of the FRAND licence
(including the royalty rate). Consequently, in Motorola, Apple was found by the

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European Commission to be a willing licensee as it had agreed in October 2011 to
have a court decide on the appropriate royalty rate for Motorola Mobilitys GSM
technology.
Although the European Commission found in Motorola that Apple was a willing
licensee, this outcome differs from previous findings of the German national courts,
which had found that Apple was not a willing licensee in disputes with Motorola
Mobility as Apple did not satisfy the criteria set out in the German Orange Book
case.28 This highlights the some residual inconsistencies in the precise tests of will-
ingness between different authorities or national courts.
The US FTCs Google/Motorola Consent Order includes obligations on Google
that are similar to the European Commissions Motorola case. There have been a
number of US court cases that looked at the question of willingness but which
tended to assess the specific facts of each case, rather than set out a definitive test.29
In China, the NDRC in its InterDigital settlement provided a safe harbour that is
similar to that used by the European Commission in Motorola in allowing Chinese
companies to demonstrate that they are willing licensees by agreeing to a binding
third party determination of what FRAND terms and rates are through arbitration.
MOFCOMs approach to willingness to date is illustrated by the commitments
accepted by MOFCOM in Microsoft/Nokia discussed above. MOFCOM did not pre-
scribe specific tests, but rather relied on more general concepts of the potential licen-
see having the good will to agree to and comply with the terms of a FRAND
licence (in Nokias commitments) and whether the potential licensee is negotiating
in good faith for a licence, leaving the door open for potentially more flexible
interpretations.
However, what if a potential licensee indicates a willingness to negotiate the terms
of a license but refuses an offer to arbitrate or to accept a third-party determination
of what constitutes FRAND terms? This leaves the interesting question of whether

26
Case COMP/39985 Motorola/Enforcement of GPRS standard essential patents.
27
Case COMP/39939 Samsung/Enforcement of UMTS standard essential patents.
28
See judgment of the German Federal Court of Justice, 6 May 2009, KZR 39/06 Orange-Book-Standard.
Under this test, to be a willing licensee, an undertaking would have to: (i) have made an unconditional
offer to take a licence which the patent holder could not refuse without infringing its FRAND obligations;
and (ii) comply with the provisions of that licence.
29
See, for example, Ericsson Inc., et al., v D-Link Systems, Inc., et al., 6:10-CV-473, Memorandum Opinion and
Order (6 August 2013), where the court ruled that Intel was not a willing licensee of Ericssons patents.
The judge highlighted specific factors which led to his conclusion (eg the fact that Ericssons offer to Intel
was the same rate it had offered to other defendants) rather than seeking to define willing licensee.
12  Journal of Antitrust Enforcement

that licensee is a willing licensee. This question is not clearly determined in Europe
and has recently been referred to the ECJ.30
In summary, authorities in China have yet to establish a clear-cut position on
when injunctive relief should be available to SEP holders. On the one hand, the dele-
tion of Article 15 of the SAICs Draft IP Regulation has lessened the risk of poten-
tially contradictory approaches being taken by the SAIC, and the NDRC and
MOFCOM, on the other. It is also encouraging to see that both the NDRC and
MOFCOM appear to have implicitly accepted the principle of willing licensee

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through commitments that they have accepted, and that this is consistent with the
approach taken in Europe and the USA. On the contrary, the absence of any refer-
ence to willing licensee in the Draft IP Regulation (most notably in Article 13) may
mean that the SAIC has not yet formed a firm view on the matter, or is unwilling to
endorse this concept in the Draft IP Regulation. How these issues will be considered
in the Chinese courts is as yet untested and SEP holders should, therefore, apply cau-
tion when seeking to enforce their IPR through the courts in China.

V . H O W A F R A N D RO YA L T Y R A T E S H O UL D B E D E T E R M I N E D
Much of the discussion on SEPs centres on a FRAND royalty rate. However, there
are many questions as to what a FRAND royalty rate is in practice and how it should
be calculated. For example, what unit should be used when calculating the sales price
to which a percentage royalty is applied, and what rate is fair, reasonable, and non-
discriminatory? There are no straightforward answers, as the FRAND rate necessarily
varies from case to case, depending on the product and industry in question and the
identity of the parties involved. In view of this, there has been a general reluctance
among both competition agencies and SSOs31 to define a test for calculating royalty
rates, a task seen as better suited for the courts and arbitration.

