Anti-monopoly Analysis of SEP-based Injunctions

By Zhu Li, LLD; Judge, IP Division of Supreme People’s Court of China,[Anti-Monopoly]

        There have been a number of cases globally arising out of injunctive reliefs for standard-essential patents (SEPs), where solutions are sought under the Competition Law. The SEPbased injunction has been under the spotlight of Competition Law enforcement agencies worldwide. In China, the Guidance for Anti-monopoly IP Law Enforcement (draft to solicit public inputs), which was prepared jointly by the National Development and Reform Commission and the Anti-Monopoly Commission of the State Council, regards the SEP-based injunction as an object of law enforcement. At the juncture of the Anti-monopoly Law, the Patent Law and the Contract Law, the SEP-based injunction must be considered in view of the Patent Law, the Contract Law and other related factors, which requires wider eyesight and more cautiousness.
  I. SEP-based Injunctions Lead to Anti-monopoly Considerations
  In the Patent Law, the core of patent rights is to prevent others from implementing the patent at issue without the authorization from the patent proprietor. Bringing an action, claiming for damages and seeking injunctive reliefs are the main means used by the proprietor to protect its patent. However, the proprietor who does not have the dominant market position, or does not make undertakings on fair, reasonable and non-discriminatory terms (FRAND terms) during the preparation of a standard, or does not participate in the preparation of the standard will not find its legal status to be changed, despite the inclusion of its patent into the standard. Therefore, this inclusion does not restrict the proprietor in exercising its basic right to bring an action, seek an injunctive relief or claim for damages, nor causes it to specifically attract the attention of the law enforcement agency under the Anti-monopoly Law.
  Only under specifically limited conditions may the SEP-based injunction lead to anti-monopoly law-related considerations. These conditions are: (1) The SEP proprietor has a dominant market position; (2) the injunctive relief is abused; and (3) the market competition is excluded or restricted. The proprietor having market dominance is the precondition for it to attract anti-monopoly attention. Once it dominates the market, the proprietor incurs a special responsibility that it should not allow its behavior to harm the normal competition in the market.
  When a given patent becomes essential to a standard, this in fact lessens or excludes the space for other competitive technologies in the standard-related field. In addition, the implementation and spreading of the standard helps further expand the market for the patent holder.This in turn increases the market power of the proprietor. However, it does not necessarily mean that the proprietor has achieved the dominant market position. To study the market power of the proprietor, the following need to be considered: First, is it mandatory or voluntary? A mandatory standard will greatly increase the market power of the proprietor, while a voluntary one will not lead to much influence, unless it turns out to become a generic standard de facto. Secondly, the competition between or among standards. For a given class of products, there may normally exist more than one competitive standard in the market. For example, in China, WCDMA, CDMA-2000 and TD-SCDMA are three different standards for the third-generation communication technology (3G). Different standards may contain SEPs that are not the same or even totally different. If an SEP is essential only in one standard that has a lower market share and is applied less extensively, for which an implementer of the standard can easily shift to a substitute standard, any proprietor of the SEP can hardly have a dominant market position.Additionally it should be noted that the competition can be between standards in the same generation or between standards in more than one generation. Therefore, whether or not a given SEP has the dominant market position should be assessed by taking into account the other competitive standards or substitute technologies and their influence in the market. Thirdly, the competition between standard products and nonstandard products. In a few fields and for users in need, standard and non-standard products can be close substitutes of each other in quality, performance and price. This way they are highly competitive against each other. Fourthly, the market share. To define or calculate the market share of a given SEP, the market for its related technologies or products need be determined on a case-by-case basis. If more than one competitive standard exists, the standard products can be used in defining their related standard markets. This way the market power of an SEP can be found by calculating the share of the market of the SEP implementing products. This method can give an accurate assessment of the market power of an SEP. Moreover, there have been precedents that each SEP license market is considered a separate relevant market. The proprietor of the SEP owning 100% of the market is deemed to have the absolute dominant market position.However, this argument cannot be established unless all of the following conditions are met: There exists no other competitive standard, or the given SEP is essential to all the standards concerned; and there has been practice of granting licenses solely based on the SEP in the market. Fifthly, the cost of transfer.The market power of an SEP is also connected with the transfer cost if users turn to others standards or patents. In the field of information or communication technology, the network effect or technical lock-in may affect the transfer cost of the user. The network effect occurs when the value of a standard for a user increases as more users begin to use the same or any compatible standard.This effect can be direct, where more users directly lead to more network effect; or indirect, where more users lead to more supplementary products, thereby creating indirectly more network effect. Under the influence of the network effect, users tend to rely on how many users use a standard, when they go to select or assess the standard. The more users, the more valuable the standard. As soon as the user base exceeds the critical number, this will produce a self-enhancing positive feedback mechanism. As the scale of the user base increases, the value of the standard becomes higher, attracting more users to adopt the standard. Due to the existence of the network effect and the positive feedback mechanism, users are easily locked into the path dependent on the standard technology. The transfer cost can be private or social. The private transfer cost includes the cost of education and training that has been or will be spent on new standard technologies, the investment into equipment and its supplementary assets that have been purchased (if any), and the cost of replacement equipment and supplementary assets.The social transfer cost is dependent upon how the network effect that a market player has been enjoying compares with the potential network effect that it is going to receive from the transfer. Sixth, the power of buyers. The marketing power of SEP proprietors is limited, when a standard implementer who seeks a license also owns an SEP or when an SEP proprietor needs a license from another SEP proprietor.
