Competition Law and Intellectual Property Rights: A “Big” Trouble for the Big Boys in Technology Business?
29 June 2015 | Source: Tay & Partners
By Nicole Leong, Tay & Partners

Early this year, Qualcomm coughed up a 6.08 billion yuan (USD975 million [1] ) fine to China's National Development and Reform Commission [2] ("NDRC") after reaching a settlement on the investigation into its licensing practice in China. Following complaints from competitors and industry associations, most notably Mobile China Alliance, which represents China's powerful mobile phone industry, and the Internet Society of China in early November 2013, NDRC carried out simultaneous dawn raids at Qualcomm's offices in Beijing and Shanghai. After months of investigation, NDRC found that Qualcomm enjoys a dominant position in the license market of standard-essential patents (SEPs) for CDMA, WCDMA, LTE (i.e. 3G and 4G) wireless communication technology and the baseband chip market. It also concluded that Qualcomm had abused that position by conducting the following abusive market behaviour -

• Imposed unfairly high patent license royalties

• Tied sales of SEPs with non-SEPs without justification

• Threatened to refuse selling baseband chips to Chinese enterprises if they did not sign patent license agreements containing unreasonable terms, and it prohibited the licensees from challenging such license agreements

To rub salt to the wound, Qualcomm had to implement a rectification plan that modifies certain parts of its business practices in China to fully satisfy the requirements of the NDRC's order.

A "big" trouble - abuse of dominant position

NDRC's decision against Qualcomm is unsurprising. In 2009, Korea Fair Trade Commission [3] prohibited Qualcomm from charging discriminatively high royalties to handset makers who purchased non-Qualcomm modem chips [4] and providing rebates to handset makers on condition that their purchase of Qualcomm's modem chips should exceed a level that would exclude its competitors from the market. Qualcomm's unfair business practices have virtually become barriers to entry into the Korean modem chip market for its competitors including VIA (Taiwan) and EoNex (Korea). As a result, Qualcomm was able to maintain its high market share close to a monopoly for more than a decade.

Can intellectual property rights and competition law co-exist?

It is a traditional view that there is inherent tension between intellectual property rights and competition law. Grant of exclusivity by intellectual property law was seen as creating monopolies, whereas competition law strives to keep the markets open and competitive. However, modern understanding would review that both intellectual property rights and competition law are complementary in encouraging innovation, new and better technologies and bring better products and services to consumers at lower price.

What are the competition law pitfalls in intellectual property licensing practice?

Grant backs

A grant back provision in an intellectual property license agreement is an agreement by a licensee to grant back to the licensor any intellectual property rights that the licensee may later develop or acquire with respect to improvements to the technology which is subject to the license. It could raise potential competition law concern particularly where the licensor has market power and such grant back is exclusive in nature (i.e. licensee does not retain the right to use or license the new technology).
Field of use restrictions

This is a common clause whereby a licensor limits the licensee's authority to produce goods to a particular purpose or customers. If the licensor and licensee are competitors, filed of use restrictions or customers restrictions could be perceived as an illegal tool to facilitate market sharing or customer allocation.

Post-expiration royalties

Patent holder's rights to royalty payments after the expiration of the subject patent has always been a thorny issue. It has been long frowned upon as it is perceived as a tool to extend the patent holder's monopoly over the subject patent which has become available in the public domain.

No challenge clauses

These clauses typically prohibit licensees from challenging licensors' patents or other intellectual property rights. These clauses are viewed sceptically in the eyes of competition law as they potentially make it easier for the licensee to maintain intellectual property protection even when the right was secured by mistake.

Reverse payment for patent settlements

This involves a payment made from the patent holder to the alleged infringer (the generic competitor) in order to settle a patent suit in exchange for their agreement to stay out of the market altogether or delay their entry into the market. Reverse payments pose potential competition law concern because they may be used to purchase an exclusive right to sell a product by inducing the most innovative patent challengers to abandon their efforts.

Abuse of dominant position in Malaysia

Back on our shores, abuse of dominant position in Malaysia is similarly prohibited under section 10 of the Competition Act 2010. Refusal to license intellectual property rights may be considered as an abuse of dominance. Whilst China has issued a guideline [5] specifically addressing issues with respect to intellectual property rights in its competition law, it is anticipated that our competition law enforcement agency, the Malaysia Competition Commission, will publish a competition law guidelines on intellectual property guidelines.

A tool for David to defeat Goliath?

Competition law is definitely a game changer for technology industry players in Malaysia. To avoid hefty financial penalty by regulator and exposure to damages by private litigant, licensor now would need to look at their licensing practice through the lens of competition law. On the other hand, licensee would find competition law a useful bargaining tool to negotiate or renegotiate their licensing agreement with a dominant licensor. It would be interesting to observe how competition law creates level playing field for technology players in Malaysia.

 

Notes

[1] Calculated at the prevailing exchange rate.

[2] NDRC is tasked with the responsibility to investigate and deal with price monopoly and activities in China.

[3] Korea Fair Trade Commission formulates and administers competition policies, and deliberates, decides and handles antitrust case.

[4] Modem chip is a core part of a cell phone that transforms people's voice into a digital signal and changes it again into an analog signal heard by people (like computer CPU).

[5] Rules on Abuses of Intellectual Property Rights Eliminating or Restricting Competition published by State Administration for Industry and Commerce of the People's Republic of China.

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