30
The following questions have been referred to the ECJ in Huawei v ZTE: (i) Is it sufficient for a successful
FRAND defence if the defendant is willing to negotiate a licence or does he have to make a binding offer
to the SEP holder on terms the SEP holder cannot refuse? Does the defendant additionally have to com-
ply withanticipated licence terms with respect to past acts of infringement?; (ii) Does art 102 of the
Treaty on the Functioning of the EU (which seeks to ensure competition) involve specific qualitative
and/or time requirements in relation to the willingness to negotiate? Can willingness to negotiate be pre-
sumed where the patent infringer has merely made a broad and general (oral) statement that that he/she
is prepared to enter into negotiations, or does the presumption require that the infringer has already
entered into negotiations by, for example, submitting specific conditions upon which he/she is prepared
to conclude a licensing agreement or must the offer contain all the provisions which are normally included
in licensing agreements in the field of technology in question?; (iii) Can the binding offer be made subject
to the condition that the SEP in dispute be actually infringed and/or valid?; (iv) If finding for an abuse of
market dominance should require defendants fulfilment of obligations arising from the requested licence,
are there particular requirements with respect to such fulfilment (eg is the infringer particularly required
to render an account on past infringement and/or to pay (pre-contractual) royalties, possibly by giving se-
curity)?; and (v) Is the FRAND defence limited to claims for injunctions or does it apply to other rem-
edies for patent infringement as well, eg damages, recall or rendering of accounts? Advocate General
Wathelets opinion on these questions was published in November 2014. The opinion is a welcome devel-
opment as it goes further than the European Commissions decisions in Samsung and Motorola towards
providing clear and practical guidance for both SEP holders and potential licensees.
31
For example, ETSI (as defined below) does not set FRAND ratess4.1 of the ETSI Guide on IPR
(September 2013) states: Specific licensing terms and negotiations are commercial issues between the
 IP and competition law in China  13

In Europe, the European Commissions Guidelines on Horizontal Cooperation32

state that [FRAND royalties] should be based on whether the fees bear a reasonable
relationship to the economic value of the IPR. However, the European Commission
has so far not given further guidance on what would constitute a FRAND royalty
rate, and maintains the view that national courts or arbitrators are best placed to de-
termine FRAND rates.33
In the absence of clear tests by which to determine FRAND terms, the practical
consequence of the European Commissions position appears to be that, to avoid po-

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tential competition claims, both SEP holders and potential licensees must turn to
third-party adjudicators or courts to determine applicable FRAND rates or terms.
Likewise, in the USA, it is the court that has taken the lead in arriving at the appro-
priate royalty rate; a number of examples are discussed below.
Chinese agencies have similarly not expressed a view on how a FRAND royalty
rate should be defined and the Draft IP Regulation is silent on this issue. However,
in the 2013 case of Huawei v InterDigital, a Chinese court became the first court to
determine a FRAND royalty rate in a decision which was subsequently affirmed on
appeal to a higher court. A petition for leave to appeal has been submitted to the
SPC with respect to the calculation of the royalty rate. If allowed, an SPC decision
on this issue could provide clarity on the approach to be followed by Chinese courts
when determining a FRAND royalty rate.

Huawei v InterDigital
On 5 December 2011 Huawei filed two complaints against InterDigital, Inc. and its
subsidiaries InterDigital Technology Corporation and InterDigital Communications,
LLC (now InterDigital Communications, Inc.) before the Shenzhen Intermediate
Peoples Court (the Shenzhen Court).
The first complaint alleged that InterDigital had abused its dominant position in
China and the USA in the market for licensing of essential patents owned by
InterDigital through differentiated pricing, tying, and refusal to deal.
The second complaint alleged that InterDigital had failed to negotiate on
FRAND terms with Huawei in respect of the licensing of essential Chinese patents,
despite having given a FRAND commitment as a member of SSOs such as the

companies and shall not be addressed within ETSI. See <http://www.etsi.org/images/files/IPR/etsi-

guide-on-ipr.pdf> accessed 30 September 2014.
32
Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to
Horizontal Co-operation Agreements (2011) OJ C11.
33
See European Commission frequently asked questions (n 19): The Commission believes that courts and
arbitrators are well placed to set FRAND rates in cases of disputes. To the extent they deem necessary, na-
tional courts may seek guidance from the Commission on the interpretation of EU competition law. In
November 2013, the Mannheim Regional Court has asked the Commission a number of questions in rela-
tion to the setting of FRAND rates in the SEP dispute between Motorola and Apple. The Commission
will publish the response to these questions on its website in due course. Joaqun Almunia,
Commissioner, European Commission, has also stated that: the courts should intervene to ensure that
standards essential patents are not used to block competitionsee Competition policy for innovation
and growth: Keeping markets open and efficient, European Competition and Consumer Day,
Copenhagen (8 March 2012) <http://europa.eu/rapid/press-release_SPEECH-12-172_en.doc> ac-
cessed 30 September 2014.
14  Journal of Antitrust Enforcement

