1. Identification of Monopoly Agreement involving Intellectual Property Rights Wang Xianlin, KoGuan Law School of Shanghai Jiao Tong University Dalian, June 10, 2010

2. Main Contents I. Overview of the Identification of Monopoly Agreement involving IPR II. Identification of Horizontal Licensing and Monopoly Agreement II. Identification of Vertical Licensing and Monopoly Agreement IV. Exemption and Safety Area in IPR Licensing Agreements

3. I. Overview of the Identification of Monopoly Agreement involving IPR IPR Abuse involves not only the abuse of dominant market position ， but also monopoly agreement stipulated in Anti-monopoly Law Licensing is the basic way for the IPR owner to exercise its right, it centers on the license agreement of IPR when analyzing whether the exercising of IPR constitutes the monopoly agreement of abusing the IPR. IPR License agreements are generally conducive to competition  A more efficient way of promoting the spreading of new technologies and the combination of IPR and other productive elements  Application of new technologies to production and distribution process will greatly reduce production cost, present new products to the market and benefit consumers  IPR owner can get reliable and relatively high investment return, which encourages innovation and stimulate input to research and development

4. Restriction on Competition by IPR Licensing Agreement However, IPR Licensing Agreement sometimes serious restrains competition. The problem of collusion arises for it involves bilateral or multilateral agreements; Due to the uniqueness of IPR, certain restrictions are indispensible and have reasonable grounds in IPR agreements, and this adds to the complexity in analyzing the restrictions in IPR agreements and provides covers and pretexts for acts of restriction on competition In some cases, restrictions in IPR agreements are used as tools for conducting cartel (such as fixing the price, restricting the output and sharing the market) which harms the consumers and may be used to eliminate competition in the market of the products using the licensed technology or the market of the licensed technology. This is beyond the scope of the inherent proper limitation of competition of IPR.

5. Distinguishing between Horizontal Restriction and Vertical Restriction The type of relationship between the Licensor and Licensee is a key benchmark in analyzing if an IPR agreement constitute a monopoly agreement  Motive for licensing usually is to increase production capacity of companies. The Licensor needs the production capacity of the licensee, while the latter needs the former’s R&D achievements  Vertical agreement brings new competitors into the market and facilitates the spreading of the licensed product or methods  Vertical restriction permits the licensor to entice the licensee to invest in new products or methods, in order to achieve efficiency in production and sales and compete more effectively in the market  Inter-brand competition can help adjust prices in intra-brand competition Of course, horizontal agreement is not in itself anti-competition, and vertical agreements are not necessarily without anti-competition effects

6. Market Concentration and the Nature of Restriction Generally, the higher the market concentration, the more detrimental it is to competition. Thus, level of concentration in relevant markets of products, technologies and innovations should be identified, and based on this, the safety area system should be set up. Of course, high market concentration doesn’t necessarily have anti-competition effect, which should be ascertained after an evaluation of the overall situation In most cases, restrictions in IPR agreements shall be evaluated with the rule of reason. But for unlawful restrictions, such as price fixing, output restriction, market sharing, boycotting and the fixing of resale prices, evaluation of their possible effect on competition is unnecessary. When evaluating the economic effect of a licensing agreement using the rule of reason, it should first be ascertained if the restriction in question have anti-competition effect, if it does, then it should be make clear if these restrictions are necessary to achieve greater benefits they have for competition.

7. II. Identification of Horizontal Licensing and Monopoly Agreement Horizontal licensing of IPR refers to the IPR licensing agreements between competitors or potential competitors in the same market. It falls into the following two major categories: 1. IPR agreement contains restriction clauses that apparently exceeds the scope of IPR which involves in the typical horizontal restriction such as fixing the price, restricting the output and sharing the market. The rule of per se unlawfulness shall be applied to identify and deal with it. The situation has no difference in kind with the horizontal collaboration of restricting competition not involving the IPR. 2. The Agreement contains restriction clauses which are closely related to the features of IPR, such as cross-licensing and patent pool, which is reasonable to some extent but can be abused to exert improper restrictions on competition. The rule of reason shall be applied to identify and deal with it.

8. Antitrust Analysis of Restrictions in Horizontal IPR Agreements The Organization of Economic Cooperation and Development believed (1989) that, although IPR licensing usually facilitates competition, if parties involved have cartel agreement and use the licensing agreement only as a sham for the illegal cartel agreement, the licensing constitutes violation of competition law. Analysis of licensing agreements becomes more complicated where the licensor and licensee compete over the sale of products, as horizontal licensing agreements contain some necessary restrictions, which can also be used as sham for cartel. In the U.S., Antitrust agencies usually use the rule of reason to analyze and deal with horizontal restrictions. But for some types of horizontal restrictions, such as price fixing, output restriction, market or consumer sharing and some forms of boycott, the rule of per se unlawfulness should be applied. On the whole, this principle is reasonable and can serve as an example for the antitrust law enforcement and justice in China.