  Despite the above, it is still highly probable that an SEP proprietor has the dominant market position, as the SEP is essential to the implementation of the standard concerned. From the burden of proof, it can be presumed that an SEP proprietor has the dominant market position unless this is overruled by any counter-evidence the proprietor provides.
  II. Abuse of SEP-based Injunctions and Its Anti - competitive Consequences
  As stated, in the context that the Patent Law and the Competition Law are overlapping each other, an SEP-based injunction sought by the patent proprietor may lead to anti competitive consequences, as long as the other two conditions are met, hich are: the abuse of injunctive reliefs; and the exclusion or restriction of the competition in the market.To abuse the injunctive relief is the means, and to exclude or restrict the competition is the result. The two are closely connected and indispensable to each other. Therefore, whether the seeking of an injunctive relief by an SEP proprietor is legitimate or not must be determined in connection with the act under the Competition Law and the assessment of any anticompetitive consequence.
  As for whether there is any abuse or not, the competitive result should also be considered. For example, in a few cases, the European Court of Justice (ECJ) interpreted an abuse as when the conduct of a company has a negative effect on the competition in the market, which is different from the usual performance-based competition, thereby probably hindering the maintenance and development of the existing level of competition in the market. The so-called “performancebased competition” means usually that a company grows itself by improving its economic efficiency internally and competes against other companies by lowering its price on the basis of the improved efficiency.The abuse of injunctive reliefs by SEP proprietors means that the proprietor uses the injunctive relief as a means to achieve an anti-competitive purpose or effect, so as to block the access to its market and receive more than reasonable returns. In addition, the proportionality principle is important to finding injunctive relief abuses.In making profits and improving its market position, an SEP proprietor may take business measures no more than those necessary to achieve its legal purposes, and should not go beyond the extent necessary to influence the competition. As for what constitutes the necessary extent, it must be assessed in connection with the competitive environment and the competitive result. However, reasonable self-defense is often considered legitimate. For example, the ECJ ever stated, “although the fact that an undertaking is in a dominant position cannot deprive it of the right to protect its own commercial interests if they are attacked and such an undertaking must be allowed the right to take such reasonable steps as it deems appropriate to protect those interests, it is not possible, however, to countenance such behaviour if its actual purpose is to strengthen that dominant position and abuse it.” Therefore, when an SEP proprietor is faced with reverse patent hijacking, such as when the standard implementer refuses or delays the payment of royalties, the seeking of an injunctive relief will not constitute an abuse. It is certain that the business environment de facto is very complicated and opportunities may come and go in an instant in a given market sector. The timely access determines from time to time if a standard implementer can develop effective competition after it enters the market. Thus, before it implements a standard, the implementer may not necessarily obtain the consent of the SEP proprietor. It may not always be unreasonable for the implementer to use it before it pays for it. As for whether such behavior constitutes a delay, it must be studied on a case-by-case basis.