European Telecommunications Standards Institute (the ETSI), whose practice it is

to require that owners of SEPs license on FRAND terms.
On 4 February 2013, the Shenzhen Court delivered its verdict that InterDigital
had:
i. abused its dominant market position by: (a) making proposals for excessive
royalties; (b) tying its SEPs with non-SEPs during licensing negotiations;
(c) insisting on Huaweis cross-licensing of all its own patents on a royalty-
free basis; and (d) seeking injunctive relief before the US District Court for

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the District of Delaware and before the US International Trade
Commission whilst still in negotiations with Huawei to force it to accept
unreasonable licensing terms, including excessive royalties; and
ii. failed to comply with FRAND commitments by commencing injunction
proceedings and asking Huawei to pay higher royalties than those paid by
Apple and Samsung (the court found that InterDigital required Huawei to
pay signicantly higher royalty rates than Apple, Samsung and other compa-
nies sometimes 100 times higher) even though Huawei had smaller global
sales.
Huawei was awarded RMB 2 million in damages. Most significantly, the Shenzhen
Court also held that the FRAND royalty rate should not exceed 0.019 per cent of
the actual sales price of each product manufactured by Huawei. In arriving at this
rate, the court estimated the royalty rate that was being charged by InterDigital to
Apple and Motorola34 and concluded that the rate charged to Huawei was unfairly
high by comparison.
On 28 October 2013, the Guangdong Higher Peoples Court (the Guangdong
Court) affirmed most of the rulings of the Shenzhen Court. In its decision, the
Guangdong Court explained that the Shenzhen Court had taken the following fac-
tors into consideration when calculating a reasonable royalty rate:

i. the prot from the exploitation of the patent or similar patents and the pro-
portion of that prot in the sales prot or revenue generated by the rele-
vant products of the licensees;
ii. that patentees derive benet only from their IPR instead of making prot
from standards;
iii. the amount of royalty should be proportionate to the amount of essential
patents a patentee owns in a standard (it is unreasonable to require imple-
menters of standards to pay for non-essential patents); and
iv. the royalty should not exceed a certain percentage of the product prot
and should be reasonably allocated between patentees.

Having explained this, the Guangdong Court supported the Shenzhen Courts
method of calculating InterDigitals estimated royalty fees based on its annual report,
other licensees sales revenue and other information, and confirmed the reasoning

34
InterDigital declined to provide the actual rates provided to Apple and Motorola due to concerns that the
confidentiality of the information would not be preserved once provided to the court.
 IP and competition law in China  15

that the royalty rate proposed to Huawei was overpriced based on a comparison to
the fixed royalty rate charged to Apple.35
On 14 April 2014, InterDigital submitted a petition to appeal the case to the SPC.
The SPC has not yet determined whether leave to appeal will be granted. In its peti-
tion to the SPC, InterDigital challenged the Chinese courts calculation of the
FRAND royalty rate, arguing that the Chinese courts36:

i. applied an incorrect economic analysis by evaluating InterDigitals lump-

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sum patent licence agreement with Apple in respect of the unexpectedly
successful sales of Apple iPhones in hindsight to construct an articial run-
ning royalty rate;37 and
ii. the Apple licence agreement was an inappropriate benchmark because its
scope of product coverage was signicantly limited as compared to the li-
cence that the court was considering for Huawei (particularly when there
are other more comparable licence agreements).

InterDigital has also stated that the Chinese courts had an incomplete under-
standing of its licensing arrangements and applied incorrect facts in calculating their
benchmark. InterDigital argues that had the Chinese courts had reference to the ap-
propriate benchmarks, they would have applied a significantly higher FRAND royalty
rate and would have found that there was no proof that InterDigitals offers to
Huawei violated its FRAND commitments.
Although the NDRC has not given any indication as to how it believes a FRAND
royalty rate should be determined, in its separate investigation into InterDigital (dis-
cussed earlier in Section IV), the NDRC judged that InterDigitals royalty rates were
too high by comparison to those set for other licensees. In particular, the NDRC
noted that InterDigitals licence fees to Chinese manufacturers were many times (up
to 100 times) higher than those offered to Samsung, Apple, and Nokia. For example,
InterDigital charged Huawei a royalty rate of 1.85 per cent of the sales prices of
Huaweis handsetsa rate that is much higher than comparable patents that it
licensed to RIM at 0.29 per cent, to HTC at 0.21 per cent, to Samsung at 0.19 per
cent, and to Apple at 0.02 per cent.
The Shenzhen Courts decision in Huawei v InterDigital was followed promptly
by the determination by a US court of a FRAND rate for the first time.38 A compari-
son of the US and Chinese approaches highlights several key points: (i) the

