When you peruse the AllThingsFRAND.com site, you will find judicial and regulatory developments around the globe on the meaning of the obligation to license standard essential patents (SEPs) on fair, reasonable, and non-discriminatory (FRAND) terms. In just the last 15 months, China, Japan, and Korea have each released key guidance documents that now treat certain breaches of FRAND commitments as potential violations of their respective antitrust laws. This blog post summarizes the FRAND related content of these key regulatory initiatives and the trends and common themes they raise in the most dynamic region of the world. ACT believes these initiatives are a good step in the right direction to provide balanced legal systems around the globe, but they also could benefit from some refinement.
SAIC’s IP Abuse Regulation
In April of 2015, China’s State Administration for Industry and Commerce (SAIC) released the final version of its Regulation on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition, which addresses FRAND terms and obligations under China’s Anti-Monopoly Law (AML). Article 13 provides that undertakings with a dominant market position shall not eliminate or restrict competition through the setting and implementing of standards. Specifically, Article 13 states that dominant undertakings are prohibited from, without justifiable reasons, (1) purposefully withholding or omitting information regarding their rights to a patent during the standards setting process and then asserting their rights after the patent has been accepted into the standard; or (2) once a patent has become a standard essential patent (SEP), engaging in conduct that would restrict or eliminate competition in violation of FRAND terms, including (but not limited to) acts such as a patent holder refusing to license its FRAND-encumbered SEPs or tying its licensing to an unreasonable condition. SAIC’s final regulation applies to SAIC only (and not the other two Chinese enforcement agencies).
Draft IP Guideline Applicable to SAIC, NDRC and MOFCOM
Both SAIC and China’s National Development and Reform Commission (NDRC) are drafting competing versions of AML guidelines on abuse of IPR that, if approved by the State Council’s Anti-Monopoly Committee, would apply to all three enforcement agencies (i.e., SAIC, NDRC and China’s Ministry of Commerce or MOFCOM). Here are some key points regarding those initiatives as they relate to standard setting:
- SAIC’s current draft guideline is similar to its own final regulation discussed above, but it delves deeper into the meaning of the FRAND commitment by adding to its list of potential AML violations the following: excessive royalties, discriminatory treatment and the use of injunctive relief or abuse of the litigation process by SEP holders (see Article 28). Unfortunately, the SAIC draft does not clarify that the SEPs subject to Article 28 should be subject only to a voluntary FRAND licensing commitment.
- The NDRC’s current draft addresses potential collusion among participants in standards development, but without requiring proof of consumer harm. Some of the proposed factors that may indicate collusion are too broad – i.e., whether standard setting excludes specific business operators or their technologies, both of which can be a natural consequence of standardization (see Section II.4). In addition, NDRC’s draft also contains various provisions that should apply only to FRAND-encumbered SEPs, but are worded in a way that they could apply to all patents (see Sections III(ii)(1), (2) & (5)). These provisions include “charging unfairly high royalty rates”; “refusals to license”; and “discriminatory treatment – all potentially abusive practices where voluntary FRAND commitments have been made, but not for patents that are not covered by FRAND licensing commitments voluntarily given by the patentee. The draft recognizes the negative impact on competition when injunctive relief is used to try to compel standard implementers to accept excessive royalties or other unreasonable conditions, but also fails to limit the set of patents for which injunctive relief can adversely impact competition to those patents that are encumbered by a voluntary FRAND commitment.
In December 2014, the Korean Fair Trade Commission (KFTC) amended its Guidelines on Unfair Exercise of Intellectual Property Rights, in which the KFTC identified certain types of licensing practices by SEP holders that may be deemed to be abusive under Korea’s Monopoly Regulation and Fair Trade Act, including:
Unreasonably refusing to license the FRAND-encumbered SEP;
Not licensing the SEP on FRAND terms so the patentee can strengthen its monopoly power or exclude competitors in the relevant market;
Requesting discriminatory terms for a SEP license, or imposing an unreasonable level of royalties;
Imposing licensing conditions that unreasonably restrict the licensee’s exercise of related patents held by the licensee; or
Coercing the licensee to accept a license of a non-SEP as a condition for the licensing of a SEP. (See Section III.3.A and D(5)).
The KFTC also notes that making a FRAND commitment obligates the owner of a FRAND-encumbered SEP to negotiate in good faith with willing licensees, and provides factors it will use to make this determination. In addition, the KFTC puts forward a narrow set of circumstances under which it will find that a SEP holder’s seeking of injunctive relief for patent infringement is unlikely to be abusive.
The KFTC has been working on further clarifications to its guidelines, and it is anticipated that these will be announced in the first half of 2016 (so stay tuned to AllThingsFRAND for more on this!).
In January 2016, the Japanese Fair Trade Commission (JFTC) revised its Guidelines for the use of Intellectual Property under the Antimonopoly Act to specifically address the harm from breaches of FRAND commitments. Notably, these revised guidelines state that a refusal to license or seeking an injunction against a party who is “willing” to take a license based on FRAND terms can violate Japan’s Antimonopoly Act. The same types of conduct also can be deemed unfair trade practices even if they do not substantially restrict competition in the relevant product market and are not considered to be unlawful monopolization.
The JFTC indicates that whether a prospective licensee is “willing” will be judged on a case-by-case basis by the conduct of both parties in the negotiations--for example, by looking at whether the licensor notified the prospective licensee of a specific patent that has been infringed and how it was infringed; whether the licensor offered a license based on reasonable conditions; whether the prospective licensee made a prompt and reasonable counteroffer; and whether the parties otherwise acted in good faith. A prospective licensee’s challenge regarding the validity, essentiality or alleged infringement of the SEP(s) at issue will not be grounds for determining that it is an unwilling licensee as long as it negotiates the terms of a license in good faith in light of standard business practices. (See Part 3(1)(i)(e)).
Identifying Common Trends for FRAND Obligations
The IP abuse initiatives in China, South Korea, and Japan vary in their level of detail. Also, the Japan and Korean IP guidelines do a better job of differentiating between the unique case of FRAND–encumbered SEPs and all other patents, thus more clearly identifying abusive practices related to the former. The various initiatives, however, are based on common principles and target similar abusive practices. For example, the regulators in China, Korea and Japan:
- Understand well how standards power innovation and investment, and the critical role competition law can play to help protect those benefits.
- Believe that patent hold up is a real problem because it disrupts technology development and dissemination (with the KFTC giving specific examples in its guidelines).
- Agree that refusing to license a FRAND-encumbered SEP to any willing licensee is unreasonable, and a breach of the SEP holder’s FRAND obligation.
- Find that seeking injunctions against willing licensees of SEPs is unreasonable except in rare circumstances (similar to U.S. case law and European Commission cases and competition agency decisions).
- China and Korea also seem to be taking the view that:
- Tying – i.e., forcing licensees of FRAND-encumbered SEPs to accept other unfair conditions as part of a licensing package (e.g., requiring the licensing of non-SEPs or unrelated patents without justification) – very likely is abusive and anti-competitive conduct.
- Demanding excessive and/or discriminatory royalties for FRAND-encumbered SEPs, whether based on a discrete practice or combined with other conduct such as seeking an injunction, very likely is unreasonable and anti-competitive.
As these jurisdictions continue to develop guidance regarding the meaning and enforcement of FRAND commitments, it will be important for them to harmonize their approaches with other key trendsetters (i.e., the United States and the European Union). We’re continuing to watch these developments and urge you to check back with us often; the regulatory pages of our web site have more complete summaries of the various initiatives we discussed.