China amends provisions on prohibiting the abuse of IP rights

On June 29, 2023, China’s State Administration for Market Regulation (SAMR) released the amended Provisions on Prohibiting the Abuse of Intellectual Property Rights to Exclude or Restrict Competition. These provisions were made in accordance with the Anti-Monopoly Law and came into force on August 1, 2023.

According to the SAMR, anti-monopoly and IP protection share the same goal of encouraging competition and innovation, improving the economy and protecting the interests of consumers and the public. When businesses use their IP rights, they must follow the laws and regulations and should not misuse these rights to prevent or limit competition.

Aimin Huo, deputy director of the legal division at CCPIT Patent and Trademark Law Office in Beijing, said IP rights can be abused to limit competition. However, he explained this can only happen if the business operator engage in the following acts:

1.Reaching monopoly agreements;

2.Licensing IP rights or selling products containing IP rights at an unfairly high price;

3.Refusing, without justification, to license other business operators to use IP rights under reasonable conditions;

4.Imposing, without justifications, restrictions on transactions;

5.Conducting, without justification, tie-in sales in violation of the trading practices or consumption habits or the function of commodities;

6.Imposing, without justifications, unreasonable trading conditions in grant-backs, cross-licensing, challenging validity of IP rights, etc.;

7.Applying, without justification, different treatment on other business operators in the condition the same as others in transactions;

8.Concentration of business operators without reporting to and approval from the SAMR;

9.Excluding or restricting competition by means of a patent pool; and

10.Relying upon formulating and implementing standards to reach monopoly agreements.

According to Huo, the provisions aim to strike a balance between protecting IP and maintaining fair competition by addressing complex and practical anti-monopoly issues related to IP, involving the rights holders, their business counterparts and public interest. The provisions also aim to encourage innovation while promoting fair competition.

He said the amended provisions establish guidelines for identifying market dominance and the legal bases for determining the dominant market position of a business operator. It also provides factors for identifying prohibited abuses of dominance when exercising IP rights, such as charging excessive prices, refusing to license, limiting transactions, engaging in tying practices, imposing unfair terms and unfair treatment.

Regarding monopoly agreements and abuse of dominance concerning the patent pool, Article 17 provides more details on these issues. On the other hand, Articles 18 and 19 address key areas where abuse of IP rights is likely to occur, with Article 19 prohibiting specific acts in the process of formulating and implementing standards.

“The amended provisions provide that, in case of reaching and implementing a monopoly agreement, abuse of dominance or illegally implementing a concentration, the business operators will be subject to a fine of up to 10 percent of the previous year’s sales or Rmb5 million (US$690,000). Its legal representative and other individuals concerned are also subject to a fine of up to Rmb1 million (US$140,000),” said Huo. “A punitive fine from two to five times the amount of the fine will be imposed in serious cases of abuse of IP rights.”

Meanwhile, Weihua Rao, a partner at Dacheng Law Offices in Guangzhou, shared some examples of the amended provisions.

“Article 9 includes the unfair behaviour of high-pricing, in which businesses with market dominance license their IP or sell products featuring their IP at an unfairly high price,” he said. “Factors to consider is the research cost and payback period of that IP. If the IP involves a higher cost to research and develop with a longer payback period, it is reasonable to set a high price. In contrast, if the price is high despite a low research cost and short payback period, it might be a case of IP abuse.”

He continued: “Article 11 lists the unreasonable trading conditions, such as not offering a reasonably equal price but requiring the trading counterpart to cross-license in the same technical field, which is unfair to the trading counterpart and will exclude and restrict them from competing in the same technical field.”

Another example is prohibiting the trading counterpart from questioning the validity of the IP during trading, which might result in the case that the IP being licensed is invalid or falling behind in technology. Despite being carried out in the name of IP, Rao said these behaviours might hinder innovation and bring unfair competition to the related markets.

He also noted that the biggest change in this amendment is the safe harbour provision. Safe harbour refers to situations where behaviours that seem to violate the Anti-Monopoly Law are exempted because they meet certain criteria.

“In the Anti-Monopoly Law amended last year, safe harbour provision is prescribed in the regulations for vertical monopoly agreements only. This means that the safe harbour provision is no longer applicable to horizontal monopoly agreements,” said Rao. “In accordance with the amendments in the Anti-monopoly Law, the Provisions on Prohibiting the Abuse of Intellectual Property Rights to Exclude or Restrict Competition have to be revised as well.”

Apart from removing the safe harbour regulations for horizontal monopoly agreements, the amended provisions also revised regulations for vertical monopoly agreements. These regulations were originally only applicable to vertical monopoly agreements designated by the Anti-Monopoly Law Enforcement Agency under the State Council, but now they can be applied to all vertical monopoly agreements. Thus, Rao reminded that businesses should bear in mind that all horizontal monopoly agreements established using IP can no longer enter into safe habour.

However, if the market shares of the business operator and their trading counterpart in any related market affected by their agreements involving IP do not exceed 30 percent, and they meet the other criteria set by the SAMR, they can enter into safe harbour for vertical monopoly agreements.

Huo believes IP has helped to encourage innovation and improved competition, but the phenomenon of IP abuse cannot be ignored and downplayed. He said: “Facing fierce competition, the business operators have the incentives and impetus to capitalize on their IP rights and dominate position to maximize the dividends and benefits of their IP rights and dominant position and build stronger moats for their business, which may result in excluding and restricting competition.”

He added: “Abuse of IP rights is a global issue. Sustained efforts are needed to strike a balance between IP and competition so as to reach the dual objective of encouraging innovation and simultaneously improving competition.”

For business operators, Huo advised to stay updated on the laws and regulations, including case laws, court rulings and decisions made by regulators. It is also crucial to be aware of industry practices and trends. Seeking legal advice during business transactions can help ensure compliance with the applicable laws and regulations and avoid any violations of the Anti-Monopoly Law.