35
Guangdong High Peoples Court decision, InterDigital Communications, Inc. and others v Huawei
Technologies Co. Ltd. [2013] 16 October 2013 Yue Gao Fa Min San Zhong Zi No. 305 <http://www.
gdcourts.gov.cn/gdcourt/front/front!content.action?lmdm=LM43&gjid=20140417024309113155> ac-
cessed 30 September 2014.
36
See InterDigitals Form 10-K for the period ended 31 March 2014 <http://ir.interdigital.com/
secfiling.cfm?filingID=1405495-15-10&CIK=1405495> accessed 30 September 2014.
37
InterDigital noted this approach had previously been rejected in US International Trade Commission
Investigation No 337-TA-800, Wireless Devices with 3G Capabilities and Components Thereof.
38
Microsoft Corp. v Motorola Inc., No 909 C10-1823JLR, (WD Wash 4 September 2013). The case is cur-
rently on appeal.
16  Journal of Antitrust Enforcement

calculation of FRAND rates is very complex and requires extensive analysis of the
relevant facts of the case; (ii) the correct FRAND rate is necessarily determined on a
case-by-case basis, taking into account all the facts that are specific to each case; and
(iii) account needs to be taken of the difficulties of comparing lump sum royalty
rates and running royalty rates.
For example, in Microsoft v Motorola, Judge Robart rejected many licences submit-
ted by the parties as being comparable, on the basis of differences such as the context
in which the licences had been negotiated (eg whether the negotiations formed part

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of a larger litigation settlement), the number of patents covered and the inclusion of
royalty caps. Similarly, in In re Innovatio IP Ventures,39 Judge Holderma rejected argu-
ments that licences proposed by the parties for benchmarking purposes were com-
parable to the licence in question. More recently, in Realtek v LSI40 a jury in
Northern California was instructed that they could consider royalty rates in other li-
cences but in considering the comparability of other licences, they should consider
certain factors including, among other things, whether the royalty was a lump sum or
running royalty rate. The heavy scrutiny applied when comparing licences for the
purposes of calculating a FRAND rate by US courts demonstrates the difficulty in
identifying an appropriate comparator. In contrast, the judgment of the Chinese
courts in Huawei v InterDigital offers minimal guidance as to how different factors
are taken into account by the court, such as how the lump sum royalty rates in an
Apple licence should be assessed in comparing against the running royalty rate
offered to Huawei.
Care should also be taken by the courts when determining a FRAND royalty rate
that rates are not set so low as to discourage innovation or participation in a stand-
ard, which would ultimately be detrimental to the market, by lessening competition.
The importance of reasonable royalty rates was recognised in Microsoft v Motorola,
where Judge Robart commented that . . . since licensing through SSOs under the
RAND commitment is, at least for some entities, an important component of profit-
ability, reducing that component would reduce the incentive to innovate and thereby
slow the pace of innovation in the economy.41
In conclusion, the methodology adopted for determining FRAND rates will
evolve in both China and other jurisdictions. However, for the moment, patent hold-
ers in China will likely continue to face concerns regarding the robustness of the
methodology and level of scrutiny applied to evidence used by Chinese courts (eg
when considering whether other licences are suitable comparators) with regard to
the determination of FRAND royalty rates. Greater transparency is also needed from
the Chinese courts and regulators regarding the calculation of FRAND royalty rates,
particularly given the complexity of such calculations. It remains to be seen whether
the SPC will take the opportunity afforded by InterDigitals appeal to provide further
guidance and precedent on this issue.

39
Re Innovatio IP Ventures, MDL 2303, No 975 1:11-cv-09308.
40
Realtek Semiconductor Corp. v LSI Corp. et al., 5:12-cv-03451.
41
Microsoft Corp. v Motorola Inc. (n 38).
 IP and competition law in China  17

V I. TY IN G O R B UN D L IN G O F SE P L I CE N CE S
Patent holders often offer licences on a portfolio basis. Such conduct may generate
substantial efficiencies but may, in certain circumstances, constitute an abuse of dom-
inance or otherwise be considered anti-competitive.
In particular, the packaging of licences may constitute either tying or bundling
the former is where the supply of one product is made conditional upon the buyer
also purchasing a separate product, whereas the latter involves the packaging of prod-
ucts to be sold in a bundle.

