Boundaries where antitrust laws are applicable to SEP

By Zhan Hao and Song Ying, AnJie Law Firm
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Standard Essential Patent (SEP) is a recent hot term for the study of antitrust practice in China. This article relates to the applicable boundaries imposed by the antitrust law, public and private equity rights, as well as the enforcement of antitrust laws and future judicial directions.

Q: Are SEP-related behaviours exempt from China’s antitrust laws?

A: “Antitrust laws” neither negate the rights given by intellectual property laws nor regard intellectual property as an exempted area from the regulations, but have given clear directions regarding what intellectual property behaviours need to be bounded by the antitrust laws – that they are only applicable to the elimination or restriction of competition due to unfair practice of intellectual property rights.

For SEP-related behaviours regulated by the antitrust laws, no special criterion has been set out, but they should still be evaluated under the framework set up by monopoly agreements, abuse of market dominance and concentration of business operators.

Q: Do SEP patentees necessarily hold market dominance?

A: We should not simply equate “standards” with market dominance. Not every SEP would necessarily constitute an independent related market. For example, if a certain patent is included in the standard but the market contains competitive SEPs, then that SEP would not constitute an independent related market. If the relevant standards make up for a small or almost non-existent market share, then that relevant SEP patentee will not have market dominance.

Zhan Hao is the Managing Partner and Song Ying is Partner at AnJie Law Firm
Zhan Hao is the Managing Partner and Song Ying is Partner at AnJie Law Firm

When a certain SEP constitutes an independent relevant market, other co-existing factors may cause the SEP patentee to not hold any market dominating position. First, one standard often includes hundreds and thousands of patents. For standards and downstream products with a lesser level of technological importance, it would be rather difficult for the patentee to obtain market dominance. Second, if the existing industry standard is replaced by a new standard within a short time, it will then be difficult for the SEP patentee to obtain market dominance.

Also, in practice, many standard implementers produce standard products without authorization. However, patent relief programmes for SEP patentees often involve high costs, implementing a ban by the general relief programme is often restricted, and potential licencees can easily delay the implementation. These practical factors often give rise to “reverse patent hold-up” problems. Finally, due to possible constraints of cross-licensing between competitors, an SEP patentee’s right to implement is often restricted.

Q: To determine abusive behaviours and reasonable grounds, should we consider the special nature of patent licensing?

A: The patent licensing market is more complicated than the traditional market. To lower transaction costs and to limit patent disputes and other internal costs, the implementation of patent licensing requires more flexibility. In assessing whether certain licensing behaviour has breached antitrust laws, we should give full consideration to the special nature of patent licensing practices through the rule of reasoning.

In the case of assessing antitrust behaviours in demanding too much in patent licensing fees, standard implementers often question the approach to calculate licensing fees based on terminal device and advocate the principle of smallest saleable patent practising unit (SSPPU) with a motive to lower costs. However, whether the principle of SSPPU is applicable and reasonable in practice would need to be carefully analyzed together with the special nature of licensing practices.

First, not all cases can clearly define SSPPU. If one SEP contains technology that contributes value to many other components, categorizing SSPPU as a certain component may very likely underestimate the value of the SEP. Moreover, patentees in practice often license their patent in the form of a portfolio of patents in order to lower costs. If the SSPPU is defined based on one patent, not only will the licensing be a great burden for the patentees, but it may also lead to disputes and lower the chance of getting licensed.

As long as the overall level of the licensing fee is fair and reasonable, accounting methods of the SEP patentees should not be bound. All licensing fees determined by the Standards Organization or antitrust laws should be final and should not limit the ways the fees are calculated. Finally, if the reasonableness of the price of the licence is judged through a public authority, the public authority should, in particular, avoid undue interference in market competition.

Q: What is the content and connotation of SEP?

A: SEP is based on the premise of the existence of a “standard”. If there is no standard, no matter how important other competitors deem this patent, it will not be regulated by the “antitrust laws”. This is because, whether the patentee decides to trade, with whom he trades and under what conditions the trades are made are all considered legitimate practice of patent rights and should not be restricted. However, when a patent is categorized within a standard there may be concerns over competition and therefore, additional general obligation other than the fair, reasonable and non-discriminatory (FRAND) principles are imposed on the patentees.

As the obligation imposed by FRAND could have a huge beneficial impact on the licencee, a potential licencee would of course hope that the scope of the SEP would reach the commercially valuable and important non-standard essential patents. From the perspective of the enforcement and judicial practice of Chinese and US/European competition laws, the interference of intellectual property by antitrust laws lies mostly within the related behaviours of SEP.

If the scope of SEP recklessly expands and even non-standard patents are regulated by antitrust regulations, this would be detrimental to the protection of intellectual property in the long run, as it discourages innovation efficiency.

Therefore, the authors recommend restricting the extended interpretations of SEP to prevent the antitrust laws from becoming a tool for individuals to gain any form of competitive advantage, resulting in excessive or even inappropriate regulations.

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