  The abuse of an injunctive relief and the anti-competitive result must be found by studying the evidence on anti-competition, in connection with the character and purpose of the suspected behavior and the competitive business environment.From the character and purpose of the behavior that an SEP proprietor seeks an injunctive relief, the anticompetitive result can be in most cases that such behavior excludes the existing competitors or prevents new players from entering the market; leads to unnecessary loss in society; causes the proprietor to grab far more than normal commercial interests under effective competitions; or hinders the competition and innovation in the downstream market.In practice it mostly happens that the proprietor takes advantage of the injunctive relief to seek higher than normal commercial interests, that is, the excessively high price.Similarly the excessively high pricing must be examined in view of the Patent Law and the Competition Law, to study the existence of any exclusion or hindrance to competition in the market. The Patent Law is there not only to protect the right of patentees to receive proper returns on their innovative investments, but also create an incentive to all the inventors in society to invest in innovative works, as innovation in and by itself promotes and creates competitions at a higher level. The anti-monopoly enforcement must be conducted cautiously with respect to the excessively high pricing by SEP proprietors. To determine whether there is an excessively high price or not, it can be done first by using the price comparison method, that is, by comparing it with the licensing royalty rates formed in the market. For example, the royalty rate before the patent is included into the standard, that which is given to other standard implementers, that for any other SEPs in the standard, or that in any other similar patent pool can be used as the comparable price, in order to get reasonably as close as possible to the market price for the SEP at issue.If there are no comparable prices available in the market, the cost/profit analysis method may be used. Notably this should be done in connection with the purpose to encourage innovations.The cost should be calculated in view of the risk that the investment may fail or that the profit may be delayed.No matter which method is used, it should be used as the threshold by enforcement agencies when the price becomes so high that it is extremely unreasonable. For example, in Huawei vs IDC for abuse of market dominance, IDC had quoted prices that were far higher than those quoted by other similar companies, with the highest price being nearly 100 times higher and the lowest price being nearly 20 times higher. In light of this, the court decided that the behavior of IDC constituted an excessively high pricing behavior prohibited under the Antimonopoly Law.
  If an SEP proprietor has made an undertaking on FRAND terms, this undertaking will have an impact on the anti-competitive effect of an injunctive relief. No matter how different legislative systems may hold different understandings on the legal character of the FRAND undertaking, undeniably a reasonable implementer of an SEPbased standard would, on the basis of the FRAND undertaking, expect that it could obtain from the SEP proprietor a fair, reasonable and nondiscriminatory license, as long as it does so on good-faith and reasonable conditions. On this expectation and reliance, the implementers or the social public would easily choose to implement the standard or purchase the products that comply with the standard. In particular, it is probable that the implementer starts to plan the business or invest before it is granted a license. Once the injunctive relief is abused by the SEP proprietor, this will probably lead to excluding others from entering the market, causing others to sustain unnecessary losses or resulting in the proprietor monopolizing high prices. But, this never means that the SEP proprietor has willingly given up its remedy to seek injunctive reliefs as soon as it has make an undertaking on FRAND terms, nor does it mean that the seeking of injunctive reliefs must lead to an anticompetitive effect. Therefore, if an SEP proprietor has made an undertaking on FRAND terms, whether the seeking of injunctive reliefs will lead to the anti-competitive effect has to be determined on a case-by-case basis.
  I I I . Safe Harbor from Antimonopoly Regulations Governing SEP-based Injunctive Reliefs
  As shown, the study of SEP-based injunctive reliefs from the perspective of the Competition Law must be conducted in view of the situation and evidence in individual cases. As no clear-cut substantial rules are set out with respect to the legitimacy or not of such reliefs, legislations, including the Guidance for Anti-monopoly IP Law Enforcement, only provide an abstract framework in regulating these injunctive reliefs, which has a very limited guiding function for law enforcers and social public. Therefore, it is necessary that in connection with specific conditions, special provisions need be formulated with respect to the conditions or procedures that deal with specific legal or illegal acts. For example, in its preliminary ruling in Huawei vs ZTE, the ECJ creates a safe harbor that an SEP holder who has given a FRAND commitment may seek injunctive relief without infringing EU Competition Law on the following conditions: (1) Prior to bringing that action, the proprietor has, first, alerted the alleged infringer in writing of the infringement complained about by designating that patent and specifying the way in which it has been infringed; and (2) secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, the proprietor has presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated. This provides a valuable reference for us.
  (Translated by Ren Qingtao)

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