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Tying
As noted above in our outline of the InterDigital case, the Shenzhen Court held that
InterDigital had abused its dominant market position by, inter alia, tying its SEPs
with non-SEPs during the licensing process. In its appeal to the Guangdong Court,
InterDigital argued that it was difficult to distinguish between the two products and
that it was industry practice (and pro-competitive) to offer them together. This argu-
ment was rejected by the court, which concluded that InterDigital should have dis-
closed all relevant SEPs at the time of standard setting (ie including, if it was so
indistinguishable, the tied non-SEP). The position that a SEP holder cannot tie its
SEPs with non-SEPs is consistent with the approach in Europe42 and the USA,43
which was recently endorsed by the European Commission in the Motorola and
Samsung decisions and the US FTC in its Google/Motorola Consent Order.

Portfolio licensing
It should be noted that portfolio licensingie InterDigitals bundling of global li-
cences for SEPs (including 3G and 4G) into a portfoliowas held not to have con-
stituted an abuse of dominance. The Shenzhen Court commented that the bundling
of SEPs (including 2G, 3G, and 4G) into a global licence portfolio was a practice
commonly seen in the wireless telecommunications market. This was affirmed by the
Guangdong Court, which added that given SEPs were (by definition) essential, the
portfolio licensing of SEPs (whether 2G, 3G, or 4G) was efficient and did not give
rise to competition concerns. The court also took into account the fact that
InterDigitals licences to Apple, Samsung, and other multinationals were all world-
wide in scope, and noted the efficiencies that such bundling would bring to
multinationals.

42
For example, a standard licence agreement set up by Sony and Philips in relation to CD technology was
accepted by the European Commission as non-abusive after (among other changes) it was amended to in-
clude only essential patentssee European Commission, Commission clears Philips/Sony CD Licensing
program (7 August 2003) <http://europa.eu/rapid/press-release_IP-03-1152_en.htm> accessed 30
September 2014. Also see Miguel Angel Pena Castellot, Directorate-General Competition, unit C-3,
Commission settles allegations of abuse and clears patent pools in the CD market (Competition Policy
Newsletter, 2003) Number 3 <http://ec.europa.eu/competition/publications/cpn/2003_3_56.pdf> ac-
cessed 30 September 2014.
43
See letter from Joel I Klein, Assistant Attorney General for Antitrust, US Department of Justice which
states that a package licence that also includes non-essential patents would give rise to anti-competitive
risks. Business Review Letter to Carey R Ramos and Paul, Weiss, Rifkind, Wharton and Garrison (10 June
1999) <http://www.usdoj.gov/atr/public/busreview/2485.htm> accessed 30 September 2014.
18  Journal of Antitrust Enforcement

Such endorsement of portfolio licensing is not unique to Chinathe European

Commission expressed the same view in its Samsung decision,44 as did the US FTC in its
Google/Motorola Consent Order,45 and the US Court of Appeals for the Federal Circuit in
U.S. Phillips Corp. International v ITC.46 In comparison with patent-by-patent licensing,
portfolio licensing is beneficial for the licensee because a portfolio licence gives the licensee
freedom to operate within a given field without concern that they only licensed some but
not all of the licensors patents that read upon a particular standard. Thus, as recognized by
the Chinese courts, global portfolio licensing is an efficient way of handling this and ensur-

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ing patent peace and freedom to operate for companies.
As discussed above, InterDigitals licensing activities were also investigated by the
NDRC in 2013. One of the commitments given by InterDigital to remedy the NDRCs
concerns was that it would offer Chinese manufacturers of cellular terminal units the op-
tion to take a worldwide portfolio licence of only SEPs (ie without non-SEPs), whenever
InterDigital engages with such manufacturers to license its patent portfolio for 2G, 3G, and
4G wireless mobile standards.47 This is consistent with the approach of the Chinese courts.
It is apparent from the Draft IP Regulation that the SAIC is also mindful of the
potential for unlawful tying and bundling in an IPR context as, although tying is al-
ready expressly covered under Article 17(5) of the AML, it is again discussed in the
following two Articles of the Draft IP Regulation:

i. Article 9: prohibits dominant undertakings from, without proper justica-

tion, engaging in tying behaviour in exercising its IPR; and
ii. Article 13(2): prohibits dominant undertakings from, without proper justi-
cation, engaging in tying behaviour during the licensing of SEPs.