9. Prohibited Horizontal Agreements in China’s Antitrust Law Competing undertakings are prohibited from concluding the following monopoly agreements relating to IPR according to Article 13 of Antitrust Law: 1. fixing or changing commodity prices, such as fixing the royalties or the price of the commodity using the patent through agreement by the competing patentees; 2. restricting the amount of commodities manufactured or marketed, such as restricting the licensees or the amount of commodities manufactured by using the IPR; 3. splitting the sales market or the purchasing market for raw materials, such as dividing its own sales market through crossing-license agreement by the competing patentees; 4. restricting the purchase of new technologies or equipment, or the development of new technologies or product, such as forbidding the licensee from developing or using new alternative technologies or products; 5. joint boycotting of transactions, such as jointly refusing to license the IPR or sell the commodities manufactured by using the IPR to certain trading counterparts by some business operators owning the IPR in related market; 6. other monopoly agreements relating to IPR confirmed as such by the authority for enforcement of the Antitrust Law under the State Council.

10. II. Identification of Vertical Licensing and Monopoly Agreement Vertical licensing of IPR refers to the IPR licensing agreements between players in different markets or at different levels of economic activities, such as those between inventors and manufacturers, or those between part producers and assemblers. Due to the vertical relationship between parties of vertical licensing agreement, restrictions in those agreements are common and many. In some way, restrictions in IPR licensing agreements are themselves vertical The negative impact of vertical restriction on competition is usually smaller than that of horizontal restriction, thus in most cases, vertical restriction is dealt with by the rule of reason, except for the per se unlawful ones. And there are many exemptions and exceptions for vertical restrictions in Anti-trust Law.

11. Antitrust Analysis of Restrictions in Vertical Agreements In determining if vertical restrictions in an IPR licensing agreement is reasonable, the exhaust doctrine or “first time sale” theory should be applied. Namely, as long as the IPR product is launched in the market, the IPR owner shall not restrict the resale price of the product or impose other restrictions. In cases where the IPR licensor enjoys a dominant market position, the problem of abuse of dominant market position by the licensor will mostly be involved, and many acts therein are often concurrently regulated by systems on the prohibition of abusing dominant market position. The antitrust law of most countries and regions have no special provisions on vertical restrictions in IPR agreements. But as long as the restrictions in question go beyond the reasonable restriction scope of IPR, relevant clauses in antitrust law shall apply Special law enforcement guidelines in some countries and regions have clear law enforcement opinions over the fixing of resale price, restriction on resale price or selling area, bond sale, sell-back and other exclusive trading.

12. Prohibited Vertical Agreements in China’s Antitrust Law Undertakings are prohibited from concluding the following monopoly agreements relating to IPR with their trading counterparts according to Article 14 of Antitrust Law: 1. fixing the prices of commodities resold to a third party, such as requesting the purchaser to resold the commodity to a third part at a fixed price by the patentee when selling the patented commodity; 2. restricting the lowest prices for commodities resold to a third party, such as restricting the lowest price for the patented commodity resold to a third party by the patentee when selling it to the purchaser; 3. other monopoly agreements relating to IPR confirmed as such by the authority for enforcement of the Antitrust Law under the State Council

13. IV. Exemption and Safety Area in IPR Licensing Agreement Like in other cases, IPR licensing agreements which are themselves monopoly agreements can be exempted by law In China, IPR agreements that can be proved to be conformant with article 15 of the Antitrust Law will not be prohibited by the State Council Antitrust Law Enforcement Agency. The People’s Court will also permit this exemption correspondingly

14. Some countries and regions also have in place the “Safety Area” system, under which, in some cases, the IPR licensing agreement in question can be deemed as having negligible impact on competition in relevant market and will be exempted from investigation by the antitrust law enforcement authority. Such a safety area system can be set up in China: in the following cases, the IPR licensing agreement in question shall be deemed as having negligible impact on competition in relevant market and the antitrust law enforcement agency of the State Council shall not investigate it. the market share of competing undertakings accounts for no more than 20% of the total in a relevant market; if the market share can not be calculated, there are at least four other operators owning the alternative IPR in the relevant market;  the market share of the operator or the trading counterpart accounts for no more than 30% of the total in a relevant market; if the market share can not be calculated, there are at least two other operators owning the alternative IPR in the relevant market However, the safety area system shall not be applied to agreements that are per se unlawful

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