The broad scope of these provisions have raised concerns that, as currently drafted,
they could be used as support for an argument that all existing portfolio licensing of SEPs
is illegal. Such a position would be inconsistent with the practice to date of the NDRC and
Chinese courts. Instead, the SAIC should accept that the efficiencies identified by the
Shenzhen Court would constitute proper justification for the purposes of Article 13(2).
It is clear from the above cases and the Draft IP Regulation that any tying of SEPs
and non-SEPs in China will be heavily scrutinized and will likely constitute an abuse
of dominance, as it would in the EU and USA. In addition, certain issues have yet to
be explored by the Chinese courts (or indeed, other jurisdictions)for example,
whether the tying of SEPs to other SEPs may (notwithstanding the Guangdong
Courts endorsement of portfolio licensing in InterDigital) be anti-competitive if the
purported SEP is not, in actuality, essential to the standard.48
44
Samsung/Enforcement of UMTS standard essential patents (n 27).
45
Decision and Order, In the Matter of Motorola Mobility LLC, and Google Inc, Docket No C-4410, 78 (23
July 2013) <http://www.ftc.gov/sites/default/files/documents/cases/2013/07/130724googlemotoro-
lado.pdf> accessed 30 September 2014, para IV.B.1.
46
U.S. Philips Corp. v International Trade Commission, 424 F 3d 1179, No 2004-1361 (Fed Cir 21 September
2005) para A.9.
47
Press release of InterDigital (n 21).
48
This issue was raised by John Jurata Jr and David B Smith in Turning the Page: the Next Chapter of
Disputes Involving Standard-Essential Patents (2013) 10 CPI Antitrust Chronicle <https://www.com-
petitionpolicyinternational.com/file/view/7000> accessed 30 September 2014.
 IP and competition law in China  19

V I I . C O M P E T I T I O N E N F O R C E M E N T I N O T H E R A R EA S O F I P R
SAIC
More recently, the SAIC has thrown its hat into the ring of competition enforcement in re-
spect of IPR issues, launching investigations into Microsoft and Broadcom. However, un-
like the NDRCs investigations into Qualcomm and InterDigital, the SAICs investigation
into Microsoft relates to compatibility, bundle sales, and file verification issues relating to
Windows and Office software.49 It, therefore, appears that the SAIC has chosen to steer
away from SEPs for its first major case and will instead explore areas in which Microsoft

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was previously found to have breached European competition rules. The SAIC has con-
firmed that the investigation was prompted by a complaint to the SAIC50 and that it con-
ducted dawn raids in July 2014.51
The SAICs informal review of Broadcom is reported to have started in September
2013 and Broadcom has made its last submission of information to the SAIC in October
2013. Little has been published since that time and the SAICs concerns are as yet unclear.
Given the early stages of these investigations, it remains to be seen what approach
the SAIC will take in enforcing the AML in respect of IPR infringements and to
what extent (if any) its approach will differ from the other agencies and courts. The
Draft IP Regulation may also impact on the SAICs enforcement activity once issued.

MOFCOM
As demonstrated by the FRAND commitments required to obtain merger clearances
for Microsofts acquisition of Nokia and Googles acquisition of Motorola
Mobility,52 the interest of Chinese agencies in IPR issues is not limited to the abuse
of dominance sphere. By including IPR commitments in remedy packages,
MOFCOM has also shown its willingness to consider and address competition con-
cerns arising from the exercise of IPR in its review of merger cases. This is not only
in the context of SEP cases such as Microsoft/Nokia, Merck KGaA/ AZ Electronic
Materials, and Google/Motorola, but also more generally in industries where it con-
siders that IPR may pose a barrier to entry, such as in relation to the Corun/Toyota/
PEVE JV (discussed below).
In reviewing IPR-related cases, MOFCOM has not hesitated to impose FRAND-
type conditions outside the context of SEPs. For example, in Merck KGaA/AZ
Electronic Materials, MOFCOM required a commitment from Merck that it would
continue to license its liquid crystal patents on non-exclusive, non-sublicensing, com-
mercially reasonable, and non-discriminatory terms without distinguishing between
SEPs and non-SEPs.53

49
Microsofts 2014 10-K filing (n 8).
50
The identity of the complainants is unconfirmed but Kingsoft, a Beijing-based company whose products
include an office applications software called WPS, is reported to have been one of the complainants.
51
SAIC, SAIC Task Force Conducts Dawn Raids on Microsoft (29 July 2014) <http://www.saic.gov.cn/
ywdt/gsyw/zjyw/xxb/201407/t20140729_147122.html> accessed 30 September 2014.
52
The conditional clearance granted by MOFCOM in Google/Motorola was subject to, among other things,
a commitment by Google that it would continue to fulfil the FRAND obligations of Motorola as regards
Motorolas SEPs.
53
Full decision in Chinese dated 30 April 2014 available at <http://fldj.mofcom.gov.cn/article/ztxx/
201404/20140400569060.shtml> accessed 30 September 2014, see para 6(2).
20  Journal of Antitrust Enforcement

MOFCOM has also introduced FRAND concepts beyond the patent area. It first
did so in its approval of Glencores acquisition of Xstrata where, in addition to the di-
vestment of a copper mine, MOFCOM required that Glencore commit to continue
offering long-term and spot trade contracts for lead and zinc concentrate to Chinese
customers for a period of seven years on fair and reasonable terms.54
More recently, on 2 July 2014, MOFCOM cleared a proposed joint venture by
Toyota China, Hunan Corun, Primearth EV Energy, Changshu Sinogy Venture
Capital, and Toyota Tsusho.55 MOFCOM concluded that the deal would reduce

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competition in the vehicle-use nickelmetal hydride battery market and also hinder
downstream hybrid power vehicle players ability to obtain batteries, and was there-
fore likely to exclude or restrict competition in two markets. To address such compe-
tition concerns, MOFCOM requested that the parties involved commit to several
obligations including that the new JV should sell its products to third parties based
on FRAND principles.

NDRC
At the time of writing, the NDRC also has ongoing IPR cases in respect of
Qualcomm and, potentially, other companies as well (including Dolby Laboratories).
The NDRCs investigation into Qualcomm began in November 2013 when the
NDRC conducted dawn raids on Qualcomm after receiving complaints regarding
Qualcomms licensing practices. In particular, the Mobile China Alliance (which rep-
resents over 20 companies in the phone industry, including ZTE, Lenovo, TCL, and
Spreadtrum, among others) is reported to have complained about the severe dam-
age caused by Qualcomms excessive pricing for patents and tie-in sales on Chinas
cell phone industry. The President of the Internet Society of China, Mr. Wu
Hequan, has stated that Qualcomm charges 5 per cent of a products sale price as pa-
tent fees and that such charges are unreasonable.56
Public statements indicate that the NDRCs investigation covers alleged abuse of
dominance through calculating licensing fees on the basis of the value of the whole
device, bundling sales of SEPs and non-SEPs, requiring licensees to cross-licence pa-
tents for free, charging for expired patents, bundling sales of patents and chips, refus-
ing to grant patent licences to chip manufacturers, and imposing unreasonable
trading conditions on the sale of patents and chips. Following reports of remedies
negotiations between Qualcomm President Derek Alberle and NDRC Director
General Xu Kunlin in October and December 2014, a decision is expected soon. It is
widely speculated that Qualcomm may receive the highest fine ever imposed by the
NDRC and may be subject to a package of numerous remedies that focus on chang-
ing the way that Qualcomm calculates its royalties.

54
Full decision in Chinese dated 16 April 2013 available at <http://fldj.mofcom.gov.cn/article/ztxx/
201304/20130400091222.shtml> accessed 30 September 2014, see para 4(2).
55
Full decision in Chinese <http://fldj.mofcom.gov.cn/article/ztxx/201407/20140700648291.shtml> ac-
cessed 30 September 2014, see para 6(1).
56
Yian Song, Wu Hequan: Qualcomms Collection of Royalties in China is Discriminatory, Unreasonable
(in Chinese) (China.org.cn, 10 April 2014) <http://big5.china.com.cn/gate/big5/news.china.com.cn/txt/
2014-04/10/content_32052255.htm> accessed 30 September 2014.
 IP and competition law in China  21

Companies in the film and video technology sector have also recently confirmed
that they are under investigation by the NDRC for alleged abuse of dominance in re-
lation to their licensing practices. This includes audio company Dolby Laboratories
and licensing agent HDMI Licensing.57

Chinese courts
Huaweis success in Huawei v InterDigitalwhether or not an SPC appeal is allowed
or notand the low royalty rate imposed by the Chinese courts will likely encourage

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Chinese companies to bring complaints in Chinese courts against SEP holders.
Indeed, InterDigital has since been served with two complaints by ZTE at the
Shenzhen Court, on 3 April 2014. The first alleges that InterDigital has failed to
comply with its FRAND obligations for the licensing of its Chinese SEPs, whereas
the second alleges that InterDigital has abused its dominant position in the USA and
China in the market for the licensing of essential patents that it owns by engaging in
excessively high pricing, tying, discriminatory treatment, and imposing unreasonable
trading conditions. Through its complaints, ZTE is seeking damages and a court-
determined FRAND rate.58
ZTE has also issued complaints in the Shenzhen Intermediate Peoples Court
against Vringo for abuse of its dominant position by failing to license its patents on
FRAND terms.59
Possibly in recognition of the greater role that Chinese courts may play in SEP
licensing disputes going forward, the SPC is reported to have published two draft
opinions in late 2014 which seek to offer courts more guidance on issues such as the
determination of licensing terms, the calculation of royalty fees, and compulsory
licensing.

V II I . C O NC L US IO N
The conclusions that may be drawn from recent developments in China are that IPR
concerns are at the top of competition agencies agendas and that the law in this area
is undergoing rapid development. Businesses active in industries where IPR play an
important roleparticularly where SEPs are involvedshould expect close scrutiny
from Chinese agencies as they continue to develop their approach in this complex
area and seek to strike a balance between the protection of IPR and safeguarding
competition in China.
It is remarkable that the Chinese agencies and courts have undertaken enforce-
ment in such a complex area given that the AML has been in force in China for only
six years. MOFCOM, for example, has demonstrated that it is able to deal with diffi-
cult IPR issues in high profile cases. This was no doubt not a straightforward task,

57
See Dolby Laboratories Form 10-Q for the period ended 28 March 2014 <http://investor.dolby.com/
secfiling.cfm?filingid1445305-14-1588&cik> accessed 30 September 2014 and Silicon Images Form
10Q for the period ended 30 June 2014 <http://ir.siliconimage.com/secfiling.cfm?filingID1003214-14-
28> accessed 30 September 2014.
58
The first hearing for both cases took place on 23 September 2014. The court record states that the abuse
of dominance case will be closed before 9 October 2014 (after this article has been submitted for
publication).
59
ZTE also filed a complaint against Vringo to the European Commission on 18 June 2014.
22  Journal of Antitrust Enforcement

given the concerns reportedly raised by a number of industry participants such as

Huawei, ZTE, Lenovo, Google, and Samsung, among others.
The political sensitivities around IPR concerns and the perceived burden of un-
fairly high royalty rates on Chinese companies60 suggest that the NDRC and SAIC
will likely continue to launch investigations related to IPR concerns under the AML.
The Chinese courts willingness to set low FRAND royalty rates may also incentivize
potential licensees to seek adjudication by Chinese courts, opening the door to a
possible increase in litigation against foreign and potentially Chinese SEP holders.

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While the complaints filed at Chinese courts have, to date, been against foreign SEP
holders, as Chinese manufacturers invest in research and development, innovate to
develop new standards, and seek to monetize their own patent portfolios, they may
in turn find themselves on the receiving end of such actions. For example, Huawei is
investing heavily in new telecommunications standards and will be increasingly con-
cerned to get a fair return on its investments. This could cause a reassessment of the
approach by Chinese courts on what is fair and reasonable. The reaction of the
Chinese agencies and courts to such actions will be scrutinized with much interest
by the international community.
There remains much uncertainty as to how competition rules will be applied in
IPR cases in China and how enforcement will be divided between the NDRC and
SAIC. The expected publication of the final version of the Draft IP Regulation will
be a positive step towards greater transparency and understanding of the SAICs
views but may raise further questions, such as how and to what extent the essential
facilities doctrine will be applied in China. Businesses operating in China will, there-
fore, need to pay close attention to further developments in this area.

60
According to a report by Chinas CCTV which aired on 19 February 2014, the implementation of
InterDigitals commitments to the NDRC will save Chinese mobile phone makers a total of around USD
1 billion annually. It is reported, however, that InterDigital had so far collected little in the way of patent
royalties from Chinese companies, if any at all. See Joy C Shaw and Olivia Wang, Chinas NDRC Yet to
Decide on InterDigitals Proposed Commitments; Qualcomm Investigation at Early Stage (PaRR, 19 February
2014) <http://app.parr-global.com/intelligence/view/1075352> accessed 30 September 2014.